The Bank of Princeton
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The Bank of Princeton
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The Bank of Princeton
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal
Year Ended December 31, 2013
[ ]
For the transition period from ________________________________ to _______________________________
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
- OR -
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 4, 2014 there were 4,578,745 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Bank’s definitive proxy statement to be filed with the Federal Deposit Insurance Corporation in connection with its 2014 Annual
Meeting of Stockholders to be held April 24, 2014 is incorporated by reference into Part III of this annual report on Form 10-K.
The Bank of Princeton
TABLE OF CONTENTS
PART I
Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Mine Safety Disclosures
PART II
Item 5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6 Selected Financial Data
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accountant Fees and Services
PART IV
Item 15 Exhibits, Financial Statement Schedules
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The Bank of Princeton
Forward-Looking Statements
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 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; the Bank’s ability to satisfy the
requirements of the FDIC consent order entered into on January 30, 2014 and other regulatory requirements applicable to the
Bank; 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.
PART I
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. We continue to operate two of the former MoreBank branches as a division of
The Bank of Princeton under the “MoreBank” name and 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.
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The Bank of Princeton
Competition
We have substantial competition in originating commercial and consumer loans in our market area. This competition
comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of our
competitors enjoy advantages over us, including greater financial resources and higher lending limits, a wider geographic
presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing
alternatives, as well as lower origination and operating costs. Among other things, this competition could reduce our interest
income and net income by decreasing the number and size of loans that we originate and the interest rates we may charge on
these loans.
In attracting business and consumer deposits, we face substantial competition from other insured depository
institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment
alternatives, including money market funds. Many of our competitors enjoy advantages over us, including greater financial
resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may
offer higher interest rates 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, 2013,
2012, 2011, 2010 and 2009:
As of December 31,
2011
$
$
$
233,504
85,527
56,453
15,396
19,341
1,957
412,178
(955)
(5,362)
405,861
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
(540)
(3,693)
281,573
$
(318)
(2,147)
172,510
$
(in thousands)
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total loans
Deferred fees and costs
Allowance for loan losses
Loans, net
2013
372,273
118,274
76,477
40,242
28,204
132
635,602
(1,769)
(8,493)
625,340
$
$
$
2012
317,946
103,627
62,702
29,127
25,617
1,480
540,499
(1,351)
(7,033)
532,115
$
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The Bank of Princeton
Substantially all of our loans are to borrowers in our immediate markets. We believe that no single borrower or
group of borrowers presents a credit concentration whereby the borrowers’ loan default would have a material adverse effect
on our financial condition or results of operations.
Commercial Real Estate, 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, 2013, we had one customer whose deposits with us represented 5.4% of our total deposits and
another customer whose deposits represented 5.1% 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.
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
Cashier’s checks
Wire transfers
EE and I U.S. savings bonds redemption
Debit cards
Direct deposit
Safe deposit boxes
Night depository
Bank-by-mail
Automated teller machines
On-line banking
Remote deposit capture
Automated telephone banking
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The Bank of Princeton
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-American market.
Staffing
As of December 31, 2013, we had 128 total employees and approximately 122 full-time equivalent employees.
Supervision and Regulation
Consent Order. On January 29, 2014, we entered into a Stipulation and Consent to the Issuance of a
Consent Order with the FDIC that was countersigned by the FDIC on January 30, 2014 (the “Stipulation”), pursuant to which
the Bank agreed to the issuance of a Consent Order by the FDIC (the “Consent Order”). We consented to the issuance of the
Consent Order without admitting any charges of unsafe or unsound banking practices or violations of law, in order to resolve
regulatory uncertainty over the adequacy of our compliance with laws relating to the Bank Secrecy Act (“BSA”) and anti-
money laundering (“AML”).
The Consent Order arises from a routine safety and soundness examination of the Bank by the FDIC, which was
conducted as of June 30, 2013. The Consent Order requires us to strengthen our BSA/AML program and our internal audit
function, and to address other related matters. Among other things, it requires our board of directors to designate a
committee to oversee the compliance with the Consent Order. We are also required to take certain actions to enhance our
staff, including a BSA officer, and board and management oversight. Other requirements of the Consent Order include:
•
develop, adopt and implement a revised BSA compliance program;
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The Bank of Princeton
•
•
•
•
•
•
•
•
perform periodic risk assessments consistent with the BSA/AML Examination Manual compiled by the
Federal Financial Institutions Examination Council;
revise internal controls designed to ensure compliance with BSA based on the results of the required risk
assessments;
establish independent testing programs for compliance with BSA and Office of Foreign Assets Control
rules and regulations;
develop, adopt and implement a BSA training program for directors, management and staff;
perform a review of suspicious activity and suspicious activity reporting since January 1, 2011;
develop an internal audit program consistent with the Interagency Policy Statement on the Internal Audit
Function and its Outsourcing;
furnish quarterly progress reports to the FDIC; and
provide certain disclosures to our stockholders.
The provisions of the Consent Order will remain effective until modified, terminated, suspended or set aside by the
FDIC. The foregoing descriptions of the Stipulation and the Consent Order are qualified in their entirety by reference to the
Consent Order and the Consent Order, which are incorporated by reference as exhibits to this report.
BSA/AML requires financial institutions to assist United States government agencies in detecting and preventing
money laundering and other types of suspicious activities. Specifically, BSA/AML requires financial institutions to keep
records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate
amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. It
has been revised several times and has taken on increased importance in this era of heightened national security.
Our board of directors and management began proactively taking steps to address identified matters promptly
following the FDIC examination, and will continue to work with the FDIC to address such matters. While we intend to take
such actions as may be necessary to enable us to comply with the Consent Order, there can be no assurance that we will be
able to fully comply with the provisions of the Consent Order, that our efforts to comply with the Consent Order will not
have adverse effects on our operations and financial condition, or that we would not be subject to other regulatory
enforcement actions in the future, including potential future actions that seek the imposition of civil money penalties.
We have also agreed to an Acknowledgement and Consent of FDIC Order with the Commissioner of Banking and
Insurance for the State of New Jersey (the “Commissioner”), effective as of January 30, 2014, which makes the Consent
Order binding between us and the Commissioner.
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 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 levels. 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. Changes 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.
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The Bank of Princeton
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. The seven year period ends for us in April, 2014.
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. No institution may pay a dividend if in default of the federal deposit insurance assessment.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was
signed into law. The Dodd-Frank Act changed the assessment base for federal deposit insurance from the amount of insured
deposits held by the depository institution to the depository institution’s average total consolidated assets less average tangible
equity, eliminating the ceiling on the size of the DIF and increasing the floor on the size of the DIF. The Dodd-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, in which case the insured depository institution will calculate 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
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The Bank of Princeton
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 DIF when it reaches 1.50 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 2.0 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.
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, 2013, averaged 0.77 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.
Risk-Based Capital Requirements. The federal banking regulators have adopted certain risk-based capital guidelines
to assist in assessing capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet
as assets and transactions, such as letters of credit, and recourse agreements, which are recorded as off-balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain
US Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.
A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk
adjusted assets. The regulators measure risk-adjusted assets, which include off-balance-sheet items, against both Tier 1 Capital
and total qualifying capital, which is the sum of Tier 1 capital and limited amounts of Tier 2 capital.
•
•
“Tier 1”, or core capital, includes common equity, perpetual preferred stock and minority interest in equity
accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions.
“Tier 2”, or supplementary capital, includes, among other things, limited life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and
lease losses, subject to certain limitations and less restricted deductions. The inclusion of elements of Tier 2
capital is subject to certain other requirements and limitations of the federal banking agencies.
Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier
1 capital to risk-weighted assets of at least 4.00% and a ratio of total capital to risk-weighted assets of at least 8.00%. The
appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. At December 31,
2013, we met both requirements with Tier 1 and Total capital ratios of 10.2% and 11.4%. In addition to risk-based capital,
banks and bank holding companies are required to maintain a minimum amount of Tier 1 capital to total assets, referred to as
the leverage capital ratio, of at least 4.00%. At December 31, 2013, our leverage ratio was 7.8%.
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The Bank of Princeton
Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions
including:
•
•
limitations on its ability to pay dividends;
the issuance by the applicable regulatory authority of a capital directive to increase capital, and in the case of
depository institutions, the termination of deposit insurance by the FDIC, and the measures described under
the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) as applicable to undercapitalized
depository institutions.
In addition, future changes in regulations or practices could further reduce the amount of capital recognized for
purposes of capital adequacy. Such a change could affect our ability to grow and could restrict the amount of profits, if any,
available for the payment of dividends.
Regulatory Capital Changes. In July 2013, the federal banking agencies issued final rules to implement the Basel III
regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking
organizations begins January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began
compliance on January 1, 2014. The final rules call for the following capital requirements:
•
•
•
•
A minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%.
A minimum ratio of tier 1 capital to risk-weighted assets of 6%.
A minimum ratio of total capital to risk-weighted assets of 8% (no change from the current rule).
A minimum leverage ratio of 4%.
In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets
applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the
capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments.
The phase-in period for the capital conservation and countercyclical capital conservation buffers for all banking organizations
will begin on January 1, 2016.
Under the proposed rules, accumulated other comprehensive income (“AOCI”) would have been included in a banking
organization’s common equity tier 1 capital. The final rules allow community banks to make a one-time election not to include
these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based
capital rules that excludes most AOCI components from regulatory capital. The opt-out election must be made in the first call
report or FR Y-9 series report that is filed after the financial institution becomes subject to the final rule.
The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and
cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations
with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding
companies as of May 19, 2010.
The proposed rules would have modified the risk-weight framework applicable to residential mortgage exposures to
require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable
risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative
effect on credit availability, the final rules do not adopt the proposed risk weights but retain the current risk weights for mortgage
exposures under the general risk-based capital rules.
Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures,
which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate
risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign
securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight.
Under the new rules, mortgage servicing assets (“MSAs”) and certain deferred tax assets (“DTAs”) are subject to
stricter limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk
weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes
in risk weights and credit conversion factors.
10
The Bank of Princeton
We are in the process of assessing the impact of these changes on our regulatory ratios and on our capital, operations,
liquidity and earnings.
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 its 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, 2013, 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, 2013, 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 (the “CFPB”), 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 CFPB 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 CFPB on July 21, 2011. While
the CFPB 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 CFPB 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.
11
The Bank of Princeton
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; 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 and the ability to repay a mortgage loan, 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.
12
The Bank of Princeton
Jumpstart Our Business Startups (JOBS) Act. In April 2012, the JOBS Act became law. The JOBS Act is aimed at
facilitating capital raising by smaller companies and banks and bank holding companies by implementing the following
changes:
•
•
•
•
•
•
Raising the threshold requiring registration under the Securities Exchange Act of 1934 (the “Exchange Act”)
for banks and bank holding companies from 500 to 2,000 holders of record;
Raising the threshold for triggering deregistration under the Exchange Act for banks and bank holding
companies from 300 to 1,200 holders of record;
Raising the limit for Regulation A offerings from $5 million to $50 million per year and exempting some
Regulation A offerings from state blue sky laws;
Permitting advertising and general solicitation in Rule 506 and Rule 144A offerings;
Allowing private companies to use “crowd funding” to raise up to $1 million in any 12-month period, subject
to certain conditions; and,
Creating a new category of issuer, called an “Emerging Growth Company,” for companies with less than $1
billion in annual gross revenue, which will benefit from certain changes that reduce the cost and burden of
carrying out an equity initial public offering (“IPO”) and complying with public company reporting
obligations for up to five years.
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.
13
The Bank of Princeton
Item 2. Properties
We conduct our operations from our headquarters and branch located at 183 Bayard Lane, Princeton, New Jersey, an
operations center at 403 Wall Street, Princeton, New Jersey, and from eleven other branch locations in New Jersey and
Pennsylvania. The following table sets forth certain information regarding the Bank’s properties as of December 31, 2013:
Location
Corporate Headquarters and Branch
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
North Wales Branch (MoreBank Division)
1222 North Welsh Road
North Wales, PA
Cheltenham Branch (MoreBank Division)
470 West Cheltenham Avenue
Philadelphia, PA
14
Leased or
Owned
Leased
Date of Lease
Expiration
October 31, 2018
Leased
May 31, 2021
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
September 30, 2016
Leased
January 25, 2016
The Bank of Princeton
Arch Street Branch (MoreBank Division)
921 Arch Street
Philadelphia, PA
Item 3. Legal Proceedings
Leased
November 30, 2017
Effective January 30, 2014, we entered into a Consent Order with the FDIC, pursuant to which we agreed to the
issuance of a Consent Order by the FDIC. We consented to the issuance of the Consent Order without admitting any charges
of unsafe or unsound banking practices or violations of law or regulation. The Consent Order requires us to strengthen our
BSA/AML program and internal audit function, and to address other related matters. We also agreed to an Acknowledgement
and Consent of FDIC Order with the Commissioner of Banking and Insurance for the State of New Jersey (the
“Commissioner”), effective as of January 30, 2014, which makes the Consent Order binding as between us and the
Commissioner. Additional information regarding the Consent Order is included in Part I, Item 1 of this report, under the
heading “Supervision and Regulation,” and in Part II, Item 7 of this report.
From time to time, we may be a party to ordinary routine litigation incidental to our business. Except as disclosed
above, 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, 2013 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 4, 2014, there were approximately 670 holders 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.
15
The Bank of Princeton
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation plan information as of December 31, 2013.
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
234,467
193,350
1,200
97,500
46,000
572,517
$11.74
$13.57
$25.00
$10.00
$25.00
$13.16
18,333
406,650
-
-
-
424,983
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, 2013 and December 31, 2012
Comparison of Operating Results for the Years Ended December 31, 2013 and December 31, 2012
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
16
The Bank of Princeton
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, 2013 and December 31, 2012
General. Our total assets increased from $769.0 million at December 31, 2012 to $877.4 million at December 31,
2013, an increase of $108.4 million, or 14%. This increase was primarily due to increases in loans receivable, net, securities
available-for-sale and accrued interest receivable and other assets. Total liabilities increased from $706.7 million at December
31, 2012 to $813.2 million at December 31, 2013, an increase of $106.5 million, or 15%. This increase was primarily the result
of a $76.6 million increase in total deposits and a $32.2 million increase in borrowings. Total stockholders’ equity increased
from $62.3 million at December 31, 2012 to $64.2 million at December 31, 2013, an increase of $2.0 million, or 3%. This
increase was primarily attributable to net income of $8.8 million and an increase in additional paid-in capital of $472 thousand,
partially offset by a decrease of $7.3 million in accumulated other comprehensive income. 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 due from banks. Cash and cash equivalents increased from $24.6 million at December 31, 2012 to $27.4
million at December 31, 2013, an increase of $2.8 million, or 11%. The increase in cash was primarily attributable to the
timing of cash payments and cash receipts.
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 accumulated other comprehensive income.
17
The Bank of Princeton
The following table presents a summary of the amortized cost and fair value of our securities available-for-sale at
December 31, 2013, 2012 and 2011.
2013
December 31,
2012
2011
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
38,112 $
35,689 $
27,330 $
28,268 $
-
-
-
-
- $
-
-
-
72,680
73,084
88,340
90,887
117,395
119,612
88,697
-
84,541
-
65,532
-
66,886
-
53,589
2,000
54,639
1,912
(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
$
199,489 $
193,314 $
181,202 $
186,041 $
172,984 $
176,163
Securities available-for-sale at fair value increased $7.3 million during the twelve months ended December 31, 2013.
This increase was the result of additional security purchases as we utilized available cash to grow our investment securitities
portfolio.
The following table presents a summary of the amortized cost and fair value of our securities held-to-maturity at
December 31, 2013, 2012 and 2011.
2013
December 31,
2012
2011
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(in thousands)
Mortgage-backed Securities-U.S.
Government-sponsored
Enterprises (GSEs)
$
423 $
454 $
600 $
643 $
1,074 $
1,166
Securities held-to-maturity decreased minimally from December 31, 2012 to December 31, 2013. The decline in held-
to-maturity securities is the result of maturities and 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.
18
The Bank of Princeton
The following table summarizes the maturity distribution schedule of the amortized cost of debt securities with
corresponding weighted-average yields at December 31, 2013. 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, 2013
After five
through ten
years
After ten
years
One year
or less
$
$
- $
165
165 $
1,984 $
3,507
5,491 $
47,863 $
29,350
77,213 $ 116,620 $
60,946 $
55,674
Weighted average yield
.70%
2.12%
2.28%
2.61%
Total
110,793
88,696
199,489
2.47%
At December 31, 2013, 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 receivable, net. Loans receivable, net increased $93.2 million from $532.1 million at December 31, 2012 to
$625.3 million at December 31, 2013, an increase of 18%. The increase was attributable to our efforts to grow our loan portfolio
through existing relationships and new business and was funded by a combination of an 11% year-over-year increase in our
total deposits and $32.2 million of additional borrowings.
The following table details our loan maturities by loan class and interest rate type at December 31, 2013:
December 31, 2013
Due after
one
through
five years
$
Due after
five years
276,831 $
44,591
47,864
39,006
26,916
50
435,258 $
Total
372,273
118,274
76,477
40,242
28,204
132
635,602
86,573 $
44,632
16,053
-
443
71
147,772 $
82,942 $
64,830
147,772 $
23,735 $
411,523
435,258 $
121,996
513,606
635,602
(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
$
$
$
$
8,869
29,051
12,560
1,236
845
11
52,572
15,319
37,253
52,572
19
$
$
$
The Bank of Princeton
The accrual of interest is discontinued when the contractual payment of principal or interest is 90 days past due or
management has serious doubts about further collectability of the principal or interest, even if the loan is currently performing.
A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well-secured. The following
table sets forth certain information regarding our nonaccrual loans, troubled debt restructurings, accruing loans 90 days or more
past-due, and other real estate owned as of December 31, 2013, 2012, 2011, 2010 and 2009.
(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
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 and performing TDRs
Other real estate owned
Total nonperforming assets and performing TDRs
December 31,
2013
2012
2011
2010
2009
$
$
$
2,535 $
5,127
-
182
394
-
8,238
4,858
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
-
-
-
-
-
-
-
13,096
927
-
-
-
-
-
-
-
10,960
1,550
14,023 $ 12,510
-
-
-
-
-
-
-
11,044
919
-
-
-
-
-
-
-
9,334
1,140
$ 11,963 $ 10,474 $
886
1,000
427
-
-
-
2,313
3,992
-
-
-
-
-
-
-
6,305
227
6,532
See Note 4 - 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, 2013 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 (the “allowance”) 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 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.
20
The Bank of Princeton
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 $7.0 million at December 31, 2012 to $8.5 million at December 31,
2013, an increase of $1.5 million or 21%. This increase was primarily attributable to applying our allowance methodology to
our gross loans at December 31, 2013, which increased 18% from December 31, 2012 to December 31, 2013. The amount of
allowance attributable to the adjustment of qualitative factors increased as we increased the allowance as a result of increasing
concentrations within the construction and commercial real estate loan categories, as well as added qualitative adjustments to
account for our relatively unseasoned loan portfolio as compared to peers.
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, 2013, 2012, 2011, 2010 and 2009:
(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
2013
Year Ended December 31,
2011
2012
2010
2009
$
7,033 $
5,362 $
3,693
$
2,147 $ 1,092
(73)
(156)
(370)
-
-
-
(599)
12
15
-
-
-
-
27
(572)
2,032
8,493 $
-
(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)
-
(149)
-
-
-
-
(149)
-
1
-
-
-
-
-
-
-
-
-
-
-
1
(149)
(1,755)
3,301
1,204
3,693 $ 2,147
Net charge-offs
Additions charged to operations (provision for loan losses)
Balance at end of year
$
Net charge offs to average loans outstanding
0.10%
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 adjustments to qualitative factors impacting the
allowance as discussed above.
21
The Bank of Princeton
The following table presents the allocation of the allowance for loan losses by portfolio segment for the years ended
December 31, 2013, 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.
2013
2012
2011
2010
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
$
2,994
1,419
2,638
58.6% $
18.6
12.0
2,557
1,244
2,163
58.8% $ 2,082
1,011
19.2
1,965
11.6
56.6% $ 1,484
718
20.8
904
13.7
58.1%
21.3
9.1
282
282
1
877
6.3
4.5
-
-
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
-
$
8,493
100.0% $
7,033
100.0% $ 5,362
100.0% $ 3,693
100.0%
2009
(in thousands)
Amount
% of
Loans to
Total
Loans
$
Commercial real estate
Commercial and industrial
Construction
Residential first-lien
mortgage
Home equity
Consumer
Unallocated
Total
900
563
349
154
171
10
-
51.4%
18.1
13.3
8.8
7.8
0.6
-
$
2,147
100.0%
See Note 4 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 decreased slightly from December 31, 2012 to December 31,
2013 as depreciation expense was almost completely offset by additions to premises and equipment that were primarily the
result of various leasehold improvements in our branches and purchasing additional computer equipment.
Other assets. Accrued interest receivable and other assets increased $6.1 million from December 31, 2012 to
December 31, 2013, primarily due to increases of $4.2 million in our deferred tax asset and a $1.5 million increase in restricted
investment in bank stocks. The increase in deferred tax asset was due to the tax effect of increased unrealized losses on
investment securities available-for-sale. The increase in unrealized losses on available-for-sale investment securities carried at
22
The Bank of Princeton
fair value was due to an increase in market interest rates from December 31, 2012 to December 31, 2013. 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 114% increase in FHLB-NY borrowings from December 31, 2012 to December 31, 2013.
Deposits. Total deposits increased from $672.4 million at December 31, 2012 to $749.0 million at December 31, 2013,
an increase of $76.6 million or 11%. Non-interest-bearing deposits increased $30.8 million, or 40%, to $107.6 million at
December 31, 2013, compared to $76.8 million at December 31, 2012. Interest-bearing deposits increased $45.8 million, or
8%, to $641.4 million at December 31, 2013, compared to $595.6 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.
The following table presents our time deposit maturities as of December 31, 2013.
(in thousands)
Time deposits of $100,000 or more
Time deposits of less than $100,000
Total
December 31, 2013
Over
three
through
six
months
Over six
through
twelve
months
Over
twelve
months
Three
months
or less
Total
$
$
14,400 $ 19,347 $
28,081 $
63,955 $
125,783
15,158
13,365
28,301
61,934
118,758
29,558 $ 32,712 $
56,382 $ 125,889 $
244,541
The following table presents the average balance of our deposit accounts for the years ended December 31, 2013,
2012 and 2011, and the average cost of funds for each category of our deposits.
2013
Avg.
Rate
Paid
% of
Average
Total
Deposits
Average
Amount
2012
Avg.
Rate
Paid
Average
Amount
% of
Average
Total
Deposits
Average
Amount
2011
Avg.
Rate
Paid
% of
Average
Total
Deposits
99,650
0.00%
13.6% $ 65,333
0.00%
10.3% $ 37,429
0.00%
7.6%
148,969
155,438
89,044
0.78
060
0.86
20.3
21.2
12.1
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
120,504
1.71
16.3
103,222
2.32
16.2
76,934
2.13
15.6
(in thousands)
Demand, non-
interest-bearing
checking
$
Demand Interest-
bearing
Money market
Savings deposits
Time deposits of
$100,000 or
more
Other time
deposits
119,464
1.70
16.5
120,525
1.93
18.9
95,341
1.83
Total
$ 733,069
.95%
100.0% 636,210
1.17%
100.0% $494,202
1.39%
19.2
100.0%
Borrowings. Borrowings increased from $28.2 million at December 31, 2012 to $60.4 million at December 31, 2013,
an increase of $32.2 million or 114%. This increase was due to increases of 18% and 4% in loans receivable, net and securities
available-for-sale, respectively, from December 31, 2012 to December 31, 2013. 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
23
The Bank of Princeton
31, 2013 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 decreased from $6.1
million at December 31, 2012 to $3.8 million at December 31, 2013, a decrease of $2.3 million or 38%. This decrease was
attributable to a decrease in accrued expenses and other liabilities of $2.5 million, partially offset by increases of $107,000 and
$56,000 in accrued interest payable and accrued salary expense, respectively. The decrease in accrued expenses and other
liabilities was primarily attributable to decreases in securities purchased and not yet settled, loan participation payments payable
and income taxes payable. These decreases were attributable to the timing of cash payments at December 31, 2013 as compared
to the prior year.
Stockholders’ equity. Stockholders’ equity increased from $62.3 million at December 31, 2012 to $64.2 million at
December 31, 2013, an increase of $1.9 million or 3%. The increase in stockholders’ equity was due to increases in retained
earnings from current year net income, partially offset by a decrease in accumulated other comprehensive income from
unrealized losses on securities available-for-sale during the year ended December 31, 2013.
Comparison of Operating Results for the Years Ended December 31, 2013 and December 31, 2012
General. Net income for the year ended December 31, 2013 was $8.8 million, an increase of approximately $2.5, or
39%, from $6.3 million for the year ended December 31, 2012. This increase was primarily attributable to an increase in net
interest income after provision for loan losses and other income that were partially offset by increases in non-interest expense
and income tax expense.
Net interest income. Net interest income after provision for loan losses increased $3.5 million, or 14%, to $28.0
million for the year ended December 31, 2013, compared to $24.5 million for the year ended December 31, 2012. While our
interest rate spread and net yield on interest-earning assets remained relatively unchanged in the year ended December 31, 2013
compared to the prior year, our average interest earning assets increased $92.7 million, or 13%. The increase in average
interest-earning assets was reflective of our ability to continue to increase the size of our loan and investment portfolios. The
average cost of interest-bearing liabilities decreased 12 basis points. The average cost of interest-bearing liabilities for the years
ending December 31, 2013 and 2012 was 1.08% and 1.20%, respectively.
Total interest and dividend income. Total interest and dividend income increased $3.4 million, or 10%, to $37.1
million for the year ended December 31, 2013, compared to $33.7 million for the prior year. The improvement in interest
income resulted from an increase in the average balance of interest-earning assets as further discussed below.
Interest income and fees on loans increased $3.2 million, or 11%, to $32.3 million for the year ended December 31,
2013, compared to $29.1 million for the prior year. The increase was attributable to an increase in the average balance of loans
of $93.4 million from $477.4 million in 2012 to $570.7 million in 2013. This increase was partially offset by a decrease in the
average yield on loans, year-over-year of 44 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 primarily by
increasing competition throughout the year ending December 31, 2013.
Interest income on securities available-for-sale increased $301,000, or 7%, for the year ended December 31, 2013,
compared to the prior year. This increase was primarily attributable to a 19 basis point increase in the average yield for the year
ended December 31, 2013 compared to the prior year period. The increase in average yield was partially offset by a $5.3
million decrease in the average balance of securities available-for-sale from an average balance of $212.5 million during the
year ended December 31, 2012 to an average balance of $207.2 during the twelve months ended December 31, 2013. The
increase in average yield was primarily attributable to an increase in overall market interest rates during 2013 as the ten-year
treasury rate increased 127 basis points from December 31, 2012 to December 31, 2013.
24
The Bank of Princeton
Interest income on securities held-to-maturity changed minimally during the year ended December 31, 2013 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 decreased $139,000 for the year ended December 31, 2013, compared to the
prior year period. The decrease was primarily due to an $8.4 million decrease in average borrowings, combined with a 12 basis
point decrease the average cost of interest-bearing liabilities.
Interest expense on deposits decreased $29,000 for the year ended December 31, 2013 compared to the prior year.
Average interest-bearing deposits increased $62.5 million, or 11%, to $633.4 million for the year ended December 31, 2013,
compared to $570.9 million in 2012. The cost of interest-bearing deposits decreased 12 basis points from year to year. The
Bank worked to grow its total deposits during 2013 through organic growth, average interest-bearing and savings deposits,
average money market deposits and average time deposits increased for the year ended December 31, 2013 compared to the
prior year period. The lower cost of interest-bearing deposits was reflective of the overall market trend as higher-rate time
deposits matured and were replaced by lower-rate time deposits. Additionally, current market interest rates for other interest-
bearing deposits continued to decrease, thereby allowing us to reduce the interest rate we pay on those deposits as well.
Provision for Loan Losses. The provision for loan losses increased $64,000 in 2013 compared to the prior year. The
increase in the 2013 provision for loan losses reflected, among other things, our increase in the allowance for loan losses
attributable to increasing concentrations within the commercial real estate and construction loan categories and the overall
increase in our loan portfolio. Our loan charge-offs, net of recoveries were $572,000 in 2013, compared to $297,000 in 2012.
See the section above titled “Financial Condition —Allowance for Loan Losses” for a discussion of our allowance for loan
losses methodology, including additional information regarding the determination of the provision for loan losses.
Non-Interest Income. Non-interest income increased $91,000 in the year ended December 31, 2013 compared to the
prior year. In 2013, non-interest income included gains of $259,000 on sales of securities available-for-sale, $1.1 million from
service charges and other fees earned in the normal course of banking operations, $851,000 from gain from life insurance
proceeds, $160,000 in other income and $264,000 from bank-owned life insurance. In 2012, non-interest income included
gains of $897,000 on sales of securities available-for-sale, $1.2 million from service charges and other fees earned in the normal
course of banking operations, $279,000 from bank-owned life insurance and $211,000 in other income. The gain from life
insurance proceeds was the result of the death benefit paid to us on a life insurance policy covering one of our former employees
that remained insured person our bank-owned life insurance program following his separation of employment.
Non-Interest Expense. Non-interest expense increased $826,000, or 5%, to $18.9 million in 2013, compared to $18.0
million in the prior year. The increase was due to the growth the Bank experienced during 2013.
Salaries and employee benefits increased $965,000, or 11%, to $9.8 million in 2013, compared to $8.9 million in the
prior year. The increase in costs were related to an increase in average FTEs associated with the growth of the bank, including
additional branch openings that occurred in the fourth quarter of 2012, combined with the additional personnel added within
the compliance department. The additions to the compliance department were a result of our efforts in the fourth quarter of
2013 to enhance our BSA/AML compliance program in accordance with the Consent Order. We anticipate that future salary
and employee benefit expenses will increase further as a result of the full-year impact of the additions to the compliance
department with regards to enhancing our BSA/AML compliance program.
Occupancy and equipment expenses increased approximately $281,000, or 10%, to $3.2 million in 2013 compared to
$2.9 million in the prior year. The increase was primarily attributable to the full-year impact of costs associated with the branch
that was opened in the fourth quarter of 2012.
Data processing and communications expense increased $181,000, or 14%, to $1.5 million in 2013 compared to $1.3
million in 2012. The increase was attributable to an increase in the number of customer accounts we process as a direct result
of continued growth in the number of loan and deposit accounts we service.
Our federal deposit insurance assessment during the year ended December 31, 2013 was $567,000, compared to
$586,000 in the prior year. We anticipate that our federal deposit insurance assessment will increase substantially in 2014 as
a result of entering into the Consent Order and there can be no guarantee that the elevated federal deposit insurance assessment
will not last beyond 2014.
25
The Bank of Princeton
OREO, net decreased to $99,000 in 2013 compared to approximately $1.1 million in the prior year. The decrease was
attributable to the write-down of two properties below their initial net realizable values in 2012.
Other non-interest expense increased $364,000, or 26%, to $1.7 million in 2013 compared to $1.4 million in the prior
year. This increase was primarily attributable to an increase in foreclosure related loan expenses on one of our nonaccrual
loans.
All other non-interest expenses changed minimally during 2013 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 $290,000, or 11%, to $3.0 million in 2013
compared to $2.7 million in the prior year. The increase was due to an increase of 31% in pre-tax income, partially offset by a
decrease in our effective tax rate from 30% in 2012 to 25% in 2013. The decrease in the effective tax rate was primarily due
to the receipt of the tax-exempt gain from life insurance proceeds.
26
The Bank of Princeton
Average Balance Sheets. The average yields and costs 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
stockholders’ equity
Interest rate spread(1)
Net interest income
Net yield on interest-
earning assets(2)
Ratio of average interest-
earning assets to average
interest-bearing liabilities
For the Year Ended December 31,
Average
Balance
2013
Interest
Average
Yield/Cost
Average
Balance
2012
Interest
Average
Yield/Cost
$
570,720
$
32,285
5.66 % $
477,366
$
29,133
6.10 %
$
$
207,227
497
22,341
800,785
27,017
827,802
238,012
155,438
239,968
633,418
25,903
659,321
105,558
764,879
62,923
4,670
23
135
37,113
1,925
936
4,091
6,952
163
2.25
4.70
0.60
4.63
0.81
0.60
1.71
1.10
0.63
$
$
7,115
1.08 %
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
$
827,802
$
735,091
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 %
3.55 %
3.56 %
$
29,998
$
26,419
3.75 %
1.21x
3.72 %
1.17x
(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities.
(2) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.
27
The Bank of Princeton
(in thousands)
Interest-earning assets:
Loans receivable, net
Investment securities:
Available-for-sale
Held-to-maturity
Other interest-earning assets
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
Demand, interest-bearing
and savings deposits
Money market
Time deposits
Total interest-bearing deposits
Federal Home Loan Bank
borrowings
Total interest-bearing
liabilities
Non-interest-bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Interest rate spread(1)
Net interest income
Net yield on interest-
earning assets(2)
Ratio of average interest-
earning assets to average
interest-bearing liabilities
For the Year Ended December 31,
2011
Average
Balance
Interest
Average
Yield/Cost
$
336,003
$
21,488
6.40 %
$
$
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
$
561,918
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 %
$
18,508
3.32 %
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.
28
The Bank of Princeton
Rate/Volume Analysis
The following table reflects the sensitivity of our interest income and interest expense to changes in volume and in
yields on interest-earning assets and costs of interest-bearing liabilities during the periods indicated.
(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,
2013 vs. 2012
Increase (Decrease) Due to
Year Ended December 31,
2012 vs. 2011
Increase (Decrease) Due to
Volume
Rate
Net
Volume
Rate
Net
$
5,281
$
(2,129) $
3,152 $
8,627 $
(982) $
7,645
54
(20)
30
5,345
253
90
277
(53)
567
4,778
$
$
$
$
$
$
$
$
247
6
(29)
(1,905) $
301
(14)
1
3,440 $
854
(15)
2
9,468 $
(502)
(7)
23
(1,468) $
352
(22)
25
8,000
(187) $
(18)
(444)
66 $
72
(167)
211 $
220
1,044
(780) $
(446)
(144)
(57)
(110)
119
(135)
(706) $
(139) $
1,594 $
(1,505) $
(569)
(226)
900
(16)
89
(1,199)
$
3,579 $
7,874 $
37 $
7,911
Liquidity, Commitments and Capital Resources
Liquidity. Our liquidity, represented by cash and due from banks, 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, 2013, we had $58.1 million of advances outstanding from the FHLB-NY and $2.3 million of advances
outstanding from the FHLB-Pittsburgh. At December 31, 2013, we had available capacity with FHLB-NY, subject to certain
29
The Bank of Princeton
collateral restrictions, of $438.7 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 Community Bankers Bank (“ACBB”) and as of December 31, 2013,
we had available capacity with ACBB of $10.0 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, 2013:
Years Ended December 31:
2014
2015
2016
2017
2018
Thereafter
Total minimum payments required
(in thousands)
$ 1,292
1,332
1,199
956
807
1,466
$ 7,052
Capital Resources. Consistent with our goals to operate as a sound and profitable financial institution, we actively
seek to maintain our status as a well-capitalized institution in accordance with regulatory standards. As of December 31, 2013,
we met the capital requirements to be considered “well capitalized”. See Note 14 - 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 our 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 counterparty 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)
2013
2012
Performance and standby letters of credit
Commitments to fund loans
Unfunded commitments under lines of credit
$
$
7,561
76,027
9,255
92,843
$
$
2,378
67,317
9,260
78,955
30
The Bank of Princeton
For additional information regarding our outstanding lending commitments at December 31, 2013, see Note 10 –
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, 2013, 2012 and 2011.
Return on Average Assets (ROA)
Return on Average Equity (ROE)
Average Equity to Average Assets
2013
1.06%
13.99%
7.60%
2012
0.86%
10.66%
8.05%
2011
0.50%
6.15%
8.13%
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, 2013, 2012 and 2011.
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-off 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.
31
The Bank of Princeton
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount
or premium and is recognized in interest income over the remaining life of the loans. The difference between the contractually-
required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable
discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the
loans. Subsequent decreases to the expected cash flows require us to evaluate the need for an allowance for loan
losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable
discount which we then reclassify as accretable discount that is recognized in interest income over the remaining life of the
loan using the level-yield 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
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”).
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, 2013 and 2012. 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 our
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.
32
The Bank of Princeton
Item 8. Financial Statements and Supplementary Data
The following audited financial statements are set forth in this Annual Report on Form 10-K on the pages listed in
the Index to Consolidated Financial Statements below.
THE BANK OF PRINCETON
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
Reports of Independent Registered Public Accounting Firms
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
34
36
37
38
39
40
42
33
The Bank of Princeton
The Bank of Princeton
The Bank of Princeton
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
ASSETS
Cash and due from banks
Securities available-for-sale
Securities held-to-maturity (fair value of $454 and $643, respectively)
Loans receivable, net of allowance for loan losses of $8,493 and $7,033
at December 31, 2013 and 2012, respectively
Bank-owned life insurance
Other real estate owned (OREO)
Premises and equipment, net
Accrued interest receivable and other assets
December 31,
2013
2012
$
$
27,425
193,314
423
625,340
8,799
927
5,772
15,428
24,619
186,041
600
532,115
8,918
1,550
5,841
9,318
TOTAL ASSETS
$
877,428
$
769,002
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, 4,578,679 and
4,578,569 shares issued and outstanding at December 31, 2013 and
2012, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
TOTAL STOCKHOLDERS’ EQUITY
$
$
107,616
641,394
749,010
60,412
3,774
813,196
22,893
29,011
16,258
(3,930)
64,232
76,793
595,571
672,364
28,246
6,109
706,719
22,893
28,539
7,457
3,394
62,283
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
877,428
$
769,002
See notes to consolidated financial statements.
36
The Bank of Princeton
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
December 31,
2013
2012
$
32,285
$
29,133
2,417
2,253
23
135
37,113
6,952
163
7,115
29,998
2,032
27,966
259
264
1,141
851
160
2,675
9,844
3,154
1,438
1,478
567
208
328
99
1,749
18,865
11,776
2,975
8,801
1.92
1.90
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
1,305
1,297
586
296
281
1,137
1,385
18,039
8,996
2,685
6,311
1.38
1.36
$
$
$
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
Gain from life insurance proceeds
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 assessment
Advertising and promotion
Office expense
Other real estate owned, net
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.
$
$
$
37
The Bank of Princeton
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the Years ended
December 31,
2013
2012
NET INCOME
Other comprehensive (loss) income
Unrealized holding (losses) gains arising during period on securities
available-for-sale
Less: reclassification adjustment for gains on sales of securities
available-for-sale, net included in net income
Income tax effect
Total other comprehensive (loss) income
COMPREHENSIVE INCOME
$
8,801
$
6,311
(10,755)
(259)
3,690
(7,324)
1,477
$
$
2,557
(897)
(364)
1,296
7,607
See notes to consolidated financial statements.
38
The Bank of Princeton
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2013 and 2012
(in thousands, except share data)
Common
stock
Paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
(loss) income
Total
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
Net income
Other comprehensive loss
Stock options exercised (60 shares at
$10.50 per share and 50 shares at
$12.00 per share)
Stock-based compensation expense
Balance, December 31, 2013
$
$
22,892
-
-
$
28,182
-
-
1,146 $
6,311
-
$
2,098
-
1,296
54,318
6,311
1,296
1
-
22,893
-
-
2
355
28,539
-
-
-
-
22,893
$
1
471
$ 29,011
-
-
7,457
8,801
-
-
-
$
16,258 $
-
-
3,394
-
(7,324)
3
355
62,283
8,801
(7,324)
-
-
(3,930)
$
1
471
64,232
See notes to consolidated financial statements.
39
The Bank of Princeton
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
2013
2012
$
8,801
$
6,311
2,032
920
471
(1,131)
621
59
(29)
(259)
(264)
(851)
-
(476)
51
125
(579)
(2,335)
7,156
(64,313)
37,159
10,257
1,635
177
(96,941)
1,234
(851)
(1,490)
(113,133)
76,587
35,900
(3,705)
1
108,783
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
2,806
24,619
27,425
(34,596)
59,215
24,619
$
$
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
Gain from life insurance proceeds
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 in accrued interest receivable and other assets
(Decrease) 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
Proceeds from 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 of overnight borrowings
Repayments of term borrowings
Proceeds from exercise of stock options
NET CASH PROVIDED BY FINANCING ACTIVITIES
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
See notes to consolidated financial statements.
40
The Bank of Princeton
THE BANK OF PRINCETON
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(in thousands)
SUPPLEMENTARY CASH FLOWS INFORMATION:
Interest paid
Income taxes paid
SUPPLEMENTARY SCHEDULE OF NONCASH ACTIVITIES:
Transfers from loans receivable, net to other real estate owned (OREO)
Securities purchased and not yet settled
See notes to consolidated financial statements.
For the Years Ended December 31,
2013
2012
$
$
$
$
7,008
4,392
1,063
-
$
$
$
7,349
3,112
2,355
610
41
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies
Organization and Nature of Operations
The Bank of Princeton (the “Bank”) 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 (“FDIC”). 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, 2013, the Bank had 116 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, TBOP New Jersey Investment Company, TBOP Delaware
Investment Company and TBOP REIT, Inc. 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, 2013 and 2012. 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.
42
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
Significant group concentrations of credit risk
Most of the Bank’s activities are with customers located within the Mercer County, New Jersey and certain Philadelphia,
Pennsylvania metropolitan areas. The Bank does not have any portion of its business dependent on a single or limited
number of customers or industries, the loss of which would have a material adverse effect on its business. No substantial
portion of loans is concentrated within a single industry or group of related industries, except that a significant majority of
commercial 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 due from banks
Cash and due from banks 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, 2013 and 2012. 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 security and it is not more
43
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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 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, as applicable. 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
statement of financial condition. 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
44
The Bank of Princeton
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 least 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 and home equity loans involve certain risks such as interest rate risk and risk of non-
repayment. Adjustable-rate loans decrease the interest rate risk to the Bank that is associated with changes in interest rates
but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted
by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying
property may be adversely affected by higher interest rates. Repayment risk can be affected by job loss, divorce, illness
45
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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 real estate
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 balance.
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 the Bank’s
46
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
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.
Based on management’s comprehensive analysis of the loan portfolio, management believes the allowance for loan losses
is adequate at the reported dates.
47
The Bank of Princeton
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 include accrued interest receivable, deferred tax asset, 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 $3.7 million
and $2.2 million is carried at cost at December 31, 2013 and 2012, 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 Community Bankers Bank (“ACBB”) at December 31, 2013 and 2012.
Management believes no impairment charge is necessary related to the FHLB restricted stock or the ACBB restricted stock
as of December 31, 2013 or 2012.
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 for the MoreBank
acquisition and 10 years for the branch acquisition. The core deposit intangible, net of accumulated amortization, was
$230,000 and $356,000 as of December 31, 2013 and 2012, respectively. Amortization expense is anticipated to be
approximately $126,000 in 2014, $65,000 in 2015 and approximately $9,000 in 2016, 2017 and 2018, respectively.
48
The Bank of Princeton
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 years ended December 31, 2013 and 2012.
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, 2013 and 2012. 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, 2013, tax year 2010 is subject to federal
examination and tax years after 2009 for state examination. 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 statement of financial
condition 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. The Bank made matching
contributions to employees of $71,000 and $32,000, respectively during the years ended December 31, 2013 and 2012.
Stock compensation plans
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.
49
The Bank of Princeton
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 of 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. Accumulated comprehensive income is comprised of net unrealized holding
losses, net of taxes, on available-for-sale securities of $3.9 million as of December 31, 2013. Accumulated comprehensive
income was comprised of net unrealized holding gains, net of taxes, on available-for-sale securities of $3.4 million as of
December 31, 2012. Gross unrealized holding losses on available-for-sale securities and the related tax effect were $6.2
million and $2.3 million, respectively as of December 31, 2013. Gross unrealized holding gains on available-for-sale
securities and the related tax effect were $4.8 million and $1.4 million, respectively, at December 31, 2012. Realized gains
or losses are reclassified out of accumulated comprehensive income when the underlying security is sold, based upon the
specific identification method.
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, net income or cash flows.
Recently issued accounting standards
In February 2013, the FASB issued Accounting Standards Update (“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’s adoption of the ASU did not have a material impact on its financial statements.
50
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies (Continued)
In July 2013, the FASB issued ASU 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, Income Taxes (Topic 740).” An unrecognized
tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a
deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows.
To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the
reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from
the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the
entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in
the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a
deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date
and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not
evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred
tax asset may be used prior to the unrecognized tax benefit being settled. The amendments in this Update do not require
new recurring disclosures. The amendments in this Update are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2013. The Bank does not expect the adoption of this FASB ASU to have a material
impact on the consolidated financial statements.
In January 2014, the FASB issued ASU 2014-04 “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-
40.” The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is
considered to have received physical possession of residential real estate property collateralizing a consumer mortgage
loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure
or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through
completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require
interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and
(2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the
process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are
effective for annual period and interim periods within those annual periods beginning after December 15, 2014. The Bank
does not expect the adoption of this FASB ASU to have a material impact on the consolidated financial statements.
Note 2 – Earnings Per Share
The following schedule presents earnings per share data for the years ended December 31, 2013 and 2012:
Twelve months ended
December 31,
2013
2012
(in thousands, except per share
data)
$
$
$
$
8,801
4,578
1.92
8,801
4,578
63
4,641
1.90
$
$
$
$
6,311
4,578
1.38
6,311
4,578
63
4,641
1.36
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
51
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Earnings Per Share (Continued)
Options and warrants to purchase 357,967 shares of common stock at a weighted average exercise price of $11.25 were included
in the computation of diluted earnings per share for the year ended December 31, 2013. Options to purchase 222,900 shares
of common stock at a weighted average exercise price of $16.37 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 at December 31, 2013.
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 at December 31, 2012.
Note 3 – Investment Securities
The following summarizes the amortized cost and estimated fair value of securities available-for-sale at December 31, 2013
and 2012 with gross unrealized gains and losses therein:
Amortized
Cost
December 31, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Available-for-sale:
U.S. Treasury securities
Mortgage-backed securities-U.S.
Government Sponsored Enterprises (GSEs)
Obligations of state and
political subdivisions
$
38,112
$
72,680
88,697
199,489
$
$
-
1,383
230
1,613
$
$
(2,423)
$
35,689
(979)
73,084
(4,386)
(7,788)
$
84,541
193,314
Amortized
Cost
December 31, 2012
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Available-for-sale:
U.S. Treasury securities
Mortgage-backed securities-U.S.
Government Sponsored Enterprises (GSEs)
Obligations of state and
political subdivisions
$
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
52
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – 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, 2013 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, 2013:
Mortgage-backed
securities-U.S.
Government Sponsored
Enterprises (GSEs)
Obligations of state and
political subdivisions
US Treasury securities
$
$
22,960
$
(979)
$
-
$
-
$
22,960
$
(979)
57,818
35,689
116,467
$
(4,013)
(2,423)
(7,415)
$
6,025
-
6,025
$
(373)
-
(373)
63,843
35,689
122,492
$
$
(4,386)
(2,423)
(7,788)
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 (GSEs)
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)
At December 31, 2013, the Bank’s debt securities portfolio consisted of approximately 339 securities, of which 178 were in an
unrealized loss position for less than twelve months and 14 were in a continuous loss position for more than twelve months.
No OTTI charges were recorded for the year ended December 31, 2013. 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.
53
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Investment Securities (Continued)
The amortized cost and estimated fair value of securities available-for-sale at December 31, 2013 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)
$
$
165
5,491
77,213
116,620
199,489
$
$
165
5,564
74,663
112,922
193,314
The following summarizes the amortized cost and estimated fair value of securities held-to-maturity at December 31, 2013
with gross unrealized gains and losses therein:
Amortized
Cost
December 31, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
Held-to-maturity:
Mortgage-backed securities-U.S.
Government Sponsored Enterprises (GSEs)
All securities held-to-maturity are due after ten years.
$
423
$
31
$
-
$
454
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 (GSEs)
$
600
$
43
$
-
$
643
Proceeds from the sale of securities available-for-sale amounted to $10.0 million for the year ended December 31, 2013, which
included realized gains of approximately $258,543. Proceeds from the sale of securities available-for-sale amounted to $45.0
million for the twelve months ended December 31, 2012, which included realized gains of approximately $903,000 and realized
losses of approximately $6,000.
Approximately $1.2 million of securities available-for-sale were pledged as collateral for Federal Home Loan Bank of
Pittsburgh borrowings at December 31, 2013. Approximately $102.8 million of securities available-for-sale and $454,341 of
securities held-to-maturity were pledged as collateral for NJ Governmental Unit Deposit Protection Act (“GUDPA”) deposits
at December 31, 2013. Approximately $1.4 million of securities available-for-sale were pledged as collateral for business
sweep accounts at December 31, 2013.
54
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Loans Receivable
Loans receivable, net at December 31, 2013 and 2012 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,
2013
December 31,
2012
(in thousands)
$
$
372,273
118,274
76,477
40,242
28,204
132
635,602
(1,769)
(8,493)
317,946
103,627
62,702
29,127
25,617
1,480
540,499
(1,351)
(7,033)
Loans, net
$
625,340
$
532,115
The following table presents nonaccrual loans by segment of the loan portfolio as of December 31, 2013 and 2012:
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
December 31,
2013
December 31,
2012
(in thousands)
$
$
2,535
5,127
-
182
394
-
8,238
$
$
2,690
4,596
892
-
359
11
8,548
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to
Impaired loans include
collect all amounts due from the borrower in accordance with the contractual terms of the loan.
nonperforming loans and include loans modified in troubled debt restructurings where concessions have been granted to
borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loans,
payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
55
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Loans Receivable (Continued)
The following table summarizes information in regards to impaired loans by loan portfolio segment segregated by those for
which a related allowance was required and those for which a related allowance was not necessary, as of December 31, 2013
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
$
$
3,270
5,805
-
700
816
-
10,591
-
-
1,986
-
-
-
1,986
3,270
5,805
1,986
700
816
-
12,577
$
2,719
5,542
-
703
820
-
9,784
-
-
1,975
-
-
-
1,975
2,719
5,542
1,975
703
820
-
11,759
$
$
-
-
-
-
-
-
-
-
-
61
-
-
-
61
-
-
61
-
-
-
61
$
$
2,565
3,900
1,544
214
798
4
9,025
22
-
785
-
-
-
807
2,587
3,900
2,329
214
798
4
9,382
$
$
-
-
-
23
4
-
27
-
-
64
-
-
-
64
-
-
64
23
4
-
91
56
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Loans Receivable (Continued)
The following table summarizes information in regards to impaired loans by loan portfolio segment 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
At December 31, 2013, twelve loans totaling $7.7 million were considered troubled debt restructurings and classified as
impaired. Troubled debt restructurings of $4.8 million were performing in accordance with their modified terms at December
31, 2013. The remaining $2.9 million of troubled debt restructurings were on non-accrual status at December 31, 2013.
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.
57
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – 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 segments of the loan portfolio summarized by
the past due status as of December 31, 2013:
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
$
$
41
572
4,247
-
165
-
5,025
$
$
-
400
-
-
250
-
650
$
$
2,508
2,143
-
182
394
-
5,227
$
$
2,549
3,115
4,247
182
809
-
10,902
Loans
Receivable
>90 Days
and
Accruing
Total
Loans
Receivable
$
$
372,273
118,274
76,477
40,242
28,204
132
635,602
$
$
-
-
-
-
-
-
-
Current
$ 369,724
115,159
72,230
40,060
27,395
132
$ 624,700
The following table presents the segments of the loan portfolio summarized by the past due status as of December 31, 2012:
Loans
Receivable
>90 Days
and
Accruing
Total
Loans
Receivable
30-59
Days Past
Due
60-89
Days Past
Due
Total
Past
Due
Current
Greater
than
90 days
(in thousands)
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
$ 314,443
98,892
58,970
29,127
25,470
1,468
$ 528,370
$
$
317,946
103,627
62,702
29,127
25,617
1,480
540,499
$
$
-
-
-
-
-
-
-
The following table presents the segments 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, 2013:
Pass
Special
Mention
Substandard
(in thousands)
Doubtful
Total
Commercial real estate
Commercial and industrial
Construction
Residential first-lien mortgage
Home equity
Consumer
Total
$
$
368,022
110,927
74,511
40,060
27,385
132
631,037
$
$
1,055
2,220
-
-
425
-
3,700
$
$
3,169
5,127
1,966
182
394
-
10,838
$
$
27
-
-
-
-
-
27
$
$
372,273
118,274
76,477
40,242
28,204
132
635,602
58
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Loans Receivable (Continued)
The following table presents the segments 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
Allowance for loan losses on loans receivables at and for the year ended December 31, 2013:
Commercial
real estate
Commercial
and industrial
Construction
Residential
first-lien
mortgage
Home equity
Consumer
Unallocated
Total
(in thousands)
Allowance for loan
losses:
Beginning balance
$
Provisions
Charge-offs
Recoveries
Ending Balance
Ending Balance:
Individually
evaluated for
impairment
Collectively
evaluated
for impairment
$
$
$
$
2,557
498
(73 )
12
$
1,244
316
(156)
15
$
2,163
845
(370)
-
$
204
78
-
-
$
256
26
-
-
$
10
(9 )
-
-
$
599
278
-
-
7,033
2,032
(599)
27
2,994
$
1,419
$
2,638
$
282
$
282
$
1
$
877
$
8,493
-
2,994
$
$
-
1,419
$
$
61
2,577
$
$
-
282
$
$
-
282
$
$
-
1
$
$
-
877
$
$
61
8,432
Recorded investment in loans receivables at December 31, 2013:
Loans:
Ending Balance:
Individually
evaluated for
impairment
Collectively
evaluated
for impairment
$
2,719
$
5,542
$
1,975
$
703
$
820
$
-
$
369,554
112,732
74,502
39,539
27,384
132
Ending Balance
$
372,273
$
118,274
$
76,477
$
40,242
$
28,204
$
132
$
-
-
-
$
11,759
623,843
$
635,602
59
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
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Loans Receivable (Continued)
Allowance for loan losses on loans receivable 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 receivable 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.
The following table summarizes information in regards to troubled debt restructurings for the year ended December 31, 2013
(dollars in thousands):
Troubled debt restructurings:
Commercial real estate
Commercial and industrial
Residential first-lien mortgage
Number of
Contracts
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
2
1
1
$
$
$
266
1,425
517
$
$
$
266
2,124
519
60
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Loans Receivable (Continued)
As indicated above, the Bank modified four loans during the year ended December 31, 2013 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. The 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, 2013, there is no specific allowance for any of these modified
loans. There were no troubled debt restructurings executed within the year ended December 31, 2013 that subsequently
defaulted during the year ended December 31, 2013.
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 and industrial
Home equity
Number of
Contracts
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
1
1
$
$
564
100
$
$
564
100
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 was 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 estate
Number of
Contracts
Outstanding
Recorded
Investment
1
$
564
Loans to Related Party. In 2008, the Bank made two commercial real estate loans to a member of its board of directors. In
2013, the Bank modified these two commercial real estate loans by lowering the interest rate on both loans. The terms of these
modifications were reviewed and approved by the disinterested members of the Bank’s board of directors. The modifications
were made in the ordinary course of business, on substantially the same terms 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. 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 10- 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 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
61
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Loans Receivable (Continued)
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 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, 2013 and 2012.
(in thousands)
2013
2012
Outstanding related party loans at January 1,
New loans
Repayments
Outstanding related party loans at December 31,
$
$
5,179
-
(197)
4,982
$
$
3,310
1,988
(119)
5,179
No loans to related parties were nonaccrual, past due, restructured or potential problems at December 31, 2013 and 2012.
Note 5 – 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
Estimated
useful lives
N/A
40 Yrs.
10 Yrs.
3-7 Yrs.
Accumulated depreciation and amortization
Total
Note 6 – Accrued Interest Receivable and Other Assets
2013
2012
$
$
410
1,741
4,568
3,492
38
10,249
(4,477)
5,772
$
$
410
1,741
3,271
2,613
521
8,556
(2,715)
5,841
The components of accrued interest receivable and other assets at December 31 were as follows (in thousands):
Accrued interest receivable
Deferred tax asset, net
Restricted investments in bank stocks
Prepaid assets and other assets
Total
2013
2012
$
$
3,074
7,413
3,811
1,130
15,428
$
$
2,849
3,247
2,321
901
9,318
62
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Deposits
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
2013
2012
$
$
107,616
244,795
152,058
125,783
118,758
$
749,010
$
76,793
213,684
154,724
111,583
115,580
672,364
As of December 31, 2013, one customer’s deposits with the Bank represented 5.4% of total deposits and another customer’s
deposits represented 5.1% of total deposits. No other customer accounted more than 5% of total deposits as of December 31,
2013.
At December 31, 2013, the scheduled maturities of certificates of deposit were as follows (in thousands):
2014
2015
2016
2017
2018
Total
Amounts
118,652
40,585
36,540
26,829
21,935
244,541
$
$
Note 8 – 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.
The following table presents the Bank’s borrowings at December 31 (in thousands):
2013
2012
FHLB-NY overnight advances
FHLB term advances
Total Borrowings
$
$
58,100
2,312
60,412
$
$
22,200
6,046
28,246
63
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Borrowings (Continued)
Average overnight advances outstanding during the year ended December 31, 2013 were $40.2 million. The maximum amount
of overnight advances outstanding during the year ended December 31, 2013 was $58.1 million.
The following table is a schedule of the Bank’s long-term debt as of December 31, 2013, 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,
2013
Maturity
Balance at
December 31,
2013
2.89 %
2014
2,312
$
2,312
At December 31, 2013, the Bank has available borrowing capacity with FHLB-NY, subject to certain collateral restrictions, of
$438.7 million. The Bank is also a member of the Atlantic Community Bankers Bank (“ACBB”). As of December 31, 2013,
the Bank has available borrowing capacity with ACBB of $10.0 million to provide short-term liquidity generally for a period
of not more than fourteen days.
Note 9 – 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
Accrued salary expense
Accrued expenses and other liabilities
Total
Note 10 – Commitments and Contingencies
Operating leases
2013
2012
$
$
1,675
418
1,681
3,774
$
$
1,568
362
4,179
6,109
The Bank has operating leases for eleven of its branch locations, as well as its operations center. Future minimum lease
payments by year under the non-cancellable lease agreements for the Bank’s facilities were as follows (in thousands):
2014
2015
2016
2017
2018
Thereafter
$
$
1,292
1,332
1,199
956
807
1,466
7,052
Rental expense for the years ended December 31, 2013 and 2012 was $1.4 million and $1.3 million, respectively.
64
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 – Commitments and Contingencies (Continued)
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 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, 2013 and 2012 was approximately $277,000 and $245,000, 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 these 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, 2013 and 2012 for guarantees under standby letters of credit issued is
not material.
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 fund loans
Unfunded commitments under lines of credit
Litigation
2013
2012
$
$
7,561
76,027
9,255
92,843
$
$
2,378
67,317
9,260
78,955
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.
65
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Income Taxes
Income tax expense 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
2013
2012
(in thousands)
$
$
3,196
255
3,451
(377 )
(99 )
(476 )
2,975
$
$
2,892
709
3,601
(731 )
(185 )
(916 )
2,685
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
Unrealized loss on securities
Net operating loss carry-forwards
Acquisition accounting adjustments
Organizational costs
Premises and equipment
Other
Total deferred tax assets
Deferred tax liabilities:
Premises and equipment
Cash basis conversions
Unrealized gain on securities
Deferred loan costs
Total deferred tax liabilities
Net deferred tax asset
2013
2012
(in thousands)
3,201
2,245
1,287
249
231
48
501
7,762
-
(1 )
-
(348 )
(349 )
7,413
$
$
2,597
-
1,363
191
260
-
760
5,171
(89 )
(91 )
(1,445 )
(299 )
(1,924 )
3,247
$
$
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
Bank-owned-life insurance death benefit
Tax-exempt income, net
Non-deductible expenses
Other
Total income taxes applicable to pre-tax income
66
2013
2012
(in thousands)
$
$
4,004
$
3,058
103
(847 )
(112 )
15
(188 )
2,975
$
345
-
(707 )
14
(25 )
2,685
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Income Taxes (Continued)
At December 31, 2013, the Bank had available federal net operating loss carryforwards of approximately $3.8 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 12 – 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. FASB ASC Topic 820 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
Management uses its best judgment in estimating the fair value of the Bank’s financial instruments, however, there are inherent
weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein
are not necessarily indicative of the amounts the Bank could have realized in sales transactions on the dates indicated. The
estimated fair value amounts have been measured as of their respective period-end and have not been re-evaluated or updated
for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values
of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each
period-end.
The fair value measurement hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially
the full term of the asset or liability.
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.
67
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – 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, 2013 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,
2013
(in thousands)
$
35,689 $
-
$
- $
35,689
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
$
35,689 $
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:
73,084
84,541
157,625
$
-
-
- $
73,084
84,541
193,314
-
-
-
-
(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 $
68
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – 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, 2013, 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,
2013
(in thousands)
$
$
- $
-
- $
- $
-
- $
3,778 $
199
3,977 $
3,778
199
3,977
Impaired loans
Real estate owned
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)
Impaired loans
Real estate owned
$
$
- $
-
- $
- $
-
- $
5,820 $
1,550
7,370 $
5,820
1,550
7,370
The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2013.
Description
Impaired loans
Real estate owned
Fair Value at
December 31,
2013
(in thousands)
Valuation
Technique
Unobservable
Input
Range
(Weighted
Average)
$
$
3,778
Discounted appraisals
199
Discounted appraisal
Discount
adjustment
0.0%-83.6%
(4.3%)
Discount
adjustment
0.0%
(0.0%)
69
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Fair Value Measurements and Disclosure (Continued)
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 due from banks (carried at cost)
The carrying amounts reported in the statement of financial condition 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.
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 and other assets 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.
70
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Fair Value Measurements and Disclosure (Continued)
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, 2013 and December 31, 2012.
The carrying amounts and estimated fair value of financial instruments at December 31, 2013, 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, 2013
Carrying
Amount
(in thousands)
Estimated
Fair Value
$
27,425 $
27,425 $
193,314
423
625,340
3,811
3,074
749,010
60,412
1,675
193,314
454
643,519
3,811
3,074
737,112
60,705
1,675
Level 1
Level 2
Level 3
27,425 $
35,689
-
-
-
-
-
-
-
- $
157,625
454
-
3,811
3,074
737,112
-
1,675
-
-
643,519
-
-
60,705
-
71
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Fair Value Measurements and Disclosure (Continued)
The carrying amounts and estimated fair value of financial instruments at December 31, 2012, are as follows:
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
-
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.
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 13 – 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, 2013 and 2012 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
72
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Stock Based Compensation (Continued)
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 Equity Incentive 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 enabled 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. In 2013, the Bank’s board of directors and stockholders approved an amendment to the 2012 Plan that increased the
maximum number of shares that may be subject to options under the 2012 Plan from 100,000 to 600,000, 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.
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, 2013:
Balance at January 1, 2013
Granted
Exercised
Forfeited
Expired
Weighted Avg.
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
Number of
Stock
Options /
Warrants
476,827
100,950
(110)
(99)
(5,051)
Weighted
Avg.
Exercise Price
13.21
$
13.41
$
11.18
$
13.75
$
11.69
$
Balance at December 31, 2013
Exercisable at December 31, 2013
572,517
373,278
$
$
13.16
6.8 years
13.25
6.3 years
$
$
837,886
767,880
73
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – 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 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,
2013
2012
5.00 years
60.23%
3.63%
0.00%
1.27 %
$ 6.91
5.58 years
26.42%
2.89%
0.00%
0.81%
$ 3.60
Stock option expenses included in salaries and employee benefits expense in the consolidated statements of income were
$295,000 and $161,000 for the years ended December 31, 2013 and 2012, respectively. Stock option expense recorded within
other expenses was $176,000 and $194,000 for the years ended December 31, 2013 and 2012, respectively. At December 31,
2013, there was approximately $488,000 of unrecognized expense related to outstanding stock options, which will be
recognized over a period of approximately 1.44 years.
Note 14 – Regulatory Matters
Consent Order
On January 29, 2014, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with the FDIC that
was countersigned by the FDIC on January 30, 2014 (the “Stipulation”), pursuant to which the Bank agreed to the issuance of
a Consent Order by the FDIC (the “Consent Order”). The Bank consented to the issuance of the Consent Order without
admitting any charges of unsafe or unsound banking practices or violations of law, in order to resolve regulatory uncertainty
over the adequacy of the Bank’s compliance with laws relating to the Bank Secrecy Act (“BSA”) and anti-money laundering
(“AML”).
The Consent Order arises from a routine safety and soundness examination of the Bank by the FDIC, which was conducted as
of June 30, 2013. The Consent Order requires the Bank to strengthen its BSA/AML program and the Bank’s internal audit
74
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 – Regulatory Matters (Continued)
function, and to address other related matters. Among other things, it requires the Bank’s board of directors to designate a
committee to oversee the compliance with the Consent Order.
The provisions of the Consent Order will remain effective until modified, terminated, suspended or set aside by the FDIC.
The Bank also agreed to an Acknowledgement and Consent of FDIC Order with the Commissioner of Banking and Insurance
for the State of New Jersey (the “Commissioner”), effective as of January 30, 2014, which makes the Consent Order binding
as between the Bank and the Commissioner.
The board of directors and management of the Bank began proactively taking steps to address identified matters promptly
following the FDIC examination, and will continue to work with the FDIC to address such matters. While the Bank intends to
take such actions as may be necessary to enable it to comply with the Consent Order, there can be no assurance that the Bank
will be able to fully comply with the provisions of the Consent Order, that its efforts to comply with the Consent Order will
not have adverse effects on the operations and financial condition of the Bank, or that the Bank would not be subject to other
regulatory enforcement actions in the future, including potential future actions that seek the imposition of civil money penalties.
Regulatory Capital
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 operations and/or financial condition.
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, 2013, that the Bank meets all capital adequacy requirements to
which it is subject.
The Bank’s actual capital amounts and ratios at December 31, 2013 and 2012 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, 2013:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
$76,298
$67,932
$67,932
11.4%
10.2%
7.8%
$ 53,533
$ 26,766
$ 34,637
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
≥
≥
≥
≥
≥
≥
8.0%
4.0%
4.0%
8.0%
4.0%
4.0%
$ 66,916
$ 40,150
$ 43,297
$ 57,027
$ 34,216
$ 38,391
≥
≥
≥
≥
≥
≥
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.
75
The Bank of Princeton
THE BANK OF PRINCETON
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Quarterly Financial Data (unaudited)
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 Tax Expense
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 Tax Expense
Income tax expense
Net Income
Earnings per common share
Basic
Diluted
Year Ended December 31, 2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
8,890
1,743
7,147
84
7,063
389
4,684
2,768
788
1,980
0.43
0.43
$
$
$
$
9,041
1,765
7,276
513
6,763
693
4,631
2,825
755
2,070
0.45
0.45
$
$
$
$
9,470
1,809
7,661
577
7,084
324
4,560
2,848
785
2,063
0.45
0.44
$
$
$
$
9,712
1,798
7,914
858
7,056
1,269
4,990
3,335
647
2,688
0.59
0.58
Year Ended December 31, 2012
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except for share and 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
$
$
$
$
$
$
$
$
76
The Bank of Princeton
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, 2013. 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, 2013, 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, 2013 using the criteria in “Internal Control—
Integrated Framework (1992)” 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,
2013.
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, 2013 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 2014 Annual
Meeting of Stockholders to be held April 24, 2014.
77
The Bank of Princeton
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 2014 Annual
Meeting of Stockholders to be held April 24, 2014.
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 2014 Annual
Meeting of Stockholders to be held April 24, 2014.
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 2014 Annual
Meeting of Stockholders to be held April 24, 2014.
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 2014 Annual
Meeting of Stockholders to be held April 24, 2014.
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, 2013 and 2012
Consolidated Statements of Income for the years ended December 31, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013 and
2012
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
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.
78
The Bank of Princeton
(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*
(B) The Bank of Princeton 2012 Equity Incentive Plan*
(C) Amendment to The Bank of Princeton 2012 Equity Incentive 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*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10 (A) Form of Nonqualified Stock Option*
10.11 (A) Form of Option for the Purchase of Shares of the Par Value of $1.00 Per Share of MoreBank*
10.12 (D) Stipulation and Consent to the Issuance of a Consent Order
10.13 (D) Consent Order
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 Exhibit B of registrant’s definitive proxy statement for the 2012 annual meeting of
stockholders, filed with the Federal Deposit Insurance Corporation on March 30, 2012.
(C) Incorporated by reference to Exhibit 10.1 to registrant’s Quarterly Report on Form 10-Q, filed with the Federal Deposit
Insurance Corporation on August 7, 2013.
(D)
Insurance Corporation on February 5, 2014.
Incorporated by reference to the exhibit to registrant’s Current Report on Form 8-K, filed with the Federal Deposit
79
The Bank of Princeton
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized as of March 25, 2014.
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)
80
The Bank of Princeton
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below on March 25, 2014 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
81
The Bank of Princeton
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*
(B) The Bank of Princeton 2012 Equity Incentive Plan*
(C) Amendment to The Bank of Princeton 2012 Equity Incentive 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*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10 (A) Form of Nonqualified Stock Option*
10.11 (A) Form of Option for the Purchase of Shares of the Par Value of $1.00 Per Share of MoreBank*
10.12 (D) Stipulation and Consent to the Issuance of a Consent Order
10.13 (D) Consent Order
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 Exhibit B of registrant’s definitive proxy statement for the 2012 annual meeting of
stockholders, filed with the Federal Deposit Insurance Corporation on March 30, 2012.
(C) Incorporated by reference to Exhibit 10.1 to registrant’s Quarterly Report on Form 10-Q, filed with the Federal Deposit
Insurance Corporation on August 7, 2013.
(D) Incorporated by reference to the exhibit to registrant’s Current Report on Form 8-K, filed with the Federal Deposit
Insurance Corporation on February 5, 2014.
82
The Bank of Princeton
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
83
The Bank of Princeton
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 25, 2014
/s/Edward Dietzler
Edward Dietzler
President
(Principal Executive Officer)
84
The Bank of Princeton
Exhibit 31.2
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:
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 25, 2014
/s/Michael J. Sanwald
Michael J. Sanwald
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
85
The Bank of Princeton
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, 2013 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
(Principal Executive Officer)
/s/Michael J. Sanwald
Michael J. Sanwald
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 25, 2014
86
The Bank of Princeton
NOTES:
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87
The Bank of Princeton
Who We Are
88
The Bank of Princeton
89
The Bank of Princeton
90
The Bank of Princeton
91
The Bank of Princeton
92
The Bank of Princeton
Useful Resources
The Bank of Princeton and MoreBank are proud to be active and partnering with many
organizations to make a difference the communities we serve. Our staff can be found
walking, running and volunteering to help raise money and awareness.
Join us at some of our upcoming events in 2014, which include:
Communiversity in Princeton - April
Shad Fest in Lambertville - April
Earth Day - Montgomery - April
Charity Walks - All locations - from Spring till Fall
Heritage Celebrations - All Locations - Spring 2014
Fireworks - Pennington, Montgomery & Lambertville - Summer 2014
Raritan River Festival - New Brunswick - Fall 2014
Upcoming Events
There’s an App for that!
The Bank of Princeton and MoreBank have developed
Apps to make life more convenient for our customers,
business partners and shareholders.
Links to the Apps can be found on our website,
in iTunes, or the Android Marketplace.
The Bank of Princeton and MoreBank are part
of the AllPoint Network, which gives you
access to 55,000 free ATM’s worldwide.
In addition to the ATM locator on our website,
you can also access this information on the
AllPoint website (www.allpointnetwork.com)
or download the AllPoint ATM Locator App
AllPoint Website
AllPoint App
Spotlight on Business
Deeply seated in the community, The Bank of
Princeton and MoreBank continue to maintain
a focus on the business community. Each
quarter, a local business customer is featured
at our branch locations in the specific market
that they serve. All twelve Spotlight on
Businesses for the quarter can be viewed on
our website along with others from previous
years.
www.thebankofprinceton.com/resources/spotlight-on-business.
What are these funny looking squares? They are QR codes.
QR code (Quick Response Code) is the trademark for a type of matrix barcode (or two-dimensional barcode).
You can download free QR code readers to your smartphone. Then just scan the code,
and you will be taken directly to the source of information.
93