Branching out
...and growing
2011 Annual Report
Dear Fellow Shareholders,
The Bank of Princeton (the “Bank”) earned $2.8 million in 2011, an increase of 18% from 2010. Despite the
economy continuing to face significant headwinds, we continued to grow loans, deposits and net income. At the
same time, we continued to invest in our company’s future and to build our business. In 2011, we added two new
branch locations to complement our nine existing branches, for a total of 11 full-service branches. Additionally,
we continued our strong commitment to our community banking roots by providing capital to many local business
and non-profit organizations while supporting more than 200 local charities and community groups.
Total assets at year-end 2011 were $664.8 million, an increase of 36% from $488.1 million at year-end 2010.
The resulting increase in assets was primarily driven by the increase in loans. Total loans were $411.2 million at
year-end 2011, an increase of 44% from the $285.2 million in loans at year-end 2010. New deposit customers,
drawn by our larger branch network and community bank focus, grew in-kind with loans during 2011. Deposit
balances at year-end 2011 were $595.5 million, an increase of $169.7 million, or 40%, compared to year-end
2010 deposit balances of $425.8 million.
The growth in our net income was visible in several of our key ratios. Our net interest margin was 3.48% for
the year 2011, an increase of 0.45% compared to 2010. Our cost of funds, a component of net interest margin,
decreased to 1.41% in 2011, down 0.11% from 2010. Our efficiency ratio, which measures the relationship of
our operating costs to revenue, was 75%, unchanged from 2010. We remain committed to improving these key
ratios in 2012 as a means of increasing returns to stockholders. We are particularly proud to report some of the
Bank’s major accomplishments in 2011. They included:
•
•
•
In July, we opened our Lambertville Branch. This is our first branch in Hunterdon County, NJ. Year-end
deposits at this branch were $19.3 million. The branch is home to The Bank of Princeton’s first art gallery.
The gallery features the work of area school children and local artists.
In September, we relocated our North Wales, PA branch from inside a supermarket to an adjacent corner
storefront in the same shopping center. The new site has been an enormous success, as branch deposits
increased almost 50% to $20.2 million at year-end.
In December, we opened our 11th branch on Nassau Street in Princeton Borough. The branch complements
our two other branches within the Princeton community, making us the most convenient community bank
in this market.
• We conducted a successful capital raise during the third and fourth quarter, resulting in approximately
$8.8 million of additional capital from new and existing stockholders.
• We were selected as number 15 on NJBIZ Magazine’s 2011 listing of New Jersey’s 50 Fastest Growing
Companies.
As a Company, we are committed to the business communities we serve as well as many local charities,
community organizations and civic events. We recognize that our success as an organization is the result of the
dedication of our employees and the partnerships that we have formed within the communities we serve. We
are committed to our core mission statement: “We listen to you, we understand, and we make a difference.” Our
Directors, Management and Staff thank you for your continued support.
Edward J. Dietzler, Acting President
Andrew M. Chon, Chairman
i
The Bank of Princeton FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal
Year Ended December 31, 2011
- OR -
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ]
For the transition period from ________________________________ to _______________________________
FDIC Certificate Number: 58513
THE BANK OF PRINCETON
(Exact name of Registrant as specified in its Charter)
New Jersey
(State or other Jurisdiction of
Incorporation or Organization)
183 Bayard Lane, Princeton, NJ
(Address of Principal Executive Offices)
68-0645074
(I.R.S. Employer
Identification No.)
08540
(Zip Code)
Registrant’s telephone number, including area code: (609) 921-1700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $5.00 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] YES [ X ] NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [ X ] NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [ X ] YES [ ] NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that
the registrant was required to submit and post such files). [ ] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] YES [ X ] NO
As of March 7, 2012 there were 4,578,330 shares of common stock outstanding.
The Bank of Princeton
TABLE OF CONTENTS
PART I
Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Mine Safety Disclosures
PART II
Item 5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6 Selected Financial Data
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accountant Fees and Services
PART IV
Item 15 Exhibits, Financial Statement Schedules
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The Bank of Princeton
Forward-Looking Statements
PART I
The Bank of Princeton (the “Company” or the “Bank”) may from time to time make written or oral “forward-
looking statements,” including statements contained in the Company’s filings with the Federal Deposit Insurance Corporation
(the “FDIC”) (including this Annual Report on Form 10-K and the exhibits thereto), in its reports to stockholders and in other
communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended
(referred to as the “Exchange Act”).
These forward-looking statements involve risks and uncertainties, such as statements of the Company’s plans,
objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of
which are beyond the Company’s control). The following factors, among others, could cause the Company’s financial
performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-
looking statements: The strength of the United States economy in general and the strength of the local economies in which
the Company conducts operations; the effects of, and changes in monetary and fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations;
market volatility; the value of our products and services as perceived by actual and prospective customers, including the
features, pricing and quality compared to competitors’ products and services; the willingness of customers to substitute
competitors’ products and services for the Company’s products and services; the impact of changes in applicable laws and
regulations; technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the
Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake
to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the
Company, except as required by applicable law or regulation.
Throughout this document, references to “we,” “us,” or “our” refer to the Bank and its consolidated subsidiaries.
Item 1. Business
General
The Bank of Princeton was incorporated on March 5, 2007 under the laws of the State of New Jersey as a New
Jersey state-chartered bank. We received a certificate of authority from the New Jersey Department of Banking and
Insurance on April 17, 2007, and commenced operations on April 23, 2007. We are a full service bank providing personal
and business lending and deposit services. As a state-chartered bank, we are regulated by the New Jersey Department of
Banking and Insurance and the FDIC. Our market area, which we serve through our eleven branches, is generally an area
within an approximate 50 mile radius of Princeton, NJ, including parts of Mercer, Somerset, Hunterdon, Monmouth and
Middlesex Counties in central New Jersey, and additional areas in portions of Philadelphia, Delaware, Montgomery and
Bucks Counties in Pennsylvania.
Since we commenced operations, we have grown through both de novo branching and acquisitions. In May 2010,
we acquired our Montgomery Township branch from The Provident Bank and, in September 2010, we acquired our three
Pennsylvania branches through a merger with MoreBank.
MoreBank, a Pennsylvania state-chartered bank, commenced operations in March 2006. We acquired MoreBank in
a stock-for-stock merger on September 30, 2010. Additional information about this transaction is included in “Note 3 –
Business Combinations” in our audited financial statements, which are included in this Form 10-K. This acquisition
expanded our geographic presence to areas in Philadelphia, Delaware and Montgomery Counties in Pennsylvania. We
continue to operate the former MoreBank branches as a division of The Bank of Princeton under the “MoreBank” name.
Our headquarters and one of our branches are located at 183 Bayard Lane, Princeton, New Jersey 08540. Our
telephone number is (609) 921-1700 and our website address is thebankofprinceton.com.
3
The Bank of Princeton
Competition
We have substantial competition in originating commercial and consumer loans in our market area. This
competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many
of our competitors enjoy advantages over us, including greater financial resources and higher lending limits, a wider
geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable
pricing alternatives, as well as lower origination and operating costs. Among other things, this competition could reduce our
interest income and net income by decreasing the number and size of loans that we originate and the interest rates we may
charge on these loans.
In attracting business and consumer deposits, we face substantial competition from other insured depository
institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment
alternatives, including money market funds. Many of our competitors enjoy advantages over us, including greater financial
resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors
may offer higher interest rates than we do, which could decrease the deposits that we attract, or require us to increase the
rates we pay to retain existing deposits or attract new deposits. Deposit competition could adversely affect our net interest
income and net income, and our ability to generate the funds we require for our lending or other operations. As a result, we
may need to seek other sources of funds that may be more expensive to obtain and could increase our cost of funds.
Lending Activities
Our loan portfolio consists of variable-rate and fixed-rate loans with a significant concentration in commercial real
estate lending. While most credit facilities are appropriately collateralized, major emphasis is placed upon the financial
condition of the borrower and the borrower’s cash flow versus debt service requirements. We use the familiarity of senior
management and director members of our loan committee with prospective borrowers to better evaluate the creditworthiness
of those prospective borrowers.
Loan growth is driven by customer demand, which in turn is influenced by individual and business indebtedness and
consumer demand for goods. Loaning money will always entail some risk. Without loaning money, however, a bank cannot
generate enough net interest income to be profitable. The risk involved in each loan must be carefully evaluated before the
loan is made. The interest rate at which the loan is made should always reflect the risk factors involved, including the term of
the loan, the value of collateral, if any, the reliability of the projected source of repayment, and the amount of the loan
requested. Credit quality and repayment capacity are generally the most important factors in evaluating loan applications.
Loan Portfolio Composition. The following table presents our loan portfolio by segment at December 31, 2011,
2010, 2009, 2008 and 2007:
(in thousands)
2011
2010
2009
2008
2007
As of December 31,
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total loans
$
233,504
85,527
56,453
15,396
19,341
1,957
412,178
$
166,472
60,768
25,970
11,870
19,285
1,441
285,806
$
89,959
31,671
23,273
15,343
13,681
1,048
174,975
$
$
48,382
16,715
11,326
-
12,302
3,012
91,737
Deferred fees and costs
Allowance for loan losses
Loans, net
(955)
(5,362)
405,861
(540)
(3,693)
281,573
$
(318)
(2,147)
172,510
$
$
$
(244)
(1,092)
90,401
$
14,077
5,114
5,654
-
2,098
2,638
29,581
(110)
(354)
29,117
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The Bank of Princeton
Substantially all of our loans are to borrowers in our immediate markets. We believe that no single borrower or
group of borrowers presents a credit concentration whereby the borrowers’ loan default would have a material adverse effect
on our financial condition or results of operations.
Commercial Real Estate and Construction Loans. We originate various types of commercial loans, including
construction loans, secured by collateral such as real estate and personal guarantees. The loans are solicited on a direct basis
and through various professionals with whom we maintain contacts and by referral from our incorporators, directors,
stockholders and customers.
Construction lending represents a segment of our loan portfolio, and is driven primarily by market conditions. Local
builders of one-to-four family homes have been the primary source of these types of loans.
Residential First-Lien Mortgage Loans. We offer a narrow range of prime residential first-lien mortgage loans at
competitive rates. Our customers, incorporators, stockholders and local real estate brokers are a significant source of these
loans. We strive to process, approve and fund loans in a timeframe that meets the needs of our borrowers. Generally, we
originate and retain non-conforming residential first-lien mortgage loans and refer conforming residential first-lien mortgage
loans to a third party, whereby we may earn a fee.
Home Equity Loans and Lines of Credit. We generate these loans and lines of credit primarily through direct
marketing at our branch locations, referrals from local real estate brokers and, to a lesser extent, by targeted direct marketing
programs such as mail and electronic mail.
Consumer Loans. We solicit consumer loans on a direct basis and upon referrals from our incorporators, directors,
stockholders and existing customers.
Deposits
Our deposit services are generally comprised of a traditional range of deposit products, including checking accounts,
savings accounts, attorney trust accounts, money market accounts, and certificates of deposit.
We offer our customers access to ATMs and other services which increase customer convenience and encourage
continued and additional banking relationships.
We endeavor to maintain competitive rates on deposit accounts, and actual rates are established at the time that they
are offered and take into consideration competitor offerings. Although we advertise in local newspapers, our primary source
of deposit relationships is satisfied customers. We offer a range of direct deposit products ranging from social security and
disability payments to direct deposit of payroll checks.
As of December 31, 2011, we had one customer whose deposits with us represented 11.2% of our total deposits and
another customer whose deposits represented 6.8% of our total deposits. We believe we have sufficient liquidity to fund our
operations should either or both of these customers withdraw their deposits. See the liquidity discussion within Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Form 10-K for more
information regarding our available funds. No other customers accounted for more than 5% of our total deposits as of
December 31, 2011.
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The Bank of Princeton
Other Services
To further attract and retain customer relationships, we provide a standard array of additional community banking
services, which include the following:
Money orders
Treasurer checks
Wire transfers
EE and I U.S. savings bonds redemption
Direct deposit
Safe deposit boxes
Night depository
Bank-by-mail
Automated teller machines
On-line banking
Remote deposit capture
Automated telephone banking
Debit cards
We may offer payroll services, credit card and merchant credit card processing through third parties whereby we do
not undertake credit or fraud risk.
Internet Banking
We advertise but do not actively solicit new deposits or loans through our website, but utilize a qualified and
experienced internet service provider to furnish the following types of customer account services:
Full on-line statements
On-line bill payment
Account inquiries
Transaction histories
Transaction details
Account-to-account transfers
Fee Income
Fee income is a component of our non-interest income. By charging non-customers fees for using our ATMs and
charging customers for banking services such as money orders, cashier’s checks, wire transfers and check orders, as well as
other deposit and loan-related fees, we earn fee income. Prudent fee income opportunities are sought to supplement net
interest income, but may be limited by our efforts to remain competitive.
Bank Premises and Market Area
Our principal office and corporate headquarters is in a full-service banking facility located at 183 Bayard Lane,
Princeton, New Jersey. We have ten additional branches in New Jersey and Pennsylvania, as well as an operations center in
Princeton, New Jersey.
The market area served by us through our eleven branches is generally an area within an approximate 50 mile radius
of Princeton, including parts of Mercer, Somerset, Hunterdon, Monmouth and Middlesex Counties in central New Jersey, and
additional areas in portions of Philadelphia, Delaware and Montgomery and Bucks Counties in Pennsylvania. Our market
area is dominated by offices of large statewide, regional and interstate banking institutions. We believe that banking services
provided in a friendly and courteous manner with timely response to customer needs will fill a niche that has arisen due to the
loss of small, local community-focused institutions. Our Pennsylvania branches provide us with a market in the greater
Philadelphia area and access to a growing, Asian market.
Staffing
As of December 31, 2011, we had 110 total employees and approximately 107 full-time equivalent employees.
Supervision and Regulation
General. We are extensively regulated under both federal and state law. These laws restrict permissible activities
and investments and require compliance with various consumer protection provisions applicable to lending, deposit,
brokerage and fiduciary activities. They also impose capital adequacy requirements and conditions to our ability to
6
The Bank of Princeton
repurchase stock or to pay dividends. We are also subject to comprehensive examination and supervision by the New Jersey
Department of Banking and Insurance (the “Department”) and the FDIC. The Department and the FDIC have broad
discretion to impose restrictions and limitations on our operations. This supervisory framework could materially impact the
conduct and profitability of our activities.
To the extent that the following information describes statutory and regulatory provisions, it is qualified in its
entirety by reference to the particular statutory and regulatory provisions. Proposals to change the laws and regulations
governing the banking industry are frequently raised at both the state and federal level. The likelihood and timing of any
changes in these laws and regulations, and the impact such changes may have on us, are difficult to ascertain. A change in
applicable laws and regulations, or in the manner such laws or regulations are interpreted by regulatory agencies or courts,
may have a material effect on our business, financial condition and results of operations.
Our deposits have been insured by the FDIC Deposit Insurance Fund, or “DIF,” for less than seven years and,
therefore, are subject to the FDIC’s Financial Institutions Letter 50-2009. Pursuant to this letter, we are examined on a 12
month risk management examination cycle, subjected to enhanced supervision for compliance examinations and Community
Reinvestment Act, or “CRA”, evaluations, and required to obtain prior approval from the FDIC for any material changes to
our business plan.
We are subject to various requirements and restrictions under federal and state law, including requirements to
maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that may be originated,
and limits on the type of other activities in which we may engage and the investments we may make. Under the Gramm-
Leach-Bliley Act, or “GLBA,” we may engage in expanded activities, such as insurance sales and securities underwriting,
through the formation of a “financial subsidiary.” In order to be eligible to establish or acquire a financial subsidiary, we
must be “well capitalized” and “well managed” and may not have less than a “satisfactory” CRA rating. At this time, we do
not engage in any activity which would require us to maintain a financial subsidiary. We are also subject to federal laws that
limit the amount of transactions between us and any nonbank affiliates. Under these provisions, transactions, such as a loan
or investment, by us with any nonbank affiliate are generally limited to 10% of our capital and surplus for all covered
transactions with such affiliate or 20% of capital and surplus for all covered transactions with all affiliates. Any extensions
of credit, with limited exceptions, must be secured by eligible collateral in specified amounts. We are also prohibited from
purchasing any “low quality” assets from an affiliate.
Monetary Policy. Our business, financial condition and results of operations are and will be affected by domestic
economic conditions and the monetary and fiscal policies of the United States government and its agencies. The monetary
policies of the Federal Reserve System, or “Federal Reserve,” have a significant effect upon the operating results of
commercial banks such as us. The Federal Reserve has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States government securities transactions and through its regulation of,
among other things, the discount rate on borrowings of member banks and the reserve requirements against member banks’
deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.
Deposit Insurance. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the
FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance
Fund, which were merged in 2006. Under the FDIC’s risk-based assessment system in effect through March 31, 2011,
insured institutions were assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels
and certain other factors. An institution’s assessment rate depended upon the category to which it is assigned, and certain
potential adjustments established by FDIC regulations, with less risky institutions paying lower assessments.
No institution may pay a dividend if in default of the federal deposit insurance assessment.
On November 12, 2009, the FDIC issued a rule that required all insured depository institutions, with limited
exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011
and 2012. The FDIC also adopted a uniform three basis point increase in assessment rates effective on January 1, 2011.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was
signed into law. The Dodd-Frank Act changed the assessment base for federal deposit insurance from the amount of insured
deposits held by the depository institution to the depository institution’s average total consolidated assets less average
tangible equity, eliminating the ceiling on the size of the DIF and increasing the floor on the size of the DIF. The Dodd-
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The Bank of Princeton
Frank Act established a minimum designated reserve ratio (“DRR”) of 1.35 percent of the estimated insured deposits,
mandates the FDIC to adopt a restoration plan should the DRR fall below 1.35 percent, and provides dividends to the
industry should the DRR exceed 1.50 percent.
On February 7, 2011, the Board of Directors of the FDIC approved a final rule on Assessments, Dividend
Assessment Base and Large Bank Pricing (the “Final Rule”). The Final Rule implements the changes to the deposit
insurance assessment system as mandated by the Dodd-Frank Act. The Final Rule became effective April 1, 2011.
The Final Rule changed the assessment base for insured depository institutions from adjusted domestic deposits to
the average consolidated total assets during an assessment period less average tangible equity capital during that assessment
period. Tangible equity is defined in the Final Rule as Tier 1 Capital and shall be calculated monthly, unless, like us, the
insured depository institution has less than $1 billion in assets, then the insured depository institution will calculate the Tier 1
Capital on an end-of-quarter basis.
The Final Rule retains the unsecured debt adjustment, which lowers an insured depository institution’s assessment
rate for any unsecured debt on its balance sheet. In general, the unsecured debt adjustment in the Final Rule will be measured
to the new assessment base and will be increased by 40 basis points. The Final Rule also contains a brokered deposit
adjustment for assessments. The Final Rule provides an exemption to the brokered deposit adjustment to financial
institutions that are “well capitalized” and have composite CAMEL ratings of 1 or 2. CAMEL ratings are confidential ratings
used by the federal and state regulators for assessing the soundness of financial institutions. These ratings range from 1 to 5,
with a rating of 1 being the highest rating.
The Final Rule also creates a new rate schedule that intends to provide more predictable assessment rates to
financial institutions. The revenue under the new rate schedule will be approximately the same. Moreover, it indefinitely
suspends the requirement that it pay dividends from the insurance fund when it reaches 1.5 percent of insured deposits, to
increase the probability that the fund reserve ratio will reach a sufficient level to withstand a future crisis. In lieu of the
dividend payments, the FDIC has adopted progressively lower assessment rate schedules that become effective when the
reserve ratio exceeds 2 percent and 2.5 percent.
The Dodd-Frank Act made permanent the $250,000 limit for federal deposit insurance and increased the cash limit
of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provides unlimited federal deposit
insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured depository institutions.
In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established
quarterly and, during the four quarters ended December 31, 2011, averaged 1.34 basis points of average assets.
The FDIC has authority to increase insurance assessments. A significant increase in insurance assessments would
likely have an adverse effect on our operating expenses and results of operations. Management cannot predict what insurance
assessment rates will be in the future.
Deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed the FDIC.
Dividend Restrictions. Under the New Jersey Banking Act of 1948, as amended (the “Banking Act”), a bank may
declare and pay cash dividends only if, after payment of the dividend, the capital stock of the bank will be unimpaired and
either the bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the
bank’s surplus. The FDIC prohibits payment of cash dividends if, as a result, the institution would be undercapitalized or the
institution is in default with respect to any assessment due to the FDIC.
Capital Adequacy Guidelines. The FDIC has promulgated risk-based capital guidelines applicable to the banking
organizations which it supervises. These guidelines are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks, to account for off-balance sheet exposures, and to minimize disincentives for
holding liquid assets. Under those guidelines, assets and off-balance sheet items are assigned to broad risk categories, each
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The Bank of Princeton
with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-
balance sheet items.
Bank assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are
given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weighting is
applied. Those computations result in total risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first-mortgage loans fully secured by residential property, which carry a 50% risk-weighting. Most
investment securities, including, primarily, general obligation claims of states or other political subdivisions of the United
States, are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weighting, and
direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. government, which have a
0% risk-weighting. Upon the conversion of off-balance sheet items to on-balance sheet equivalents, direct credit substitutes,
including general guarantees and standby letters of credit backing financial obligations, are given a 100% risk-weighting.
Transaction-related contingencies such as bid bonds, standby letters of credit backing non-financial obligations, and undrawn
commitments (including commercial credit lines with an initial maturity of more than one year), have a 50% risk-weighting.
Short-term commercial letters of credit have a 20% risk-weighting, and certain short-term unconditionally cancelable
commitments have a 0% risk weighting.
The minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least 4% of the total capital is required to be “Tier 1 Capital,” consisting of stockholders’
equity and qualifying preferred stock, less certain goodwill items and other intangible assets. The remainder, or “Tier 2
Capital,” may consist of: the allowance for loan losses of up to 1.25% of risk-weighted assets; excess of qualifying preferred
stock; hybrid capital instruments; perpetual debt; mandatory convertible securities; and qualifying subordinated debt and
intermediate-term preferred stock up to 50% of Tier 1 Capital. Total capital is the sum of Tier 1 Capital and Tier 2 Capital
less reciprocal holdings of other banking organization’s capital instruments, investments in unconsolidated subsidiaries, and
any other deductions as determined by the FDIC. At December 31, 2011, our Tier 1 and Total risk-based capital ratios were
11.51% and 12.71%, respectively.
In addition, the FDIC has established minimum leverage ratio requirements for the banking institutions it supervises.
For banks that meet certain specified criteria, including having the highest regulatory rating and not experiencing significant
growth or expansion, these requirements provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly
assets equal to 3%. Other banks and bank holding companies generally are required to maintain a leverage ratio of 4 to 5%.
At December 31, 2011, our leverage ratio was 8.11%.
As an additional means to identify problems in the financial management of depository institutions, the Federal
Deposit Insurance Act (“FDIA”) requires federal bank regulatory agencies to establish certain non-capital safety and
soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to
operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to
take action against institutions that fail to meet such standards.
Basel III Proposed Changes in Capital Requirements. In December 2010, the Basel Committee released its final
framework for strengthening international capital and liquidity regulation (''Basel III"). Basel III, when implemented by the
U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain more
capital, with a greater emphasis on common equity. Implementation is presently scheduled to be phased in between 2013 and
2019, although it is possible that implementation may be delayed as a result of multiple factors including the current
condition of the banking industry within the U.S. and abroad.
The Basel III final capital framework, among other things, (i) introduces as a new capital measure "Common Equity
Tier 1” ("CET1”); (ii) specifies that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments meeting
specified requirements; (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be
made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to
existing regulations.
When fully phased in, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum
ratio of CET1 to risk-weighted assets of at least 4.5%, plus a "capital conservation buffer" of 2.5%; (ii) a minimum ratio of
Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer; (iii) a minimum ratio of Total
(Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0% plus the capital conservation buffer and (iv) as a newly
9
The Bank of Princeton
adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet
exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the
quarter).
Basel III also provides for a "countercyclical capital buffer," generally to be imposed when national regulators
determine that excess aggregate credit growth becomes associated with a buildup of systemic risk that would be a CET1 add-
on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented. The capital conservation buffer is
designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets
above the minimum but below the conservation buffer (or below the combined capital conservation buffer and
countercyclical capital buffer, when the latter is applied) may face constraints on dividends, equity repurchases and
compensation based on the amount of the shortfall.
Prompt Corrective Action. In addition to the required minimum capital levels described above, federal law
establishes a system of “prompt corrective actions” which federal banking agencies are required to take, and certain actions
which they have discretion to take, based upon the capital category into which a federally regulated depository institution
falls. Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any
institution which is not adequately capitalized. Under the rules, an institution will be deemed “well capitalized” or better if
its leverage ratio exceeds 5%, its Tier 1 risk-based capital ratio exceeds 6%, and if the Total risk-based capital ratio exceeds
10%. An institution will be deemed to be “adequately capitalized” or better if it exceeds the minimum federal regulatory
capital requirements. However, it will be deemed “undercapitalized” if it fails to meet the minimum capital requirements;
“significantly undercapitalized” if it has a Total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio
that is less than 3%, or a leverage ratio that is less than 3%, and “critically undercapitalized” if the institution has a ratio of
tangible equity to total assets that is equal to or less than 2%.
The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan,
along with a performance guaranty by a holding company or a third party. In addition, an undercapitalized institution
becomes subject to certain automatic restrictions including a prohibition on payment of dividends, a limitation on asset
growth and expansion, in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a
prohibition on the payment of certain “management fees” to any “controlling person.” Institutions that are classified as
undercapitalized are also subject to certain additional supervisory actions, including: increased reporting burdens and
regulatory monitoring; a limitation on the institution’s ability to make acquisitions, open new branch offices, or engage in
new lines of business; obligations to raise additional capital; restrictions on transactions with affiliates; and restrictions on
interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior
executive officers or directors, or sale of the institution to a willing purchaser. If an institution is deemed to be “critically
undercapitalized” and continues in that category for four quarters, the statute requires, with certain narrowly limited
exceptions, that the institution be placed in receivership.
As of December 31, 2011, we met the criteria to be classified as “well capitalized.” This classification is primarily
for the purpose of applying the federal prompt corrective action provisions and is not intended to be and should not be
interpreted as a representation of our overall financial condition or prospects.
Community Reinvestment Act. The Community Reinvestment Act, or “CRA,” requires that banks meet the credit
needs of all of their assessment area (as established for these purposes in accordance with applicable regulations based
principally on the location of branch offices), including those of low income areas and borrowers. The CRA also requires
that the FDIC assess all financial institutions that it regulates to determine whether these institutions are meeting the credit
needs of the community they serve. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,”
“needs to improve” or “unsatisfactory”. Our record in meeting the requirements of the CRA is made publicly available and is
taken into consideration in connection with any applications with federal regulators to engage in certain activities, including
approval of a branch or other deposit facility, mergers and acquisitions, office relocations, or expansions into non-banking
activities. As of December 31, 2011, we maintained a “satisfactory” CRA rating.
Dodd-Frank Act. The Dodd-Frank Act became law on July 21, 2010. The Dodd-Frank Act implements far-
reaching changes across the financial regulatory landscape.
The Dodd-Frank Act creates the Bureau of Consumer Financial Protection (“Bureau”), which is an independent
bureau within the Federal Reserve System with broad authority to regulate the consumer finance industry, including
10
The Bank of Princeton
regulated financial institutions such as us, and non-banks and others who are involved in the consumer finance industry. The
Bureau has exclusive authority through rulemaking, orders, policy statements, guidance and enforcement actions to
administer and enforce federal consumer finance laws, to oversee non-federally regulated entities, and to impose its own
regulations and pursue enforcement actions when it determines that a practice is unfair, deceptive or abusive (“UDA”). The
federal consumer finance laws were previously interpreted, administered and enforced by different federal agencies,
including the FDIC, our current federal regulator. On July 21, 2011, all of the functions and responsibilities of the Bureau
were transferred to it. While the Bureau has the exclusive power to interpret, administer and enforce federal consumer
finance laws and UDA, the Dodd-Frank Act provides that the FDIC continues to have examination and enforcement powers
over us relating to the matters within the jurisdiction of the Bureau because we have less than $10 billion in assets. The
Dodd-Frank Act also gives state attorneys general the ability to enforce federal consumer protection laws.
The Dodd-Frank Act also:
•
•
•
•
•
•
•
•
•
•
Applies the same leverage and risk-based capital requirements to most bank holding companies (“BHCs”)
that apply to insured depository institutions. On June 14, 2011 the federal banking agencies published a
final rule regarding minimum leverage and risk-based capital requirements for certain banks and for bank
holding companies consistent with the requirements of Section 171 of the Dodd-Frank Act. For a more
detailed description of the minimum capital requirements see “Regulation and Supervision – Capital
Requirements”;
Requires the FDIC to make its capital requirements for insured depository institutions countercyclical, so
that capital requirements increase in times of economic expansion and decrease in times of economic
contractions;
Requires BHCs and banks to be both well-capitalized and well-managed in order to acquire banks located
outside their home state and requires any BHC electing to be treated as a financial holding company to be
both well-managed and well-capitalized;
Changes the assessment base for federal deposit insurance from the amount of insured deposits held by the
depository institution to the depository institution’s average total consolidated assets less tangible equity,
eliminates the ceiling on the size of the DIF and increases the floor on the size of the DIF;
Makes permanent the $250,000 limit for federal deposit insurance and increases the cash limit of Securities
Investor Protection Corporation protection from $100,000 to $250,000 and provides unlimited federal
deposit insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured
depository institutions;
Eliminates all remaining restrictions on interstate banking by authorizing national and state banks to
establish de novo branches in any state that would permit a bank chartered in that state to open a branch at
that location;
Repeals Regulation Q, the federal prohibitions on the payment of interest on demand deposits, effective
July 21, 2011, thereby permitting depository institutions to pay interest on business transaction and other
accounts;
Enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal
Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount
of time for which collateral requirements regarding covered transactions must be maintained. These
requirements became effective on July 21, 2011.
Expands insider transaction limitations through the strengthening of loan restrictions to insiders and the
expansion of the types of transactions subject to the various limits, including derivative transactions,
repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions.
Restrictions are also placed on certain asset sales to and from an insider to an institution, including
requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s
board of directors. These requirements became effective on July 21, 2011.
Strengthens the previous limits on a depository institution’s credit exposure to one borrower which limited
a depository institution’s ability to extend credit to one person (or group of related persons) in an amount
exceeding certain thresholds. The Dodd-Frank Act expanded the scope of these restrictions to include credit
exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing
transactions.
While designed primarily to reform the financial regulatory system, the Dodd Frank Act also contains a number of
corporate governance provisions that will affect companies with securities registered under the Exchange Act. The Dodd-
11
The Bank of Princeton
Frank Act requires the Securities and Exchange Commission to adopt rules which may affect our executive compensation
policies and disclosure. It also exempts smaller issuers, such as us, from the requirement, originally enacted under Section
404(b) of the Sarbanes-Oxley Act of 2002, that our independent auditor also attest to and report on management’s assessment
of internal control over financial reporting.
Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized,
many of the new requirements called for have yet to be implemented and will likely be subject to implementing regulations
over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-
Frank Act will be implemented by the various agencies, the full extent of the impact such requirements will have on financial
institutions’ operations is unclear. The Dodd-Frank Act could require us to make material expenditures, in particular
personnel training costs and additional compliance expenses, or otherwise adversely affect our business, financial condition,
results of operations or cash flow. It could also require us to change certain of our business practices, adversely affect our
ability to pursue business opportunities that we might otherwise consider pursuing, cause business disruptions and/or have
other impacts that are as of yet unknown to us. Failure to comply with these laws or regulations, even if inadvertent, could
result in negative publicity, fines or additional expenses, any of which could have an adverse effect on our business, financial
condition, results of operations or cash flow.
Federal Home Loan Bank Membership. We are a member of the Federal Home Loan Bank of New York (FHLB-
NY). Each member of the FHLB-NY is required to maintain a minimum investment in capital stock of the FHLB-NY. The
Board of Directors of the FHLB-NY can increase the minimum investment requirements in the event it has concluded that
additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum
investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because
the extent of any obligation to increase our investment in the FHLB-NY depends entirely upon the occurrence of a future
event, potential payments to the FHLB-NY are not determinable.
Additionally, in the event that we fail, the right of the FHLB-NY to seek repayment of funds loaned to us will take
priority over certain other creditors.
Other Laws and Regulations. We are subject to a variety of laws and regulations which are not limited to banking
organizations. For example, in lending to commercial and consumer borrowers, and in owning and operating its own
property, we are subject to regulations and potential liabilities under state and federal environmental laws.
We are heavily regulated by regulatory agencies at the federal and state levels. As a result of the recent financial
crisis and economic downturn, we, like most of our competitors, have faced and expect to continue to face increased
regulation and regulatory and political scrutiny, which creates significant uncertainty for us and the financial services
industry in general.
Several recent regulatory initiatives were adopted that may have future impacts on our business and financial results.
For instance, on September 24, 2010 the Board of Governors of the Federal Reserve System issued a final rule to regulate the
compensation of mortgage loan originators and prohibits compensation to a mortgage loan originator that is based on the
loan’s terms or conditions, except for the amount of credit extended. The final rule was effective April 1, 2011. In addition,
the federal banking agencies released a final rule on July 28, 2010 to implement the requirements of the Secure and Fair
Enforcement for Mortgage Licensing Act of 2008 for the federal registration of mortgage loan originators (the “Rule”).
Under the Rule, banks and employees of a bank who engage in the business of loan origination must, among other things,
register with the National Mortgage Licensing System and Registry (the “NMLS”). The deadline for registration with the
NMLS was July 29, 2011.
Future Legislation and Regulation. In light of current conditions in the U.S. and global financial markets and the
U.S. and global economies, regulators have increased their focus on the regulation of the financial services industry.
Proposals that could substantially intensify the regulation of the financial services industry have been and are expected to
continue to be introduced in the U.S. Congress, in state legislatures and by applicable regulatory authorities. These proposals
may change banking statutes and regulation and our operating environment in substantial and unpredictable ways. If enacted,
these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the
competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict
whether any of these proposals will be enacted and, if enacted, the effect that it, or any implementing regulations, would have
on our business, financial condition and results of operations.
12
The Bank of Princeton
Item 1A. Risk Factors
As a smaller reporting company, the Company is not required to provide the information otherwise required by this
Item.
Item 1B. Unresolved Staff Comments
Not applicable.
13
The Bank of Princeton
Item 2. Properties
We conduct our operations from our headquarters and branch located at 183 Bayard Lane, Princeton, New Jersey, an
operations center at 403 Wall Street, Princeton, New Jersey, and from ten other branch locations in New Jersey and
Pennsylvania. The following table sets forth certain information regarding the Company’s properties as of December 31,
2011:
Location
Corporate Headquarters
183 Bayard Lane
Princeton, NJ
Operations Center
403 Wall Street
Princeton, NJ
Hamilton Branch
339 Route 33
Hamilton, NJ
Pennington Branch
2 Route 31
Pennington, NJ
Chambers Street Branch
21 Chambers Street
Princeton, NJ
Monroe Branch
1 Rossmoor Drive, Suite 1200
Monroe Township, NJ
Montgomery Branch
1185 Route 206 North
Princeton, NJ
Lambertville Branch
10-12 Bridge Street
Lambertville, NJ
Nassau Street Branch
194 Nassau Street
Princeton, NJ
Upper Darby Branch (MoreBank Division)
7050 Terminal Square
Upper Darby, PA
North Wales Branch (MoreBank Division)
1222-A North Welsh Road
North Wales, PA
Cheltenham Branch (MoreBank Division)
470 West Cheltenham Avenue
Philadelphia, PA
14
Leased or
Owned
Leased
Date of Lease
Expiration
October 31, 2018
Leased
April 30, 2016
Leased
October 31, 2014
Leased
April 30, 2012
Leased
December 31, 2016
Leased
July 31, 2020
Leased
April 30, 2015
Owned
N/A
Leased
November 30, 2021
Leased
November 30, 2012
Leased
September 30, 2016
Leased
January 25, 2016
The Bank of Princeton
Item 3. Legal Proceedings
From time to time, we may be a party to ordinary routine litigation incidental to our business. There were no
material legal proceedings to which we were a party or of which any of our property was the subject, pending or, to our
knowledge, contemplated by governmental authorities, at December 31, 2011 or the date of this report.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
There is no established public trading market for our common stock. Although shares of our common stock are
transferable, our common stock is not listed on any stock exchange or quoted in any over-the-counter securities market.
There can be no assurance that a trading market for our common stock will develop in the future, and stockholders wishing to
sell common stock may have to seek buyers and negotiate a transaction price by themselves.
Holders
As of March 7, 2012, there were approximately 636 shareholders of our common stock.
Dividends
We have not declared or paid cash dividends on our common stock since we began operations. Under the New
Jersey Banking Act of 1948, as amended, we may declare and pay cash dividends only if, after payment of the dividend, our
capital stock will be unimpaired and either we will have a surplus of not less than 50% of our capital stock or the payment of
the dividend will not reduce our surplus. The FDIC prohibits payment of cash dividends if, as a result, we would be
undercapitalized or are in default with respect to any assessment due to the FDIC. Our board of directors intends to follow a
policy of retaining earnings for the purpose of increasing our capital and therefore the Company does not anticipate declaring
or paying dividends for the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation plan information as of December 31, 2011.
Plan Category
Equity Compensation Plan approved by security holders:
The Bank of Princeton 2007 Stock Option Plan
MoreBank 2004 Incentive Equity Compensation Plan
Equity compensation plan not approved by security
holders:
Organizer warrants
MoreBank Organizer options
Total
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
Number of
shares of
common stock
remaining
available for
future issuance
under
compensation
plans
$11.45
$25.00
$10.00
$25.00
$12.82
22,351
-
-
-
22,351
Number of
shares of
common stock
to be issued
upon exercise
of outstanding
options,
warrants and
rights
257,716
1,200
97,500
46,000
402,416
15
The Bank of Princeton
Item 6. Selected Financial Data
As a smaller reporting company, the Company is not required to provide the information otherwise
required by this Item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with "Part I—Item 1. Business" and our Consolidated Financial
Statements and the notes thereto included in this Form 10-K. The following discussion should also be read in conjunction
with the "Cautionary Note Regarding Forward-Looking Statements"
Our Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in sections as
follows:
Overview and Strategy
Comparison of Financial Condition at December 31, 2011 and December 31, 2010
Comparison of Operating Results for the Years Ended December 31, 2011 and December 31, 2010
Rate Volume Analysis
Liquidity, Commitments and Capital Resources
Off-Balance Sheet Arrangements
Impact of Inflation
Return on Equity and Assets
Critical Accounting Policies and Estimates
Recently Issued Accounting Standards
Overview and Strategy
The Bank of Princeton was incorporated on March 5, 2007 under the laws of the State of New Jersey as a New
Jersey state-chartered bank. We received a certificate of authority from the New Jersey Department of Banking and
Insurance on April 17, 2007, and commenced operations on April 23, 2007. We are a full service bank providing personal
and business lending and deposit services. As a state-chartered bank, we are primarily regulated by the New Jersey
Department of Banking and Insurance and the Federal Deposit Insurance Corporation, or “FDIC.” Our market area, which
we serve through our eleven branches, is generally an area within an approximate 50 mile radius of Princeton, NJ, including
parts of Mercer, Somerset, Hunterdon, Monmouth and Middlesex Counties in central New Jersey, and additional areas in
portions of Philadelphia, Delaware, Montgomery and Bucks Counties in Pennsylvania.
Since we commenced operations, we have grown through both de novo branching and acquisitions. In May 2010,
we acquired our Montgomery Township branch from The Provident Bank, in September 2010, we acquired our three
Pennsylvania branches through a merger with MoreBank and in December 2011 we opened our third Princeton branch.
MoreBank, a Pennsylvania state-chartered bank, commenced operations in March 2006. We acquired MoreBank in
a stock-for-stock merger on September 30, 2010. Additional information about this transaction is included in “Note 3 –
Business Combinations” in our Consolidated Financial Statements included in this Form 10-K. This acquisition expanded our
geographic presence to areas in Philadelphia, Delaware and Montgomery Counties in Pennsylvania. We continue to operate
the former MoreBank branches as a division of The Bank of Princeton under the “MoreBank” name.
We remain focused on establishing and retaining customer relationships by offering a broad range of traditional
financial services and products, competitively-priced and delivered in a responsive manner to small businesses, professionals
and individuals in our market area. As a locally-operated community bank, we seek to provide superior customer service that
is highly personalized, efficient and responsive to local needs. To better serve our customers, we endeavor to provide state-
of-the-art delivery systems with automated teller machines (ATMs), current operating software, timely reporting, online bill
pay and other similar up-to-date products and services. We seek to deliver these products and services with the care and
professionalism expected of a community bank and with a special dedication to personalized customer service.
16
The Bank of Princeton
Our primary business objectives are:
•
•
•
to provide local businesses, professionals and individuals with banking services responsive to and
determined by their needs and local market conditions,
to attract deposits and loans through competitive pricing, responsiveness and service, and
to provide a reasonable return to stockholders on capital invested.
We strive to serve the financial needs of our customers while providing an appropriate return to our stockholders,
consistent with safe and sound banking practices. We expect that a financial strategy that utilizes variable rates and matching
assets and liabilities will enable us to increase our net interest margin, while managing interest rate risk. We also seek to
generate fee income from various sources, subject to our desire to maintain competitive pricing within our market area.
We have used and will continue to use correspondent relationships when it is cost-beneficial to complete product
lines. Our recognition of, and commitment to, the needs of the local community, combined with highly personalized and
responsive customer service, differentiate us from our competition. We continue to capitalize upon the personal contacts and
relationships of our organizers, directors, stockholders and officers to establish and grow our customer base.
Comparison of Financial Condition at December 31, 2011 and December 31, 2010
General. Our total assets increased from $488.3 million at December 31, 2010 to $664.9 million at December 31,
2011, an increase of $176.6 million, or 36%. This increase was primarily due to increases in loans, net, cash and cash
equivalents, securities available-for-sale and bank-owned life insurance. Total liabilities increased from $447.3 million at
December 31, 2010 to $610.6 million at December 31, 2011, an increase of $163.3 million, or 37%. This increase was
primarily the result of a $169.8 million increase in total deposits, partially offset by a decrease in borrowings. Total
stockholders’ equity increased from $41.0 million at December 31, 2010 to $54.3 million at December 31, 2011, an increase
of $13.4 million, or 33%. This increase was primarily attributable to the sale of common stock of $8.6 million, net income of
$2.8 million and other comprehensive income of $1.7 million. The growth of our balance sheet has been a direct result of the
successful implementation of our business plan. Although we will continue to seek to grow our business through the
continued implementation of our business plan, the growth experienced in the past may not be indicative of future results.
Cash and cash equivalents. Cash and cash equivalents increased from $25.6 million at December 31, 2010 to $59.2
million at December 31, 2011, an increase of $33.6 million, or 131%. The increase in cash was primarily due to the increase
in deposits and proceeds from the sale of common stock in excess of the increase in loans and investment securities from
December 31, 2010 to December 31, 2011.
Investment Securities. We hold securities that are available to fund increased loan demand or deposit withdrawals
and other liquidity needs, and which provide an additional source of interest income. Securities are classified as held-to-
maturity (“HTM”) or available-for-sale (“AFS”) at the time of purchase. Securities are classified as HTM if we have the
ability and intent to hold them until maturity. HTM securities are carried at cost, adjusted for unamortized purchase
premiums and discounts. Securities that are not classified as AFS are carried at fair value with unrealized gains and losses,
net of income taxes, reported as a component of equity within other comprehensive income.
17
The Bank of Princeton
The following table presents a summary of the amortized cost and fair value of our securities available-for-sale at
December 31, 2011, 2010 and 2009.
2011
December 31,
2010
2009
(in thousands)
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
U.S. Treasury securities
$
- $
- $
3,746 $
3,754 $
- $
-
-
-
15,052
15,042
2,501
2,498
117,395
119,612
108,936
110,120
64,368
65,882
Total
$
172,984 $
176,163 $
159,072 $
159,601 $
68,806 $
53,589
2,000
54,639
1,912
28,383
27,742
-
2,955
2,943
1,937
-
2,043
70,423
Securities available-for-sale at fair value increased $16.6 million during the twelve months ended December 31,
2011. This increase was the result of additional liquidity provided by our increasing deposit base and proceeds from the sale
of common stock, net of loan growth.
The following table presents a summary of the amortized cost and fair value of our securities held-to-maturity at
December 31, 2011, 2010 and 2009.
U.S. Government
agency securities
U.S. Government-sponsored
Residential mortgage-backed
securities
Obligations of state and
political subdivisions
Corporate securities
2011
December 31,
2010
2009
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
-
-
-
-
6,008
5,990
1,074
1,166
1,394
1,454
2,162
2,200
(in thousands)
U.S. Government
agency securities
U.S. Government-sponsored
Residential mortgage-backed
securities
Obligations of state and
political subdivisions
Total
$
1,074 $
1,166 $
1,394 $
1,454 $
8,671 $
-
-
-
-
501
507
8,697
Securities held-to-maturity decreased minimally from December 31, 2010 to December 31, 2011. The decline in
held-to-maturity securities in the table above is the result of our decision to allow the held-to-maturity portfolio to run off.
18
The Bank of Princeton
The following table summarizes the maturity distribution schedule of the amortized cost of debt securities with
corresponding weighted-average yields at December 31, 2011. Interest income presented in this Form 10-K for tax-
advantaged obligations of state and political subdivisions has not been adjusted to reflect fully taxable-equivalent interest
income. Weighted-average yields presented below have also not been computed on a fully taxable-equivalent basis.
Expected maturities may differ from contractual maturities because the securities may be called without any penalties.
(in thousands)
U.S. government-sponsored Residential
mortgage-backed securities
Obligations of state and political subdivisions
Corporate securities
Total
After one
through five
years
December 31, 2011
After five
through ten
years
After ten
years
One year or
less
$
$
612 $
1,114
-
1,726 $
3,471 $
1,440
1,000
5,911 $
22,241 $
16,399
1,000
39,640 $ 126,781 $
92,145 $
34,636
-
Weighted average yield
2.06%
1.84%
2.29%
2.50%
Total
118,469
53,589
2,000
174,058
2.43%
At December 31, 2011, there were no holdings of any one issuer, other than the U.S. government and its agencies, in
an amount greater than 10% of our total stockholders’ equity. See Note 6 - Investment Securities in the Notes to
Consolidated Financial Statements within this Form 10-K for additional information regarding debt securities.
Loans, net. Loans receivable, net increased $124.3 million from $281.6 million at December 31, 2010 to $405.9
million at December 31, 2011, an increase of 44%. The increase was attributable to our efforts to grow our loan portfolio
through existing relationships and new business and was primarily funded by a 40% year over year increase in our total
deposits.
The following table details our loan maturities by loan class and interest rate type at December 31, 2011:
(in thousands)
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
Type:
Fixed rate loans
Floating rate loans
Total
December 31, 2011
Due in
one year
or less
Due after
one
through
five years
Due after
five years
Total
$
9,432 $
31,379
18,756
1,583
1,723
1,342
$ 64,215 $
45,410 $
28,329
4,195
-
2,965
495
81,394 $
178,662 $ 233,504
85,527
25,819
56,453
33,502
15,396
13,813
19,341
14,653
120
1,957
266,569 $ 412,178
237,496
29,073 $
83,773
328,405
266,569 $ 412,178
$ 15,099 $
39,601 $
49,116
41,793
$ 64,215 $
81,394 $
19
The Bank of Princeton
The accrual of interest is discontinued when the contractual payment of principal or interest is 90 days past due or
management has serious doubts about further collectability of the principal or interest, even if 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.
The following table sets forth certain information regarding our nonaccrual loans, troubled debt restructurings, accruing loans
90 days or more past-due, and other real estate owned as of December 31, 2011, 2010, 2009 and 2008.
(in thousands)
Nonaccrual loans:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total nonaccrual loans
Troubled debt restructurings (TDRs) – performing
Troubled debt restructurings (TDRs) – nonperforming
Accrual loans 90 days or more past due:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Residential second-lien mortgage
Consumer
Total accrual loans 90 days or more past due
Total nonperforming loans, performing TDRs and
nonperforming TDRs
Other real estate owned
Total nonperforming assets and performing TDRs
December 31,
2011
2010
2009
2008
$
5,229 $ 3,488 $
2,135
892
-
456
-
8,712
2,332
-
1,782
-
-
276
-
5,546
3,788
-
886 $
1,000
427
-
-
-
2,313
3,992
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11,044
919
9,334
1,140
6,305
227
$ 11,963 $ 10,474 $ 6,532 $
155
-
-
-
-
-
155
-
-
-
-
-
-
-
-
-
155
-
155
There were no nonaccrual loans, troubled debt restructurings, accruing loans 90 days or more past-due or other real
estate owned as of December 31, 2007. See Note 7 - Loans Receivable in the Notes to Consolidated Financial Statements
within this Form 10-K for additional information regarding our loans not classified as nonperforming assets as of December
31, 2011 for which we have classified the loans as having potential credit problems that could result in the loans being
classified as nonaccrual, past-due 90 or more days or troubled debt restructurings in a future period.
Analysis of Allowance for Loan Losses. Our allowance for loan losses is based on a documented methodology,
which includes an ongoing evaluation of the loan portfolio, and reflects management’s best estimate of probable losses in the
loan portfolio as of the reporting date. The determination of the allowance for loan losses involves a high degree of judgment
and complexity. In evaluating the adequacy of the allowance for loan losses, management gives consideration to current
economic conditions, statutory examinations of the loan portfolio by regulatory agencies, loan reviews performed
periodically by independent third parties, delinquency information, management’s internal review of the loan portfolio, and
other relevant factors. In determining and maintaining our allowance for loan losses, we comply with the Federal Financial
Institutions Examination Council (FFIEC) Interagency Policy Statements on the Allowance for Loan and Lease Losses and
on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Associations.
Our allowance for loan losses is maintained at a level considered adequate to provide for probable losses. We
perform, at lease quarterly, an evaluation of the adequacy of the allowance. The allowance is based on our past loan loss
experience (which is bound by our limited operating history), known and inherent risks in the portfolio, adverse situations
20
The Bank of Princeton
that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, the composition of the loan
portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires
material estimates that may be susceptible to significant 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 loans not considered impaired, as well as smaller balance
homogeneous loans, such as residential mortgage 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.
The allowance for loan losses increased from $3.7 million at December 31, 2010 to $5.4 million at December 31,
2011, an increase of $1.7 million or 45%. This increase was primarily attributable to a 44% increase in gross loans from
December 31, 2010 to December 31, 2011.
The following table presents a summary of changes in our allowance for loan losses and includes information
regarding charge-offs, and selected coverage ratios for the years ended December 31, 2011, 2010, 2009, 2008 and 2007:
(in thousands)
Balance at beginning of year
Charge offs:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total charge offs
Recoveries:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total recoveries
2011
Year Ended December 31,
2009
2010
2008
2007
$
3,693 $
2,147 $ 1,092
$
354 $
(286)
(217)
(143)
-
(80)
-
(726)
(1,251)
(446)
(7)
-
(52)
-
(1,756)
-
(149)
-
-
-
-
(149)
-
-
-
-
-
-
-
-
18
-
-
-
-
18
(708)
2,377
5,362 $
-
1
-
-
-
-
-
-
-
-
-
-
-
1
(149)
(1,755)
1,204
3,301
3,693 $ 2,147
$
-
-
-
-
-
-
-
-
738
1,092 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
354
354
Net charge-offs
Additions charged to operations (provision for loan losses)
Balance at end of year
$
Net charge offs to average loans outstanding
0.21%
0.84 %
0.12 %
- %
- %
Our allowance for loan losses is allocated to the various segments of our portfolio identified above. The unallocated
component of the allowance for loan losses is maintained to cover uncertainties that could affect our estimate of probable
losses. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio. Additions to the allowance charged to operations
are the result of applying our allowance methodology to the existing loan portfolio. Increases in the additions charged to
operations were primarily the result of increases in the loan portfolio, combined with increases in nonperforming loans as
discussed above.
21
The Bank of Princeton
The following table presents the allocation of the allowance for loan losses by portfolio segment for the years ended
December 31, 2011, 2010 and 2009. The allocation of a portion of the allowance for loan losses to one category of loans
does not preclude its availability to absorb losses in other categories.
2011
December 31,
2010
2009
(in thousands)
Amount
% of Loans
to Total
Loans
Amount
% of Loans
to Total
Loans
Amount
% of Loans
to Total
Loans
$
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Unallocated
2,082
1,011
1,965
101
179
12
12
56.6 % $
20.8
13.7
3.7
4.7
0.5
-
1,484
718
904
78
178
9
322
58.1 % $
21.3
9.1
4.2
6.8
0.5
-
900
563
349
154
171
10
-
51.4 %
18.1
13.3
8.8
7.8
0.6
-
Total
$
5,362
100.0 % $
3,693
100.0 % $
2,147
100.0 %
At December 31, 2008 and 2007, our allowance for loan losses was comprised primarily of unallocated reserves.
Our allowances for loan losses were approximately $1.1 million and $355,000 at December 31, 2008 and 2007, respectively,
and our loans were approximately $91.5 million and $29.5 million at December 31, 2008 and 2007, respectively. See Note 7
Loans Receivable in the Notes to Consolidated Financial Statements within this Form 10-K for additional information
regarding our allowance for loan losses.
Bank Owned Life Insurance. Bank-owned life insurance (“BOLI”) increased $2.6 million to $8.6 million at
December 31, 2011 compared to $6.0 million the prior year. The increase was attributable to an increase in additional
insureds added to our BOLI program in 2011.
Premises and equipment. Premises and equipment, net increased from $4.2 million at December 31, 2010 to $5.2
million at December 31, 2011, an increase of $1.0 million or 24%. This increase was primarily due to the opening of two
new branches and the relocation of one branch during the year ended December 31, 2011, one of which included a purchase
of land and building.
Other assets. Accrued interest receivable and other assets decreased $908,000 from December 31, 2010 to
December 31, 2011, primarily due to decreases of $471,000 in deferred tax assets and $960,000 in prepaid assets and other
assets that were partially offset by increases in accrued interest receivable and restricted investments in bank stocks during
the period.
Deposits. Total deposits increased from $425.8 million at December 31, 2010 to $595.6 million at December 31,
2011, an increase of $169.8 million or 40%. Non-interest-bearing deposits increased $15.7 million, or 51%, to $46.4 million
at December 31, 2011, compared to $30.7 million at December 31, 2010. Interest-bearing deposits increased $154.0 million,
or 39%, to $549.2 million at December 31, 2011, compared to $395.1 million in the prior year. Our deposit growth was
primarily related to the competitive pricing of our deposit products coupled with the continued development of relationships
with local small business and the high level of individualized customer service we provide.
22
The Bank of Princeton
The following table presents our time deposit maturities as of December 31, 2011.
(in thousands)
Time deposits of $100,000 or more
Time deposits of less than $100,000
Total
December 31, 2011
Over
three
through
six
months
Three
months
or less
Over six
through
twelve
months
Over
twelve
months
Total
$
$
13,276 $ 11,238 $ 29,537 $ 48,804 $ 102,855
10,986
119,173
34,677
24,262 $ 20,420 $ 64,214 $ 113,132 $ 222,028
64,328
9,182
The following table presents the average balance of our deposit accounts for the years ended December 31, 2011,
2010 and 2009, and the average cost of funds for each category of our deposits.
2011
Avg.
Rate
Paid
Average
Amount
2010
% of
Average
Total
Deposits
Average
Amount
Avg.
Rate
Paid
% of
Average
Total
Deposits
Average
Amount
2009
Avg.
Rate
Paid
% of
Average
Total
Deposits
$
37,429
- %
7.6 % $ 20,623
0.00 %
6.6 % $ 14,628
0.00 %
7.3 %
99,194
1.4
20.1
62,829
1.29
20.2
31,232
0.84
15.5
104,600
80,704
1.1
1.2
21.2
16.3
86,699
47,628
1.29
1.47
27.8
15.3
78,115
8,484
1.90
1.18
38.7
4.2
76,934
2.1
15.6
43,127
2.30
13.8
28,459
2.57
14.1
(in thousands)
Non-interest-
bearing demand
deposits
Interest-bearing
demand deposits
Money market
deposits
Savings deposits
Time deposits of
$100,000 or
more
Other time
deposits
95,341
1.8
19.2
50,628
2.31
16.3
40,834
2.70
Total
$ 494,202
1.4 %
100.0 % $311,534
1.54 %
100.0 % $201,752
1.82 %
20.2
100.0 %
Borrowings. Borrowings decreased from $19.1 million at December 31, 2010 to $11.3 million at December 31,
2011, a decrease of $7.7 million or 40%. This decrease was primarily the result of the scheduled maturity of certain of our
FHLB-NY and FHLB-Pittsburgh advances during the period. The Company utilizes its available capacity with FHLB-NY as
an additional source of funding. Due to the deposit growth experienced by the Bank during the year ended December 31,
2011, it was not necessary for us to utilize our borrowing capacity with the FHLB.
The FHLB-Pittsburgh advances were among the liabilities assumed in connection with our acquisition of MoreBank
in September 2010. The remaining FHLB-Pittsburgh advances are fixed-rate term advances that are being paid down in
accordance with their terms. We do not have additional borrowing capacity with the FHLB-Pittsburgh and our relationship
with them will terminate once the remaining advances are repaid. See Note 3 - Business Combination in the Notes to
Consolidated Financial Statements within this Form 10-K for more information regarding our acquisition of MoreBank.
23
The Bank of Princeton
Accrued interest payable and other liabilities. Accrued interest payable and other liabilities increased from $2.4
million at December 31, 2010 to $3.6 million at December 31, 2011, an increase of $1.2 million or 50%. This increase was
primarily attributable to an increase in accrued interest payable as a result of the increase in interest-bearing deposits during
the year ended December 31, 2011, combined with an increase in accrued expenses and other liabilities at year-end 2011.
Stockholders’ equity. Stockholders’ equity increased from $41.0 million at December 31, 2010 to $54.3 million at
December 31, 2011, an increase of $13.3 million or 33%. The increase in stockholders’ equity was due to increases in
retained earnings from current year net income as well as common stock and paid-in-capital from our stock sale that occurred
in the second half of 2011.
Comparison of Operating Results for the Years Ended December 31, 2011 and December 31, 2010
General. Net income for the year ended December 31, 2011 was $2.8 million, an increase of approximately
$400,000, or 18%, from $2.4 million for the year ended December 31, 2010. This increase was primarily attributable to an
increase in net interest income that was partially offset by increases in non-interest expense and income tax expense.
Net interest income. Net interest income after the provision for loan loss increased $8.3 million, or 108%, to $16.1
million for the year ended December 31, 2011, compared to $7.8 million for the year ended December 31, 2010. Our net
interest rate spread on the average balance of interest-earning assets increased 25 basis points, to 3.32%, compared to 3.07%
in the prior year. The average yield on interest-earning assets was relatively unchanged, while the average cost of interest-
bearing liabilities decreased 23 basis points. The average yield on interest-earning assets was 4.82% and 4.80% for the years
ended December 31, 2011 and 2010, respectively. The average cost of interest-bearing liabilities for the years ending
December 31, 2011 and 2010 was 1.50% and 1.73%, respectively.
Total interest and dividend income. Total interest and dividend income increased $9.5 million, or 59%, to $25.7
million for the year ended December 31, 2011, compared to $16.2 million for the prior year. The improvement in interest
income resulted primarily from an increase in the average balance of interest-earning assets.
Interest income and fees on loans increased $8.5 million, or 65%, to $21.5 million for the year ended December 31,
2011, compared to $13.0 million for the prior year. The increase was primarily attributable to an increase in the average
balance of loans of $136.1 million from $200.7 million in 2010 to $336.8 million in 2011. This increase was partially offset
by a decrease in the average yield on loans, year-over-year of 10 basis points. The increase in average loans was due to
increased loan production, combined with the effect of the MoreBank acquisition that occurred at the end of the third quarter
of 2010.
Interest income on securities available-for-sale increased $1.1 million, or 39%, to $4.0 million for the year ended
December 31, 2011, compared to $2.9 million in the prior year. This increase was primarily attributable to a 79% increase in
the average balance of Securities available-for-sale from an average balance of $99.4 million during the twelve months ended
December 31, 2010 to an average balance of $177.8 during the twelve months ended December 31, 2011. This increase was
partially offset by a 65 basis point decrease in the average yield for the twelve months ended December 31, 2011 compared to
the prior year period. The increase in the average balance was primarily attributable to the difference between average
deposit and average loan growth during the period.
Interest income on securities held-to-maturity decreased $146,000, or 71%, to $59,000 for the year ended December
31, 2011 compared to $205,000 for the prior year. The average balance of securities held-to-maturity decreased $3.5 million
to $1.3 million in 2011, compared to $4.8 million in the prior year. The average yield on securities held-to-maturity increased
19 basis points to 4.49%, compared to 4.30% in the prior year. The decrease in the average balance was primarily due to
maturities and our decision to not purchase additional securities for the held-to-maturity portfolio as we manage our
investment portfolio to allow for greater flexibility as our liquidity needs change.
Interest Expense. Total interest expense increased $2.0 million, or 40%, to $7.2 million for the year ended
December 31, 2011, compared to $5.1 million in the prior year. The increase primarily related to a $179.7 million increase in
the average balance of interest-bearing liabilities when comparing the twelve months ended December 31, 2011 to the prior
year period. This increase was partially offset by a 23 basis point decrease in the average cost of interest-bearing liabilities to
1.50% compared to 1.73% in the prior year.
24
The Bank of Princeton
Interest expense on deposits increased $2.1 million, or 44%, to $6.9 million in 2011, compared to $4.8 million in
2010. Average interest-bearing deposits increased $175.6 million, or 62%, to $456.8 million for the year ended December 31,
2011, compared to $281.2 million in 2010. The average cost of interest-bearing deposits decreased 19 basis points from year
to year. As the Company worked to grow its total deposits during 2011 through organic growth, de novo branches, as well as
the MoreBank acquisition in the third quarter of 2010, average demand deposits, interest-bearing and savings deposits,
average money market deposits and average time deposits increased 69%, 25% and 89%, respectively, for the twelve months
ended December 31, 2011 compared to the prior year period.
Provision for Loan Losses. The provision for loan losses decreased 924,000 or 28% to $2.4 million in 2011
compared to $3.3 million in the prior year. The decrease in the 2011 provision for loan losses reflected, among other things,
the stabilization of economic conditions that impact our loan portfolio in our markets. Our loan charge-offs, net of recoveries
were $708,000 in 2011, compared to $1.8 million in 2010. See the section above titled “Financial Condition —Allowance for
Loan Losses” for a discussion of our allowance for loan losses methodology, including additional information regarding the
determination of the provision for loan losses.
Non-Interest Income. Non-interest income increased approximately $275,000, or 11%, to $2.8 million in 2011,
compared to $2.6 million in the prior year. In 2011, non-interest income included gains of $2.0 million on sales of securities
available-for-sale and nominal amounts for income from bank-owned life insurance and service charges and other fees earned
in the normal course of banking operations. In 2010, non-interest income included gains of $1.2 million on sales of securities
available-for-sale and a bargain purchase gain of $1.0 million from the acquisition of MoreBank, as well as nominal amounts
of income from bank-owned life insurance and service charges and other fees earned in the normal course of banking
operations.
Non-Interest Expense. Non-interest expense increased $5.7 million, or 60%, to $15.1 million in 2011, compared to
$9.4 million in the prior year. The increase was due to the growth of the Bank experienced during 2011, inclusive of the costs
associated with the operation of the three MoreBank branches for all of 2011 versus only the fourth quarter of 2010.
Salaries and employee benefits increased $2.4 million, or 51%, to $7.3 million in 2011, compared to $4.8 million in
the prior year. The increase in costs were related to an increase in overall FTEs associated with the growth of the bank
through additional branch openings as well as the full-year impact of the MoreBank acquisition that only impacted the fourth
quarter of 2010.
Occupancy and equipment expenses increased approximately $847,000, or 53%, to $2.5 million in 2011 compared
to $1.6 million in the prior year. The increase was attributable to the costs associated with the opening of two new branches
and the relocation of a third branch in 2011, combined with the full-year impact of the additional MoreBank branches that
only impacted the fourth quarter of 2010.
Professional fees increased $416,000, or 46%, to $1.3 million in 2011, compared to 903,000 in the prior year. This
increase was attributable to increased audit and legal fees related to our Form 10 registration filing, quarterly report filings,
the organization of a New Jersey investment company subsidiary and our common stock offering discussed further in Note 3
in the Notes to Consolidated Financial Statements within this Form 10-K.
Other real estate owned expense increased $177,000, or 188%, to $271,000 in 2011 from $94,000 in the prior year.
This increase was primarily related to the write down of other real estate owned to net realizable value.
All other non-interest expenses increased primarily as a result of the Bank’s opening of three new branches in 2011,
combined with the inclusion of operating costs associated with MoreBank impacting the full year 2011 versus only the fourth
quarter of 2010.
Provision for Income Taxes. The provision for income taxes increased $2.6 million, or 171%, to $1.1 million in
2011 compared to an income tax benefit of $1.5 million in the prior year. The increase is primarily related to an increase of
331% in pre-tax income, combined with the tax benefit realized in 2010 due to the reversal of the valuation allowance on
deferred tax assets that were previously not more likely than not to be realized. The effective tax rate for 2011 was 27%
compared to (166)% for 2010.
25
The Bank of Princeton
Average Balance Sheets. The average yields and costs shown in the following table are derived by dividing income
or expense by the daily average balance of assets or liabilities, respectively, for the periods presented. Nonaccrual loans are
included in the average balance of loans receivable, net for all periods presented. No tax equivalent adjustments have been
made.
(in thousands)
Interest-earning assets:
Loans receivable, net
Investment securities:
Available-for-sale
Held-to-maturity
Other interest-earning assets
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
Demand, interest-bearing
and savings deposits
Money market
Time deposits
Total interest-bearing deposits
Federal Home Loan Bank
borrowings
Total interest-bearing
liabilities
Non-interest-bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Interest rate spread(1)
For the Year Ended December 31,
Average
Balance
2011
Interest
Average
Yield/Cost
Average
Balance
2010
Interest
Average
Yield/Cost
$
336,813
$
21,488
6.38 % $
200,670
$
13,007
6.48 %
4,017
59
109
25,673
2.26
4.49
0.65
4.82
177,760
1,308
16,711
532,592
29,919
562,511
$
179,898
104,599
172,275
456,772
2,390
1,102
3,384
6,876
1.33
1.05
1.96
1.51
99,371
4,778
32,649
337,468
15,915
353,383
$
106,522
83,718
90,916
281,156
$
$
$
$
19,325
289
1.50
15,204
476,097
40,659
516,756
45,755
7,165
1.50 %
296,360
22,157
318,517
34,866
$
562,511
$
353,383
2,892
205
97
16,201
1,483
1,118
2,187
4,788
342
2.91
4.30
0.30
4.80
1.39
1.34
2.41
1.70
2.25
5,130
1.73
%
3.32 %
3.07 %
Net interest income
$
18,508
$
11,071
Net yield on interest-
earning assets(2)
Ratio of average interest-
earning assets to average
interest-bearing liabilities
3.48 %
1.12x
3.28 %
1.14x
(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities.
(2) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.
26
The Bank of Princeton
(in thousands)
Interest-earning assets:
Loans receivable, net
Investment securities:
Available-for-sale
Held-to-maturity
Other interest-earning assets
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
Demand, interest-bearing
and savings deposits
Money market
Time deposits
Total interest-bearing deposits
Federal Home Loan Bank
borrowings
Total interest-bearing
liabilities
Non-interest-bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Interest rate spread(1)
Net interest income
Net yield on interest-
earning assets(2)
Ratio of average interest-
earning assets to average
interest-bearing liabilities
Average
Balance
2009
Interest
Average
Yield/Cost
$
129,746
$
7,466
5.75 %
$
$
3,548
384
25
11,423
$
4.31
4.24
0.31
4.98
82,338
9,060
8,164
229,308
7,607
236,915
$
37,008
78,115
72,001
187,124
337
1,483
1,858
3,678
0.91
1.90
2.58
1.97
6,493
129
1.98
3,807
1.97 %
193,617
16,243
209,860
27,055
$
236,915
$
7,616
3.32 %
3.48 %
1.12x
(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities.
(2) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.
27
The Bank of Princeton
Rate/Volume Analysis
The following table reflects the sensitivity of our interest income and interest expense to changes in volume and in
yields on interest-earning assets and costs of interest-bearing liabilities during the periods indicated.
Year Ended December 31,
2011 vs. 2010
Increase (Decrease) Due to
Year Ended December 31,
2010 vs. 2009
Increase (Decrease) Due to
Volume
Rate
Net
Volume
Rate
Net
$ 8,686 $
(205 ) $
8,481 $
4,597 $
944 $
5,541
(in thousands)
Interest and dividend income:
Loans receivable
Investment securities:
Available-for-sale
Held-to-maturity
1,772
(156 )
(146 )
Total interest-earning assets $ 10,156
Other interest-earnings assets
(647 )
10
158
(684 ) $
1,125
(146 )
12
9,472 $
496
(184 )
(56 )
4,853 $
(1,152 )
5
128
(75 ) $
(656 )
(179 )
72
4,778
$
Interest expense:
Demand, interest-bearing and
savings
Money market
Time deposits
Federal Home Loan Bank
borrowings
$
Total interest-bearing
liabilities
$
967 $
220
1,619
(60 ) $
(236 )
(422 )
$
907
(16 )
1,197
$
990
75
477
$
156
(440 )
(148 )
1,146
(365)
329
25
(78 )
(53 )
197
16
213
2,831 $
(796 ) $
2,035 $
1,739 $
(416 ) $
1,323
Change in net interest income
$
7,325 $
112
$
7,437 $
3,114 $
341 $
3,455
Liquidity, Commitments and Capital Resources
Liquidity. Our liquidity, represented by cash and cash equivalents, is a product of our operating, investing and
financing activities. Our primary sources of funds are deposits, principal repayments of securities and outstanding loans, and
funds provided from operations. In addition, we invest excess funds in short-term interest-earnings assets such as overnight
deposits or U.S. agency securities, which provide liquidity to meet lending requirements. While scheduled payments from the
amortization of loans and securities and short-term investments are relatively predictable sources of funds, general interest
rates, economic conditions and competition greatly influence deposit flows and repayments on loans and mortgage-backed
securities.
We strive to maintain sufficient liquidity to fund operations, loan demand and to satisfy fluctuations in deposit
levels. We are required to have enough investments that qualify as liquid assets in order to maintain sufficient liquidity to
ensure safe and sound banking operations. Liquidity may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans. We attempt to maintain adequate but not excessive
liquidity, and liquidity management is both a daily and long-term function of our business management. We manage our
liquidity in accordance with a board of directors-approved asset liability policy, which is administered by our asset liability
committee (ALCO). ALCO reports interest rate sensitivity, liquidity, capital and investment related matters on a quarterly
basis to our board of directors.
We review cash flow projections regularly and update them in order to maintain liquid assets at levels believed to
meet the requirements of normal operations, including loan commitments and potential deposit outflows from maturing
certificates of deposit and savings withdrawals.
While deposits are our primary source of funds, we are also able to generate cash through borrowings from the
FHLBNY. At December 31, 2011, we had $8.3 million of advances outstanding from the FHLBNY and $3.0 million of
advances outstanding from the FHLB-Pittsburgh. At December 31, 2011, we had available capacity with FHLBNY, subject
28
The Bank of Princeton
to certain collateral restrictions, of $324.2 million. We have elected to allow the advances outstanding from FHLB-
Pittsburgh that were assumed as part of the MoreBank acquisition, to amortize in accordance with their terms. We do not
have any additional borrowing capacity available with the FHLB-Pittsburgh.
Additionally, we are a member of the Atlantic Central Bankers Bank (“ACBB”) and as of December 31, 2011, we
had available capacity with ACBB of $6.0 million to provide short-term liquidity generally for a period of not more than
fourteen days.
Contractual Obligations. We have non-cancelable operating leases for branch offices and our operations center.
The following is a schedule by years of future minimum rental payments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year at December 31, 2011:
Years Ended December 31:
2012
2013
2014
2015
2016
Thereafter
Total minimum payments required
(in thousands)
$ 1,048
1,025
1,047
1,032
828
2,038
$ 7,018
Capital Resources. Consistent with our goals to operate as a sound and profitable financial organization, we actively
seek to maintain our status as a well-capitalized institution in accordance with regulatory standards. As of December 31,
2011, we met the capital requirements to be considered “well capitalized”. See Note 18 - Regulatory Capital Requirements in
the Notes to Consolidated Financial Statements included within this Form 10-K for more information regarding our capital
resources.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of our business of investing
in loans and securities as well as in the normal course of maintaining and improving the Bank’s facilities. These financial
instruments include significant purchase commitments, such as commitments related to capital expenditure plans and
commitments to purchase investment securities or mortgage-backed securities, and commitments to extend credit to meet the
financial needs of our customers.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the loan contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee by our customers. Our exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit is represented by the contractual notional amount of those
instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance-
sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
We had the following off-balance sheet financial instruments whose contract amounts represent credit risk at
December 31:
(in thousands)
2011
2010
Performance and standby letters of credit
Commitments to grant loans
Unfunded commitments under lines of credit
$
$
2,367
57,563
6,767
66,697
$
$
2,550
57,474
8,084
68,108
29
The Bank of Princeton
For additional information regarding our outstanding lending commitments at December 31, 2011, see Note 13 to
the Consolidated Financial Statements contained in this Annual Report on Form 10-K.
Impact of Inflation
The financial statements included in this document have been prepared in accordance with accounting principles
generally accepted in the United States of America. These principles require the measurement of financial position and
results of operations in terms of historical dollars, without considering changes in the relative purchasing power of money,
over time, due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more
significant impact on our performance than the effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are
affected by inflation.
Return on Equity and Assets
The following table presents certain performance ratios for the years ended December 31, 2011, 2010 and 2009.
Return on Average Assets (ROA)
Return on Average Equity (ROE)
Average Equity to Average Assets
2011
0.50%
6.15%
8.13%
2010
0.62%
6.78%
9.46%
2009
0.17%
1.53%
11.42%
Our dividend payout ratio was zero for all periods presented above as we did not declare or pay dividends during
any of the years ended December 31, 2011, 2010 and 2009.
Critical Accounting Policies and Estimates
In the preparation of our financial statements, we have adopted various accounting policies that govern the
application of accounting principles generally accepted in the United States and in accordance with general practices within
the banking industry. Our significant accounting policies are described in our financial statements under Note 1- Summary
of Significant Accounting Policies. While all of these policies are important to understanding the financial statements,
certain accounting policies described below involve significant judgment and assumptions by management that have a
material impact on the carrying value of certain assets and liabilities. We consider these accounting estimates to be critical
accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we
believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual
results could differ from these judgments and assumptions that could have a material impact on the carrying values of our
assets and liabilities and our results of operations.
Allowance for Credit 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 our 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 our estimate of losses inherent in our unfunded loan commitments and is recorded in other liabilities
on the balance sheet. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-
offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent
recoveries, if any, are credited to the allowance for loan losses. All, or part, of the principal balance of loans receivable are
charged-off to the allowance for loan losses as soon as it is determined that the repayment of all, or part, of the principal
balance is highly unlikely. For a more detailed discussion of our allowance for loan loss methodology and the allowance for
loan losses see the section titled “Analysis of the Allowance for Loan Losses” in this “Management’s Discussion and
Analysis of Financial Condition and Results Of Operations.”
Acquired Loans. Loans that we acquire in acquisitions subsequent to January 1, 2009 are recorded at fair value with
no carryover of the related allowance for loan losses. Determining the fair value of the loans involves estimating the amount
and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a
market rate of interest.
30
The Bank of Princeton
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable
discount or premium and is recognized in interest income over the remaining life of the loans. The difference between the
contractually-required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the
nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the
life of the loans. Subsequent decreases to the expected cash flows require us to evaluate the need for an allowance for loan
losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the
nonaccretable discount which we then reclassify as accretable discount that is recognized in interest income over the
remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to
collect is performed in a similar manner as that used to determine our allowance for loan losses. Charge-offs of the principal
on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment.
Income Taxes. We account 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 uncertainties in income taxes, which
sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. We
had no material unrecognized tax benefits or accrued interest and penalties as of December 31, 2011 and 2010. Our policy is
to account for interest and penalties as a component of other expense.
We have provided for federal and state income taxes on the basis of reported income. 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 liabilities and assets, respectively,
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.
Recently Issued Accounting Standards
Refer to Note 2 of the Notes to Consolidated Financial Statements for discussion of recently issued accounting
standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, the Company is not required to provide the information otherwise required by this
Item.
31
The Bank of Princeton
Item 8. Financial Statements and Supplementary Data
The following audited financial statements are set forth in this Annual Report on Form 10-K on the pages listed in
the Index to Consolidated Financial Statements below.
THE BANK OF PRINCETON
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
33
34
35
36
37
39
32
The Bank of Princeton
The Bank of Princeton THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
ASSETS
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Securities available-for-sale at fair value
Securities held-to-maturity (fair value of $1,166 and $1,454, respectively)
Loans receivable, net of allowance for loan losses of $5,362 and $3,693
at December 31, 2011 and 2010, respectively
Bank-owned life insurance
Other real estate owned
Premises and equipment, net
Accrued interest receivable and other assets
December 31,
2011
2010
$
18,015
41,200
$
59,215
176,163
1,074
405,861
8,639
919
5,165
7,835
11,257
14,363
25,620
159,601
1,394
281,573
6,032
1,140
4,153
8,743
TOTAL ASSETS
$
664,871
$
488,256
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
Borrowings
Accrued interest payable and other liabilities
TOTAL LIABILITIES
STOCKHOLDERS’ EQUITY:
Common stock, $5.00 par value, 10,000,000 authorized, 4,578,330 and
3,952,185 shares issued and outstanding at December 31, 2011 and
2010, respectively
Paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income
TOTAL STOCKHOLDERS’ EQUITY
$
46,385 $
549,188
595,573
11,344
3,636
610,553
22,892
28,182
1,146
2,098
54,318
30,669
395,144
425,813
19,058
2,427
447,298
19,761
22,515
(1,667 )
349
40,958
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
664,871
$
488,256
See notes to consolidated financial statements.
34
The Bank of Princeton
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
For the Year ended
December 31,
2011
2010
$
21,488
$
13,007
4,017
59
109
25,673
6,876
289
7,165
18,508
2,377
16,131
1,976
-
255
599
2,830
7,254
2,457
1,319
1,153
616
318
312
271
112
1,273
15,085
3,876
1,063
2,813
0.69
0.68
2,892
205
97
16,201
4,788
342
5,130
11,071
3,301
7,770
1,229
1,014
33
279
2,555
4,805
1,610
903
732
454
199
159
94
-
470
9,426
899
(1,488 )
2,387
0.68
0.68
$
$
$
$
$
$
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees
Debt securities:
Securities available-for-sale
Securities held-to-maturity
Other interest and dividend income
TOTAL INTEREST AND DIVIDEND INCOME
INTEREST EXPENSE
Deposits
Borrowings
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
Provision for loan losses
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
NON-INTEREST INCOME
Gain on sale of securities available-for-sale, net
Gain on acquisition of MoreBank
Income from bank-owned life insurance
Fees and service charges
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
Other real estate owned expense
Loss on disposal of premises and equipment
Other
TOTAL NON-INTEREST EXPENSE
INCOME BEFORE INCOME TAX EXPENSE (BENEFIT)
INCOME TAX EXPENSE (BENEFIT)
NET INCOME
Earnings per common share-basic
Earnings per common share-diluted
See notes to consolidated financial statements.
35
The Bank of Princeton
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2011 and 2010
(in thousands, except share data)
Common stock
Paid-in capital
Retained earnings
(accumulated
deficit)
Accumulated
other
comprehensive
income
Total
$
15,112
$
15,765 $
(4,054 ) $
1,067 $
27,890
2,387
-
2,387
Balance, December 31, 2009
Comprehensive income:
Net income
Other comprehensive income (loss):
Unrealized loss on available-for-sale
securities, net of reclassification
adjustments and income taxes of
$859
Total comprehensive income
Acquisition of MoreBank (465,195
shares at $12.00 per share)
Acquisition of MoreBank (47,200
options at $0.43 per option)
Warrants exercised (464,565 shares
at $12.00 per share)
Stock-based compensation expense
Balance, December 31, 2010
Comprehensive income:
Net income
Other comprehensive income:
Unrealized gain on available-for-sale
securities, net of reclassification
adjustments and income taxes of
$901
Total comprehensive income
Sale of common stock (621,862
shares at $13.75 per share)
-
-
2,326
-
2,323
-
19,761
$
$
-
-
-
-
3,257
20
3,252
221
22,515 $
-
-
-
-
-
(1,667 ) $
(718 )
$
-
-
-
-
349 $
-
2,813
-
1,749
$
-
-
-
2,098 $
-
-
-
3,109
5,441
Stock options exercised (4,283 shares
at $10.48 per share)
Stock-based compensation expense
Balance, December 31, 2011
$
22
-
22,892 $
23
203
28,182 $
-
-
1,146 $
See notes to consolidated financial statements.
36
(718 )
1,669
5,583
20
5,575
221
40,958
2,813
1,749
4,562
8,550
45
203
54,318
The Bank of Princeton
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year ended December 31,
2011
2010
$
2,813 $
2,387
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
Stock-based compensation
Amortization of premiums and accretion of discounts on securities
Accretion of net deferred loan fees and costs
Amortization of premiums and accretion of discounts on deposits
Amortization of premiums on borrowings
Net realized gains on sale of securities available-for-sale
Gain on acquisition of MoreBank
Increase in cash surrender value of bank-owned life insurance
Loss on disposition of premises and equipment
Increase in deferred income taxes
Loss on other real estate owned
Proceeds on sale of other real estate owned
Amortization of core deposit intangible
Decrease (increase) in accrued interest receivable and other assets
Increase in accrued interest payable and other liabilities
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities
Maturities, calls and principal repayments of available-for-sale securities
Proceeds from sale of available-for-sale securities
Maturities, calls and principal 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
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
Net (repayments) proceeds of overnight borrowings
Repayments of term borrowings
Proceeds from issuance of common stock
Proceeds from exercise of stock options
NET CASH PROVIDED BY FINANCING ACTIVITIES
2,377
742
203
1,731
(1,068)
97
(82)
(1,976)
-
(255)
112
(430)
197
203
126
327
1,209
6,326
(146,197)
56,799
75,740
312
(125,777)
(2,352)
(1,866)
(16)
-
(143,357)
169,663
(1,044)
(6,588)
8,550
45
170,626
3,301
480
221
648
(130)
24
(21)
(1,229)
(1,014)
(32)
-
(1,556)
80
-
45
(395)
1,809
4,618
(144,276)
33,360
32,431
7,248
(64,075)
(6,000)
(1,846)
(40)
11,028
(132,170)
143,635
1,044
(4,386)
-
5,575
145,868
18,316
7,304
25,620
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
33,595
25,620
59,215 $
$
See notes to consolidated financial statements.
37
The Bank of Princeton
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(in thousands)
SUPPLEMENTARY CASH FLOWS INFORMATION:
Interest paid
Income taxes paid
SUPPLEMENTARY SCHEDULE OF NONCASH ACTIVITIES:
Transfers from loans receivable, net to other real estate owned
Assets from acquisition of MoreBank
Liabilities from acquisition of MoreBank
$
$
$
$
$
6,594 $
1,419 $
4,693
-
179 $
- $
- $
993
64,560
68,971
See notes to consolidated financial statements.
38
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies
Organization and Nature of Operations
The Bank of Princeton (the “Bank” or the “Company”) was incorporated on March 5, 2007 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, 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 eleven branches,
is generally an area within an approximate 50 mile radius of Princeton, NJ, including parts of Mercer, Somerset,
Hunterdon, Monmouth and Middlesex Counties in central New Jersey, and additional areas in portions of Philadelphia,
Delaware, Montgomery and Bucks Counties in Pennsylvania.
The Bank offers traditional retail banking services, one-to four-family residential mortgage loans, multi-family and
commercial mortgage loans, construction loans, commercial business loans and consumer loans, including home equity
loans and lines of credit. As of December 31, 2011, the Bank had 103 full-time employees and 7 part-time
employees. The Bank maintains a website at www.thebankofprinceton.com.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Bank and its wholly-owned subsidiaries: Bayard Lane,
LLC, Bayard Properties, LLC, 112 Fifth Avenue, LLC and TBOP New Jersey Investment Company. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in
the United States of America (“GAAP”).
Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated 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 determination of
other-than-temporary impairment of securities and the valuation of deferred tax assets.
Management believes that the allowance for loan losses is adequate as of December 31, 2011 and 2010. While
management uses current information 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 or other factors.
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 effect certain changes that result in additions to the
allowance based on their judgments about information available to them at the time of their examinations.
Subsequent Events
Management evaluated subsequent events until the date of issuance of this report and concluded that no events occurred
that were of a material nature.
39
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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. 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.
Business combinations
The Bank accounts for business combinations in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“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, on deposit at other financial institutions 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 or 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, 2011 and 2010. 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 evaluates securities for other-than-temporary-impairment (“OTTI”) on, at least, a quarterly basis, and more
frequently when economic or market conditions warrant such an evaluation. In determining OTTI under the ASC Topic
320, management considers many factors, including: (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; (3) whether the market
decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or
more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether
40
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
an OTTI decline exists involves a high degree of subjectivity and judgment and is based on information available to
management at a point in time. An OTTI is deemed to have occurred if there has been an adverse change in the
remaining expected future cash flows.
When an OTTI of debt securities occurs, the amount of the OTTI recognized in earnings depends on whether the Bank
intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized
cost basis. If the Bank intends to sell or more likely than not will be required to sell the security before recovery of its
amortized cost basis, the OTTI shall be recognized in earnings at an amount equal to the difference between the
security’s amortized cost basis and its fair value at the balance sheet date. If the Bank does not intend to sell the
security and it is not more likely than not that the Bank will be required to sell the security before recovery of its
amortized cost basis, the OTTI shall be separated into the amount representing the credit loss and the amount related to
all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash
flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors shall
be recognized in other comprehensive income, net of applicable tax benefit. The previous amortized cost basis less the
OTTI recognized in earnings shall become the new amortized cost basis of the investment.
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.
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 Receivable
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.
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, home equity and consumer loan classes.
For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or
interest is 90 days past due or management has serious doubts about further collectability of principal or interest, even
though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is
either guaranteed or well-secured. When a loan is placed on 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 collectability of principal. Generally, loans
are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time (generally six months) and the ultimate collectability 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.
41
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
Allowance for credit 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 loan losses is increased by the provision for loan losses, and decreased by
charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and
subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are
charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is
highly unlikely.
The allowance for loan losses is maintained at a level considered adequate to provide for probable losses. The Company
performs, at lease quarterly, an evaluation of the adequacy of the allowance. The allowance is based on past loan loss
experience (which is bound by the Company’s limited operating history), 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, the
composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to significant revision as more information becomes
available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that
are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted
cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that
loan. The general component covers pools of loans by loan class including loans not considered impaired, as well as
smaller balance homogeneous loans, such as residential mortgage 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.
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, home equity 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.
42
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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.
loans
interest rate risk and risk of non-
involve certain risks such as
Residential first-lien mortgage
repayment. Adjustable-rate loans decrease 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 degree of 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 for projects which are pre-sold or leased, 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 and industrial 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 assets. In most cases, any repossessed collateral for a
defaulted commercial business loan 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.
An unallocated component of the allowance for loan losses 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
43
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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 loan 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 costs to sell the
property.
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
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, inventory reports,
accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally
discounted based on the age of the financial information or the quality of the assets.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank
does not separately identify individual residential first-lien mortgage loans, home equity loans and consumer loans for
impairment disclosures, unless such loans are a troubled debt restructuring.
Loans whose terms are modified are classified as troubled debt restructurings if the Bank grants borrower concessions
and it is deemed that 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.
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-off to the allowance for loan losses. Loan not classified are rated pass.
44
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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 allowance
for loan losses is adequate at the reported dates.
Bank-owned life insurance
The Bank is the beneficiary of insurance policies on the lives of certain officers 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.
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 $1,338,000
and $1,322,000 is carried at cost at December 31, 2011 and 2010, 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 of stock in Atlantic Central Bankers Bank (“ACBB”) at December 31, 2011 and 2010.
Management believes no impairment charge is necessary related to the FHLB restricted stock or the ACBB restricted
stock as of December 31, 2011 or 2010.
45
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
Intangible assets
The acquisition of MoreBank on September 30, 2010 and the acquisition of a branch in 2010 resulted in the Bank
recording core deposit intangibles of $551,000 and $100,000, respectively. 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 core deposit intangible, net of accumulated amortization, was $481,000 and $607,000 as of December 31,
2011 and 2010, respectively. Amortization expense is anticipated to be approximately $125,000 in 2012, 2013 and
2014, respectively, and approximately $106,000 in 2015.
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 the twelve month periods ended December 31, 2011 and
2010.
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, 2011 and
2010. 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, 2011, tax years 2008
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 liabilities and assets, respectively, 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 tax 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 and letters of 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, 2011 and 2010, no matching contributions were made.
46
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Thatcost 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-
Sholes 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.
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.
Reclassifications
Certain amounts as of and for the year ended December 31, 2010 have been reclassified to conform to the current year’s
presentation. These reclassifications did not have any impact on stockholders’ equity or net income.
Note 2 – Recent Accounting Pronouncements
Receivables. In April 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-02, Receivables (Topic 310): A
Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, to clarify the accounting principles
applied to loan modifications. ASU No. 2011-02 was issued to address the recording of an impairment loss in FASB ASC
310, Receivables. ASU No. 2011-02 adds text to the scope guidance Section 310-40-15 that is meant to help determine when
a lender has granted a concession on their terms of a loan. The added material also provides criteria that should be used to
help determine when the loan restructuring delays a payment by a length of time that is considered insignificant and when the
borrower is having financial problems. For public companies, the effective date is for the first interim or annual period
beginning on or after June 15, 2011, or later with retrospective application to the beginning of the fiscal year for loans that
47
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Recent Accounting Pronouncements (Continued)
are restructured during the year in which the changes are adopted. The Bank adopted this update as of the quarter beginning
July 1, 2011 with retrospective application to the beginning of the year. The adoption of ASU No. 2011-02 did not impact
the Company’s financial condition or results of operations.
Transfers and Servicing. In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860):
Reconsideration of Effective Control for Repurchase Agreements. The amendments in ASU No. 2011-03 remove from the
assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the
financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral
maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective
control are not changed by the amendments in ASU No. 2011-03. This update is effective for the first interim or annual
period beginning on or after December 15, 2011 and is to be applied prospectively to transactions or modifications of
transactions that occur on or after the effective date. The Bank does not expect the adoption of ASU No. 2011-03 to have a
material impact on its financial condition or results of operations.
Fair Value. In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this
update result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial
Reporting Standards (IFRS). Consequently, the amendments change the wording used to describe many of the requirements
in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the
amendments in this update clarify the FASB’s intent about the application of existing fair value measurement requirements.
Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about
fair value measurements. This update is effective during interim and annual periods beginning on or after December 15,
2011 and is to be applied prospectively; early adoption is not permitted. The Bank does not anticipate the adoption of this
update will impact its financial condition or results of operations.
Comprehensive Income. In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income. This update provides an entity the option to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to
present each component of net income along with total net income, each component of other comprehensive income along
with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement,
the entity is required to present the components of net income and total net income, the components of other comprehensive
income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the
two-statement approach, an entity is required to present components of net income and total net income in the statement of
net income. The statement of other comprehensive income should immediately follow the statement of net income and
include the components of other comprehensive income and a total for other comprehensive income, along with a total for
comprehensive income. The amendments do not affect how earnings per share is calculated or presented. This update is
effective for fiscal years and interim periods beginning after December 15, 2011 and is to be applied retrospectively. The
adoption of this update will not impact the Bank’s financial condition or results of operations, but will result in a change in
presentation of other comprehensive income.
In December, 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date to the Presentation of Reclassifications of
Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05. In response to
stakeholder concerns regarding the operational ramifications of the presentation of these reclassifications for current and
previous years, the FASB has deferred the implementation date of this provision to allow time for further consideration. The
requirement in ASU 2011-05, Presentation of Comprehensive Income, for the presentation of a combined statement of
comprehensive income or separate, but consecutive, statements of net income and other comprehensive income is still
effective for fiscal years and interim periods beginning after December 15, 2011 for public companies, and fiscal years
ending after December 15, 2011 for nonpublic companies.
48
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Business Combination
The Bank acquired MoreBank on September 30, 2010. The Bank exchanged 465,195 of its common shares for all
outstanding MoreBank shares and also replaced outstanding and unexercised MoreBank options with fully-vested options
topurchase common stock of the Bank. Total consideration transferred by the Bank amounted to approximately $5,602,000
for net assets of approximately $6,617,000. The transaction included no contingent consideration arrangements.
The excess of net assets acquired over the consideration transferred of approximately $1,014,000 was recognized as a gain on
acquisition for the year ended December 31, 2010. 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.
The Bank acquired loans with a fair value of $49.2 million. Included in this amount was $1.5 million of 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 mark discount of $0.1 million, 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.
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.
Information about the acquired loan portfolio as of September 30, 2010 is as follows (in thousands):
Loans
Acquired
without
Deteriorated
Credit
Quality
Loans
Acquired
with
Deteriorated
Credit
Quality
Total Loans
Acquired
$
Contractually required principal and interest at acquisition
Contract cash flows not expected to be collected (nonaccretable discount)
Expected cash flows at acquisition
Interest component of expected cash flows (accretable discount)
Fair value of acquired loans
$
59,022 $
(535)
58,487
(10,839)
47,648
$
1,996
(424)
1,572
(68)
1,504
$
$
61,018
(959)
60,059
(10,907)
49,152
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.
49
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – Business Combination (Continued)
Acquisition-related costs amounted to approximately $155,000 and are presented in professional fees within the statements of
operations for the year ended December 31, 2010. 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 following table
summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of the acquisition (in
thousands):
Assets
Cash and cash equivalents
Securities available for sale
Loans receivable, net
Premises and equipment, net
Core deposit intangible
Other assets
Total assets acquired
Liabilities
Deposits
Borrowings
Other liabilities
Total liabilities assumed
Net assets acquired
$
$
11,028
11,169
49,152
780
551
2,908
75,588
63,525
5,283
163
68,971
6,617
The Bank’s statement of operations includes MoreBank’s results beginning as of the acquisition date. 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.
(in thousands, except earnings per common share data)
Net interest income
Net income
Earnings per common share-basic
Earnings per common share-diluted
$
$
$
$
13,042
1,936
0.58
0.57
Note 4 – Stock Offering
The Bank conducted a stock offering during the third and fourth quarters of 2011. The Bank sold 621,862 shares of common
stock at the offering price per share of $13.75. The effect of these transactions was to increase the Bank’s cash and capital
positions by $8.6 million during the year ended December 31, 2011.
Note 5 – Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS is calculated by dividing net income by the weighted average number of common
stock outstanding for the period, adjusted to include the effect of outstanding stock options and warrants, if dilutive, using
the treasury stock method. Shares issued during any period are weighted for the portion of the period they were outstanding.
50
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Earnings Per Share (Continued)
The following schedule presents earnings per share data for the twelve month periods ended December 31, 2011 and 2010:
Net income applicable to common stock
Weighted average number of common shares outstanding
Basic earnings per share
Net income applicable to common stock
Weighted average number of common shares outstanding
Dilutive effect on common shares outstanding
Weighted average number of diluted common shares outstanding
Diluted earnings per share
Twelve months ended
December 31,
2011
2010
(in thousands, except per share
data)
$
$
2,813 $
4,103
0.69 $
$
2,813 $
4,103
52
4,155
0.68 $
$
2,387
3,490
0.68
2,387
3,490
30
3,520
0.68
Options and warrants to purchase 330,549 shares of common stock at a weighted average exercise price of $10.86 were
included in the computation of diluted earnings per share for the twelve months ended December 31, 2011. Options to
purchase 73,366 shares of common stock at a weighted average exercise price of $21.66 were not included in the
computation of diluted earnings per share because the exercise price equaled or exceeded the estimated fair value of our
common stock for the twelve months ended December 31, 2011.
Options and warrants to purchase 218,616 shares of common stock at a weighted average exercise price of $10.18 were
included in the computation of diluted earnings per share for the twelve months ended December 31, 2010. Options to
purchase 101,467 shares of common stock at a weighted average exercise price of $18.61 were not included in the
computation of diluted earnings per share because the exercise price equaled or exceeded the estimated fair value of our
common stock for the twelve months ended December 31, 2010.
51
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Investment Securities
The following summarizes the amortized cost and estimated fair value of securities available-for-sale at December 31, 2011
and 2010 with gross unrealized gains and losses therein:
Amortized
Cost
December 31, 2011
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Available-for-sale:
Mortgage-backed securities-U.S.
Government Sponsored Enterprises (GSE’s) $
Obligations of state and
political subdivisions
Corporate securities
$
117,395
$
2,252
$
(35) $
119,612
53,589
2,000
172,984
$
1,057
-
3,309
$
(7)
(88)
(130) $
54,639
1,912
176,163
Amortized
Cost
December 31, 2010
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Available-for-sale:
U.S. Treasury securities
U.S. Government agency securities
Mortgage-backed securities-U.S.
Government Sponsored Enterprises (GSE’s)
Obligations of state and
political subdivisions
Corporate securities
$
$
3,746
15,052
108,936
28,383
2,955
159,072
$
$
17
35
1,735
25
8
1,820
$
$
(9) $
(45)
3,754
15,042
(551)
110,120
(666)
(20)
(1,291) $
27,742
2,943
159,601
The unrealized losses, categorized by the length of time in a continuous loss position, and the fair value of related securities
available-for-sale as of December 31, 2011 are as follows:
Less than 12 Months
Fair
Value
Unrealized
Losses
More than 12 Months
Fair
Value
Unrealized
Losses
(in thousands)
Total
Fair
Value
Unrealized
Losses
December 31, 2011:
Mortgage-backed
securities-U.S.
Government Sponsored
Enterprises (GSE’s)
Obligations of state and
political subdivisions
Corporate securities
$
$
8,870
$
34 $
1,130 $
1
$
10,000
$
1,613
933
11,416
$
6
67
107 $
1,009
979
3,118 $
1
21
23
$
2,622
1,912
14,534
$
35
7
88
130
52
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Investment Securities (Continued)
The unrealized losses, categorized by the length of time in a continuous loss position, and the fair value of related securities
available-for-sale as of December 31, 2010 are as follows:
Less than 12 Months
Fair
Value
Unrealized
Losses
More than 12 Months
Fair
Value
Unrealized
Losses
(in thousands)
Total
Fair
Value
Unrealized
Losses
December 31, 2010:
U.S. Treasury securities
U.S. Government agency
securities
Mortgage-backed
securities-U.S.
Government Sponsored
Enterprises (GSE’s)
Obligations of state and
political subdivisions
Corporate securities
$
1,882 $
9 $
2,978
45
48,519
551
23,266
1,980
78,625 $
666
20
1,291 $
$
- $
-
-
-
-
- $
- $
1,882 $
-
2,978
9
45
-
48,519
551
-
-
- $
23,266
1,980
78,625 $
666
20
1,291
At December 31, 2011, the Bank’s debt securities portfolio consisted of approximately 237 securities, of which 11 were in an
unrealized loss position for less than twelve months and 4 were in a continuous loss position for more than twelve months.
No OTTI charges were recorded for the twelve months ended December 31, 2011. The Bank does not intend to sell these
securities and it is not more likely than not that we will be required to sell these securities. Unrealized losses primarily relate
to interest rate fluctuations and not credit concerns.
The amortized cost and estimated fair value of securities available-for-sale at December 31, 2011 by contractual maturity are
shown below. Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Amortized
Cost
Fair Value
(in thousands)
$
$
1,726 $
5,911
39,640
125,707
172,984 $
1,756
5,891
40,368
128,148
176,163
53
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Investment Securities (Continued)
The following summarizes the amortized cost and estimated fair value of securities held-to-maturity at December 31, 2011
and 2010 with gross unrealized gains and losses therein:
Amortized
Cost
December 31, 2011
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Held-to-maturity:
Mortgage-backed securities-U.S.
Government Sponsored Enterprises (GSE’s) $
1,074
$
92
$
- $
1,166
Amortized
Cost
December 31, 2010
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Held-to-maturity:
Mortgage-backed securities-U.S.
Government Sponsored Enterprises (GSE’s) $
1,394
$
60 $
-
$
1,454
Proceeds from the sale of securities available-for-sale amounted to $75.7 million for the twelve months ended December 31,
2011, which included realized gains of approximately $2.0 million and realized losses of approximately $6,000. Proceeds
from the sale of securities available-for-sale amounted to $32.4 million for the twelve months ended December 31, 2010,
which included realized gains of approximately $1.2 million and no realized losses.
Approximately $2.1 million of securities available-for-sale were pledged as collateral for Federal Home Loan Bank of New
York (“FHLBNY”) borrowings at December 31, 2011. Approximately $4.6 million of securities available-for-sale were
pledged as collateral for Federal Home Loan Bank of Pittsburgh borrowings at December 31, 2011. Approximately $62.5
million of securities available-for-sale and $1.2 million of securities held-to-maturity were pledged as collateral for NJ
Governmental Unit Deposit Protection Act (“GUDPA”) deposits at December 31, 2011. Approximately $2.0 million of
securities available-for-sale were pledged as collateral for business sweep accounts at December 31, 2011.
54
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Loans Receivable
Loans receivable, net at December 31, 2011 and 2010 were comprised of the following:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total loans
Deferred fees and costs
Allowance for loan losses
December 31,
December 31,
2011
2010
(in thousands)
$
233,504 $
85,527
56,453
15,396
19,341
1,957
412,178
(955 )
(5,362 )
166,472
60,768
25,970
11,870
19,285
1,441
285,806
(540 )
(3,693 )
Loans, net
$
$
405,861
281,573
The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2011 and December 31,
2010:
December 31,
2011
December 31,
2010
(in thousands)
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
$
$
5,229 $
2,135
892
-
456
-
8,712 $
3,488
1,782
-
-
276
-
5,546
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 loans and 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 loans,
payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
55
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Loans Receivable (Continued)
The following table summarizes information in regards to impaired loans by loan portfolio class segregated by those for
which a related allowance was required and those for which a related allowance was not necessary, as of December 31, 2011
and the year then ended:
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
(in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance
recorded:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
$
With an allowance recorded:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
$
5,021
2,599
3,004
-
558
-
11,182
1,897
-
-
-
362
-
2,259
6,918
2,599
3,004
-
920
-
13,441 $
3,615 $
2,152
2,961
-
455
-
9,183
1,633
-
-
-
385
-
2,018
5,248
2,152
2,961
-
840
-
11,201 $
- $
-
-
-
-
-
-
14
-
-
-
2
-
16
14
-
-
-
2
-
16 $
4,422 $
2,278
2,961
-
485
-
10,146
1,633
-
-
-
393
-
2,026
6,055
2,278
2,961
-
878
-
12,172 $
-
-
86
-
-
-
86
-
-
-
-
22
-
22
-
-
86
-
22
-
108
56
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Loans Receivable (Continued)
The following table summarizes information in regards to impaired loans by loan portfolio class segregated by those for
which a related allowance was required and those for which a related allowance was not necessary, as of December 31, 2010
and the year then ended:
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
(in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance
recorded:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
With an allowance recorded:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
$
$
$
7,942
2,961
1,998
-
720
-
13,621
$
5,867
1,783
1,991
-
657
-
10,298
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,942
2,961
1,998
-
720
-
13,621 $
5,867
1,783
1,991
-
657
-
10,298 $
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
$
6,797
3,003
1,991
-
715
-
12,506
-
-
-
-
-
-
-
6,797
3,003
1,991
-
715
-
12,506 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
At December 31, 2011, thirteen loans totaling $7.0 million were considered troubled debt restructurings and classified as
impaired. Troubled debt restructurings of $2.3 million were performing in accordance with their modified terms at December
31, 2011. The remaining $4.7 million of troubled debt restructurings were on non-accrual status at December 31, 2011.
At December 31, 2010, eight loans totaling $6.0 million were considered troubled debt restructurings and classified as
impaired. Troubled debt restructurings of $3.5 million were performing in accordance with their modified terms at December
31, 2010. The remaining $2.5 million of troubled debt restructurings were on non-accrual status at December 31, 2010.
57
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Loans Receivable (Continued)
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable by the
length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by
the past due status as of December 31, 2011:
30-59
Days Past
Due
60-89
Days Past
Due
Greater
than
90 days
(in thousands)
Total
Past
Due
Total
Loans
Current
Receivable
Loans
Receivable
>90 Days
and
Accruing
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
$
$
1,958
362
-
187
-
-
2,507
$
$
93
559
-
-
-
-
652
$
$
4,919
1,031
892
-
182
-
7,024
$
6,970
1,952
892
187
182
-
$ 10,183
$ 226,534
83,575
55,561
15,209
19,159
1,957
$ 401,995
$ 233,504
85,527
56,453
15,396
19,341
1,957
$ 412,178
$
$
-
-
-
-
-
-
-
The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2010:
30-59
Days Past
Due
60-89
Days Past
Due
Greater
than
90 days
Total
Past
Due
(in thousands)
Total
Loans
Current
Receivable
Loans
Receivable
>90 Days
and
Accruing
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
$
$
1,690
460
323
-
-
-
2,473
$
$
1,916
-
-
-
161
-
2,077
$
$
2,174
1,680
-
-
127
-
3,981
$
$
5,780
2,140
323
-
288
-
8,531
$ 160,692
58,628
25,647
11,870
18,997
1,441
$ 277,275
$ 166,472
60,768
25,970
11,870
19,285
1,441
$ 285,806
$
$
-
-
-
-
-
-
-
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified
ratings of special mention, substandard and doubtful within the Bank’s internal risk rating system as of December 31, 2011:
Pass
Special
Mention
Substandard
Doubtful
Total
(in thousands)
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
$
$
224,776 $
82,046
50,933
15,396
18,885
1,957
393,993 $
3,499 $
1,093
4,628
-
-
-
9,220 $
5,112 $
2,388
892
-
421
-
8,813 $
117 $
-
-
-
35
-
152 $
233,504
85,527
56,453
15,396
19,341
1,957
412,178
58
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Loans Receivable (Continued)
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified
ratings of special mention, substandard and doubtful within the Bank’s internal risk rating system as of December 31, 2010:
Pass
Special
Mention
Substandard
Doubtful
Total
(in thousands)
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
$
$
160,369 $
57,203
22,458
11,870
18,769
1,441
272,110 $
- $
1,558
-
-
80
-
1,638 $
5,986 $
2,007
3,512
-
436
-
11,941 $
117 $
-
-
-
-
-
117 $
166,472
60,768
25,970
11,870
19,285
1,441
285,806
Allowance for loan losses on financing receivables at and for the year ended December 31, 2011:
Commercial
real estate
Commercial
and industrial
Construction
Residential
first-lien
mortgage
Home equity
Consumer
Unallocated
Total
(in thousands)
Allowance for loan
losses:
Beginning balance
Provisions
Charge-offs
Recoveries
$
$
1,484
884
(286 )
-
$
718
492
(217 )
18
$
904
1,204
(143 )
-
$
78
23
-
-
$
178
81
(80 )
-
$
9
3
-
-
$
322
(310 )
-
-
3,693
2,377
(726 )
18
Ending Balance
$
2,082
$
1,011
$
1,965
$
101
$
179
$
12
$
12
$
5,362
Ending Balance:
Individually
evaluated for
impairment
Collectively
evaluated
for impairment
Loans acquired
with deteriorated
credit quality*
$
$
$
14
$
-
$
-
$
-
$
2
$
-
$
-
$
16
2,068
$
1,011
$
1,965
$
101
$
177
$
12
$
12
$
5,346
86
$
22
$
-
$
-
$
13
$
-
$
-
$
121
Recorded investment in financing receivables at December 31, 2011:
Loans:
Ending Balance:
Individually
evaluated for
impairment
Collectively
evaluated
for impairment
Loans acquired
with deteriorated
credit quality
$
4,377
$
1,974
$
2,961
$
-
$
693
$
-
$
-
$
10,005
228,256
83,375
53,492
15,396
18,501
1,957
871
178
-
-
147
-
-
-
400,977
1,196
Ending Balance
$
233,504
$
85,527
$
56,453
$
15,396
$
19,341
$
1,957
$
-
$
412,178
*These amounts represent credit marks established on loans acquired in the MoreBank merger, which are netted against
loans and not included in the allowance for loan losses.
59
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Loans Receivable (Continued)
Allowance for loan losses and recorded investment in financing receivables at and for the year ended December 31, 2010:
Commercial
real estate
Commercial
and industrial
Construction
Residential
first-lien
mortgage
Home equity
Consumer
Unallocated
Total
(in thousands)
Allowance for loan
losses:
Beginning balance
Provisions
Charge-offs
Recoveries
$
$
900
1,833
(1,250 )
1
$
563
601
(446 )
-
$
349
562
(7 )
-
$
154
(76 )
-
-
$
171
60
(53 )
-
$
10
(1 )
-
-
$
-
322
-
-
2,147
3,301
(1,756 )
1
Ending Balance
$
1,484
$
718
$
904
$
78
$
178
$
9
$
322
$
3,693
Ending Balance:
Individually
evaluated for
impairment
Collectively
evaluated
for impairment
Loans acquired
with deteriorated
credit quality*
$
$
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
1,484
$
718
$
904
$
78
$
178
$
9
$
322
$
3,693
86
$
35
$
-
$
-
$
14
$
-
$
-
$
135
Recorded investment in financing receivables at December 31, 2010:
Loans:
Ending Balance:
Individually
evaluated for
impairment
Collectively
evaluated
for impairment
Loans acquired
with deteriorated
credit quality
$
4,914
$
1,396
$
1,991
$
-
$
508
$
-
$
-
$
8,809
160,605
58,985
23,979
11,870
18,628
1,441
953
387
-
-
149
-
-
-
275,508
1,489
Ending Balance
$
166,472
$
60,768
$
25,970
$
11,870
$
19,285
$
1,441
$
-
$
285,806
*These amounts represent credit marks established on loans acquired in the MoreBank merger, which are netted against
loans and not included in the allowance for loan losses.
The following table summarizes information in regards to troubled debt restructurings for the year ended December 31, 2011
(dollars in thousands):
Troubled debt restructurings:
Commercial real estate
Commercial and industrial
Construction
Home equity
Number of
Contracts
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
1
2
1
2
$
$
$
$
1,001
487
1,990
868
$
$
$
$
1,351
545
1,970
868
60
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Loans Receivable (Continued)
As indicated above, the Bank modified six loans during the twelve months ended December 31, 2011. In modifying these
loans, the Bank capitalized interest, extended the maturity and/or reduced the interest rate on the original loan. Other than the
two modifications discussed further below, the remaining troubled debt restructurings in the table above are all performing in
accordance with their modified terms. These troubled debt restructurings are impaired loans and therefore, in accordance
with the Company’s policy, are individually evaluated for impairment. As of December 31, 2011, there is no specific
allowance for any of these modified loans.
The following table summarizes information in regards to troubled debt restructurings for the year ended December 31,
2011that subsequently defaulted (dollars in thousands):
Troubled debt restructurings that
subsequently defaulted:
Commercial real estate
Home equity
Number of
Contracts
Outstanding
Recorded
Investment
1
1
$
$
93
618
Subsequent to modification, the Bank collected a payment of $908 on the commercial real estate loan modified during 2011
that reduced the outstanding balance of the loan to $93. This troubled debt restructuring is currently in default. The home
equity loan modified during 2011 is also in default as of December 31, 2011. These troubled debt restructurings are impaired
loans and therefore, in accordance with the Company’s policy, are individually evaluated for impairment. As of December
31, 2011, there is no specific allowance for any of these modified loans.
Loans to Related Party. In 2008 the Bank extended two commercial real estate loans to a member of its board of directors.
One of the commercial real estate loans is secured by the building that houses the Bank’s corporate headquarters and one of
its branches that the Bank leases from a company that is 99% owned by this member of our board of directors. See Note 13
Commitments and Contingencies for additional information regarding the terms of the lease. Both of the commercial real
estate loans were negotiated as arms-length and were reviewed and approved by the disinterested members of the Bank’s
board of directors. The loans were made in the ordinary course of business, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Bank and did
not involve more than the normal risk of collectability or present other unfavorable features.
The table below presents information regarding the loans to the related party for the years ended December 31, 2011 and
2010.
(in thousands)
2011
2010
Outstanding related party loans at January 1,
New loans
Repayments
Outstanding related party loans at December 31,
$
$
$
3,361
-
(97 )
3,264
$
3,452
(91 )
3,361
No loans to related parties were nonaccrual, past due, restructured or potential problems at December 31, 2011 and 2010.
61
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Premises and Equipment
The components of premises and equipment at December 31 were as follows (in thousands):
Land
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Construction in progress
Accumulated depreciation and amortization
Estimated
useful lives
N/A
40 Yrs.
10 Yrs.
3-7 Yrs.
$
2011
2010
$
410
1,741
2,454
2,160
284
7,049
(1,884 )
-
-
2,127
1,678
1,544
5,349
(1,196 )
4,153
Total
$
5,165 $
Note 9 – Accrued Interest Receivable and Other Assets
The components of accrued interest receivable and other assets at December 31 were as follows (in thousands):
Accrued interest receivable
Deferred tax asset
Restricted investments in bank stocks
Prepaid assets and other assets
Total
Note 10 – Deposits
2011
2010
$
$
2,478
2,695
1,438
1,224
7,835
$
$
1,971
3,166
1,422
2,184
8,743
The components of deposits at December 31 were as follows (in thousands):
Demand, non-interest-bearing checking
Demand, interest-bearing and savings
Money market
Time deposits, $100,000 and over
Time deposits, other
Total
2011
2010
$
$
46,385 $
204,297
122,863
102,855
119,173
595,573 $
30,669
159,475
100,626
57,643
77,400
425,813
As of December 31, 2011, one customer’s deposits with the Bank represented 11.2% of total deposits and another customer
represented 6.8% of total deposits. No other customer accounted more than 5% of total deposits as of December 31, 2011.
62
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 – Deposits (Continued)
At December 31, 2011, the scheduled maturities of certificates of deposit were as follows (in thousands):
2012
2013
2014
2015
2016
Amounts
108,896
45,852
27,684
11,548
28,048
222,028
$
$
Note 11 – Borrowings
The following table is a schedule of the Bank’s long-term debt as of December 31, 2011, consisting of FHLB-NY amortizing
and FHLB-Pittsburgh term, fixed-rate advances with weighted average interest rates and maturities (dollars in thousands):
Weighted
Average
Interest Rate at
December 31,
2011
1.82 %
2.29 %
2.71 %
Maturity
2011
2012
2013
2014
$
$
2,384
3,350
5,610
11,344
The Bank had $18.0 million of long-term debt outstanding with the FHLB-NY and FHLB-Pittsburgh at December 31, 2010.
There were no federal funds purchased as of December 31, 2011. Federal funds purchased were $1.0 million at December
31, 2010. At December 31, 2011, the Bank had federal funds available for purchase with the ACBB of $6.0 million at
interest rates that adjust daily.
At December 31, 2011, the Bank also had $324.2 million of borrowing capacity with the FHLB-NY that is subject to the
Bank providing acceptable collateral in the form of certain investment securities or loans.
Note 12 – Accrued Interest Payable and Other Liabilities
The components of Accrued interest payable and other liabilities at December 31 were as follows (in thousands):
Accrued interest payable
Income taxes payable
Accrued expenses and other liabilities
Total
2011
2010
$
$
1,663 $
167
1,806
3,636 $
1,092
93
1,242
2,427
63
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Commitments and Contingencies
Operating leases
The Bank has operating leases for ten 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 (in thousands):
2012
2013
2014
2015
2016
Thereafter
$
$
1,048
1,025
1,047
1,032
828
2,038
7,018
Rental expense for the years ended December 31, 2011 and 2010 was $1.0 million and $700,000, respectively.
The Bank has an operating lease agreement with a member of the Bank’s board of directors for a building containing the
Bank’s 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 each of the
years ended December 31, 2011 and 2010 was approximately $256,000 and $253,000, respectively.
Commitments to extend credit
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 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 (in thousands):
Performance and standby letters of credit
Commitments to grant loans
Unfunded commitments under lines of credit
2011
2010
$
$
2,367
57,563
6,767
66,697
$
$
2,550
57,474
8,084
68,108
64
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Commitments and Contingencies (Continued)
Litigation
The Bank, in the normal course of business, may 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.
Note 14 – Income Taxes
Income tax expense (benefit) from operations for the years ended December 31 is as follows:
Current tax expense:
Federal
State
Total current
Deferred income tax benefit:
Federal
State
Total deferred
Reversal of valuation allowance
Total income taxes applicable to pre-tax income
2011
2010
(in thousands)
$
$
1,215
322
1,537
(318 )
(156 )
(474 )
-
1,063
$
$
39
29
68
(83 )
(36 )
(119 )
(1,437 )
(1,488 )
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities as of December 31 are as follows:
Deferred tax assets:
Allowance for loan losses
Net operating loss carry-forwards
Acquisition accounting adjustments
Organizational costs
Other
Total deferred tax assets
Deferred tax liabilities:
Premises and equipment
Cash basis conversions
Unrealized gains on securities
Deferred loan costs
Total deferred tax liabilities
Net deferred tax asset
65
2011
2010
(in thousands)
1,948
1,439
154
294
367
4,202
60
(186 )
(1,081 )
(300 )
(1,507 )
2,695
$
$
1,241
1,587
425
367
270
3,890
(52 )
(270 )
(180 )
(222 )
(724 )
3,166
$
$
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 – Income Taxes (Continued)
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
Total income taxes applicable to pre-tax income
2011
2010
(in thousands)
$
1,318
$
306
109
(307 )
7
-
-
(64 )
1,063
$
43
(61 )
105
(345 )
(1,437 )
(99 )
(1.488 )
$
At December 31, 2011, the Bank had available federal net operating loss carryforwards of approximately $4.2 million, which
expire between 2028 and 2030. There are currently no state net operating loss carryforwards available. 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 $222,000.
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 in 2010, the Bank acquired net deferred tax assets of approximately $1.8 million.
Note 15 – Fair Value Measurements and Disclosure
The Bank follows the guidance on fair value measurements now codified as FASB ASC Topic 820, Fair Value
Measurements and Disclosures. Fair value measurements are not adjusted for transaction costs. ASC Topic 820 establishes
a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
Management uses its best judgment in estimating the fair value of the Bank’s financial instruments; however, there are
inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value
estimates herein are not necessarily indicative of the amounts the Bank could have realized in sales transactions on the dates
indicated. The estimated fair value amounts have been measured as of their respective period-end and have not been re-
evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such,
the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the
amounts reported at each period-end.
The fair value measurement hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for
substantially the full term of the asset or liability.
66
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Fair Value Measurements and Disclosure (Continued)
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and
unobservable (i.e., supported with little or no market activity).
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair
value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value
hierarchy used at December 31, 2011 were as follows:
Description
Mortgage-backed securities-U.S.
Government Sponsored Enterprises
(GSE’s)
Obligations of state and
political subdivisions
Corporate securities
Securities available-for-sale
(Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 2)
Significant
Other
Observable
Inputs
(Level 3)
Significant
Unobservable
Inputs
Total Fair
Value
December 31,
2011
(in thousands)
$
- $
119,612 $
-
-
- $
54,639
1,912
176,163 $
$
-
$
-
-
- $
119,612
54,639
1,912
176,163
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value
hierarchy used at December 31, 2010 were as follows:
(Level 1)
Quoted Prices in
Active
Markets for
Identical
Assets
(Level 2)
Significant
Other
Observable
Inputs
(Level 3)
Significant
Unobservable
Inputs
Total Fair
Value
December 31,
2010
Description
U.S. Treasury securities
U.S. Government agency securities
Mortgage-backed securities-U.S. Government
$
Sponsored Enterprises (GSE’s)
Obligations of state and political subdivisions
Corporate securities
Securities available-for-sale
$
(in thousands)
3,754 $
-
-
-
2,943
6,697 $
- $
15,042
110,120
27,742
-
152,904 $
- $
-
-
-
-
- $
3,754
15,042
110,120
27,742
2,943
159,601
67
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Fair Value Measurements and Disclosure (Continued)
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy
used at December 31, 2011, were as follows:
Description
Impaired loans
Real estate owned
(Level 1)
Quoted Prices in
Active
Markets for
Identical
Assets
(Level 2)
Significant
Other
Observable
Inputs
(Level 3)
Significant
Unobservable
Inputs
Total Fair
Value
December 31,
2011
(in thousands)
$
$
- $
-
- $
- $
-
- $
4,927 $
740
5,667 $
4,927
740
5,667
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy
used at December 31, 2010, were as follows:
Description
Real estate owned
(Level 1)
Quoted Prices in
Active
Markets for
Identical
Assets
(Level 2)
Significant
Other
Observable
Inputs
(Level 3)
Significant
Unobservable
Inputs
Total Fair
Value
December 31,
2010
(in thousands)
$
$
- $
- $
- $
- $
1,140 $
1,140 $
1,140
1,140
The following methods and assumptions were used by the Bank in estimating fair value disclosures:
Cash and cash equivalents (carried at cost)
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.
Securities
The fair value of securities available-for-sale (carried at fair value) and held-to-maturity (carried at amortized cost) are
determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing
(Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively
on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark
quoted prices.
Loans receivable (carried at cost)
The fair value of loans receivable 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
68
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Fair Value Measurements and Disclosure (Continued)
contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that
reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Impaired loans (generally carried at fair value)
Impaired loans carried at fair value are those impaired loans in which the Bank has measured impairment generally based on
the fair value of the related 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.
Other real estate owned (carried at fair value)
Other real estate owned is adjusted to fair value, less estimated selling costs, upon transfer of loans to other real estate
owned. Subsequently, other real estate owned is carried at the lower of carrying value or fair value less cots to sell. 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.
Federal Home Loan Bank stock and ACBB stock (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 payable (carried at cost)
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
Deposit liabilities (carried at cost)
The fair value 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
value 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.
Borrowings
Fair value of FHLB advances are determined by discounting the anticipated future cash payments by using the rates currently
available to the Bank for debt with similar terms and remaining maturities.
Off-Balance sheet financial instruments (disclosed at cost)
Fair value for the Bank’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on
fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties’ credit standing. The fair values of these off-balance sheet financial instruments are not
considered material as of December 31, 2011 and December 31, 2010.
69
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Fair Value Measurements and Disclosure (Continued)
The carrying amounts and estimated fair value of financial instruments are as follows:
December 31, 2011
Estimated
December 31, 2010
Estimated
Carrying
Value
Fair
Value
Carrying
Value
(in thousands)
Fair
Value
Financial assets:
Cash and cash equivalents
Securities available-for-sale
Securities held-to-maturity
Loans receivable, net
Restricted investments in bank stocks
Accrued interest receivable
$
59,215 $
176,163
1,074
405,861
1,438
2,478
59,215 $
176,163
1,166
417,284
1,438
2,478
25,620 $
159,601
1,394
281,573
1,422
1,971
Financial liabilities:
Deposits
Federal funds purchased
Borrowings
Accrued interest payable
Limitations
595,573
-
11,344
1,663
597,703
-
11,383
1,663
425,813
1,044
18,014
1,092
25,620
159,601
1,454
285,002
1,422
1,971
422,724
1,044
18,048
1,092
The fair value estimates are made at a discrete point in time based on relevant market information and information about the
financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect the estimates. Further, the foregoing
estimates may not reflect the actual amount that could be realized if all or substantially all of the financial instruments were
offered for sale. This is due to the fact that no market exists for a sizable portion of the loan, deposit and off-balance sheet
instruments.
In addition, the fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to
value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other
significant assets that are not considered financial assets include premises and equipment. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted
valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of
the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these
estimated fair values.
Note 16 – 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.
70
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 – Comprehensive Income (Continued)
The components of other comprehensive income for the years ended December 31 were as follows:
Unrealized holding gains on securities available-for-sale
Reclassifications of gains included in net income
Tax effect
Other comprehensive income (loss)
2011
2010
(Dollars in thousands)
$
$
4,626 $
(1,976 )
2,650
(901 )
1,749
$
141
(1,229 )
(1,088 )
370
(718 )
Reclassification gains of $2.0 million and $1.2 million were included within Gain on sale of securities available-for-sale in
the Consolidated Statements of Operations for the years ended December 31, 2011 and 2010, respectively.
Note 17 – Stock 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 10 years after the grant date 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, 2011 and 2010 and will expire in 2017.
In 2007, the Bank adopted the 2007 Stock Option Plan (the “2007 Plan”), which was approved by our board of directors in
August 2007 and by our 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. The 2007 Plan will terminate ten years from the date of
stockholder approval.
In connection with the Bank’s acquisition of MoreBank on September 30, 2010, all outstanding and unexercised options to
acquire shares of MoreBank common stock became fully vested and exercisable and converted into fully vested and
exercisable options to purchase shares of common stock of the Bank in an amount and at an exercise price based on the
merger exchange ratio. These options remain subject to all of the other terms and conditions to which they were subject
immediately prior to the effective time of the merger.
71
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Stock Based Compensation (Continued)
The following is a summary of the status of the Bank’s stock option and warrant activity and related information for the
twelve months ended December 31, 2011:
Balance at January 1, 2010
Granted
Options issued at acquisition
Exercised
Forfeited
Number of
Stock
Options /
Warrants
Weighted
Avg.
Exercise Price
10.14
11.56
25.00
10.00
10.12
255,183 $
93,833 $
47,200 $
(50 ) $
(63,250 ) $
Weighted Avg.
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
Balance at December 31, 2010
332,916 $
12.66
7.7 years
Exercisable at December 31, 2010
261,352 $
13.03
7.4 years
$
$
735,910
687,057
Balance at January 1, 2011
Granted
Exercised
Forfeited
332,916 $
86,150 $
(4,283 ) $
(12,367 ) $
12.66
12.52
10.48
10.96
Balance at December 31, 2011
402,416 $
12.82
7.6 years
Exercisable at December 31, 2011
299,106 $
13.09
5.6 years
$
$
928,110
778,218
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
Fair value
For the twelve months ended December 31,
2011
2010
6.0 years
23.99%
22.70%
0.00%
1.67%
$ 3.26
7 years
24.57%
18.36%
0.00%
2.52%
$ 2.49
Stock option expenses included in salaries and employee benefits expense in the Consolidated Statements of Operations were
$203,000 and $221,000 for the twelve months ended December 31, 2011 and 2010, respectively. At December 31, 2011,
there was approximately $238,000 of unrecognized expense related to outstanding stock options, which will be recognized
over a period of approximately 3.1 years.
Note 18 – Regulatory Capital Requirements
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
72
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 – Regulatory Capital Requirements (Continued)
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, 2011, 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, 2011 and 2010 are presented below:
Actual
For capital adequacy
purposes
To be well capitalized under
prompt corrective action
provisions
Ratio
Amount
Ratio
Amount
Ratio
Amount
December 31, 2011:
$57,101
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets) $51,739
$51,739
Tier 1 capital (to average assets)
12.7%
11.5%
8.1%
$ 35,952
$ 17,976
$ 25,520
December 31, 2010:
Total capital (to risk-weighted assets)
$42,030
Tier 1 capital (to risk-weighted assets) $38,336
$38,336
Tier 1 capital (to average assets)
12.3%
11.2%
7.9%
$ 27,292
$ 13,646
$ 24,331
≥
≥
≥
≥
≥
≥
8.0%
4.0%
4.0%
$ 44,940
$ 26,964
$ 31,900
8.0%
4.0%
4.0%
$ 34,115
$ 20,649
$ 38,930
≥
≥
≥
≥
≥
≥
10.0%
6.0%
5.0%
10.0%
6.0%
5.0%
The Bank is subject to certain restrictions on the amount of dividends that it may declare due to regulatory considerations.
73
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 – Quarterly Financial Data
Year Ended December 31, 2011
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
5,614 $
1,677
3,937
128
3,809
275
3,137
947
326
621 $
6,175 $
1,712
4,463
355
4,108
840
3,807
1,141
392
749 $
6,598 $
1,811
4,787
525
4,262
540
3,915
887
261
626 $
7,286
1,965
5,321
1,369
3,952
1,175
4,226
901
84
817
0.16 $
0.16 $
0.19 $
0.19 $
0.16 $
0.15 $
0.18
0.18
Year Ended December 31, 2010
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except for share and per share data)
3,345 $
937
2,408
90
2,318
39
1,967
390
-
390 $
3,587 $
1,132
2,455
383
2,072
731
2,178
625
2
623 $
3,891 $
1,337
2,554
816
1,738
1,595
2,211
1,122
-
1,122 $
5,378
1,724
3,654
2,012
1,642
190
3,070
(1,238 )
(1,490 )
252
0.13 $
0.13 $
0.18 $
0.18 $
0.32 $
0.32 $
0.05
0.05
Interest and dividend income
Interest expense
$
Net Interest Income
Provision for loan losses
Non-interest income
Non-interest expense
Net Interest Income after Provision for Loan Losses
Income before Income Taxes
Income tax expense
Net Income
Earnings per common share
Basic
Diluted
Interest and dividend income
Interest expense
Net Interest Income
Provision for loan losses
$
$
$
$
Net Interest Income after Provision for Loan Losses
Non-interest income
Non-interest expenses
Income before Income Taxes
Income tax expense (benefit)
Net Income
Earnings per common share
Basic
Diluted
$
$
$
74
The Bank of Princeton
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a)
Disclosure Controls and Procedures
An evaluation was performed under the supervision, and with the participation of the Company’s management,
including the Acting President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rule l3a-l5(e) promulgated under the Exchange Act) as of December 31,
2011. Based on such evaluation, the Company’s Acting President and Chief Financial Officer have concluded that the
Company’s disclosure controls and procedures are effective, as of December 31, 2011, to ensure that the information required
to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in FDIC rules and forms.
(b)
Internal Control Over Financial Reporting
This annual report does not include a report of management's assessment regarding internal control over financial
reporting or an attestation report of the Company's registered public accounting firm due to a transition period established by
rules of the Securities and Exchange Commission for newly public companies.
There have been no changes in the Company’s internal control over financial reporting that occurred during the last
fiscal quarter to which this Annual Report on Form 10-K relates that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The Company responds to this Item by incorporating by reference the material responsive to this Item in the
Company’s definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2012
Annual Meeting of Stockholders to be held April 24, 2012.
Item 11. Executive Compensation
The Company responds to this Item by incorporating by reference the material responsive to this Item in the
Company’s definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2012
Annual Meeting of Stockholders to be held April 24, 2012.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The Company responds to this Item by incorporating by reference the material responsive to this Item in the
Company’s definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2012
Annual Meeting of Stockholders to be held April 24, 2012.
75
The Bank of Princeton
Item 13. Certain Relationships and Related Transactions, and Director Independence
The Company responds to this Item by incorporating by reference the material responsive to this Item in the
Company’s definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2012
Annual Meeting of Stockholders to be held April 24, 2012.
Item 14. Principal Accountant Fees and Services
The Company responds to this Item by incorporating by reference the material responsive to this Item in the
Company’s definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2012
Annual Meeting of Stockholders to be held April 24, 2012.
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a) The following portions of the Company’s consolidated financial statements are set forth in Item 8 of this Annual
Report:
i.
Consolidated Statements of Financial Condition as of December 31, 2011 and 2010
ii.
Consolidated Statements of Operations for the years ended December 31, 2011 and 2010
iii.
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2011 and
2010
iv.
Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010
v.
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules
All financial statement schedules are omitted as the information, if applicable, is presented in the consolidated
financial statements or notes thereto.
76
The Bank of Princeton
(c) Exhibits
Exhibit
No.
2.1
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
21.1
31.1
31.2
32.1
Description
(A) Agreement and Plan of Merger dated as of May 5, 2010 by and between The Bank of Princeton and MoreBank.
(A) Certificate of Incorporation, as amended.
(A) Amended and Restated Bylaws
(A) Specimen form of stock certificate.
(A) The Bank of Princeton 2007 Stock Option Plan*
(A) Form of Incentive Stock Option Agreement*
(A) Form of Nonqualified Stock Option Agreement*
(A) Warrant Agreement for Organizers*
(A) Form of Warrant Certificate*
(A) MoreBank 2004 Incentive Equity Compensation Plan*
(A) Form of Incentive Stock Option Agreement*
(A) Form of Nonqualified Stock Option*
(A) Form of Option for the Purchase of Shares of the Par Value of $1.00 Per Share of MoreBank*
(B) Agreement and Release by and between Steven C. Ackmann and The Bank of Princeton*
Subsidiaries of the Registrant
Rule 13a-14(a) Certification of the Principal Executive Officer
Rule 13a-14(a) Certification of the Principal Financial Officer
Section 1350 Certifications
* Management contract or compensatory plan, contract or arrangement.
(A) Incorporated by reference to the exhibit to registrant’s Form 10, General Form For Registration Of Securities, filed with
the Federal Deposit Insurance Corporation on May 2, 2011.
(B) Incorporated by reference to the exhibit to registrant’s Current Report on Form 8-K, filed with the Federal Deposit
Insurance Corporation on January 26, 2012.
77
The Bank of Princeton
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 23, 2012.
SIGNATURES
The Bank of Princeton
By:
/s/Edward Dietzler
Edward Dietzler
Acting President
(Principal Executive Officer)
The Bank of Princeton
By:
/s/Michael J. Sanwald
Michael J. Sanwald
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
78
The Bank of Princeton
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below on March 23, 2012 by the
following persons on behalf of the Registrant and in the capacities indicated.
/s/Edward Dietzler
Edward Dietzler
Acting President
(Principal Executive Officer)
/s/Andrew M. Chon
Andrew M. Chon
Director, Chairman
/s/Stephen Distler
Stephen Distler
Director, Vice Chairman
/s/Judith A. Giacin
Judith A. Giacin
Director
/s/Richard Gillespie
Richard Gillespie
Director
/s/Michael J. Sanwald
Michael J. Sanwald
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/Stephen Shueh
Stephen Shueh
Director
/s/Robert N. Ridolfi, Esq
Robert N. Ridolfi, Esq
Director
/s/Ross Wishnick
Ross Wishnick
Director, Vice Chairman
79
The Bank of Princeton
EXHIBIT INDEX
Description
(A) Agreement and Plan of Merger dated as of May 5, 2010 by and between The Bank of Princeton and MoreBank.
(A) Certificate of Incorporation, as amended.
(A) Amended and Restated Bylaws
(A) Specimen form of stock certificate.
(A) The Bank of Princeton 2007 Stock Option Plan*
(A) Form of Incentive Stock Option Agreement*
(A) Form of Nonqualified Stock Option Agreement*
(A) Warrant Agreement for Organizers*
(A) Form of Warrant Certificate*
(A) MoreBank 2004 Incentive Equity Compensation Plan*
(A) Form of Incentive Stock Option Agreement*
(A) Form of Nonqualified Stock Option*
(A) Form of Option for the Purchase of Shares of the Par Value of $1.00 Per Share of MoreBank*
(B) Agreement and Release by and between Steven C. Ackmann and The Bank of Princeton*
Subsidiaries of the Registrant
Rule 13a-14(a) Certification of the Principal Executive Officer
Rule 13a-14(a) Certification of the Principal Financial Officer
Section 1350 Certifications
Exhibit
No.
2.1
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
21.1
31.1
31.2
32.1
* Management contract or compensatory plan, contract or arrangement.
(A) Incorporated by reference to the exhibit to registrant’s Form 10, General Form For Registration Of Securities, filed with
the Federal Deposit Insurance Corporation on May 2, 2011.
(B) Incorporated by reference to the exhibit to registrant’s Current Report on Form 8-K, filed with the Federal Deposit
Insurance Corporation on January 26, 2012.
80
The Bank of Princeton
SUBSIDIARIES OF REGISTRANT
As of December 31, 2011
Name of Subsidiary
TBOP New Jersey Investment Company
Bayard Lane, LLC
112 Fifth Avenue, LLC
Bayard Properties, LLC
Exhibit 21.1
Jurisdiction of
Incorporation
or Formation
NJ
NJ
NJ
NJ
81
The Bank of Princeton
RULE 13A-14(A)/15D-14(A) CERTIFICATIONS OF THE
CHIEF EXECUTIVE OFFICER
Exhibit 31.1
I, Edward Dietzler, certify that:
1. I have reviewed this annual report on Form 10-K of The Bank of Princeton:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of circumstances under which such statements
were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operation and cash flows of the registrant as of,
and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Intentionally omitted.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting
Date:
March 23, 2012
/s/Edward Dietzler
Edward Dietzler
Acting President
82
The Bank of Princeton
RULE 13A-14(A)/15D-14(A) CERTIFICATIONS OF THE
CHIEF FINANCIAL OFFICER
I, Michael J. Sanwald, certify that:
1. I have reviewed this annual report on Form 10-K of The Bank of Princeton:
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of circumstances under which such statements were made, not
misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the
periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b)
Intentionally omitted.
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting
Date: March 23, 2012
/s/Michael J. Sanwald
Michael J. Sanwald
Executive Vice President and Chief Financial Officer
83
The Bank of Princeton
SECTION 1350 CERTIFICATIONS
Exhibit 32.1
In connection with the Annual Report of The Bank of Princeton (the “Company”) on Form 10-K for the period
ending December 31, 2011 as filed with the Federal Deposit and Insurance Corporation on the date hereof (the “Report”), the
undersigned certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of
1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/Edward Dietzler
Edward Dietzler
Acting President
/s/Michael J. Sanwald
Michael J. Sanwald
Executive Vice President and Chief Financial Officer
March 23, 2012
84
The Bank of Princeton
85
Incorporators
Gregg E. Chaplin
Andrew M. Chon
Peter M. Crowley
Stephen Distler
Richard Gillespie
Bumsung K. Han
John A. Horvath
Kevin R. Kenyon
W. Andrew Krusen, Jr.
Janet M. Lasley
Emmett J. Lescroat
Dennis M. Machulsky
Casey K. Min
J. Scott Needham
Henry S. Opatut
Robert N. Ridolfi, Esq.
James M. Riley
Jeffery H. Sands
Eric L. Steinfeldt
Ross E. Wishnick
The Bank of Princeton
Board of Directors
Andrew M. Chon, Chairman
Stephen Distler, Vice Chairman
Ross E. Wishnick, Vice Chairman
Judith Giacin
Richard Gillespie
Robert N. Ridolfi, Esq.
Stephen K. Shueh
Advisory Board
J. Scott Needham, Chairman
George Bustin
Barbara Cuneo
Peter J. Dawson
Michael Goodman, Esq.
Yongkuen Joh
Emmett Lescroart
Lance Liverman
Jerry Maclean
Joseph Ridolfi
Chetan Shah
Scott Sipprelle
86
The Bank of Princeton
Relationship Management
Management & Support
Community Banking Executives
Stephanie M Adkins, Chambers
Nina D. Melker, Hamilton
Paul M. Bencivengo, Hamilton
William McDowell, Pennington
William McCoy, Montgomery
William D. Allan, Monroe
Michael Johnson, Lambertville
Kris Muse, Nassau
Retail
Carly Meyer, Chambers
Customer Service Managers
Rose Russo, Bayard
Cathy E. Proctor, Chambers
Suzanne M. Lippincott, Hamilton
Ulrike Ahrens, Pennington
Miriam I. Colon, Montgomery
Doris Kostanek, Monroe
Emilia Dovidio, Lambertville
Rhoda Sundhar, Nassau
MoreBank Division
Senior Management
Paul Hyon
Lender
Mike Han
Senior Management
Edward J. Dietzler
Michael J. Sanwald
Douglas V. Conover
Carol R. Coles
Marketing
Barbara A. Cromwell
Human Resources
Anna Maria Miller
Administration
Kelly Tarity
Operations & Compliance
Karen D. Pfeifer
Thomas Perrotta
Loan Administration
Carol Safchinsky
Mary Beth Gorecki, Consumer Credit
Harold John Young, Commercial Lender
Finance
Edward P. Hassenkamp
William E. Fischer
Customer Service Managers
Haeran Hwangbo, Cheltenham
Young Soon Sim, North Wales
Woomee Han, Upper Darby
Operations & Administration
Rebekah Oh
87
88
89
Growing our Communities.
The Bank of Princeton
Bank Wisely.
Advancing Opportunities
Allies, Inc,
Alzheimer’s Association
American Friends of Yeshiva Amalah
Shel Torah
American Heart Association
American Legion
Arc Mercer
Arts Council of Princeton
Auxiliary of University Medical
Center at Princeton
Artsbridge
Beth El Synagogue
Big Brothers Big Sisters of Mercer County
Capital Health Foundation
Catholic Charities of the
Diocese of Trenton
Christine's Hope for Kids Foundation
City of Angels NJ, Inc.
Colin Pascik Road to Recovery Fund
Community Options
Corner House Foundation
Crawford House
Cystic Fibrosis Foundation
Derek’s Dream
Dress for Success of Mercer County
Duke University Hospital
Eden Autism Services
Foundation of Morris Hall/
St. Lawrence, Inc.
Friends of Ely Park
Fund: 101
Hadassah Southern New Jersey Region
Hamilton Area YMCA
Hamilton Education Foundation
Hamilton Post 31
Hamilton Township Economic
Development Advisory Committee
Health Care Ministry of Princeton
Historical Society of Princeton
HomeFront
Hopewell Valley Education
Foundation
Hopewell Valley Gridiron Club
Hopewell Valley Soccer Association
Hopewell Valley Veterans Association
Hopewell Valley YMCA
Hunterdon County
Chamber of Commerce
Jewish Family & Children’s Services
of Mercer County
Joint Effort Community Sports
Junior Achievement of NJ
Kidsbridge
Korean American Institute
of Princeton
Korean Community Center of Princeton
Lambertville Chamber of Commerce
Lambertville Historical Society
Literacy Volunteers in Mercer County
Lower Bucks County YMCA
Mary Jacobs Library
Mercer County Community
College Foundation
Mercer County Italian American
Festival Association
Mercer Regional Chamber of Commerce
Mercer Hispanic Association
Miracle League of Mercer County
Montgomery Business Association
Montgomery-Rocky Hill Rotary Club
Montgomery Township Fireworks
Montgomery Township Food Pantry
Montgomery Township Volunteer Fire
Company No.1
Nassau Hockey League
Nemours Funds for Childrens Health
New Hope Chamber of Commerce
New Jersey Regional Coalition
New School for Music Study
Nick & Jim Friends in Heaven
Memorial Foundation
Opera New Jersey
Our Lady of Sorrows, St. Anthony Parish
Passage Theatre Company
Peddie Parents Association
Pennington Business &
Professional Association
Pi Day
Plan Smart NJ
Play for Pink
Princeton Academy of
the Sacred Heart
Princeton Alumni Association
Princeton Cranbury Babe Ruth League
Princeton Education Foundation
Princeton Family YMCA
Princeton Regional Schools
PrincetonKIDS
Princeton Montessori School
Princeton Pop Warner Football
Princeton Pro Musica
Princeton Recreation Department
Princeton Regional Chamber
of Commerce
Princeton Senior Resource Center
Princeton Soccer Association
Princeton Symphony Orchestra
Princeton University Art Museum
Princeton Young Achievers
Project Freedom
Recreational Foundation
of Hopewell Valley
Riverside Symphonia
Rotary Club of Princeton
Robert Wood Johnson Foundation
Run Free Ranch
Ryan’s Quest
Saint Hedwig’s Council #7344
Sanctuary Guild of
Our Lady of the Angels
Science Mentors 1:1
Smith Memorial
South Hunterdon Regional Schools
South Soccer Parent Organization
Special Olympics New Jersey
St. Francis Medical Center Foundation
Steinert High School Athletics
Stony Brook Millstone
Watershed Association
Teal Tea Foundation
The American Cancer Society
The Arc of Hunterdon Foundation
The Foundation of Morris Hall
The Friendly Sons & Daughters of
St. Patrick of Mercer County
The Jewish Center of Princeton
The Parkinson Alliance, Inc.
The Princeton Singers
The Salvation Army
continued...
We Listen...We Understand...We make a difference.
Growing more Communities.
The Bank of Princeton
Bank Wisely.
(Continued from the previous page...)
The Salvation Army
The Trenton Irish American Association
Thomas Edison State College Foundation
Trenton Public Education Foundation
Trinity Church
Trustees of Princeton University
200 Club of Mercer County
UIH Family Partners
Union Fire Company
United Way of Hunterdon County
West Amwell Golf Day
YWCA Trenton
Zonta Club of Trenton
Asian Pacific American Bar Association of Pennsylvania
Beautiful Foundation
Greater Philadelphia Asian Social Service Center
Greater Philadelphia Korean American Golf Association
Greater Philadelphia Korean Association of 5 North Province
Greater Southern New Jersey Korean American Association
Korean American Broadcasting Company
Korean American Youth Foundation
Korean Community Center of Greater Princeton
National Association for Korean Schools
Philadelphia Chinatown Development Corporation
The Milal Mission in Philadelphia
Thank you to our community partners for
making a difference.
The Bank of Princeton
www.thebankofprinceton.com
Corporate Headquarters
183 Bayard Lane
Princeton, NJ 08540
609.921.1700
21 Chambers Street
Princeton, NJ 08542
609.921.6800
194 Nassau Street
Princeton, NJ 08542
609.921.3311
1185 Route 206 North
Princeton, NJ 08540
609.497.0500
2 Route 31 South
Pennington, NJ 08534
609.730.8500
339 Route 33
Hamilton, NJ 08619
609.584.0011
1 Rossmoor Drive, Suite 120
Monroe Township, NJ 08831
609.655.7790
10 Bridge Street
Lambertville, NJ 08530
609.397.0333
Loan Operations
403 Wall Street
Princeton, NJ 08540
609.454.0116
MoreBank A Division of The Bank of Princeton
www.morebankusa.com
470 West Cheltenham Avenue
Philadelphia, PA 19126
215.224.6400
7050 Terminal Square, Suite 201
Upper Darby, PA 19082
610.734.1444
1222A Welsh Road
North Wales, PA 19454
215.631.9911
We look forward to 2012!
Branching out wisely.