The Bank of Princeton
Still Growing
Still Growing
Established 2007
Established 2007
Annual Report 2012
At The Bank of Princeton,
We listen to you –
we appreciate your business,
and we’re committed to being a true resource
for our community.
We understand –
and we show it by providing you with the
highest level of friendly, helpful, and
personalized banking services.
We get it –
we know you want to be treated with respect,
and we thank you, genuinely, for entrusting
us with your banking.
Most importantly, we believe that our
own success is achieved only when
yours is, when we deliver our unique
banking experience to you…and everyone
we meet. For you, in that way,
We make a difference.
The Bank of Princeton
2012 Annual Report
2
84
Letter to Shareholders
2012 Form 10-K
Bank Wisely.
Who We Are
The Bank of Princeton
Dear Fellow Shareholders,
The Bank of Princeton (the “Bank”) earned $6.3 million in 2012, an increase of 124% from 2011. Despite the economy facing
ongoing challenges on its road to recovery, we continued to grow loans, deposits and net income. The Bank remained
focused in 2012 with prudent investment in our infrastructure that will allow for further efficient growth in the future. We added
two new branch locations to our existing organization, for a total of 12 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 2012 were $769 million, an increase of 16% from $665 million at year-end 2011. The resulting
increase in assets was primarily driven through “de novo” branch openings and organic growth through the Bank’s existing
branch network. Gross loans were $539 million at year-end 2012, an increase of 31% from the $411 million in loans at
year-end 2011. New deposit customers, drawn by our larger branch network and community bank focus, grew in-kind with
loans during 2012. Deposit balances at year-end 2012 were $672 million, an increase of $76 million, or 13%, compared to
year-end 2011 deposit balances of $596 million.
The growth in our net income was visible in several of our key ratios. Our net interest margin was 3.56% for the year 2012,
an increase of 0.24% compared to 2011. Our cost of funds, a component of net interest margin, decreased to 1.20% in
2012, down 0.30% from 2011. The Bank’s operating efficiency, or efficiency ratio, which measures the relationship of our
operating costs to revenue, was 62% in 2012, an improvement of 17% from 2011. In addition, the Bank is focused on
maintaining high asset quality. The Bank’s non-performing asset ratio decreased from 1.80% in 2011 to 1.68% in 2012.
We remain committed to improving these key ratios in 2013 as a means of increasing returns to stockholders. We are
particularly proud to report some of the Bank’s major accomplishments in 2012. They include:
•
•
•
•
•
•
On April 25, 2012, The Bank of Princeton celebrated its 5th anniversary in business. Beginning with one location
at 21 Chambers St. and a dozen employees, the Bank has grown to 12 full service branch locations at year-end,
supported by a committed staff of over 120.
In late August, we ventured into a new market, as the bank opened a branch in the heart of New Brunswick.
Located at 1 Spring Street, our full-service branch is convenient to the municipal complex, hospital facilities, the
Rutgers University campus and the New Brunswick train station. As of year-end, the branch had over $8.0 million
in deposits.
In September, the New Jersey Economic Development Authority approved the addition of The Bank of Princeton as
a Premier Lender. This partnership assists and demonstrates our commitment to providing resources to the small
business community in the markets that we serve.
In December, we introduced a new look and redesign of our website.
MoreBank, a division of The Bank of Princeton, opened a branch location at 921 Arch Street in Philadelphia on
December 18, 2012. This full-service branch is positioned in historic Chinatown and features exceptional customer
service delivered by a multi-lingual staff.
We were selected as one of New Jersey’s 50 fastest growing companies by NJBIZ. The Bank was extremely proud
to receive this honor for the second year in a row as we moved from 15th in 2011 to an impressive 3rd place in 2012.
As a Company, we remain 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 maintain the focus on 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, President
Andrew M. Chon, Chairman
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, 2012
- OR -
]
[
For the transition period from ________________________________ to _______________________________
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 4,578,569 shares of common stock outstanding.
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
PART I
2
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Forward-Looking Statements
PART I
The Bank of Princeton (the “Bank”) may from time to time make written or oral “forward-looking statements,”
including statements contained in the Bank’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
Bank, which are made in good faith by the Bank 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 Bank’s plans, objectives,
expectations, estimates and intentions that are subject to change based on various important factors (some of which are
beyond the Bank’s control). The following factors, among others, could cause the Bank’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 Bank 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 Bank’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 Bank at managing the risks
involved in the foregoing.
The Bank cautions that the foregoing list of important factors is not exclusive. The Bank 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
Bank, 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 twelve 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, 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 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. This acquisition expanded our geographic presence to areas in
Philadelphia, Delaware and Montgomery Counties in Pennsylvania. We continue to operate two of the former MoreBank
branches as a division of The Bank of Princeton under the “MoreBank” name. In the fourth quarter of 2012 we opened one
additional branch within the MoreBank division in Philadelphia, Pennsylvania.
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 www.thebankofprinceton.com.
3
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 on deposits, 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 loans and other 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 also use any
familiarity that senior management and director members of our loan committee have 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, 2012,
2011, 2010, 2009 and 2008:
(in thousands)
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total loans
$
2012
317,946
103,627
62,702
29,127
25,617
1,480
540,499
$
2011
233,504
85,527
56,453
15,396
19,341
1,957
412,178
As of December 31,
$
2010
166,472
60,768
25,970
11,870
19,285
1,441
285,806
$
2009
89,959
31,671
23,273
15,343
13,681
1,048
174,975
Deferred fees and costs
Allowance for loan losses
Loans, net
(1,351)
(7,033)
532,115
(955)
(5,362)
405,861
$
$
(540)
(3,693)
281,573
(318)
(2,147)
172,510
$
$
2008
48,382
16,715
11,326
-
12,302
3,012
91,737
(244)
(1,092)
90,401
$
$
4
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, Commercial and Industrial, and Construction Loans. We originate various types of
commercial loans, including construction loans, secured by collateral such as real estate, business assets 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 subsequently, based on contractual terms, 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, 2012, we had one customer whose deposits with us represented 5.5% of our total deposits and
another customer whose deposits represented 5.4% 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, 2012.
5
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-related 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 eleven 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 twelve 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, 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, 2012, we had 122 total employees and approximately 116 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
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. The Dodd-Frank Act significantly expands the coverage and scope of
the limitations on affiliate transactions within a banking organization.
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
7
tangible equity, eliminating the ceiling on the size of the DIF and increasing the floor on the size of the DIF. The Dodd-
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 provided unlimited federal deposit
insurance until December 31, 2012 for noninterest-bearing demand transaction accounts at all insured depository institutions.
The unlimited coverage for noninterest-bearing demand transaction accounts was not renewed.
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, 2012, averaged 0.90 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
8
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
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
assigned certain 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. Exceptions include, 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, 2012, our Tier 1 and Total risk-based capital ratios were
10.3% and 11.5%, 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, 2012, our leverage ratio was 7.6%.
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 requires bank holding
companies and their bank subsidiaries to maintain more capital, with a greater emphasis on common equity. Basel III also
provides for a “countercyclical capital buffer” in the range of 0% to 2.5% when fully implemented. Basel III would 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.
On June 7, 2012, the U.S. banking agencies requested comment on the three proposed rules that, taken together,
would establish an integrated regulatory capital framework implementing Basel III in the U.S. As proposed, U.S.
implementation of Basel III would lead to significantly higher capital requirements and more restrictive leverage and
liquidity ratios than those currently in place. Once adopted, these new capital requirements would be phased in over time.
Comments to the proposed rules were requested by September 7, 2012 in order to begin the gradual integration of the
proposed rules on January 1, 2013. U.S. banking agencies have delayed implementation of the proposed new rules as they
continue to weigh views expressed during the comment period. The ultimate impact that the U.S. implementation of the new
capital and liquidity standards would have on us is currently being reviewed. At this point, we cannot determine the ultimate
9
effect that any final regulations, if enacted, would have upon our earnings or financial condition. In addition, important
questions remain as to how the numerous capital and liquidity mandates of the Dodd-Frank Act will be integrated
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, 2012, 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, 2012, 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
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 and all of the functions and responsibilities associated with them were transferred to the
Bureau on July 21, 2011. 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.
10
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;
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 provided unlimited federal
deposit insurance until December 31, 2012 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, 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;
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; and
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-
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,
including rules regulating compensation of residential mortgage loan originators, residential mortgage loan servicing
practices, and defining qualified mortgage loans, 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.
11
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 events in the financial
markets and the economy in recent years, 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.
Future Legislation and Regulation. Regulators have increased their focus on the regulation of the financial
services industry in recent years. 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.
Item 1A. Risk Factors
As a smaller reporting company, the Bank is not required to provide the information otherwise required by this Item.
Item 1B. Unresolved Staff Comments
Not applicable.
12
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 twelve other branch locations in New Jersey and
Pennsylvania. The following table sets forth certain information regarding the Bank’s properties as of December 31, 2012:
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
New Brunswick Branch
1 Spring Street, Suite 102
New Brunswick, NJ
Upper Darby Branch (MoreBank Division)
7050 Terminal Square
Upper Darby, PA1
North Wales Branch (MoreBank Division)
1222 North Welsh Road
North Wales, PA
13
Leased or
Owned
Leased
Date of Lease
Expiration
October 31, 2018
Leased
April 30, 2016
Leased
October 31, 2015
Leased
April 30, 2017
Leased
December 31, 2016
Leased
July 31, 2020
Leased
April 30, 2015
Owned
N/A
Leased
November 30, 2021
Leased
March 31, 2017
Leased
February 28, 2013
Leased
September 30, 2016
Cheltenham Branch (MoreBank Division)
470 West Cheltenham Avenue
Philadelphia, PA
Arch Street Branch (MoreBank Division)
921 Arch Street
Philadelphia, PA
1 The Bank closed this branch as of February 1, 2013.
Item 3. Legal Proceedings
Leased
January 25, 2016
Leased
November 30, 2017
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, 2012 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 11, 2013, there were approximately 656 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 Bank does not anticipate declaring or
paying dividends for the foreseeable future.
14
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation plan information as of December 31, 2012.
Number of
shares of
common stock
to be issued
upon exercise
of outstanding
options,
warrants and
rights
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
Number of
shares of
common stock
remaining
available for
future issuance
under
compensation
plans
239,727
92,400
1,200
97,500
46,000
476,827
$11.74
$13.75
$25.00
$10.00
$25.00
$13.21
13,073
7,600
-
-
-
20,673
Plan Category
Equity Compensation Plans approved by security
holders:
The Bank of Princeton 2007 Stock Option Plan
The Bank of Princeton 2012 Stock Option Plan
MoreBank 2004 Incentive Equity Compensation Plan
Equity compensation plan not approved by security
holders:
Organizer warrants
MoreBank Organizer options
Total
Item 6. Selected Financial Data
As a smaller reporting company, the Bank 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, 2012 and December 31, 2011
Comparison of Operating Results for the Years Ended December 31, 2012 and December 31, 2011
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
15
Overview and Strategy
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.
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.
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, 2012 and December 31, 2011
General. Our total assets increased from $664.9 million at December 31, 2011 to $769.0 million at December 31,
2012, an increase of $104.1 million, or 16%. This increase was primarily due to increases in loans, net and securities
available-for-sale, partially offset by a decrease in cash and cash equivalents. Total liabilities increased from $610.6 million
at December 31, 2011 to $706.7 million at December 31, 2012, an increase of $96.1 million, or 16%. This increase was
primarily the result of a $76.8 million increase in total deposits and a $16.9 million increase in borrowings. Total
stockholders’ equity increased from $54.3 million at December 31, 2011 to $62.3 million at December 31, 2012, an increase
of $8.0 million, or 15%. This increase was primarily attributable to net income of $6.3 million and an increase in
accumulated other comprehensive income of $1.3 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 decreased from $59.2 million at December 31, 2011 to
$24.6 million at December 31, 2012, a decrease of $34.6 million, or 58%. The decrease in cash was primarily due to the
funding of the increase in loans, net and securities available-for-sale in excess of the increases in deposits and borrowings
from December 31, 2011 to December 31, 2012.
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 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.
16
The following table presents a summary of the amortized cost and fair value of our securities available-for-sale at
December 31, 2012, 2011 and 2010.
2012
December 31,
2011
2010
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
27,330 $
28,268 $
-
-
- $
-
- $
3,746 $
3,754
-
15,052
15,042
88,340
90,887
117,395
119,612
108,936
110,120
65,532
-
66,886
-
53,589
2,000
54,639
1,912
28,383
2,955
27,742
2,943
$
181,202 $
186,041 $
172,984 $
176,163 $
159,072 $
159,601
(in thousands)
U.S. Treasury securities
U.S. Government
agency securities
Mortgage-backed Securities-U.S.
Government-sponsored
Enterprises (GSEs)
Obligations of state and
political subdivisions
Corporate securities
Total
Securities available-for-sale at fair value increased $9.9 million during the twelve months ended December 31,
2012. This increase was the result of additional liquidity provided by our increasing deposit base, 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, 2012, 2011 and 2010.
2012
December 31,
2011
2010
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
600 $
643 $
1,074 $
1,166 $
1,394 $
1,454
(in thousands)
Mortgage-backed Securities-U.S.
Government-sponsored
Enterprises (GSEs)
Securities held-to-maturity decreased minimally from December 31, 2012 to December 31, 2011. The decline in
held-to-maturity securities is the result of our decision to allow the held-to-maturity portfolio to run off.
17
The following table summarizes the maturity distribution schedule of the amortized cost of debt securities with
corresponding weighted-average yields at December 31, 2012. 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)
Mortgage-backed Securities-U.S. Government-
sponsored Enterprises (GSEs)
Obligations of state and political subdivisions
Total
After one
through five
years
December 31, 2012
After five
through ten
years
After ten
years
One year
or less
$
$
- $
662
662 $
1,585 $
1,610
3,195 $
43,577 $
22,669
66,246 $ 111,699 $
71,108 $
40,591
Weighted average yield
1.08%
1.80%
2.28%
2.61%
Total
116,270
65,532
181,802
2.47%
At December 31, 2012, 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 3 - 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 $126.2 million from $405.9 million at December 31, 2011 to $532.1
million at December 31, 2012, an increase of 31%. The increase was attributable to our efforts to grow our loan portfolio
through existing relationships and new business and was funded by available cash, a 13% year-over-year increase in our total
deposits and $16.9 million of additional borrowings.
The following table details our loan maturities by loan class and interest rate type at December 31, 2012:
December 31, 2012
Due after
one
through
five years
$
Due after
five years
206,535 $
59,081
35,090
27,712
22,227
498
351,143 $
Total
317,946
103,627
62,702
29,127
25,617
1,480
540,499
71,342 $
35,914
7,935
1,415
235
424
117,265 $
68,681 $
48,584
117,265 $
29,930 $
321,213
351,143 $
113,405
427,094
540,499
(in thousands)
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total loans
Type:
Fixed rate loans
Floating rate loans
Total loans
Due in
one year
or less
$
$
$
$
40,069
8,632
19,677
-
3,155
558
72,091
14,794
57,297
72,091
18
$
$
$
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, 2012, 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
Home equity
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,
2012
2011
2010
2009
2008
$
$
2,690 $
4,596
892
-
359
11
8,548
2,412
-
5,229
2,135
892
-
456
-
8,712
2,332
-
$
3,488 $
1,782
-
-
276
-
5,546
3,788
-
886
1,000
427
-
-
-
2,313
3,992
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
155
-
-
-
-
-
155
-
-
-
-
-
-
-
-
-
11,044
10,960
919
1,550
12,510 $ 11,963
9,334
1,140
6,305
227
$ 10,474 $ 6,532
$
155
-
155
$
See Note 5 - 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, 2012 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
that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, the composition of the loan
19
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 $5.4 million at December 31, 2011 to $7.0 million at December 31,
2012, an increase of $1.6 million or 31%. This increase was primarily attributable to applying our allowance methodology to
our gross loans at December 31, 2012, which increased 31% from December 31, 2011 to December 31, 2012.
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, 2012, 2011, 2010, 2009 and 2008:
(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
2012
Year Ended December 31,
2010
2011
2009
2008
$
5,362 $
3,693 $
2,147
$
1,092 $
354
-
(388)
-
-
-
(5)
(393)
-
95
-
-
1
-
96
(297)
1,968
7,033 $
(286)
(217)
(143)
-
(80)
-
(726)
-
18
-
-
-
-
18
(708)
2,377
5,362 $
(1,251)
(446)
(7)
-
(52)
-
(1,756)
1
-
-
-
-
-
1
(1,755)
3,301
3,693
-
(149)
-
-
-
-
(149)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(149)
738
1,204
2,147 $ 1,092
$
Net charge-offs
Additions charged to operations (provision for loan losses)
Balance at end of year
$
Net charge offs to average loans outstanding
0.06%
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.
20
The following table presents the allocation of the allowance for loan losses by portfolio segment for the years ended
December 31, 2012, 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.
2012
2011
2010
2009
December 31,
(in thousands)
Amount
% of
Loans to
Total
Loans
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
Total
$
2,557
1,244
2,163
58.8% $
19.2
11.6
2,082
1,011
1,965
56.6% $ 1,484
718
20.8
904
13.7
58.1% $
21.3
9.1
204
256
10
599
5.4
4.7
0.3
-
101
179
12
12
3.7
4.7
0.5
-
78
178
9
322
4.2
6.8
0.5
-
900
563
349
154
171
10
-
51.4%
18.1
13.3
8.8
7.8
0.6
-
$
7,033
100.0% $
5,362
100.0% $ 3,693
100.0% $ 2,147
100.0%
At December 31, 2008, our allowance for loan losses was comprised primarily of unallocated reserves. Our
allowances for loan losses was approximately $1.1 million at December 31, 2008, and our loans were approximately $91.5
December 31, 2008. See Note 5 Loans Receivable in the Notes to Consolidated Financial Statements within this Form 10-K
for additional information regarding our allowance for loan losses.
Premises and equipment. Premises and equipment, net increased from $5.2 million at December 31, 2011 to $5.8
million at December 31, 2012, an increase of $600,000 or 13%. This increase was primarily due to the opening of one new
branch during the year ended December 31, 2011.
Other assets. Accrued interest receivable and other assets increased $1.5 million from December 31, 2011 to
December 31, 2012, primarily due to increases of $371,000 in accrued interest receivable, $883,000 in restricted investments
in bank stocks and $552,000 in deferred tax assets that were partially offset by a decrease in prepaid assets and other assets
during the period. The increase in accrued interest receivable was primarily due to increases of 31% and 6% in loans
receivable, net and securities available for sale, respectively, from December 31, 2011 to December 31, 2012. We are
required to own restricted investments in the form of stock of the FHLB-NY. The amount of FHLB-NY stock we are
required to hold is determined in part by the amount of FHLB-NY borrowings outstanding. The restricted investments in
bank stocks increased as a result of the 149% increase in FHLB-NY borrowings from December 31, 2011 to December 31,
2012.
Deposits. Total deposits increased from $595.6 million at December 31, 2011 to $672.4 million at December 31,
2011, an increase of $76.8 million or 13%. Non-interest-bearing deposits increased $30.4 million, or 66%, to $76.8 million
at December 31, 2012, compared to $46.4 million at December 31, 2011. Interest-bearing deposits increased $46.4 million,
or 8%, to $595.6 million at December 31, 2012, compared to $549.2 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.
21
The following table presents our time deposit maturities as of December 31, 2012.
(in thousands)
Time deposits of $100,000 or more
Time deposits of less than $100,000
Total
$
$
December 31, 2012
Over
three
through
six
months
Three
months
or less
Over six
through
twelve
months
Over
twelve
months
9,250 $
7,834
6,161 $ 23,301 $ 72,871
9,190
67,553
17,084 $ 15,351 $ 54,304 $ 140,424
31,003
Total
111,583
115,580
227,163
$
$
The following table presents the average balance of our deposit accounts for the years ended December 31, 2012,
2011 and 2010, and the average cost of funds for each category of our deposits.
2012
Avg.
Rate
Paid
% of
Average
Total
Deposits
Average
Amount
2011
Avg.
Rate
Paid
Average
Amount
% of
Average
Total
Deposits
Average
Amount
2010
Avg.
Rate
Paid
% of
Average
Total
Deposits
65,333
0.00%
10.3% $ 37,429
0.00%
7.6% $ 20,623
0.00%
6.6%
119,121
140,405
87,604
0.99
0.61
0.77
18.7
22.1
13.8
99,194
104,600
80,704
1.41
1.05
1.22
20.1
21.2
16.3
62,829
86,699
47,628
1.29
1.29
1.47
20.2
27.8
15.3
103,222
2.32
16.2
76,934
2.13
15.6
43,127
2.30
13.8
(in thousands)
Demand, non-
interest-bearing
checking
$
Demand Interest-
bearing
Money market
Savings deposits
Time deposits of
$100,000 or
more
Other time
deposits
120,525
1.93
18.9
95,341
1.83
19.2
50,628
2.31
Total
$ 636,210
1.17%
100.0% $494,202
1.39%
100.0% $311,534
1.54%
16.3
100.0%
Borrowings. Borrowings increased from $11.3 million at December 31, 2011 to $28.2 million at December 31,
2012, an increase of $16.9 million or 149%. This increase was due to increases of 31% and 5% in loans receivable, net and
securities available for sale, respectively, from December 31, 2011 to December 31, 2012. The Bank utilizes its available
capacity with FHLB-NY as an additional source of funding. The deposit growth experienced by the Bank during the year
ended December 31, 2012 was not sufficient to fund our loan growth and investments in our securities available-for-sale,
causing us to utilize our available capacity with the FHLB-NY in order to increase these interest-earning assets.
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.
Accrued interest payable and other liabilities. Accrued interest payable and other liabilities increased from $3.6
million at December 31, 2011 to $6.1 million at December 31, 2012, an increase of $2.5 million or 68%. This increase was
primarily attributable to an increase in accrued expenses and other liabilities of $2.1 million and an increase of $486,000 in
income taxes payable. The increase in accrued expenses and other liabilities was primarily attributable to an increase in
22
securities purchased and not yet settled and an increase in loan participation payments payable. The increase in income taxes
payable was attributable to a 124% increase in net income for the year ended December 31, 2012 compared to the prior year
period.
Stockholders’ equity. Stockholders’ equity increased from $54.3 million at December 31, 2011 to $62.3 million at
December 31, 2012, an increase of $8.0 million or 15%. The increase in stockholders’ equity was due to increases in
retained earnings from current year net income and accumulated other comprehensive income from unrealized gains on
securities-available-for-sale during the year ended December 31, 2012.
Comparison of Operating Results for the Years Ended December 31, 2012 and December 31, 2011
General. Net income for the year ended December 31, 2012 was $6.3 million, an increase of approximately $3.5, or
124%, from $2.8 million for the year ended December 31, 2011. 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 provision for loan losses increased $8.4 million, or 52%, to $24.5
million for the year ended December 31, 2012, compared to $16.1 million for the year ended December 31, 2011. Our net
interest margin on the average balance of interest-earning assets increased 24 basis points, to 3.72%, compared to 3.48% in
the prior year. The average yield on interest-earning assets decreased slightly from 4.82% to 4.76%, when comparing the
twelve months ended December 31, 2012 to the prior year period. The average cost of interest-bearing liabilities decreased
30 basis points. The average cost of interest-bearing liabilities for the years ending December 31, 2012 and 2011 was 1.20%
and 1.50%, respectively.
Total interest and dividend income. Total interest and dividend income increased $8.0 million, or 31%, to $33.7
million for the year ended December 31, 2012, compared to $25.7 million for the prior year. The improvement in interest
income resulted primarily from an increase in the average balance of interest-earning assets as further discussed below.
Interest income and fees on loans increased $7.6 million, or 36%, to $29.1 million for the year ended December 31,
2012, compared to $21.5 million for the prior year. The increase was primarily attributable to an increase in the average
balance of loans of $141.4 million from $336.0 million in 2011 to $477.4 million in 2012. This increase was partially offset
by a decrease in the average yield on loans, year-over-year of 30 basis points. The increase in average loans was due to
increased loan production. The decrease in the average yield on loans was due to lower interest rates on new loan production
that was caused by the overall drop in market interest rates throughout the banking business sector.
Interest income on securities available-for-sale increased $352,000, or 9%, to $4.4 million for the year ended
December 31, 2012, compared to $4.0 million in the prior year. This increase was primarily attributable to a 20% increase in
the average balance of securities available-for-sale from an average balance of $177.5 million during the year ended
December 31, 2011 to an average balance of $212.5 during the twelve months ended December 31, 2012. This increase was
partially offset by a 20 basis point decrease in the average yield for the year ended December 31, 2012 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, combined with our decision to utilize cash and FHLB-NY borrowings to fund
additional interest-earning assets.
Interest income on securities held-to-maturity changed minimally during the year ended December 31, 2012
compared to prior year period. We continue to maintain our strategy 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 89,000 for the year ended December 31, 2012, compared to the
prior year period. The increase was due to a 27% increase in average interest-bearing liabilities that was almost completely
offset by a 30 basis point decline in our cost of interest-bearing liabilities.
Interest expense on deposits increased $105,000, or 2%, to $7.0 million in 2012, compared to $6.9 million in 2011.
Average interest-bearing deposits increased $114.1 million, or 25%, to $570.9 million for the year ended December 31, 2012,
compared to $456.8 million in 2011. The cost of interest-bearing deposits decreased 29 basis points from year to year. As the
Bank worked to grow its total deposits during 2012 through organic growth and de novo branches, average interest-bearing
and savings deposits, average money market deposits and average time deposits increased 13%, 34% and 32%, respectively,
23
for the year ended December 31, 2012 compared to the prior year period. The lower cost of interest-bearing deposits was
reflective of the overall market trend as we lowered the rates we were willing to pay for deposits in order to alleviate pressure
on the spread between the interest rate with which we earn income from interest-earning assets and the interest rate we pay
for interest-bearing liabilities.
Provision for Loan Losses. The provision for loan losses decreased 409,000 or 17% to $2.0 million in 2012
compared to $2.4 million in the prior year. The decrease in the 2012 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 $358,000 in 2012, compared to $708,000 in 2011. 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 decreased approximately $246,000, or 9%, to $2.6 million in 2012,
compared to $2.8 million in the prior year.
In 2012, non-interest income included gains of $897,000 on sales of securities
available-for-sale and $1.2 million from service charges and other fees earned in the normal course of banking operations. In
2011, non-interest income included gains of $2.0 million on sales of securities available-for-sale, $594,000 from service
charges and other fees earned in the normal course of banking operations, as well as nominal amounts of income from bank-
owned life insurance. The increase in fees and service charges was primarily attributable to an increase in early loan payoff
fees collected from borrowers who paid prepayment penalties in order to take advantage of lower interest rates.
Non-Interest Expense. Non-interest expense increased $2.9 million, or 20%, to $18.0 million in 2012, compared to
$15.1 million in the prior year. The increase was due to the growth the Bank experienced during 2012.
Salaries and employee benefits increased $1.6 million, or 22%, to $8.9 million in 2012, compared to $7.3 million in
the prior year. The increase in costs were related to an increase in overall FTEs associated with the growth of the bank,
including additional branch openings.
Occupancy and equipment expenses increased approximately $416,000, or 17%, to $2.9 million in 2012 compared
to $2.5 million in the prior year. The increase was attributable to the costs associated with the opening of one new branch and
the full-year impact of a branch that was opened in the fourth quarter of 2011.
Loss on other real estate owned increased to $1.1 million in 2012 compared to approximately $271,000 in the prior
year. The increase was attributable to the write-down of two properties below their initial net realizable values.
All other non-interest expenses changed minimally during 2012 as we sought to manage our non-interest expenses
and maintain our operating efficiency as we continue to organically grow the bank.
Provision for Income Taxes. The provision for income taxes increased $1.6 million, or 153%, to $2.7 million in
2012 compared to $1.1 million in the prior year. The increase is primarily related to an increase of 132% in pre-tax income,
The effective tax rate for 2012 was 30% compared to 27% for 2011.
24
Average Balance Sheets. The average yields and cost of funds 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
For the Year Ended December 31,
Average
Balance
2012
Interest
Average
Yield/Cost
Average
Balance
2011
Interest
Average
Yield/Cost
$
477,366
$
29,133
6.10 % $
336,003
$
21,488
6.40 %
4,369
37
134
33,673
$
1,859
863
4,259
6,981
273
2.06
4.01
0.77
4.76
0.90
0.61
1.90
1.22
0.80
$
$
7,254
1.20 %
$
$
212,464
922
17,362
708,114
26,977
735,091
206,725
140,405
223,747
570,877
34,273
605,150
70,730
675,880
59,211
4,017
59
109
25,673
$
2,428
1,089
3,359
6,876
289
2.26
4.49
0.64
4.82
1.33
1.04
1.99
1.51
1.50
7,165
1.50 %
177,498
1,308
17,037
531,846
30,072
561,918
183,238
104,600
168,934
456,772
19,320
476,092
40,877
516,969
44,949
stockholders’ equity
$
735,091
$
561,918
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
3.56 %
3.32 %
$
26,419
$
18,508
3.72 %
1.17x
3.48 %
1.18x
(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.
25
(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
For the Year Ended December 31,
2010
Average
Balance
Interest
Average
Yield/Cost
$
200,670
$
13,007
6.48 %
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 %
$
$
99,371
4,778
32,649
337,468
15,915
353,383
106,522
83,718
90,916
281,156
15,204
296,360
22,157
318,517
34,866
stockholders’ equity
$
353,383
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
$
11,071
3.07 %
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
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.
(in thousands)
Interest and dividend income:
Loans receivable
Investment securities:
Available-for-sale
Held-to-maturity
Other interest-earnings assets
Total interest-earning assets
Interest expense:
Demand, interest-bearing and
savings
Money market
Time deposits
Federal Home Loan Bank
borrowings
Total interest-bearing
liabilities
Change in net interest income
Year Ended December 31,
2012 vs. 2011
Increase (Decrease) Due to
Year Ended December 31,
2011 vs. 2010
Increase (Decrease) Due to
Volume
Rate
Net
Volume
Rate
Net
$
8,627
$
(982) $
7,645 $
8,686
$
(205) $
8,481
854
(15)
2
9,468
211
220
1,044
119
1,594
7,874
$
$
$
$
$
$
$
$
(502)
(7)
23
(1,468) $
352
(22)
25
8,000 $
1,772
(156 )
(146 )
10,156 $
(647)
10
158
(684) $
(780) $
(446)
(144)
(569) $
(226)
900
967 $
220
1,619
(60) $
(236)
(422)
(135)
(16)
25
(78)
1,125
(146)
12
9,472
907
(16)
1,197
(53)
(1,505) $
89 $
2,831 $
(796) $
2,035
37
$
7,911 $
7,325 $
112 $
7,437
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
FHLB-NY. At December 31, 2012, we had $22.2 million of advances outstanding from the FHLB-NY and $6.0 million of
advances outstanding from the FHLB-Pittsburgh. At December 31, 2012, we had available capacity with FHLB-NY, subject
27
to certain collateral restrictions, of $380.4 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, 2012, 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, 2012:
Years Ended December 31:
2013
2014
2015
2016
2017
Thereafter
Total minimum payments required
$
(in thousands)
1,197
1,208
1,195
995
707
1,437
6,739
$
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,
2012, we met the capital requirements to be considered “well capitalized”. See Note 16 - 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)
2012
2011
Performance and standby letters of credit
Commitments to grant loans
Unfunded commitments under lines of credit
$
$
2,378
67,317
9,260
78,955
$
$
2,367
57,563
6,767
66,697
28
For additional information regarding our outstanding lending commitments at December 31, 2012, see Note 11 –
Commitments and Contingencies in the Notes to 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, 2012, 2011 and 2010.
Return on Average Assets (ROA)
Return on Average Equity (ROE)
Average Equity to Average Assets
2012
0.86%
10.66%
8.05%
2011
0.50%
6.15%
8.13%
2010
0.62%
6.78%
9.46%
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, 2012, 2011 and 2010.
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. Generally, 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 when 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.
29
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, 2012 and 2011. 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
See Note 1 to the Consolidated Financial Statements contained in this Annual Report on Form 10-K for a discussion
of recently issued accounting standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, the Bank is not required to provide the information otherwise required by this Item.
30
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
2012 AND 2011
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
32
33
34
33
35
34
36
35
37
36
37
38
39
40
31
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Board of Directors and
Stockholders of The Bank of Princeton
Board of Directors and
Stockholders of The Bank of Princeton
We have audited the accompanying consolidated statements of financial condition of The Bank of
Princeton and subsidiaries (“the Company”) as of December 31, 2012 and 2011, and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash
flows for the years then ended. The Company’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We have audited the accompanying consolidated statements of financial condition of The Bank
of Princeton and subsidiaries (“the Company”) as of December 31, 2012 and 2011, and the
related consolidated statements of income, comprehensive income, changes in stockholders’
equity, and cash flows for the years then ended. The Company’s management is responsible for
these consolidated financial statements. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of The Bank of Princeton and subsidiaries as of December 31, 2012 and
2011, and the results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Bank of Princeton and subsidiaries as of
December 31, 2012 and 2011, and the results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in the United
States of America.
Philadelphia, Pennsylvania
March 21, 2013
Philadelphia, Pennsylvania
March 21, 2013
32
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 $643 and $1,166, respectively)
Loans receivable, net of allowance for loan losses of $7,033 and $5,362
at December 31, 2012 and 2011, respectively
Bank-owned life insurance
Other real estate owned
Premises and equipment, net
Accrued interest receivable and other assets
$
December 31,
2012
2011
$
24,619
-
24,619
186,041
600
532,115
8,918
1,550
5,841
9,318
18,015
41,200
59,215
176,163
1,074
405,861
8,639
919
5,165
7,835
TOTAL ASSETS
$
769,002
$
664,871
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, 4,578,569 and
4,578,330 shares issued and outstanding at December 31, 2012 and
2011, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive income
TOTAL STOCKHOLDERS’ EQUITY
$
$
76,793
595,571
672,364
28,246
6,109
706,719
22,893
28,539
7,457
3,394
62,283
46,385
549,188
595,573
11,344
3,636
610,553
22,892
28,182
1,146
2,098
54,318
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
769,002
$
664,871
See notes to consolidated financial statements.
33
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years ended
December 31,
2012
2011
$
29,133
$
21,488
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees
Available-for-sale debt securities:
Taxable
Tax-exempt
Held-to-maturity debt securities
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
Income from bank-owned life insurance
Fees and service charges
Other income
TOTAL NON-INTEREST INCOME
NON-INTEREST EXPENSE
Salaries and employee benefits
Occupancy and equipment
Professional fees
Data processing and communications
Federal deposit insurance
Advertising and promotion
Office expense
Other real estate owned expense, net
Loss on disposal of premises and equipment
Other
TOTAL NON-INTEREST EXPENSE
INCOME BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE
NET INCOME
Earnings per common share-basic
Earnings per common share-diluted
See notes to consolidated financial statements.
$
$
$
34
2,660
1,709
37
134
33,673
6,981
273
7,254
26,419
1,968
24,451
897
279
1,197
211
2,584
8,879
2,873
1,373
1,237
586
296
281
1,137
58
1,319
18,039
8,996
2,685
6,311
1.38
1.36
3,025
992
59
109
25,673
6,876
289
7,165
18,508
2,377
16,131
1,976
255
594
5
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
$
$
$
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the Years ended
December 31,
2012
2011
NET INCOME
Other comprehensive income
Unrealized holding gains arising during period on securities available-
for-sale
Less: reclassification adjustment for gains included in net income
Income tax effect
Total other comprehensive income
COMPREHENSIVE INCOME
$
6,311
$
2,813
2,557
(897)
(364)
1,296
7,607
$
4,626
(1,976)
(901)
1,749
4,562
$
See notes to consolidated financial statements.
35
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2012 and 2011
(in thousands, except share data)
Common stock
Paid-in capital
Retained earnings
(accumulated
deficit)
Accumulated
other
comprehensive
income
Total
Balance, December 31, 2010
Net income
Other comprehensive income
Sale of common stock (621,862
shares at $13.75 per share)
Stock options exercised (4,283 shares
at $10.48 per share)
Stock-based compensation expense
Balance, December 31, 2011
Net income
Other comprehensive income
Stock options exercised (140 shares
at $10.50 per share and 99 shares
at $12.00 per share)
Stock-based compensation expense
Balance, December 31, 2012
$
$
19,761
-
-
3,109
22
-
22,892
-
-
$
$
22,515
-
-
(1,667 ) $
2,813
-
349 $
-
1,749
5,441
23
203
28,182
-
-
-
-
-
1,146
6,311
-
-
-
-
2,098
-
1,296
1
-
22,893
$
2
355
28,539 $
-
-
7,457 $
-
-
3,394 $
40,958
2,813
1,749
8,550
45
203
54,318
6,311
1,296
3
355
62,283
See notes to consolidated financial statements.
36
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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
Increase in cash surrender value of bank-owned life insurance
Loss on disposition of premises and equipment
Increase in deferred income taxes
Net loss on other real estate owned
Amortization of core deposit intangible
(Increase) decrease 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
Proceeds on sale of other real estate owned
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 USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
Net proceeds (repayments) 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
For the Years ended December 31,
2012
2011
$
6,311
$
2,813
1,968
830
355
(964)
497
59
(36)
(897)
(279)
58
(916)
928
125
(172)
1,862
9,729
(101,952)
51,155
45,040
796
483
(131,072)
-
(1,565)
(884)
(137,999)
76,733
22,200
(5,262)
-
3
93,674
2,377
742
203
1,731
(1,068)
97
(82)
(1,976)
(255)
112
(430)
197
126
327
1,209
6,123
(146,197)
56,799
75,740
203
312
(125,777)
(2,352)
(1,866)
(16)
(143,154)
169,663
(1,044)
(6,588)
8,550
45
170,626
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
(34,596)
59,215
24,619
$
$
33,595
25,620
59,215
See notes to consolidated financial statements.
37
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
Securities purchased and not yet settled
$
$
$
$
7,349
3,112
2,355
610
$
$
$
6,594
1,419
179
-
See notes to consolidated financial statements.
38
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”) 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 twelve 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, 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, 2012, the Bank had 110 full-time employees and 12 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, 2012 and 2011. 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
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.
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, 2012 and 2011. 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”) quarterly, 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 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. 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
40
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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 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.
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
41
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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 Bank
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 Bank’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.
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.
Residential first-lien mortgage loans
interest rate risk and risk of non-
involve certain risks such as
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
42
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
underlying property may be adversely affected by higher interest rates. Repayment risk can be affected by job loss,
divorce, illness and personal bankruptcy of 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
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
43
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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.
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.
44
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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 $2,221,000
and $1,338,000 is carried at cost at December 31, 2012 and 2011, 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, 2012 and 2011.
Management believes no impairment charge is necessary related to the FHLB restricted stock or the ACBB restricted
stock as of December 31, 2012 or 2011.
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 $356,000 and $481,000 as of December 31,
2012 and 2011, respectively. Amortization expense is anticipated to be approximately $126,000 in 2013, $114,000 in
2014 and approximately $9,000 in 2015 and 2016, respectively.
45
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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, 2012 and
2011.
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, 2012 and
2011. 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, 2012, tax years 2009
through 2011 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 sponsors 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 year
ended December 31, 2012, the Bank contributed $32,000 in matching contributions to employees. During the year
ended December 31, 2011, no matching contributions were made.
Stock compensation plan
The stock compensation accounting guidance set forth in FASB ASC Topic 718, Compensation - Stock Compensation,
requires that compensation costs relating to share-based payment transactions be recognized in financial statements. That
cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock
compensation accounting guidance covers a wide range of share-based compensation arrangements including stock
options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.
46
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
The stock compensation accounting guidance requires that compensation costs for all stock awards be calculated and
recognized over the employees’ service period, generally defined as the vesting period. For awards with graded vesting,
compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-
Scholes model is used to estimate the fair value of stock options.
Earnings per share
Basic earnings per share amounts are calculated by dividing income available to common stockholders by the weighted
average common shares outstanding during the period, and exclude any dilutive effects stock options and warrants.
Diluted earnings per share amounts include the dilutive effects of stock 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, 2012 have been reclassified to conform to the current year’s
presentation. These reclassifications did not have any impact on stockholders’ equity or net income.
Recently issued accounting standards
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Comprehensive
Income. The amendments in this ASU are intended to improve the reporting of reclassifications out of accumulated
other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated
other comprehensive income on the respective line items in net income if the amount being reclassified is required to be
reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net
income in the same reporting period, an entity is required to cross-reference other disclosures required that provide
additional detail about those amounts. This would be the case when a portion of the amount reclassified out of
accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or
expense in the same reporting period. The ASU is effective for public entities for reporting periods beginning after
December 15, 2012. The Bank is evaluating the impact of the ASU, but does not expect a material impact on the
financial statements.
Note 2 – 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.
47
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Earnings Per Share
The following schedule presents earnings per share data for the years ended December 31, 2012 and 2011:
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 of potential common shares
Weighted average number of diluted common shares outstanding
Diluted earnings per share
Twelve months ended
December 31,
2012
2011
(in thousands, except per share
data)
6,311
4,578
1.38
$
$
6,311
$
4,578
63
4,641
1.36
$
2,813
4,103
0.69
2,813
4,103
52
4,155
0.68
$
$
$
$
Options and warrants to purchase 286,377 shares of common stock at a weighted average exercise price of $10.73 were
included in the computation of diluted earnings per share for the year ended December 31, 2012. Options to purchase
198,800 shares of common stock at a weighted average exercise price of $16.67 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 year ended December 31, 2012.
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 year 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 year
ended December 31, 2011.
48
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Investment Securities
The following summarizes the amortized cost and estimated fair value of securities available-for-sale at December 31, 2012
and 2011 with gross unrealized gains and losses therein:
Available-for-sale:
U.S. Treasury securities
Mortgage-backed securities-U.S.
Government Sponsored Enterprises (GSE’s)
Obligations of state and
political subdivisions
Amortized
Cost
December 31, 2012
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
$
27,330
$
88,340
65,532
181,202
$
$
951
2,550
1,477
4,978
$
$
(13)
$
28,268
(3)
90,887
(123)
(139)
$
66,886
186,041
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
53,589
2,000
172,984
$
$
$
2,252
1,057
-
3,309
$
$
(35)
$
119,612
(7)
(88)
(130)
$
54,639
1,912
176,163
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, 2012 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, 2012:
Mortgage-backed
securities-U.S.
Government Sponsored
Enterprises (GSE’s)
Obligations of state and
political subdivisions
US Treasury securities
$
$
-
$
-
$
349
$
9,738
4,945
14,683
(123)
(13)
(136)
$
$
-
-
349
$
(3)
-
-
(3)
$
$
349
$
(3)
9,738
4,945
15,032
$
(123)
(13)
(139)
49
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – 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, 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
$
(35)
1,613
933
11,416
$
(6)
(67)
(107) $
1,009
979
3,118
$
(1)
(21)
(23)
$
2,622
1,912
14,534
$
(7)
(88)
(130)
At December 31, 2012, the Bank’s debt securities portfolio consisted of approximately 277 securities, of which 46 were in an
unrealized loss position for less than twelve months and one was in a continuous loss position for more than twelve months.
No OTTI charges were recorded for the twelve months ended December 31, 2012. 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, 2012 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)
$
$
662
3,195
66,246
111,099
181,202
$
$
664
3,248
68,216
113,913
186,041
The following summarizes the amortized cost and estimated fair value of securities held-to-maturity at December 31, 2012
with gross unrealized gains and losses therein:
Amortized
Cost
December 31, 2012
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Held-to-maturity:
Mortgage-backed securities-U.S.
Government Sponsored Enterprises (GSE’s)
$
600
$
43
$
-
$
643
All securities held-to-maturity are due after ten years.
50
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Investment Securities (Continued)
The following summarizes the amortized cost and estimated fair value of securities held-to-maturity at December 31, 2011
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
Proceeds from the sale of securities available-for-sale amounted to $45.0 million for year ended December 31, 2012, which
included realized gains of approximately $957,000 and realized losses of approximately $60,000. Proceeds from the sale of
securities available-for-sale amounted to $75.7 million for the year ended December 31, 2011, which included realized gains
of approximately $2.0 million and realized losses of approximately $6,000.
Approximately $2.1 million of securities available-for-sale were pledged as collateral for Federal Home Loan Bank of
Pittsburgh borrowings at December 31, 2012. Approximately $95.7 million of securities available-for-sale and $643,000 of
securities held-to-maturity were pledged as collateral for NJ Governmental Unit Deposit Protection Act (“GUDPA”) deposits
at December 31, 2012. Approximately $2.0 million of securities available-for-sale were pledged as collateral for business
sweep accounts at December 31, 2012.
Note 5 – Loans Receivable
Loans receivable, net at December 31, 2012 and 2011 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,
2012
December 31,
2011
(in thousands)
$
$
317,946
103,627
62,702
29,127
25,617
1,480
540,499
(1,351)
(7,033)
233,504
85,527
56,453
15,396
19,341
1,957
412,178
(955)
(5,362)
Loans, net
$
532,115
$
405,861
51
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Loans Receivable (Continued)
The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2012 and 2011:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
December 31,
2012
December 31,
2011
(in thousands)
$
$
2,690
4,596
892
-
359
11
8,548
$
$
5,229
2,135
892
-
456
-
8,712
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.
52
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – 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, 2012
and the year then ended:
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
$
$
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
(in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
3,646
2,857
3,004
-
829
12
10,348
-
2,183
-
-
-
-
2,183
3,646
5,040
3,004
-
829
12
12,531
$
2,697
2,629
2,877
-
805
11
9,019
-
1,985
-
-
-
-
1,985
2,697
4,614
2,877
-
805
11
11,004
$
$
-
-
-
-
-
-
-
-
255
-
-
-
-
255
-
255
-
-
-
-
255
$
$
2,658
1,621
2,881
-
780
11
7,951
-
2,082
-
-
-
-
2,082
2,658
3,703
2,881
-
780
11
10,033
$
$
-
-
86
-
5
-
91
-
-
-
-
-
-
-
-
-
86
-
5
-
91
53
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – 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
At December 31, 2012, thirteen loans totaling $5.8 million were considered troubled debt restructurings and classified as
impaired. Troubled debt restructurings of $2.4 million were performing in accordance with their modified terms at December
31, 2012. The remaining $3.4 million of troubled debt restructurings were on non-accrual status at December 31, 2012.
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.
54
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – 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, 2012:
30-59
Days Past
Due
60-89
Days Past
Due
Greater
than
90 days
(in thousands)
Total
Past
Due
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
$
$
988
305
-
-
-
12
1,305
$
$
-
1,095
2,840
-
-
-
3,935
$
$
2,515
3,335
892
-
147
-
6,889
$
$
3,503
4,735
3,732
-
147
12
12,129
Loans
Receivable
>90 Days
and
Accruing
Total
Loans
Receivable
$
$
317,946
103,627
62,702
29,127
25,617
1,480
540,499
$
$
-
-
-
-
-
-
-
Current
$ 314,443
98,892
58,970
29,127
25,470
1,468
$ 528,370
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
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
Loans
Receivable
>90 Days
and
Accruing
Total
Loans
Receivable
$
$
233,504
85,527
56,453
15,396
19,341
1,957
412,178
$
$
-
-
-
-
-
-
-
Current
$ 226,534
83,575
55,561
15,209
19,159
1,957
$ 401,995
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, 2012:
Pass
Special
Mention
Substandard
(in thousands)
Doubtful
Total
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
$
$
310,212
98,484
59,841
29,127
25,153
1,468
524,285
$
$
4,221
290
-
-
-
-
4,511
$
$
3,420
4,853
2,861
-
464
12
11,610
$
$
93
-
-
-
-
-
93
$
$
317,946
103,627
62,702
29,127
25,617
1,480
540,499
55
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – 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, 2011:
Pass
Special
Mention
Substandard
(in thousands)
Doubtful
Total
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
Allowance for loan losses on loans receivables at and for the year ended December 31, 2012:
Commercial
real estate
Commercial
and industrial
Construction
Residential
first-lien
mortgage
Home equity
Consumer
Unallocated
Total
(in thousands)
$
2,082
475
-
-
$
1,011
526
(388)
95
$
1,965
198
-
-
$
101
103
-
-
$
179
76
-
1
$
12
3
(5 )
-
$
12
587
-
-
5,362
1,968
(393)
96
2,557
$
1,244
$
2,163
$
204
$
256
$
10
$
599
$
7,033
-
2,557
86
$
$
$
255
989
9
$
$
$
-
2,163
-
$
$
$
-
204
-
$
$
$
-
256
13
$
$
$
-
10
-
$
$
$
Recorded investment in loans receivables at December 31, 2012:
Loans:
Ending Balance:
Individually
evaluated for
impairment
Collectively
evaluated
for impairment
Loans acquired
with deteriorated
credit quality
$
2,291
$
4,526
$
2,877
$
-
$
667
$
11
$
315,249
99,013
59,825
29,127
24,812
1,469
406
88
-
-
138
-
Ending Balance
$
317,946
$
103,627
$
62,702
$
29,127
$
25,617
$
1,480
$
-
599
-
-
-
-
-
$
$
$
255
6,778
108
$
10,372
529,495
632
$
540,499
*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.
56
Allowance for loan
losses:
Beginning balance
$
Provisions
Charge-offs
Recoveries
Ending Balance
Ending Balance:
Individually
evaluated for
impairment
Collectively
evaluated
for impairment
Loans acquired
with deteriorated
credit quality*
$
$
$
$
Allowance for loan
losses:
Beginning balance
$
Provisions
Charge-offs
Recoveries
Ending Balance
Ending Balance:
Individually
evaluated for
impairment
Collectively
evaluated
for impairment
Loans acquired
with deteriorated
credit quality*
$
$
$
$
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Loans Receivable (Continued)
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)
$
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
2,082
$
1,011
$
1,965
$
101
$
179
$
12
$
12
$
5,362
14
2,068
86
$
$
$
-
1,011
22
$
$
$
-
1,965
-
$
$
$
-
101
-
$
$
$
2
177
13
$
$
$
-
12
-
$
$
$
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
$
-
$
228,256
83,375
53,492
15,396
18,501
1,957
871
178
-
-
147
-
Ending Balance
$
233,504
$
85,527
$
56,453
$
15,396
$
19,341
$
1,957
$
-
12
-
-
-
-
-
$
$
$
16
5,346
121
$
10,005
400,977
1,196
$
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.
The following table summarizes information in regards to troubled debt restructurings for the year ended December 31, 2012
(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
-
1
$
$
$
$
-
564
-
100
$
$
$
$
-
564
-
100
57
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Loans Receivable (Continued)
As indicated above, the Bank modified two loans during the twelve months ended December 31, 2012 that were categorized
as troubled debt restructurings. In modifying these loans, the Bank capitalized interest, extended the maturity and/or reduced
the interest rate on the original loan. Other than the modifications discussed further below, the remaining troubled debt
restructurings in the table above are performing in accordance with their modified terms. These troubled debt restructurings
are impaired loans and therefore, in accordance with the Bank’s policy, are individually evaluated for impairment. As of
December 31, 2012, 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, 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
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, 2012, 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, 2012
that subsequently defaulted (dollars in thousands):
Troubled debt restructurings that
subsequently defaulted:
Commercial real and industrial
Number of
Contracts
Outstanding
Recorded
Investment
1
$
564
This troubled debt restructuring is an impaired loan and therefore, in accordance with the Bank’s policy, is individually
evaluated for impairment. As of December 31, 2012, there is a $63,000 specific allowance for this modified loan.
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
58
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Loans Receivable (Continued)
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. The home equity loan modified during 2011 is in default as of
December 31, 2012. 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, 2012, there is no specific allowance for any of these
modified loans.
Loans to Related Party. In 2008 the Bank made 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 11-
Commitments and Contingencies for additional information regarding the terms of the lease.
In 2011 the Bank made two commercial and industrial loans to a company for which one member of its board of directors is a
partial owner, in the amount of $52,000. The terms of these commercial and industrial 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 rate 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.
In 2012 the Bank made a commercial real estate loan to a member of its board of directors in the amount of $2.0 million.
The terms of this commercial real estate loan were negotiated as arms-length and were reviewed and approved by the
disinterested members of the Bank’s board of directors. The loan was made in the ordinary course of business, on
substantially the same terms, including interest rate 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 related parties for the years ended December 31, 2012 and 2011.
(in thousands)
2012
2011
Outstanding related party loans at January 1,
New loans
Repayments
Outstanding related party loans at December 31,
$
$
3,310
1,988
(119)
5,179
$
$
3,264
52
(6)
3,310
No loans to related parties were nonaccrual, past due, restructured or potential problems at December 31, 2012 and 2011.
Note 6 – 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
Total
2012
2011
$
$
410
1,741
3,271
2,613
521
8,556
(2,715)
5,841
$
$
410
1,741
2,454
2,160
284
7,049
(1,884)
5,165
Estimated
useful lives
N/A
40 Yrs.
10 Yrs.
3-7 Yrs.
59
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Accrued Interest Receivable and Other Assets
The components of accrued interest receivable and other assets at December 31 were as follows (in thousands):
2012
2011
Accrued interest receivable
Deferred tax asset
Restricted investments in bank stocks
Prepaid assets and other assets
Total
Note 8 – Deposits
$
$
2,849
3,247
2,321
901
9,318
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
2012
76,793
213,684
154,724
111,583
115,580
672,364
$
$
$
$
$
$
2,478
2,695
1,438
1,224
7,835
2011
46,385
204,297
122,863
102,855
119,173
595,573
As of December 31, 2012, one customer’s deposits with the Bank represented 5.5% of total deposits and another customer’s
deposits represented 5.4% of total deposits. No other customer accounted more than 5% of total deposits as of December 31,
2012.
At December 31, 2012, the scheduled maturities of certificates of deposit were as follows (in thousands):
2013
2014
2015
2016
2017
Amounts
86,739
62,659
18,653
29,700
29,412
227,163
$
$
Note 9 – Borrowings
The Bank’s borrowings consist of FHLB-NY overnight advances and FHLB-NY amortizing and FHLB-Pittsburgh term,
fixed-rate advances. The Bank utilizes federal funds purchased to meet short-term liquidity needs. All of the Bank’s
borrowings are collateralized by securities and/or loans pledged to the respective FHLB. The terms of the security
agreements with each FHLB include a specific assignment of collateral that requires the maintenance of qualifying collateral
in excess of the FHLB advances, when discounted at certain pre-established rates.
60
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Borrowings (Continued)
The following table presents the Bank’s borrowings at December 31.
FHLB-NY overnight advances
FHLB term advances
Total Borrowings
2012
2011
(in thousands)
$
$
22,200
6,046
28,246
$
$
-
11,344
11,344
The following table is a schedule of the Bank’s long-term debt as of December 31, 2012, 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,
2012
Maturity
2.37 %
2.76 %
2013
2014
Balance at
December 31,
2012
2,064
3,982
6,046
$
At December 31, 2012, the Bank has available borrowing capacity with FHLB-NY, subject to certain collateral restrictions,
of $380.5 million. The Bank is also a member of the Atlantic Central Bankers Bank (“ACBB”). As of December 31, 2012,
the Bank has available borrowing capacity with ACBB of $6.0 million to provide short-term liquidity generally for a period
of not more than fourteen days.
Note 10 – 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
2012
2011
$
$
1,568
653
3,888
6,109
$
$
1,663
167
1,806
3,636
61
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Commitments and Contingencies
Operating leases
The Bank has operating leases for eleven 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):
2013
2014
2015
2016
2017
Thereafter
$
$
1,197
1,208
1,195
995
707
1,437
6,739
Rental expense for the years ended December 31, 2012 and 2011 was $1.3 million and $1.0 million, 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, which is included in the above lease schedule. The lease terms were comparable
to similarly outfitted office space in the Bank’s market. The Bank is also required to pay a monthly fee for certain operating
expenses, including real estate taxes, insurance, utilities, maintenance and repairs, in addition to the base rent. Rental
expense to this related party for the years ended December 31, 2012 and 2011 was approximately $245,000 and $256,000,
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.
Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer
to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved
in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires
collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a
liquidation of such collateral should be sufficient to cover the maximum potential amount under the corresponding
guarantees. The current amount of the liability as of December 31, 2012 and 2011 for guarantees under standby letters of
credit issued is not material.
62
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Commitments and Contingencies (Continued)
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
Litigation
2012
2011
2,378
67,317
9,260
78,955
$
$
2,367
57,563
6,767
66,697
$
$
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 12 – Income Taxes
Income tax expense 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
Total income tax expense
2012
2011
(in thousands)
$
$
2,892
709
3,601
(731 )
(185 )
(916 )
2,685
$
$
1,215
322
1,537
(318 )
(156 )
(474 )
1,063
63
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Income Taxes (Continued)
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
2012
2011
(in thousands)
2,597
1,363
191
260
760
5,171
(89 )
(91 )
(1,445 )
(299 )
(1,924 )
3,247
$
$
1,948
1,439
154
294
367
4,202
60
(186 )
(1,081 )
(300 )
(1,507 )
2,695
$
$
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
Other
Total income taxes applicable to pre-tax income
2012
2011
(in thousands)
$
$
3,058
$
1,318
345
(707 )
14
(25 )
2,685
$
109
(307 )
7
(64 )
1,063
At December 31, 2012, the Bank had available federal net operating loss carryforwards of approximately $4.0 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.
Note 13 – Fair Value Measurements and Disclosure
The Bank follows the guidance on fair value measurements now codified as FASB ASC Topic 820, Fair Value
Measurement. 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.
64
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Fair Value Measurements and Disclosure (Continued)
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.
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, 2012 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,
2012
(in thousands)
$
28,268 $
-
$
- $
28,268
-
-
90,887
66,886
157,773
$
-
-
- $
90,887
66,886
186,041
Description
U.S. Treasury securities
Mortgage-backed securities-U.S.
Government Sponsored Enterprises
(GSE’s)
Obligations of state and
political subdivisions
Securities available-for-sale at fair value
$
28,268 $
65
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Fair Value Measurements and Disclosure (Continued)
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
(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)
Mortgage-backed securities-U.S.
Government Sponsored Enterprises
(GSE’s)
Obligations of state and
political subdivisions
Corporate securities
Securities available-for-sale at fair value
$
$
- $
119,612 $
-
-
- $
54,639
1,912
176,163 $
- $
-
-
- $
119,612
54,639
1,912
176,163
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, 2012, 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,
2012
(in thousands)
$
$
- $
-
- $
- $
-
- $
5,820 $
1,550
7,370 $
5,820
1,550
7,370
Impaired loans
Real estate owned
66
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – 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:
(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
Impaired loans
Real estate owned
The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2012.
Description
Impaired loans
Real estate owned
Fair Value at
December 31,
2012
(in thousands)
Valuation
Technique
Unobservable
Input
Range
(Weighted
Average)
$
$
5,820
Discounted appraisals
1,550
Discounted appraisals
Discount
adjustment
Discount
adjustment
7.7%-69.2%
(26.9%)
0.0%-35.4%
(33.9%)
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.
Investment 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 is estimated using discounted cash flow analyses, using market rates at the balance sheet
date that reflect the credit and interest rate risk inherent in the loans. Projected future cash flows are calculated based upon
contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that
reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
67
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Fair Value Measurements and Disclosure (Continued)
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 costs 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, 2012 and December 31, 2011.
68
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Fair Value Measurements and Disclosure (Continued)
The carrying amounts and estimated fair value of financial instruments at December 31, 2012, are as follows:
Financial assets:
Cash and cash equivalents
Securities available-for-sale at fair value
Securities held-to-maturity
Loans receivable, net
Restricted investments in bank stocks
Accrued interest receivable
Financial liabilities:
Deposits
Borrowings
Accrued interest payable
December 31, 2012
Carrying
Amount
(in thousands)
Estimated
Fair Value
$
24,619 $
24,619 $
186,041
600
532,115
2,321
2,849
672,364
28,246
1,568
186,041
643
548,920
2,321
2,849
677,398
28,248
1,568
Level 1
Level 2
Level 3
24,619 $
28,268
-
-
-
-
-
-
-
- $
157,773
643
-
2,321-
2,849
677,398
-
1,568
-
-
548,920
-
-
28,248
-
The carrying amounts and estimated fair value of financial instruments at December 31, 2011 are as follows:
Carrying
Amount
(in thousands)
Estimated
Fair Value
$
59,215 $
176,163
1,074
405,861
1,438
2,478
595,573
11,344
1,663
59,215
176,163
1,166
417,284
1,438
2,478
597,703
11,383
1,663
Financial assets:
Cash and cash equivalents
Securities available-for-sale at fair value
Securities held-to-maturity
Loans receivable, net
Restricted investments in bank stocks
Accrued interest receivable
Financial liabilities:
Deposits
Borrowings
Accrued interest payable
Limitations
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.
69
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Fair Value Measurements and Disclosure (Continued)
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 14 – Accumulated Comprehensive Income
Accumulated comprehensive income is comprised of net unrealized holding gains, net of taxes, on available-for-sale
securities of $3,394,000 and $2,098,000 as of December 31, 2012 and 2011, respectively. Realized gains or losses are
reclassified out of accumulated comprehensive income when the underlying security is sold, based upon the specific
identification method.
Note 15 – 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, 2012 and 2011 and will expire in 2017.
In 2007, the Bank adopted The Bank of Princeton 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. Vesting periods range from
immediate to four years from the date of grant. 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.
In 2012, the Bank adopted The Bank of Princeton 2012 Stock Option Plan (the “2012 Plan”), which was approved by our
board of directors in February 2012 and by our stockholders in May 2012. The 2012 Plan enables the board of directors to
grant stock options or restricted shares of common stock to employees, directors, consultants and other individuals who
provide services to the Bank. The shares subject to or related to options under the 2012 Plan are authorized and unissued
shares of the Bank. The maximum number of shares that may be subject to options under the 2012 Plan is 100,000, all of
which may be issued as Incentive Stock Options or as Non-Qualified Stock Options. Vesting periods range from immediate
to four years from the date of grant. The 2012 Plan will terminate ten years from the date of stockholder approval.
70
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – 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 year
ended December 31, 2012:
Balance at January 1, 2012
Granted
Exercised
Forfeited
Expired
Weighted Avg.
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
Number of
Stock
Options /
Warrants
402,416
129,450
(239)
(40,976)
(13,824)
Weighted
Avg.
Exercise Price
12.82
$
13.75
$
11.12
$
11.61
$
11.43
$
Balance at December 31, 2012
Exercisable at December 31, 2012
476,827
373,278
$
$
13.21
6.8 years
13.25
6.3 years
$
$
837,886
767,880
The following is a summary of the status of the Bank’s stock option and warrant activity and related information for the year
ended December 31, 2011:
Balance at January 1, 2011
Granted
Exercised
Forfeited
Weighted Avg.
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
Number of
Stock
Options /
Warrants
332,916
86,150
(4,283)
(12,367)
Weighted
Avg.
Exercise Price
12.66
$
12.52
$
10.48
$
10.96
$
Balance at December 31, 2011
Exercisable at December 31, 2011
402,416
299,106
$
$
12.82
7.6 years
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 year ended December 31,
2012
2011
5.58 years
26.42%
2.89%
0.00%
0.81%
$ 3.60
6.0 years
23.99%
22.70%
0.00%
1.67%
$ 3.26
Stock option expenses included in salaries and employee benefits expense in the Consolidated Statements of Operations were
$161,000 and $203,000 for the year ended December 31, 2012 and 2011, respectively. Stock option expense
71
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Stock Based Compensation (Continued)
recorded within other expenses was $194,000 for the year ended December 31, 2012. There was no stock option expense
recorded within other expenses for the year ended December 31, 2011. At December 31, 2012, there was approximately
$274,000 of unrecognized expense related to outstanding stock options, which will be recognized over a period of
approximately 1.4 years.
Note 16 – 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
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, 2012, that the Bank meets all capital adequacy
requirements to which it is subject.
The Bank’s actual capital amounts and ratios at December 31, 2012 and 2011 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, 2012:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
$65,567
$58,534
$58,534
11.5%
10.3%
7.6%
$ 45,622
$ 22,811
$ 30,713
December 31, 2011:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
$57,101
$51,739
$51,739
12.7%
11.5%
8.1%
$ 35,952
$ 17,976
$ 25,520
≥
≥
≥
≥
≥
≥
8.0%
4.0%
4.0%
8.0%
4.0%
4.0%
$ 57,027
$ 34,216
$ 38,391
$ 44,940
$ 26,964
$ 31,900
≥
≥
≥
≥
≥
≥
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.
72
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Quarterly Financial Data
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 expense
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
Net Income
Earnings per common share
Basic
Diluted
Year Ended December 31, 2012
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
7,838
1,856
5,982
456
5,526
225
4,049
1,702
591
1,111
0.24
0.24
$
$
$
$
8,268
1,850
6,418
813
5,605
761
4,363
2,003
597
1,406
0.31
0.30
$
$
$
$
8,818
1,772
7,046
392
6,654
463
4,457
2,660
853
1,807
0.39
0.39
$
$
$
$
8,749
1,776
6,973
307
6,666
1,135
5,170
2,631
644
1,987
0.44
0.43
Year Ended December 31, 2011
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except for share and per share data)
5,614
1,677
3,937
128
3,809
275
3,137
947
326
621
0.16
0.16
$
$
$
$
6,175
1,712
4,463
355
4,108
840
3,807
1,141
392
749
0.19
0.19
$
$
$
$
6,598
1,811
4,787
525
4,262
540
3,915
887
261
626
0.16
0.15
$
$
$
$
7,286
1,965
5,321
1,369
3,952
1,175
4,226
901
84
817
0.18
0.18
$
$
$
$
$
$
$
$
73
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
An evaluation was performed under the supervision, and with the participation of the Bank’s management, including
the President and Chief Financial Officer, of the effectiveness of the design and operation of the Bank’s disclosure controls
and procedures (as defined in Rule l3a-l5(e) promulgated under the Exchange Act) as of December 31, 2012. Based on such
evaluation, the Bank’s President and Chief Financial Officer have concluded that the Bank’s disclosure controls and
procedures are effective, as of December 31, 2012, to ensure that the information required to be disclosed by the Bank in the
reports that the Bank files or submits under the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in FDIC rules and forms.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in
accordance with accounting principles generally accepted in the United States, which is commonly referred to as GAAP. The
effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the
exercise of judgment in designing, implementing, operating and evaluating the Bank’s internal control over financial
reporting. Because of these inherent limitations, internal control over financial reporting cannot provide absolute assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP and may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that our internal control over financial reporting may become inadequate because of changes in conditions or other
factors, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Bank’s President and Chief Financial Officer, evaluated the effectiveness
of the Bank’s internal control over financial reporting as of December 31, 2012 using the criteria in “Internal Control—
Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such
evaluation, management assessed that the Bank’s internal control over financial reporting was effective as of December 31,
2012.
Changes in Internal Control Over Financial Reporting
There was no change in the Bank’s internal control over financial reporting identified during the quarter ended
December 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Bank’s internal control over
financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The Bank responds to this Item by incorporating by reference the material responsive to this Item in the Bank’s
definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2013 Annual
Meeting of Stockholders to be held April 30, 2013.
74
Item 11. Executive Compensation
The Bank responds to this Item by incorporating by reference the material responsive to this Item in the Bank’s
definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2013 Annual
Meeting of Stockholders to be held April 30, 2013.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The Bank responds to this Item by incorporating by reference the material responsive to this Item in the Bank’s
definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2013 Annual
Meeting of Stockholders to be held April 30, 2013.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The Bank responds to this Item by incorporating by reference the material responsive to this Item in the Bank’s
definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2013 Annual
Meeting of Stockholders to be held April 30, 2013.
Item 14. Principal Accountant Fees and Services
The Bank responds to this Item by incorporating by reference the material responsive to this Item in the Bank’s
definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2013 Annual
Meeting of Stockholders to be held April 30, 2013.
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a) The following portions of the Bank’s consolidated financial statements are set forth in Item 8 of this Annual Report:
i.
ii.
iii.
iv.
v.
vi.
Consolidated Statements of Financial Condition as of December 31, 2012 and 2011
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012 and 2011
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012 and
2011
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011
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.
75
(c) Exhibits
Exhibit
No.
2.1
3.1
3.2
4.1
4.2
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.
The Bank will furnish to the FDIC upon request copies of the instruments defining the rights of the Federal Home
Loan Bank of New York and the Federal Home Loan Bank of Pittsburgh with respect to the Bank’s long-term
debt.
(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*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10 (B) Agreement and Release by and between Steven C. Ackmann and The Bank of Princeton*
21.1
31.1
31.2
32.1
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.
76
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 21, 2013.
SIGNATURES
The Bank of Princeton
By:
/s/Edward Dietzler
Edward Dietzler
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)
77
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below on March 21, 2013 by the
following persons on behalf of the Registrant and in the capacities indicated.
/s/Edward Dietzler
Edward Dietzler
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
78
EXHIBIT INDEX
Exhibit
No.
2.1
3.1
3.2
4.1
4.2
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.
The Bank will furnish to the FDIC upon request copies of the instruments defining the rights of the Federal Home
Loan Bank of New York and the Federal Home Loan Bank of Pittsburgh with respect to the Bank’s long-term
debt.
(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*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10 (B) Agreement and Release by and between Steven C. Ackmann and The Bank of Princeton*
21.1
31.1
31.2
32.1
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.
79
SUBSIDIARIES OF REGISTRANT
Exhibit 21.1
Name of Subsidiary
TBOP New Jersey Investment Company
Bayard Lane, LLC
112 Fifth Avenue, LLC
Bayard Properties, LLC
TBOP REIT, Inc.
TBOP Delaware Investment Company
Jurisdiction of
Incorporation
or Formation
NJ
NJ
NJ
NJ
NJ
DE
80
I, Edward Dietzler, certify that:
RULE 13A-14(A)/15D-14(A) CERTIFICATIONS OF THE
CHIEF EXECUTIVE OFFICER
1. I have reviewed this annual report on Form 10-K of The Bank of Princeton:
Exhibit 31.1
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 operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
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 21, 2013
/s/Edward Dietzler
Edward Dietzler
President
81
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 operations and cash flows of the registrant as of, and for, the
periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
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)
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 21, 2013
/s/Michael J. Sanwald
Michael J. Sanwald
Executive Vice President and Chief Financial Officer
82
SECTION 1350 CERTIFICATIONS
Exhibit 32.1
In connection with the Annual Report of The Bank of Princeton (the “Bank”) on Form 10-K for the period ending
December 31, 2012 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 Bank.
/s/Edward Dietzler
Edward Dietzler
President
/s/Michael J. Sanwald
Michael J. Sanwald
Executive Vice President and Chief Financial Officer
March 21, 2013
83
The Bank of Princeton
Board of Directors
Andrew M. Chon, Chairman
Stephen Distler, Vice Chairman
Ross E. Wishnick, Vice Chairman
Edward J. Dietzler, President
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
Martin Kahn
Emmett Lescroart
Lance Liverman
Jerry Maclean
Joseph Ridolfi
Chetan Shah
Scott Sipprelle
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
84
The Bank of Princeton
Relationship Management
Management & Support
Community Banking Executives
Stephanie M Adkins, Chambers
William D. Allan, Monroe
Paul M. Bencivengo, Hamilton
William McDowell, Pennington
William McCoy, Montgomery/New Brunswick
Kris Muse, Nassau
R.Christian Pfefferle, Lambertville
Retail Administrator
Carly Meyer, Chambers
Regional Relationship Manager
Suzanne M. Lippincott, Hamilton
Market Managers
Ulrike Ahrens, Pennington
´
Miriam I. Colon, New Brunswick
Sokha Eng, Arch Street
Haeran Hwangbo, Cheltenham
Connie Inverso, Monroe
Darshana Jadav, Montgomery
Cathy E. Proctor, Chambers
Rose Russo, Bayard
Paul Sabol, Lambertville
Young Soon Sim, North Wales
Rhoda Sundhar, Nassau
Senior Management
Edward J. Dietzler
Douglas V. Conover
Michael J.Sanwald
Paul Hyon
Carol R. Coles
Marketing
Barbara A. Cromwell
Human Resources
Anna Maria Miller
Operations & Compliance
Karen D. Pfeifer
Thomas Perrotta
Loan Administration
Carol Safchinsky
Mary Beth Gorecki, Consumer Credit
Christopher Tonkovich, Commercial Credit
Finance
Edward P. Hassenkamp
William E. Fischer
William E. Fischer
85
Making a difference… celebrating
five years of community banking.
The Bank of Princeton celebrates the Bank’s “5th Anniversary” with bank wide festivites
and community outreach. Pictured above Michael Sanwald, EVP Chief Financial
Officer; Ed Hassenkamp, VP Controller; Edward Dietzler, Bank President; (f) Anna
Maria Miller, VP HR Director; (r) Michelle Liquari, Human Resource Administrator;
(f) Barbara Cromwell, SVP Director of Market Development; (r) Ross Wishnick, Vice
Chairman; Stephen Dister, Vice Chairman; Stephen Shueh, Board Member; (f)Kelly
Tarity, IT Director; (r) William Fischer, VP of Finance; and Doug Conover, EVP Chief
Lending Officer.
86
A special community deserves
a special bank.
The Bank of Princeton hosts a ribbon-cutting ceremony and grand opening
celebration at 1 Spring Street in New Brunswick. The New Brunswick branch is located
in the heart of the city, close to Rutgers University and the Court House.
Upper image: (l to r) Edward Dietzler, Bank President; Pam Stefanek, New Brunswick
Advisory Board Member and Executive Director of New Brunswick City Market; Mr.
Russell Marchetta Public Information Officer Mayor’s office of New Brunswick; Andrew
Chon, Chairman of the Board of Directors; Miriam Colón, New Brunswick Market
Manager; Judith A. Giacin, Board Member; Mr. Omar Boraie of Boraie Development; and
Robert N. Ridolfi, Esq., Board Member. Lower image (l to r) William McCoy, SVP
Community Bank Executive; Linda Brown, Assistant Market Manager; Chris Gemmell,
Relationship Manager; Miriam Colón, New Brunswick Market Manager; Luke Kiensicki,
Teller Manager; and Edward Dietzler, Bank President.
87
Making a difference…
and becoming one of the fastest
growing community banks.
The Bank of Princeton accepted the Bank’s “50 Fastest Growing Companies” award at
a recent ceremony in Somerset. The sponsors and representatives for the award were
(from left to right): Ted Knauss, Market Leader, PNC Bank ; Ross Wishnick, Vice
Chairman for The Bank of Princeton; Michael McGuire, CEO, United Healthcare of
New Jersey; Andrew Chon, Chairman of the Board for The Bank of Princeton; and
Thomas R. Vreeland, Partner, ParenteBeard. This is the second year in a row The Bank
of Princeton was honored, transitioning from 15th place in 2011 to 3rd place in 2012.
88
The Bank of Princeton
Making a difference…
and becoming one of the fastest
growing community banks.
The Bank of Princeton accepted the Bank’s “50 Fastest Growing Companies” award at
a recent ceremony in Somerset. The sponsors and representatives for the award were
(from left to right): Ted Knauss, Market Leader, PNC Bank ; Ross Wishnick, Vice
Chairman for The Bank of Princeton; Michael McGuire, CEO, United Healthcare of
New Jersey; Andrew Chon, Chairman of the Board for The Bank of Princeton; and
Thomas R. Vreeland, Partner, ParenteBeard. This is the second year in a row The Bank
of Princeton was honored, transitioning from 15th place in 2011 to 3rd place in 2012.
Partnering with Communities,
in “More” ways than one.
MoreBank, a division of The Bank of Princeton, celebrates their newest location at 921
Arch Street in the Chinatown section of Philadelphia. With the abilities to communicate
in Chinese, Korean and Vietnamese, MoreBank has been welcomed into this diverse
community. Shown at the ribbon-cutting ceremony marking the event are: (l to r) John
Chin, Executive Director, Philadelphia Chinatown Development Corporation; Stephen
Shueh, Board Member of The Bank of Princeton; Daniel Oh, Minority Whip and
Councilman-At-Large from the City of Philadelphia; (r) Mark Squilla , District #1
Councilman from the City of Philadelphia, (f) Paul Hyon, Regional President of More-
Bank; Kevin Dow, Chief Operating Officer and Deputy Commerce Director for the City
of Philadelphia; Ross Wishnick, Vice Chairman of The Bank of Princeton; and Stephen
Distler, Vice Chairman of The Bank of Princeton.
MoreBank is a division of The Bank of Princeton and has three locations in
Pennsylvania. The merger of MoreBank with The Bank of Princeton occurred in 2010.
88
89
Reaching Communities...
The Bank of Princeton
Bank Wisely.
African American Chamber
of Commerce
Alborada Spanish dance Theater
Allies, Inc.
Alzheimer’s Association
American Heart Association
American Legion
Arc Mercer
Arts Council of Princeton
Auxiliary of University Medical
Center at Princeton
Artsbridge
Attack Mac, Inc.
Beth El Synagogue
Big Brothers Big Sisters of Mercer County
Boy Scouts Troop #29
Bucks County Presbyterian Church
Building One New Jersey
Capital Health Foundation
Capital Region Minority Chamber
of Commerce
Catholic Charities of the
Diocese of Trenton
Chabad of Mercer County - Princeton
Christine’s Hope for Kids
Citera Children’s Fund
Community Options
Corner House Foundation
Crawford House
Dance Stop Studio
Delaware County Fraternal Order
of Police, Lodge #27
Delaware Township Schools, Partners
in Education
Dress for Success of Mercer County
Eden Autism Services
Edison Chamber of Commerce
Friends of Ely Park
Friends of Lambertville Library/
Acme Screening Room
Greater Brunswick Charter School
Hadassah Southern New Jersey Region
Hamilton Area YMCA
Hamilton Education Foundation
Hamilton Police Athletic League
Hamilton Post 31
Hamilton Township Economic
Development Advisory Committee
Health Care Ministry of Princeton
Help Portrait - Princeton Chapter
HiTops Half Marathon
HomeFront
Contributions page 1
HomeSharing
Hopewell Harvest Fair
Hopewell Valley Central High School
Hopewell Valley Education
Foundation
Hopewell Valley Gridiron Club
Hopewell Valley Soccer Association
Hopewell Valley Veterans Association
Hopewell Valley YMCA
Hunterdon County
Chamber of Commerce
Isles
Jamesburg Fall Festival
Jewish Family & Children’s Services
of Mercer County
Joint Effort Community Sports
Kids4Kids Through Music
Kidsbridge
Korean Community Center of Greater
Princeton
Lambertville Area Education Foundation
Lambertville Chamber of Commerce
Lambertville Historical Society
Lambertville/NewHope Winterfest
Lambertville/New Hope Fireworks
Lambertville/West Amwell
Youth Association
Lawrenceville Flames Hockey Association
LUPE Fund, Inc.
March of Dimes
Mary Jacobs Library Foundation
Mercer County Bar Assocation
Mercer County Community
College Foundation
Mercer County Italian American Association
Mercer Regional Chamber of Commerce
Middlesex County Regional
Chamber of Commerce
We Listen...We Understand...We make a difference.
Monmouth Medical Center Foundation
Montgomery Basketball Association
Montgomery Business Association
Montgomery - Rocky Hill Rotary Club
Montgomery Township Education
Development Community
Montgomery Township Fireworks
Montgomery Township Food Pantry
Montgomery Township Volunteer Fire
Company No.1
NAMI Mercer
National Multiple Sclerosis Society-
NJ Metro Chapter
New Brunswick City Market
New Brunswick Community Food Alliance
New Hope Chamber of Commerce
New Hope Film Festival
New Hope Historical Society
NJ Bankers Association
Our Lady of Sorrows, St. Anthony
Parish
Pennington Business &
Professional Association
Pennington Day, Inc.
Pennington Montessori
Pennington Volunteer
Fire Department
PeopleCare Center for Non Profits
Plan Smart NJ
Princeton Academy of
the Sacred Heart
Princeton Alumni Association - PA3
Princeton Area Community
Foundation
Princeton Community Housing
Princeton Cranbury Babe Ruth League
Princeton Education Foundation
Princeton Family YMCA
Princeton in Africa
Princeton KIDS/TOTS
Princeton Merchants Association
Princeton Pro Musica
Princeton Recreation Department
Princeton Regional Schools
Princeton Regional Chamber
of Commerce
Princeton Senior Resource Center
Princeton Symphony Orchestra
Continued...
Cultivating more Partnerships.
The Bank of Princeton
Bank Wisely.
Asian Pacific American Bar Association of Pennsylvania
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 NK-5P
Korean American Association of Greater Philadelphia
Korean American Broadcasting Company
Korean American Soccor Association of Greater Phialdephia
Korean CBMC of North America
Pan Asian Association
Philadelphia Chinatown Development Corporation
Philadelphia Master Chorale
The Mil Al Mission in Philadelphia
The National Association for Korean Schools
- Mid Atlantic Chapter
Thank you to our community partners for
making a difference.
(Continued from the previous page...)
Recreational Foundation
of Hopewell Valley
Riverside Symphonia
Rocky Hilll Hook & Ladder Co. #1
Rossmoor Charity
Rotary Club of Princeton
Robert Wood Johnson Foundation
Ryan’s Quest
Sanctuary Guild of
Our Lady of the Angels
Science Mentors 1:1
SERV Behavioral Health Services
Sisterhood of Rossmoor
Jewish Congregation
Sourland Hills Actors Guild
South Hunterdon Regional Schools
South Soccer Parent Organization
Special Olympics New Jersey
St. Francis Medical Center Foundation
St. Gregory The Great
Steinert High School Athletics
The American Cancer Society
The Arc of Hunterdon Foundation
The Learning Center for Exceptional
Children
The Lewis School
The Foundation of Morris Hall/
St. Lawrence, Inc.
The Friendly Sons & Daughters of
St. Patrick of Mercer County
The Parkinson Alliance, Inc.
The Trenton Area Soup Kitchen
Thomas Edison State College Foundation
Trenton Catholic Academy
Trenton Fire Department &
Local 6 Firefighters Union
Trinity Church
Trustees of Princeton University
UIH Family Partners
United Way of Hunterdon County
University Medical Center of Princeton
Waldorf School of Princeton
West Amwell Golf Day
Yeshivat Keter Torah
YWCA of Trenton
YWCA of Princeton
The Bank of Princeton
www.thebankofprinceton.com
Corporate Headquarters
183 Bayard Lane
Princeton, NJ 08540
609.921.1700
339 Route 33
Hamilton, NJ 08619
609.584.0011
21 Chambers Street
Princeton, NJ 08542
609.921.6800
194 Nassau Street
Princeton, NJ 08542
609.921.3311
1 Rossmoor Drive, Suite 120
Monroe Township, NJ 08831
609.655.7790
10 Bridge Street
Lambertville, NJ 08530
609.397.0333
1185 Route 206 North
Princeton, NJ 08540
609.497.0500
1 Spring Street, Suite 102
New Brunswick, NJ 08901
732.993.0066
2 Route 31 South
Pennington, NJ 08534
609.730.8500
Operations Center
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
921 Arch Street
Philadelphia, PA 19107
215.923.6200
1222 Welsh Road
North Wales, PA 19454
215.631.9911
We look forward to 2013!
Branching out wisely.