Shareholders of Bank of Princeton are learning just how valuable good internal controls are – $2.5 million in this case.

Investors Bancorp in Short Hills, N.J., agreed in May to buy the $1 billion-asset Bank of Princeton for $154 million in cash and stock. But Investors revealed this week that it was originally willing to pay more – before it noticed "certain internal control issues" in Bank of Princeton's annual report.

Those issues involved two unnamed bank officers who, in January, "circumvented established internal controls regarding the proper reporting and authorization" of the expense reports, Bank of Princeton disclosed in an April filing. The breakdown in controls was discovered through the bank's accounts payable procedures and no loss was incurred.

But it almost killed the deal. On April 17, Investors terminated talks to buy Bank of Princeton. The break-up was short-lived; Investors returned to the bargaining table three days later, reducing its offer by 2%, to $30.50 a share. Based on Bank of Princeton's shares outstanding, that equaled a reduction of roughly $2.5 million.

Bank of Princeton did not disclose the specific issue with the two expense reports, nor did it detail any consequences for the officers. A call to Bank of Princeton wasn't returned; a spokeswoman for Investors said its executives were not immediately available to comment.

The matter was serious enough that Bank of Princeton also amended its procedures to make sure that only the audit committee will receive whistleblower complaints and alleged code of conduct violations.

"Management failed to consistently maintain an effective control environment, specifically as it relates to the tone at the top of the organization," Bank of Princeton's filing said. "We believe that certain actions of bank officers did not demonstrate the appropriate level of control consciousness."

The bank also drafted an expense reimbursement policy and began training sessions tied to each of those policies.

Investors' registration statement, filed Tuesday in conjunction with the pending deal, also disclosed that the $22 billion-asset company wasn't Bank of Princeton's first choice for a buyer.

In September, an unnamed company made a bid that exceeded Investors' initial offer by about 6%. The other bank spent four weeks conducting due diligence on Bank of Princeton before requesting more time to evaluate the deal.

Bank of Princeton terminated talks with the other bank due to a "potentially extensive delay and pricing uncertainty," the registration statement said.

Investors also provided an update on its efforts to address an informal agreement it reached with regulators in August tied to Bank Secrecy Act and anti-money-laundering compliance matters.

Under the agreement, Investors agreed to implement internal controls to ensure full BSA compliance and to review certain transactions and accounts for BSA and AML compliance, among other things.

So far, Investors has restructured reporting lines, improved technology and increased staff, including hiring senior personnel, the latest filing said. While the Bank of Princeton application remains "under processing" by the FDIC, Investors said it should be able "to demonstrate substantial compliance" with the informal agreement.

Still, Investors cautioned that it could not assure that it would receive regulatory approval for the Princeton acquisition.

When the deal was announced, Investors said it expected to complete the acquisition by the end of this year. Under that timetable, Investors had projected 6% earnings accretion in 2017.

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