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The Bank of Princeton
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Bank of Princeton
We have audited the accompanying balance sheet of The Bank of Princeton (the “Bank”) as of
December 31, 2010, and the related statements of operations, stockholders’ equity, and cash flows for the year
then ended. The Bank of Princeton’s management is responsible for these financial statements. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 Bank 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
Bank’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 audit provides a reasonable basis for our opinion.
We audited the financial statements of The Bank of Princeton as of December 31, 2009 and for the year
then ended in accordance with auditing standards generally accepted in the United States of America. In our
report dated March 8, 2010 we expressed an unqualified opinion on those statements.
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, 2010 and 2009, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the
United States of America.
Philadelphia, Pennsylvania
April 4, 2011
1
The Bank of Princeton
Balance Sheet
December 31, 2010 and 2009
Assets
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Securities available for sale
Securities held to maturity (fair value 2010 - $1,454,053; 2009 -
$8,696,634)
Loans, net of allowance for loan losses of $3,693,369 and $2,146,776 at
December 31, 2010 and 2009, respectively
Bank-owned life insurance
Other real estate owned
Premises and equipment, net
Accrued interest receivable and other assets
2010
2009
$ 11,256,625
14,363,000
$ 7,155,513
148,000
25,619,625
7,303,513
159,600,616
70,423,247
1,394,188
8,670,715
281,572,864
6,032,322
1,140,000
4,153,278
8,742,773
172,510,112
-
227,283
2,007,505
3,518,160
Total Assets
$ 488,255,666
$ 264,660,535
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
Federal funds purchased
Borrowings
Accrued interest payable and other liabilities
Total liabilities
Stockholders’ equity
$ 30,669,037
395,143,988
$ 16,576,817
202,051,536
425,813,025
218,628,353
1,044,000
18,014,131
2,427,057
-
17,137,823
1,004,547
447,298,213
236,770,723
Common stock, $5 par value; authorized 10,000,000 shares; issued
and outstanding 2010 - 3,952,185 shares; 2009 - 3,022,375
shares
Paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
19,760,925
22,514,824
(1,667,411)
349,115
15,111,875
15,765,295
(4,054,458)
1,067,100
40,957,453
27,889,812
Total liabilities and stockholders’ equity
$ 488,255,666
$ 264,660,535
See notes to financial statements.
2
The Bank of Princeton
Statement of Operations
Years Ended December 31, 2010 and 2009
Interest and dividend income
Loans receivable, including fees
Debt securities:
Taxable
Tax-exempt
Other
2010
2009
$ 13,007,001
$ 7,465,677
2,880,841
216,313
96,676
3,914,270
18,524
24,922
Total interest and dividend income
16,200,831
11,423,393
Interest expense
Deposits
Borrowings
Total interest expense
Net interest income
Provision for loan losses
4,787,576
342,513
3,678,094
128,797
5,130,089
3,806,891
11,070,742
7,616,502
3,301,108
1,203,583
Net interest income after provision for loan losses
7,769,634
6,412,919
Non-interest income
Gain on sale of securities available for sale
Gain on acquisition of MoreBank
Other income
Total non-interest income
Non-interest expense
Salaries and employee benefits
Occupancy and equipment
Professional fees
Data processing and communications
Federal deposit insurance
Advertising and promotion
Office expense
Loss on other real estate owned
Other
Total non-interest expense
Income before income tax
Income tax benefit
Net Income
See notes to financial statements.
3
1,229,088
1,014,476
311,435
413,259
-
164,634
2,554,999
577,893
4,729,804
1,609,996
903,309
663,441
453,512
199,430
158,719
80,000
627,619
3,706,199
1,269,479
421,739
437,894
409,957
153,830
143,158
-
35,851
9,425,830
6,578,107
898,803
412,705
(1,488,244)
-
$ 2,387,047
$ 412,705
The Bank of Princeton
Statement of Operations (Continued)
Years Ended December 31, 2010 and 2009
Net income per common share - basic
2010
2009
$ 0.69
$ 0.14
Net income per common share - diluted
$ 0.68
$ 0.14
See notes to financial statements.
4
The Bank of Princeton
Statement of Stockholders’ Equity
Years Ended December 31, 2010 and 2009
Common
stock
Paid-in
capital
Accumulated
deficit
Accumulated
other
comprehen-
sive income
Total
Balance - December 31, 2008
$ 15,100,000 $ 15,516,753 $ (4,467,163) $ 711,681 $ 26,861,271
Comprehensive income:
Net income
Change in net unrealized gains
on securities available
for sale, net of
reclassification adjustment
and tax effect
Total comprehensive income
Warrants exercised (2,375 shares at
$12 per share)
Share-based compensation expense
-
-
412,705
-
412,705
-
-
-
355,419
355,419
768,124
11,875
-
16,625
231,917
-
-
-
-
28,500
231,917
Balance - December 31, 2009
15,111,875
15,765,295
(4,054,458)
1,067,100
27,889,812
-
2,387,047
-
2,387,047
Comprehensive loss:
Net income
Change in net unrealized gains
on securities available for
sale, net of reclassification
adjustment and tax effect
Total comprehensive income
Acquisition of MoreBank (465,195
shares at $12 per share)
Acquisition of MoreBank (47,200
options at $0.43 per option)
Warrants exercised (464,565 shares
-
-
-
2,325,975
3,256,365
-
20,066
at $12 per share)
2,322,825
3,251,955
Options exercised (50 shares at $10
per share)
Share-based compensation expense
250
-
250
220,893
-
-
-
-
-
-
(717,985)
(717,985)
1,669,062
5,582,340
20,066
5,574,780
500
220,893
-
-
-
-
-
Balance - December 31, 2010
$ 19,760,925 $ 22,514,824 $ (1,667,411) $ 349,115 $ 40,957,453
See notes to financial statements.
5
The Bank of Princeton
Statement of Cash Flows
Years Ended December 31, 2010 and 2009
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses
Depreciation and amortization
Income from bank-owned life insurance
Share-based compensation
Deferred income taxes
Accretion of deferred loan fees
Net amortization of securities premiums
Net realized gain on sale of securities available for sale
Gain on acquisition of MoreBank
Loss on other real estate owned
Increase in accrued interest receivable and other assets
Increase (decrease) in accrued interest payable and other liabilities
2010
2009
$ 2,387,047
$ 412,705
3,301,108
479,761
(32,322)
220,893
(1,555,782)
(130,016)
647,502
(1,229,088)
(1,014,476)
80,000
(349,460)
1,809,348
1,203,583
371,025
-
231,917
-
(106,666)
246,843
(413,259)
-
-
(1,413,244)
(91,459)
Net Cash Provided by Operating Activities
4,614,515
441,445
Cash Flows from Investing Activities
Purchases of available for sale securities
Maturities, calls and repayments of available for sale securities
Proceeds from sales of available for sale securities
Purchases of held to maturity securities
Maturities, calls, and repayments of held to maturity securities
Net increase in loans
Purchases of bank-owned life insurance
Purchases of premises and equipment
Purchases of restricted bank stock
Net cash received from MoreBank acquisition
(144,276,426)
33,360,184
32,430,563
-
7,247,547
(64,074,733)
(6,000,000)
(1,845,857)
(40,200)
11,028,316
(37,915,840)
29,751,750
8,934,654
(13,588,623)
5,386,070
(83,433,151)
-
(88,977)
(859,000)
-
Net Cash Used in Investing Activities
(132,170,606)
(91,813,117)
Cash Flows from Financing Activities
Net increase in deposits
Net increase in federal funds purchased
Proceeds from borrowings
Repayments of borrowings
Proceeds from exercise of stock warrants and options
143,659,729
1,044,000
-
(4,406,806)
5,575,280
52,030,972
-
18,000,000
(862,177)
28,500
Net Cash Provided by Financing Activities
145,872,203
69,197,295
Net Increase (Decrease) in Cash and Cash Equivalents
18,316,112
(22,174,377)
Cash and Cash Equivalents - Beginning
7,303,513
29,477,890
Cash and Cash Equivalents - Ending
$ 25,619,625
$ 7,303,513
See notes to financial statements.
6
The Bank of Princeton
Statement of Cash Flows (Continued)
Years Ended December 31, 2010 and 2009
Supplementary Cash Flows Information
Interest paid
2010
2009
$ 4,693,427
$ 3,564,212
Supplementary Schedule of Noncash Investing and Financing Activities
Transfers from loans, net to other real estate owned
$ 992,717
$ 227,283
Assets from acquisition of MoreBank
$ 75,587,819
$ -
Liabilities from acquisition of MoreBank
$ 68,970,937
$ -
See notes to financial statements.
7
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
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 by the New Jersey Department of Banking and Insurance and the
Federal Deposit Insurance Corporation. The area served by the Bank, through its nine branches, is
primarily the Mercer County, New Jersey and certain Philadelphia, Pennsylvania metropolitan areas.
The Bank acquired MoreBank on September 30, 2010, which is more fully described in Note 2 –
Business Combinations. In accordance with the terms of the plan of merger, the Bank issued shares
of its common stock in exchange for all of the outstanding shares of MoreBank common stock. Upon
issuance of these shares, the total number of shareholders of the Bank’s common stock exceeded 500
shareholders. Pursuant to requirements of Section 12(b) of the Securities Exchange Act of 1934, the
Bank plans to file a registration statement with regulatory authorities within 120 days of December
31, 2010.
Subsequent events
Effective April 1, 2009, the Bank adopted Financial Accounting Standards Board (FASB) guidance
now codified as FASB ASC Topic 855, Subsequent Events. This guidance establishes general
standards for accounting and for disclosure of events that occur after the balance sheet date but before
financial statements are issued. The subsequent event guidance sets forth the period after the balance
sheet date during which management of a reporting entity should evaluate events or transactions that
may occur for potential recognition in the financial statements, identifies the circumstances under
which an entity should recognize events or transactions occurring after the balance sheet date in the
financial statements, and the disclosures that should be made about events or transactions that occur
after the balance sheet date. Management evaluated subsequent events until the date of issuance of
the report and concluded that no events occurred that were of a material nature.
Basis of financial statement presentation
The financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”). In preparing the financial statements,
management is required to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and revenues and expenses for the periods then
ended. Actual results could differ significantly from those estimates.
8
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
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. Because of uncertainties associated with estimating the amounts, timing and
likelihood of possible outcomes, 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, the potential impairment of restricted stock, the valuation of deferred
tax assets, and the determination of other-than-temporary impairment of securities.
A material estimate that is particularly susceptible to significant change relates to the determination of
the allowance for loan losses. Management believes that the allowance for loan losses is
adequate. While management uses the most current information available to recognize losses on
loans, future additions to the allowance for loan losses may be necessary based on changes in
economic conditions in the market area.
In addition, various regulatory agencies, as an integral part of their examination process, periodically
review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about information available to them at the time of
their examinations.
Significant group concentrations of credit risk
Most of the Bank’s activities are with customers located within the Mercer County, New Jersey and
certain Philadelphia, Pennsylvania metropolitan areas. Note 3 describes the type of securities in
which the Bank invests. Note 4 describes the types of lending in which the Bank engages. The Bank
does not have any portion of its business dependent on a single or limited number of customers or
industries, the loss of which would have a material adverse effect on its business. No substantial
portion of loans is concentrated within a single industry or group of related industries, except that a
significant majority of loans are secured by real estate. There are numerous risks associated with
commercial and consumer lending that could impact the borrowers’ ability to repay on a timely basis.
They include, but are not limited to: the owner’s business expertise, changes in local, national, and in
some cases international economies, competition, governmental regulation, and the general financial
stability of the borrowing entity.
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.
9
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
Business combinations
The Bank accounts for business combinations in accordance with FASB ASC Topic 805, Business
Combinations, and, accordingly, records the net assets of companies acquired at estimated fair value
at the acquisition date and includes the results of operations of the companies acquired in the
statements of operations as of the acquisition date. The Bank recognizes the excess of net assets
acquired over consideration transferred as a gain on acquisition and the excess of consideration
transferred over net assets acquired as goodwill.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and federal funds sold with original maturities of 90
days or less. Generally, federal funds are purchased for one-day periods.
Securities
Investments in debt securities that the Bank has the positive intent and ability to hold to maturity are
classified as held to maturity securities and reported at amortized cost. Debt and equity securities that
are bought and held principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized holding gains and losses included in
earnings. Debt and equity securities not classified as trading securities, nor as held to maturity
securities are classified as available for sale securities and reported at fair value, with unrealized
holding gains or losses, net of deferred income taxes, reported in the accumulated other
comprehensive income component of stockholders’ equity. The Bank held no trading securities at
December 31, 2010 and 2009. Discounts and premiums are accreted and amortized, respectively, to
income by use of the level-yield method. Gain or loss on sales of securities available for sale is based
on the specific identification method.
Management considers, in determining whether other-than-temporary impairment exists, (1) the
length of time and the extent to which the fair value has been less than amortized cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to
retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery
in fair value.
Accounting guidance specifies that (a) if a company does not have the intent to sell a debt security
prior to recovery and, (b) it is more likely than not that it will not have to sell the debt security prior to
recovery, the security would not be considered other-than-temporarily impaired unless there is a
credit loss.
The credit component of an other-than-temporary impairment of a debt security is recognized in
earnings and the remaining portion in other comprehensive income. For held-to-maturity debt
securities, the amount of an other-than-temporary impairment recorded in other comprehensive
income for the noncredit portion of a previous other-than-temporary impairment will be amortized
prospectively over the remaining life of the security on the basis of the timing of future estimated
cash flows of the security.
10
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
For equity securities, when the Bank decides to sell an impaired available-for-sale security and the
entity does not expect the fair value of the security to fully recover before the expected time of sale,
the security is deemed other-than-temporarily impaired in the period in which the decision to sell is
made. The Bank recognizes an impairment loss when the impairment is deemed other than temporary
even if a decision to sell has not been made.
Loans
Loans receivable that the Bank has the intent and ability to hold for the foreseeable future or until
maturity or payoff are reported at their outstanding unpaid principal balances, net of an allowance for
loan losses, deferred fees and costs, and fair value adjustments under the acquisition method of
accounting. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, and fair value adjustments under the acquisition method of accounting
are deferred and recognized as an adjustment of the yield (interest income) on the related loans. The
Bank is generally amortizing these amounts over the contractual life of the loan. Premiums and
discounts on purchased loans are amortized as adjustments to interest income using the level yield
method.
The loan receivable portfolio is segmented into commercial real estate, commercial and industrial,
construction, residential first-lien mortgage, residential second-lien mortgage, and consumer loan
classes.
For all classes of loans receivable, 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, including impaired 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 (generally six months) and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt. The past due status of all classes of loans receivable is determined on
contractual due dates for loan payments.
Allowance for loan losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded
lending commitments. The allowance for loan losses represents management’s estimate of losses
inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The
reserve for unfunded lending commitments represents management’s estimate of losses inherent in its
unfunded loan commitments and is recorded in other liabilities on the balance sheet. The allowance
for credit losses is increased by the provision for loan losses, and decreased by charge-offs, net of
recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and
subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of
loans receivable are charged off to the allowance as soon as it is determined that the repayment of all,
or part, of the principal balance is highly unlikely.
11
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
The allowance for loan losses is maintained at a level considered adequate to provide for losses that
can be reasonably anticipated. The Bank performs a quarterly evaluation of the adequacy of the
allowance. The allowance is based on the Bank’s past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value
of any underlying collateral, composition of the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective as it requires material estimates that may be
susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans
that are classified as impaired. For loans that are classified as impaired, an allowance is established
when the discounted cash flows (or collateral value or observable market price) of the impaired loan
is lower than the carrying value of that loan. The general component covers pools of loans by loan
class including commercial loans not considered impaired, as well as smaller balance homogeneous
loans, such as residential real estate and other consumer loans. These pools of loans are evaluated for
loss exposure based upon historical loss rates for each of these categories of loans, adjusted for
qualitative factors. These qualitative risk factors include:
1. Lending policies and procedures, including underwriting standards and collection, charge-off,
and recovery practices.
2. National, regional, and local economic and business conditions, as well as the condition of
various market segments, including the value of underlying collateral for collateral-dependent
loans.
3. Nature and volume of the portfolio and terms of loans.
4. Experience, ability, and depth of lending management and staff.
5. Volume and severity of past due, classified and nonaccrual loans, as well as other loan
modifications.
6. Quality of the Bank’s loan review system, and the degree of oversight by the Bank’s Board of
Directors.
7. Existence and effect of any concentrations of credit and changes in the level of such
concentrations.
8. Effect of external factors, such as competition and legal and regulatory requirements.
Each factor is assigned a value to reflect improving, stable or declining conditions based on
the
management’s best
evaluation. Adjustments to the factors are supported through documentation of changes in conditions
in a narrative accompanying the allowance for loan loss calculation.
information available at
judgment using
time of
relevant
the
12
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
The Bank determines the allowance for credit losses by portfolio segment, which consists of
commercial real estate loans, commercial and industrial loans, construction loans, residential first-lien
mortgage loans, residential second-lien mortgage loans and consumer loans. The Bank estimates the
inherent risk of loss on all loans by portfolio segment, based primarily on the risk factors identified
above and by applying a weight factor to each element for each portfolio segment.
Each factor is assigned a value to reflect improving, stable or declining conditions based on
management’s best judgment using relevant information available at the time of the evaluation.
Adjustments to the factors are supported through documentation of changes in conditions in a
narrative accompanying the allowance for loan loss calculation.
Single family real estate loans involve certain risks such as interest rate risk and risk of non
repayment. Adjustable-rate single family real estate loans decreases the interest rate risk to the Bank
that is associated with changes in interest rates but involve other risks, primarily because as interest
rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby
increasing the potential for default. At the same time, the marketability of the underlying property
may be adversely affected by higher interest rates. Repayment risk can be affected by job loss,
divorce, illness and personal bankruptcy or the borrower.
Construction lending is generally considered to involve a high risk due to the concentration of
principal in a limited number of loans and borrowers and the effects of general economic conditions
on developers and builders. Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the project and the estimated
cost (including interest) of the project. The nature of these loans is such that they are generally
difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not
necessarily pre-sold and thus pose a greater potential risk to the Bank than construction loans to
individuals on their personal residences.
Commercial real estate lending entails significant additional risks as compared with single-family
residential property lending. Such loans typically involve large loan balances to single borrowers or
groups of related borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project. The success of such projects is sensitive to changes in
supply and demand conditions in the market for commercial real estate as well as economic
conditions generally.
Commercial business lending is generally considered higher risk due to the concentration of principal
in a limited number of loans and borrowers and the effects of general economic conditions on the
business. Commercial business loans are primarily secured by inventories and other business. In
most cases, any repossessed collateral for a defaulted commercial business loans will not provide an
adequate source of repayment of the outstanding loan balance.
Consumer loans generally have shorter terms and higher interest rates than other lending but
generally involve more credit risk because of the type and nature of the collateral and, in certain
cases, the absence of collateral. In addition, consumer lending collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be adversely effected by job loss,
divorce, illness and personal bankruptcy. In most cases, any repossessed collateral for a defaulted
consumer loan will not provide an adequate source of repayment of the outstanding loan.
13
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
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.
The Bank further segregates the portfolio into original legacy loans and those loans acquired in the
MoreBank merger. The loans acquired in the MoreBank merger were recorded at fair value with no
carryover of the related allowance for loan losses.
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 loans. 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 real estate loans, commercial and industrial loans 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.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its
estimated fair value. The estimated fair values of substantially all of the Bank’s impaired loans are
measured based on the estimated fair value of the loan’s collateral, less the cost to sell.
For commercial real estate loans, estimated fair values of the real estate collateral are determined
primarily through third-party appraisals. When a real estate-secured loan becomes impaired, a
decision is made regarding whether an updated certified appraisal of the real estate is necessary. This
decision is based on various considerations, including the age of the most recent appraisal, the loan-
to-value ratio based on the original appraisal and the condition of the property. Appraised values are
discounted to arrive at the estimated selling price of the collateral, which is considered to be the
estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable
and inventory and equipment, estimated fair values are determined based on the borrower’s financial
statements,
receivable aging or equipment appraisals or
invoices. Indications of value from these sources are generally discounted based on the age of the
financial information or the quality of the assets.
reports, accounts
inventory
smaller balance homogeneous
Large groups of
for
impairment. Accordingly, the Bank does not separately identify individual residential first-lien
mortgage loans, residential second-lien mortgage loans and consumer loans for impairment
disclosures, unless such loans are the subject of a troubled debt restructuring agreement.
loans are collectively evaluated
14
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
it
is deemed
Loans whose terms are modified are classified as troubled debt restructurings if the Bank grants
borrower concessions and
those borrowers are experiencing financial
difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary
reduction in interest rate or an extension of a loan’s stated maturity date. Nonaccrual troubled debt
restructurings are restored to accrual status if principal and interest payments, under the modified
terms, are current for six consecutive months after modification. Loans classified as troubled debt
restructurings are designated as impaired.
that
The allowance calculation methodology includes further segregation of loan classes into risk-rating
categories. The borrower’s overall financial condition, repayment sources, guarantors and value of
collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies
arise, such as delinquent loan payments, for commercial and consumer loans.
Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful
and loss. Loans classified special mention have potential weaknesses that deserve management’s
close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment
prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize
the liquidation of the debt. They include loans that are inadequately protected by the current sound
net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified
doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic
that collection or liquidation in full, on the basis of current conditions and facts, is highly
improbable. Loans classified loss are considered uncollectible and are charged to the allowance for
loan losses. Loan not classified are rated pass.
In addition, federal regulatory agencies, as an integral part of their examination process, periodically
review the Bank’s allowance for loan losses and may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at the time of their
examination, which may not be currently available to management. Based on management’s
comprehensive analysis of the loan portfolio, management believes the current level of the allowance
for loan losses is adequate.
Bank-owned life insurance
The Bank is the beneficiary of insurance policies on the lives of certain officers, employees and
directors of the Bank. This life insurance investment is accounted for using the cash surrender value
method and is recorded at its net realizable value. Increase in cash surrender values are recorded as
non-interest income.
Other real estate owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at
fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the assets are then recorded at
the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations
and changes in the valuation allowance are included in non-interest expense.
15
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
Premises and equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line method over the shorter of the lease term or estimated useful lives of
the related assets.
Accrued interest receivable and other assets
Accrued interest receivable and other assets are recorded at net realizable value and include accrued
interest receivable, deferred tax assets, net, restricted investments in bank stocks, prepaid assets and
other assets.
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold
restricted stock of its district Federal Home Loan Bank according to a predetermined formula.
Restricted stock in the amount of $1,322,000 and $898,000 is carried at cost at December 31, 2010
and 2009, respectively.
Management’s determination of whether these investments are impaired is based on an assessment of
the ultimate recoverability of their cost, rather than by recognizing temporary declines in value. The
determination of whether a decline affects the ultimate recoverability of 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.
The Bank also held $100,000 and $50,000 of stock in Atlantic Central Bankers Bank at December 31,
2010 and 2009, respectively. Management believes no impairment charge is necessary related to the
FHLB restricted stock or the ACBB restricted stock as of December 31, 2010.
Intangible assets
The acquisition of MoreBank on September 30, 2010 resulted in the Bank recording a core deposit
intangible of $551,409. The core deposit intangible asset is amortized to expense on a straight-line
basis over the expected period of benefit, which was established initially to be 5 years.
The recoverability of the carrying value of intangible assets will be evaluated whenever changes in
circumstances indicate recoverability may be in doubt and there may be impairment. Permanent
declines in value, if any, will be charged to expense. There were no impairment charges in 2010.
16
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
Income taxes
The Bank accounts for income taxes in accordance with income tax accounting guidance contained in
FASB ASC Topic 740, Income Taxes. This includes guidance related to accounting for uncertainty
in income taxes, which sets out a consistent framework to determine the appropriate level of tax
reserves to maintain for uncertain tax positions. The Bank had no material unrecognized tax benefits
or accrued interest and penalties as of December 31, 2010 and 2009. The Bank’s policy is to account
for interest and penalties as a component of other non-interest expense. The Bank is subject to income
taxes in the U. S. and various state and local jurisdictions. As of December 31, 2010, tax years 2007
through 2010 are subject to examination by various taxing authorities. Tax regulations are subject to
interpretation of the related tax laws and regulations and require significant judgment to apply.
Federal and state income taxes have been provided on the basis of reported income or loss. The
amounts reflected on the tax returns differ from these provisions due principally to temporary
differences in the reporting of certain items for financial reporting and income tax reporting purposes.
The tax effect of these temporary differences is accounted for as deferred taxes applicable to future
periods.
Deferred income tax expense or benefit is determined by recognizing deferred tax assets and
liabilities for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred assets and liabilities of a change in tax rates is recognized in earnings in the period that
includes the enactment date. The realization of deferred tax assets is assessed and a valuation
allowance provided for the full amount which is not more likely than not to be realized.
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
The Bank has a 401(k) plan into which 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 years ended December 31, 2010 and 2009, no matching contributions were
made.
17
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
Stock compensation plan
The stock compensation accounting guidance set forth in FASB ASC Topic 718, Compensation -
Stock Compensation requires that compensation costs relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the grant date fair value of
the equity or liability instruments issued. The stock compensation accounting guidance covers a wide
range of share-based compensation arrangements including stock options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans.
The stock compensation accounting guidance requires that compensation costs for all stock awards be
calculated and recognized over the employees’ service period, generally defined as the vesting period.
For awards with graded vesting, compensation cost is recognized on a straight-line basis over the
requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value
of stock options.
Earnings per share
Basic earnings per share amounts are calculated by dividing income available to common
stockholders by the weighted average common shares outstanding during the period, and exclude any
dilutive effects of vested and exercisable options and warrants. Diluted earnings per share amounts
include the dilutive effects of vested and exercisable options and warrants whose exercise price is less
than the market price of the Bank’s shares. Diluted earnings per share amounts are calculated by
dividing income available to common stockholders by the weighted average common shares
outstanding during the period if options and warrants were exercised and converted into common
stock, using the treasury stock method.
18
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
The following table sets forth the computation of basic and diluted earnings per share for the years
ended December 31, 2010 and 2009:
Income
(numerator)
Shares
(denominator)
Per share
amount
Year ended December 31, 2010:
Basic earnings per share:
Net income
$
2,387,047
3,481,571
$
0.69
Effect of dilutive securities:
Stock options and warrants
29,367
Dilutive earnings per share
$
2,387,047
3,510,938
$
0.68
Year ended December 31, 2009:
Basic earnings per share:
Net income
$
412,705
3,020,031
$
0.14
Effect of dilutive securities:
Stock options and warrants
3,446
Dilutive earnings per share
$
412,705
3,023,476
$
0.14
Advertising costs
The Bank charges the costs of advertising to expense as incurred.
Comprehensive income
Accounting principles generally require that recognized revenues, 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.
The components of other comprehensive income for the years ended December 31 were as follows:
2010
2009
Unrealized holding gains on securities available for sale
Reclassification of gains included in net income
$
141,232
(1,229,088)
$
951,772
(413,259)
Tax effect
(1,087,856)
369,871
538,513
(183,094)
Change in net unrealized gains on available for sale securities,
net of reclassification adjustment and tax effect
$
(717,985)
$
355,419
19
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
Interest Rate Risk
The Bank is principally engaged in the business of attracting deposits from the general public and
using these deposits, together with borrowings and other funds, to purchase securities and to make
loans. The potential for interest rate risk exists as a result of the generally shorter duration of interest-
sensitive liabilities compared to the generally longer duration of interest-sensitive assets. In a rising
rate environment, liabilities re-price faster than assets, thereby reducing net interest income. For this
reason, management regularly monitors the maturity structure of assets and liabilities in order to
measure the level of interest rate risk and to plan for future volatility.
Reclassifications
Certain amounts as of and for the year ended December 31, 2009 have been reclassified to conform to
the current year’s presentation. These reclassifications did not have any impact on stockholders’
equity or net income.
Recent accounting pronouncements
The FASB has issued the following updates to the FASB Accounting Standards Codification (ASC).
Accounting Standard Update (ASU) 2011-01
The amendments in this Update temporarily delay the effective date of the disclosures about troubled
debt restructurings in Update 2010-20 for public entities. Under the existing effective date in Update
2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings
for periods beginning on or after December 15, 2010. The delay is intended to allow the FASB time
to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of
the new disclosures about troubled debt restructurings for public entities and the guidance for
determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that
guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The
Bank does not expect the adoption of these amendments to have a material effect on their financial
position or results of operation. The deferral in this amendment is effective upon issuance.
ASU 2010-29
The objective of this Update is to address diversity in practice about the interpretation of the pro
forma revenue and earnings disclosure requirements for business combinations. Paragraph 805-10-
50-2(h) requires a public entity to disclose pro forma information for business combinations that
occurred in the current reporting period. The disclosures include pro forma revenue and earnings of
the combined entity for the current reporting period as though the acquisition date for all business
combinations that occurred during the year had been as of the beginning of the annual reporting
period. If comparative financial statements are presented, the pro forma revenue and earnings of the
combined entity for the comparable prior reporting period should be reported as though the
acquisition date for all business combinations that occurred during the current year had been as of the
beginning of the comparable prior annual reporting period.
20
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 1 - Summary of Significant Accounting Policies (continued)
ASU - 2010-20
In January 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings in Update No. 2010-20. The amendments in this ASU temporarily
delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for
public entities. The delay is intended to allow the FASB time to complete its deliberations on what
constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt
restructurings for public entities and the guidance for determining what constitutes a troubled debt
restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for
interim and annual periods ending after June 15, 2011.
In practice, some preparers have presented the pro forma information in their comparative financial
statements as if the business combination that occurred in the current reporting period had occurred as
of the beginning of each of the current and prior annual reporting periods. Other preparers have
disclosed the pro forma information as if the business combination occurred at the beginning of the
prior annual reporting period only, and carried forward the related adjustments, if applicable, through
the current reporting period.
The amendments in this Update specify that if a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only.
The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805
to include a description of the nature and amount of material, nonrecurring pro forma adjustments
directly attributable to the business combination included in the reported pro forma revenue and
earnings.
The amendments in this Update are effective prospectively for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2010. Early adoption was permitted. The adoption of this standard did not have a
material impact on our balance sheet or statement of operations.
21
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 2 - Business Combinations
Consistent with its plans for strategic growth, the Bank acquired all of the outstanding common stock of
MoreBank, a Pennsylvania commercial bank, in a stock-for-stock transaction on September 30, 2010.
MoreBank was merged into the Bank on this date. The Bank exchanged 465,195 of its common shares,
valued at $12 per share by a third-party valuation firm, for all outstanding MoreBank shares and also
replaced outstanding and unexercised MoreBank options with 47,200 fully-vested options to purchase
common stock of the Bank. Total consideration transferred by the Bank amounted to $5,602,428 for net
assets of $6,616,904. The transaction included no contingent consideration arrangements.
The excess of net assets acquired over the consideration transferred of $1,014,476 was recognized as a
gain on acquisition. This gain resulted primarily from MoreBank deferred tax assets that were deemed
unrealizable by MoreBank prior to the business combination. The Bank applied a “more likely than not”
criterion on the date of acquisition in evaluating the need for a valuation allowance against these acquired
deferred tax assets. It was determined that no valuation allowance was required, and, accordingly, these
deferred tax assets will more likely than not be realized by the Bank.
Fair value for most loans acquired was estimated by using a methodology wherein loans with comparable
characteristics were aggregated by type of collateral, remaining maturity and re-pricing terms. Cash
flows for each pool were determined by estimating future credit losses and rates of prepayment.
Projected monthly cash flows were then discounted to acquisition date value using a risk-adjusted market
rate for similar loans. To estimate the fair value of the remaining loans, the underlying collateral for the
loans was analyzed assuming the fair values of the loans were derived from the eventual sale of the
collateral. The value of the collateral was based upon recent appraisals. Those values were discounted
using market-derived rates of return, with consideration given to the period of time and costs associated
with the foreclosure and disposition of the collateral. The MoreBank allowance for loan losses was not
included in the Bank’s accounting for this transaction as the loans were recorded at their fair values.
The Bank acquired loans with evidence of deterioration of credit quality since origination for which it was
probable, at the time of the acquisition, that the Bank would be unable to collect all contractually required
payments due. In accordance with the “Loans and Debt Securities Acquired with Deteriorating Credit
Quality” section of FASB ASC 310 “Receivables,” the Bank recorded a non-accretable, credit-related
discount, which is defined as the loans’ contractually required payments receivable in excess of the
amount of their cash flows expected to be collected. The Bank considered factors such as payment
history, collateral values, and accrual status when determining whether there was evidence of
deterioration of a loan’s credit quality at the acquisition date.
The Bank assumed transaction account deposits, time deposits and borrowings as part of the MoreBank
acquisition. The fair value of these items was calculated by discounting the contractual rates and
maturities using market rates for instruments with similar terms and maturities at the acquisition date.
Acquisition-related costs amounted to approximately $155,000 and are presented in professional fees
within the statements of operations. Valuation of MoreBank options and their replacement Bank options
were shown to be equal, and, accordingly, no amounts were recorded to post-combination earnings.
The Bank’s statement of operations includes MoreBank’s results beginning as of the acquisition date.
22
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 2 - Business Combinations (continued)
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as
of the date of the acquisition:
Assets:
Cash and cash equivalents
Securities available for sale
Loans, net
Premises and equipment, net
Core deposit intangible
Other assets
$
11,028,338
11,168,980
49,151,828
779,677
551,409
2,907,609
Total assets acquired
75,587,841
Liabilities:
Deposits
Borrowings
Other liabilities
Total liabilities assumed
63,524,943
5,283,114
162,880
68,970,937
Net assets acquired
$
6,616,904
The following summarizes the unaudited pro forma results of operations for the year ended December 31,
2010, as if the Bank acquired MoreBank on January 1, 2010. The pro forma results for 2010 include
merger costs, net of tax, of approximately $80,000, or $0.02 per diluted share.
Net interest income before provision for loan losses
Net income
Earnings-per-share – basic
Earnings-per-share – diluted
$ 13,042,000
$ 1,936,000
$ 0.58
$ 0.57
23
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 3 - Securities
The amortized cost and approximate fair value of securities are summarized as follows:
Amortized cost
Gross
Unrealized
gains
Gross
Unrealized
losses
Fair value
December 31, 2010:
Securities available for sale:
U.S. Treasury securities
U.S. government agency securities
Residential mortgage-backed securities:
U.S. government-sponsored
Obligations of state and political subdivisions
Corporate securities
Securities held to maturity:
Mortgage-backed securities:
U.S. government-sponsored
December 31, 2009:
Securities available for sale:
U.S. government agency securities
Residential mortgage-backed securities:
U.S. government-sponsored
Corporate securities
Securities held to maturity:
U.S. government agency securities
Residential mortgage-backed securities:
U.S. government-sponsored
Obligations of state and political subdivisions
$
3,745,854
15,052,195
$
17,321
35,358
$
(9,275)
(45,493)
$
3,753,900
15,042,060
108,935,548
28,383,218
2,954,839
1,734,697
24,674
7,721
(550,308)
(665,653)
(20,080)
110,119,937
27,742,239
2,942,480
$
159,071,654
$
1,819,771
$
(1,290,809)
$
159,600,616
$
1,394,188
$
59,865
$
-
$
1,454,053
$
2,500,972
$
11,193
$
(14,060)
$
2,498,105
64,368,484
1,936,973
1,600,364
106,320
(86,999)
-
65,881,849
2,043,293
$
68,806,429
$
1,717,877
$
(101,059)
$
70,423,247
$
6,007,923
$
22,077
$
(40,310)
$
5,989,690
2,162,190
500,602
38,163
5,989
-
-
2,200,353
506,591
$
8,670,715
$
66,229
$
(40,310)
$
8,696,634
24
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 3 - Securities (continued)
The Bank had 88 securities available for sale in an unrealized loss position as of December 31, 2010,
consisting of one U.S Treasury security with a fair value of $1,881,720; four U.S. government agency
securities with an aggregate fair value of $4,920,597; 37 U.S. government-sponsored mortgage-backed
securities and with an aggregate fair value of $46,576,542; 44 obligations of state and political
subdivisions with an aggregate fair value of $23,265,972; and two corporate securities with an aggregate
fair value of $1,979,920. All had been in an unrealized loss position for less than 12 months at
December 31, 2010.
The unrealized losses on the investments in U.S. government obligations and U.S. government agency
securities were caused by interest rate increases. The contractual terms of these investments do not permit
the issuer to settle the securities at a price less than the amortized cost bases of the investments. The Bank
does not intend to sell these investments and it is not more likely than not that it will be required to sell
these investments before recovery of their amortized costs bases; therefore, they are not deemed to be
other-than-temporarily impaired.
The unrealized losses on the U.S government-sponsored mortgage-backed securities were caused by
interest rate increases. The Bank purchased these investments at a discount relative to their face amount,
and the contractual cash flows of these investments are guaranteed by an agency of the U.S. government.
Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost
bases of the Bank’s investments. Because the decline in market value is attributable to changes in interest
rates and not credit quality, and because the Bank does not intend to sell the investments and it is not
more likely than not that the Bank will be required to sell the investments before recovery of their
amortized cost bases, the Bank does not consider these investments to be other-than-temporarily
impaired.
The unrealized losses on the obligations of state and political subdivisions were caused by interest rate
increases. The Bank purchased these investments at a discount relative to their face amount, and the
contractual cash flows of these investments, which are primarily general obligation bonds of the issuers,
are buoyed by the broad taxing authority of those issuers. Accordingly, it is expected that the securities
would not be settled at a price less than the amortized cost bases of the Bank’s investments. Because the
decline in market value is attributable to changes in interest rates and not credit quality, and because the
Bank does not intend to sell the investments and it is not more likely than not that the Bank will be
required to sell the investments before recovery of their amortized cost bases, the Bank does not consider
these investments to be other-than-temporarily impaired.
The unrealized losses on the corporate securities were caused by interest rate increases. The Bank
purchased these investments at a discount relative to their face amount. It is expected that the securities
would not be settled at a price less than the amortized cost bases of the Bank’s investments. Because the
decline in market value is attributable to changes in interest rates and not credit quality, and because the
Bank does not intend to sell the investments and it is not more likely than not that the Bank will be
required to sell the investments before recovery of their amortized cost bases, the Bank does not consider
these investments to be other-than-temporarily impaired.
25
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 3 – Securities (continued)
There were 12 securities in an unrealized loss position as of December 31, 2009, consisting of one U.S.
government agency security available for sale with a fair value of $985,940; eight U.S government-
sponsored mortgage-backed securities available for sale with an aggregate fair value of $8,251,648; and
three U.S. government agency securities held to maturity with an aggregate fair value of $2,959,690. All
were in an unrealized loss position for less than 12 months at December 31, 2009.
The amortized cost and fair value of securities as of December 31, 2010, by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities because the securities may be
called without any penalties.
Available for sale
Held to maturity
Amortized
cost
Fair
value
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
$
535,550
17,816,335
13,161,814
18,622,407
108,935,548
$
535,550
17,806,104
12,930,350
18,208,675
110,119,937
Amortized
cost
-
$
-
-
-
Fair
value
-
$
-
-
-
1,394,188
1,454,053
$
159,071,654
$
159,600,616
$
1,394,188
$
1,454,053
During 2010, the Bank sold 34 securities available for sale for total proceeds of $32,430,563, resulting in
gross realized gains of $1,229,088. During 2009, the Bank sold securities available for sale for total
proceeds of $8,934,654, resulting in gross realized gains of $413,259.
At December 31, 2010 and 2009, U.S. government agency, U.S government-sponsored mortgage-backed
securities of $88,792,988 were pledged by the Bank to the Commissioner of Banking, State of New
Jersey, for the purpose of securing public deposits under the Governmental Unit Deposit Protection Act.
At December 31, 2010 and 2009, residential first-lien mortgage loans, residential second-lien mortgage
loans, U.S government-sponsored mortgage-backed securities of $44,495,548 were pledged by the Bank
to the FHLB-NY as collateral for long-term and short-term borrowings. At December 31, 2010, U.S
government-sponsored mortgage-backed securities of $5,780,317 were pledged by the Bank to the FHLB-
Pittsburgh as collateral for long-term and short-term borrowings. In addition, at December 31, 2010 and
2009, U.S government-sponsored mortgage-backed securities of $1,956,778 were pledged by the Bank to
the FHLB-NY as collateral for the Bank’s business sweep accounts held at the FHLB-NY.
26
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 4 - Loans
The components of loans receivable at December 31 were as follows:
2010
2009
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Residential second-lien mortgage
Consumer
$
166,472,102
60,768,227
25,970,065
11,869,889
19,284,480
1,441,365
$
89,959,353
31,670,986
23,272,903
15,342,860
13,681,219
1,047,871
Total loans
285,806,128
174,975,192
Deferred fees
Allowance for loan losses
(539,895)
(3,693,369)
(318,304)
(2,146,776)
Loans, net
$
281,572,864
$
172,510,112
Allowance for Possible Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses that is charged
against earnings and represents the Bank’s best estimate of probable losses in the loan portfolio at the
balance sheet date. The allowance is necessary to reserve for estimated loan losses and risks inherent in
the loan portfolio. The methodology is based on historical loss experience by type of credit and internal
risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current
events and conditions.
The Bank’s process for determining the appropriate level of the allowance for loan losses is designed to
account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends,
including the levels of and trends related to nonaccrual loans, past-due loans, potential problem loans,
criticized loans and net charge-offs or recoveries, among other factors.
The amount of the provision reflects not only the necessary increases in the allowance for loan losses
related to newly identified credit deterioration in the loan portfolio, but also reflects any necessary
increases or decreases in required allowances for specific loans or loan pools. The level of the allowance
reflects the Bank’s continuing evaluation of industry concentrations, specific credit risks, loan loss
experience, current loan portfolio quality, present economic, political and regulatory conditions and
unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for
specific credits; however, the entire allowance is available for any credit that, in the Bank’s judgment,
should be charged off.
While the Bank utilizes its best judgment based on currently available information, the ultimate adequacy
of the allowance for loan losses is dependent upon a variety of factors beyond the Bank’s control,
including, among other things, the performance of the loan portfolio, the economy, changes in interest
rates and the view of the regulatory authorities toward loan classifications.
27
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 4 - Loans (continued)
The Bank’s allowance for loan losses consists of three elements:
(i) specific valuation allowances based on probable losses on specific loans;
(ii) historical valuation allowances based on historical loan loss experience for similar loans with
similar characteristics and trends, adjusted, as necessary, to reflect the impact of current
conditions; and
(iii) general valuation allowances based on general economic conditions and other qualitative risk
factors, both internal and external.
The allowances established for probable losses on specific loans are based on a regular analysis and
evaluation of problem loans. Loans are classified based on an internal credit risk grading process that
evaluates, among other things: (i) a borrower’s ability to repay a loan; (ii) the underlying collateral on a
loan, if any; and (iii) the economic environment and industry in which the borrower operates. This
analysis is performed for all commercial loans. When a loan has a calculated grade of 7 or higher, the
Bank analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically
allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are
determined by analyzing a borrower’s ability to repay amounts owed, collateral deficiencies, the relative
risk grade of the loan and economic conditions affecting a borrower’s industry, among other things.
The following table details activity in the allowance for loan losses by portfolio segment for the year
ended December 31, 2010. Allocation of a portion of the allowance to one category of loans does not
preclude its availability to absorb losses in other categories.
28
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 4 - Loans (continued)
Allowance for loan losses:
Beginning balance
Provisions
Charge-offs
Recoveries
Ending balance
Ending balance:
Individually evaluated for impairment
Collectively evaluted for impairment
Loans acquired with deteriorated credit quality*
Total
Loans:
Ending balance:
Individually evaluated for impairment
Collectively evaluted for impairment
Loans acquired with deteriorated credit quality
Commercial real
estate
Commercial and
industrial
Construction
Residential
first-lien
mortgage
Residential
second-lien
mortgage
Consumer
Unallocated
Total
$
899,592
1,833,529
(1,250,000)
780
$
562,364
601,400
(445,853)
-
$
349,094
562,121
(7,387)
-
$
154,434
(76,185)
-
$
171,015
59,723
(52,055)
-
$
10,277
(1,673)
-
$
322,193
-
-
$
2,146,776
3,301,108
(1,755,295)
780
$
1,483,901
$
717,911
$
903,828
$
78,249
$
178,683
$
8,604
$
322,193
$
3,693,369
$
-
1,483,901
86,405
-
$
717,911
35,116
-
$
903,828
-
-
$
78,249
-
-
$
178,683
13,466
-
$
8,604
-
-
$
322,193
-
$
-
3,693,369
134,987
$
1,570,306
$
753,027
$
903,828
$
78,249
$
192,149
$
8,604
$
322,193
$
3,828,356
$
4,913,794
160,604,975
953,333
$
1,395,182
58,985,599
387,446
$
1,991,048
23,979,017
$
-
11,869,889
-
-
$
508,264
18,627,645
148,571
$
-
1,441,365
-
-
$
-
-
$
8,808,288
275,508,490
1,489,350
Ending balance
$
166,472,102
$
60,768,227
$
25,970,065
$
11,869,889
$
19,284,480
$
1,441,365
$
-
$
285,806,128
*These amounts represent credit marks established on loans acquired in the MoreBank acquisition which are netted
against loans and not included in the allowance for loan losses.
The following is an analysis of the allowance for loan losses for the year ended December 31, 2009:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
$
1,092,258
1,203,583
(149,065)
-
$
2,146,776
29
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 4 - Loans (continued)
A loan is considered impaired when, based on current information and events, it is probable that the Bank
will be unable to collect all amounts due from the borrower in accordance with the contractual terms of
the loan. Impaired loans include nonperforming commercial loans but also include loans modified in
troubled debt restructurings where concessions have been granted to borrowers experiencing financial
difficulties. These concessions could include a reduction in the interest rate on the loan, payment
extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
The following table summarizes information on impaired loans by loan portfolio class as of December 31,
2010. There were no impaired loans for which a related allowance was necessary at December 31, 2010.
Unpaid
principal
balance
Recorded
investment
Related
allowance
Average
recorded
investment
Interest
income
recognized
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Residential second-lien mortgage
Consumer
$
7,941,347
2,961,280
1,998,435
$
5,867,127
1,782,628
1,991,048
-
720,235
-
-
656,835
-
-
$
-
-
-
-
-
$
6,796,824
3,003,329
1,991,048
-
715,393
-
-
$
-
-
-
-
-
$
13,621,297
$
10,297,638
$
-
$
12,506,594
$
-
Impaired loans include $1,489,350 of loans, net of credit marks of $134,987, which were acquired in the
MoreBank acquisition.
The total recorded investment in impaired loans consisted of nonaccrual loans totaling $2,313,239 as of
December 31, 2009. The recorded investment in impaired loans not requiring an allowance for loan
losses was $2,083,622 at December 31, 2009. The recorded investment in impaired loans requiring an
allowance for loan losses at December 31, 2009 was $229,617 and the related allowance for loan losses
was $141,417. At December 31, 2009, included in impaired loans is an $885,481 loan classified as a
troubled debt restructuring. In addition to this amount, the Bank had troubled debt restructurings that
were performing in accordance with their modified terms of $3,991,827 at December 31, 2009.
At December 31, 2010, the Bank had nine loans totaling $6,012,239 that were considered troubled debt
restructurings and classified as impaired. Troubled debt restructurings of $3,788,304 were performing in
accordance with their modified terms at December 31, 2010. The remaining $2,223,935 of troubled debt
restructurings were on nonaccrual status at December 31, 2010.
30
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 4 - Loans (continued)
The Bank recognizes income on impaired loans under the cash basis when the collateral on the loan is
sufficient to cover the outstanding obligation to the Bank. Interest income that would have been
recognized on these loans, had they been current in accordance with their original terms, totaled
approximately $407,000 for the year ended December 31, 2010. During 2009, interest income that would
have been recognized on impaired loans had they been current in accordance with their original terms
totaled approximately $312,000. The amount of interest income that was actually recorded during 2009
with respect to such loans amounted to approximately $154,000.
Nonaccrual and past-due loans
Loans are considered past-due if the required principal and interest payments have not been received as of
the date such payments were due. Loans are placed on nonaccrual status at 90 days past-due, or when, in
the Bank’s opinion, the borrower may be unable to meet payment obligations as they become due, as well
as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of
whether or not such loans are considered past-due. At the time that 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.
The following table presents nonaccrual loans at December 31, 2010, segregated by loan portfolio class:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Residential second-lien mortgage
Consumer
Total
2010
$
3,487,766
1,782,628
-
-
275,821
-
$
5,546,215
31
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 4 - Loans (continued)
The following table presents an aging analysis of past-due loans as of December 31, 2010, segregated by
loan portfolio class:
30-59 days
past due
60-89 days
past due
> than 90 days
Total past due
Current
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Residential second-lien mortgage
Consumer
$
1,689,605
460,157
323,188
-
-
-
$
1,915,890
-
-
-
160,873
-
$
2,174,642
1,679,762
-
-
127,250
-
$
5,780,137
2,139,919
323,188
-
288,123
-
$
160,691,965
58,628,308
25,646,877
11,869,889
18,996,357
1,441,365
Total loans
receivables
$
166,472,102
60,768,227
25,970,065
11,869,889
19,284,480
1,441,365
Loans
receivable >
90 days and
accruing
-
$
-
-
-
-
-
Total
$
2,472,950
$
2,076,763
$
3,981,654
$
8,531,367
$
277,274,761
$
285,806,128
$
-
There were no loans past-due 90 days or more still accruing interest at December 31, 2009.
Credit quality indicators
As part of the on-going monitoring of the credit quality of the loan portfolio, the Bank tracks certain
credit quality indicators including trends related to (i) the weighted-average risk grade of commercial
loans, (ii) the level of classified commercial loans, (iii) net charge-offs and (iv) non-performing loans (see
details above). The Bank utilizes a risk grading matrix to assign a risk grade to each of its commercial
loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the 8 risk
grades is as follows:
Grade 1 - This grade includes “pass” loans to very high credit-quality borrowers. The borrowers in
this grade generally have significant capital strength, moderate leverage and readily available
financing alternatives.
Grades 2 to 4 - These grades include “pass” loans to borrowers of solid credit quality with moderate
risk. The borrowers in these grades are differentiated from borrowers in grade 1 on the basis of size
(capital and/or revenue), leverage, asset quality and the stability of the industry or market area.
Grade 5 - This grade includes “pass” loans to borrowers of acceptable credit quality and risk. The
borrowers in this grade are differentiated from grades 1 to 4 in terms of size, secondary sources of
repayment and/or lesser stature in other key credit metrics.
Grade 6 - This grade includes “special mention” loans in accordance with regulatory guidelines. This
grade is intended to be temporary, and includes loans to borrowers whose credit quality has clearly
deteriorated and are at risk of further decline unless active measures are taken to correct the situation.
32
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 4 - Loans (continued)
Grade 7 - This grade includes “substandard” loans in accordance with regulatory guidelines. A
“substandard” loan is defined as having particular weaknesses which make payment default or
principal exposure likely but not yet certain. Such loans are usually dependent upon collateral
liquidation, a secondary source of repayment or an event outside of the normal course of business.
Grade 8 - This grade includes “doubtful” loans in accordance with regulatory guidelines. These loans
are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult
to determine or upon some near-term event which lacks certainty.
Grade 9 - This grade includes “loss” loans in accordance with regulatory guidelines. These loans are
to be charged-off or charged-down when payment is acknowledged to be uncertain or when the
timing or value of payments cannot be determined. “Loss” is not intended to imply that the entire
loan or some portion of the loan will never be paid, nor does it in any way imply that there has been a
forgiveness of debt. There were no loans rated loss at December 31, 2010.
The following table presents weighted-average risk grades and classified loans by loan portfolio class
at December 31, 2010. Classified loans include loans in risk grades 7 (substandard) and 8 (doubtful).
Pass
Special mention
Substandard
Doubtful
Total
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Residential second-lien mortgage
Consumer
$
160,368,904
57,203,731
22,457,832
11,869,889
18,768,108
1,441,365
$
-
1,557,894
-
-
79,678
-
$
5,985,570
2,006,602
3,512,233
-
436,694
-
$
117,628
-
-
-
-
-
$
166,472,102
60,768,227
25,970,065
11,869,889
19,284,480
1,441,365
Total
$
272,109,829
$
1,637,572
$
11,941,099
$
117,628
$
285,806,128
33
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 5 - Premises and Equipment
The components of premises and equipment at December 31 were as follows:
Leasehold improvements
Furniture, fixtures and equipment
Construction in progress
Accumulated depreciation and amortization
Estimated
useful lives
10 Yrs.
3-7 Yrs.
2010
2009
$
2,126,556
1,678,208
1,544,470
$
1,451,557
1,269,246
2,896
5,349,234
(1,195,956)
2,723,699
(716,194)
Premises and equipment, net
$
4,153,278
$
2,007,505
Depreciation and amortization expense charged to operations amounted to $479,761 and $371,025 for the
years ended December 31, 2010 and 2009, respectively.
Construction in progress represents costs for acquisition and fit-out of new branches. Total commitments
for these purposes at December 31, 2010 were $620,000.
Note 6 - Accrued Interest Receivable and Other Assets
The components of accrued interest receivable and other assets at December 31 were as follows:
2010
2009
Accrued interest receivable
Deferred tax asset
Restricted investments in bank stocks
Prepaid assets and other assets
$
1,970,690
3,165,739
1,422,200
2,184,144
$
1,037,209
-
948,000
1,532,951
$
8,742,773
$
3,518,160
34
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 7 - Deposits
The components of deposits at December 31 were as follows:
Demand, non-interest-bearing
Demand, interest-bearing and savings
Money market
Time deposits, $100,000 and over
Time deposits, other
2010
2009
$
30,669,037
159,474,898
100,626,289
57,642,614
77,400,187
$
16,576,817
65,285,222
77,004,979
23,336,364
36,424,971
Total deposits
$
425,813,025
$
218,628,353
At December 31, 2010, the scheduled maturities of time deposits were as follows:
2011
2012
2013
2014
2015
$
62,688,335
35,977,510
6,108,281
21,091,946
9,176,729
$
135,042,801
35
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 8 - Borrowings
The following table is a schedule of the Bank’s long-term debt as of December 31, 2010 and 2009,
consisting of FHLB-NY and FHLB-Pittsburgh amortizing fixed-rate long-term advances by maturities:
Rate at
December 31,
2010
1.60%
2.34%
1.93%
1.82%
1.66%
2.61%
2.23%
2.05%
2.70%
3.30%
2.61%
2.40%
Maturity
2010
2009
8/8/2011
12/19/2011
5/14/2012
8/28/2012
10/15/2012
6/3/2013
8/28/2013
10/15/2013
7/23/2014
8/6/2014
8/28/2014
10/14/2014
$
702,083
1,470,644
1,023,061
1,769,860
1,289,232
1,032,235
2,091,055
1,474,410
1,492,753
1,033,678
3,048,341
1,586,779
$
-
-
-
2,756,204
1,945,778
-
2,820,230
1,959,983
1,874,893
-
3,812,141
1,968,594
$
18,014,131
$
17,137,823
Maturities of long-term debt in years subsequent to December 31, 2010 are as follows:
2011
2012
2013
2014
$
6,743,942
5,311,545
3,709,760
2,248,884
$
18,014,131
At December 31, 2010, federal funds purchased were $1,044,000. There were no amounts outstanding at
December 31, 2009.
At December 31, 2010, the Bank had federal funds available for purchase with the ACBB of $6,000,000
at interest rates that adjust daily.
At December 31, 2010, the Bank also had $244,381,500 of borrowing capacity with the FHLB-NY that is
based upon collateral available at that date.
36
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 9 - Accrued Interest Payable and Other Liabilities
The components of accrued interest payable and other liabilities at December 31 were as follows:
2010
2009
Accrued interest payable
Accrued expenses and other liabilities
$
1,092,169
1,334,888
$
627,264
377,283
$
2,427,057
$
1,004,547
Note 10 - 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 and standby letters of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet. The contract, or notional,
amounts of those instruments reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party (the “counterparty”)
to the financial instrument for commitments to extend credit and standby letters of credit written is
represented by the contractual notional amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as they do 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. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee by the counterparty. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Bank evaluates each customer’s creditworthiness 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 of the counterparty. Collateral held varies, but primarily includes residential and income-
producing real estate.
The Bank had the following off-balance sheet financial instruments whose contract amounts represent
credit risk at December 31:
2010
2009
Performance and standby letters of credit
Commitments to grant loans
Unfunded commitments under lines of credit
$
2,550,345
57,473,806
8,083,948
$
7,945,909
3,596,294
34,660,520
$
68,108,099
$
46,202,723
37
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 11 - Commitments and Contingencies
The Bank has operating leases for nine 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 were as follows:
2011
2012
2013
2014
2015
Thereafter
$
877,417
873,743
840,451
858,479
840,395
1,601,256
$
5,891,741
Rental expense for the years ended December 31, 2010 and 2009 was $748,272 and $618,945,
respectively.
The Bank has an operating lease agreement with a related party for its corporate headquarters and a
branch. The lease terms were comparable to similarly outfitted office space in the Bank’s market. The
Bank is also required to pay a monthly fee for certain operating expenses, including real estate taxes,
insurance, utilities, maintenance and repairs, in addition to the base rent. Rental expense to this related
party for the years ended December 31, 2010 and 2009 was approximately $284,000 in each year.
The Bank may at times be subject to potential liability under laws and government regulation and various
claims and legal actions that are pending or may be asserted against it. Liabilities are established for legal
claims when payments associated with the claims become probable and the costs can be reasonably
estimated. The actual costs of resolving legal claims may be substantially higher or lower than the
amounts established for those claims. Based on information currently available, advice of counsel,
available insurance coverage and established liabilities, the Bank has determined that there are no
eventual outcomes that will have a material adverse effect on the Bank’s financial position or results of
operations.
38
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 12 - Income Taxes
The components of income tax expense (benefit) at December 31 were as follows:
Current:
Federal
State
2010
2009
$
38,326
29,212
-
$
-
Total current
67,538
-
Deferred:
Federal
State
(83,444)
(35,692)
195,085
56,638
Total deferred
(119,136)
251,723
Reversal of valuation allowance
(1,436,646)
(251,723)
Total income taxes applicable to pre-tax income
$
(1,488,244)
$
-
There was no provision for income taxes for the year ended December 31, 2009 due to net operating
losses incurred.
Total income taxes differed from the amount computed by applying the statutory federal income tax rate
to pre-tax income as follows:
Federal income tax expense at statutory rate
Increases (reductions) in taxes resulting from:
State income taxes, net of federal benefit
Tax-exempt income, net
Non-deductible expenses
Gain on acquisition
Decrease in valuation allowance
Other
2010
2009
$
305,593
$
140,320
42,837
(61,223)
105,123
(344,922)
(1,436,646)
(99,006)
-
(5,554)
86,908
-
(251,723)
30,049
Total
$
(1,488,244)
$
-
39
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 12 - Income Taxes (continued)
The components of the net deferred tax liability at December 31 were as follows:
Deferred tax assets:
Allowance for loan losses
Net operating loss carry-forwards
Acquisition accounting adjustments
Organizational costs
Organizer warrants
Other
2010
2009
$
1,241,080
1,586,820
424,810
367,420
-
270,076
$
803,158
729,659
-
354,864
109,656
61,469
3,890,206
2,058,806
Valuation allowance
-
(1,436,646)
Total deferred tax assets, net of valuation allowance
3,890,206
622,160
Deferred tax liabilities:
Premises and equipment
Cash basis conversions
Unrealized gains on securities
Deferred loan costs
Discount accretion
(52,300)
(269,780)
(179,847)
(222,530)
(10)
(97,626)
(375,767)
(549,718)
(98,836)
(49,931)
Total deferred tax liabilities
(724,467)
(1,171,878)
Net deferred tax asset (liability)
$
3,165,739
$
(549,718)
At December 31, 2010, the Bank had available federal net operating loss carryforwards of approximately
$4,600,000, which expire between 2028 and 2030. There are currently no state net operating loss
carryforwards available. Included in the net operating loss carryforwards are amounts that were
generated by MoreBank, which the Bank acquired on September 30, 2010. These net operating losses are
subject to an annual Internal Revenue Code Section 382 limitation of approximately $220,000.
Based on projections of future taxable income over periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Bank will realize the benefits of these
deductible differences.
As a result of the acquisition of MoreBank, the Bank acquired net deferred tax assets of approximately
$1,800,000.
40
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 13 - 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. All 97,500 Organizer warrants were outstanding at December 31, 2010 and 2009.
In 2007, the Bank adopted the 2007 Stock Option Plan (the “2007 Plan”), which was approved by the
Board of Directors in August 2007 and by the stockholders 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 2007 Plan are
authorized and unissued shares of the Bank. The maximum number of shares that may be subject to
options under the 2007 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 2007 Plan, out of its authorized and unissued shares, such number of shares. The 2007
Plan will terminate ten years from the date of stockholder approval.
In accordance with the 2007 Plan, 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 an initial term no shorter than three (3) years and
includes an immediate vested amount and equal annual vesting amounts thereafter over the vesting term.
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions:
Expected life
Expected volatility
Forfeiture rate
Dividend yield
Risk-free interest rate
2010
7 years
24.57%
18.36%
0.00%
2.52%
2009
7 years
25.95%
0.00%
0.00%
2.74%
41
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 13 - Share-Based Compensation (continued)
The following is a summary of the Bank’s share-based compensation activity and related information for
the years ended December 31, 2010 and 2009:
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term
Aggregate
intrinsic
value
Warrants and
options
December 31, 2010:
Outstanding - beginning of year
Options granted
Options issued in acquisition
Exercised
Forfeited
255,183
93,833
47,200
(50)
(63,250)
$ 10.14
$ 11.56
$ 25.00
$ 10.00
$ 10.12
Outstanding - end of year
332,916
$ 12.66
7.4 years
$ 735,910
Options exercisable - end of year
261,352
$ 13.03
7.0 years
$ 687,057
Weighted-average fair value of options
granted and issued during the year
$ 2.49
December 31, 2009:
Outstanding - beginning of year
Options granted
Exercised
Forfeited
219,700
60,266
-
(24,783)
$ 10.10
$ 10.28
-
$ 10.00
Outstanding - end of year
255,183
$ 10.14
8.4 years
$ -
Options exercisable - end of year
67,535
$ 10.00
8.8 years
$ -
Weighted-average fair value of options
granted during the year
$ 3.38
Total share-based compensation expense for the years ended December 31, 2010 and 2009 was $220,893
and $231,917, respectively, which related to stock options only.
As of December 31, 2010, there was $305,224 of unrecognized compensation cost related to non-vested
stock options granted in 2010 and prior years. The cost is expected to be recognized on a graded vesting
method over a weighted-average period of 2.3 years.
42
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 14 - 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, 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. These warrants were exercisable at any time up to their expiration date of
April 17, 2010, three years from the date of issuance.
There were 747,625 of these warrants outstanding at December 31, 2009. There were 464,565 and 2,375
warrants exercised during the years ended December 31, 2010 and 2009, respectively. There were
283,060 warrants that expired during the year ended December 31, 2010.
Note 15 - Employment Agreement
The Bank entered into employment agreements with certain employees. The term of the agreements is
one year, with automatic, one-year renewals. 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 16 - 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 loans
receivable from related parties in the amount of $3,361,053 and $3,452,020 at December 31, 2010 and
2009, respectively. Deposits of related parties totaled $11,637,045 and $2,695,694 as of December 31,
2010 and 2009, respectively.
During 2010, no loans to related parties were originated. During 2009, loans originated to related parties
totaled $125,000. During 2010 and 2009, principal repayments on loans to related parties were $90,967
and $46,798, respectively.
43
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 17 - 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 the federal banking agencies 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 classifications 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,
2010, 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, which ended on April 16,
2010.
The Bank’s actual capital amounts and ratios at December 31, 2010 and 2009 are presented below:
Actual
For capital adequacy
purposes
To be well capitalized
under prompt corrective
action provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2010:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
$
$
$
42,030
38,336
38,336
12.3%
11.2%
7.9%
$
$
$
27,292
13,646
24,331
December 31, 2009:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
$
$
$
29,073
26,926
26,926
15.7%
14.5%
10.0%
$
$
$
14,864
7,432
21,635
≥
≥
≥
≥
≥
≥
8.0%
4.0%
5.0%
8.0%
4.0%
8.0%
$
$
$
34,115
20,649
38,930
≥ 10.0%
≥
6.0%
≥
8.0%
$
$
$
18,580
11,148
21,635
≥ 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.
The New Jersey Department of Banking and Insurance, in issuing a 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, both to defray anticipated initial losses. Accordingly, $1,950,000 of the
Bank’s surplus is reserved for this purpose.
44
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 18 - Fair Values of Financial Instruments
The Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities
and to determine fair value disclosures. In accordance with FASB ASC Topic 820, Fair Value
Measurements and Disclosures, the fair value of a financial instrument is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized
in an immediate settlement of the instrument.
The recent fair value guidance provides a consistent definition of fair value, which focuses on an exit
price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market
participants at the measurement date under current market conditions. If there has been a significant
decrease in the volume and level of activity for the asset or liability, a change in valuation technique or
the use of multiple valuation techniques may be appropriate. In such instances, determining the price at
which willing market participants would transact at the measurement date under current market
conditions depends on the facts and circumstances and requires the use of significant judgment. The fair
value is a reasonable point within the range that is most representative of fair value under current market
conditions.
In accordance with this guidance, the Bank groups its financial assets and financial liabilities measured at
fair value in three levels, based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. These levels are:
Level 1: Valuation is based on unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date. Level 1
assets and liabilities generally include debt and equity securities that are traded in an active
exchange market. Valuations are obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.
Level 2: Valuation is based on inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly. The valuation may be based
on quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the asset or liability.
Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities. Level 3 assets and
liabilities include financial instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as instruments for which
determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement.
45
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 18 - Fair Values of Financial Instruments (continued)
The following methods and assumptions were used by the Bank in estimating fair value disclosures for
financial instruments:
Cash and cash equivalents (carried at cost)
The carrying amounts reported in the balance sheets for cash and short-term instruments approximate
those assets’ fair values.
Securities
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at
amortized cost) are determined by obtaining quoted market prices on nationally recognized securities
exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in
the industry to value debt securities without relying exclusively on quoted market prices for the
specific securities but rather by relying on the securities’ relationship to other benchmark quoted
prices.
Loans (carried at cost)
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 as well as projected
repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently
with no significant change in credit risk, fair values are based on carrying values.
Impaired loans (generally carried at fair value)
Impaired loans are those in which the Bank 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. At December 31, 2009, the fair value consists of the loan balances of $229,617
net of a valuation allowance of $141,417. There were no impaired loans measured at fair value at
December 31, 2010.
Other real estate owned
Real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of a loan
to real estate owned. Subsequently, real estate owned assets are carried at the lower of carrying value
or fair value. Fair value is based upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral. These assets are included as Level 3 fair
values.
Restricted investments in bank stocks (carried at cost)
The carrying amount of restricted investments in bank stock approximates fair value, and considers
the limited marketability of such securities.
Accrued interest receivable and accrued interest payable (carried at cost)
The carrying amounts of accrued interest receivable and accrued interest payable approximate fair
value.
46
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 18 - Fair Values of Financial Instruments (continued)
Deposits (carried at cost)
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook
savings and money market 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 of deposit to a schedule of aggregated expected monthly maturities on
time deposits.
Federal funds purchased (carried at cost)
The carrying amounts of federal funds purchased approximate fair value.
Borrowings (carried at cost)
Fair values of FHLB-NY and FHLB-Pittsburgh advances are estimated using discounted cash flow
analysis, based on quoted prices for new FHLB-NY and FHLB-Pittsburgh 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 (disclosed at cost)
Fair values for the Bank’s off-balance-sheet financial instruments, comprised of letters of credit,
lending commitments and lines 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.
47
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 18 - Fair Values of Financial Instruments (continued)
For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair
value hierarchy at December 31, 2010 and 2009 were as follows:
Description
Total
(Level 1) quoted
prices in active
markets for
identical assets
(Level 2)
Significant
other observable
inputs
(Level 3)
Significant
unobservable
inputs
December 31, 2010:
U.S. Treasury securities
U.S. government agency securities
Mortgage-backed securities:
U.S. government-sponsored entity issue
Obligations of state and political subdivisions
Corporate securities
$
3,753,900
15,042,060
110,119,937
27,742,239
2,942,480
$
3,753,900
$
-
-
-
-
2,942,480
15,042,060
110,119,937
27,742,239
-
-
$
-
-
-
-
Securities available for sale
$
159,600,616
$
6,696,380
$
152,904,236
$
-
December 31, 2009:
U.S. government agency securities
Mortgage-backed securities:
U.S. government-sponsored entity issue
Corporate securities
$
2,498,105
$
-
$
2,498,105
$
-
65,881,849
2,043,293
-
65,881,849
2,043,293
-
-
-
Securities available for sale
$
70,423,247
$
2,043,293
$
68,379,954
$
-
Certain assets and liabilities are measured at fair value on a non-recurring basis; that is, the instruments
are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment).
48
The Bank of Princeton
Notes to Financial Statements
December 31, 2010 and 2009
Note 18 - Fair Values of Financial Instruments (continued)
For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the
fair value hierarchy at December 31, 2010 were as follows:
Description
Total
December 31, 2010:
(Level 1) quoted
prices in active
markets for
identical assets
(Level 2)
Significant
other observable
inputs
(Level 3)
Significant
unobservable
inputs
Other real estate owned
$
1,140,000
$
-
$
-
$
1,140,000
December 31, 2009:
Impaired loans
Other real estate owned
$
88,200
227,283
-
$
-
-
$
-
$
88,200
227,283
Total
$
315,483
$
-
$
-
$
315,483
The estimated fair values, and related carrying amounts, of the Bank’s financial instruments at
December 31, 2010 and 2009 were as follows:
2010
2009
Carrying
amount
Fair value
Carrying
amount
Fair value
Financial assets:
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Loans, net
Restricted investments in bank stocks
Accrued interest receivable
$
25,619,625
159,600,616
1,394,188
281,572,864
1,422,200
1,970,690
$
25,619,625
159,600,616
1,454,053
285,001,994
1,422,200
1,970,690
$
7,303,513
70,423,247
8,670,715
172,510,112
948,000
1,037,209
$
7,303,513
70,423,247
8,696,634
174,729,529
948,000
1,037,209
Financial liabilities:
Deposits
Federal funds purchased
Borrowings
Accrued interest payable
425,813,025
1,044,000
18,014,131
1,092,169
422,724,000
1,044,000
18,048,000
1,092,169
218,628,353
217,972,468
-
17,137,823
627,264
-
17,341,491
627,264
49
The Bank of Princeton
The Bank of Princeton
NOTES
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