|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2003 | |
| OR |
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ______________________ to ________________________ |
|
| Commission File Number: 0-23293 | |
| Delaware (State or other jurisdiction of incorporation or organization) |
06-1497903 (I.R.S. Employer Identification No.) |
|
| 18 Oakland Avenue, Warwick, New York (Address of principal executive offices) |
10990-0591 (Zip code) |
|
| (845) 986-2206 (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.
Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
YES X NO
As of August 14, 2003, there were 4,558,872 shares of the registrant's common stock outstanding.
NEXT PAGE| PART I -- FINANCIAL INFORMATION | Page Number |
|
| Item 1. | Financial Statements -- Unaudited |
|
| Consolidated Statements of Financial Condition at June 30, 2003and December 31, 2002 |
4 | |
Consolidated Statements of Income for the three months ended June 30, 2003 and 2002 |
5 | |
Consolidated Statements of Changes in Equity for for the six months ended June 30, 2003 and 2002 |
6 | |
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 |
7 | |
Notes to Unaudited Consolidated Financial Statements |
8-13 | |
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
13-23 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
23 |
| Item 4. | Controls and Procedures |
24 |
PART II -- OTHER INFORMATION |
||
Item 1. |
Legal Proceedings | 24 |
| Item 2. | Changes in Securities |
24 |
| Item 3. | Defaults Upon Senior Securities |
24 |
| Item 4. | Submission of Matters to a Vote of Security Holders |
24-25 |
| Item 5. | Other Information |
25 |
| Item 6. | Exhibits and Reports on Form 8-K | 25 |
Signature Page |
26 | |
Financial Statement Certifications |
||
| Statements contained in this Form 10-Q which are not historical facts are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, general economic conditions; changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; other economic, competitive, governmental, regulatory or technological factors affecting the Company's operations, pricing, products and services; and other risks detailed in documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements made by us are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and intention of management as of the date made and are not guarantees of future performance. We expressly disclaim any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. |
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements -- Unaudited
| June 30, 2003 |
December 31, 2002 |
|||
| (Dollars in thousands) | ||||
| ASSETS | ||||
| Cash on hand and in banks | $ 19,465 | $ 59,667 | ||
| Securities: | ||||
| Available-for-sale, at fair value | 375,698 | 208,787 | ||
| Held-to-maturity, at amortized cost (fair value of $2,335 at
June 30, 2003 and $2,812 at December 31, 2002) |
2,324 |
2,810 |
||
| Total securities | 378,022 |
211,597 |
||
| Residential real estate loans, net | 154,912 | 235,156 | ||
| Residential real estate loans held for sale | 4,085 | 4,794 | ||
| Multi family and commercial real estate loans, net | 158,132 | 152,521 | ||
| Consumer loans, net | 45,329 | 52,115 | ||
| Commercial business loans, net | 25,733 |
24,619 |
||
| Total loans | 388,191 | 469,205 | ||
| Allowance for loan losses | (4,991 |
) | (4,932 |
) |
| Total loans, net | 383,200 |
464,273 |
||
| Accrued interest receivable | 3,697 | 3,381 | ||
| Federal Home Loan Bank stock | 11,662 | 11,200 | ||
| Bank premises ∓mp; equipment, net | 9,459 | 9,266 | ||
| Other real estate owned, net | 100 | 1,145 | ||
| Bank owned life insurance | 12,424 | 12,064 | ||
| Goodwill and other intangible assets | 2,506 | 2,609 | ||
| Other assets | 7,307 |
6,036 |
||
| Total assets | $ 827,842 |
$ 781,238 |
||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||
| Liabilities: | ||||
| Deposits: | ||||
| Time | $ 107,321 | $ 117,253 | ||
| Money market | 72,203 | 70,081 | ||
| Savings and NOW | 258,343 | 223,737 | ||
| Non-interest-bearing checking | 62,262 |
55,604 |
||
| Total depositor accounts | 500,129 | 466,675 | ||
| Mortgagors' escrow funds | 3,509 | 3,368 | ||
| Accrued interest payable | 1,496 | 1,523 | ||
| Federal Home Loan Bank advances | 233,245 | 216,495 | ||
| Other liabilities | 12,667 |
12,069 |
||
| Total liabilities | 751,046 |
700,130 |
||
| STOCKHOLDERS' EQUITY | ||||
| Preferred stock, $.01 par value; 5,000,000 authorized;
none issued |
-- | -- | ||
| Common stock, $.01 par value; 15,000,000 shares authorized;
6,635,447 and 6,632,814 shares issued as of June 30, 2003 and December 31, 2002, respectively; 4,533,673 and 4,833,407 shares outstanding as of June 30, 2003 and December 31, 2002, respectively |
66 | 66 | ||
| Additional paid-in capital | 65,110 | 64,518 | ||
| Retained earnings | 50,145 | 47,855 | ||
| Accumulated other comprehensive income, net | 1,715 | 585 | ||
| Unallocated ESOP common stock | (3,650 | ) | (4,069 | ) |
| Unearned RRP common stock | (1,242 |
) | (1,488 |
) |
| 112,144 | 107,467 | |||
| Treasury stock (2,101,774 and 1,799,407 shares at June 30,
2003 and December 31, 2002, respectively) |
(35,348 |
) | (26,359 |
) |
| Total stockholders' equity | 76,796 |
81,108 |
||
| Total liabilities and stockholders' equity | $ 827,842 |
$ 781,238 |
||
WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| For the Three Months
Ended June 30, |
For the Six Months
Ended June 30, |
|||||||
| 2003 |
2002 |
2003 |
2002 |
|||||
| (In thousands, except per share amounts) | ||||||||
| Interest Income: | ||||||||
| Interest on loans | $ 7,096 | $ 9,160 | $ 14,956 | $ 18,515 | ||||
| Interest and dividends on securities | 2,763 | 3,277 | 5,703 | 6,703 | ||||
| Interest on federal funds sold | -- | -- | -- | 20 | ||||
| Interest on short-term money market instruments | 69 |
72 |
182 |
79 |
||||
| Total interest income | 9,928 |
12,509 |
20,841 |
25,317 |
||||
| Interest Expense: | ||||||||
| Time deposits | 695 | 873 | 1,466 | 1,860 | ||||
| Money market deposits | 231 | 379 | 507 | 756 | ||||
| Savings and NOW deposits | 877 | 1,042 | 1,986 | 2,020 | ||||
| Mortgagors' escrow deposits | 17 | 23 | 30 | 37 | ||||
| Borrowed funds | 2,782 |
3,210 |
5,571 |
6,547 |
||||
| Total interest expense | 4,602 |
5,527 |
9,560 |
11,220 |
||||
| Net interest income | 5,326 |
6,982 |
11,281 |
14,097 |
||||
| Provision for Loan Losses | (10 |
) | (225 |
) | (90 |
) | (455 |
) |
| Net interest income after provision for loan losses | 5,316 |
6,757 |
11,191 |
13,642 |
||||
| Non-Interest Income: | ||||||||
| Service and fee income | 1,442 | 1,313 | 2,871 | 2,444 | ||||
| Gain on securities transactions | 229 | -- | 352 | 242 | ||||
| Net gain on sale of loans | 129 | 100 | 265 | 146 | ||||
| Other income | 77 |
1,070 |
274 |
1,234 |
||||
| Total non-interest income | 1,877 |
2,483 |
3,762 |
4,066 |
||||
| Non-Interest Expense: | ||||||||
| Salaries and employee benefits | 2,489 | 2,790 | 5,139 | 5,418 | ||||
| FDIC insurance | 20 | 21 | 40 | 40 | ||||
| Occupancy | 521 | 541 | 1,062 | 1,079 | ||||
| Data processing | 311 | 303 | 645 | 579 | ||||
| Advertising | 99 | 54 | 153 | 93 | ||||
| Professional fees | 259 | 376 | 452 | 626 | ||||
| Other | 837 |
835 |
1,587 |
1,539 |
||||
| Total non-interest expense | 4,536 |
4,920 |
9,078 |
9,374 |
||||
| Income before provision for income taxes | 2,657 | 4,320 | 5,875 | 8,334 | ||||
| Provision for Income Taxes | 971 |
1,798 |
2,212 |
3,360 |
||||
| Net income | $ 1,686 |
$ 2,522 |
$ 3,663 |
$ 4,974 |
||||
| Weighted Average: | ||||||||
| Common shares | 4,294 | 4,596 | 4,358 | 4,589 | ||||
| Dilutive stock options | 237 |
189 |
234 |
164 |
||||
| 4,531 |
4,785 |
4,592 |
4,753 |
|||||
| Earnings per Share: | ||||||||
| Basic | $ 0.39 |
$ 0.55 |
$ 0.84 |
$ 1.08 |
||||
| Diluted | $ 0.37 |
$ 0.53 |
$ 0.80 |
$ 1.05 |
||||
WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| Common Stock |
Additional Paid In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss), net |
Unallocated Common Stock Held by ESOP |
Unearned Common Stock Held by RRP |
Treasury Stock |
Comprehensive Income (Loss) |
|||||||||
| (In thousands) | ||||||||||||||||
| BALANCE, December 31, 2001 | $ 66 | $ 63,681 | $ 39,739 | $ (822 | ) | $ (4,900 | ) | $ (2,001 | ) | $ (21,760 | ) | |||||
| Net Income, January 1, 2002 -
June 30, 2002 |
-- | -- | 4,974 | -- | -- | -- | -- | $ 4,974 | ||||||||
| Unrealized appreciation on
securities available-for-sale, net |
-- | -- | -- | 1,988 | -- | -- | -- | 1,988 |
||||||||
| Comprehensive income(loss) | -- | -- | -- | -- | -- | -- | $ 6,962 |
|||||||||
| Purchase of treasury stock | -- | -- | -- | -- | -- | -- | (240 | ) | ||||||||
| Allocation of ESOP stock | -- | 249 | -- | -- | 412 | -- | -- | |||||||||
| Cash dividends paid | -- | -- | (498 | ) | -- | -- | -- | -- | ||||||||
| Stock option plan. | -- | 32 | -- | -- | -- | -- | -- | |||||||||
| Earned portion of RRP | -- |
47 |
-- |
-- |
-- |
249 |
-- |
|||||||||
| BALANCE, June 30, 2002 | $ 66 |
$ 64,090 |
$ 44,215 |
$ 1,166 |
$ (4,488) |
$ (1,752) |
$ (22,000 |
) | ||||||||
| BALANCE, December 31, 2002 | $ 66 | $ 64,518 | $ 47,855 | $ 585 | $ (4,069) | $ (1,488 | ) | $ (26,359 | ) | |||||||
| Net Income, January 1, 2003 -
June 30, 2003 |
-- | -- | 3,663 | -- | -- | -- | -- | $ 3,663 | ||||||||
| Unrealized appreciation on
securities available-for-sale, net |
-- | -- | -- | 1,130 | -- | -- | -- | 1,130 |
||||||||
| Comprehensive income | -- | -- | -- | -- | -- | -- | -- | $ 4,793 |
||||||||
| Purchase of treasury stock | -- | -- | -- | -- | -- | -- | (8,993 | ) | ||||||||
| Allocation of ESOP stock | -- | 436 | -- | -- | 419 | -- | -- | |||||||||
| Cash dividends paid | -- | -- | (1,373 | ) | -- | -- | -- | -- | ||||||||
| Stock option plan. | -- | 30 | -- | -- | -- | -- | 4 | |||||||||
| Earned portion of RRP | -- |
126 |
-- |
-- |
-- |
246 |
-- |
|||||||||
| BALANCE, June 30, 2003 | $ 66 |
$ 65,110 |
$ 50,145 |
$ 1,715 |
$ (3,650 |
) | $ (1,242 |
) | $ (35,348 |
) | ||||||
WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months
Ended June 30, |
||||
| 2003 |
2002 |
|||
| (In thousands) | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||
| Net income | $ 3,663 | $ 4,974 | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||
| Depreciation | 413 | 469 | ||
| Amortization of intangibles | 103 | 103 | ||
| Amortization (accretion) of discount on investment securities | 2,407 | (1,101 | ) | |
| Net increase in accrued interest receivable | (316 | ) | (332 | ) |
| Net (increase) decrease in BOLI and other assets | (260 | ) | 2,962 | |
| Provision for loan losses | 90 | 455 | ||
| Net gain on sales of loans | (265 | ) | (146 | ) |
| Net gain on curtailment of the defined benefit pension plan | -- | (817 | ) | |
| Mortgage loans funded | (40,298 | ) | (15,480 | ) |
| Mortgage loans sold | 41,274 | 15,836 | ||
| Net gain on sales of securities | (352 | ) | (242 | ) |
| Net decrease in accrued interest payable | (27 | ) | (385 | ) |
| Net increase (decrease) in accrued expenses and other liabilities | 598 |
(197 |
) | |
| Total reconciliation adjustments | 3,367 |
1,125 |
||
| Net cash provided by operating activities | 7,030 |
6,099 |
||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||
| Proceeds from maturities and calls of securities | 2,546 | 17,853 | ||
| Purchases of securities | (256,034 | ) | (45,328 | ) |
| Proceeds from sale of securities available-for-sale | 2,280 | 31,231 | ||
| Principal repayments from mortgage-backed securities | 84,389 | 23,375 | ||
| (Purchase) redemption of Federal Home Loan Bank capital stock | (462 | ) | 3,710 | |
| Purchase of commercial loan portfolio | (3,097 | ) | (58,910 | ) |
| Net decrease in loans | 83,074 | 25,717 | ||
| Purchases of fixed assets, net | (606 |
) | (186 |
) |
| Net cash used in investing activities | (87,910 |
) | (2,538 |
) |
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||
| Net increase in deposits | 33,454 | 23,764 | ||
| Net increase in escrow deposits | 141 | 1,361 | ||
| Net increase (decrease) in borrowed funds | 16,750 | (30,790 | ) | |
| Dividends on common stock | (1,374 | ) | (498 | ) |
| Purchase of treasury stock | (8,993 | ) | (240 | ) |
| Stock options exercised | 34 | 33 | ||
| ESOP allocation | 419 | 412 | ||
| Earned portion of RRP. | 247 |
249 |
||
| Net cash provided by (used in) financing activities | 40,678 |
(5,711 |
) | |
| Net decrease in cash | (40,202 | ) | ( 2,150 | ) |
| Cash and Cash Equivalents, beginning of year | 59,667 |
25,766 |
||
| Cash and Cash Equivalents, end of period | $ 19,465 |
$ 23,616 |
||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||
| Cash paid during the year for- | ||||
| Interest on deposits and borrowed funds | $ 9,587 | $11,605 | ||
| Income taxes | 3,104 | 3,348 | ||
WARWICK COMMUNITY BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain information and footnote disclosures normally included in the unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the December 31, 2002 Annual Report on Form 10-K, filed on March 31, 2003.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Warwick Community Bancorp, Inc. (" Parent Company"), its savings bank subsidiary, The Warwick Savings Bank ("Warwick Savings"), and its commercial bank subsidiary, The Towne Center Bank ("Towne Center") and its title business subsidiary, Hardenburgh Abstract Company of Orange County, Inc. ("Hardenburgh"). The consolidated financial statements of the Parent Company and its subsidiaries (collectively, the "Company") conform to generally accepted accounting principles and reporting practices followed by the banking industry. All significant intercompany balances and transactions are eliminated in consolidation.
The unaudited consolidated financial statements included herein reflect all normal recurring adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the results of operations that may be expected for the entire year ending December 31, 2003.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period, adjusted for the unallocated portion of the shares held by the Warwick Community Bancorp, Inc. Employee Stock Ownership Plan ("ESOP") in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position 93-6, "Employers Accounting for Employee Stock Ownership Plans," and unearned shares held by the Recognition and Retention Plan of Warwick Community Bancorp, Inc. ("RRP"). Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and resulted in the issuance of common stock that then shared in the earnings of the Company, is computed by dividing net income by the weighted average number of common shares and dilutive instruments.
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||
| 2003 |
2002 |
2003 |
2002 |
|
| (In thousands, except per share amounts) | ||||
| Net income | $ 1,686 | $ 2,522 | $ 3,663 | $ 4,974 |
| Basic weighted-average common shares outstanding | 4,294 | 4,596 | 4,358 | 4,589 |
| Plus: Dilutive stock options | 237 |
189 |
234 |
164 |
| Diluted weighted-average common shares outstanding | 4,531 |
4 ,785 |
4,592 |
4 ,753 |
| Net income per common share: | ||||
| Basic | $ 0.39 |
$ 0.55 |
$ 0.84 |
$ 1.08 |
| Diluted | $ 0.37 |
$ 0.53 |
$ 0.80 |
$ 1.05 |
Stock-Based Compensation
At June 30, 2003, the Company had stock-based employee compensation plans, including a stock option plan. The Company accounts for this stock option plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||
| 2003 |
2002 |
2003 |
2002 |
|
| (In thousands, except per share amounts) | ||||
| Net income, as reported | $ 1,686 |
$2,522 |
$ 3,663 |
$4,974 |
| Add: Stock-based compensation expense included in reported net income, net of related tax effects |
72 | 79 | 148 | 156 |
| Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effect |
(237) |
(224) |
(472) |
(461) |
| Pro forma net income | $ 1,521 |
$2,377 |
$ 3,339 |
$4,669 |
| Earnings per share: | ||||
| Basic-as reported | $0.39 |
$0.55 |
$0.84 |
$1.08 |
| Basic-pro forma | $0.35 |
$0.52 |
$0.77 |
$1.02 |
| Diluted- as reported | $0.37 |
$0.53 |
$0.80 |
$1.08 |
| Diluted-pro forma | $0.34 |
$0.50 |
$0.73 |
$0.98 |
There are 472,985 options that are currently exercisable. The fair value of each option was estimated on the date granted using the Black-Scholes option pricing model. The fair value of the options granted in 2003 and 2002 was estimated to be $8.86 and $7.25, respectively. The following weighted-average assumptions were used for grants in 2003 and 2002: risk free interest rate of 2.90% and 4.49%; expected dividend yield of 1.2%; expected life of five years; and expected volatility of 35.06% and 28.75%.
Comprehensive Income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income includes revenues, expenses, gains and losses that, under accounting principles generally accepted in the United States of America, are included in comprehensive income but excluded from net income. Comprehensive income and accumulated other comprehensive income are reported net of related income taxes. Accumulated other comprehensive income for the Company consists solely of unrealized holding gains or losses on available for sale securities and an adjustment for the minimum pension liability.
New Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 addresses disclosures to be made by a guarantor in its financial statements about its obligations under guarantees. The interpretation also requires the recognition, at estimated fair value, of a liability by the guarantor at the inception of certain guarantees issued or modified after December 31, 2002. This recognition requirement did not have a material impact on the Company's consolidated financial statements.
FASB Interpretation No.46, "Consolidation of Variable Interest Entities," was issued in January 2003. The Interpretation provides guidance on the identification of entities controlled through means other than voting rights. The Interpretation specifies how a business enterprise should evaluate its interests in a variable interest entity to determine whether to consolidate that entity. A variable interest entity must be consolidated by its primary beneficiary if the entity does not effectively disperse risks among the parties involved. Adoption of this interpretation did not have a significant effect on the Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," ("SFAS No. 149") was issued on April 30, 2003. The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This Statement is in effect for contracts entered into or modified after June 30, 2003. The adoption of this Statement is not expected to have a significant effect on the Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," ("SFAS No. 150") was issued in May 2003. SFAS No. 150 requires instruments within its scope to be classified as a liability (or, in some cases, as an asset). SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 (i.e. July 1, 2003 for calendar year entities). For financial instruments created before June 1, 2003 and still existing at the beginning of the interim period of adoption, transition generally should be applied by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attributes of the Statement. The adoption of SFAS No. 150 did not have a significant effect on the Company's consolidated financial statements.
2. Loan Portfolio Composition
The following table sets forth the composition of the Company's loan portfolio in dollar amounts and percentage of the portfolio at the dates indicated.
| At June 30, 2003 |
At December 31, 2002 |
|||||||
| Amount |
Percent of Total |
Amount |
Percent of Total |
|||||
| (Dollars in thousands) | ||||||||
| Real Estate Loans: | ||||||||
| One- to four-family | $ 155,167 | 40.05 | % | $ 232,045 | 49.53 | % | ||
| One-to four-family held for sale | 4,085 | 1.06 | 4,794 | 1.02 | ||||
| One-to four-family construction | -- | -- | 3,441 | 0.74 | ||||
| Multi family and commercial real estate | 153,142 | 39.52 | 144,124 | 30.76 | ||||
| Construction and development | 4,660 |
1.20 |
8,061 |
1.72 |
||||
| Total real estate loans | 317,054 |
81.83 |
392,465 |
83.77 |
||||
| Commercial business loans | 25,705 |
6.63 | 24,567 |
5.24 | ||||
| Consumer loans: | ||||||||
| Automobile | 20,169 | 5.21 | 25,616 | 5.47 | ||||
| Home equity | 23,682 | 6.11 | 24,695 | 5.27 | ||||
| Other consumer loans | 848 |
0.22 |
1,183 |
0.25 |
||||
| Total consumer loans | 44,699 |
11.54 |
51,494 |
10.99 |
||||
| Total loans | 387,458 | 100.00 |
% | 468,526 | 100.00 |
% | ||
| Premiums and deferred loan fees,net | 733 | 679 | ||||||
| Allowance for loan losses | (4,991 |
) | (4,932 |
) | ||||
| Total loans, net | $ 383,200 |
$ 464,273 |
||||||
3. Non-Performing Assets
The following table sets forth information regarding non-accrual loans, other past due loans and other real estate owned at the dates indicated.
| June 30, 2003 |
December 31, 2002 |
|||
| (Dollars in thousands) | ||||
| Non-accruing loans: | ||||
| One- to four-family | $1,835 | $ 1,279 | ||
| Multi family and commercial real estate | 338 | 422 | ||
| Commercial business loans | 75 | 84 | ||
| Consumer loans | 66 |
-- |
||
| Total non-accrual loans | 2,314 | 1,785 | ||
| Accruing loans delinquent 90 days or more: | ||||
| Multi-family and commercial real estate | -- | 114 | ||
| Commercial business loans | 9 |
141 |
||
| Total | 9 |
255 |
||
| Total non-performing loans | 2,323 |
2,040 |
||
| Foreclosed real estate: | ||||
| One- to four-family | 100 | 209 | ||
| Multi family and commercial real estate | -- |
936 |
||
| Total | 100 |
1,145 |
||
| Total non-performing assets | $ 2,423 |
$ 3,185 |
||
| Non-performing loans to total loans | 0.60 | % | 0.44 | % |
| Total non-performing assets to total assets | 0.29 | % | 0.41 | % |
4. Allowance for Loan Losses
The following table sets forth the activity in the Company's allowance for loan losses at and for the periods indicated.
| Six Months Ended June 30, |
Year Ended December 31, |
|||||
| 2003 |
2002 |
2002 |
||||
| (Dollars in thousands) | ||||||
| Allowance for loan losses: | ||||||
| Balance at beginning of period | $ 4,932 | $ 3,650 | $ 3,650 | |||
| Charge-offs: | ||||||
| Commercial business | 36 | -- | 56 | |||
| Consumer loans | 18 |
38 |
37 |
|||
| Total charge-offs | 54 | 38 | 93 | |||
| Recoveries: | ||||||
| Commercial business | 6 | -- | -- | |||
| Consumer loans | 17 |
12 |
37 |
|||
| Total recoveries | 23 | 12 | 37 | |||
| Provision for loan losses | 90 |
455 |
1,338 |
|||
| Balance at end of Period | $ 4,991 |
$ 4,079 |
$ 4,932 |
|||
| Ratio of net charge-offs during the period to average loans outstanding | 0.01 | % | 0.00 | % | 0.01 | % |
| Ratio of allowance for loan losses to total loans at end of period | 1.29 | % | 0.74 | % | 1.06 | % |
| Ratio of allowance for loan losses to non-performing loans | 214.85 | % | 139.45 | % | 241.76 | % |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Warwick Community Bancorp, Inc. is a bank holding company incorporated in September 1997 under the laws of the State of Delaware and is registered under the Bank Holding Company Act of 1956, as amended ("BHCA"). The Parent Company elected to become a financial holding company under the BHCA in October 2000. The primary business of the Parent Company is the operation of its wholly owned subsidiaries, Warwick Savings, Towne Center and Hardenburgh, the Parent Company's title insurance agency subsidiary. Presently, the only significant assets of the Parent Company are the capital stock of Warwick Savings, Towne Center and Hardenburgh, the note evidencing the loan the Parent Company made to the ESOP to allow the ESOP to purchase 8% of the Parent Company's common stock issued in the Parent Company's initial public offering, and the investments acquired with the net proceeds of the offering retained by the Parent Company. While the following discussion of financial condition and results of operations includes the collective results of the Parent Company and its subsidiaries, this discussion reflects primarily Warwick Savings' activities. Unless otherwise disclosed, the information presented herein reflects the financial condition and results of operations of the Parent Company and its subsidiaries on a consolidated basis, and as used herein the term "Company" refers to the Parent Company and its subsidiaries collectively.
Critical Accounting Policies and Estimates
"Management's Discussion and Analysis of Financial Condition and Results of Operation" is based upon the Company's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 of the Company's Audited Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, and filed with the SEC, contains a summary of the Company's significant accounting policies. Management believes the Company's policy with respect to the methodology for the determination of the allowance for loan losses involves a high degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application is periodically reviewed with the Board of Directors.
The allowance for loan losses is based upon management's evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectibility may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company's loans are secured by real estate in the states of New York and New Jersey. Accordingly, the collectibility of a substantial portion of the carrying value of the Company's loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the New York and New Jersey areas experience adverse economic shock. Further adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company's control.
Financial Condition
For the six-month period ended June 30, 2003, total assets of the Company increased $46.6 million from $781.2 million at December 31, 2002 to $827.8 million at June 30, 2003. This increase in total assets was primarily attributable to a $166.4 million, or 78.7%, increase in securities, which increased from $211.6 million at December 31, 2002 to $378.0 million at June 30, 2003. The increase in the Company's securities portfolio was the result of the reinvestment of the significant cash flows from loan repayments primarily into shorter duration investment securities rather than long-term fixed-rate residential loans and securities. Partially offsetting this increase was the $81.0 million, or 17.3%, decrease in total loans, which decreased from $469.2 million at December 31, 2002 to $388.2 million at June 30, 2003. The decrease in total loans was attributable to the $80.2 million decrease in one-to four- family real estate loans and the $6.8 million decrease in consumer loans, resulting from very high loan repayments. Increases of $5.6 million and $1.1 million in commercial real estate loans and commercial business loans, respectively, partially offset the run-off in residential and consumer loans. The allowance for loan losses increased to $5.0 million at June 30, 2003 from $4.9 million at December 31, 2002. Additionally, the Company's investment in the Federal Home Loan Bank of New York ("FHLBNY") capital stock increased $462,000 from $11.2 million at December 31, 2002 to $11.7 million at June 30, 2003. Other real estate owned decreased $1.0 million to $100,000 at June 30, 2003 from $1.1 million at December 31, 2002.
Deposits increased $33.4 million, or 7.2%, from $466.7 million at December 31, 2002 to $500.1 million at June 30, 2003. This increase was primarily attributable to an increase of $34.6 million in savings and NOW accounts, an increase of $2.1 million in money market accounts and an increase of, $6.6 million in non-interest-bearing checking accounts which were partially offset by the decrease in certificates of deposit accounts of $9.9 million. The Company remains a deposit-driven financial institution with emphasis on core deposit accumulation and retention as a basis for sound growth and profitability. The Company believes its record of sustaining core deposit growth is reflective of the Company's retail approach to banking which emphasizes convenient branch locations, extended hours of operation, quality service and active marketing.
Borrowed funds, comprised primarily of advances from the FHLBNY, increased $16.7 million, to $233.2 million at June 30, 2003 from $216.5 million at December 31, 2002. The increase in borrowings helped fund the purchase of investment securities discussed above.
Total stockholders' equity decreased by $4.3 million, or 5.3%, from $81.1 million at December 31, 2002 to $76.8 million at June 30, 2003. The decrease in total stockholders' equity was primarily attributable to the repurchases of 302,367 shares of the Company's outstanding common stock during the first six months of 2003 at a total cost of $9.0 million. Also contributing to the decrease in stockholders' equity were the payments of quarterly cash dividends to shareholders amounting to $ 1.4 million, which dividends were paid on February 14, 2003 and May 9, 2003. On July 16, 2003, the Company declared a dividend on its common stock of $0.15 per share of common stock. The dividend was paid on August 8, 2003 to stockholders of record on July 26, 2003. The decrease in stockholders' equity was partially offset by net income of $3.7 million for the six months ended June 30, 2003 and a decrease in unallocated ESOP and unearned RRP common stock which resulted in a $1.2 million increase in stockholders' equity.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.
Average Balance Sheets. The following table sets forth certain information regarding the Company's average statements of financial condition and its average statements of income for the three and six months ended June 30, 2003 and 2002, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs were derived by dividing interest income or expense by the average balance of assets or liabilities, respectively, for the periods shown. The yields include deferred fees and discounts, which are considered yield adjustments. Average balances were computed based on month-end balances. Management believes the use of average monthly balances instead of average daily balances does not have a material effect on the information presented.
| Three Months Ended June 30, |
|||||||||
| 2003 |
2002 |
||||||||
| Average Balance |
Interest |
Average Yield/ Cost |
Average Balance(1) |
Interest |
Average Yield/ Cost |
||||
| Assets: | (Dollars in thousands) | ||||||||
| Interest-earning assets: | |||||||||
| One-to four-family loans, net | $ 179,544 | $ 3,071 | 6.84 | % | $ 315,353 | $5,617 | 7.12 | % | |
| Multi family and commercial real estate loans, net |
155,628 | 2,844 | 7.31 | 95,608 | 1,797 | 7.52 | |||
| Commercial business loans, net | 27,412 | 401 | 5.85 | 33,710 | 543 | 6.44 | |||
| Consumer loans, net | 46,437 | 780 | 6.72 | 65,768 | 1,203 | 7.32 | |||
| Mortgage-backed securities | 265,848 | 1,930 | 2.90 | 99,974 | 1,540 | 6.16 | |||
| Interest earning accounts at banks | 25,460 | 69 | 1.08 | 18,373 | 72 | 1.57 | |||
| Investment securities | 66,786 |
833 |
4.99 | 113,604 |
1,737 |
6.12 | |||
| Total interest-earning assets | 767,115 | 9,928 |
5.18 | 742,390 | 12,509 |
6.74 | |||
| Non-interest earning assets | 44,460 |
38,574 |
|||||||
| Total assets | $ 811,575 |
$ 780,964 |
|||||||
| Liabilities and stockholders' equity: | |||||||||
| Interest-bearing liabilities: | |||||||||
| Savings and NOW deposits | $ 249,264 | 877 | 1.41 | % | $ 192,441 | 1,042 | 2.17 | % | |
| Mortgagor's escrow deposits | 3,365 | 17 | 2.02 | 4,262 | 23 | 2.16 | |||
| Money market accounts | 83,381 | 231 | 1.11 | 77,181 | 379 | 1.96 | |||
| Time deposits | 108,563 |
695 |
2.56 | 111,484 |
873 |
3.13 | |||
| Total deposits | 444,573 | 1,820 | 1.64 | 385,368 | 2,317 | 2.40 | |||
| Borrowed funds | 213,326 |
2,782 |
5.22 | 249,406 |
3,210 |
5.15 | |||
| Total interest-bearing liabilities | 657,899 | 4,602 |
2.80 | 634,774 | 5,527 |
3.48 | |||
| Non-interest bearing liabilities | 76,742 |
67,431 |
|||||||
| Total liabilities | 734,641 | 702,205 | |||||||
| Stockholders' equity | 76,934 |
78,759 |
|||||||
| Total liabilities and stockholders' equity | $ 811,575 |
$ 780,964 |
|||||||
| Net interest income/interest rate spread | $ 5,326 |
2.38 |
% | $ 6,982 |
3.26 |
% | |||
| Net interest-earning assets/net interest margin | $ 109,216 |
2.78 |
% | $ 107,616 |
3.76 |
% | |||
| Ratio of interest-earning assets to interest-bearing liabilities |
116.60 | % | 116.95 | % | |||||
(1) Certain reclassifications have been made to escrow and non-interest bearing deposits.
| Six Months Ended June 30, |
|||||||||
| 2003 |
2002 |
||||||||
| Average Balance |
Interest |
Average Yield/ Cost |
Average Balance(1) |
Interest |
Average Yield/ Cost |
||||
| Assets: | (Dollars in thousands) | ||||||||
| Interest-earning assets: | |||||||||
| One-to four-family loans, net | $ 200,624 | $ 6,887 | 6.87 | % | $ 321,614 | $11,484 | 7.14 | % | |
| Multi family and commercial real estate loans, net |
153,707 | 5,649 | 7.35 | 91,381 | 3,441 | 7.53 | |||
| Commercial business loans, net | 28,361 | 812 | 5.73 | 34,963 | 1,091 | 6.24 | |||
| Consumer loans, net | 48,024 | 1,608 | 6.70 | 68,345 | 2,499 | 7.31 | |||
| Mortgage-backed securities | 233,437 | 4,063 | 3.48 | 97,708 | 3,125 | 6.40 | |||
| Federal funds sold | -- | -- | -- | 2,557 | 20 | 1.56 | |||
| Interest earning accounts at banks | 34,753 | 182 | 1.05 | 11,870 | 79 | 1.33 | |||
| Investment securities | 63,591 |
1,640 |
5.16 | 119,116 |
3,578 |
6.01 | |||
| Total interest-earning assets | 762,497 | 20,841 |
5.47 | 747,554 | 25,317 |
6.77 | |||
| Non-interest earning assets | 43,955 |
39,611 |
|||||||
| Total assets | $ 806,452 |
$ 787,165 |
|||||||
| Liabilities and stockholders' equity: | |||||||||
| Interest-bearing liabilities: | |||||||||
| Savings and NOW deposits | $ 241,459 | 1,986 | 1.64 | % | $ 185,728 | 2,020 | 2.18 | % | |
| Mortgagor's escrow deposits | 2,852 | 30 | 2.10 | 3,514 | 37 | 2.11 | |||
| Money market deposits | 82,720 | 507 | 1.23 | 77,679 | 756 | 1.95 | |||
| Time deposits | 111,105 |
1,466 |
2.64 | 112,564 |
1,860 |
3.30 | |||
| Total deposits | 438,136 | 3,989 | 1.82 | 379,485 | 4,673 | 2.46 | |||
| Borrowed funds | 214,775 |
5,571 |
5.19 | 263,852 |
6,547 |
4.96 | |||
| Total interest-bearing liabilities | 652,911 | 9,560 |
2.93 | 643,337 | 11,220 |
3.49 | |||
| Non-interest bearing liabilities | 74,782 |
66,544 |
|||||||
| Total liabilities | 727,693 | 709,881 | |||||||
| Stockholders' equity | 78,759 |
77,284 |
|||||||
| Total liabilities and stockholders' equity | $ 806,452 |
$ 787,165 |
|||||||
| Net interest income/interest rate spread | $ 11,281 |
2.54 |
% | $ 14,097 |
3.28 |
% | |||
| Net interest-earning assets/net interest margin |
$ 109,586 |
2.96 |
% | $ 104,217 |
3.77 |
% | |||
| Ratio of interest-earning assets to interest-bearing liabilities |
116.78 |
% | 116.20 |
% | |||||
(1) Certain reclassifications have been made to escrow and non-interest bearing deposits.
Rate/Volume Analysis. The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
| Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002 |
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002 |
|||||||||||
| Increase (Decrease) in Net Interest Income Due to |
Increase (Decrease) in Net Interest Income Due to |
|||||||||||
| Volume |
Rate |
Net |
Volume |
Rate |
Net |
|||||||
| (In thousands) | (In thousands) | |||||||||||
| Interest-earning assets: | ||||||||||||
| One-to four-family loans, net | $ (2,419 | ) | $ (127 | ) | $ (2,546 | ) | $(4,320 | ) | $(277 | ) | $(4,597 | ) |
| Multi family and commercial real estate loans, net |
1,128 | (81 | ) | 1,047 | 2,347 | (139 | ) | 2,208 | ||||
| Commercial business loans, net | (101 | ) | (41 | ) | (142 | ) | (206 | ) | (73 | ) | (279 | ) |
| Consumer loans, net | (354 | ) | (69 | ) | (423 | ) | (743 | ) | (148 | ) | (891 | ) |
| Mortgage-backed securities | 2,555 | (2,165 | ) | 390 | 4,341 | (3,403 | ) | 938 | ||||
| Federal funds sold | -- | -- | -- | (20 | ) | -- | (20 | ) | ||||
| Interest earning accounts at banks | 28 | (31 | ) | (3 | ) | 152 | (49 | ) | 103 | |||
| Investment securities | (716 |
) | (188 |
) | (904 |
) | (1,668 |
) | (270 |
) | (1,938 |
) |
| Total | 121 |
(2,702 |
) | (2,581 |
) | (117 |
) | (4,359 |
) | (4,476 |
) | |
| Interest-bearing liabilities: | ||||||||||||
| Savings and NOW deposits | 308 | (473 | ) | (165 | ) | 606 | (640 | ) | (34 | ) | ||
| Mortgagor's escrow deposits | (5 | ) | (1 | ) | (6 | ) | (7 | ) | -- | (7 | ) | |
| Money market deposits | 30 | (178 | ) | (148 | ) | 49 | (298 | ) | (249 | ) | ||
| Time deposit | (23 | ) | (155 | ) | (178 | ) | (24 | ) | (370 | ) | (394 | ) |
| Borrowed funds | (464 |
) | 36 |
(428 |
) | (1,218 |
) | 242 |
(976 |
) | ||
| Total | (154 |
) | (771 |
) | (925 |
) | (594 |
) | (1.066 |
) | (1,660 |
) |
| Net change in net interest income | $ 275 |
$ (1,931 |
) | $(1,656 |
) | $ 477 |
$(3,293 |
) | $(2,816 |
) | ||
Comparison of Operating Results for the Three Months Ended June 30, 2003 and 2002
General. For the three months ended June 30, 2003, the Company recognized net income of $1.7 million, or $0.37 per diluted share, as compared to net income of $2.5 million, or $0.53 per diluted share, for the three months ended June 30, 2002, which represents an $836,000, or 33.1%, decrease. Net interest income decreased $1.7 million, or 23.7%, for the three months ended June 30, 2003 and non-interest income decreased $606,000, or 24.4% during the same period. Non-interest expense decreased $384,000, or 7.8%. For the second quarter ended June 30, 2003, annualized return on average assets ("ROAA") and annualized return on average equity ("ROAE") were 0.83% and 8.77%, respectively. The ROAA and ROAE for the corresponding quarter of 2002 were 1.29% and 12.81%, respectively.
Interest Income. Interest income amounted to $9.9 million for the three months ended June 30, 2003, as compared to $12.5 million for the three months ended June 30, 2002. This decrease of $2.6 million, or 20.6%, reflects the impact of the Federal Reserve Bank's well-publicized interest rate reductions, which led to a significant increase in one-to four-family mortgage loan and mortgage-backed securities prepayments that were reinvested at lower yields. The Company chose to reinvest these funds in relatively short duration mortgage-backed securities and other investment securities at a lower yield rather than in long-term fixed-rate residential mortgages in order to manage its exposure to rising interest rates. During the quarter ended June 30, 2003 interest earned on the Company's residential mortgage loan portfolio decreased $2.5 million, while there was a $514,000 decrease in interest and dividends earned on securities, a $423,000 decrease in interest earned on consumer loans and a $142,000 decrease in interest earned on commercial business loans, as compared to the respective amounts earned over the three-month period ended June 30, 2002. These decreases were partially offset by the $1.0 million increase in interest earned on commercial real estate loans as compared to the respective amounts earned over the three-month period ended June 30, 2002.
Interest Expense. Total interest expense for the three-month period ended June 30, 2003 decreased from $5.5 million to $4.6 million, a decrease of $925,000, or 16.7%, as compared to the same three-month period one year earlier. The 68 basis point decrease in the cost of funds to 2.80% accounted for the decrease in interest expense and was only partially offset by the $23.1 million increase in average interest bearing liabilities, principally in savings and NOW accounts. The cost of funds was influenced by the continued decline in rates. Average deposit balances increased $59.2 million, or 21.5%, while average borrowed funds decreased $36.1 million, or 14.4%, for the three months ended June 30, 2003.
Net Interest Income. Net interest income for the three months ended June 30, 2003 decreased $1.7 million, or 23.7%, to $5.3 million compared to the three months ended June 30, 2002, primarily as a result of the $135.8 million decrease in the average balance of one-to four-family mortgage loans coupled with a decrease of 156 basis points in the average yield earned on total interest earning assets and was only partially offset by the decrease in the cost of interest bearing liabilities. Interest rate spread decreased to 2.38% from 3.26%, and the net interest margin was 2.78% and 3.76%, respectively, for the three-month periods ended June 30, 2003 and 2002.
Provision for Loan Losses. The provision for loan losses for the three months ended June 30, 2003 decreased $215,000, or 95.5%, to $10,000 compared to the three months ended June 30, 2002. The decrease in the provision was a result of the decline in total loans, as well as management's assessment of the loan portfolio and its assessment of the local economy and market conditions.
Non-Interest Income. Non-interest income, net, decreased $606,000 to $1.9 million for the three months ended June 30, 2003, from $2.5 million for the three months ended June 30, 2002. Excluding the $817,000 one-time gain recorded in other income that resulted from the Company's curtailment of its defined benefit pension plan in 2002, non-interest income, net, increased by $211,000 for the three months ended June 30, 2003 as compared to the comparable period in 2002. During the second quarter of 2003, service and fee income increased 9.8% to $1.4 million, which resulted primarily from increased fees attributable to sales and services provided to a growing customer base.
Non-Interest Expense. Non-interest expense totaled $4.5 million for the three month period ended June 30, 2003 as compared to $4.9 million for the same period in 2002. Salaries and employee benefits expense decreased $301,000 for the three months ended June 30, 2003 as compared to three months ended June 30, 2002 due primarily to reduced pension costs that resulted from the curtailment of the Company's defined benefit pension plan and a reduction in post retirement medical benefits. Professional fees decreased $117,000 for the three months ended June 30, 2003 as compared to the same period in 2002 primarily as a result of additional sales training that was provided to the Company's branch personnel last year in conjunction with developing a more sales oriented corporate culture. Partially offsetting these decreases was the $45,000 increase in advertising for the three months ended June 30, 2003 as compared to the same period in 2002. This was attributable to the grand opening of our seventh full-service Warwick Savings branch in Goshen, New York.
Provision for Income Taxes. The $827,000 decrease in the provision for income taxes to $971,000 for the three-month period ended June 30, 2003, as compared to the three-month period ended June 30, 2002, was primarily attributable to the 38.5% decrease in pre-tax income. The applicable tax rates for the second quarter of 2003 and 2002 were 36.54% and 41.62%, respectively. The lower marginal tax rate resulted primarily from an increase in tax exempt income as a proportion of total income during 2003 as compared to 2002.
Comparison of Operating Results for the Six Months Ended June 30, 2003 and 2002
General. For the six months ended June 30, 2003, the Company recognized net income of $3.7 million, or $0.80 per diluted share, as compared to net income of $5.0 million, or $1.05 per diluted share, for the six months ended June 30, 2002, which represents a $1.3 million, or 26.4%, decrease. Net interest income decreased $2.8 million, or 20.0%, for the six months ended June 30, 2003 and non-interest income decreased $304,000, or 7.5% during the same period. For the six months ended June 30, 2003, annualized return on average assets ("ROAA") and annualized return on average equity ("ROAE") were 0.91% and 9.30%, respectively. The ROAA and ROAE for the corresponding period of 2002 were 1.25% and 12.69%, respectively.
Interest Income. Interest income amounted to $20.8 million for the six months ended June 30, 2003, as compared to $25.3 million for the six months ended June 30, 2002. This decrease of $4.5 million, or 17.7%, reflects the impact of the Federal Reserve Bank's interest rate reductions which led to a significant increase in one-to four-family mortgage loans and mortgage-backed securities prepayments that were reinvested at lower yields. The Company chose to reinvest these funds in relatively short duration mortgage-backed securities and other investment securities at a lower yield rather than in long-term fixed-rate residential mortgages in order to manage its exposure to rising interest rates. During the six month period ended June 30, 2003 interest earned on the Company's residential mortgage loan portfolio decreased $4.6 million, while there was a $1.0 million decrease in interest and dividends earned on securities and a $891,000 decrease in interest earned on consumer loans, as compared to the respective amounts earned over the six-month period ended June 30, 2002. These decreases were partially offset by the $2.2 million increase in interest earned on commercial real estate loans as compared to the respective amounts earned over the six-month period ended June 30, 2002.
Interest Expense. Total interest expense for the six-month period ended June 30, 2003 decreased from $11.2 million to $9.5 million, a decrease of $1.7 million, or 14.8%, as compared to the same six-month period one year earlier. The 56 basis point decrease in the cost of funds to 2.93% accounted for the decrease in interest expense and was only partially offset by the $9.6 million increase in the average balance of interest bearing liabilities. The cost of funds was influenced by the continued decline in rates. Average deposit balances increased $58.7 million, or 15.4% while average borrowed funds decreased $49.1 million, or 18.6% for the six months ended June 30, 2003.
Net Interest Income. Net interest income for the six months ended June 30, 2003 decreased $2.8 million, or 20.0%, to $11.3 million compared to the six months ended June 30, 2002, primarily as a result of the $121.0 million decrease in the average balance of one-to four-family mortgage loans coupled with a decrease of 130 basis points in the average yield earned on total interest earning assets and was only partially offset by the decrease in the cost of interest bearing liabilities. Interest rate spread decreased to 2.54% from 3.28%, and the net interest margin was 2.96% and 3.77%, respectively, for the six-month periods ended June 30, 2003 and 2002.
Provision for Loan Losses. The provision for loan losses for the six months ended June 30, 2003 decreased $365,000, or 80.2%, to $90,000 compared to the six months ended June 30, 2002. The decrease in the provision was a result of the decrease in the loan portfolio, as well as management's assessment of the loan portfolio and its assessment of the local economy and market conditions.
Non-Interest Income. Non-interest income, net, for the six months ended June 30, 2003 and 2002 totaled $3.8 million and $4.1 million, respectively. Excluding the $817,000 one-time gain recorded in other income that resulted from the Company's curtailment of its defined benefit pension plan in 2002, non-interest income, net, increased by $513,000 for the six months ended June 30, 2003 as compared to the comparable period in 2002. Service and fee income increased 17.5% to $2.9 million, for the six months ended June 30, 2003 primarily as a result of increased fees attributable to sales and services provided to a growing customer base.
Non-Interest Expense. Non-interest expense for the six months ended June 30, 2003 decreased $296,000 to $9.1 million from $9.4 million as compared to the same period in 2002. Salaries and employee benefits expense decreased $279,000 for the six months ended June 30, 2003 as compared to six months ended June 30, 2002 due primarily to reduced pension costs that resulted from the curtailment of the Company's defined benefit pension plan. Professional fees decreased $174,000 for the six months ended June 30, 2003 as compared to June 30,2002 primarily as a result of additional sales training that was provided to the Company's branch personnel last year in conjunction with developing a more sales oriented corporate culture. Data processing expense and advertising expense increased $66,000 and $60,000, respectively, for the six months ended June 30, 2003 as compared to June 30, 2002. The increase in data processing expense reflects the increase in core deposits during the first six months of 2003. The increase in advertising is from the promotion of our seventh full-service Warwick Savings branch in Goshen, New York.
Provision for Income Taxes. The $1.2 million decrease in the provision for income taxes to $2.2 million for the six-month period ended June 30, 2003, as compared to the six-month period ended June 30, 2002, was primarily attributable to the 29.5% decrease in pre-tax income. The applicable tax rates for the six months of 2003 and 2002 were 37.65% and 40.32%, respectively. The lower marginal tax rate resulted primarily from an increase in tax exempt income as a proportion of total income during 2003 as compared to 2002.
Liquidity and Capital Resources
Liquidity is managed using a combination of customer deposits, cash and short-term interest-earning assets, mortgage loans held for sale, investment securities held as available for sale and borrowings from the FHLBNY.
At June 30, 2003, the Company's total approved loan origination commitments outstanding totaled $62.4 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2003 totaled $83.5 million. Based on historical experience, management believes that a significant portion of such deposits will remain with the Company.
At June 30, 2003, the Company had cash and due from banks of $19.5 million and securities available for sale of $375.7 million. Management believes these amounts, together with the Company's borrowing capabilities, to be more than adequate to meet its short-term cash needs.
Regulatory Capital Position
The Company's primary regulator, the Federal Reserve Board (the "Federal Reserve") which regulates bank holding companies, has issued guidelines classifying and defining bank holding capital into the following components: (1) Tier I capital, which includes tangible stockholders' equity for common stock and certain perpetual preferred stock, and (2) Tier II capital, which includes a portion of the allowance for loan losses and preferred stock that does not qualify as Tier I capital. The risk-based capital guidelines require financial institution holding companies to maintain specific defined credit risk factors (risk-adjusted assets). As of June 30, 2003 the minimum Tier I and combined Tier I and Tier II capital ratios required by the Federal Reserve for capital adequacy were 4% and 8%, respectively.
Warwick Savings and Towne Center are subject to minimum regulatory capital requirements imposed by the Federal Deposit Insurance Corporation ("FDIC"), which requirements are, as a general matter, based on the amount and composition of an institution's assets. Insured institutions in the strongest financial and managerial condition, with a rating of 1 (the highest examination rating of the FDIC under the Uniform Financial Institutions Rating System) are required to maintain Tier 1 capital of not less than 3.0% of total assets (the "leverage capital ratio"). For all other banks, the minimum leverage capital ratio is 4.0%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the institution.
The following table shows Warwick Savings' regulatory capital positions and ratios at June 30, 2003.
| Actual | For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Provisions |
|||||||
| Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
||||
| Total Capital (to risk-weighted assets) |
$ 63,432 | 16.50 | % | $ 30,756 | 8.00 | % | $38,445 | 10.00 | % |
| Tier 1 Capital (to risk-weighted assets) |
58,712 | 15.27 | 15,378 | 4.00 | 23,067 | 6.00 | |||
| Tier 1 Capital (to average assets) |
58,712 | 7.73 | 30,364 | 4.00 | 37,956 | 5.00 | |||
The following table shows the Parent Company's regulatory capital positions and ratios as of June 30, 2003.
| Actual Capital | For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Provisions |
|||||||
| Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
||||
| Total Capital (to risk-weighted assets) |
$77,822 | 18.42 | % | $ 33,806 | 8.00 | % | $42,258 | 10.00 | % |
| Tier 1 Capital (to risk-weighted assets) |
72,617 | 17.18 | 16,903 | 4.00 | 25,355 | 6.00 | |||
| Tier 1 Capital (to average assets) |
72,617 | 8.98 | 32,363 | 4.00 | 40,453 | 5.00 | |||
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure about market risk is presented at December 31, 2002 in the Company's Annual Report on Form 10-K, which was filed with the SEC on March 31, 2003. There have been no material changes in the Company's market risk at June 30, 2003 as compared to December 31, 2002. The Company's most significant form of market risk is interest rate risk, as the majority of its assets and liabilities are sensitive to changes in interest rates. As noted in Item 2, Management's Discussion and Analysis, the decrease in the Company's net interest income is due, in part, to the relative changes in yield and cost of the Company's assets and liabilities as a result of the decreasing market interest rates in 2002 and into 2003. Should market interest rates increase, the cost of interest-bearing liabilities may increase faster than the rates on interest-earning assets. Conversely, should market interest rates fall significantly below current levels, the Company's net interest margin may also be negatively impacted. Market risk is reviewed quarterly by the Company's Asset Liability Committee.
Item 4. Controls and Procedures
An evaluation of the Company's disclosure controls and procedures (as defined in Rule13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")) as of June 30, 2003, was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended June 30, 2003, that has materially effected, or is reasonably likely to materially affect, our internal control over financial reporting.
The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company's business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.
PART II -- OTHER INFORMATION
| Item 1. | Legal Proceedings |
| The Company is involved in legal proceedings incurred in the normal course of business. In the opinion of management, none of these proceedings are expected to have a material effect on the consolidated financial position or results of operations of the Company. |
|
| Item 2. | Changes in Securities |
| Not applicable. |
|
| Item 3. | Defaults upon Senior Securities |
| Not applicable. |
|
| Item 4. | Submission of Matters to a Vote of Security Holders |
| 1. Election of Directors with terms ending in 2006: |
| For | Withhold | ||
| Anthony R. Bottini | 3,809,983 | 42,120 | |
| R. Michael Kennedy | 3,809,359 | 42,744 | |
| John W. Sanford | 3,809,593 | 42,510 | |
| Robert M. Smith | 3,809 620 | 42,483 |
The following are the names of the directors (and remaining terms) whose terms continued after the meeting :
| Term Expires |
|||
| Ronald J. Gentile | 2005 | ||
| Thomas G. Kahn | 2004 | ||
| Fred M. Knipp | 2004 | ||
| Fred G. Kowal | 2004 | ||
| Emil R. Krahulik | 2005 | ||
| David F. McBride | 2004 | ||
| John J. McDermott, III | 2005 |
| 2. | Approval of the amendment to the Stock Option Plan to increase the number of shares for which awards may be granted: For: 3,521,724 Against: 285,038 Abstain: 45,341 Broker Non-Vote: 0 |
|
| 3. | Ratification of the appointment of KPMG LLP as independent auditors for the fiscal year ending December 31, 2003. For: 3,772,567 Against: 37,994 Abstain: 41,542 Broker Non-Vote: 0 |
| Item 5. | Other Information |
| Not applicable. |
|
| Item 6. | Exhibits and Reports on Form 8-K (a) Exhibits See Index to Exhibits. (b) Reports on Form 8-K On May 2, 2003, the Company filed a Form 8-K, dated May 1, 2003, with the SEC of the Company's earnings release for the quarterly period March 31, 2003. On May 6, 2003, the Company filed a Form 8-K, dated May 6, 2003, with the SEC of the presentation made at the Annual Meeting of Shareholders of Registrant on May 6, 2003. On July 29, the Company filed a Form 8-K, dated July 25, 2003, with the SEC of the Company's earnings release for the three and six months ended June 30, 2003 and that the Chairman and Chief Executive Officer will be speaking at an Investor Conference on July 30, 2003. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Warwick Community Bancorp, Inc. (Registrant) |
||
| Date: August 14, 2003 | By: | /s/ Fred G. Kowal Chairman and Chief Executive Officer (Duly Authorized Officer) |
| Date: August 14, 2003 | By: | /s/ Arthur W. Budich Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
INDEX TO EXHIBITS
| Exhibit Number |
Document |
| 3.1 | Certificate of Incorporation of Warwick Community Bancorp, Inc. (1) |
| 3.2 | Bylaws of Warwick Community Bancorp, Inc., as amended (9) |
| 4.1 | Certificate of Incorporation of Warwick Community Bancorp, Inc. (11) |
| 4.2 | Bylaws of Warwick Community Bancorp, Inc., as amended (11) |
| 4.3 | Form of Stock Certificate of Warwick Community Bancorp, Inc. (1) |
| 4.4 | Rights Agreement between Warwick Community Bancorp, Inc. and Registrar and Transfer Company, dated as of October 17, 2000, as amended by Amendment No. One to the rights Agreement dated September
17, 2002 (6) |
| 4.5 | Form of Right Certificate (7) |
| 4.6 | Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of Warwick Community Bancorp, Inc. (7) |
| 10.1 | Employment Agreement by and between Warwick Community Bancorp, Inc. and Fred G. Kowal (8) |
| 10.2 | Amendment No. 1 to the Employment Agreement by and between Warwick Community Bancorp, Inc. and Fred G. Kowal (10) |
| 10.3 | Employment Agreement by and between Warwick Community Bancorp, Inc. and Ronald J. Gentile (2) |
| 10.4 | First Amendment to Employment Agreement by and between Warwick Community Bancorp, Inc. and Ronald J. Gentile (4) |
| 10.5 | Employment Agreement by and between Warwick Community Bancorp, Inc. and Arthur W. Budich (2) |
| 10.6 | First Amendment to Employment Agreement by and between Warwick Community Bancorp, Inc. and Arthur W. Budich (4) |
| 10.7 | Employment Agreement by and between Warwick Community Bancorp, Inc. and Nancy L. Sobotor-Littell (2) |
| 10.8 | First Amendment to Employment Agreement by and between Warwick Community Bancorp, Inc. and Nancy L. Sobotor-Littell (4) |
| 10.9 | Recognition and Retention Plan of Warwick Community Bancorp, Inc. (3) |
| 10.10 | First Amendment to the Recognition and Retention Plan of Warwick Community Bancorp, Inc. (5) |
| 10.11 | Second Amendment to the Recognition and Retention Plan of Warwick Community Bancorp, Inc. (8) |
| 10.12 | Trust Agreement between Warwick Community Bancorp, Inc. and Orange County Trust Company for the Recognition and Retention Plan of Warwick Community Bancorp, Inc. (2) |
| 10.13 | Stock Option Plan of Warwick Community Bancorp, Inc. (3) |
| 10.14 | First Amendment to the Stock Option Plan of Warwick Community Bancorp, Inc. (5) |
| 10.15 | Form of Amended Stock Option Agreement for Directors under the Stock Option Plan of Warwick Community Bancorp, Inc (9) |
| 10.16 | Form of Amended Stock Option Agreement for Employees under the Stock Option Plan of Warwick Community Bancorp, Inc.(9) |
| 10.17 | Benefit Restoration Plan of The Warwick Savings Bank (1) |
| 10.18 | Grantor Trust Agreement by and between The Warwick Savings Bank and HSBC Bank USA for the Benefit Restoration Plan of The Warwick Savings Bank (2) |
| 10.19 | Change in Control Severance Plan of Warwick Community Bancorp, Inc. and Affiliates (9) |
| 11.1 | Statement re: Computation of per share earnings (See the Statement of Income and Note 2 of the Notes to Unaudited Consolidated Financial Statements in this report on Form 10-Q). |
| 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer |
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer |
| 32 | Section 1350 Certifications. |
| (1) | Incorporated herein by reference to the Exhibits to the Company's Registration Statement on Form S-1, filed on September 19, 1997, Registration No. 333-36021. |
| (2) | Incorporated herein by reference to the Exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1998. |
| (3) | Incorporated herein by reference to the Company's definitive Proxy Statement for the Special Meeting of Shareholders held on June 24, 1998. |
| (4) | Incorporated herein by reference to the Exhibits to the Company's Annual Report on Form 10-K for the transition period from June 30, 1998 to December 31, 1998 |
| (5) | Incorporated herein by reference to the Company's definitive Proxy Statement for the Special Meeting of Shareholders held on April 20, 1999. |
| (6) | Incorporated herein by reference to the Exhibits to the Company's Registration Statement on Form 8-A, filed on October 18,2000. |
| (7) | Incorporated herein by reference to the Exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. |
| (8) | Incorporated herein by reference to the Exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. |
| (9) | Incorporated herein by reference to the Exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. |
| (10) | Incorporated herein by reference to the Company's Quarterly Report on Form t for the Special-Q for the quarter ended September 30, 2002. |
| (11) | Incorporated herein by reference to the Exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. |