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Horizon BancorpOrganic Innovation Annual Report 2014 At The Bank of Princeton... We listen to you - we appreciate your business, and we’re committed to being a true resource for our community. We understand - and we show it by providing you with the highest level of friendly, helpful, and personalized banking services. We get it - we know you want to be treated with respect, and we thank you, genuinely, for entrusting us with your banking. Most important, we believe that our own success is achieved only when yours is, when we deliver our unique banking experience to you… and everyone we meet. For you, in that way, We make a difference. $955 MM The Bank of Princeton Annual Report 2014 Table of Contents Letter to the Shareholders ................................................................................ i 2014 Form 10-K .................................................................................................. 1 Who We Are ...................................................................................................... 92 At The Bank of Princeton... We listen to you - we appreciate your business, and we’re committed to being a true resource for our community. We understand - and we show it by providing you with the highest level of friendly, helpful, and personalized banking services. We get it - we know you want to be treated with respect, and we thank you, genuinely, for entrusting us with your banking. Most important, we believe that our own success is achieved only when yours is, when we deliver our unique banking experience to you… and everyone we meet. For you, in that way, We make a difference. $955 MM Letter to Shareholders Dear Fellow Shareholders, The Bank of Princeton (the “Bank”) earned $9 million in 2014, an increase of 2% from 2013. We were able to build on our strong results from 2013 and continued to grow loans, deposits and net income in 2014. Book value per share was $17.13 at December 31, 2014, an increase of $3.10 per share, or 22%, from December 31, 2013. Total assets at year-end 2014 were $955 million, an increase of 9% from $877 million at year-end 2013. The resulting increase in assets was driven by growing organically through the Bank’s existing branch network. Gross loans were $733 million at year-end 2014, an increase of $99 million, or 16% from year-end 2013. Deposit balances at year-end 2014 were $848 million, an increase of $99 million, or 13%, compared to year-end 2013 deposit balances of $749 million. The growth in our net income was a direct result of our ability to grow our balance sheet by leveraging our existing network. Despite increased competition as the economy continued to recover, we were able to maintain our net interest margin at 3.80% in 2014 compared to 3.75% in 2013. Our cost of funds, a component of net interest margin, decreased to 0.86% in 2014, down 0.07% from 2013. The Bank remains focused on maintaining high-quality assets as evidenced by our non-performing assets to total assets ratio, which was 1.12% at year end. The collective result of all the aforemen- tioned numbers was the continued strength of the Bank’s return on equity at 12.53% for 2014. We remain committed to improving our financial performance while remaining focused on high-quality asset growth in 2015 so that we may con- tinue to increase value to our shareholders. We are especially delighted to report some of the Bank’s major achievements in 2014. They include: • Our Lending team, consisting of 13 individuals, successfully closed $250 million in Commercial Loans. Collectively their efforts grew the loan portfolio $99 million to $733 million at year end. • A campaign highlighting Business and Personal Checking products featured No Monthly Service Charges was our focus at both The Bank of Princeton and MoreBank. • A “Go Green” partnership with our customers was a huge success. A large portion of our customer base began to receive e-statements reducing mailings and paper. In addition, the Bank rolled out environmentally friendly options such as tablet and smartphone apps. • Digital marketing efforts provided a platform of introduction to the Bank, and included useful product and pro- motional information. • Committed to our philanthropic spirit, our staff participated in supporting 250 plus local non-profit organizations by accepting monetary donations and hosting collection drives of food, clothing, and school supplies at each of our locations. The strength of our balance sheet, coupled with our disciplined growth, was illustrated in the Bank’s record performance for 2014. The Bank of Princeton continues to show an accelerated progression compared to banks in our peer group. “Our focus” rests on establishing, enriching and retaining customer relationships as we meet the needs of the communities we serve. “Our passion” for supporting non-profit and charitable organizations endures. “Our success” as an institution is a result of the hard work and persistence of the Bank’s employees coupled with the partnerships developed throughout our footprint. We are appreciative and motivated by the support of our customers, shareholders, and community partners. The Directors, Management and Staff would like to Thank You, genuinely, for your efforts and for joining with us as we continue to listen, understand and… together… make a difference Edward J. Dietzler, President Andrew M. Chon, Chairman i The Bank of Princeton FEDERAL DEPOSIT INSURANCE CORPORATION Washington, D.C. 20429 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2014 - OR - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] For the transition period from ________________________________ to _______________________________ FDIC Certificate Number: 58513 THE BANK OF PRINCETON (Exact name of Registrant as specified in its Charter) New Jersey (State or other Jurisdiction of Incorporation or Organization) 183 Bayard Lane, Princeton, NJ (Address of Principal Executive Offices) 68-0645074 (I.R.S. Employer Identification No.) 08540 (Zip Code) Registrant’s telephone number, including area code: (609) 921-1700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $5.00 per share Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] YES [ X ] NO Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [ X ] NO Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] YES [ ] NO Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). [ ] YES [ ] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] YES [ X ] NO As of March 17, 2015 there were 4,582,599 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 2015 Annual Meeting of Stockholders to be held April 29, 2015 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 Accounting Fees and Services PART IV Item 15 Exhibits, Financial Statement Schedules Signatures 2 PAGE 3 12 12 12 14 14 14 15 15 31 31 73 73 73 73 74 74 74 74 74 76 The Bank of Princeton Cautionary Note Regarding 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; our borrowers’ ability to repay their loans; changes in the real estate market that can affect real estate that serves as collateral for some of our loans; the adequacy of our allowance for loan losses and our methodology for determining such allowance; 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; changes in technology or interruptions and breaches in security of our information systems; 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 MoreBank branch in Philadelphia, Pennsylvania. Our headquarters and one of our branches are located at 183 Bayard Lane, Princeton, New Jersey 08540. Our telephone number is (609) 921-1700 and our website address is www.thebankofprinceton.com. 3 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. 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, 2014, 2013, 2012, 2011 and 2010: (in thousands) Commercial real estate Commercial and industrial Construction Residential first-lien mortgage Home equity Consumer Total loans $ 2014 450,250 127,469 78,822 45,383 30,711 2,654 735,289 $ 2013 372,273 118,274 76,477 40,242 28,204 132 635,602 As of December 31, 2012 2011 $ 317,946 103,627 62,702 29,127 25,617 1,480 540,499 $ 233,504 85,527 56,453 15,396 19,341 1,957 412,178 $ 2010 166,472 60,768 25,970 11,870 19,285 1,441 285,806 - Deferred fees and costs Allowance for loan losses Loans, net (2,150) (10,008) 723,131 $ (1,769) (8,493) 625,340 $ (1,351) (7,033) 532,115 (955) (5,362) 405,861 (540) (3,693) 281,573 $ $ $ 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. 4 The Bank of Princeton 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 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, 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 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 automated teller machines (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 from time to time 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, 2014, we had one customer whose deposits with us represented 5.9 percent of our total deposits. We believe we have sufficient liquidity to fund our operations should this customer withdraw its 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 percent of our total deposits as of December 31, 2014. 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 We also offer, on a somewhat limited basis, payroll-related services, credit card and merchant credit card processing through third parties whereby we do not undertake credit or fraud risk. 5 The Bank of Princeton 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, 2014, we had 131 total employees and approximately 128 full-time equivalent employees. Supervision and Regulation General. We are extensively regulated under both federal and state law. These laws restrict permissible activities and investments and require compliance with various consumer protection provisions applicable to lending, deposit, brokerage and fiduciary activities. They also impose capital adequacy requirements and conditions to our ability to 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. 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, 6 The Bank of Princeton 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 percent of our capital and surplus for all covered transactions with such affiliate or 20 percent 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 ours. 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 (“DIF”). 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 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. 7 The Bank of Princeton 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, 2014, averaged 1.28 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 percent 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 percent for assets with low credit risk, such as certain US Treasury securities, to 100 percent 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 percent and a ratio of total capital to risk-weighted assets of at least 8.00 percent. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. At December 31, 2014, we met both requirements with Tier 1 and Total capital ratios of 9.9 percent and 11.2 percent, respectively. 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 percent. At December 31, 2014, our leverage ratio was 8.2 percent. 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; and 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. 8 The Bank of Princeton 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 began 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 percent; A minimum ratio of tier 1 capital to risk-weighted assets of 6 percent; A minimum ratio of total capital to risk-weighted assets of 8 percent (no change from the current rule); and A minimum leverage ratio of 4 percent. In addition, the final rules establish a common equity Tier 1 capital conservation buffer of 2.5 percent 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. 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. 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 percent, its Tier 1 risk-based capital ratio exceeds 6 percent, and its Total risk-based capital ratio exceeds 10 percent. 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 percent, a Tier 1 risk- based capital ratio that is less than 3 percent, or a leverage ratio that is less than 3 percent, and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2 percent. 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 9 The Bank of Princeton 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 salary increases 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, 2014, 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. Beginning January 1, 2015, all insured depository institutions must incorporate the revised regulatory capital requirements into the prompt corrective action framework, including the new common equity Tier 1 capital to risk-weighted assets ratio and the higher minimum Tier 1 risk-based capital ratio requirements. 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, 2014, 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. Among other things, the Dodd-Frank Act created 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. 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-capitalized and well-managed; 10 The Bank of Princeton • • • • • • • 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 Securities Exchange Act of 1934 (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. Jumpstart Our Business Startups (JOBS) Act. In April 2012, the Jumpstart Our Business Startups Act of 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 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; 11 The Bank of Princeton • • • 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 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 (the “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 our 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. 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, 2014: 12 The Bank of Princeton Leased or Owned Leased Date of Lease Expiration October 31, 2018 Leased August 11, 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 Leased November 30, 2017 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 Arch Street Branch (MoreBank Division) 921 Arch Street Philadelphia, PA 13 The Bank of Princeton Item 3. Legal Proceedings On February 3, 2015, the FDIC terminated its Consent Order with us (the “Consent Order”). The Consent Order was issued on January 30, 2014 and required us to strengthen our BSA/AML program and internal audit function, and to address other related matters. Concurrently with the termination of the Consent Order, a related Acknowledgement and Consent between us and the NJDOBI also terminated. From time to time, we may be a party to ordinary routine litigation incidental to our business. Except for the Consent Order and the related Acknowledgement and Consent, 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, 2014 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 17, 2015, there were approximately 672 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 percent 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. Securities Authorized for Issuance under Equity Compensation Plans The following table summarizes our equity compensation plan information as of December 31, 2014. See Note 13 to our audited financial statements included in this Annual Report on Form 10-K for a description of the material features of each plan. 14 The Bank of Princeton 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 229,667 299,867 1,200 97,500 46,000 674,234 $11.91 $14.07 $25.00 $10.00 $25.00 $13.51 23,133 300,133 - - - 323,266 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, 2014 and December 31, 2013 Comparison of Operating Results for the Years Ended December 31, 2014 and December 31, 2013 Rate/Volume Analysis Liquidity, Commitments and Capital Resources Off-Balance Sheet Arrangements Impact of Inflation Return on Equity and Assets Critical Accounting Policies and Estimates Recently Issued Accounting Standards Overview and Strategy 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 ATMs, current operating software, timely reporting, online bill pay and other similar up-to- 15 The Bank of Princeton 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, 2014 and December 31, 2013 General. Our total assets increased from $877.4 million at December 31, 2013 to $955.3 million at December 31, 2014, an increase of $77.9 million, or nine percent. This increase was primarily due to increases in loans receivable, net of $97.8 million and bank-owned life insurance of $9.1 million, partially offset by a decrease in securities available-for-sale of $29.5 million. Total liabilities increased from $813.2 million at December 31, 2013 to $876.8 million at December 31, 2014, an increase of $63.6 million, or eight percent. This increase was primarily the result of a $98.8 million increase in total deposits, partially offset by a $36.1 million decrease in borrowings. Total stockholders’ equity increased from $64.2 million at December 31, 2013 to $78.5 million at December 31, 2014, an increase of $14.3 million, or 22 percent. This increase was primarily attributable to net income of $9.0 million and increases in additional paid-in capital of $0.7 million and accumulated other comprehensive income of $4.5 million. The growth of our balance sheet has been a direct result of the successful implementation of our business plan. Although we will continue to seek to grow our business through the continued implementation of our business plan, the growth experienced in the past may not be indicative of future results. We manage our balance sheet based on a number of interrelated criteria, such as changes in interest rates, fluctuations in certain asset and liability categories whose changes are not totally controlled by us, such as swings in deposit account balances driven by depositors’ needs, prepayments and issuer call options exercised on securities available for sale, early payoffs on loans, investment opportunities presented by market conditions, lending originations, capital provided by earnings, and active management of our overall liquidity positions. The management of these dynamic and interrelated elements of our balance sheet result in fluctuations in balance sheet items throughout the year. Cash and due from banks. Cash and cash equivalents increased from $27.4 million at December 31, 2013 to $31.9 million at December 31, 2014, an increase of $4.4 million, or 16 percent. 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. 16 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, 2014, 2013 and 2012. 2014 December 31, 2013 2012 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value $ 14,770 $ 14,551 $ 38,112 $ 35,689 $ 27,330 $ 28,268 - - - - - - 76,428 77,188 72,680 73,084 88,340 90,887 (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 $ 162,863 $ 163,800 $ 199,489 $ 193,314 $ 181,202 $ 71,665 - 72,061 - 88,697 - 84,541 - 65,532 - 66,886 - 186,041 Securities available-for-sale, which is carried at fair value, decreased $29.5 million, or 15 percent, during the twelve months ended December 31, 2014. This decrease was the result of security sales as we utilized cash proceeds to grow our loan portfolio and repay borrowings. The following table presents a summary of the amortized cost and fair value of our HTM securities at December 31, 2014, 2013 and 2012. 2014 December 31, 2013 2012 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value (in thousands) Mortgage-backed Securities-U.S. Government-sponsored Enterprises (GSEs) $ 420 $ 456 $ 423 $ 454 $ 600 $ 643 HTM securities decreased minimally from December 31, 2013 to December 31, 2014. The decline in HTM securities is the result of maturities and our strategy to not purchase additional securities for the HTM portfolio as we manage our investment portfolio to allow for greater flexibility as our liquidity needs change. The following table summarizes the maturity distribution schedule of the amortized cost of debt securities with corresponding weighted-average yields at December 31, 2014. 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. 17 The Bank of Princeton (in thousands) One year or less After one through five years December 31, 2014 After five through ten years After ten years Total U.S. Treasury Securities Mortgage-backed Securities-U.S. Government- sponsored Enterprises (GSEs) Obligations of state and political subdivisions Total $ - $ - $ 14,770 $ - $ 14,770 622 - 622 $ 1,041 2,896 3,937 $ 37,424 42,060 37,341 76,428 71,665 26,709 78,820 $ 79,484 $ 162,863 $ Weighted average yield 2.19% 2.60% 2.17% 2.59% 2.39% At December 31, 2014, there were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than ten percent 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 from $625.3 million at December 31, 2013 to $723.1 million at December 31, 2014, an increase of $97.8 million, or 16 percent. 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 a 13 percent year-over- year increase in our total deposits and a decrease of securities available-for-sale. The following table details our loan maturities by loan segment and interest rate type at December 31, 2014: (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 December 31, 2014 Due in one year or less Due after one through five years Due after five years Total $ 9,312 $ 92,110 $ 36,215 20,893 1,045 609 2,585 30,336 16,429 - 354 33 $ 70,659 $ 139,262 $ 348,828 $ 450,250 127,469 78,822 45,383 30,711 2,654 525,368 $ 735,289 60,918 41,500 44,338 29,748 36 $ 14,661 $ 55,998 89,646 $ 49,616 $ 70,659 $ 139,262 $ 488,780 36,588 $ 140,895 594,394 525,368 $ 735,289 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. 18 The Bank of Princeton 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, 2014, 2013, 2012, 2011, and 2010. (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, 2014 2013 2012 2011 2010 6,190 $ 2,535 $ 2,690 $ 1,185 1,911 166 419 - 9,871 3,797 4,596 892 - 359 11 8,548 2,412 5,127 - 182 394 - 8,238 4,858 5,229 $ 3,488 1,782 - - 276 - 5,546 3,788 2,135 892 - 456 - 8,712 2,332 - - - - - - - 13,668 804 - - - - - - - - - - - - - - 9,334 10,960 1,140 1,550 14,472 $ 14,023 $ 12,510 $ 11,963 $ 10,474 - - - - - - - 11,044 919 - - - - - - - 13,096 927 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, 2014 and for other information on our loan ratings of special mention, substandard and doubtful, all of which contain varying degrees of 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 least 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. 19 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 segment 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 $8.5 million at December 31, 2013 to $10.0 million at December 31, 2014, an increase of $1.5 million, or approximately 18 percent. This increase was primarily attributable to applying our allowance methodology to our loan portfolio at December 31, 2014, which increased approximately 16 percent from December 31, 2013 to December 31, 2014. The amount of allowance attributable to qualitative factors increased in 2014 as a result of increasing concentrations within the commercial real estate loan segment. Qualitative factors also account for our relatively unseasoned loan portfolio as compared to peers. Other factors affecting the increase in our allowance were the year-over-year increase in past due loans as a percentage of total loans receivable and the year-over-year increase in loans classified special mention, substandard and doubtful in accordance with our loan rating system as a percentage of total loans. Additionally, there was a nominal year-over-year increase in nonperforming assets and performing TDRs. Offsetting these factors was a marked year-over-year decrease in charged-off loans, net of recoveries. The large decrease in charged-off loans in 2014 compared to 2013 had the direct effect of reducing the provision for loan losses year-over-year. As a consequence of these changing attributes within our loan portfolio, our ratio of allowance for loan losses to total loans receivable increased slightly at December 31, 2014 compared to December 31. 2013. 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, 2014, 2013, 2012, 2011 and 2010: (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 2014 Year Ended December 31, 2012 2013 2011 2010 $ 8,493 $ 7,033 $ 5,362 $ 3,693 $ 2,147 (116) - - - - (29) (145) (73) (156) (370) - - - (599) - (388) - - - (5) (393) 5 70 - - - 5 80 (65) 1,580 10,008 $ - 12 95 15 - - - - 1 - - - 96 27 (297) (572) 2,032 1,968 8,493 $ 7,033 $ (286) (217) (143) - (80) - (726) (1,251) (446) (7) - (52) - (1,756) 1 - - 18 - - - - - - - - 1 18 (1,755) (708) 2,377 3,301 5,362 $ 3,693 Net charge-offs Additions charged to operations (provision for loan losses) $ Balance at end of year Net charge offs to average loans outstanding 0.01 % 0.10 % 0.06 % 0.21 % 0.84 % 20 The Bank of Princeton 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. The following table presents the allocation of the allowance for loan losses by portfolio segment for the years ended December 31, 2014, 2013, 2012, 2011 and 2010. 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. 2014 2013 2012 2011 December 31, (in thousands) Amount Commercial real estate Commercial and industrial Construction Residential first-lien mortgage Home equity Consumer Unallocated $ 3,621 1,530 2,719 318 307 17 1,496 % of Loans to Total Loans Amount % of Loans to Total Loans Amount % of Loans to Total Loans Amount % of Loans to Total Loans 61.2 % $ 17.3 10.7 2,994 1,419 2,638 58.6 % $ 2,557 1,244 18.6 2,163 12.0 58.8 % $ 2,082 1,011 19.2 1,965 11.6 56.6 % 20.8 13.7 6.2 4.2 .4 - 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 - Total $ 10,008 100.0 % $ 8,493 100.0 % $ 7,033 100.0 % $ 5,362 100.0 % 2010 (in thousands) Amount Commercial real estate Commercial and industrial Construction Residential first-lien mortgage Home equity Consumer Unallocated $ 1,484 718 904 78 178 9 322 % of Loans to Total Loans 58.1 % 21.3 9.1 4.2 6.8 0.5 - Total $ 3,693 100.0 % 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. 21 The Bank of Princeton Premises and equipment. Premises and equipment, net increased slightly from December 31, 2013 to December 31, 2014, as additions to premises and equipment that were primarily the result of leasehold improvements in our expanded operations center and purchases of additional computer equipment were mostly offset by depreciation expense. Accrued interest receivable and other assets. Accrued interest receivable and other assets decreased $3.9 million, or 26 percent, from December 31, 2013 to December 31, 2014, primarily due to decreases of $2.2 million in our deferred tax asset and $1.8 million in restricted investments in bank stocks. The decrease in our deferred tax asset was primarily due to the tax effect of the year-over-year decrease in unrealized losses on securities available-for-sale. The decrease in unrealized losses on securities available-for-sale, which are carried at fair value, was due to an increase in market interest rates from December 31, 2013 to December 31, 2014. The decrease in restricted investments in bank stocks was primarily the result of a $36.1 million decrease in FHLB-NY borrowings from December 31, 2013 to December 31, 2014. 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. Deposits. Total deposits increased from $749.0 million at December 31, 2013 to $847.9 million at December 31, 2014, an increase of $98.8 million, or 13 percent. Non-interest-bearing deposits increased $27.5 million, or 26 percent, to $135.2 million at December 31, 2014, compared to $107.6 million at December 31, 2013. Interest-bearing deposits increased $71.3 million, or 11 percent, to $712.7 million at December 31, 2014, compared to $641.4 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 businesses and the high level of individualized customer service we provide. The following table presents our time deposit maturities as of December 31, 2014. December 31, 2014 (in thousands) Time deposits of $100,000 or more Time deposits of less than $100,000 Total Total 172,652 122,020 294,672 Three months or less Over three through six months $ 20,944 $ 10,249 13,867 17,474 $ Over six through twelve months Over twelve months 62,299 $ 71,935 $ 38,319 59,585 $ 27,723 $ 34,811 $ 100,618 $ 131,520 $ 22 The Bank of Princeton The following table presents the average balance of our deposit accounts for the years ended December 31, 2014, 2013 and 2012, and the average cost of funds for each category of our deposits. 2014 Avg. Rate Paid Average Amount 2013 % of Average Total Deposits Average Amount Avg. Rate Paid % of Average Total Deposits Average Amount 2012 Avg. Rate Paid % of Average Total Deposits $ 125,472 0.00 % 15.9 % $ 99,650 0.00 % 13.6 % $ 65,333 0.00 % 10.3 % 151,917 148,462 89,647 0.75 0.62 0.91 19.2 18.8 11.3 148,969 155,438 0.78 0.60 89,044 0.86 20.3 21.2 12.1 119,121 0.99 140,405 0.61 87,604 0.77 18.7 22.1 13.8 153,039 1.48 19.3 120,504 1.71 16.3 103,222 2.32 16.2 (in thousands) Demand, non- interest-bearing checking Demand Interest- bearing Money market Savings deposits Time deposits of $100,000 or more Other time deposits 122,406 1.51 15.5 119,464 1.70 16.5 120,525 1.93 Total $ 790,943 .88 % 100.0 % 733,069 .95 % 100.0 % 636,210 1.17 % 18.9 100.0 % Borrowings. Borrowings decreased from $60.4 million at December 31, 2013 to $24.3 million at December 31, 2014, a decrease of $36.1 million, or 60 percent. The Bank utilizes its available capacity with FHLB-NY as an additional source of liquidity to fund increases in asset classes not funded by increases in our deposits. The deposit growth experienced by the Bank during the year ended December 31, 2014 and amounts realized from the decrease in securities available-for-sale were sufficient to fund our loan growth and increase in bank-owned life insurance, causing us to reduce our borrowings with the FHLB-NY. FHLB-Pittsburgh advances were among the liabilities assumed in connection with our acquisition of MoreBank in September, 2010. The FHLB-Pittsburgh fixed-rate term advances that remained at December 31, 2013 were paid off during 2014 in accordance with their terms. We do not have additional borrowing capacity with the FHLB-Pittsburgh as our relationship with FHLB-Pittsburgh terminated once these advances were repaid. Accrued interest payable and other liabilities. Accrued interest payable and other liabilities increased from $3.8 million at December 31, 2013 to $4.6 million at December 31, 2014, an increase of $0.8 million, or 22 percent. This increase was attributable to increases in accrued salary expense of $0.1 million and accrued expenses and other liabilities of $0.8 million, partially offset by a decrease of $0.1 million in accrued interest payable. The increase in accrued expenses and other liabilities was primarily attributable to an increase in FDIC assessments payable and income taxes payable. The increase in FDIC assessments payable is the result of a higher assessment rate due to the Consent Order. The increase in income taxes payable was attributable to the timing of cash payments at December 31, 2014 as compared to the prior year. Stockholders’ equity. Stockholders’ equity increased from $64.2 million at December 31, 2013 to $78.5 million at December 31, 2014, an increase of $14.3 million, or 22 percent. The increase in stockholders’ equity was due to a $9.0 million increase in retained earnings from current year net income, a $4.5 million increase in accumulated other comprehensive income due to unrealized net gains in the securities available-for-sale portfolio at December 31, 2014 compared to December 31, 2013, and a $0.7 million increase in paid-in-capital due to an increase in stock-based compensation expense in the current year compared to the prior year. 23 The Bank of Princeton Comparison of Operating Results for the Years Ended December 31, 2014 and December 31, 2013 General. Net income for the year ended December 31, 2014 was $9.0 million, an increase of approximately $0.2 million, or two percent, from $8.8 million for the year ended December 31, 2013. This increase was primarily attributable to an increase in net interest income after provision for loan losses that was partially offset by increases in non-interest expense and income tax expense. Net interest income. Net interest income after provision for loan losses increased $3.9 million, or 14 percent, to $31.8 million for the year ended December 31, 2014, compared to $28.0 million for the year ended December 31, 2013. Our interest rate spread increased from 3.55 percent for the year ended December 31, 2013 to 3.61 percent for the year ended December 31, 2014, an increase of six basis points. Our average interest-earning assets increased $77.7 million, or ten percent, while the average yield on those assets was relatively unchanged. The increase in average interest-earning assets was primarily the result of our ability to continue to increase the size of our loan portfolio. Our average interest-bearing liabilities increased $49.0 million, or seven percent, while the average cost of those liabilities decreased seven basis points. Total interest and dividend income. Total interest and dividend income increased $3.5 million, or nine percent, to $40.6 million for the year ended December 31, 2014, compared to $37.1 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 $3.9 million, or 12 percent, to $36.2 million for the year ended December 31, 2014, compared to $32.3 million for the prior year. The increase was attributable to an increase in the average balance of loans receivable, net of $107.3 million from $570.7 million in 2013 to $678.1 million in 2014. This increase was partially offset by a 33 basis point decrease in the year-over-year average yield on loans. 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, 2014. Interest income on securities available-for-sale decreased approximately $464,000, or ten percent, for the year ended December 31, 2014 compared to the prior year. This increase was primarily attributable to a $30.2 million decrease in average balances and a 13 basis point increase in the average yield. Average balances decreased due to sales of securities that provided cash to fund the increase in our loan portfolio. Interest income on securities held-to-maturity changed minimally during the year ended December 31, 2014 compared to the prior year period. We continue to maintain our strategy to not purchase additional securities for the held-to- maturity portfolio as we manage our investment portfolio to allow for greater flexibility as our liquidity needs change. Interest Expense. Total interest expense increased $42,000 for the year ended December 31, 2014, compared to the prior year period. This slight increase was due to a $49.0 million increase in average interest-bearing liabilities, which was almost entirely offset by a seven basis point decrease in the cost of interest-bearing liabilities. Interest expense on deposits increased $28,000 for the year ended December 31, 2014 compared to the prior year. Average interest-bearing deposits increased $32.1 million, or five percent, to $665.5 million for the year ended December 31, 2014, compared to $633.4 million in 2013. The cost of interest-bearing deposits decreased five basis points from year to year. The Bank worked to grow its total deposits during 2014 through organic growth; average interest-bearing demand and savings deposits as well as average time deposits all increased for the year ended December 31, 2014 compared to the prior year period. The lower cost of interest-bearing deposits was reflective of our efforts to optimally manage our deposit mix and the overall market trend for deposit rates, 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 decreased $452,000 in 2014 compared to the prior year. The decrease in the 2014 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, the overall increase in our loan portfolio year-over-year, and the decrease in loan charge-offs, net of recoveries (“net charge-offs”) recorded in our allowance for loan losses during the year ended December 31, 2014 compared to the prior period. The net charge-offs recorded in our allowance for loan losses were $65,000 in 2014, compared to $572,000 in 2013. See the section 24 The Bank of Princeton 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 $71,000 in the year ended December 31, 2014 compared to the prior year. In 2014, non-interest income included gains of $1.0 million on sales of securities available-for-sale, $1.2 million from service charges and other fees earned in the normal course of banking operations, and $430,000 from bank- owned life insurance. 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, $264,000 from bank-owned life insurance and an $851,000 gain on life insurance proceeds. The 2013 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 who remained an insured person in our bank-owned life insurance program following his separation of employment. Non-Interest Expense. Non-interest expense increased approximately $3.5 million, or 19 percent, to $22.4 million in 2014, compared to $18.9 million in the prior year. The increase was due to the growth that the Bank experienced during 2014 and additional expenses incurred as a result of the Consent Order. Salaries and employee benefits increased approximately $1.4 million, or 15 percent, to $11.3 million in 2014, compared to $9.8 million in the prior year. The increases in costs were related to an increase in average FTEs associated with the growth of the bank, and included the full-year impact of personnel added within the BSA department during the fourth quarter of 2013. These 2013 additions to the BSA 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. Occupancy and equipment expenses increased approximately $325,000, or 10 percent, to $3.5 million in 2014 compared to $3.2 million in the prior year. The increase was primarily attributable to the impact of costs associated with an expanded operations center that was opened in the second quarter of 2014. Professional fees increased $537,000, or 37 percent, to approximately $2.0 million in 2014 compared to $1.4 million in 2013. The increase was primarily attributable to a range of professional services procured pursuant to various requirements of the Consent Order, including those related to internal audit and BSA analytical services. A significant portion of these incremental expenses were related to Consent Order remediation activities that are not anticipated to be incurred going forward. Data processing and communications expense increased $187,000, or 13 percent, to approximately $1.7 million in 2014 compared to $1.5 million in 2013. 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. Federal deposit insurance assessments during the year ended December 31, 2014 were $1.2 million, compared to $567,000 in the prior year. Our federal deposit insurance assessment increased substantially in 2014 as a direct result of the Consent Order. OREO, net increased $217,000 in 2014 compared to the prior year. The increase was primarily attributable to the write-down of two properties below their initial net realizable values in 2014. Other non-interest expense increased $193,000, or 11 percent, to $1.9 million in 2014, compared to $1.7 million in the prior year. This increase was primarily attributable to an increase in losses on disposal of assets. All other non-interest expenses changed minimally during 2014 as we sought to manage our non-interest expenses and maintain our operating efficiency as we continue to organically grow the bank. Income Tax Expense. The provision for income taxes increased $193,000, or six percent, to $3.2 million in 2014 compared to $3.0 million in the prior year. The increase was due to a three percent increase in pre-tax income and an increase in our effective tax rate from 25.3 percent in 2013 to 26.0 percent in 2014. The increase in the effective tax rate was primarily due to the receipt of an $851,000 tax-exempt gain from life insurance proceeds in 2013. 25 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) For the Year Ended December 31, Average Balance 2014 Interest Average Yield/Cost Average Balance 2013 Interest Average Yield/Cost $ 678,058 $ 36,170 5.33 % $ 570,720 $ 32,285 5.66 % 177,073 421 22,953 878,505 32,167 910,672 241,564 148,462 275,445 665,471 $ $ 4,206 21 170 40,567 2.38 4.99 0.74 4.62 1,953 918 4,109 6,980 0.81 0.62 1.49 1.05 207,227 497 22,341 800,785 27,017 827,802 238,012 155,438 239,968 633,418 $ $ 42,839 177 0.41 25,903 708,310 130,498 838,808 71,864 7,157 1.01 % 659,321 105,558 764,879 62,923 $ 910,672 $ 827,802 4,670 23 135 37,113 2.25 4.70 0.60 4.63 1,925 936 4,091 6,952 163 0.81 0.60 1.71 1.10 0.63 7,115 1.08 % 3.61 % 3.55 % Net interest income $ 33,410 $ 29,998 Net yield on interest- earning assets(2) Ratio of average interest- earning assets to average interest-bearing liabilities 3.80 % 1.24x 3.75 % 1.21x (1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (2) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 26 The Bank of Princeton For the Year Ended December 31, 2012 Average Balance Interest Average Yield/Cost $ 477,366 $ 29,133 6.10 % 212,464 922 17,362 708,114 26,977 735,091 206,725 140,405 223,747 570,877 $ $ 4,369 37 134 33,673 2.06 4.01 0.77 4.76 1,859 863 4,259 6,981 0.90 0.61 1.90 1.22 34,273 273 0.80 7,254 1.20 % 605,150 70,730 675,880 59,211 $ 735,091 (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 $ 26,419 Net yield on interest- earning assets(2) Ratio of average interest- earning assets to average interest-bearing liabilities 3.56 % 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 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 $ Year Ended December 31, 2014 vs. 2013 Increase (Decrease) Due to Year Ended December 31, 2013 vs. 2012 Increase (Decrease) Due to Volume Rate Net Volume Rate Net $ 5,726 $ (1,841 ) $ 3,885 $ 5,281 $ (2,129 ) $ 3,152 (665 ) (3 ) 4 5,062 $ 201 1 31 (1,608 ) $ (464 ) (2 ) 35 3,454 $ 54 (20 ) 30 5,345 $ 247 6 (29) (1,905 ) $ 301 (14 ) 1 3,440 Interest expense: Demand, interest-bearing and savings Money market Time deposits Federal Home Loan Bank borrowings $ Total interest-bearing liabilities $ 29 $ (44 ) 530 (1 ) $ 26 (512 ) $ 28 (18 ) 18 253 $ 90 277 (187 ) $ (18 ) (444 ) 70 (56 ) 14 (53) (57 ) 66 72 (167 ) (110 ) 585 $ (543 ) $ 42 $ 567 $ (706 ) $ (139 ) Change in net interest income $ 4,477 $ (1,065) $ 3,412 $ 4,778 $ (1,199) $ 3,579 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, 2014, we had $24.3 million of overnight advances outstanding from the FHLB-NY. At December 31, 2014, we had available capacity with FHLB-NY, subject to certain collateral restrictions, of $477.5 million. 28 The Bank of Princeton Additionally, we are a member of the Atlantic Community Bankers Bank (“ACBB”) and as of December 31, 2014, 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, 2014: Years Ended December 31: 2015 2016 2017 2018 2019 Thereafter Total minimum payments required (in thousands) $ 1,377 1,278 1,070 922 669 1,037 $ 6,353 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, 2014, 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) 2014 2013 Performance and standby letters of credit Commitments to fund loans Unfunded commitments under lines of credit $ $ 8,843 91,228 11,320 111,391 $ $ 7,561 76,027 9,255 92,843 For additional information regarding our outstanding lending commitments at December 31, 2014, see Note 10 – Commitments and Contingencies in the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K. 29 The Bank of Princeton 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, 2014, 2013 and 2012. Return on Average Assets (ROA) Return on Average Equity (ROE) Average Equity to Average Assets 2014 0.99% 12.53% 7.89% 2013 1.06% 13.99% 7.60% 2012 0.86% 10.66% 8.05% 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, 2014, 2013 and 2012. 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. 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 non-accretable discount. The non-accretable discount represents estimated future credit losses expected to be incurred over 30 The Bank of Princeton 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 non- accretable 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 non-accretable 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 (“ASC”) Topic 740, Income Taxes. This includes guidance related to accounting for uncertainties in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. We had no material unrecognized tax benefits or accrued interest and penalties as of December 31, 2014 and 2013. 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, we are not required to provide the information otherwise required by this Item. 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. 31 The Bank of Princeton THE BANK OF PRINCETON INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Condition Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Page 33 34 35 36 37 38 40 32 The Bank of Princeton 33 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 $456 and $454, respectively) Loans receivable, net of allowance for loan losses of $10,008 and $8,493 at December 31, 2014 and 2013, respectively Bank-owned life insurance Other real estate owned (OREO) Premises and equipment, net Accrued interest receivable and other assets December 31, 2014 2013 $ $ 31,872 163,800 420 723,131 17,929 804 5,816 11,490 27,425 193,314 423 625,340 8,799 927 5,772 15,428 TOTAL ASSETS $ 955,262 $ 877,428 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, 4,582,315 and 4,578,679 shares issued and outstanding at December 31, 2014 and 2013, respectively Paid-in capital Retained earnings Accumulated other comprehensive income (loss) TOTAL STOCKHOLDERS’ EQUITY $ 135,157 $ 712,700 847,857 24,300 4,603 876,760 22,912 29,755 25,259 576 78,502 107,616 641,394 749,010 60,412 3,774 813,196 22,893 29,011 16,258 (3,930) 64,232 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 955,262 $ 877,428 See notes to consolidated financial statements. 34 The Bank of Princeton THE BANK OF PRINCETON CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) For the Years Ended December 31, 2014 2013 $ 36,170 $ 32,285 INTEREST AND DIVIDEND INCOME Loans receivable, including fees Securities available-for-sale: Taxable Tax-exempt Securities held-to-maturity Other interest and dividend income TOTAL INTEREST AND DIVIDEND INCOME INTEREST EXPENSE Deposits Borrowings TOTAL INTEREST EXPENSE NET INTEREST INCOME Provision for loan losses NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES NON-INTEREST INCOME Gain on sale of securities available-for-sale, net 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. $ $ $ 35 2,055 2,151 21 170 40,567 6,980 177 7,157 33,410 1,580 31,830 1,006 430 1,193 - 117 2,746 11,288 3,479 1,975 1,665 1,223 208 311 316 1,942 22,407 12,169 3,168 9,001 1.97 1.92 $ $ $ 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 The Bank of Princeton THE BANK OF PRINCETON CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) For the Years ended December 31, 2014 2013 NET INCOME Other comprehensive income (loss) Unrealized holding gains (losses) arising during period on securities available-for-sale Income tax effect on unrealized holding gains (losses) Less: reclassification adjustment for gains on sales of securities available-for-sale1 Income tax effect on reclassification adjustment for gains on sales of securities available-for-sale2 Total other comprehensive income (loss) COMPREHENSIVE INCOME $ 9,001 $ 8,801 8,118 (2,948 ) (1,006 ) 342 4,506 13,507 $ (10,755) 3,602 (259 ) 88 (7,324) 1,477 $ 1 Amounts are included in Gain on sale of securities available-for-sale, net on the Consolidated Statements of Income as a separate element within Total non-interest income. 2 Amounts are included in Income Tax Expense in the Consolidated Statements of Income. See notes to consolidated financial statements. 36 The Bank of Princeton THE BANK OF PRINCETON CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the Years Ended December 31, 2014 and 2013 (in thousands, except share and per share data) Common stock Paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total 22,893 - - - - 22,893 - - 28,539 - - 7,457 8,801 - 1 471 $ 29,011 - - - - $ 16,258 $ 9,001 - 3,394 - (7,324) - - (3,930) - 4,506 $ 62,283 8,801 (7,324) 1 471 64,232 9,001 4,506 19 - 22,912 $ 22 722 $ 29,755 - - $ 25,259 $ - - 576 $ 41 722 78,502 $ Balance, January 1, 2013 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 Net income Other comprehensive income Stock options exercised (66 shares at $13.75 per share, 3,520 shares at various and 50 shares at $12.00 per share) Stock-based compensation expense Balance, December 31, 2014 See notes to consolidated financial statements. 37 The Bank of Princeton THE BANK OF PRINCETON CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2014 2013 $ 9,001 $ 8,801 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 Deferred income tax expense Net loss on other real estate owned Amortization of core deposit intangible Increase in accrued interest receivable and other assets Increase (decrease) in accrued interest payable and other liabilities NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities Proceeds from sale of available-for-sale securities Maturities, calls and principal repayments of available-for-sale securities Maturities, calls and principal repayments of held-to-maturity securities Net increase in loans Purchases of bank-owned life insurance Proceeds from bank-owned life insurance Proceeds on sale of other real estate owned Purchases of premises and equipment Redemptions (purchases) of restricted bank stock NET CASH USED IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits Net (repayments) proceeds of overnight borrowings Repayments of term borrowings Proceeds from exercise of stock options NET CASH PROVIDED BY FINANCING ACTIVITIES 1,580 959 722 (687) 763 158 (11) (1,006) (430) - 57 (452) 197 126 (130) 829 11,676 (30,121) 46,256 22,183 4 (100,628) (8,700) - 420 (1,060) 1,788 (69,858) 98,689 (33,800) (2,301) 41 62,629 2,032 920 471 (1,131) 621 59 (29) (259) (264) (851) - (476) 51 125 (579) (2,335) 7,156 (64,313) 10,257 37,159 177 (96,941) - 1,234 1,635 (851) (1,490) (113,133) 76,587 35,900 (3,705) 1 108,783 2,806 24,619 27,425 NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS, END OF PERIOD 4,447 27,425 31,872 $ $ See notes to consolidated financial statements. 38 The Bank of Princeton THE BANK OF PRINCETON CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued) (in thousands) For the Years Ended December 31, 2014 2013 SUPPLEMENTARY CASH FLOWS INFORMATION: Interest paid Income taxes paid $ $ 7,259 $ 3,198 $ 7,008 4,392 SUPPLEMENTARY SCHEDULE OF NONCASH ACTIVITIES: Transfers from loans receivable, net to other real estate owned (OREO) $ 494 $ 1,063 See notes to consolidated financial statements. 39 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, 2014, the Bank had 125 full-time employees and 6 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 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, 2014 and 2013. 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. 40 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 surrounding areas as well as 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 (loss) component of stockholders’ equity. The Bank held no trading securities at December 31, 2014 and 2013. 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities, 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 41 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Summary of Significant Accounting Policies (Continued) security and it is not more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors shall be recognized in other comprehensive income, net of applicable tax benefit. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment will be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. For equity securities, when the Bank decides to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than- temporarily impaired in the period in which the decision to sell is made. The Bank recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made. Loans Receivable Loans receivable 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 segments. For all segments 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 segments 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 Consolidated Statements 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 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. 42 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Summary of Significant Accounting Policies (Continued) 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 segment, including loans not considered impaired, as well as smaller balance homogeneous loans, such as residential mortgage, home equity and consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these loan segments, 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; and 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 and personal bankruptcy of the borrower. 43 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Summary of Significant Accounting Policies (Continued) 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 impaired loans are measured based on the estimated fair value of the loan’s collateral, less costs to sell the property. 44 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Summary of Significant Accounting Policies (Continued) 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 segments 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. 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. 45 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Summary of Significant Accounting Policies (Continued) Premises and equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight- line method over the shorter of the lease term or estimated useful lives of the related assets. Accrued interest receivable and other assets Accrued interest receivable and other assets 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 $1.9 million and $3.7 million is carried at cost at December 31, 2014 and 2013, 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, 2014 and 2013. Management believes no impairment charge is necessary related to the FHLB restricted stock or the ACBB restricted stock as of December 31, 2014 or 2013. 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 approximately $104,000 and $230,000 as of December 31, 2014 and 2013, respectively. Amortization expense is anticipated to be approximately $65,000 in 2015 and approximately $9,000 in 2016, 2017, 2018 and 2019, respectively. 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, 2014 and 2013. 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, 2014 and 2013. 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, 2014, tax years after 2011 are subject to federal examination and tax years after 2010 to state examination. Tax regulations are subject to interpretation of the related tax laws and regulations and require significant judgment to apply. 46 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Summary of Significant Accounting Policies (Continued) 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 $77,000 and $71,000, respectively during the years ended December 31, 2014 and 2013. 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. 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. 47 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Summary of Significant Accounting Policies (Continued) 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 consolidated statements of financial condition, such items, along with net income, are components of comprehensive income. Accumulated other comprehensive income is comprised of net unrealized holding gains and losses, net of taxes, on available-for-sale securities. Realized gains or losses are reclassified out of accumulated other 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, 2013 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 January 2014, the FASB issued Accounting Standards Update (“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 periods, and interim periods within those annual periods, beginning after December 15, 2014. The Bank does not expect the adoption of this ASU to have a material impact on the consolidated financial statements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs— Contracts with Customers (Subtopic 340-40). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Accounting Standards Codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2016. The Bank is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the consolidated financial statements. In August 2014, the FASB issued ASU 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310- 40), Classification of Certain Government-guaranteed Mortgage Loans upon Foreclosure. The amendments in this update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure; 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Bank does not expect the adoption of this ASU to have a material impact on the consolidated financial statements. 48 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 – Earnings Per Share The following schedule presents earnings per share data for the years ended December 31, 2014 and 2013: Net income applicable to common stock Weighted average number of common shares outstanding Basic earnings per share Net income applicable to common stock Weighted average number of common shares outstanding Dilutive effect of potential common shares Weighted average number of diluted common shares outstanding Diluted earnings per share Twelve months ended December 31, 2014 2013 (in thousands, except per share data) $ $ $ $ 9,001 $ 4,579 1.97 $ 9,001 $ 4,579 114 4,693 1.92 $ 8,801 4,578 1.92 8,801 4,578 63 4,641 1.90 Options and warrants to purchase 606,834 shares of common stock at a weighted average exercise price of $12.41 were included in the computation of diluted earnings per share for the year ended December 31, 2014. Options to purchase 75,750 shares of common stock at a weighted average exercise price of $22.22 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, 2014. 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. Note 3 – Investment Securities The following summarizes the amortized cost and estimated fair value of securities available-for-sale at December 31, 2014 and 2013 with gross unrealized gains and losses therein: Amortized Cost December 31, 2014 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 $ $ 14,770 $ - $ (219 ) $ 14,551 76,428 1,006 (246 ) 77,188 71,665 162,863 $ 705 1,711 $ (309 ) (774 ) $ 72,061 163,800 49 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities (Continued) 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 $ - $ (2,423 ) $ 35,689 72,680 1,383 (979 ) 73,084 88,697 199,489 $ 230 1,613 $ (4,386 ) (7,788 ) $ 84,541 193,314 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, 2014 are as follows: December 31, 2014: US Treasury securities Mortgage-backed securities-U.S. Government Sponsored Enterprises (GSEs) Obligations of state and political subdivisions Less than 12 Months Fair Value Unrealized Losses More than 12 Months Fair Value Unrealized Losses (in thousands) Total Fair Value Unrealized Losses $ - $ - $ 14,551 $ (219) $ 14,551 $ (219) - - - - $ $ - 11,822 (246) 11,822 - - $ 22,752 49,125 $ (309) (774) $ 22,752 49,125 $ (246) (309) (774) 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) 50 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities (Continued) At December 31, 2014, there were no securities in the less-than-twelve-months category and 63 securities in the twelve- months-or-more category for the securities available-for-sale portfolio. Included in the 63 securities in the twelve-months-or- more category are (a) three U. S. government securities; (b) 51 municipal debt obligations; (c) five mortgage-backed securities; and (d) four collateralized mortgage obligations. 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-related criteria. No OTTI charges were recorded for the years ended December 31, 2014 and 2013. At December 31, 2013, there were 164 securities in the less-than-twelve-months category and 14 securities in the twelve- months-or-more category for the securities available-for-sale portfolio. Included in the 164 securities in the less-than-twelve- months category for securities available-for-sale are (a) nine U.S. government securities; (b) 137 municipal debt obligations; (c) eight mortgage-backed securities; and (d) 10 collateralized mortgage obligations. In the twelve-months-or-more category, all securities are municipal debt obligations. The amortized cost and estimated fair value of securities available-for-sale at December 31, 2014 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) $ $ 622 $ 3,937 78,820 79,484 162,863 $ 625 4,006 79,081 80,088 163,800 The following summarizes the amortized cost and estimated fair value of securities held-to-maturity at December 31, 2014 with gross unrealized gains and losses therein: Amortized Cost December 31, 2014 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. 420 $ 36 $ - $ 456 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) $ 423 $ 31 $ - $ 454 51 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 – Investment Securities (Continued) Proceeds from the sale of securities available-for-sale amounted to $46.3 million for the year ended December 31, 2014, which included realized gains of approximately $1.0 million and realized losses of approximately $33,600. Proceeds from the sale of securities available-for-sale amounted to $10.3 million for the twelve months ended December 31, 2013, which included realized gains of approximately $258,543. Securities available-for-sale with fair values of approximately $96.1 million and securities held-to-maturity with fair values of approximately $456,000 were pledged as collateral for NJ Governmental Unit Deposit Protection Act (“GUDPA”) deposits at December 31, 2014. Securities available-for-sale with fair values of approximately $364,000 were pledged as collateral for business sweep accounts at December 31, 2014. Note 4 – Loans Receivable Loans receivable, net at December 31, 2014 and 2013 were comprised of the following: Commercial real estate Commercial and industrial Construction Residential first-lien mortgage Home equity Consumer Total loans Deferred fees and costs Allowance for loan losses December 31, December 31, 2014 2013 (in thousands) $ 450,250 $ 127,469 78,822 45,383 30,711 2,654 735,289 (2,150 ) (10,008 ) 372,273 118,274 76,477 40,242 28,204 132 635,602 (1,769 ) (8,493 ) Loans, net $ $ 723,131 625,340 The following table presents nonaccrual loans by segment of the loan portfolio as of December 31, 2014 and 2013: December 31, 2014 December 31, 2013 (in thousands) Commercial real estate Commercial and industrial Construction Residential first-lien mortgage Home equity Consumer Total 6,190 $ 1,185 1,911 166 419 - 9,871 $ 2,535 5,127 - 182 394 - 8,238 $ $ 52 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, 2014 and the year then ended: Unpaid Principal Balance Recorded Investment Related Allowance (in thousands) Average Recorded Investment Interest Income Recognized - $ - - - - - - 417 255 200 - - - 872 417 255 200 - - - 872 $ 4,644 $ 3,711 - 685 889 - 9,929 1,195 957 1,953 - - - 4,105 5,839 4,668 1,953 685 889 - 14,034 $ 64 102 - 22 24 - 212 14 151 - - - - 165 78 253 - 22 24 - 377 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 2,296 3,640 - 688 719 - 7,343 5,321 2,495 1,931 - - - 9,747 2,052 $ 3,467 - 677 719 - 6,915 4,758 2,479 1,911 - - - 9,148 7,617 6,135 1,931 688 719 - 17,090 $ 6,810 5,946 1,911 677 719 - 16,063 $ $ 53 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 54 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, 2014: 30-59 Days Past Due 60-89 Days Past Due Greater than 90 days (in thousands) Total Past Due Total Loans Current Receivable Loans Receivable >90 Days and Accruing Commercial real estate Commercial and industrial Construction Residential first-lien mortgage Home equity Consumer Total $ $ 919 3,470 25 - - - 4,414 $ $ 3,948 783 - 1,565 - - 6,296 $ $ 6,190 1,185 1,911 166 419 - 9,871 $ 11,057 5,438 1,936 1,731 419 - $ 20,581 $ 439,193 122,031 76,886 43,652 30,292 2,654 $ 714,708 $ 450,250 127,469 78,822 45,383 30,711 2,654 $ 735,289 $ $ - - - - - - - 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 Total Loans Current Receivable Loans Receivable >90 Days and Accruing Commercial real estate Commercial and industrial Construction Residential first-lien mortgage Home equity Consumer Total $ $ 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 $ 369,724 115,159 72,230 40,060 27,395 132 $ 624,700 $ 372,273 118,274 76,477 40,242 28,204 132 $ 635,602 $ $ - - - - - - - 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, 2014: Pass Special Mention Substandard Doubtful Total (in thousands) Commercial real estate Commercial and industrial Construction Residential first-lien mortgage Home equity Consumer Total $ $ 437,342 $ 122,151 76,911 45,217 30,219 2,654 714,494 $ 6,081 $ 2,021 - - 73 - 8,175 $ 6,804 $ 3,297 1,911 166 419 - 12,597 $ 23 $ - - - - - 23 $ 450,250 127,469 78,822 45,383 30,711 2,654 735,289 55 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, 2013: Pass Special Mention Substandard Doubtful Total (in thousands) Commercial real estate Commercial and industrial Construction Residential first-lien mortgage Home equity Consumer Total $ $ 368,022 $ 110,927 74,511 40,060 27,385 132 621,037 $ 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 Allowance for loan losses on loans receivables at and for the year ended December 31, 2014: 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 $ $ 2,994 738 (116 ) 5 $ 1,419 41 - 70 $ 2,638 81 - - $ 282 36 - - $ 282 25 - - $ 1 40 (29 ) 5 $ 877 619 - - 8,493 1,580 (145 ) 80 Ending Balance $ 3,621 $ 1,530 $ 2,719 $ 318 $ 307 $ 17 $ 1,496 $ 10,008 Ending Balance: Individually evaluated for impairment Collectively evaluated for impairment $ $ 417 $ 255 $ 200 $ - $ - $ - $ - $ 872 3,204 $ 1,275 $ 2,519 $ 318 $ 307 $ 17 $ 1,496 $ 9,136 Recorded investment in loans receivables at December 31, 2014: Loans: Ending Balance: Individually evaluated for impairment Collectively evaluated for impairment $ 6,810 $ 5,946 $ 1,911 $ 677 $ 719 $ - $ - $ 16,063 443,440 121,523 76,911 44,706 29,992 2,654 - 719,226 Ending Balance $ 450,250 $ 127,469 $ 78,822 $ 45,383 $ 30,711 $ 2,654 $ - $ 735,289 56 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, 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 $ $ 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 Ending Balance $ 2,994 $ 1,419 $ 2,638 $ 282 $ 282 $ 1 $ 877 $ 8,493 Ending Balance: Individually evaluated for impairment Collectively evaluated for impairment $ $ - $ - $ 61 $ - $ - $ - $ - $ 61 2,994 $ 1,419 $ 2,577 $ 282 $ 282 $ 1 $ 877 $ 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 $ - $ - $ 11,759 369,554 112,732 74,502 39,539 27,384 132 - 623,843 Ending Balance $ 372,273 $ 118,274 $ 76,477 $ 40,242 $ 28,204 $ 132 $ - $ 635,602 At December 31, 2014, thirteen loans totaling $7.9 million were considered troubled debt restructurings and classified as impaired. Troubled debt restructurings of $3.8 million were performing in accordance with their modified terms at December 31, 2014. The remaining $4.1 million of troubled debt restructurings were on non-accrual status at December 31, 2014. 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. The following table summarizes information in regards to troubled debt restructurings for the year ended December 31, 2014 (dollars in thousands): Troubled debt restructurings: Commercial and industrial Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment 1 $ 579 $ 579 As indicated above, the Bank modified one loan during the year ended December 31, 2014 that was categorized as a troubled debt restructuring. In modifying this commercial and industrial loan, the Bank extended the maturity date and reduced the interest rate on the original loan. Troubled debt restructurings are impaired loans and are individually evaluated for impairment in accordance with the Bank’s policy. There was a $13,125 allowance related to this modified commercial and industrial loan at December 31, 2014. 57 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Loans Receivable (Continued) This troubled debt restructuring executed within the year ended December 31, 2014 did not subsequently default during the year ended December 31, 2014. 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 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. 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. 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 the loans and the 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 loans was repaid during 2014. The other loan 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 percent 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 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, 2014 and 2013. (in thousands) 2014 2013 Outstanding related party loans at January 1, New loans Repayments Outstanding related party loans at December 31, $ $ $ 4,982 - (1,162 ) 3,820 $ 5,179 - (197 ) 4,982 No loans to related parties were nonaccrual, past due, restructured or potential problems at December 31, 2014 and 2013. Note 5 – Premises and Equipment The components of premises and equipment at December 31 were as follows (in thousands): 58 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 – Premises and Equipment (Continued) Land Buildings Leasehold improvements Furniture, fixtures and equipment Construction in progress Accumulated depreciation and amortization Total Estimated useful lives N/A 40 Yrs. 10 Yrs. 3-7 Yrs. 2014 2013 $ 410 1,741 4,993 3,791 73 11,008 (5,192 ) 5,816 $ 410 1,741 4,568 3,492 38 10,249 (4,477 ) 5,772 $ $ Note 6 – Accrued Interest Receivable and Other Assets The components of accrued interest receivable and other assets at December 31 were as follows (in thousands): Accrued interest receivable Deferred tax asset, net Restricted investments in bank stocks Prepaid assets and other assets Total Note 7 – Deposits 2014 2013 $ $ 3,198 5,259 2,023 1,010 11,490 $ $ 3,074 7,413 3,811 1,130 15,428 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 2014 2013 $ $ 135,157 $ 273,380 144,648 172,652 122,020 847,857 $ 107,616 244,795 152,058 125,783 118,758 749,010 As of December 31, 2014, one customer’s deposits with the Bank represented 5.9 percent of total deposits. No other customer accounted for more than 5 percent of total deposits as of December 31, 2014. At December 31, 2014, the scheduled maturities of certificates of deposit were as follows (in thousands): 2015 2016 2017 2018 2019 Total Amounts 163,152 54,516 31,778 23,631 21,595 294,672 $ $ 59 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 – Borrowings The Bank’s borrowings consist of FHLB-NY overnight 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 FHLB-NY. The terms of the security agreement with the FHLB-NY 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): 2014 2013 FHLB-NY overnight advances FHLB term advances Total Borrowings $ $ 24,300 - 24,300 $ $ 58,100 2,312 60,412 At December 31, 2014, the Bank has available borrowing capacity with the FHLB-NY, subject to certain collateral restrictions, of $477.5 million. The Bank is also a member of the Atlantic Community Bankers Bank (“ACBB”). As of December 31, 2014, 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 2014 2013 $ $ 1,573 $ 501 2,529 4,603 $ 1,675 418 1,681 3,774 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): 2015 2016 2017 2018 2019 Thereafter $ $ 1,377 1,278 1,070 922 669 1,037 6,353 Rental expense for each of the years ended December 31, 2014 and 2013 was $1.4 million. 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 60 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 – Commitments and Contingencies (Continued) expense to this related party for the years ended December 31, 2014 and 2013 was approximately $284,000 and $277,000, 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, 2014 and 2013 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 2014 2013 $ $ 8,843 91,228 11,320 111,391 $ $ 7,561 76,027 9,255 92,843 Litigation The Bank, in the normal course of business, may be subject to potential liability under laws and government regulation and various claims and legal actions that are pending or may be asserted against it. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims. Based on information currently available, advice of counsel, available insurance coverage and established liabilities, the Bank has determined that there are no eventual outcomes that will have a material adverse effect on the Bank’s financial position or results of operations. 61 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 2014 2013 (in thousands) $ $ 3,390 230 3,620 (201 ) (251 ) (452 ) 3,168 $ $ 3,196 255 3,451 (377 ) (99 ) (476 ) 2,975 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31 are as follows: Deferred tax assets: Allowance for loan losses Net operating loss carry-forwards Unrealized losses on securities Organizational costs Premises and equipment Other Total deferred tax assets Deferred tax liabilities: Deferred loan costs Unrealized gains on securities Premises and equipment Acquisition accounting adjustments Cash basis conversions Total deferred tax liabilities Net deferred tax asset 2014 2013 (in thousands) 3,901 1,212 - 307 - 777 6,197 (390 ) (361 ) (97 ) (90 ) - (938 ) 5,259 $ $ 3,201 1,287 2,245 348 48 840 7,969 (348 ) - - (207 ) (1 ) (556 ) 7,413 $ $ 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 62 2014 2013 (in thousands) $ 4,137 $ 4,004 (14 ) - (882 ) 15 (88 ) 3,168 $ 103 (847 ) (112 ) 15 (188 ) 2,975 $ The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 – Income Taxes (Continued) At December 31, 2014, the Bank had available federal net operating loss carry-forwards of approximately $3.6 million, which expire between 2028 and 2030. There are currently no state net operating loss carry-forwards available. The net operating loss carry-forwards 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 (“Topic 820”). Fair value measurements are not adjusted for transaction costs. 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. 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, 2014 were as follows: 63 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12 – Fair Value Measurements and Disclosure (Continued) 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 $ (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, 2014 (in thousands) $ 14,551 $ - $ - $ 14,551 - 77,188 - 14,551 $ 72,061 149,249 $ - - - $ 77,188 72,061 163,800 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: 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 $ (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 - 73,084 - 35,689 $ 84,541 157,625 $ - - - $ 73,084 84,541 193,314 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, 2014, 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, 2014 (in thousands) Impaired loans Other real estate owned $ $ - $ - - $ - $ - - $ 8,387 $ 193 8,580 $ 8,387 193 8,580 64 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) Impaired loans Other real estate owned $ $ - $ - - $ - $ - - $ 3,778 $ 199 3,977 $ 3,778 199 3,977 The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2014. Description Fair Value at December 31, 2014 (in thousands) Valuation Technique Unobservable Input Range (Weighted Average) Impaired loans $ 8,387 Appraisal of collateral1 Other real estate owned $ 193 Agreement of sale Discount adjustment2 0.0%-5.0% (3.4%) Estimated selling costs3 10.5% (10.5%) 1 Fair value is generally determined through independent appraisal of the underlying collateral, primarily using comparable sales. 2 Appraisals may be adjusted by management for qualitative factors, such as economic conditions and estimated liquidation expense. 3 Selling costs include sales commissions and other costs incidental to the sale. The following table presents quantitative information with regards to Level 3 fair value measurements at December 31, 2013. Description Impaired loans Other real estate owned Fair Value at December 31, 2013 (in thousands) Valuation Technique Unobservable Input Range (Weighted Average) $ $ 3,778 Appraisal of collateral1 199 Appraisal of collateral1 Discount adjustment2 Discount adjustment2 0.0%-83.6% (4.3%) 0.0% (0.0%) 1 Fair value is generally determined through independent appraisal of the underlying collateral, primarily using comparable sales. 2 Appraisals may be adjusted by management for qualitative factors, such as economic conditions and estimated liquidation expense. 65 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12 – Fair Value Measurements and Disclosure (Continued) 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 benchmarkquoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. Loans receivable (carried at cost) The fair value of loans receivable are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans, which is characterized as Level 3 in the fair value hierarchy. 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, discounted for estimated selling costs or other factors the Bank determines will impact collection of 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 cost 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. The discount adjustment from the appraised value is a significant unobservable input in the determination of the fair value for other real estate owned. These assets are included as Level 3 fair values. Federal Home Loan Bank stock and ACBB stock (carried at cost) The carrying amount of restricted investments in bank stock approximates fair value, and considers the limited marketability of such securities. Accrued interest receivable and payable (carried at cost) The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value. 66 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12 – Fair Value Measurements and Disclosure (Continued) 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 (carried at cost) 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, which is characterized as Level 3 in the fair value hierarchy. 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, 2014 and December 31, 2013. The carrying amounts and estimated fair value of financial instruments at December 31, 2014, are as follows: Carrying Amount (in thousands) Estimated Fair Value December 31, 2014 Level 1 Level 2 Level 3 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 31,872 $ 163,800 420 723,131 2,023 3,198 31,872 $ 163,800 456 743,720 2,023 3,198 31,872 $ 14,551 - - - - - $ 149,249 456 - 2,023 3,198 Financial liabilities: Deposits Borrowings Accrued interest payable 847,857 23,400 1,573 846,654 23,400 1,573 - - - 846,654 - 1,573 - - - 743,720 - - - 23,400 - The carrying amounts and estimated fair value of financial instruments at December 31, 2013, are as follows: 67 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12 – Fair Value Measurements and Disclosure (Continued) Carrying Amount (in thousands) Estimated Fair Value December 31, 2013 Level 1 Level 2 Level 3 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 27,425 $ 193,314 423 625,340 3,811 3,074 27,425 $ 193,314 454 643,519 3,811 3,074 27,425 $ 35,689 - - - - - $ 157,625 454 - 3,811 3,074 Financial liabilities: Deposits Borrowings Accrued interest payable Limitations 749,010 60,412 1,675 737,112 60,705 1,675 - - - 737,112 - 1,675 - - - 643,519 - - - 60,705 - 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, 2014 and 2013 and will expire in 2017. In 2007, the Bank adopted The Bank of Princeton 2007 Stock Option Plan (the “2007 Plan”), which was approved by our board of directors in August 2007 and by our stockholders in October 2007. The 2007 Plan enables the board of directors to grant stock options to employees, directors, consultants and other individuals who provide services to the Bank. The shares subject to or related to options under the 2007 Plan are authorized and unissued shares of the Bank. The maximum number of shares that may be subject to options under the 2007 Plan is 300,000, all of which may be issued as Incentive Stock 68 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13 – Stock-Based Compensation (Continued) 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. At December 31, 2014 and 2013, 46,000 MoreBank Organizer options remained outstanding. These options were granted to organizers of MoreBank for their efforts during the organization and start-up of MoreBank. These options are immediately exercisable, expire in December 2016, and enable the option holder to purchase one (1) share of the Bank’s common stock at $25.00 per share. 1,200 options remained outstanding at December 31, 2014 and 2013 under the MoreBank 2004 Incentive Equity Compensation Plan (the “MoreBank Plan”). These options are immediately exercisable, expire in December 2017, and enable the option holder to purchase one (1) share of the Bank’s common stock at $25.00 per share. The MoreBank Plan was adopted by MoreBank to provide stock options and stock awards to MoreBank’s directors and employees. 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. In 2014, the Bank adopted an amendment to each of the 2007 Plan and to the 2012 Plan, which amendments were approved by our board of directors, to provide that all outstanding options under the 2007 Plan and the 2012 Plan will become fully vested and exercisable upon a change in control of the Bank and to further specify the consideration that may be exchanged with respect to outstanding awards upon any such change in control. 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, 2014: Balance at January 1, 2014 Granted Exercised Forfeited Expired Weighted Avg. Remaining Contractual Life Aggregate Intrinsic Value Number of Stock Options / Warrants Weighted Avg. Exercise Price 13.16 14.94 11.11 13.40 12.60 572,517 $ 110,100 $ (3,636 ) $ (2,763 ) $ (1,984 ) $ Balance at December 31, 2014 674,234 $ 13.51 6.1 years Exercisable at December 31, 2014 571,665 $ 13.52 5.7 years $ $ 2,882,477 2,473,825 69 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, 2013: Balance at January 1, 2013 Granted Exercised Forfeited Expired Weighted Avg. Remaining Contractual Life Aggregate Intrinsic Value Number of Stock Options / Warrants Weighted Avg. Exercise Price 13.21 13.41 11.18 13.75 11.69 476,827 $ 100,950 $ (110 ) $ (99 ) $ (5,051 ) Balance at December 31, 2013 572,517 $ 13.16 6.8 years Exercisable at December 31, 2013 373,278 $ 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, 2014 2013 5.34 years 43.66% 1.59% 0.00% 1.75 % $ 6.15 5.00 years 60.23% 3.63% 0.00% 1.27 % $ 6.91 Stock option expenses included in salaries and employee benefits expense in the consolidated statements of income were $437,000 and $295,000 for the years ended December 31, 2014 and 2013, respectively. Stock option expense recorded within other expenses was $285,000 and $176,000 for the years ended December 31, 2014 and 2013, respectively. At December 31, 2014, there was approximately $438,000 of unrecognized expense related to outstanding stock options, which will be recognized over a period of approximately 1.24 years. Note 14 – Regulatory Matters 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 FDIC signed an Order Terminating Consent Order on February 3, 2015. The Consent Order arose from a routine safety and soundness examination of the Bank by the FDIC, which was conducted as of June 30, 2013. The Consent Order required us to strengthen our BSA/AML program and our internal audit function, and to address other related matters. Among other things, it required our board of directors to designate a committee to oversee the compliance with the Consent Order. We were also required to take certain actions to enhance our staff, including a BSA officer, and board and management oversight. 70 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14 – Regulatory Matters (Continued) 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. 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 made the Consent Order binding between us and the Commissioner. This Acknowledgement and Consent of FDIC Order was terminated concurrent with the FDIC’s Order Terminating Consent Order. 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, 2014, that the Bank meets all capital adequacy requirements to which it is subject. The Bank’s actual capital amounts and ratios at December 31, 2014 and 2013 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, 2014: Total capital (to risk-weighted assets) $87,610 Tier 1 capital (to risk-weighted assets) $77,821 $77,821 Tier 1 capital (to average assets) 11.2% 9.9% 8.2% $ 62,632 $ 31,316 $ 37,994 December 31, 2013: Total capital (to risk-weighted assets) $76,298 Tier 1 capital (to risk-weighted assets) $67,932 $67,932 Tier 1 capital (to average assets) 11.4% 10.2% 7.8% $ 53,533 $ 26,766 $ 34,637 8.0% 4.0% 4.0% $ 78,289 $ 46,974 $ 47,493 8.0% 4.0% 4.0% $ 66,916 $ 40,150 $ 43,297 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. 71 The Bank of Princeton THE BANK OF PRINCETON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15 – Quarterly Financial Data (unaudited) Year Ended December 31, 2014 $ $ $ $ First Quarter Second Quarter Third Quarter Fourth Quarter (In thousands, except per share data) 9,694 $ 1,760 7,934 252 7,682 552 5,458 2,776 766 2,010 $ 10,042 $ 1,755 8,287 371 7,916 633 5,784 2,765 762 2,003 $ 10,241 $ 1,828 8,413 360 8,053 708 5,512 3,249 896 2,353 $ 10,590 1,814 8,776 597 8,179 853 5,653 3,379 744 2,635 0.44 $ 0.43 $ 0.44 $ 0.39 $ 0.51 $ 0.46 $ 0.58 0.56 Year Ended December 31, 2013 First Quarter Second Quarter Third Quarter Fourth Quarter (In thousands, except for share and per share data) 8,890 $ 1,743 7,147 84 7,063 389 4,684 2,768 788 1,980 $ 9,041 $ 1,765 7,276 513 6,763 693 4,631 2,825 755 2,070 $ 9,470 $ 1,809 7,661 577 7,084 324 4,560 2,848 785 2,063 $ 9,712 1,798 7,914 858 7,056 1,269 4,990 3,335 647 2,688 0.43 $ 0.43 $ 0.45 $ 0.45 $ 0.45 $ 0.44 $ 0.59 0.58 Interest and dividend income Interest expense $ Net Interest Income after Provision for Loan Losses Income before Income Tax Expense Net Interest Income Provision for loan losses Non-interest income Non-interest 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 $ $ $ 72 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, 2014. 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, 2014, 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, 2014 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, 2014. 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, 2014 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 2015 Annual Meeting of Stockholders to be held April 29, 2015. 73 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 2015 Annual Meeting of Stockholders to be held April 29, 2015. 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 2015 Annual Meeting of Stockholders to be held April 29, 2015. 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 2015 Annual Meeting of Stockholders to be held April 29, 2015. Item 14. Principal Accounting 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 2015 Annual Meeting of Stockholders to be held April 29, 2015. 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. Consolidated Statements of Financial Condition as of December 31, 2014 and 2013 Consolidated Statements of Income for the years ended December 31, 2014 and 2013 Consolidated Statements of Comprehensive Income for the years ended December 31, 2014 and 2013 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014 and 2013 v. Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013 vi. 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. 74 The Bank of Princeton (c) Exhibits Exhibit No. 2.1 3.1 3.2 4.1 4.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 21.1 31.1 31.2 32.1 Description (A) Agreement and Plan of Merger dated as of May 5, 2010 by and between The Bank of Princeton and MoreBank. (A) Certificate of Incorporation, as amended. (A) Amended and Restated Bylaws (A) Specimen form of stock certificate. 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 with respect to the Bank’s long-term debt. (B) The Bank of Princeton Amended and Restated 2007 Stock Option Plan* (B) The Bank of Princeton Amended and Restated 2012 Equity Incentive Plan* (A) Form of Incentive Stock Option Agreement* Form of Incentive Stock Option Agreement* (A) Form of Nonqualified Stock Option Agreement* Form of Nonqualified Stock Option Agreement* (A) Warrant Agreement for Organizers* (A) Form of Warrant Certificate* (A) MoreBank 2004 Incentive Equity Compensation Plan* (A) Form of Incentive Stock Option Agreement* (A) Form of Nonqualified Stock Option* (A) Form of Option for the Purchase of Shares of the Par Value of $1.00 Per Share of MoreBank* (C) Stipulation and Consent to the Issuance of a Consent Order (C) Consent Order 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 Exhibits 10.1 or 10.2, as applicable, of registrant’s Current Report on Form 8-K, filed with the Federal Deposit Insurance Corporation on October 20, 2014. (C) 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. 75 The Bank of Princeton Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 19, 2015. SIGNATURES The Bank of Princeton By: /s/Edward Dietzler Edward Dietzler President (Principal Executive Officer) The Bank of Princeton By: /s/Michael J. Sanwald Michael J. Sanwald Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 76 The Bank of Princeton Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below on March 19, 2015 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 77 The Bank of Princeton EXHIBIT INDEX Exhibit No. 2.1 3.1 3.2 4.1 4.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 21.1 31.1 31.2 32.1 Description (A) Agreement and Plan of Merger dated as of May 5, 2010 by and between The Bank of Princeton and MoreBank. (A) Certificate of Incorporation, as amended. (A) Amended and Restated Bylaws (A) Specimen form of stock certificate. 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 with respect to the Bank’s long-term debt. (B) The Bank of Princeton Amended and Restated 2007 Stock Option Plan* (B) The Bank of Princeton Amended and Restated 2012 Equity Incentive Plan* (A) Form of Incentive Stock Option Agreement* Form of Incentive Stock Option Agreement* (A) Form of Nonqualified Stock Option Agreement* Form of Nonqualified Stock Option Agreement* (A) Warrant Agreement for Organizers* (A) Form of Warrant Certificate* (A) MoreBank 2004 Incentive Equity Compensation Plan* (A) Form of Incentive Stock Option Agreement* (A) Form of Nonqualified Stock Option* (A) Form of Option for the Purchase of Shares of the Par Value of $1.00 Per Share of MoreBank* (C) Stipulation and Consent to the Issuance of a Consent Order (C) Consent Order 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 Exhibits 10.1 or 10.2, as applicable, of registrant’s Current Report on Form 8-K, filed with the Federal Deposit Insurance Corporation on October 20, 2014. (C) 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. 78 The Bank of Princeton Form of Incentive Stock Option Agreement Exhibit 10.4 INCENTIVE STOCK OPTION AGREEMENT UNDER THE BANK OF PRINCETON 2012 EQUITY INCENTIVE PLAN BANK OF PRINCETON (the “Bank”) and ___________________________________ (the “Optionee”). THIS INCENTIVE STOCK OPTION AGREEMENT (this “Agreement”) is made between THE for the benefit of the key employees, directors and advisors of the Bank and its Affiliates; and WHEREAS, the Bank maintains The Bank of Princeton 2012 Equity Incentive Plan (the “Plan”) the terms of the Plan; and WHEREAS, the Plan permits the award of Incentive Stock Options to purchase Shares, subject to further align the Optionee’s personal financial interests with those of the Bank’s stockholders. WHEREAS, the Bank desires to grant the Optionee Incentive Stock Options under the Plan to intending to be legally bound hereby, the parties agree as follows: NOW, THEREFORE, in consideration of these premises and the agreements set forth herein and Award of Option. This Agreement evidences the grant to the Optionee of an option (the “Option”) to purchase _________________ (______) Shares (the “Option Shares”). The Option is subject to the terms set forth herein, and in all respects is subject to the terms and provisions of the Plan applicable to Incentive Stock Options, which terms and provisions are incorporated herein by this reference. Except as otherwise specified herein or unless the context herein requires otherwise, the terms defined in the Plan will have the same meanings herein. Revenue Code, the Option is intended to be an incentive stock option as described by Section 422 of the Code. Nature of the Option. Subject to the limitation contained in Section 422(d) of the Internal Date of Grant; Term of Option. The Option was granted on ___________, ____ (the “Effective Date”) and may not be exercised later than the date that is ten (10) years after that date, subject to earlier termination in accordance with the Plan. Option Exercise Price. The per share exercise price of the Option is ____________________________ ($__.__) (the “Exercise Price”), which is the Fair Market Value per Share on the Effective Date. provisions of the Plan and this Agreement, as follows: Exercise of Option. The Option will become exercisable only in accordance with the terms and continuous service to the Bank through the applicable vesting date as follows: Right to Exercise. Option Shares will become exercisable if the Optionee remains in ___% of the Options will vest on the Effective Date ___% of the Options will vest __________________________ ___% of the Options will vest __________________________ ___% of the Options will vest __________________________ ___% of the Options will vest __________________________ Upon a termination of the Optionee’s service with the Bank, the Option will be exercisable only to the extent specified in Section 6 of the Plan. Solely for purposes of this Option, service with the Bank will be deemed to include service with an Affiliate of the Bank for so long as that entity remains an Affiliate of the Bank. 79 The Bank of Princeton Notwithstanding the foregoing, this Option (to the extent then outstanding) will become fully vested and immediately exercisable upon a Change in Control. Method of Exercise. The Optionee may exercise the Option by providing written notice to the Bank stating the election to exercise the Option. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Bank or such other person as may be designated by the Bank, and shall be accompanied by payment of the Exercise Price and an amount equal to any required tax withholding. Payment of the Exercise Price and any required tax withholding will be made in cash or such other form as may be accepted by the Board in accordance with the Plan. may be required or appropriate under applicable law, the Plan or otherwise. Share Legends. Any certificate evidencing an Option Share will contain such legends as that any exercise may apply only with respect to a whole number of Option Shares. Partial Exercise. The Option may be exercised in whole or in part; provided, however, will be void, if the issuance of the Option Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. Restrictions on Exercise. The Option may not be exercised, and any purported exercise Non-Transferability of Option. The Option may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution. During the Optionee’s lifetime, the Option is exercisable only by the Optionee. Subject to the foregoing and the terms of the Plan, the terms of the Option will be binding upon the executors, administrators and heirs of the Optionee. Tax Consequences. The Optionee has reviewed with the Optionee’s own tax advisors the federal, state, local and foreign tax consequences of the Option. The Optionee is relying solely on such advisors and not on any statements or representations of the Bank or any of its agents or affiliates. The Optionee understands that he or she (and not the Bank) will be responsible for his or her own tax liabilities arising in connection with this award or the transactions contemplated by this Agreement. The Bank does not warrant that the Option is an incentive stock option as described by Section 422 of the Code or otherwise subject to any other particular tax treatment. No Continuation of Service. Neither the Plan nor this Option will confer upon the Optionee any right to continue in the service of the Bank or any of its Affiliates, or limit in any respect the right of the Bank or its Affiliates to discharge the Optionee at any time, with or without Cause and with or without notice. The Plan. The Optionee has received a copy of the Plan, has read the Plan and is familiar with its terms, and hereby accepts the Option subject to the terms and provisions of the Plan, as amended from time to time. Pursuant to the Plan, the Board is authorized to interpret the Plan and to adopt rules and regulations not inconsistent with the Plan as it deems appropriate. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board with respect to questions arising under the Plan or this Agreement. Early Disposition of Stock. Subject to the fulfillment by the Optionee of any conditions limiting the disposition of the Option Shares, the Optionee agrees that if the Optionee disposes of any Option Shares before the later of (i) the first anniversary of the date on which the Option Shares are transferred to the Optionee or (ii) the second anniversary of the Effective Date, then the Optionee will notify the Bank in writing within 30 days after the date of such disposition. Entire Agreement. This Agreement, together with the Plan, represents the entire agreement between the parties and supersedes any and all prior or contemporaneous discussions, understandings or any agreements of any nature, written or otherwise, relating to the subject matter hereof. New Jersey, without regard to the application of the principles of conflicts of laws. Governing Law. This Agreement will be construed in accordance with the laws of the State of 80 The Bank of Princeton Execution. This Agreement may be executed, including execution by facsimile signature, in one or more counterparts, each of which will be deemed an original, and all of which together shall be deemed to be one and the same instrument. This space intentionally left blank; signature page follows. 81 The Bank of Princeton _________, 20__. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the ___ day of THE BANK OF PRINCETON By: Name: Title: OPTIONEE: Signature Print Name Address: 82 The Bank of Princeton Form of Nonqualified Stock Option Agreement NON-QUALIFIED STOCK OPTION AGREEMENT UNDER THE BANK OF PRINCETON 2012 EQUITY INCENTIVE PLAN Exhibit 10.6 THE BANK OF PRINCETON (the “Bank”) and ___________________________________ (the “Optionee”). THIS NON-QUALIFIED STOCK OPTION AGREEMENT (this “Agreement”) is made between for the benefit of the key employees, directors and advisors of the Bank and its Affiliates; and WHEREAS, the Bank maintains The Bank of Princeton 2012 Equity Incentive Plan (the “Plan”) subject to the terms of the Plan; and WHEREAS, the Plan permits the award of Non-Qualified Stock Options to purchase Shares, to further align the Optionee’s personal financial interests with those of the Bank’s stockholders. WHEREAS, the Bank desires to grant the Optionee Non-Qualified Stock Options under the Plan intending to be legally bound hereby, the parties agree as follows: NOW, THEREFORE, in consideration of these premises and the agreements set forth herein and Award of Option. This Agreement evidences the grant to the Optionee of an option (the “Option”) to purchase _________________________ (______) Shares (the “Option Shares”). The Option is subject to the terms set forth herein, and in all respects is subject to the terms and provisions of the Plan applicable to Non- Qualified Stock Options, which terms and provisions are incorporated herein by this reference. Except as otherwise specified herein or unless the context herein requires otherwise, the terms defined in the Plan will have the same meanings herein. Nature of the Option. The Option is intended to be a nonstatutory stock option and is not intended to be an incentive stock option as described by Section 422 of the Code, or to otherwise qualify for any special tax benefits to the Optionee. Date of Grant; Term of Option. The Option was granted on ___________, _____ (the “Effective Date”) and may not be exercised later than the date that is ten (10) years after that date, subject to earlier termination in accordance with the Plan. ($__.__) (the “Exercise Price”), which is the Fair Market Value per Share on the Effective Date. Option Exercise Price. The per share exercise price of the Option is _____________________ provisions of the Plan and this Agreement, as follows: Exercise of Option. The Option will become exercisable only in accordance with the terms and continuous service to the Bank through the applicable vesting date as follows: Right to Exercise. Option Shares will become exercisable if the Optionee remains in ____ of the Options will vest on the Effective Date ____ of the Options will vest __________________________ ____ of the Options will vest __________________________ Upon a termination of the Optionee’s service with the Bank, the Option will be exercisable only to the extent specified in Section 6 of the Plan. Solely for purposes of this Option, service with the Bank will be deemed to include service with an Affiliate of the Bank for so long as that entity remains an Affiliate of the Bank. Notwithstanding the foregoing, this Option (to the extent then outstanding) will become fully vested and immediately exercisable upon a Change in Control. 83 The Bank of Princeton Method of Exercise. The Optionee may exercise the Option by providing written notice to the Bank stating the election to exercise the Option. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Bank or such other person as may be designated by the Bank, and shall be accompanied by payment of the Exercise Price and an amount equal to any required tax withholding. Payment of the Exercise Price and any required tax withholding will be made in cash or such other form as may be accepted by the Board in accordance with the Plan. may be required or appropriate under applicable law, the Plan or otherwise. Share Legends. Any certificate evidencing an Option Share will contain such legends as that any exercise may apply only with respect to a whole number of Option Shares. Partial Exercise. The Option may be exercised in whole or in part; provided, however, will be void, if the issuance of the Option Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. Restrictions on Exercise. The Option may not be exercised, and any purported exercise Non-Transferability of Option. The Option may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution. During the Optionee’s lifetime, the Option is exercisable only by the Optionee. Subject to the foregoing and the terms of the Plan, the terms of the Option will be binding upon the executors, administrators and heirs of the Optionee. Tax Consequences. The Optionee has reviewed with the Optionee’s own tax advisors the federal, state, local and foreign tax consequences of the Option. The Optionee is relying solely on such advisors and not on any statements or representations of the Bank or any of its agents or affiliates. The Optionee understands that he or she (and not the Bank) will be responsible for his or her own tax liabilities arising in connection with this award or the transactions contemplated by this Agreement. No Continuation of Service. Neither the Plan nor this Option will confer upon the Optionee any right to continue in the service of the Bank or any of its Affiliates, or limit in any respect the right of the Bank or its Affiliates to discharge the Optionee at any time, with or without Cause and with or without notice. The Plan. The Optionee has received a copy of the Plan, has read the Plan and is familiar with its terms, and hereby accepts the Option subject to the terms and provisions of the Plan, as amended from time to time. Pursuant to the Plan, the Board is authorized to interpret the Plan and to adopt rules and regulations not inconsistent with the Plan as it deems appropriate. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board with respect to questions arising under the Plan or this Agreement. Entire Agreement. This Agreement, together with the Plan, represents the entire agreement between the parties and supersedes any and all prior or contemporaneous discussions, understandings or any agreements of any nature, written or otherwise, relating to the subject matter hereof. New Jersey, without regard to the application of the principles of conflicts of laws. Governing Law. This Agreement will be construed in accordance with the laws of the State of Execution. This Agreement may be executed, including execution by facsimile signature, in one or more counterparts, each of which will be deemed an original, and all of which together shall be deemed to be one and the same instrument. This space intentionally left blank; signature page follows. 84 The Bank of Princeton 20__. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the ___ day of _________, THE BANK OF PRINCETON By: Name: Title: OPTIONEE: Signature Print Name Address: 85 The Bank of Princeton SUBSIDIARIES OF REGISTRANT Exhibit 21.1 Name of Subsidiary 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 DE 86 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 19, 2015 /s/Edward Dietzler Edward Dietzler President (Principal Executive Officer) 87 The Bank of Princeton RULE 13A-14(A)/15D-14(A) CERTIFICATIONS OF THE CHIEF FINANCIAL OFFICER Exhibit 31.2 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) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting Date: March 19, 2015 /s/Michael J. Sanwald Michael J. Sanwald Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 88 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, 2014 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 19, 2015 89 The Bank of Princeton NOTES: This page intentionally left blank for your convenience. 90 The Bank of Princeton A special community deserves a special bank. 91 The Bank of Princeton Who We Are Board of Directors Advisory Board, Princeton Andrew M. Chon, Chairman Stephen Distler, Vice Chairman Ross E. Wishnick, Vice Chairman Edward J. Dietzler, President Judith Giacin Richard Gillespie Robert N. Ridolfi, Esq. Stephen K. Shueh Incorporators Gregg E. Chaplin Andrew M. Chon Peter M. Crowley Stephen Distler Richard Gillespie Bumsung K. Han John A. Horvath Kevin R. Kenyon W. Andrew Krusen, Jr. Janet M. Lasley Emmett J. Lescroart Dennis M. Machulsky Casey K. Min J. Scott Needham Henry S. Opatut Robert N. Ridolfi, Esq. James M. Riley Jeffery H. Sands Eric L. Steinfeldt Ross E. Wishnick J. Scott Needham, Chairman George L. Bustin Barbara Cuneo Peter J. Dawson Robert Dunn Paul Gerard Michael Goodman, Esq. Yongkuen Joh Martin Kahn Emmett J. Lescroart Lance Liverman Jerry MacLean Nelson Obus Joseph Ridolfi Chetan Shah Scott Sipprelle Advisory Board, New Brunswick Thea Berkhout Sam Boraie Michael Cangemi James Decker Glynn Dwyer Jonathan Glick Ninfa Mueller Ros Neal Beverly A. Poelstra Mark Sherman Pam Stefanek H. Edward Wilkin, III $955 MM 92 The Bank of Princeton Relationship Management Management & Support Commercial Lenders Executive Management Stephanie M. Williams, Chambers Michele Lewis-Fleming, Chambers Kris Muse, Nassau Steven J. Landau, Montgomery/ Lambertville William McDowell, Pennington Paul M. Bencivengo, Hamilton William D. Allan, Monroe William McCoy, New Brunswick Jennifer Yoo, Cheltenham Hiwon Kim, Cheltenham Troy Hwang, North Wales Market Managers Rose Russo, Bayard Darshana Jadav, Chambers Paul Sabol, Nassau Roseanne Maresma, Montgomery Rhoda Sundhar, Pennington Suzanne Lippincott, Hamilton Connie Inverso, Monroe Amy Lavery, Lambertville Miriam I. Colón, New Brunswick Esther Youngsoon Sim, Cheltenham Hae Ran Hwangbo, North Wales Sokha Eng, Arch Street Edward J. Dietzler Carol R. Coles Douglas V. Conover Paul Y. Hyon Daniel J. O’Donnell Michael J. Sanwald Marketing Barbara A. Cromwell Human Resources Anna Maria Miller Operations & Compliance Stacy Miano Karen D. Pfeifer Kelly Tarity Loan Administration Mary Beth Gorecki, Consumer Credit Dawn Hathaway, Loan Compliance Christopher Tonkovich, Commercial Credit Finance Edward P. Hassenkamp 93 The Bank of Princeton Listening. Pictured above (left to right) Edward J. Dietzler, President of The Bank of Princeton; Paul Y. Hyon, Regional President of MoreBank; Daniel J. O’Donnell, EVP General Counsel & Chief Risk Officer; Carol R. Coles, EVP Chief Credit Officer; Michael J. Sanwald, EVP Chief Financial Officer; and Douglas V. Conover, EVP Chief Lending Officer. The Bank of Princeton, with nine branch locations, serves Mercer, Hunterdon, Middlesex and Somerset Counties. MoreBank, a division of The Bank of Princeton has three locations nearby in Pennsylvania. The merger of MoreBank with The Bank of Princeton occurred in 2010. Gaining Perspective 94 The Bank of Princeton A Year of One Great Deal after Another The Bank of Princeton & MoreBank A Deal Worth Singing About! 1.10% Certificate of Deposit for 1 Year The Bank of Princeton Wise Checking Featuring NO Monthly Service Charges MoreBank Soar into 2015... 1.00% Money Market Account through February 2015 The Bank of Princeton & MoreBank See what all the buzz is about! 1.00% Certificate of Deposit for 1 Year The Bank of Princeton & MoreBank e-Statement Promotion Switch from paper statements to e-statements and receive $5.00 deposited to your checking account 95 The Bank of Princeton Putting our website to work for you! The Bank of Princeton and MoreBank offer many valuable resources on their websites to assist with managing finances. Discover over 20 calculators used to facilitate with budgets, loan estimating and help formulate a plan to become a millionaire! Find a number of practical forms, including a switch kit, for download and print. Review fraud prevention information as well as explore your local weather. Upcoming Events Directors, Management and Staff are proud to be active and partnering with many organizations to make a difference in the communities we serve. Our staff can be found walking, running and volunteering to raise money and awareness. Join us at some of our upcoming events in 2015. Visit... www.thebankofprinceton.com for additional information including links to purchase tickets or options for supporting these worthy charities and local events. Spotlight on Business The Bank of Princeton and MoreBank continue to partner and maintain a focus on the business community. Each quarter, a business customer is selected and featured at the branch location specific to their market. All twelve Spotlights on Business are highlighted for one quarter and then archived on our website. Have you downloaded the App? Our personal Banking Apps, developed for both smart phones and the iPad, make life more convenient. Uncover links to the Apps on our website, in iTunes or Google Play for Android. thebankofprinceton.com/personal/mobile-banking Coming in 2015... A Business Online Banking Mobile App! Soon you can take care of your business banking from any smartphone or tablet! Upcoming Events 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. 96 The Bank of Princeton Year-End Total Assets $955 Million 2014 $877 Million 2013 $769 Million 2012 $665 Million 2011 $488 Million 2010 $265 Million 2009 $194 Million 2008 $66 Million 2007 97 The Bank of Princeton Boy Scout Troop 29 Bridge Academy, The Allies, Inc. Alzheimer's Association American Cancer Society Dillon Youth Basketball League Joint Effort - Princeton Dress for Success Kalmia Club, The Eden Autism Services Foundation Korean American Association American Heart Association Edison Chamber of Commerce of Greater Philadelphia American Legion, The Elijah's Promise American Repertory Ballet Family Guidance Center Korean American Association of Southern New Jersey Animal Alliance of New Jersey Feria de Negocios Hispanos Korean American Institute of Princeton Anchor House Arc of Hunterdon County, The Arts Council of Princeton Food Cupboard of the Inter-Faith Korean American Soccer Association Housing Alliance, The Forsgate Foundation, The of Greater Philadelphia Korean American Sports Association Asian Pacific American Bar Association Friendly Sons & Daughters of St. Patrick of Greater Philadelphia of Pennsylvania of Mercer County Big Brothers Big Sisters of Mercer County Friends of Ely Park Korean Community Center of Greater Princeton George's Pet Adoption Day, The Lambertville Chamber of Commerce Capital Health Foundation of Commerce Greater New Hope Chamber Lamb Foundation, The Lambertville Food Pantry Capital Region Minority Chamber Greater Philadelphia Asian Social Lambertville / New Hope Winter Festival of Commerce Services Center Lambertville Historical Society Catholic Charities, Diocese of Metuchen Greener New Jersey Productions Lambertville-West Amwell Youth Catholic Charities, Diocese of Trenton Habitat for Humanity, Raritan Valley Baseball & Softball Association Center for Educational Advancement Hamilton Area YMCA Learning Center for Exceptional Center for Family, Community & Hamilton Education Foundation Children, The Social Justice, Inc., The Center for Literacy Help Portrait - Princeton Chapter Leukemia & Lymphoma Society HiTOPS, Inc. LifeTies, Inc. Central Bucks Chamber of Commerce HomeFront Children's Home Society of New Jersey HomeSharing, Inc. March of Dimes Foundation Mary Jacobs Library Foundation Crisis Ministry of Mercer County, The Hopewell Elementary School Science Fair Meals on Wheels of Trenton / Ewing Christine's Hope for Kids Foundation Hopewell Harvest Fair Mercer County Bar Association Community Options Communiversity Corner House Hopewell Valley Arts Council Mercer County Community College Hopewell Valley Education Foundation Foundation Hopewell Valley Soccer Association Mercer County Turkey Trot Crossroads of the American Revolution Hopewell Valley Veterans Association Mercer Street Friends Food Bank D&R Greenway Land Trust Hopewell Valley YMCA Middlesex County Regional Chamber Dance Stop Studio Hunterdon County Chamber of Commerce Daytop New Jersey at Crawford House of Commerce MidJersey Chamber of Commerce Delaware Township School Partners Hyacinth AIDS Foundation MidSummer Marketing Event in Education Jack & Jill of America, Inc. Mil Al Mission “Commitment is what transforms a promise into reality.” ~ Abraham Lincoln Jewish Family & Children Services Minding Our Business Jewish Family Services of Middlesex County Montgomery Elementary Schools PTA Montgomery Baseball League John Warms Montgomery High School Montgomery Basketball Association Alumni Association Montgomery Business Association Montgomery / Rocky Hill Rotary Club Philabundance Ryan's Quest Montgomery Rodeo Philadelphia Chinatown Development Science Mentors 1 to 1 Montgomery Township Education Corporation Foundation Philadelphia Korean Senior Montgomery Township Environmental Golf Association Commission PlanSmart NJ Send Hunger Packing Princeton SERV Behavioral Health Systems Shad Fest Lambertville South Hunterdon Regional Montgomery Township Food Pantry Princeton Academy of the Sacred Heart High School Baseball Montgomery Township Fireworks Princeton Area Alumni Association Special Strides Committee Princeton Education Foundation St. Francis Medical Center Foundation Montgomery Township Volunteer Princeton Historical Society Steamboat Floating Classroom Fire Company No. 1 & No. 2 Princeton High School Baseball Susan G. Komen Montgomery Women's Club Morven Museum & Garden Nassau Hockey League Booster Club Princeton in Africa PrincetonKIDS Thomas Edison State College Foundation Trenton Area Soup Kitchen, The Trenton Catholic Academy National Association for Korean Schools, Princeton Pro Musica Trinity Church The Mid-Atlantic Chapter New Brunswick Cultural Center Hub City Music Festival Princeton Public Library Trinity Counseling Service Princeton Recreation Department United Way of Hunterdon County Princeton Regional Chamber Unity Square / New Brunswick 4-H New Brunswick Fire Department of Commerce Princeton Senior Resource Center Trunk or Treat VolunteerConnect New Brunswick Little League New Hope Film Festival New Hope Historical Society Princeton Symphony Orchestra Waldorf School of Princeton Princeton Tennis Program Watchung Hills Ponytail Softball New Hope-Solebury Girls Soccer Princeton University Summer Chamber League, Inc. New Hope-Solebury Spirit Run Concerts West Amwell Township Princeton Youth Baseball Association Womanspace Wounded Warriors Project Yeshivat Keter Torah YMCA Camp Mason YWCA of Trenton New Jersey Association of Community Providers New Jersey Foundation for Aging New Jersey Oyster Bowl Recreation Foundation of Hopewell Valley, Inc. Riverside Symphonia New Jersey State Elks Association Ronald McDonald House of NJ Bankers Association New Brunswick North Brunswick Township High School Rotary Club of Princeton Notre Dame High School Open Space Pace Parkinson Alliance, The Passage Theatre Company Paul Robeson House, The Pennington Business & Professional Association Pennington Day, Inc. Pennington Montessori Pennington Volunteer Fire Company People & Stories / Gente y Cuentos C o m p a s s i o n & Dedication Extending sincere gratitude to our community partners. Together... making a difference. C o r p o r a t e H 183 Bayard Lane Princeton, NJ 08540 e a dquart e r s 21 Chambers Street Princeton, NJ 08542 194 Nassau Street Princeton, NJ 08542 1185 Route 206 North Princeton, NJ 08540 2 Route 31 South Pennington, NJ 08534 339 Route 33 Hamilton, NJ 08619 1 Rossmoor Drive, Ste 120 Monroe Twp, NJ 08831 10 Bridge Street Lambertville, NJ 08530 1 Spring Street, Ste 102 New Brunswick, NJ 08901 403 Wall Street Princeton, NJ 08540 470 W. Cheltenham Avenue Philadelphia, PA 19126 1222 Welsh Road North Wales, PA 19454 921 Arch Street Philadelphia, PA 19107 r e t n e tio ns C Op e r a www.thebankofprinceton.com 609.921.1700 www.morebankusa.com 215.224.6400
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