EX-13 4 dex13.txt EXHIBIT 13 Exhibit 13 PAMRAPO BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- GENERAL Pamrapo Bancorp, Inc. (the "Company") owns 100% of the issued and outstanding stock of Pamrapo Savings Bank, SLA (the "Bank"), which is the primary asset of the Company. The Company's business is conducted principally through the Bank. BUSINESS OF THE COMPANY The Bank's principal business has been and continues to be attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, primarily in one-to-four family, owner occupied residential mortgage loans. In addition, in times of low loan demand, the Bank will invest in mortgage-backed securities to supplement its lending portfolio. The Bank also invests, to a lesser extent, in multi-family residential mortgage loans, commercial real estate loans, home equity and second mortgage loans and consumer loans. The earnings of the Bank depend primarily upon the level of net interest income, which is the difference between the interest earned on assets such as loans, mortgage-backed securities, investments and other interest-earning assets and the interest paid on liabilities such as deposits and borrowings. Net interest income is affected by many factors, including regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flow. Net interest income is also affected by the amount, composition and relative interest rates of the Bank's assets and liabilities and by the repricing of such assets and liabilities. The Bank is vulnerable to interest rate fluctuations to the extent that its interest-bearing liabilities mature or reprice more rapidly than its interest-earning assets. Such asset/liability structure may result in lower net interest income during periods of rising interest rates and may be beneficial in times of declining interest rates. The Bank's net income is also affected by provisions for loan losses, non-interest income, non-interest expenses and income taxes. FINANCIAL CONDITION The Company's consolidated assets at December 31, 2003 totaled $636.9 million, which represents an increase of $48.2 million or 8.19% when compared to $588.7 million at December 31, 2002, primarily due to an increase in mortgage-backed securities. Securities available for sale decreased $621,000 or 13.67% to $3.9 million at December 31, 2003 when compared to $4.5 million at December 31, 2002. The decrease during the year ended December 31, 2003, resulted primarily from proceeds from repayments on securities available for sale amounting to $652,000 which offset purchases of securities available for sale of $32,000. Investment securities held to maturity increased $2.3 million or 32.39% to $9.4 million at December 31, 2003 when compared to $7.1 million at December 31, 2002. The increase during the year ended December 31, 2003 resulted primarily from purchases of investment securities held to maturity of $2.4 million. Mortgage-backed securities held to maturity increased $72.3 million or 49.49% to $218.4 million at December 31, 2003 from $146.1 million at December 31, 2002. The increase during the year ended December 31, 2003 resulted primarily from purchases of mortgage-backed securities of $160.9 million, sufficient to offset principal repayments of $87.9 million on mortgage-backed securities. Net loans amounted to $378.6 million and $389.9 million at December 31, 2003 and 2002, respectively, which represents a decrease of $11.3 million or 2.90%, primarily due to loan repayments exceeding loan originations by $10.9 million. Total deposits at December 31, 2003 increased $46.7 million or 10.48% to $492.2 million compared to $445.5 million at December 31, 2002. Advances from the Federal Home Loan Bank of New York ("FHLB-NY") totaled $87.0 million and $84.3 million at December 31, 2003 and 2002, respectively. The net increase of $2.7 million during the year ended December 31, 2003, resulted from new advances from the FHLB-NY, which were used to fund loan commitments, purchase of mortgage-backed securities and for general corporate purposes. Stockholders' equity amounted to $51.3 million and $50.8 million at December 31, 2003 and 2002, respectively. During the years ended December 31, 2003 and 2002, net income of $7.8 million and $7.1 million, respectively, was recorded and cash dividends of $4.0 million and $3.9 million, respectively, were paid on the Company's common stock. During the years ended December 31, 2003 and 2002, the Company repurchased 174,673 and 20,600 shares, respectively, of its common stock for $3.2 million and $279,000, respectively, under a stock repurchase program. 9 PAMRAPO BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) -------------------------------------------------------------------------------- RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NET INCOME Net income increased by $658,000 or 9.24% to $7.8 million during the year ended December 31, 2003 compared to $7.1 million for the year ended December 31, 2002. The increase in net income during the 2003 period was primarily due to decreases in total interest expense of $1.9 million and provision for loan losses of $550,000, which more than offset decreases in total interest income of $1.3 million and non-interest income of $11,000, along with increases in non-interest expense of $18,000 and income taxes of $417,000. INTEREST INCOME Interest income on loans during the year ended December 31, 2003 decreased by $3.2 million or 10.92% to $26.1 million when compared to $29.3 million during 2002. During the years ended December 31, 2003 and 2002, the yield earned on the loan portfolio was 6.94% and 7.61%, respectively. The average balance of loans outstanding during the years ended December 31, 2003 and 2002, totaled $376.0 million and $384.7 million, respectively. Interest on mortgage-backed securities increased $1.8 million or 23.08% during the year ended December 31, 2003 to $9.6 million compared to $7.8 million for 2002. During the years ended December 31, 2003 and 2002, the average balance of mortgage-backed securities totaled $199.6 million and $127.7 million, respectively, resulting in a net increase of $71.9 million or 56.30%. The yield earned on the mortgage-backed securities portfolio was 4.80% and 6.08% during 2003 and 2002, respectively. Interest earned on investment securities increased by $219,000 or 42.28% to $737,000 for the year ended December 31, 2003, when compared to $518,000 for 2002. The increase during the year ended December 31, 2003, resulted from an increase of $3.3 million or 45.83% in the average balance of the investment securities portfolio, sufficient to offset a decrease of twenty-three basis points in the yield earned on the investment securities portfolio from 7.23% in 2002 to 7.00% in 2003. Interest on other interest-earning assets amounted to $346,000 and $508,000 during the years ended December 31, 2003 and 2002, respectively. The average balance of other interest-earning assets outstanding decreased $7.0 million or 27.45% to $18.5 million in 2003 from $25.5 million in 2002, along with a decrease of twelve basis points in the yield earned on other interest-earning assets to 1.87% in 2003 from 1.99% in 2002. INTEREST EXPENSE Interest on deposits decreased $1.8 million or 15.65% to $9.7 million during the year ended December 31, 2003 compared to $11.5 million for 2002. The decrease during 2003 was attributable to a decrease of sixty-nine basis points in the Bank's average cost of interest-bearing deposits to 2.17% for 2003 from 2.86% for 2002 partially offset by an increase of $44.3 million or 11.04% in the average balance of interest-bearing deposits outstanding. Interest on advances and other borrowed money decreased $65,000 or 1.71% to $3.7 million during the year ended December 31, 2003 compared to $3.8 million for 2002. The decrease during 2003 was attributable to a decrease of eighty-nine basis points in the Bank's cost of borrowings from 5.04% for 2002 to 4.15% for 2003, sufficient to offset an increase of $14.7 million or 19.47% in the average balance of advances and other borrowed money from $75.5 million in 2002 to $90.2 million in 2003. NET INTEREST INCOME Net interest income for the year ended December 31, 2003, increased $554,000 or 2.43% to $23.3 million for 2003 as compared to $22.8 million for 2002. The Bank's net interest rate spread decreased from 3.77% in 2002 to 3.57% in 2003 and its interest rate margin decreased from 4.18% in 2002 to 3.86% in 2003. The decrease in net interest rate spread primarily resulted from a ninety basis point decrease in the yield on interest-earning assets from 6.98% in 2002 to 6.08% in 2003, sufficient to offset a seventy basis point decrease in the cost of average interest-bearing liabilities from 3.21% in 2002 to 2.51% in 2003. PROVISION FOR LOAN LOSSES During the years ended December 31, 2003 and 2002, the Bank provided $84,000 and $634,000, respectively, for loan losses. At December 31, 2003 and 2002, the Bank's loan portfolio included loans totaling $1.6 million and $2.7 million, respectively, which were delinquent ninety days or more. The Bank maintains an allowance for loan losses based on management's evaluation of the risk inherent in its loan portfolio which gives due consideration to changes in general market conditions and in the nature and volume of the Bank's loan activity. The allowance for loan losses amounted to $2.52 million at December 31, 2003, representing .65% of total loans and 161.53% of loans delinquent ninety days or more compared to an allowance of $2.55 million at December 10 PAMRAPO BANCORP, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- 31, 2002, representing .65% of total loans and 94.41% of loans delinquent ninety days or more. During the years ended December 31, 2003 and 2002, the Bank charged off loans aggregating $126,000 and $244,000, respectively. The Bank monitors its loan portfolio and intends to continue to provide for loan losses based on its ongoing periodic review of the loan portfolio and general market conditions. NON-INTEREST INCOME Non-interest income decreased by $11,000 or 0.43% to $2.56 million during the year ended December 31, 2003 as compared to $2.57 million for 2002. The decrease in non-interest income during 2003 resulted primarily from a decrease in the gain on sale of branches of $479,000, sufficient to offset increases in fees and service charges of $179,000 and miscellaneous income of $288,000. During the year ended December 31, 2002, the Bank sold deposits of $21.8 million, furniture, fixtures and leasehold improvements of $221,000 and account loans of $148,000 at its two Brick, New Jersey, branch offices to another financial institution. As a result of the sale, the Bank recognized a net gain of $479,000. NON-INTEREST EXPENSES Non-interest expenses increased $18,000 to $12.81 million during the year ended December 31, 2003 compared to $12.79 million for 2002. Salaries and employee benefits, occupancy and advertising decreased $467,000, $51,000 and $36,000, respectively, during the year ended December 31, 2003, which were more than offset by increases in equipment and miscellaneous expenses of $87,000 and $486,000, respectively. INCOME TAXES Income tax expense totaled $5.2 million and $4.8 million during the years ended December 31, 2003 and 2002, respectively. The increase in 2003 resulted primarily from an increase in pre-tax income of $1.1 million. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 NET INCOME Net income increased by $2.1 million or 42.00% to $7.1 million during the year ended December 31, 2002 compared to $5.0 million for the year ended December 31, 2001. The increase in net income during the 2002 period was primarily due to increases in total interest income of $1.4 million and in non-interest income of $645,000, along with a decrease in total interest expense of $2.3 million, which more than offset increases in non-interest expense of $157,000, provision for loan losses of $175,000 and income taxes of $1.9 million. INTEREST INCOME Interest income on loans during the year ended December 31, 2002 increased by $1.8 million or 6.55% to $29.3 million when compared to $27.5 million during 2001. During the years ended December 31, 2002 and 2001, the yield earned on the loan portfolio was 7.61% and 8.07%, respectively. The average balance of loans outstanding during the years ended December 31, 2002 and 2001, totaled $384.7 million and $340.3 million, respectively, representing an increase of $44.4 million or 13.05%. Interest on mortgage-backed securities decreased $160,000 or 2.02% during the year ended December 31, 2002 to $7.8 million compared to $7.9 million for 2001. During the years ended December 31, 2002 and 2001, the average balance of mortgage-backed securities totaled $127.7 million and $121.6 million, respectively, resulting in a net increase of $6.1 million or 5.02%. The yield earned on the mortgage-backed securities portfolio was 6.08% and 6.52% during 2002 and 2001, respectively. Interest earned on investment securities decreased by $78,000 or 13.09% to $518,000 for the year ended December 31, 2002, when compared to $596,000 for 2001. The decrease during the year ended December 31, 2002, resulted from a decrease of $1.7 million or 18.97% in the average balance of the investment securities portfolio, sufficient to offset an increase of forty-eight basis points in the yield earned on the investment securities portfolio from 6.75% in 2001 to 7.23% in 2002. Interest on other interest-earning assets amounted to $508,000 and $623,000 during the years ended December 31, 2002 and 2001, respectively. The average balance of other interest-earning assets outstanding increased $13.7 million or 116.10% to $25.5 million in 2002 from $11.8 million in 2001, sufficient to offset a decrease of 327 basis points in the yield earned on other interest-earning assets to 1.99% in 2002 from 5.26% in 2001. INTEREST EXPENSE Interest on deposits decreased $3.4 million or 22.82% to $11.5 million during the year ended December 31, 2002 compared to $14.9 million for 2001. The decrease during 2002 was attributable to a decrease of 105 basis points in the Bank's average cost of interest-bearing 11 PAMRAPO BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) -------------------------------------------------------------------------------- deposits to 2.86% for 2002 from 3.91% for 2001 partially offset by an increase of $19.9 million or 5.22% in the average balance of interest-bearing deposits outstanding. Interest on advances and other borrowed money increased $1.2 million or 46.15% to $3.8 million during the year ended December 31, 2002 compared to $2.6 million for 2001. The increase during 2002 was attributable to an increase of $30.0 million or 65.81% in the average balance of advances and other borrowings outstanding, partially offset by a decrease of seventy-five basis points in the Bank's cost of borrowings from 5.79% for 2001 to 5.04% for 2002. NET INTEREST INCOME Net interest income for the year ended December 31, 2002, increased $3.7 million or 19.37% to $22.8 million for 2002 as compared to $19.1 million for 2001. The Bank's net interest rate spread increased from 3.48% in 2001 to 3.77% in 2002 and its interest rate margin increased from 3.95% in 2001 to 4.18% in 2002. The increase in net interest rate spread primarily resulted from a ninety basis point decrease in the cost of average interest-bearing liabilities to 3.21% in 2002 from 4.11% in 2001, sufficient to offset a sixty-one basis point decrease in the yield on interest-earning assets from 7.59% in 2001 to 6.98% in 2002. PROVISION FOR LOAN LOSSES During the years ended December 31, 2002 and 2001, the Bank provided $634,000 and $459,000, respectively, for loan losses. At December 31, 2002 and 2001, the Bank's loan portfolio included loans totaling $2.7 million and $3.3 million, respectively, which were delinquent ninety days or more. The Bank maintains an allowance for loan losses based on management's evaluation of the risk inherent in its loan portfolio which gives due consideration to changes in general market conditions and in the nature and volume of the Bank's loan activity. The allowance for loan losses amounted to $2.55 million at December 31, 2002, representing .65% of total loans and 94.41% of loans delinquent ninety days or more compared to an allowance of $2.15 million at December 31, 2001, representing .57% of total loans and 65.95% of loans delinquent ninety days or more. During the years ended December 31, 2002 and 2001, the Bank charged off loans aggregating $244,000 and $273,000, respectively. The Bank monitors its loan portfolio and intends to continue to provide for loan losses based on its ongoing periodic review of the loan portfolio and general market conditions. NON-INTEREST INCOME Non-interest income increased by $645,000 or 33.58% to $2.6 million during the year ended December 31, 2002 as compared to $1.9 million for 2001. The increase in non-interest income during 2002 resulted primarily from increases in fees and service charges of $85,000, gain on sale of branches of $479,000 and miscellaneous income of $81,000. During the year ended December 31, 2002, the Bank sold deposits of $21.8 million, furniture, fixtures and leasehold improvements of $221,000 and account loans of $148,000 at its two Brick, New Jersey, branch offices to another financial institution. As a result of the sale, the Bank recognized a net gain of $479,000. NON-INTEREST EXPENSES Non-interest expenses increased $156,000 to $12.8 million during the year ended December 31, 2002 compared to $12.6 million for 2001. Occupancy, federal insurance premium, advertising, equipment and miscellaneous expenses decreased $121,000, $1,000, $53,000, $72,000 and $401,000, respectively, during the year ended December 31, 2002, which were more than offset by increases in salaries and employee benefits of $804,000. INCOME TAXES Income tax expense totaled $4.8 million and $2.9 million during the years ended December 31, 2002 and 2001, respectively. The increase in 2002 resulted primarily from increases in pre-tax income of $4.0 million and an increase in the New Jersey income tax rate from 3% to 9% as a result of a tax law change. LIQUIDITY AND CAPITAL RESOURCES The Bank's primary sources of funds are deposits, amortization and prepayments of loan and mortgage-backed securities principal, FHLB-NY advances, maturities of investment securities and funds provided from operations. While scheduled loan and mortgage-backed securities amortization and maturities of investment securities are a relatively predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by market interest rates, economic conditions and competition. The Bank is required to maintain sufficient liquidity to ensure its safe and sound operation by the Office of Thrift Supervision ("OTS") regulations. The Bank adjusts its liquidity levels in order to meet funding needs for deposit outflows, payments of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, when applicable, and loan funding 12 -------------------------------------------------------------------------------- commitments. The Bank also adjusts its liquidity level as appropriate to meet its asset/liability objectives. In addition, the Bank invests its excess funds in federal funds and interest-bearing deposits with the FHLB-NY, which provides liquidity to meet lending requirements. The Bank's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. Cash was generated by operating activities in each of the above periods. The primary source of cash from operating activities during each period was net income. The primary sources of investing activities of the Bank are lending and investment in mortgage-backed securities. In addition to funding new loan production and the purchase of mortgage-backed securities through operations and financing activities, new loan production and purchases of mortgage-backed securities were also funded by principal repayments on existing loans and mortgage-backed securities. The primary sources of financing activities during the 2003 period were net increases in deposits of $46.7 million and net advances from the FHLB-NY of $2.7 million. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds and interest-bearing deposits. If the Bank requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB-NY, which provide an additional source of funds. At December 31, 2003 and 2002, advances from the FHLB-NY amounted to $87.0 million and $84.3 million, respectively. The Bank anticipates that it will have sufficient funds available to meet its current loan commitments. At December 31, 2003, the Bank had outstanding commitments to originate loans and fund unused credit lines of $29.6 million. Certificates of deposit scheduled to mature in one year or less, at December 31, 2003, totaled $175.9 million. Management believes that, based upon historical experience, a significant portion of such deposits will remain with the Bank. At December 31, 2003, the Bank exceeded each of the three OTS capital requirements. The Bank's tangible, core and risk-based capital ratios were 7.26%, 7.26% and 15.13%, respectively. The Bank was categorized as "well-capitalized" under the prompt corrective action regulations of the OTS. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and the related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services because such prices are affected by inflation to a larger extent than interest rates. 13 PAMRAPO BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION --------------------------------------------------------------------------------
December 31, ---------------------------------- Assets Note(s) 2002 2003 -------------------------------------------------------------------------------------------------------- Cash and amounts due from depository institutions $ 6,172,543 $ 5,929,784 Interest-bearing deposits in other banks 17,684,844 4,196,698 -------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 1 and 15 23,857,387 10,126,482 Securities available for sale 1,2,9 and 15 4,542,528 3,921,902 Investment securities held to maturity 1,3,9 and 15 7,095,209 9,422,111 Mortgage-backed securities held to maturity 1,4,9 and 15 146,138,326 218,418,340 Loans receivable 1,5,9 and 15 389,864,704 378,640,773 Foreclosed real estate 1 155,340 -- Investment in real estate 1 213,643 129,640 Premises and equipment 1,6 and 10 4,417,239 4,092,683 Federal Home Loan Bank of New York stock 9 4,403,400 4,743,900 Interest receivable 1,7 and 15 2,982,315 2,838,497 Deferred tax asset 1 and 13 779,394 843,543 Other assets 12 4,209,460 3,717,310 -------------------------------------------------------------------------------------------------------- Total assets $ 588,658,945 $ 636,895,181 -------------------------------------------------------------------------------------------------------- Liabilities and stockholders' equity -------------------------------------------------------------------------------------------------------- Liabilities -------------------------------------------------------------------------------------------------------- Deposits 8 and 15 $ 445,507,415 $ 492,160,765 Advances from Federal Home Loan Bank of New York 9 and 15 84,340,000 87,000,000 Other borrowed money 10 and 15 149,166 117,748 Advance payments by borrowers for taxes and insurance 3,835,862 3,495,739 Other liabilities 12 4,070,229 2,797,586 -------------------------------------------------------------------------------------------------------- Total liabilities 537,902,672 585,571,838 -------------------------------------------------------------------------------------------------------- Commitments and contingencies 14 and 15 -- -- Stockholders' equity 1, 11 and 13 -------------------------------------------------------------------------------------------------------- Preferred stock; authorized 3,000,000 shares; issued and outstanding - none -- -- Common stock; par value $.01; 7,000,000 shares (2002) and 25,000,000 shares (2003) authorized; 6,900,000 shares issued; 5,145,986 shares (2002) and 4,974,313 shares (2003) outstanding 69,000 69,000 Paid-in capital in excess of par value 18,937,168 18,957,298 Retained earnings - substantially restricted 50,889,220 54,621,926 Accumulated other comprehensive income - Unrealized gain on securities available for sale, net of income tax 242,546 243,170 Treasury stock, at cost; 1,754,014 shares (2002) and 1,925,687 shares (2003) (19,381,661) (22,568,051) -------------------------------------------------------------------------------------------------------- Total stockholders' equity 50,756,273 51,323,343 -------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 588,658,945 $ 636,895,181 --------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 14 PAMRAPO BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME --------------------------------------------------------------------------------
Year Ended December 31, ---------------------------------------------------- Note(s) 2001 2002 2003 --------------------------------------------------------------------------------------------------------------------------- Interest income: Loans 1 and 5 $ 27,480,276 $ 29,266,901 26,102,108 Mortgage-backed securities 1 7,924,810 7,764,545 9,570,040 Investments 1 596,371 518,481 737,285 Other interest-earning assets 623,336 508,158 346,011 --------------------------------------------------------------------------------------------------------------------------- Total interest income 36,624,793 38,058,085 36,755,444 --------------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits 8 14,908,910 11,482,660 9,691,521 Advances and other borrowed money 2,635,383 3,807,006 3,741,656 --------------------------------------------------------------------------------------------------------------------------- Total interest expense 17,544,293 15,289,666 13,433,177 --------------------------------------------------------------------------------------------------------------------------- Net interest income 19,080,500 22,768,419 23,322,267 Provision for loan losses 1 and 5 458,888 634,090 83,777 --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 18,621,612 22,134,329 23,238,490 --------------------------------------------------------------------------------------------------------------------------- Non-interest income: Fees and service charges 1,200,562 1,285,725 1,464,683 Gain on sale of branches -- 478,563 -- Miscellaneous 720,554 801,605 1,089,901 --------------------------------------------------------------------------------------------------------------------------- Total non-interest income 1,921,116 2,565,893 2,554,584 --------------------------------------------------------------------------------------------------------------------------- Non-interest expenses: Salaries and employee benefits 12 6,430,140 7,234,261 6,767,218 Net occupancy expense of premises 6 and 14 1,206,893 1,085,575 1,034,747 Equipment 6 1,354,638 1,282,556 1,369,764 Advertising 233,745 181,207 144,744 Federal insurance premium 74,314 73,019 72,599 Miscellaneous 3,334,617 2,933,980 3,420,331 --------------------------------------------------------------------------------------------------------------------------- Total non-interest expenses 12,634,347 12,790,598 12,809,403 --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 7,908,381 11,909,624 12,983,671 Income taxes 1 and 13 2,907,980 4,786,232 5,202,845 --------------------------------------------------------------------------------------------------------------------------- Net income 1 $ 5,000,401 $ 7,123,392 $ 7,780,826 --------------------------------------------------------------------------------------------------------------------------- Net income per common share: 1 Basic $ 0.97 $ 1.39 $ 1.54 --------------------------------------------------------------------------------------------------------------------------- Diluted $ 0.97 $ 1.39 $ 1.54 --------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding: 1 Basic 5,160,346 5,141,486 5,055,816 --------------------------------------------------------------------------------------------------------------------------- Diluted 5,160,346 5,141,486 5,061,471 --------------------------------------------------------------------------------------------------------------------------- Dividends per common share 1 $ 0.72 $ 0.75 $ 0.80 ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 15 PAMRAPO BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME --------------------------------------------------------------------------------
Year Ended December 31, ---------------------------------------------- 2001 2002 2003 ----------------------------------------------------------------------------------------------------- Net income $ 5,000,401 $ 7,123,392 $ 7,780,826 ----------------------------------------------------------------------------------------------------- Other comprehensive income, net of income taxes: Gross unrealized holding gain on securities available for sale 191,091 97,762 1,024 Deferred income taxes (68,900) (51,000) (400) ----------------------------------------------------------------------------------------------------- Other comprehensive income 122,191 46,762 624 ----------------------------------------------------------------------------------------------------- Comprehensive Income $ 5,122,592 $ 7,170,154 $ 7,781,450 -----------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 16 PAMRAPO BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY --------------------------------------------------------------------------------
Paid-in Retained Accumulated Capital in Earnings - Other Excess of Par Substantially Comprehensive Treasury Common Stock Value Restricted Income Stock Total --------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2000 $ 34,500 $ 18,906,768 $ 46,332,436 $ 73,593 $ (18,818,788) $ 46,528,509 Net income for the year ended December 31, 2001 -- -- 5,000,401 -- -- 5,000,401 Purchase of treasury stock -- -- -- -- (416,145) (416,145) Unrealized gain on securities available for sale, net of income taxes -- -- -- 122,191 -- 122,191 Cash dividends -- -- (3,711,781) -- -- (3,711,781) --------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2001 34,500 18,906,768 47,621,056 195,784 (19,234,933) 47,523,175 Net income for the year ended December 31, 2002 -- -- 7,123,392 -- -- 7,123,392 Stock split 34,500 (34,500) -- -- -- -- Purchase of treasury stock -- -- -- -- (279,328) (279,328) Reissuance of treasury stock -- 64,900 -- -- 132,600 197,500 Unrealized gain on securities available for sale, net of income taxes -- -- -- 46,762 -- 46,762 Cash dividends -- -- (3,855,228) -- -- (3,855,228) --------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2002 69,000 18,937,168 50,889,220 242,546 (19,381,661) 50,756,273 Net income for the year ended December 31, 2003 -- -- 7,780,826 -- -- 7,780,826 Purchase of treasury stock -- -- -- -- (3,221,490) (3,221,490) Sale of treasury stock -- 20,130 -- -- 35,100 55,230 Unrealized gain on securities available for sale, net of income taxes -- -- -- 624 -- 624 Cash dividends -- -- (4,048,120) -- -- (4,048,120) --------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2003 $ 69,000 $ 18,957,298 $ 54,621,926 $ 243,170 $ (22,568,051) $ 51,323,343 =================================================================================================================================
See notes to consolidated financial statements. 17 PAMRAPO BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASHFLOWS --------------------------------------------------------------------------------
Year Ended December 31, -------------------------------------------------- 2001 2002 2003 --------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 5,000,401 $ 7,123,392 $ 7,780,826 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment and investment in real estate 584,996 619,262 553,622 (Accretion) amortization of deferred fees, premiums and discounts, net (7,895) 128,086 1,037,197 Provision for loan losses 458,888 634,090 83,777 Provision for losses on foreclosed real estate 20,037 -- -- (Gain) on sales of foreclosed real estate (34,359) (8,349) (17,362) (Gain) on sale of real estate held for investment -- -- (42,230) (Gain) on sale of branches -- (478,563) -- Deferred income taxes (26,319) 391,008 (64,549) (Increase) decrease in interest receivable (178,242) (38,089) 143,818 (Increase) decrease in other assets (440,326) (2,477,357) 492,150 (Decrease) in other liabilities (805,963) (423,935) (1,272,643) Distribution of treasury stock -- 197,500 -- --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,571,218 5,667,045 8,694,606 --------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Principal repayments on securities available for sale 1,081,230 895,307 651,692 Purchases of securities available for sale (570,385) (43,590) (31,692) Purchases of investment securities held to maturity (4,000,000) (4,110,600) (2,388,040) Proceeds from calls of investment securities held to maturity 6,000,000 2,000,000 -- Principal repayments on mortgage-backed securities held to maturity 30,463,577 44,499,307 87,887,524 Purchases of mortgage-backed securities held to maturity (34,155,728) (68,421,533) (160,853,754) Proceeds from sales of student loans -- 147,950 -- Net change in loans receivable (60,394,792) (21,311,805) 10,851,961 Proceeds from sales of foreclosed real estate 335,017 91,150 172,702 Additions to premises and equipment and investment in real estate (359,171) (413,813) (225,433) Proceeds from sale of investment in real estate -- -- 122,600 Proceeds from sale of premises and equipment -- 221,437 -- Purchase of Federal Home Loan Bank of New York stock (299,900) (607,300) (340,500) --------------------------------------------------------------------------------------------------------- Net cash (used in) investing activities (61,900,152) (47,053,490) (64,152,940) ---------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 18 --------------------------------------------------------------------------------
Year Ended December 31, -------------------------------------------------- 2001 2002 2003 --------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits $ 37,176,939 $ 50,726,043 $ 46,653,350 Cash paid for sale of deposits -- (21,326,860) -- Advances from Federal Home Loan Bank of New York 35,000,000 25,000,000 33,000,000 Repayment of Advances from Federal Home Loan Bank of New York (3,243,100) (8,000,000) (30,340,000) Net (decrease) in other borrowed money (26,786) (29,010) (31,418) Net increase (decrease) in payments by borrowers for taxes and insurance 984,838 319,330 (340,123) Cash dividends paid (3,711,781) (3,855,228) (4,048,120) Sale of treasury stock -- -- 55,230 Purchase of treasury stock (416,145) (279,328) (3,221,490) --------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 65,763,965 42,554,947 41,727,429 --------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 8,435,031 1,168,502 (13,730,905) Cash and cash equivalents - beginning 14,253,854 22,688,885 23,857,387 --------------------------------------------------------------------------------------------------------- Cash and cash equivalents - ending $ 22,688,885 $ 23,857,387 $ 10,126,482 --------------------------------------------------------------------------------------------------------- Supplemental information: Transfer of loans receivable to foreclosed real estate $ 33,264 $ -- $ -- --------------------------------------------------------------------------------------------------------- Loans to facilitate sales of foreclosed real estate $ 94,500 $ -- $ -- --------------------------------------------------------------------------------------------------------- Cash paid during the period for: Income taxes $ 2,775,334 $ 4,830,190 $ 4,851,141 --------------------------------------------------------------------------------------------------------- Interest on deposits and borrowings $ 17,551,080 $ 15,348,766 $ 13,514,822 ---------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 19 PAMRAPO BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidated financial statement presentation The consolidated financial statements include the accounts of the Company, its wholly owned subsidiary, Pamrapo Savings Bank, S.L.A. (the "Bank") and the Bank's wholly owned subsidiary, Pamrapo Service Corp., Inc. (the "Service Corp."). The Company's business is conducted principally through the Bank. All significant intercompany 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"). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses, the assessment of prepayment risks associated with mortgage-backed securities and the determination of the amount of deferred tax assets which are more likely than not to be realized. Management believes that the allowance for loan losses is adequate, prepayment risks associated with mortgage-backed securities are properly recognized and all deferred tax assets are more likely than not to be recognized. While management uses available 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. Additionally, assessments of prepayment risks related to mortgage-backed securities are based upon current market conditions, which are subject to frequent change. Finally, the determination of the amount of deferred tax assets more likely than not to be realized is dependent on projections of future earnings, which are subject to frequent change. 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 recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Cash and cash equivalents Cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits in other banks having original maturities of three months or less. Investment and mortgage-backed securities Investments in debt securities that the enterprise 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 nor 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 a separate component of stockholders' equity. Premiums and discounts on all securities are amortized/accreted using the interest method. Interest and dividend income on securities, which includes amortization of premiums and accretion of discounts, is recognized in the consolidated financial statements when earned. The adjusted cost basis of an identified security sold or called is used for determining security gains and losses recognized in the consolidated statements of income. Loans receivable Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees and discounts. The Bank defers loan origination fees and certain direct loan origination costs and amortizes/accretes such amounts as an adjustment of yield over the contractual lives of the related loans. Discounts on loans purchased are recognized as income by use of the level-yield method over the terms of the respective loans. Uncollectible interest on loans is charged off, or an allowance is established based on management's evaluation. An allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is probable, in which case the loan is returned to an accrual status. 20 Allowance for loan losses An allowance for loan losses is maintained at a level considered adequate to absorb loan losses. Management of the Bank, in determining the allowance for loan losses, considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. The Bank utilizes a two tier approach: (1) identification of impaired loans and the establishment of specific loss allowances, if necessary, on such loans; and (2) establishment of general valuation allowances on the remainder of its loan portfolio. The Bank maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified loans based on a review of such information and/or appraisals of the underlying collateral. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of loan portfolio, current economic conditions and management's judgment. Although management believes that adequate specific and general loan loss allowances are established, actual losses are dependent upon future events and, as such, further additions to the allowance for loan losses may be necessary. An impaired loan is evaluated based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan evaluated for impairment is deemed to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. An insignificant payment delay, which is defined as up to ninety days by the Bank, will not cause a loan to be classified as impaired. A loan is not impaired during a period of delay in payment if the Bank expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. Thus, a demand loan or other loan with no stated maturity is not impaired if the Bank expects to collect all amounts due, including interest accrued at the contractual interest rate, during the period the loan is outstanding. All loans identified as impaired are evaluated independently. The Bank does not aggregate such loans for evaluation purposes. Payments received on impaired loans are applied first to accrued interest receivable and then to principal. Foreclosed real estate and investment in real estate Real estate acquired by foreclosure or deed in lieu of foreclosure is initially recorded at the lower of cost or estimated fair value at date of acquisition and subsequently carried at the lower of such initially recorded amount or estimated fair value less estimated costs to sell. Costs incurred in developing or preparing properties for sale are capitalized. Expenses of holding properties and income from operating properties are recorded in operations as incurred or earned. Gains and losses from sales of such properties are recognized as incurred. Real estate held for investment is carried at cost less accumulated depreciation. Income and expense of operating the property are recorded in operations. Premises and equipment Premises and equipment are comprised of land, at cost, and buildings, building improvements, leaseholds and furnishings and equipment, at cost, less accumulated depreciation and amortization. Significant renewals and betterments are charged to the property and equipment account. Maintenance and repairs are expensed in the year incurred. Rental income is netted against occupancy expense in the consolidated statements of income. Income taxes The Company, Bank and Service Corp. file a consolidated federal income tax return. Income taxes are allocated to the Company, Bank and Service Corp. based on their respective income or loss included in the consolidated income tax return. Separate state income tax returns are filed by the Company, Bank and Service Corp. Federal and state income taxes have been provided on the basis of reported income. The amounts reflected on the Company's and subsidiaries' 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. Deferred income tax expense or benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. 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 21 PAMRAPO BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- the period that includes the enactment date. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which is not likely to be realized. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets. Interest-rate risk The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to invest in securities, to make loans secured by real estate and, to a lesser extent, make consumer loans. The potential for interest-rate risk exists as a result of the generally shorter duration of the Bank's interest-sensitive liabilities compared to the generally longer duration of its interest-sensitive assets. In a rising interest rate environment, liabilities will reprice faster than assets, thereby reducing net interest income. For this reason, management regularly monitors the maturity structure of the Bank's assets and liabilities in order to measure its level of interest-rate risk and to plan for future volatility. Disclosures about fair value of financial instruments The following methods and assumptions were used in estimating the fair value of its financial instruments: Cash and cash equivalents and interest receivable: The carrying amounts reported in the consolidated financial statements for cash and cash equivalents and interest receivable approximate their fair values. Securities: The fair value of securities, as well as commitments to purchase securities, is determined by reference to quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: Fair value is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, of such loans. Deposits: The carrying amounts reported in the consolidated financial statements for non-interest-bearing demand, NOW, Money Market, savings and club accounts approximate their fair values. For fixed-maturity certificates of deposit, fair value is estimated using the rates currently offered for deposits of similar remaining maturities. Advances from Federal Home Loan Bank of New York and other borrowed money: Fair value is estimated using rates currently offered for liabilities of similar remaining maturities, or when available, quoted market prices. Commitments to extend credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Stock-based compensation The Company, under a plan approved by its stockholders in 2003, has granted stock options to certain employees. See note 12 for additional information as to option grants. The Company accounts for options granted using the intrinsic value method, in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No compensation expense has been reflected in net income for the options granted as all such grants have an exercise price equal to the market price of the underlying stock at the date of grant. The following table provides information as to net income and earnings per share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as amended, to all option grants. Year Ended December 31, 2003 ------------------------------------------------------------------------------- Net income as reported $ 7,780,826 Total stock-based compensation expense, net of income taxes, included in reported net income -- Total stock-based compensation expense, net of income taxes, that would have been included in the determination of net income if the fair value method had been applied to all grants (160,836) ------------------------------------------------------------------------------- Pro forma net income $ 7,619,990 Net income per common share, as reported: Basic $ 1.54 Diluted 1.54 ------------------------------------------------------------------------------- Pro forma net income per common share: Basic $ 1.51 Diluted 1.51 ------------------------------------------------------------------------------- Net income per common share Basic net income per common share is based on the weighted average number of common shares actually outstanding. Diluted net income per share is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of stock options, if dilutive, using the treasury stock method. 22 -------------------------------------------------------------------------------- Reclassification Certain amounts for prior periods have been reclassified to conform to the current period's presentation. 2. SECURITIES AVAILABLE FOR SALE
December 31, 2002 ---------------------------------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------- Carrying Cost Gains Losses Value ---------------------------------------------------------------------------------------------------- Mortgage-backed securities $ 2,189,845 $ 58,207 $ -- $ 2,248,052 Mutual funds 1,441,917 400 -- 1,442,317 Trust originated preferred security, maturing after twenty years 500,000 25,000 -- 525,000 Equity security 7,020 320,139 -- 327,159 ---------------------------------------------------------------------------------------------------- $ 4,138,782 $ 403,746 $ -- $ 4,542,528 ====================================================================================================
December 31, 2003 ---------------------------------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------- Carrying Cost Gains Losses Value ---------------------------------------------------------------------------------------------------- Mortgage-backed securities $ 1,536,503 $ 25,546 $ -- $ 1,562,049 Mutual funds 1,473,609 -- 9,832 1,463,777 Trust originated preferred security, maturing after twenty years 500,000 40,000 -- 540,000 Equity security 7,020 349,056 -- 356,076 ---------------------------------------------------------------------------------------------------- $ 3,517,132 $ 414,602 $ 9,832 $ 3,921,902 ====================================================================================================
There were no sales of investment securities available for sale during the years ended December 31, 2001, 2002 and 2003. 23 PAMRAPO BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- 3. INVESTMENT SECURITIES HELD TO MATURITY
December 31, 2002 ---------------------------------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------- Estimated Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------- Subordinated notes due after five through ten years $ 7,095,209 $ 365,801 $ -- $ 7,461,010 ====================================================================================================
December 31, 2003 ---------------------------------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------- Estimated Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------- Subordinated notes due after five through ten years $ 9,422,111 $ 527,889 $ -- $ 9,950,000 ====================================================================================================
There were no sales of investment securities held to maturity during the years ended December 31, 2001, 2002 and 2003. 24 -------------------------------------------------------------------------------- 4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
December 31, 2002 ---------------------------------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------- Estimated Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------- Federal Home Loan Mortgage Corporation $ 98,734,189 $ 3,871,401 $ -- $ 102,605,590 Federal National Mortgage Association 38,481,631 1,718,481 1,385 40,198,727 Government National Mortgage Association 1,217,349 91,901 -- 1,309,250 Collateralized Mortgage Obligations 7,705,157 153,372 -- 7,858,529 ---------------------------------------------------------------------------------------------------- $ 146,138,326 $ 5,835,155 $ 1,385 $ 151,972,096 ====================================================================================================
December 31, 2003 ---------------------------------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------- Estimated Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------- Federal Home Loan Mortgage Corporation $ 147,045,961 $ 1,711,309 $ 906,034 $ 147,851,236 Federal National Mortgage Association 55,604,882 717,259 750,040 55,572,101 Government National Mortgage Association 681,932 54,875 -- 736,807 Collateralized Mortgage Obligations 15,085,565 43 211,036 14,874,572 ---------------------------------------------------------------------------------------------------- $ 218,418,340 $ 2,483,486 $ 1,867,110 $ 219,034,716 ====================================================================================================
There were no sales of mortgage-backed securities held to maturity during the years ended December 31, 2001, 2002 and 2003. 25 PAMRAPO BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- 5. LOAN RECEIVABLE December 31, -------------------------------------------------------------- 2002 2003 -------------------------------------------------------------- Real estate mortgage: One-to-four family $ 253,972,105 $ 228,458,746 Multi-family 37,069,398 40,538,648 Commercial 31,624,172 41,168,523 FHA insured and VA guaranteed 186,109 75,047 -------------------------------------------------------------- 322,851,784 310,240,964 -------------------------------------------------------------- Real estate construction 6,519,779 11,225,286 -------------------------------------------------------------- Land 1,372,803 1,373,985 -------------------------------------------------------------- Commercial 658,216 406,733 -------------------------------------------------------------- Consumer: Passbook or certificate 552,252 585,733 Home improvement 336,268 229,153 Equity and second mortgage 59,233,431 59,757,904 Automobile 1,243,333 734,138 Personal 1,297,740 1,144,480 -------------------------------------------------------------- 62,663,024 62,451,408 -------------------------------------------------------------- Total 394,065,606 385,698,376 -------------------------------------------------------------- Less: Loans in process 1,882,044 5,168,432 Allowance for loan losses 2,550,000 2,515,000 Deferred loan fees (costs) and discounts (231,142) (625,829) -------------------------------------------------------------- 4,200,902 7,057,603 -------------------------------------------------------------- $ 389,864,704 $ 378,640,773 -------------------------------------------------------------- At December 31, 2001, 2002 and 2003, loans serviced by the Bank for the benefit of others totalled approximately $1,584,000, $1,104,000 and $665,000, respectively. At December 31, 2001, 2002 and 2003, nonaccrual loans for which interest has been discontinued totalled approximately $2,256,000, $1,485,000, and $809,000, respectively. During the years ended December 31, 2001, 2002 and 2003, the Bank recognized interest income of approximately $88,000, $24,000, and $35,000, respectively, on these loans. Interest income that would have been recorded, had the loans been on the accrual status, would have amounted to approximately $230,000, $151,000, and $79,000 for the years ended December 31, 2001, 2002 and 2003, respectively. The Bank is not committed to lend additional funds to the borrowers whose loans have been placed on nonaccrual status. The following is an analysis of the allowance for loan losses: Year Ended December 31, ------------------------------------------------------------------------------ 2001 2002 2003 ------------------------------------------------------------------------------ Balance, beginning $ 1,950,000 $ 2,150,000 $ 2,550,000 Provisions charged to operations 458,888 634,090 83,777 Recoveries credited to allowance 14,432 10,346 7,512 Loan losses charged to allowance (273,320) (244,436) (126,289) ------------------------------------------------------------------------------ Balance, ending $ 2,150,000 $ 2,550,000 $ 2,515,000 ------------------------------------------------------------------------------ Impaired loans and related amounts recorded in the allowance for loan losses are summarized as follows: ------------------------------------------------------------------------ December 31, ------------------------------------------------------------------------ 2002 2003 ------------------------------------------------------------------------ Recorded investment in impaired loans: With recorded allowances $ 32,959 $ 458,730 Without recorded allowances 1,566,438 767,984 ------------------------------------------------------------------------ Total impaired loans 1,599,397 1,226,714 Related allowance for loan losses 32,959 173,730 ------------------------------------------------------------------------ Net impaired loans $ 1,566,438 $ 1,052,984 ------------------------------------------------------------------------ The activity with respect to loans to directors, officers and associates of such persons is as follows: Year Ended December 31, ---------------------------------------------- 2003 ---------------------------------------------- Balance, beginning $ 2,109,537 Loans originated 1,059,828 Collection of principal (1,083,212) ---------------------------------------------- Balance, ending $ 2,086,153 ---------------------------------------------- 26 6. PREMISES AND EQUIPMENT December 31, -------------------------------------------------------------- 2002 2003 -------------------------------------------------------------- Land $ 701,625 $ 701,625 -------------------------------------------------------------- Buildings and improvements 4,027,388 4,027,388 Less accumulated depreciation 1,817,150 1,945,466 -------------------------------------------------------------- 2,210,238 2,081,922 -------------------------------------------------------------- Leasehold improvements 1,190,690 1,190,690 Less accumulated amortization 516,257 636,066 -------------------------------------------------------------- 674,433 554,624 -------------------------------------------------------------- Furnishings and equipment 5,693,398 5,909,523 Less accumulated depreciation 4,862,455 5,155,011 -------------------------------------------------------------- 830,943 754,512 -------------------------------------------------------------- $ 4,417,239 $ 4,092,683 -------------------------------------------------------------- Depreciation expense for the years ended December 31, 2001, 2002, and 2003 totalled approximately $571,000, $606,000, and $550,000, respectively. Depreciation charges are computed on the straight-line method over the following estimated useful lives: ------------------------------------------------------ Buildings and improvements 10 to 50 years Leasehold improvements 10 years Furnishings and equipment 3 to 10 years 7. INTEREST RECEIVABLE December 31, -------------------------------------------------------------- 2002 2003 -------------------------------------------------------------- Loans, net of allowance for uncollected interest of approximately $130,000 and $55,000, respectively $ 2,078,868 $ 1,737,368 Mortgage-backed securities 756,356 926,421 Investment securities 147,091 174,708 -------------------------------------------------------------- $ 2,982,315 $ 2,838,497 -------------------------------------------------------------- 27 PAMRAPO BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- 8. DEPOSITS
December 31, ------------------------------------------------------------------------------------------------------------------ 2002 2003 ------------------------------------------------------------------------------------------------------------------ Weighted Weighted Average Average Rate Amount Percent Rate Amount Percent ------------------------------------------------------------------------------------------------------------------ Demand: Non-interest-bearing demand 0.00% $ 26,313,782 5.91 0.00% $ 30,254,587 6.15 NOW 1.26% 33,200,162 7.45 1.00% 41,592,334 8.45 ------------------------------------------------------------------------------------------------------------------ 0.70% 59,513,944 13.36 0.58% 71,846,921 14.60 Money Market 2.11% 32,594,320 7.31 1.33% 38,495,382 7.82 Savings and club 2.34% 155,430,932 34.89 1.35% 179,463,134 36.46 Certificates of deposit 3.18% 197,968,219 44.44 2.39% 202,355,328 41.12 ------------------------------------------------------------------------------------------------------------------ 2.48% $ 445,507,415 100.00 1.66% $ 492,160,765 100.00 ------------------------------------------------------------------------------------------------------------------
The scheduled maturities of certificates of deposit are as follows (in thousands): December 31, ------------------------------------------------------------- Maturity Period 2002 2003 ------------------------------------------------------------- One year or less $ 164,187 $ 175,898 After one to three years 30,150 21,661 After three years 3,631 4,796 ------------------------------------------------------------- $ 197,968 $ 202,355 ------------------------------------------------------------- Certificates of deposit of $100,000 or more by the time remaining until maturity are as follows (in thousands): December 31, ------------------------------------------------------------- Maturity Period 2002 2003 ------------------------------------------------------------- Three months or less $ 11,880 $ 12,239 After three through six months 12,107 11,612 After six through twelve months 24,510 32,538 After twelve months 9,346 9,134 ------------------------------------------------------------- $ 57,843 $ 65,523 ------------------------------------------------------------- A summary of interest on deposits follows: Year Ended December 31, 2001 2002 2003 ---------------------------------------------------------------------------- Demand $ 1,147,870 $ 1,080,086 $ 1,029,530 Savings and club 3,281,412 3,428,455 3,118,465 Certificates of deposit 10,490,771 6,983,647 5,550,866 ---------------------------------------------------------------------------- 14,920,053 11,492,188 9,698,861 Less penalties for early withdrawal of certificates of deposit (11,143) (9,528) (7,340) ---------------------------------------------------------------------------- $ 14,908,910 $ 11,482,660 $ 9,691,521 ---------------------------------------------------------------------------- 28 9. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK December 31, ---------------------------------------------------------------- 2002 2003 ---------------------------------------------------------------- Weighted Weighted Maturing Average Average by Interest Interest December 31, Rate Amount Rate Amount ---------------------------------------------------------------- 2003 5.50% $ 27,340,000 --% $ -- 2004 3.49% 12,000,000 2.80% 17,000,000 2005 3.98% 13,000,000 3.21% 20,000,000 2006 4.47% 12,000,000 3.35% 25,000,000 2007 3.50% 3,000,000 2.75% 8,000,000 2008 4.85% 7,000,000 4.85% 7,000,000 2010 6.19% 10,000,000 6.19% 10,000,000 ---------------------------------------------------------------- 4.79% $ 84,340,000 3.60% $ 87,000,000 ---------------------------------------------------------------- At December 31, 2002 and 2003, the advances were secured by pledges of the Bank's investment in the capital stock of the Federal Home Loan Bank of New York totalling $4,403,400, and $4,743,900 respectively, and a blanket assignment of the Bank's unpledged qualifying mortgage loans, mortgage-backed securities and investment securities portfolios. At December 31, 2002 and 2003, the Company also had available to it $27,525,700 and $30,223,900, respectively, under a revolving overnight line of credit, expiring August 22, 2003 and August 24, 2004, respectively, with the Federal Home Loan Bank of New York. Borrowings are at the lenders cost of funds plus .25%. There were no outstanding borrowings under the line of credit at December 31, 2002 and 2003. 10. OTHER BORROWED MONEY December 31, ---------------------------------------------------------------- 2002 2003 ---------------------------------------------------------------- Interest Interest Rate Amount Rate Amount ---------------------------------------------------------------- Mortgage loan 8.00% $ 149,166 8.00% $ 117,748 ---------------------------------------------------------------- The mortgage loan is payable in 144 equal monthly installments of $3,518 through February 1, 2007 and is secured by premises with a carrying value of $1,340,000 and $1,310,000 at December 31, 2002 and 2003, respectively. 11. REGULATORY CAPITAL For the purpose of granting to eligible account holders a priority in the event of future liquidation, the Bank, at the time of conversion, established a special account in an amount equal to its total retained earnings of $18.4 million at June 30, 1989. In the event of a future liquidation of the converted Bank (and only in such event), an eligible account holder who continues to maintain his deposit account shall be entitled to receive a distribution from the special account. The total amount of the special account is decreased (but never increased) in an amount proportionately corresponding to decreases in the deposit account balances of eligible account holders as of each subsequent year end. After conversion, no dividends may be paid to stockholders if such dividends would reduce the retained earnings of the converted Bank below the amount required by the special account. The Bank is subject to various regulatory capital requirements administered by the banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank. 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 classification 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 of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted total assets (as defined). The following tables present a reconciliation of capital per GAAP and regulatory capital and information as to the Bank's capital levels at the dates presented: December 31, ---------------------------------------------------------------- 2002 2003 ---------------------------------------------------------------- GAAP capital $ 43,757 $ 46,774 Less: Investment in and advances to non-includable subsidiary (2,040) (365) Unrealized (gain) on securities available for sale (243) (243) ---------------------------------------------------------------- Core and tangible capital 41,474 46,166 Add: general valuation allowance 2,517 2,341 ---------------------------------------------------------------- Total regulatory capital $ 43,991 $ 48,507 ---------------------------------------------------------------- 29 PAMRAPO BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) --------------------------------------------------------------------------------
To Be Well Capitalized Under Minimum Capital Prompt Corrective (Dollars in Thousands) Actual Requirements Action Provisions --------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio --------------------------------------------------------------------------------------- December 31, 2002: --------------------------------------------------------------------------------------- Total Capital (to risk-weighted assets) $ 43,991 14.35% $ 24,518 8.00% $ 30,648 10.00% Tier 1 Capital (to risk-weighted assets) 41,474 13.53% -- -- 18,389 6.00% Core (Tier 1) Capital (to adjusted total assets) 41,474 7.08% 23,440 4.00% 29,300 5.00% Tangible Capital (to adjusted total assets) 41,474 7.08% 8,790 1.50% -- -- December 31, 2003: --------------------------------------------------------------------------------------- Total Capital (to risk-weighted assets) $ 48,507 15.13% $ 25,645 8.00% $ 32,057 10.00% Tier 1 Capital (to risk-weighted assets) 46,166 14.40% -- -- 19,234 6.00% Core (Tier 1) Capital (to adjusted total assets) 46,166 7.26% 25,451 4.00% 31,814 5.00% Tangible Capital (to adjusted total assets) 46,166 7.26% 9,544 1.50% -- --
As of January 27, 2003, the most recent notification from the State of New Jersey Department of Banking and Insurance, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions existing or events which have occurred since notification that management believes have changed the institution's category. 30 -------------------------------------------------------------------------------- 12. BENEFIT PLANS Pension Plan ("Plan") The Bank has a non-contributory defined benefit pension plan covering all eligible employees. The benefits are based on years of service and employees' compensation. The Bank's funding policy is to contribute the maximum amount that can be deducted for federal income tax purposes. The Plan's assets consist primarily of mutual funds and bank deposits. The following tables set forth the Plan's funded status and components of net periodic pension cost: December 31, ---------------------------------------------------------------------- 2002 2003 ---------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $ 4,470,707 $ 5,670,347 Service cost 230,791 256,339 Interest cost 336,367 371,695 Actuarial loss 752,164 542,283 Benefits paid (119,682) (120,980) ---------------------------------------------------------------------- Benefit obligation at end of year $ 5,670,347 $ 6,719,684 ---------------------------------------------------------------------- Change in Plan Assets Fair value of assets at beginning of year $ 3,408,608 $ 5,444,022 Actual (loss) gain on plan assets (181,718) 274,184 Employer contributions 2,336,814 329,308 Benefits paid (119,682) (120,980) ---------------------------------------------------------------------- Fair value of assets at end of year $ 5,444,022 $ 5,926,534 ---------------------------------------------------------------------- December 31, ---------------------------------------------------------------------- 2002 2003 ---------------------------------------------------------------------- Reconciliation of Funded Status Accumulated benefit obligation $ 4,918,612 $ 5,771,037 ---------------------------------------------------------------------- Projected benefit obligation $ 5,670,347 $ 6,719,684 Fair value of assets (5,444,022) (5,926,534) ---------------------------------------------------------------------- Funded status 226,325 793,150 Unrecognized net (loss) (2,295,871) (2,818,291) Unrecognized past service liability (161,550) (143,778) ---------------------------------------------------------------------- (Prepaid) expense included in other assets $ (2,231,096) $ (2,168,919) ---------------------------------------------------------------------- Assumption Used Discount rate 6.625% 6.25% Rate of increase in compensation 4.00% 3.50%
Year Ended December 31, ------------------------------------------------------------------------------------- 2001 2002 2003 ------------------------------------------------------------------------------------- Net Periodic Pension Expense Service cost $ 192,887 $ 230,791 $ 256,339 Interest cost 296,009 336,367 371,695 Expected return on assets (297,851) (338,524) (430,733) Amortization of unrecognized loss 1,256 68,393 176,412 Unrecognized past service liability -- 13,329 17,772 ------------------------------------------------------------------------------------- Net periodic pension expense $ 192,301 $ 310,356 $ 391,485 ------------------------------------------------------------------------------------- Assumptions Discount rate 8.00% 7.25% 6.625% Rate of increase in compensation 5.00% 4.50% 4.00% Long-term rate of return on plan assets 8.50% 8.50% 8.00%
Plan assets For 2003, the plan's assets realized an annual return of 5%. The weighted-average allocation by asset category are as follows: December 31, ---------------------------------------------------- 2002 2003 ---------------------------------------------------- Certificates of deposit 63% 37% Mutual fund shares 20% 29% Mortgage-backed securities 5% 9% Equity securities 12% 25% ---------------------------------------------------- 100% 100% ---------------------------------------------------- For 2004, the Company intends to maintain the current asset mix and seek to achieve an optimal risk/reward profile by limiting market exposure to present levels. Based on an analysis of the current market environment, we project a 2.5% return from cash, a 5% return from fixed income and a 10% return from equities, for an overall expected return of approximately 6.50%. The long-term rate-of-return-on-assets assumption is set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the Plan's actual target allocation of asset classes. Equities and fixed income securities are assumed to earn real rates of return in the ranges of 5-9% and 2-6%, respectively. Additionally, the long-term inflation rate is projected to be 3%. When these overall return expectations are applied to a typical Plan's target allocation, the result is an expected return of 8% to 10%. Equity securities include Pamrapo Bancorp, Inc. common stock in the amounts of $442,000 (8% of total plan assets) and $659,000 (11% of total plan assets) at December 31, 2002 and 2003, respectively. 31 PAMRAPO BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- Contributions The Company expects to contribute approximately $439,000 to the pension plan in 2004. Savings and Investment Plan ("SIP") The Bank sponsors a SIP pursuant to Section 401(k) of the Internal Revenue Code, for all eligible employees. Employees may elect to save up to 10% of their compensation of which the Savings Bank will match 50% of the employee's contribution. The SIP expense amounted to approximately, $106,000, $124,000 and $120,000 for the years ended December 31, 2001, 2002 and 2003, respectively. Supplemental Executive Retirement Plan ("SERP") The Bank has an unfunded non-qualified deferred retirement plan for certain employees. A participant who retires at age 65 (the "Normal Retirement Age"), is entitled to an annual retirement benefit equal to 75% of his compensation reduced by his retirement plan annual benefits. Participants retiring before the Normal Retirement Age receive the same benefits reduced by a percentage based on years of service to the Bank and the number of years prior to the Normal Retirement Age that participant retires. The following tables set forth the SERP's funded status and components of net periodic SERP cost: December 31, ---------------------------------------------------------------------- 2002 2003 ---------------------------------------------------------------------- Projected benefit obligation at beginning of year $ 2,596,758 $ 2,790,762 Service cost (11,265) -- Interest cost 177,653 181,629 Actuarial loss (gain) 345,576 (62,263) Benefit payments (33,456) (163,312) Termination benefits -- 92,740 Plan amendment (284,504) -- ---------------------------------------------------------------------- Projected benefit obligation at end of year 2,790,762 2,839,556 Plan assets at fair value -- -- ---------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 2,790,762 2,839,556 Unrecognized net loss (895,743) (753,092) Benefit paid in fourth quarter (64,928) (13,631) Unrecognized past service liability (588,702) (493,484) ---------------------------------------------------------------------- Accrued SERP cost included in other liabilities $ 1,241,389 $ 1,579,349 ---------------------------------------------------------------------- Assumptions: Discount rate 6.625% 6.25% Rate of increase in compensation 4.00% 3.50% Net periodic SERP cost includes the following components:
Year Ended December 31, ------------------------------------------------------------------------------------- 2001 2002 2003 ------------------------------------------------------------------------------------- Service cost $ -- $ (11,265) $ -- Interest cost 173,378 177,653 181,629 Net amortization 150,029 184,636 173,975 Special termination benefits -- -- 92,740 ------------------------------------------------------------------------------------- Net periodic SERP cost $ 323,407 $ 351,024 $ 448,344 ------------------------------------------------------------------------------------- Contributions made $ 121,497 $ 163,312 $ 110,384 ------------------------------------------------------------------------------------- Assumptions: Discount rate 8.00% 7.25% 6.625% Rate of increase in compensation 5.50% 4.50% 4.00% Amortization period in years 6.37 4.94 7.83
32 Stock Options Stock options granted under a stockholder approved stock option plan may be either options that qualify as incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or non-statutory options. All options are vested at the grant date and may be exercised up to ten years from the date of grant. All options granted will be exercisable in the event the optionee terminates his employment, or due to death or disability. A summary of stock option activity follows: Weighted Number Range Average of Option of Exercise Exercise Shares Price Price ----------------------------------------------------------------- December 31, 2002 -- $ -- $ -- Options granted 87,000 18.41 18.41 Options exercised (3,000) 18.41 18.41 ----------------------------------------------------------------- December 31, 2003 84,000 18.41 18.41 ----------------------------------------------------------------- Exercisable at: December 31, 2003 84,000 18.41 18.41 ----------------------------------------------------------------- At December 31, 2003, the weighted average remaining contractual life of the stock options granted was approximately 9.5 years and stock options for up to 67,380 additional shares of common stock were available for future grants. No options were forfeited during 2003. The Company, as permitted by Financial Accounting Standards Board ("FASB") Statement of Financial Accounting standards ("SFAS") No. 123, recognizes compensation cost for stock options granted based on the intrinsic value method instead of the fair value based method. The grant-date fair values of the stock options granted during 2003, which have exercise prices equal to the market price of the common stock at the grant date, were estimated using the Black-Scholes option-pricing model. Such fair value and the assumptions used for estimating fair value are as follows: Year Ended December 31, 2003 --------------------------------------------------- Grant-date fair value per share $ 3.08 Expected common stock dividend yield 4.35% Expected option life 7.0 years Risk-free interest rate 2.78% Volatility 25.61% --------------------------------------------------- 13. INCOME TAXES The Bank qualifies as a savings institution under the provisions of the Internal Revenue Code and was therefore, prior to January 1, 1996, permitted to deduct from taxable income an allowance for bad debts based upon eight percent of taxable income before such deduction, less certain adjustments. Retained earnings at December 31, 2003, include approximately $6,907,000 of such bad debt, which, in accordance with SFAS No. 109, "Accounting for Income Taxes," is considered a permanent difference between the book and income tax basis of loans receivable, and for which income taxes have not been provided. If such amount is used for purposes other than for bad debt losses, including distributions in liquidation, it will be subject to income tax at the then current rate. The tax effect of existing temporary differences which give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows: December 31, ------------------------------------------------------- 2002 2003 ------------------------------------------------------- Deferred tax assets ------------------- Allowance for losses $ 1,044,130 $ 1,030,950 Deferred loan fees 130,326 86,177 Depreciation 98,391 90,223 Reserve for uncollected interest 43,677 21,877 ------------------------------------------------------- 1,316,524 1,229,227 ------------------------------------------------------- Deferred tax liabilities ------------------------ Benefit plans 375,930 224,084 Unrealized gain on securities available for sale 161,200 161,600 ------------------------------------------------------- 537,130 385,684 ------------------------------------------------------- Net deferred tax assets $ 779,394 $ 843,543 ------------------------------------------------------- The components of income taxes are summarized as follows: Year Ended December 31, ------------------------------------------------------------------- 2001 2002 2003 ------------------------------------------------------------------- Current tax expense: Federal $ 2,501,025 $ 3,376,150 $ 4,039,901 State 433,274 1,019,074 1,227,493 ------------------------------------------------------------------- 2,934,299 4,395,224 5,267,394 ------------------------------------------------------------------- Deferred tax (benefit) expense: Federal (24,347) 496,539 (48,838) State (1,972) (105,531) (15,711) ------------------------------------------------------------------- (26,319) 391,008 (64,549) ------------------------------------------------------------------- $ 2,907,980 $ 4,786,232 $ 5,202,845 ------------------------------------------------------------------- 33 PAMRAPO BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- The following table presents a reconciliation between the reported income taxes and the income taxes which would be computed by applying the normal federal income tax rate of 34% to income before income taxes: Year Ended December 31, -------------------------------------------------------------------- 2001 2002 2003 -------------------------------------------------------------------- Federal income tax $ 2,688,850 $ 4,049,272 $ 4,414,448 Increases in income taxes resulting from: New Jersey income tax, net of federal income tax effect 168,315 603,430 799,776 Other items, net 50,815 133,530 (11,379) -------------------------------------------------------------------- Effective income tax $ 2,907,980 $ 4,786,232 $ 5,202,845 -------------------------------------------------------------------- 14. COMMITMENTS AND CONTINGENCIES The Bank is party to financial instruments with off-balance sheet risk in the normal course of business primarily to meet the financing needs of its customers. These financial instruments include commitments to originate loans and purchase securities. The commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to originate loans 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. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Savings 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 real estate and income-producing commercial properties. The Bank had loan commitments outstanding as follows: December 31, ------------------------------------------------- 2002 2003 ------------------------------------------------- To originate loans $ 18,415,000 $ 19,652,000 ------------------------------------------------- At December 31, 2003, all the outstanding commitments to originate loans are at fixed interest rates which range from 5.50% to 8.25%. All commitments are due to expire within ninety days. At December 31, 2003, undisbursed funds from approved lines of credit under a homeowners' equity and a commercial equity lending program amounted to approximately $8,949,000 and $1,004,000, respectively. Unless they are specifically cancelled by notice from the Bank, these funds represent firm commitments available to the respective borrowers on demand. The interest rates charged for any month on funds disbursed under these programs range from 0% to 4.25% above the prime rate. Rental expenses related to the occupancy of premises totalled $312,000, $272,000 and $248,000 for the years ended December 31, 2001, 2002 and 2003, respectively. At December 31, 2003, minimum non-cancellable obligations under lease agreements with original terms of more than one year are as follows: December 31, Amount ---------------------------- 2004 $ 205,000 2005 207,000 2006 211,000 2007 141,000 2008 90,000 Thereafter 377,000 ---------------------------- $ 1,231,000 ---------------------------- The Bank is also a party to litigation which arises primarily in the ordinary course of business. In the opinion of management, the ultimate disposition of such litigation should not have a material effect on the consolidated financial position of the Company. 34 15. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts and fair value of the financial instruments are as follows (in thousands): December 31, ------------------------------------------------------------------------------- 2002 2003 ------------------------------------------------------------------------------- Carrying Carrying Value Fair Value Value Fair Value ------------------------------------------------------------------------------- Financial Assets ------------------------------------------------------------------------------- Cash and cash equivalents $ 23,857 $ 23,857 $ 10,126 $ 10,126 Securities available for sale 4,543 4,543 3,922 3,922 Investment securities held to maturity 7,095 7,461 9,422 9,950 Mortgage-backed securities held to maturity 146,138 151,972 218,418 219,035 Loans receivable 389,865 400,548 378,641 388,649 Interest receivable 2,982 2,982 2,838 2,838 Financial Liabilities ------------------------------------------------------------------------------- Deposits 445,507 446,626 492,161 492,948 Advances and other borrowed money 84,489 88,896 87,118 89,741 Commitments ------------------------------------------------------------------------------- To originate loans 18,415 18,415 19,652 19,652 Unused lines of credit 10,143 10,143 9,953 9,953 35 PAMRAPO BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- 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. In addition, the fair value estimates were 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 and liabilities that are not considered financial assets and liabilities include mortgage servicing rights, premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of the 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. 16. PARENT COMPANY FINANCIAL INFORMATION The following condensed financial statements of the Company should be read in conjunction with the Notes to Consolidated Financial Statements. STATEMENTS OF FINANCIAL CONDITION December 31, ------------------------------------------------------- Assets 2002 2003 ------------------------------------------------------- Cash and cash equivalents $ 6,812,987 $ 4,289,428 Investment in subsidiary 43,757,083 46,774,417 Refundable income taxes 120,965 121,490 Other assets 178,328 200,658 ------------------------------------------------------- Total assets $ 50,869,363 $ 51,385,993 ------------------------------------------------------- Liabilities and stockholders' equity ------------------------------------------------------- Liabilities ------------------------------------------------------- Other liabilities $ 113,090 $ 62,650 ------------------------------------------------------- Total liabilities $ 113,090 $ 62,650 ------------------------------------------------------- Stockholders' equity ------------------------------------------------------- Common stock 69,000 69,000 Paid-in-capital in excess of par value 18,937,168 18,957,298 Retained earnings - substantially restricted 51,131,766 54,865,096 Treasury stock, at cost (19,381,661) (22,568,051) ------------------------------------------------------- Total stockholders' equity 50,756,273 51,323,343 ------------------------------------------------------- Total liabilities and stockholders' equity $ 50,869,363 $ 51,385,993 ------------------------------------------------------- 36 STATEMENTS OF INCOME Year Ended December 31, ------------------------------------------------------------------------------- 2001 2002 2003 ------------------------------------------------------------------------------- Dividends from subsidiary $ 5,000,000 $ 5,000,000 $ 5,000,000 Interest income 5,306 5,364 4,208 ------------------------------------------------------------------------------- Total income 5,005,306 5,005,364 5,004,208 Expenses 470,761 507,798 360,532 ------------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiary and income taxes (benefit) 4,534,545 4,497,566 4,643,676 Equity in undistributed earnings of subsidiary 354,260 2,505,451 3,016,710 ------------------------------------------------------------------------------- Income before income taxes (benefit) 4,888,805 7,003,017 7,660,386 Income taxes (benefit) (111,596) (120,375) (120,440) ------------------------------------------------------------------------------- Net income $ 5,000,401 $ 7,123,392 $ 7,780,826 ------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------------------------------------------------------------- 2001 2002 2003 ------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 5,000,401 $ 7,123,392 $ 7,780,826 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary (354,260) (2,505,451) (3,016,710) (Increase) in refundable income taxes (87,119) (9,129) (525) Decrease (increase) in other assets 2,193 9,538 (22,330) Increase (decrease) in other liabilities 14,196 10,090 (50,440) Distribution of treasury stock -- 197,500 -- ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,575,411 4,825,940 4,690,821 ------------------------------------------------------------------------------------------------- Cash flows from financing activities: Cash dividends paid (3,711,781) (3,855,228) (4,048,120) Sale of treasury stock -- -- 55,230 Purchase of treasury stock (416,145) (279,328) (3,221,490) ------------------------------------------------------------------------------------------------- Net cash (used in) financing activities (4,127,926) (4,134,556) (7,214,380) ------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 447,485 691,384 (2,523,559) Cash and cash equivalents - beginning 5,674,118 6,121,603 6,812,987 ------------------------------------------------------------------------------------------------- Cash and cash equivalents - ending $ 6,121,603 $ 6,812,987 $ 4,289,428 -------------------------------------------------------------------------------------------------
37 PAMRAPO BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- 17. QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except for per share amounts) First Second Third Fourth Year Ended December 31, 2002 Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------- Interest income $ 9,603 $ 9,592 $ 9,486 $ 9,377 Interest expense 3,917 3,780 3,812 3,781 -------------------------------------------------------------------------------- Net interest income 5,686 5,812 5,674 5,596 Provision for loan losses 210 225 125 74 Non-interest income 530 504 943 589 Non-interest expenses 2,966 3,243 3,257 3,325 Income taxes 1,109 1,023 1,484 1,170 -------------------------------------------------------------------------------- Net income $ 1,931 $ 1,825 $ 1,751 $ 1,616 -------------------------------------------------------------------------------- Net income per common share: Basic $ 0.37 $ 0.36 $ 0.34 $ 0.32 Diluted $ 0.37 $ 0.36 $ 0.34 $ 0.32 -------------------------------------------------------------------------------- Dividends per common share $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 -------------------------------------------------------------------------------- (In thousands, except for per share amounts) First Second Third Fourth Year Ended December 31, 2003 Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------- Interest income $ 9,343 $ 9,312 $ 9,015 $ 9,085 Interest expense 3,623 3,553 3,350 2,907 -------------------------------------------------------------------------------- Net interest income 5,720 5,759 5,665 6,178 Provision for loan losses 30 30 20 4 Non-interest income 573 667 711 604 Non-interest expenses 3,156 3,269 3,255 3,129 Income taxes 1,260 1,263 1,249 1,431 -------------------------------------------------------------------------------- Net income $ 1,847 $ 1,864 $ 1,852 $ 2,218 -------------------------------------------------------------------------------- Net income per common share: Basic $ 0.36 $ 0.36 $ 0.37 $ 0.45 Diluted $ 0.36 $ 0.36 $ 0.37 $ 0.45 -------------------------------------------------------------------------------- Dividends per common share $ 0.20 $ 0.20 $ 0.20 $ 0.20 -------------------------------------------------------------------------------- 38 PAMRAPO BANCORP, INC. AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT -------------------------------------------------------------------------------- To The Board of Directors and Stockholders Pamrapo Bancorp, Inc. We have audited the consolidated statements of financial condition of Pamrapo Bancorp, Inc. (the "Company") and Subsidiaries as of December 31, 2002 and 2003, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the above mentioned consolidated financial statements present fairly, in all material respects, the financial position of Pamrapo Bancorp, Inc. and Subsidiaries as of December 31, 2002 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ February 4, 2004 Pine Brook, New Jersey 39 PAMRAPO BANCORP, INC. AND SUBSIDIARIES MANAGEMENT RESPONSIBILITY STATEMENT -------------------------------------------------------------------------------- Management of Pamrapo Bancorp, Inc. and Subsidiaries is responsible for the preparation of the consolidated financial statements and all other consolidated financial information included in this report. Consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. All consolidated financial information included in the report agrees with the consolidated financial statements. In preparing the consolidated financial statements, management makes informed estimates and judgments with consideration given to materiality about the expected results of various events and transactions. Management maintains a system of internal accounting control that includes personnel selection, appropriate division of responsibilities, and formal procedures and policies consistent with high standards of accounting and administrative practice. Consideration has been given to the necessary balance between the costs of systems of internal control and the benefits derived. Management reviews and modifies its systems of accounting and internal control in light of changes in conditions and operations as well as in response to recommendations from the independent certified public accountants. Management believes the accounting and internal control systems provide reasonable assurance that assets are safeguarded and the consolidated financial information is reliable. The Board of Directors is responsible for determining that management fulfills its responsibilities in the preparation of the consolidated financial statements and the control of operations. The Board appoints the independent certified public accountants. The Board meets with management, the independent certified public accountants, and also the internal auditor, approves the overall scope of audit work and related fee arrangements, and reviews audit reports and findings. /s/ William J. Campbell William J. Campbell President and Chief Executive Officer /s/ Kenneth D. Walter Kenneth D. Walter Vice President-Treasurer and Chief Financial Officer /s/ Robert A. Hughes Robert A. Hughes Vice President February 4, 2004 40 PAMRAPO BANCORP, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL CONDITION AND OPERATING DATA OF THE COMPANY --------------------------------------------------------------------------------
At December 31, -------------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 2000 2001 2002 2003 -------------------------------------------------------------------------------------------------- Financial condition data: Total amount of: Assets $ 448,020 $ 469,558 $ 539,639 $ 588,659 $ 636,895 Loans receivable 268,280 309,082 369,239 389,865 378,641 Securities available for sale 6,429 5,713 5,304 4,543 3,922 Mortgage-backed securities 120,824 118,791 122,418 146,138 218,418 Investment securities 7,996 6,996 5,000 7,095 9,422 Deposits 361,925 379,410 416,587 445,507 492,161 Advances and other borrowed money 30,813 35,788 67,518 84,489 87,118 Stockholders' equity 48,254 46,529 47,523 50,756 51,323
Year Ended December 31, -------------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 2000 2001 2002 2003 -------------------------------------------------------------------------------------------------- Operating data: Interest income $ 31,253 $ 33,162 $ 36,625 $ 38,058 $ 36,755 Interest expense 13,642 15,498 17,544 15,290 13,433 -------------------------------------------------------------------------------------------------- Net interest income 17,611 17,664 19,081 22,768 23,322 Provision for loan losses 299 208 459 634 84 Non-interest income 1,565 1,576 1,921 2,566 2,555 Non-interest expenses 11,464 11,988 12,635 12,791 12,809 Income taxes 2,696 2,568 2,908 4,786 5,203 -------------------------------------------------------------------------------------------------- Net income $ 4,717 $ 4,476 $ 5,000 $ 7,123 $ 7,781 Net income per share Basic $ 0.85 $ 0.85 $ 0.97 $ 1.39 $ 1.54 Diluted 0.85 0.85 0.97 1.39 1.54 -------------------------------------------------------------------------------------------------- Dividends per share $ 0.63 $ 0.69 $ 0.72 $ 0.75 $ 0.80 -------------------------------------------------------------------------------------------------- Dividend payout ratio 73.35% 80.84% 74.23% 54.12% 52.02% --------------------------------------------------------------------------------------------------
41 PAMRAPO BANCORP, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL CONDITION AND OPERATING DATA OF THE COMPANY (continued) --------------------------------------------------------------------------------
At or for Year Ended December 31, -------------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 -------------------------------------------------------------------------------------------------- Selected Financial Ratios: Return on average assets 1.09% 0.99% 0.99% 1.26% 1.25% Return on average equity 9.66% 9.57% 10.76% 14.52% 15.45% Average equity/average assets 11.29% 10.30% 9.24% 8.70% 8.08% Interest rate spread 3.76% 3.53% 3.48% 3.77% 3.57% Net yield on average interest-earning assets 4.28% 4.08% 3.95% 4.18% 3.86% Non-interest expenses to average assets 2.65% 2.64% 2.50% 2.27% 2.06% Equity/total assets 10.77% 9.91% 8.81% 8.62% 8.06% Capital ratios: Tangible 9.30% 8.27% 7.26% 7.08% 7.26% Core 9.30% 8.27% 7.26% 7.08% 7.26% Risk-based 19.52% 16.29% 14.43% 14.35% 15.13% Non-performing loans to total assets 0.94% 0.87% 0.60% 0.46% 0.24% Non-performing loans to loans receivable 1.57% 1.30% 0.88% 0.69% 0.41% Non-performing assets to total assets 1.03% 1.00% 0.65% 0.49% 0.24% Allowance for loan losses to non-performing loans 47.62% 47.74% 65.95% 94.41% 161.53% Average interest-earning assets/average interest-bearing liabilities 1.16x 1.15x 1.13x 1.14x 1.13x Net interest income after provision for loan losses to non-interest expenses 1.51x 1.46x 1.47x 1.73x 1.81x
42 PAMRAPO BANCORP, INC. AND SUBSIDIARIES STOCKHOLDER INFORMATION -------------------------------------------------------------------------------- MARKET FOR COMMON STOCK AND RELATED MATTERS Pamrapo Bancorp, Inc.'s common stock is presently quoted on the National Association of Securities Dealers Automated Quotation's National Market System under the symbol "PBCI." At March 3, 2004, the Corporation's 4,974,313 outstanding shares of common stock were held by approximately 1,600 persons or entities. The following table sets forth the high and low closing sales price per common share for the periods indicated. Such prices do not necessarily reflect retail markups, markdowns or commissions. Closing Prices --------------------- Quarter Ended High Low -------------------------------------------------------- March 31, 2002* $ 13.80 $ 13.00 June 30, 2002 16.95 13.60 September 30, 2002 16.64 14.00 December 31, 2002 17.69 15.99 March 31, 2003 18.60 16.45 June 30, 2003 18.55 17.00 September 30, 2003 23.12 17.70 December 31, 2003 25.65 20.91 * Prices retroactively adjusted for a two-for-one stock split on May 29, 2002. Dividends were paid as follows: ------------------------------------------- March, 2002* $ .1875 June, 2002 .1875 September, 2002 .1875 December, 2002 .1875 March, 2003 .20 June, 2003 .20 September, 2003 .20 December, 2003 .20 * Dividends retroactively adjusted for a two-for-one stock split on May 29, 2002. Future dividend policy will be determined by the Board of Directors after giving consideration to the Company's financial condition, results of operations, tax status, industry standards, economic conditions and other factors. Dividends will also depend upon dividend payments by the Bank to the Corporation, which is its primary source of income. The Board may also consider the payment of stock dividends from time to time, in addition to, or in lieu of cash dividends. Under federal regulations, the Bank may not declare or pay a cash dividend on any of its common stock if the effect thereof would cause the Bank's regulatory capital to be reduced below the amount required for the liquidation account or the regulatory capital requirements imposed by the Office of Thrift Supervision ("OTS"). The Bank must provide at least 30 days advance notice to the OTS before declaring a dividend. 43