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PROSPECTUS
SYNERGY FINANCIAL GROUP, INC.
(Holding Company for Synergy Bank and Synergy Financial Services, Inc.)
310 North Avenue East
Cranford, New Jersey 07016
(908) 956-4011
Up to 1,265,000 Shares of Common Stock
Synergy Financial Group, Inc. is a federally-chartered corporation that is
offering for sale up to 1,265,000 shares of its common stock at $10.00 per
share. Synergy Financial Group, Inc. is the holding company for Synergy Bank and
Synergy Financial Services, Inc. The shares being offered will represent 43.5%
of the outstanding common stock of Synergy Financial Group, Inc. after the
completion of this stock offering. Synergy, MHC, a federally-chartered mutual
holding company will own the remainder of the outstanding common stock of
Synergy Financial Group, Inc. Directors and executive officers of Synergy
Financial Group, Inc. currently intend to purchase approximately 8.9% of the
common stock of Synergy Financial Group, Inc. being offered, assuming 1,100,000
shares are sold. Shares of common stock purchased by directors and executive
officers cannot be sold for a period of one year following the offering, and
stock certificates issued to directors and executive officers will bear a legend
restricting their sale.
The deadline for ordering stock is 12:00 noon, eastern time, on September
4, 2002, and may be extended to September 29, 2002. The minimum purchase is 25
shares (minimum investment of $250). All funds submitted shall be placed in a
segregated deposit account at Synergy Bank until the shares are issued or the
funds are returned. No stock will be sold if Synergy Financial Group, Inc. does
not receive orders for at least 935,000 shares.
There is currently no public market for the stock. Synergy Financial Group,
Inc. anticipates that the stock will be quoted on the OTC Bulletin Board, and if
so, the trading symbol is expected to be "SFGI." See Market for the Stock on
page 15 of this document.
Trident Securities is not required to sell any specific number or dollar
amount of stock but will use its best efforts to sell the stock offered.
MINIMUM MAXIMUM
---------- -----------
Number of Shares 935,000 1,265,000
Total Underwriting Commissions and Expenses $600,000 $600,000
Net Proceeds $8,750,000 $12,050,000
Net Proceeds Per Share $9.36 $9.53
- ------------------------------------------- ---------- -----------
Based upon market conditions and the approval of the Office of Thrift
Supervision, Synergy Financial Group, Inc. may increase the offering by up to
15% of the 1,265,000 shares to be sold, which would bring the number of shares
to be sold to 1,454,750 shares. No notice of an increase will be given to
persons who have subscribed for stock unless the number of shares to be sold is
increased beyond 1,454,750 shares.
Please refer to Risk Factors beginning on page 8 of this document.
These securities are not deposits or savings accounts and are not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
TRIDENT SECURITIES
A Division of McDonald Investments Inc.
The Date of this Prospectus is August 9, 2002
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read this entire document carefully, including the
consolidated financial statements and the notes to the consolidated financial
statements of Synergy Financial Group, Inc.
Synergy Financial Group, Inc.
Synergy Financial Group, Inc. is a federally-chartered corporation
incorporated in 2001 that was formed for the purpose of acquiring all of the
capital stock that Synergy Bank issued upon its reorganization from the mutual
to stock form of ownership in 2001. Synergy Financial Group, Inc. also holds all
of the stock of Synergy Financial Services, Inc., a New Jersey corporation
incorporated in 1997. Currently, all of the outstanding common stock of Synergy
Financial Group, Inc. is held by Synergy, MHC, a federally- chartered mutual
holding company.
The shares being offered will represent 43.5% of the outstanding common
stock of Synergy Financial Group, Inc. after the completion of this stock
offering. Synergy, MHC will own the remainder of the outstanding common stock of
Synergy Financial Group, Inc. The following chart shows the corporate structure
after completion of the stock offering.
|------------| |------------------------------------------------------|
|Synergy, MHC| |Minority Stockholders of Synergy Financial Group, Inc.|
|------------| |------------------------------------------------------|
| 56.5% | 43.5%
| |
|------------------------------------------------------|
| Synergy Financial Group, Inc. |
|------------------------------------------------------|
| 100% | 100%
|------------| |--------------------------------|
|Synergy Bank| |Synergy Financial Services, Inc.|
|------------| |--------------------------------|
Synergy Financial Group, Inc. has not engaged in any significant business
since its formation in 2001. Its primary activity is holding all of the stock of
Synergy Bank and Synergy Financial Services, Inc. Synergy Financial Group, Inc.
will invest the proceeds of the offering as discussed under Use of Proceeds on
page 13. In the future, it may pursue other business activities, including
mergers and acquisitions, investment alternatives and diversification of
operations. There are, however, no current understandings or agreements for
these activities.
Synergy, MHC
Synergy, MHC is a federally-chartered mutual holding company that was
formed in 2001 in connection with the mutual holding company reorganization of
Synergy Bank. Synergy, MHC has not engaged in any significant business since its
formation in 2001. Synergy, MHC currently owns 100% of the outstanding common
stock of Synergy Financial Group, Inc. So long as Synergy, MHC is in existence,
it will at all times own at least a majority of the outstanding common stock of
Synergy Financial Group, Inc. It is anticipated that the only business activity
of Synergy, MHC going forward will be to own a majority of Synergy Financial
Group, Inc.'s common stock.
Synergy Bank
Synergy Bank is a federally-chartered stock savings bank that was organized
in 1952 as a federal credit union. In May 1998, Synergy Bank converted its
charter from a credit union to a federal mutual savings bank and, as a result,
was able to begin serving the general public as well as the employees of its
former credit union sponsor corporation. Synergy Bank conducts a traditional
community bank operation,
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offering retail banking services, one- to-four family residential, multi-family
and non-residential mortgages, home equity and other consumer loans. Synergy
Bank has undertaken a branch expansion strategy in order to lessen its
dependence on deposits primarily obtained from branch offices located within the
corporate facilities of its former corporate credit union sponsor corporation.
In recent years, Synergy Bank has significantly expanded loan origination,
including automobile, home equity and non-residential mortgage loans.
Our Use of the Proceeds Raised from the Sale of Stock.
The proceeds from the sale of common stock will provide us with additional
equity capital, which will support future deposit growth and expanded
operations. While we currently exceed the regulatory capital requirements to be
considered adequately capitalized, the sale of stock, coupled with the
accumulation of earnings, less dividends or other reductions in capital, from
year to year, represents a means for the orderly preservation and expansion of
our capital base. If our current growth continues at the same rate and if we
expand further as we currently plan, we will need the additional capital to
remain adequately capitalized under regulatory capital requirements.
Synergy Financial Group, Inc. will use at least 50% of the proceeds of the
offering to make a capital contribution to Synergy Bank. Synergy Financial
Group, Inc. will also lend its employee stock ownership plan cash to enable the
plan to buy 8.0% of the shares sold in the offering. The balance will be
retained as Synergy Financial Group, Inc.'s initial capitalization and used for
general business purposes which may include investment in securities,
repurchasing shares of its common stock or paying cash dividends.
The funds received by Synergy Bank will be used for general business
purposes, including originating loans and purchasing securities. We intend to
grow our branch office network, which will expand our geographic reach. At March
31, 2002, Synergy Bank had eleven office locations, including its main office.
Subsequent to March 31, 2002, one branch office was closed, and two new branch
offices were opened in April and May 2002. Two additional new branch offices are
expected to open in the third locations over the next year. We also may consider
various diversification and expansion opportunities in addition to expanding our
core banking business through internal growth, through the acquisition of branch
offices and through the acquisition of other financial institutions. See Use of
Proceeds on page 13.
How We Determined the Offering Range.
The offering range is based on an independent valuation prepared by FinPro,
Inc., an appraisal firm experienced in appraisals of financial institutions.
FinPro has determined that as of July 29, 2002, our estimated aggregate pro
forma market value ranged from a minimum of $21,494,250 to a maximum of
$29,080,450, with a midpoint of $25,287,350. Based on this valuation and the
$10.00 per share price, the number of shares of common stock being issued by
Synergy Financial Group, Inc. will range from 2,149,425 to 2,908,045. The $10.00
per share price was selected primarily because it is the price most commonly
used in stock offerings of this type. Synergy Financial Group, Inc. is offering
43.5% of these shares, or between 935,000 shares and 1,265,000 shares, for
purchase by eligible depositors of Synergy Bank in a subscription offering and
to the general public if a community or a syndicated community offering is held.
The number of shares of Synergy Financial Group, Inc. that Synergy, MHC will own
after completion of the stock offering will range from 1,214,425 to 1,643,045.
The independent valuation does not indicate market value. Do not assume or
expect that Synergy Financial Group, Inc.'s valuation as indicated above means
that the common stock will trade at or above the $10.00 purchase price after the
stock offering.
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FinPro's valuation contains an analysis of a number of factors, including
but not limited to:
o our financial condition and results of operations as of March 31, 2002;
o our operating trends;
o the competitive environment in which we operate;
o operating trends of certain savings institutions and mutual holding
companies;
o relevant economic conditions both nationally and in New Jersey which affect
the operations of savings institutions;
o stock market values of certain institutions; and
o stock market conditions for publicly traded savings institutions and mutual
holding companies.
In addition, FinPro's valuation takes into account the effect of the
additional capital raised by the sale of the common stock on our estimated pro
forma market value. In preparing its independent valuation, FinPro focused
primarily on the price/earnings and price/book valuation methodologies, both of
which are discussed in the valuation report. See Where You Can Find Additional
Information on page 100 for how to obtain a copy of the valuation report. The
following table compares Synergy Financial Group, Inc.'s pro forma
price/earnings and price/book ratios, on a fully converted equivalent basis at
the minimum, midpoint and maximum of the offering range to the medians for all
publicly traded thrifts, all publicly traded New Jersey thrifts and a comparable
group of twelve publicly traded thrifts identified in the valuation report.
Thrift institutions not in the mutual holding company structure are excluded
from each comparison group. See Pro Forma Data on page 17 for a description of
the assumptions used in calculating the multiples and ratios for Synergy
Financial Group, Inc. at the minimum, midpoint and maximum of the offering
range.
Price/Core
Earnings Price/Book
Multiple* Ratio
---------- ----------
Synergy Financial Group, Inc.:
Minimum (935,000 shares sold)............................................................ 11.76x 52.36%
Midpoint (1,100,000 shares sold)......................................................... 13.33x 56.98%
Maximum (1,265,000 shares sold).......................................................... 15.38x 60.98%
Median for all publicly traded thrifts that underwent a standard conversion................... 16.26x 118.67%
Median for all publicly traded New Jersey thrifts that underwent a standard conversion........ 12.46x 143.97%
Median for the comparable group............................................................... 13.86x 116.44%
___________
* The pro forma price/core earnings multiples for Synergy Financial Group,
Inc. presented in the above table are based on core earnings for the
trailing twelve months as required by regulatory appraisal guidelines.
Therefore, these ratios differ from the ratios presented in the tables
under Pro Forma Data on page 17.
The independent valuation must be updated before we complete the stock
offering. The amount of common stock being offered may be increased by up to 15%
without notice to persons who have subscribed for stock, so that a total of
1,454,750 shares would be sold in the offering. We received authorization from
the Office of Thrift Supervision ("OTS") to conduct the stock offering on August
7, 2002. The updated independent valuation will be subject to the further
approval of the OTS before we can complete the stock offering. If the updated
independent valuation would result in more than 1,454,750 shares being sold, we
would subscribed and such persons would have the opportunity to change or cancel
their subscription orders. See pages 81 to 93.
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The Amount of Stock You May Purchase.
Minimum purchase = 25 shares
Maximum purchase = 10,000 shares
The maximum number of shares that any individual (or individuals through a
single account) may purchase is 10,000. The maximum number of shares that any
individual may purchase together with any associate or group of persons acting
in concert is 15,000 shares.
The purchase limitations are set by the plan of stock issuance adopted by
our Board of Directors. If determined to be necessary or desirable by the Board
of Directors, the plan may be amended by a two-thirds vote of the full Board,
with the concurrence of the OTS. Thus, the purchase limitation may be revised
after completion of the subscription offering without notice to subscribers,
except that in the event the maximum purchase limitation is increased, persons
who subscribed for the maximum will be notified and permitted to revise their
subscription.
How We Will Prioritize Orders if We Receive Orders for More Shares than are
Available.
You might not receive any or all of the stock you request. We have granted
subscription rights in the following order of priority:
o Priority 1 - depositors of Synergy Bank at the close of business on April
30, 2001 with deposits of at least $50.00.
o Priority 2 - the tax qualified employee stock benefit plans of Synergy
Financial Group, Inc.
o Priority 3 - depositors of Synergy Bank at the close of business on June
30, 2002 with deposits of at least $50.00.
To the extent that shares remain available and depending on market
conditions at or near the completion of the subscription offering, we may
conduct a community offering and possibly a syndicated community offering, and
preference may be given first to residents of Middlesex, Monmouth, Morris and
Union counties, New Jersey, and second to residents of New Jersey. The community
offering, if any, may commence simultaneously with, during or subsequent to the
completion of the subscription offering. A syndicated community offering, if we
conduct one, would commence just prior to, or as soon as practicable after, the
termination of the subscription offering and would be open to the general public
beyond the local community. We will have the right to reject orders, in whole or
in part, in the community or syndicated community offerings, and orders received
in connection with a syndicated community offering would receive a lower
priority than orders received in the subscription offering and community
offering. See The Stock Offering on page 81.
Potential Conflicts with Personal Interests of Officers and Directors - Our
Officers, Directors and Employees Will Receive Additional Compensation and
Benefits After the Stock Offering.
In order to tie our employees' and directors' interests closer to our
stockholders' interests, we intend to establish certain benefit plans that use
our stock as compensation. Officers, directors, and employees will not be
required to pay cash in exchange for shares received under the employee stock
ownership plan or shares received under the restricted stock plan, but will be
required to pay the exercise price to exercise stock options.
The following table presents information regarding the participants in each
plan, the percentage of total shares sold in the offering, and the dollar value
of the stock for our employee stock ownership plan and stock- based incentive
plans. The table below assumes the sale of 1,100,000 shares in the stock
offering. It is assumed that the value of the stock in the table is $10.00 per
share. Options are given no value because their
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exercise price will be equal to the fair market value of the stock on the day
the options are granted. As a result, anyone who receives an option will only
benefit from the option if the price of the stock rises above the exercise the
stock benefit plans.
Percentage of
Individuals Total Shares Sold
Eligible Estimated Number in the Offering
to Receive Value of Shares/ Based on Midpoint
Awards of Shares Options of Offering Range
------ --------- ------- -----------------
Employee Stock Ownership Plan..... Employees $880,000 88,000 8.0%
Restricted Stock Plan Awards...... Officers and
Directors 440,000 44,000 4.0
Stock Options..................... Officers and
Directors - 110,000 10.0
In addition, Synergy Bank currently maintains employment agreements with
certain of its executive officers which are also executive officers of Synergy
Financial Group, Inc. The employment agreements provide compensation for such
persons upon termination of employment. Synergy Bank has also implemented a
supplemental executive retirement plan on behalf of such executive officers and
a Phantom Stock Plan on behalf of the President and Chief Executive Officer
which provide pension benefits for such persons. These plans will continue to
provide annual accruals for pension benefits on behalf of these executive
officers after the completion of the stock offering. See Management - Executive
Compensation on page 77.
Directors are paid a fee of $1,000 per Board meeting and $300 per committee
meeting. The Chairman receives an additional annual fee of $3,000. The total
fees paid to the directors for the year ended December 31, 2001 were
approximately $155,000. Directors who also serve as employees of Synergy Bank do
not receive compensation as directors. See Management - Director Compensation on
page 77.
Our Policy Regarding Dividends.
At this time, we do not plan to pay dividends in the immediate future on
the common stock of Synergy Financial Group, Inc. We will in the future consider
paying cash dividends, and the timing, amount and frequency would be determined
at that time. There are also restrictions on our ability to pay dividends. See
Dividend Policy on page 15.
If we pay dividends to stockholders of Synergy Financial Group, Inc., it is
anticipated that any dividends payable to Synergy, MHC would be waived. Under
OTS regulations, such dividend waivers would not result in dilution to public
stockholders in the event that Synergy, MHC converts to stock form in the
future. See Regulation - Regulation of Synergy Financial Group, Inc. on page 71.
Deadlines for Purchasing Stock.
The subscription offering will terminate at 12:00 noon, eastern time, on
September 4, 2002 unless extended. The subscription offering may be extended to
September 29, 2002. A community offering and a syndicated community offering, if
such offerings are conducted, may terminate at any time without notice but no
later than October 19, 2002. See The Stock Offering on page 81.
How You May Pay for Your Shares.
In the subscription offering and the direct community offering you may pay
for your shares by:
(1) payment in cash, if delivered in person;
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(2) personal check, bank draft or money order; or
(3) authorizing us to withdraw available funds from your deposit accounts
maintained with Synergy Bank.
In the case of payments made in cash, personal check, bank draft or money
order, subscription funds will be placed in a segregated account at Synergy
Bank. Interest will be paid on subscription funds at Synergy Bank's regular
savings account rate from the date the payment is received until the offering is
either completed or terminated. The offering will not be completed and no stock
will be sold unless we receive orders for at least 935,000 shares. If the
offering is not competed for any reason, all funds submitted pursuant to the
offerings will be promptly refunded with interest as described above. See The
Stock Offering - Ordering and Receiving Common Stock on page 89.
Any orders received in the subscription or community offering which
aggregate $25,000 or more, if paid by check, must be paid by official bank or
certified check. We will not accept copies or facsimiles of order forms or
permit wire transfers as payment for shares ordered for purchase. Synergy Bank
cannot lend funds to anyone for the purpose of purchasing shares. See The Stock
Offering - Ordering and Receiving Common Stock on page 89.
Once Submitted, Your Stock Order is Irrevocable.
For your subscription to be valid, you must return to us a properly
completed original order form with full payment for your shares. An order form,
once we receive it, may not be modified, canceled or withdrawn without our
consent. If the offering is not completed by October 19, 2002, you will have the
right to modify or withdraw your order and to have your subscription funds
returned with interest at Synergy Bank's regular savings account rate. See The
Stock Offering - Ordering and Receiving Common Stock on page 89.
Your Subscription Rights Are Not Transferable.
Selling or transferring your right to buy stock in the subscription
offering is illegal. If you exercise violates this restriction, your order will
not be filled. You also may be subject to penalties imposed by the OTS.
Purchases by Directors and Executive Officers.
Synergy Financial Group, Inc.'s directors, executive officers and their
associates are expected to purchase approximately 97,500 shares, or $975,000, of
common stock in the offering, which represents 10.4%, 8.9%,and 7.7% at the
minimum, midpoint and maximum of the offering range, respectively. See
Management - Proposed Stock Purchases by Management on page 80.
In addition, if stockholders of Synergy Financial Group, Inc. approve the
restricted stock plan and the stock option plan as described under Management -
Executive Compensation on page 77, and provided that all shares under the
restricted stock plan are awarded and all options under the stock option plan
are awarded and exercised, directors and executive officers may own up to 22.9%
of the outstanding common stock at the midpoint of the offering range.
Purchases of common stock in the offering by directors and executive
officers will be counted toward the minimum of 935,000 shares required to be
sold to complete the offering. Management may, but is not required to, purchase
additional shares in the offering to satisfy the 935,000 share minimum, subject
to the limitation on the individual maximum share purchase limitations and the
requirement that directors, executive officers and their associates may not
purchase, in the aggregate, more than 31% of the shares sold in the offering.
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Shares of common stock purchased by directors and executive officers cannot
be sold for a period of one year following the offering, and stock certificates
issued to directors and executive officers will bear a legend restricting their
sale. See The Stock Offering - Restrictions on Transferability by Directors and
Executive Officers on page 94.
We Do Not Expect that an Active and Liquid Trading Market for the Stock Will
Develop, and the Liquidity and Price of the Stock may be Adversely Affected by a
Limited Trading Market.
We expect the stock to be traded on the over-the-counter market with
quotations available on the OTC Electronic Bulletin Board. The stock is not
expected to meet the listing requirements for the Nasdaq system and it is not
expected that an application to the Nasdaq system will be made. Prior to this
offering, Synergy Financial Group, Inc. has not offered its stock to the public,
and it is highly unlikely that an active and liquid trading market for the stock
will develop. The lack of an active and liquid trading market may adversely
affect the liquidity and price of the stock. We have entered into an agency
agreement with Trident Securities under which Trident Securities will assist us,
on a best efforts basis, in the solicitation of subscriptions and purchase
orders for our stock in the offering. Trident Securities is a division of
McDonald Investments Inc., which is a broker-dealer registered with the National
Association of Securities Dealers, Inc. Trident Securities intends the Stock on
page 15.
Possible Conversion of Synergy, MHC to Stock Form.
In the future, Synergy, MHC may convert from the mutual to capital stock
form, in a transaction commonly known as a "second-step conversion." In a
second-step conversion, members of Synergy, MHC would have subscription rights
to purchase common stock of Synergy Financial Group, Inc. or its successor, and
the public stockholders of Synergy Financial Group, Inc. would be entitled to
exchange their shares of common stock for an equal percentage of shares of the
converted Synergy, MHC. This percentage may be adjusted to reflect any assets
owned by Synergy, MHC. Synergy Financial Group, Inc.'s public stockholders,
therefore, would own approximately the same percentage of the resulting entity
as they owned prior to the second-step conversion. The Board of Directors has no
current plans to undertake a "second-step conversion" transaction.
Recent Legislation to Curtail Corporate Accounting Irregularities.
Recently, several large publicly-traded companies have announced large
losses resulting from the restatement of their financial statements. The losses
resulting from potential accounting irregularities have caused one prominent
public company to file for corporate bankruptcy. The accounting restatements and
alleged improprieties by corporate officers reported by several large public
companies have caused a loss in public confidence and a precipitous drop in the
stock markets during the past several weeks. In response, on July 30, 2002,
President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act").
Additional regulations are expected to be promulgated by the Securities and
Exchange Commission (the "SEC"). As a result of the accounting restatements by
large public companies, the passage of the Act and regulations to be implemented
by the SEC, publicly-traded companies, such as ours, will be subject to
additional and more cumbersome reporting regulations and disclosure. These new
regulations, which are intended to curtail corporate fraud, will require certain
officers to personally certify certain SEC filings and financial statements and
will require additional measures to be taken by our officers, directors and
outside auditors. The loss of investor confidence in the stock market and the
new laws and regulations will increase our expenses and could adversely affect
the prices of publicly-traded stocks, such as ours.
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RISK FACTORS
In addition to the other information in this document, you should consider
carefully the following risk factors in evaluating an investment in our common
stock.
The relatively small amount of stock being offered makes it highly unlikely
that an active and liquid trading market for the stock will develop, and the
liquidity and price of the stock may be adversely affected by a limited trading
market.
We expect that our common stock will trade on the over-the-counter market
with quotations available on the OTC Bulletin Board. Due to the relatively small
size of the offering to the public, an active market for the stock is not
expected to exist after the offering. This means that there will be limited
secondary market liquidity for our stock. This might make it difficult for you
to buy or sell the stock after the initial offering which may negatively affect
the price of the stock or cause significant volatility in the price of our
stock. See Market for the Stock on page 15.
Increases in market rates of interest could adversely affect our equity.
At March 31, 2002, we held approximately $49.5 million in
available-for-sale securities. Generally accepted accounting principles ("GAAP")
require that these securities be carried at fair value on our balance sheet.
Unrealized holding gains or losses on these securities, that is, the difference
between the fair value and the amortized cost of these securities, net of
deferred taxes, is reflected in our stockholders' equity. If interest rates
increase, the fair value of our available-for-sale securities generally
decreases, which also decreases equity.
Recently, market rates of interest have increased which caused the fair
value of our available-for-sale securities to decrease and also caused equity to
decrease. As of December 31, 2001, our available-for-sale securities portfolio
had an unrealized loss of approximately $39,000. At March 31, 2002, our
available-for- sale securities portfolio had an unrealized loss of approximately
$445,000. At March 31, 2002, our stockholders' equity included approximately
$285,000 in accumulated other comprehensive loss, which was comprised
exclusively of net unrealized losses on our available-for-sale securities
portfolio. If market interest rates further increase, our equity could be
further adversely affected.
As disclosed under Use of Proceeds, the proceeds from the stock offering
will be used for general business purposes, including originating loans and
purchasing securities. The same risks described above with respect to the affect
of interest rates on the fair value of our available for sale securities will
apply to any new securities purchased with the proceeds of the stock offering
and held as available for sale.
Our return on equity after the offering may be low; this may negatively affect
the price of our stock.
The net proceeds from the offering will substantially increase our equity
capital. It will take a significant period of time to prudently invest this
capital. For the year ended December 31, 2001, our return on average equity was
8.95%. On a pro forma basis assuming that 1,265,000 shares had been sold at the
beginning of the year, our return on average equity for the year ended December
31, 2001 would be approximately 6.15%. As a result, our return on equity, which
is the ratio of our earnings divided by our equity capital, may be lower than
that of similar companies. To the extent that the stock market values a company
based in part on its return on equity, our low return on equity relative to our
peer group could negatively affect the trading price of our stock.
We intend to adopt an employee stock ownership plan as part of the stock
offering. We also intend to adopt other stock-based benefit plans. The money
that we use to buy stock to fund our stock-based benefit
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plans will not be available for investment and will increase our future
expenses. In addition, the public company costs of preparing reports for
stockholders and the SEC will also cause our expenses to be higher than they
would be if we did not conduct the stock offering and did not expand our
employee benefit plans. See Pro Forma Data on page 17 and Management - Potential
Stock Benefit Plans - Employee Stock Ownership Plan on page 79.
We will have substantial discretion over the use of the proceeds of the
offering.
We will have broad discretion over the use of the proceeds from this stock
offering. At least 50% of the proceeds of the offering will be used to make a
capital contribution to Synergy Bank, approximately 9% will be used to lend the
Synergy Financial Group, Inc. employee stock ownership plan cash to allow the
plan to buy 8% of the shares sold in the offering. The remaining approximately
40% of the net proceeds will be retained by Synergy Financial Group, Inc., and
we will initially invest these proceeds in intermediate term mortgage-backed
securities issued by government sponsored enterprises.
Future changes in interest rates may reduce our profits.
Our ability to make a profit largely depends on our net interest income,
which could be negatively affected by changes in interest rates. Net interest
income is the difference between:
o the interest income we earn on our interest-earning assets, such as
loans and securities; and
o the interest expense we pay on our interest-bearing liabilities, such
as deposits and amounts we borrow.
The rates we earn on our assets and the rates we pay on our liabilities are
generally fixed for a contractual period of time. We, like many savings
institutions, have liabilities that generally have shorter contractual
maturities than our assets. This imbalance can create significant earnings
volatility, because market interest rates change over time. In a period of
rising interest rates, the interest income earned on our assets may not increase
as rapidly as the interest paid on our liabilities. In a period of declining
interest rates, the interest income earned on our assets may decrease more
rapidly than the interest paid on our liabilities. See Management's Discussion
and Analysis of Financial Condition and Results of Operations - Management of
Interest Rate Risk and Market Risk on page 31.
In addition, changes in interest rates can affect the average life of loans
and mortgage-backed and related securities. A reduction in interest rates
results in increased prepayments of loans and mortgage-backed and related
securities, as borrowers refinance their debt in order to reduce their borrowing
cost. This causes reinvestment risk. This means that we may not be able to
reinvest prepayments at rates that are comparable to the rates we earned on the
prepaid loans or securities.
A relatively large portion of our total loan portfolio consists of consumer
loans, primarily auto loans, and we intend to increase our origination of such
loans after the offering. The repayment risk related to these types of loans is
considered to be greater than the risk related to residential loans.
At March 31, 2002, our loan portfolio included approximately $58.8 million
of consumer loans, or 22.35% of our total loan portfolio, including $53.2
million of auto loans. It is our intention to increase the size of the auto loan
portfolio until such loans constitute approximately one-third of our total loan
portfolio. Consumer lending is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties and any late
payments or the failure to repay such loans would hurt our earnings. See
Business of Synergy Bank - Lending Activities - Consumer Loans on page 49.
9
We intend to increase our origination of non-residential mortgage loans after
the offering. These types of loans traditionally involve a higher degree of
repayment risk than residential loans.
At March 31, 2002, our loan portfolio included approximately $17.1 million
of non-residential mortgage loans, or 6.50% of our total loan portfolio.
Although non-residential mortgage loans constitute a relatively small
percentage of our loan portfolio, we intend to increase our origination of
non-residential mortgage loans after the offering to comprise a total of
approximately one-third of our total loan portfolio with consumer loans
comprising another third of our total loan portfolio and traditional
single-family residential real estate lending together with home equity loans
comprising the last third of our total loan portfolio.
Non-residential lending is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties. The
likelihood that non-residential mortgage loans will not be repaid or will be
late in paying is generally greater than with residential loans. Any failure to
pay or late payments would hurt our earnings. See Business of Synergy Bank -
Lending Activities - Non-Residential Mortgage Loans on page 49.
We have a relatively high percentage of unseasoned credits, which are considered
to pose a potentially greater repayment risk than loans that have been
outstanding for a longer period of time.
As a result of our recent growth, including growth in our non-residential
mortgage loans, a significant portion of our loan portfolio is represented by
new credits. Generally, loans that are relatively new, referred to as unseasoned
loans, do not have sufficient repayment history to determine the likelihood of
repayment in accordance with their terms. At March 31, 2002, a significant
percentage of our total loan portfolio consisted of loans that would be
considered unseasoned.
We intend to expand our branch office network, and expenses related to such
expansion will negatively impact earnings in future periods.
We intend to increase our branch presence. At March 31, 2002, we had eleven
office locations, including our main office. Subsequent to March 31, 2002, one
branch office was closed, and two new branch offices were opened in April and
May 2002. Two additional new branch offices are expected to open in the third
quarter of 2002. We currently plan to open four additional new branch locations
over the next year in an expansion of our geographic reach. This plan will
result in a tripling of our fixed assets over such period. The expenses
associated with opening new branch offices, in addition to the personnel and
operating costs that we will have once such offices open, will significantly
increase our non-interest expense in future periods, decreasing earnings.
We may not continue to experience the same rate of growth that we have in the
past, and we may not be able to successfully manage our current growth.
Over the past several years, we have experienced rapid and significant
growth. Our total assets have increased by $169 million, from $176 million at
December 31, 1997, to $345 million at March 31, 2002. There can be no assurance
that we will continue to experience such rapid growth, or any growth, in the
future. If we do experience continued growth, we can not assure you that we will
be able to adequately and profitably manage such growth or that our earnings
will adequately provide the necessary capital to maintain required regulatory
capital levels.
10
We have a high concentration of loans and deposits with the employees of one
company and the majority of our branch locations are located on the corporate
premises of such company. This concentration of our business with the employees
of a specific company exposes us to the risk of a downturn in such company's
performance or an acquisition of such company.
Synergy Bank was originally chartered as a credit union for a
pharmaceutical research and manufacturing company. We converted from a credit
union charter in 1998, and a significant concentration of our loans and deposits
continue to be associated with employees of our former credit union sponsor. At
March 31, 2002, approximately 30% of our total loan portfolio was comprised of
loans made to individuals employed by such company, and approximately 40% of our
total deposits were associated with individuals employed by such company. If
such company experienced difficulties, it could affect the ability of such
employees to repay their loans in a timely manner, and our level of deposits, in
particular, demand deposits, could fall.
In addition, we currently operate six on-site branch offices located on
various corporate premises of the former credit union sponsor corporation. A
change in the corporate ownership of such company could affect this
relationship.
We originate approximately two-thirds of our auto loans though a single source,
and we would be unable to maintain the current high volume of auto loan
originations if we were no longer able to obtain business though this source.
In late 1999, we began to originate direct auto loans over the Internet
through an independent online loan referral web site. Currently, we originate an
average of approximately $2.5 million of auto loans per month through this
source. We intend to continue to grow the auto loan portfolio as part of our
plan through originations and purchases in order to increase the consumer loan
portfolio to approximately one-third of our total loans. However, if for any
reason we lose this source of business, we would be unable to maintain or
increase our level of auto lending.
Strong competition within our market area may limit our growth and
profitability.
Competition in the banking and financial services industry is intense. We
compete with commercial banks, savings institutions, mortgage brokerage firms,
credit unions, finance companies, mutual funds, insurance companies, and
brokerage and investment banking firms operating locally and elsewhere. Many of
these competitors have substantially greater resources and lending limits than
we do and may offer certain services that we do not or cannot provide. Our
profitability depends upon our continued ability to successfully compete in our
market area.
We plan to remain independent and you should not invest in our common stock if
you are anticipating our sale.
Over the past year, there have occurred several acquisitions of companies
that have a mutual holding company form of organization, as we do, with large
premiums paid to the stockholders of such companies. It is our intention to
continue operating as an independent financial institution, and you are urged
not to invest in our stock if you are anticipating a quick sale of Synergy
Financial Group, Inc. We do not plan to undertake a sale of Synergy Financial
Group, Inc. even if the acquisition would result in our stockholders receiving a
substantial premium over the market price of our stock at the time of a sale.
11
If we are faced with challenges to our independence, such as an election or
proxy contest, we intend to defend ourselves. Our defense could significantly
increase our expenses and reduce our net income and return on equity, which
could negatively impact our stock price.
The OTS has recently stated its intention to impose more stringent
restrictions on the approval of acquisitions of greater than 10% of the
outstanding stock in the three years after a thrift holding company's initial
stock offering and has stated that it intends to approve only those acquisitions
of control within three years that comply strictly with the regulatory criteria.
The OTS may require as a condition of approving our stock offering that we
retain our federal stock charter for a minimum of three years following our
stock offering. In addition, the charter of Synergy Financial Group, Inc.
contains provisions which have an anti- takeover effect and restrict the ability
to purchase our stock. See Restrictions on Acquisition of Synergy Financial
Group, Inc. on page 96.
Persons who purchase stock in the offering will own a minority of Synergy
Financial Group, Inc.'s common stock and will not be able to exercise voting
control over most matters put to a vote of stockholders.
Public stockholders will own a minority of the outstanding shares of
Synergy Financial Group, Inc.'s common stock. Synergy, MHC will own a majority
of Synergy Financial Group, Inc's common stock after the offering. The same
directors and executive officers who manage Synergy Financial Group, Inc. also
manage Synergy, MHC. The Board of Directors of Synergy, MHC is also the Board of
Directors of Synergy Financial Group, Inc. and will be able to exercise voting
control over most matters put to a vote of stockholders. For example, Synergy,
MHC may exercise its voting control to prevent a sale or merger transaction in
which stockholders could receive a premium for their shares or to approve
employee benefit plans.
In addition, Synergy Financial Group, Inc.'s directors, executive officers
and their associates are expected to purchase approximately 97,500 shares in the
offering, which represents 10.4%, 8.9%,and 7.7% at the minimum, midpoint and
maximum of the offering range, respectively. Furthermore, if stockholders of
Synergy Financial Group, Inc. approve the restricted stock plan and the stock
option plan, and provided that all shares under the restricted stock plan are
awarded and all options under the stock option plan are awarded and exercised,
directors and executive officers may own up to 22.9% of the outstanding common
stock at the midpoint of the offering range. See Management - Executive
Compensation on page 77 and Management - Proposed Stock Purchases by Management
on page 80.
The implementation of stock-based benefit plans may dilute your ownership
interest in Synergy Financial Group, Inc.
We intend to adopt a stock option plan and a restricted stock plan
following the stock offering. These stock benefit plans will be funded through
either open market purchases or from the issuance of authorized but unissued
shares. Stockholders would experience a reduction in ownership interest in the
event newly issued shares are used to fund stock options and awards made under
the restricted stock plan. The use of newly issued shares of stock to fund the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 3.8%. The use of newly
issued shares of stock to fund the stock option plan instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 9.1%. See Management - Potential Stock Benefit Plans on page 79.
12
We do not plan in the immediate future to pay dividends on the common stock of
Synergy Financial Group, Inc.
At this time, we do not plan to pay dividends in the immediate future on
the common stock of Synergy Financial Group, Inc. We will in the future consider
paying cash dividends, and the timing, amount and frequency would be determined
at that time. There are also restrictions on our ability to pay dividends. See
Dividend Policy on page 15.
If we pay dividends to stockholders of Synergy Financial Group, Inc., it is
anticipated that any dividends payable to Synergy, MHC would be waived. Under
OTS regulations, such dividend waivers would not result in dilution to public
stockholders in the event that Synergy, MHC converts to stock form in the
future. See Regulation - Regulation of Synergy Financial Group, Inc. on page 71.
We believe that subscription rights have no value and that your tax basis in our
common stock will be the purchase price, but the Internal Revenue Service may
disagree.
Our tax counsel, Malizia Spidi & Fisch, PC, believes that it is more likely
than not that the non- transferable subscription rights to purchase common stock
have no value in the absence of both an oversubscription in the subscription
offering and an increase in the market price of the common stock upon
commencement of trading following completion of the stock offering. Tax counsel
expresses no belief as to whether or not the subscription rights have value, if
both an oversubscription in the subscription offering occurs and the market
price of the common stock increases upon commencement of trading following
completion of the stock offering, as the issue of whether or not the
subscription rights have value is dependent upon all of the facts and
circumstances that occur. If the Internal Revenue Service ("IRS") determines
that your subscription rights have ascertainable value, you could be taxed in an
amount equal to the value of those rights. We are aware of no case in which the
IRS has ever asserted that subscription rights are taxable.
Our subsidiary, Synergy Financial Services, Inc., has been negatively impacted
by the current state of the equity securities market.
Our service corporation subsidiary, Synergy Financial Services, Inc., had
income of $99,000 for the year ended December 31, 2000, but a net operating loss
of $30,000 for the year ended December 31, 2001 and a net operating loss of
$40,000 for the three months ended March 31, 2002. We are unable to guarantee
when, or if, such subsidiary will again be profitable. A new operational plan
has recently been implemented, and this subsidiary is projected to start
providing net income commencing in calendar year 2004.
USE OF PROCEEDS
We are conducting this stock offering principally to raise additional
capital to support our continued growth. The net proceeds will depend on the
expenses incurred by us in connection with the offering and the total number of
shares of stock issued in the offering, which will depend on the independent
valuation and marketing considerations. Although the actual net proceeds from
the sale of the common stock cannot be determined until the offering is
completed, we estimate that we will receive net proceeds from the sale of common
stock of between $8.75 million at the minimum and $12.05 million at the maximum
of the offering range.
Assuming the sale of $9.35 million, $11.0 million and $12.65 million of
common stock at the minimum, midpoint and maximum, respectively, of the offering
range, expenses of $600,000, and the
13
purchase of 8% of the shares by the employee stock ownership plan, the following
table shows the manner in which we will use the net proceeds:
MINIMUM MIDPOINT MAXIMUM
--------------------- ---------------------- ------------------------
$ % $ % $ %
---------- ------- ------------ ------- ----------- --------
Loan to employee stock ownership plan.... $ 748,000 8.6% $ 880,000 8.5% $ 1,012,000 8.4%
Investment in Synergy Bank............... 4,375,000 50.0 5,200,000 50.0 6,025,000 50.0
Synergy Financial Group, Inc.
working capital...................... 3,627,000 41.4 4,320,000 41.5 5,013,000 41.6
---------- ----- ----------- ----- ----------- -----
Net Proceeds.................... $8,750,000 100.0% $10,400,000 100.0% $12,050,000 100.0%
========== ===== =========== ===== =========== =====
We will use at least 50% of the cash received in the offering to make a
capital contribution to Synergy Bank. We will also lend our employee stock
ownership plan cash to enable the plan to buy 8% of the shares sold in the
offering. The balance will be retained as our initial capitalization and used
for general business purposes which may include investment in securities,
repurchasing shares of our common stock, or paying cash dividends. We will
initially invest these proceeds in intermediate term mortgage-backed securities
issued by government sponsored enterprises.
The funds received by Synergy Bank from us will be used for general
business purposes, including originating loans and purchasing securities. We
intend to grow Synergy Bank's branch network either through opening or acquiring
branch offices. At March 31, 2002, we had eleven office locations, including our
main office. Subsequent to March 31, 2002, one branch office was closed, and two
new branch offices were opened in April and May 2002. Two additional new branch
offices are expected to open in the third quarter of 2002. We currently plan to
open four additional new branch locations over the next year. In addition to
expansion of our branch network through opening or acquiring branch offices, we
intend to actively consider the acquisition of local financial institutions as
part of expanding our banking operations. The consideration to be paid to the
stockholders of such institutions would be in the form of cash. It is uncertain
when or if these acquisitions would occur.
An investment in securities of funds received by either Synergy Financial
Group, Inc. or Synergy Bank would be in accordance with our normal investment
policies, as described under Business of Synergy Bank - Securities Portfolio on
page 58, which permit investment in various types of liquid assets, including
U.S. government and government agency obligations, securities of various federal
agencies and government- sponsored entities (including securities collateralized
by mortgages), certificates of deposits of insured banks and savings
institutions, municipal securities and corporate debt securities. At March 31,
2002, our securities portfolio consisted primarily of mortgage-backed securities
issued by the Government National Mortgage Association ("GNMA" or "Ginnie Mae"),
the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") and the
Federal National Mortgage Association ("FNMA" or "Fannie Mae"). At March 31,
2002, we had no U.S. government obligations.
If the employee stock ownership plan does not purchase common stock in the
offering, it may purchase shares of common stock in the market after the stock
offering. If the purchase price of the common stock is higher than $10 per
share, the amount of proceeds required for the purchase by the employee stock
ownership plan will increase and the resulting stockholders' equity will
decrease.
The net proceeds may vary significantly because total expenses of the stock
offering may be significantly more or less than those estimated. The net
proceeds will also vary if the number of shares to be issued in the stock
offering are adjusted to reflect a change in the estimated pro forma market
value of
14
Synergy Financial Group, Inc. and Synergy Bank. The net proceeds will also vary
if our employee stock ownership plan purchases shares in the open market at an
average cost that is higher or lower than $10.00 per share. Payments for shares
made through withdrawals from existing deposit accounts at Synergy Bank will not
result in the receipt of new funds for investment but will result in a reduction
of Synergy Bank's deposits and interest expense as funds are transferred from
interest-bearing certificates or other deposit accounts.
DIVIDEND POLICY
At this time, we do not plan to pay dividends in the immediate future on
the common stock of Synergy Financial Group, Inc. We will in the future consider
paying cash dividends, and the timing, amount and frequency would be determined
at that time by the Board of Directors of Synergy Financial Group, Inc. In
making its decision regarding the timing, frequency and initial annual amount of
any dividends, the Board of Directors will consider several factors, including:
financial condition; results of operations; tax considerations; alternative
investment opportunities available to us; industry standards; and general
economic conditions.
There can be no assurance that dividends will be paid on the stock or that,
if paid, dividends will not be reduced or eliminated in future periods.
Synergy Financial Group, Inc.'s ability to pay dividends also depends on
the receipt of dividends from Synergy Bank which is subject to a variety of
regulatory limitations on the payment of dividends. See Regulation - Regulation
of Synergy Bank - Dividend and Other Capital Distribution Limitations on page
69. Furthermore, as a condition to the OTS giving its authorization to conduct
the stock offering, Synergy Financial Group, Inc. has agreed that it will not
initiate any action within one year of completion of the stock offering in the
furtherance of payment of a special distribution or return of capital to
stockholders of Synergy Financial Group, Inc.
If Synergy Financial Group, Inc. pays dividends to its stockholders, it is
anticipated that dividends payable to Synergy, MHC would be waived. Under OTS
regulations, public stockholders would not be diluted for any dividends waived
by Synergy, MHC in the event that Synergy, MHC converts to stock form. See
Regulation - Regulation of Synergy Financial Group, Inc. on page 71.
MARKET FOR THE STOCK
Synergy Financial Group, Inc. has never issued capital stock. Consequently,
there is not, at this time, any market for the stock. Following the completion
of the offering, Synergy Financial Group, Inc. anticipates that its stock will
be traded on the over-the-counter market under the symbol "SFGI" with quotations
available through the OTC Electronic Bulletin Board. Synergy Financial Group,
Inc. expects that Trident Securities will use its best efforts to make a market
in the stock. Making a market may include the solicitation of potential buyers
and sellers in order to match buy and sell orders. However, Trident Securities
will not be obligated with respect to these efforts.
The development of an active trading market depends on the existence of
willing buyers and sellers. Due to the small size of the offering, it is highly
unlikely that an active trading market will develop and be maintained after the
offering. The relatively small amount of stock being issued to the public may
make it difficult to buy or sell our stock in the future. You could have
difficulty disposing of your shares and you should not view the shares as a
short term investment. You may not be able to sell your shares at a price equal
to or above the price you paid.
15
CAPITALIZATION
Set forth below is the historical capitalization as of March 31, 2002 and
the pro forma capitalization of Synergy Financial Group, Inc. after giving
effect to the offering. The table also gives affect to the assumptions set forth
under Pro Forma Data on page 17. A change in the number of shares sold in the
offering may affect materially the pro forma capitalization.
Pro Forma Capitalization at March 31, 2002
-----------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
935,000 1,100,000 1,265,000 1,454,750
Actual, at Shares at Shares at Shares at Shares at
March 31, $10.00 per $10.00 per $10.00 per $10.00 per
2002 share share share share (1)
---------- ----------- ---------- ---------- -----------
(In thousands)
Deposits(2)......................................... $276,762 $276,762 $276,762 $276,762 $276,762
Borrowed funds...................................... 41,500 41,500 41,500 41,500 41,500
-------- -------- -------- -------- --------
Total deposits and borrowed funds................... $318,262 $318,262 $318,262 $318,262 $318,262
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock, $0.10 par value, 2,000,000
shares authorized; none to be issued.............. $ - $ - $ - $ - $ -
Common stock, $0.10 par value, 18,000,000
shares authorized, assuming shares
outstanding as shown(3)........................... - 215 253 291 334
Additional paid-in capital(3)(4).................... 100 8,635 10,247 11,859 13,714
Retained earnings................................... 22,824 22,824 22,824 22,824 22,824
Accumulated other comprehensive gain (loss),
net of tax........................................ (285) (285) (285) (285) (285)
Less:
Common stock acquired by employee stock
ownership plan(5)............................... - (748) (880) (1,012) ^(1,164)
Common stock acquired by restricted stock plan(6). - (374) (440) (506) (582)
-------- -------- -------- -------- --------
Total stockholders' equity.......................... $ 22,639 $ 30,267 $ 31,719 $ 33,171 $ 34,841
======== ======== ======== ======== ========
__________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the independent valuation and a
commensurate increase in the offering range of up to 15% to reflect changes
in market and financial conditions.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
stock in the offering. Any withdrawals would reduce pro forma deposits by
an amount equal to the withdrawals.
(3) Includes shares held at March 31, 2002 by Synergy, MHC and shares to be
held by Synergy, MHC after completion of the stock offering. No effect has
been given to the issuance of additional shares of stock pursuant to any
stock option plan that may be adopted by Synergy Financial Group, Inc. and
presented for approval by the stockholders after the offering. An amount
equal to 10% of the shares of stock sold in the offering would be reserved
for issuance upon the exercise of options to be granted under the stock
option plan following the stock offering. See Management - Potential Stock
Benefit Plans - Stock Option Plan on page 79.
(4) Additional paid-in capital amounts under pro forma capitalization are net
of stock offering expenses. Actual capitalization at March 31, 2002
consists of the existing capitalization of Synergy Financial Group, Inc.
and this amount is also included under pro forma capitalization.
(5) Assumes that 8.0% of the shares sold in the offering will be purchased by
the employee stock ownership plan, and that the funds used to acquire the
employee stock ownership plan shares will be borrowed from Synergy
Financial Group, Inc. For an estimate of the impact of the loan on
earnings, see Pro Forma Data on page 17. Synergy Financial Group, Inc.
intends to make scheduled discretionary contributions to the employee stock
ownership plan sufficient to enable the plan to service and repay its debt
over a ten year period. The amount of shares to be acquired by the employee
stock ownership plan is reflected as a reduction of stockholders' equity.
See Management - Potential Stock Benefit Plans - Employee Stock Ownership
Plan on page 79. If the employee stock ownership plan is unable to purchase
stock in the stock offering due to an oversubscription in the offering by
eligible account holders having first priority, and the purchase price in
the open market is greater than the original $10.00 price per share, there
will be a corresponding reduction in stockholders' equity. See The Stock
Offering - Subscription Offering - Subscription Rights on page 83.
(6) Assumes that an amount equal to 4% of the shares of stock sold in the
offering is purchased by the restricted stock plan following the stock
offering. The stock purchased by the restricted stock plan is reflected as
a reduction of stockholders' equity. See footnote (2) to the table under
Pro Forma Data on page 17. See Management - Potential Stock Benefit Plans -
Restricted Stock Plan on page 80.
16
PRO FORMA DATA
The actual net proceeds from the sale of the stock cannot be determined
until the offering is completed. However, investable net proceeds to Synergy
Financial Group, Inc. are currently estimated to be between approximately $7.6
million and $10.5 million (or $12.2 million if the independent valuation is
increased by 15%) based on the following assumptions:
o an amount equal to the cost of purchasing 8% of the shares issued will
be loaned to the employee stock ownership plan to fund its purchase of
8% of the shares issued;
o an amount equal to 4% of the shares issued will be awarded pursuant to
the restricted stock plan adopted no sooner than six months following
the offering, funded through open market purchases; and
o expenses of the offering are estimated to be approximately $600,000.
We have prepared the following table, which sets forth our historical net
income and stockholders' equity prior to the offering and our pro forma
consolidated net income and stockholders' equity following the offering. In
preparing this table and in calculating pro forma data, we have made the
following assumptions:
o Pro forma earnings have been calculated assuming the stock had been
sold at the beginning of the period and the net proceeds had been
invested at an average yield of 2.7% for the three months ended March
31, 2002 and for the year ended December 31, 2001, respectively, which
approximates the yield on a one-year U.S. Treasury bill on March 31,
2002 and December 31, 2001. The yield on a one-year U.S. Treasury
bill, rather than an arithmetic average of the average yield on
interest-earning assets and the average rate paid on deposits, has
been used to estimate income on net proceeds because it is believed
that the one-year U.S. Treasury bill rate is a more accurate estimate
of the rate that would be obtained on an investment of net proceeds
from the offering.
o The pro forma after-tax yield on the net proceeds is assumed to be
1.73% for the three months ended March 31, 2002 and for the year ended
December 31, 2001, based on an effective tax rate of 36% for both
periods.
o We did not include any withdrawals from deposit accounts to purchase
shares in the offering.
o Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of
shares of stock, as adjusted in the pro forma net earnings per share
to give effect to the purchase of shares by the employee stock
ownership plan.
o Pro forma stockholders' equity amounts have been calculated as if the
stock had been sold on March 31, 2002 and December 31, 2001,
respectively, and no effect has been given to the assumed earnings
effect of the transactions.
The following pro forma data relies on the assumptions we outlined above,
and this data does not represent the fair market value of the common stock, the
current value of assets or liabilities, or the amount of money that would be
distributed to stockholders if we liquidated Synergy Financial Group, Inc. The
pro forma data does not predict how much we will earn in the future. You should
not use the following information to predict future results of operations.
17
The following table summarizes historical data and pro forma data of
Synergy Financial Group, Inc. at or for the three months ended March 31, 2002
based on the assumptions set forth above and in the table and should not be used
as a basis for projections of market value of the stock following the stock
offering. No effect has been given in the table to the possible issuance of
additional stock reserved for future issuance pursuant to a stock option plan
that may be adopted by the Board of Directors of Synergy Financial Group, Inc.
and approved by stockholders following the stock offering. See Management -
Potential Stock Benefit Plans - Stock Option Plan on page 79.
At or For the Three Months Ended March 31, 2002
------------------------------------------------------------------
$9,350,000 $11,000,000 $12,650,000 $14,547,500
Independent Independent Independent Independent
Valuation Valuation Valuation Valuation
---------- ------------ ------------ ------------
935,000 1,100,000 1,265,000 1,454,750
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
share share share share
---------- ------------ ------------ ------------
(Dollars in thousands, except per share amounts)
Gross proceeds............................................. $ 9,350 $ 11,000 $ 12,650 $ 14,548
Less expenses.............................................. (600) (600) (600) (600)
Estimated net proceeds.................................. 8,750 10,400 12,050 13,948
Less ESOP funded by Synergy Financial Group, Inc........... (748) (880) (1,012) (1,164)
Less restricted stock plan adjustment...................... (374) (440) (506) (582)
---------- ------------ ------------ ------------
Estimated investable net proceeds....................... $ 7,628 $ 9,080 $ 10,532 $ 12,202
========== ============ ============ ============
Net Income:
Historical ............................................. $ 509 $ 509 $ 509 $ 509
Pro forma income on net proceeds........................ 33 39 46 53
Pro forma ESOP adjustments(1)........................... (12) (14) (16) (19)
Pro forma restricted stock plan adjustment(2)........... (12) (14) (16) (19)
---------- ------------ ------------ ------------
Pro forma net income(1)(3)(4)........................... $ 518 $ 520 $ 523 $ 524
========== ============ ============ ============
Per share net income:
Historical ............................................. $ 0.25 $ 0.21 $ 0.18 $ 0.16
Pro forma income on net proceeds........................ 0.02 0.02 0.02 0.02
Pro forma ESOP adjustments(1)........................... (0.01) (0.01) (0.01) (0.01)
Pro forma restricted stock plan adjustment(2)........... (0.01) (0.01) (0.01) (0.01)
---------- ------------ ------------ ------------
Pro forma net income per share(1)(3)(4)................. $ 0.25 $ 0.21 $ 0.18 $ 0.16
========== ============ ============ ============
Shares used in calculation of income per share (1)......... 2,076,495 2,442,935 2,809,375 3,230,782
Stockholders' equity:
Historical ............................................. $ 22,639 $ 22,639 $ 22,639 $ 22,639
Estimated net proceeds.................................. 8,750 10,400 12,050 13,948
Less: Common Stock acquired by the ESOP(1).............. (748) (880) (1,012) (1,164)
Less: Common Stock acquired by the restricted stock
plan(2)........................................... (374) (440) (506) (582)
---------- ------------ ------------ ------------
Pro forma stockholders' equity(1)(3)(4)................. $ 30,267 $ 31,719 $ 33,171 $ 34,841
========== ============ ============ ============
Stockholders' equity per share:
Historical ............................................. $ 10.53 $ 8.95 $ 7.79 $ 6.77
Estimated net proceeds.................................. 4.07 4.11 4.14 4.17
Less: Common Stock acquired by the ESOP(1).............. (0.35) (0.35) (0.35) (0.35)
Less: Common stock acquired by the restricted stock
plan(2)........................................... (0.17) (0.17) (0.17) (0.17)
---------- ------------ ------------ ------------
Pro forma stockholders' equity per share(4)............. $ 14.08 $ 12.54 $ 11.41 $ 10.42
========== ============ ============ ============
Offering price as a percentage of pro forma
stockholders' equity per share........................... 71.02% 79.74% 87.64% 95.97%
========== ============ ============ ============
Offering price to pro forma net income per share........... 10.00 X 11.90X 13.89X 15.63X
========== ============ ============ ============
Shares used in calculation of stockholders'
equity per share........................................ 2,149,425 2,528,735 2,908,045 3,344,252
(Footnotes on following page)
18
__________________
(1) Assumes that 8% of the shares of stock sold in the offering will be
purchased by the employee stock ownership plan and that the plan will
borrow funds from Synergy Financial Group, Inc. The stock acquired by the
employee stock ownership plan is reflected as a reduction of stockholders'
equity. Synergy Financial Group, Inc. intends to make annual contributions
to the plan in an amount at least equal to the principal and interest
requirement of the loan. This table assumes a 10 year amortization period.
See Management - Potential Stock Benefit Plans - Employee Stock Ownership
Plan on page 79. The pro forma net earnings assumes: (i) that Synergy
Financial Group, Inc.'s contribution to the employee stock ownership plan
for the principal portion of the debt service requirement for the three
months ended March 31, 2002 was made at the end of the period; (ii) that
1,870, 2,200, 2,530 and 2,910 shares at the minimum, midpoint, maximum, and
15% above the maximum of the range, respectively, were committed to be
released during the three months ended March 31, 2002, at an average fair
value of $10.00 per share and were accounted for as a charge to expense in
accordance with Statement of Position ("SOP") No. 93-6; and (iii) only the
employee stock ownership plan shares committed to be released were
considered outstanding for purposes of the net earnings per share
calculations. All employee stock ownership plan shares were considered
outstanding for purposes of the stockholders' equity per share
calculations.
(2) Gives effect to the restricted stock plan that may be adopted by Synergy
Financial Group, Inc. following the stock offering and presented for
approval at a meeting of stockholders to be held after completion of the
stock offering. If the restricted stock plan is approved by the
stockholders, the restricted stock plan would be expected to acquire an
amount of stock equal to 4% of the shares of stock sold in the offering, or
37,400, 44,000, 50,600 and 58,200 shares of stock respectively at the
minimum, midpoint, maximum and 15% above the maximum of the range through
open market purchases. Funds used by the restricted stock plan to purchase
the shares will be contributed to the restricted stock plan by Synergy
Financial Group, Inc. In calculating the pro forma effect of the restricted
stock plan, it is assumed that the required stockholder approval has been
received, that the shares were acquired by the restricted stock plan at the
beginning of the three months ended March 31, 2002 through open market
purchases, at $10.00 per share, and that 20% of the amount contributed was
amortized to expense during the three months ended March 31, 2002. The
restricted stock plan will be amortized over 5 years. The issuance of
authorized but unissued shares of stock to the restricted stock plan
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.8% and pro forma net income per
share for the three months ended March 31, 2002 would be $0.25, $0.21,
$0.18 and $0.16 at the minimum, midpoint, maximum and 15% above the maximum
of the range, respectively, and pro forma stockholders' equity per share at
March 31, 2002 would be $13.84, $12.33, $11.21 and $10.24 at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively.
There can be no assurance that stockholder approval of the restricted stock
plan will be obtained, or the actual purchase price of the shares will be
equal to $10.00 per share. See Management - Potential Stock Benefit Plans -
Restricted Stock Plan on page 80.
(3) The retained earnings of Synergy Financial Group, Inc. and Synergy Bank
will continue to be substantially restricted after the stock offering. See
Dividend Policy on page 15 and Regulation - Regulation of Synergy Bank -
Dividends and Other Capital Distribution Limitations on page 69.
(4) No effect has been given to the issuance of additional shares of stock
pursuant to the stock option plan that may be adopted by Synergy Financial
Group, Inc. following the stock offering which, in turn, would be presented
for approval at a meeting of stockholders to be held after the completion
of the stock offering. If the stock option plan is presented and approved
by stockholders, an amount equal to 10% of the stock sold in the offering,
or 93,500, 110,000, 126,500 and 145,475 shares at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, will be
reserved for future issuance upon the exercise of options to be granted
under the stock option plan. The issuance of authorized but unissued shares
of stock to the stock option plan instead of open market purchases would
dilute the voting interests of existing stockholders by approximately 9.1%.
Assuming stockholder approval of the stock option plan and the exercise of
all options at the end of the period at an exercise price of $10.00 per
share, the pro forma net earnings per share would be $0.24, $0.20, $0.18
and $0.16, respectively at the minimum, midpoint, maximum and 15% above the
maximum of the range for the three months ended March 31, 2002; pro forma
stockholders' equity per share would be $13.91, $12.44, $11.35, and $10.40,
respectively at the minimum, midpoint, maximum and 15% above the maximum of
the range at March 31, 2002. See Management - Potential Stock Benefit Plans
- Stock Option Plan on page 79.
19
The following table summarizes historical data and pro forma data of
Synergy Financial Group, Inc. at or for the year ended December 31, 2001 based
on the assumptions set forth above and in the table and should not be used as a
basis for projections of market value of the stock following the stock offering.
No effect has been given in the table to the possible issuance of additional
stock reserved for future issuance pursuant to a stock option plan that may be
adopted by the Board of Directors of Synergy Financial Group, Inc. and approved
by stockholders following the stock offering. See Management - Potential Stock
Benefit Plans - Stock Option Plan on page 79.
At or For the Year Ended December 31, 2001
------------------------------------------------------------------
$9,350,000 $11,000,000 $12,650,000 $14,547,500
Independent Independent Independent Independent
Valuation Valuation Valuation Valuation
----------- ------------- -------------- --------------
935,000 1,100,000 1,265,000 1,454,750
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
share share share share
----------- ------------- -------------- --------------
(Dollars in thousands, except per share amounts)
Gross proceeds........................................... $ 9,350 $ 11,000 $ 12,650 $ 14,548
Less expenses............................................ (600) (600) (600) (600)
Estimated net proceeds................................ 8,750 10,400 12,050 13,948
Less ESOP funded by Synergy Financial Group, Inc......... (748) (880) (1,012) (1,164)
Less restricted stock plan adjustment.................... (374) (440) (506) (582)
----------- ------------- -------------- --------------
Estimated investable net proceeds..................... $ 7,628 $ 9,080 $ 10,532 $ 12,202
=========== ============= ============== ==============
Net Income:
Historical ........................................... $ 1,902 $ 1,902 $ 1,902 $ 1,902
Pro forma income on net proceeds...................... 132 157 182 211
Pro forma ESOP adjustments(1)......................... (48) (56) (65) (75)
Pro forma restricted stock plan adjustment(2)......... (48) (56) (65) (75)
----------- ------------- -------------- --------------
Pro forma net income(1)(3)(4)......................... $ 1,938 $ 1,947 $ 1,954 $ 1,963
=========== ============= ============== ==============
Per share net income:
Historical ........................................... $ 0. 91 $ 0.78 $ 0.68 $ 0.59
Pro forma income on net proceeds...................... 0.06 0.06 0.06 0.07
Pro forma ESOP adjustments(1)......................... (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan adjustment(2)......... (0.02) (0.02) (0.02) (0.02)
----------- ------------- -------------- --------------
Pro forma net income per share(1)(3)(4)............... $ 0.93 $ 0.80 $ 0.70 $ 0.62
=========== ============= ============== ==============
Shares used in calculation of income per share (1)....... 2,082,105 2,449,535 2,816,965 3,239,510
Stockholders' equity:
Historical ........................................... $ 22,390 $ 22,390 $ 22,390 $ 22,390
Estimated net proceeds................................ 8,750 10,400 12,050 13,948
Less: Common Stock acquired by the ESOP(1)............ (748) (880) (1,012) (1,164)
Less: Common Stock acquired by the restricted stock
plan(2)......................................... (374) (440) (506) (582)
----------- ------------- -------------- --------------
Pro forma stockholders' equity(1)(3)(4)............... $ 30,018 $ 31,470 $ 32,922 $ 34,592
=========== ============= ============== ==============
Stockholders' equity per share:
Historical ........................................... $ 10.42 $ 8.85 $ 7.70 $ 6.70
Estimated net proceeds................................ 4.07 4.11 4.14 4.17
Less: Common Stock acquired by the ESOP(1)............ (0.35) (0.35) (0.35) (0.35)
Less: Common stock acquired by the restricted stock
plan(2)......................................... (0.17) (0.17) (0.17) (0.17)
Pro forma stockholders' equity per share(4)........... $ 13.97 $ 12.44 $ 11.32 $ 10.35
----------- ------------- -------------- --------------
Offering price as a percentage of pro forma
stockholders' equity per share......................... 71.58% 80.39% 88.34% 96.62%
=========== ============= ============== ==============
Offering price to pro forma net income per share......... 10.75X 12.50X 14.29X 16.13X
=========== ============= ============== ==============
Shares used in calculation of stockholders' equity
per share.............................................. 2,149,425 2,528,735 2,908,045 3,344,252
(Footnotes on following page)
20
__________________
(1) Assumes that 8% of the shares of stock sold in the offering will be
purchased by the employee stock ownership plan and that the plan will
borrow funds from Synergy Financial Group, Inc. The stock acquired by the
employee stock ownership plan is reflected as a reduction of stockholders'
equity. Synergy Financial Group, Inc. intends to make annual contributions
to the plan in an amount at least equal to the principal and interest
requirement of the loan. This table assumes a 10 year amortization period.
See Management - Potential Stock Benefit Plans - Employee Stock Ownership
Plan on page 79. The pro forma net earnings assumes: (i) that Synergy
Financial Group, Inc.'s contribution to the employee stock ownership plan
for the principal portion of the debt service requirement for year ended
December 31, 2001 was made at the end of the period; (ii) that 7,480,
8,800, 10,120 and 11,640 shares at the minimum, midpoint, maximum, and 15%
above the maximum of the range, respectively, were committed to be released
during the year ended December 31, 2001, at an average fair value of $10.00
per share and were accounted for as a charge to expense in accordance with
Statement of Position ("SOP") No. 93-6; and (iii) only the employee stock
ownership plan shares committed to be released were considered outstanding
for purposes of the net earnings per share calculations. All employee stock
ownership plan shares were considered outstanding for purposes of the
stockholders' equity per share calculations.
(2) Gives effect to the restricted stock plan that may be adopted by Synergy
Financial Group, Inc. following the stock offering and presented for
approval at a meeting of stockholders to be held after completion of the
stock offering. If the restricted stock plan is approved by the
stockholders, the restricted stock plan would be expected to acquire an
amount of stock equal to 4% of the shares of stock sold in the offering, or
37,400, 44,000, 50,600 and 58,200 shares of stock respectively at the
minimum, midpoint, maximum and 15% above the maximum of the range through
open market purchases. Funds used by the restricted stock plan to purchase
the shares will be contributed to the restricted stock plan by Synergy
Financial Group, Inc. In calculating the pro forma effect of the restricted
stock plan, it is assumed that the required stockholder approval has been
received, that the shares were acquired by the restricted stock plan at the
beginning of the year ended December 31, 2001 through open market
purchases, at $10.00 per share, and that 20% of the amount contributed was
amortized to expense during the year ended December 31, 2001. The
restricted stock plan will be amortized over 5 years. The issuance of
authorized but unissued shares of stock to the restricted stock plan
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.8% and pro forma net income per
share for the year ended December 31, 2001 would be $0.92, $0.78, $0.68,
and $0.60, at the minimum, midpoint, maximum and 15% above the maximum of
the range, respectively, and pro forma stockholders' equity per share at
December 31, 2001 would be $13.73, $12.23, $11.13 and $10.17 at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that stockholder approval of the
restricted stock plan will be obtained, or the actual purchase price of the
shares will be equal to $10.00 per share. See Management - Potential Stock
Benefit Plans - Restricted Stock Plan on page 79.
(3) The retained earnings of Synergy Financial Group, Inc. and Synergy Bank
will continue to be substantially restricted after the stock offering. See
Dividend Policy on page 15 and Regulation - Regulation of Synergy Bank -
Dividends and Other Capital Distribution Limitations on page 69.
(4) No effect has been given to the issuance of additional shares of stock
pursuant to the stock option plan that may be adopted by Synergy Financial
Group, Inc. following the stock offering which, in turn, would be presented
for approval at a meeting of stockholders to be held after the completion
of the stock offering. If the stock option plan is presented and approved
by stockholders, an amount equal to 10% of the stock sold in the offering,
or 93,500, 110,000, 126,500 and 145,475 shares at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, will be
reserved for future issuance upon the exercise of options to be granted
under the stock option plan. The issuance of authorized but unissued shares
of stock to the stock option plan instead of open market purchases would
dilute the voting interests of existing stockholders by approximately 9.1%.
Assuming stockholder approval of the stock option plan and the exercise of
all options at the end of the period at an exercise price of $10.00 per
share, the pro forma net earnings per share would be $0.89, $0.76, $0.66
and $0.58, respectively at the minimum, midpoint, maximum and 15% above the
maximum of the range for the year ended December 31, 2001; pro forma
stockholders' equity per share would be $13.80, $12.34, $11.27, and $10.33,
respectively at the minimum, midpoint, maximum and 15% above the maximum of
the range at December 31, 2001. See Management - Potential Stock Benefit
Plans - Stock Option Plan on page 79.
21
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents Synergy Bank's historical and pro forma
capital position relative to its capital requirements as of March 31, 2002. Pro
forma capital levels assume receipt by Synergy Bank of at least 50% of the net
proceeds. For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see Use of Proceeds, Capitalization and Pro Forma
Data on pages 13, 16 and 17. The definitions of the terms used in the table are
those provided in the capital regulations issued by the OTS. For a discussion of
the capital standards applicable to Synergy Bank, see Regulation - Regulation of
Synergy Bank - Regulatory Capital Requirements on page 68.
Pro Forma at March 31, 2002
---------------------------------------------------------------------------------------
Actual, at $9,350,000 $11,000,000 $12,650,000 $14,547,500
March 31, 2002 Offering Offering Offering (1) Offering
-------------------- ---------------------------------------------------------------------------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
GAAP Capital(3)... $22,484 6.52% $26,859 7.69% $27,684 7.91% $28,509 8.13% $29,458 8.37%
Tangible Capital:
Actual or
Pro Forma..... $22,769 6.59% $27,144 7.76% $27,969 7.98% $28,794 8.20% $29,743 8.44%
Required........ 5,179 1.50 5,245 1.50 5,257 1.50 5,269 1.50 5,284 1.50
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess.......... $17,590 5.09% $21,899 6.26% $22,712 6.48% $23,525 6.70% $24,459 6.94%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Core Capital:
Actual or
Pro Forma..... $22,769 6.59% $27,144 7.76% $27,969 7.98% $28,794 8.20% $29,743 8.44%
Required(4)..... 10,358 3.00 10,489 3.00 10,514 3.00 10,539 3.00 10,567 3.00
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess.......... $12,411 3.59% $16,655 4.76% $17,455 4.98% $18,255 5.20% $19,176 5.44%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Risk-Based
Capital:
Actual or
Pro Forma
(5)(6)........ $24,387 10.76% $28,762 12.57% $29,587 12.90% $30,412 13.24% $31,361 13.62%
Required........ 18,135 8.00 18,310 8.00 18,343 8.00 18,376 8.00 18,414 8.00
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess.......... $ 6,252 2.76% $10,452 4.57% $11,244 4.90% $12,036 5.24% $12,947 5.62%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
_________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% as a
result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
offerings.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. The risk-based capital level is shown as a percentage of
risk-weighted assets.
(3) GAAP capital includes unrealized gain (loss) on available-for-sale
securities, net, which is not included as regulatory capital.
(4) The current OTS core capital requirement for savings banks is 3% of total
adjusted assets for thrifts that receive the highest supervisory rating for
safety and soundness and a 4% to 5% core capital ratio requirement for all
other thrifts. See Regulation - Regulation of Synergy Bank - Regulatory
Capital Requirements on page 68.
(5) Assumes net proceeds are invested in assets that carry a 50% risk-weighing.
(6) The difference between equity under GAAP and regulatory risk-based capital
is attributable to the subtraction of accumulated other comprehensive loss
of $285,000.
22
RECENT DEVELOPMENTS
The following financial information and other data in this section is
derived from Synergy Financial Group, Inc.'s unaudited consolidated financial
statements for the three and six month periods ended June 30, 2002 and 2001, and
should be read together with Synergy Financial Group, Inc.'s consolidated
financial statements and the notes thereto beginning on page F-2 of this
prospectus. In the opinion of management, all adjustments consisting of normal
recurring adjustments that are necessary for a fair presentation of the interim
periods have been reflected. The results of operations and other data presented
for the three and six month periods ended June 30, 2002 do not necessarily
indicate the results that may be expected for the fiscal year ending December
31, 2002.
Selected Financial Highlights
(Dollars in thousands)
Balance Sheet: At At
June 30, December 31,
2002 2001
---------- ------------
Assets............................... $371,391 $296,963
Loans receivable, net................ 290,235 224,689
Securities........................... 56,330 51,047
Cash and cash equivalents............ 3,825 3,708
Deposits............................. 301,735 249,813
FHLB advances........................ 43,200 22,500
Total equity......................... 23,873 22,390
Summary of Operations: For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------- ---------------------
2002 2001 2002 2001
-------- -------- --------- --------
Interest income............................................ $5,787 $4,665 $10,902 $9,091
Interest expense........................................... 2,140 2,404 4,119 4,538
Net interest income........................................ 3,647 2,261 6,783 4,553
Provision for loan losses.................................. 281 150 551 195
Net interest income after provision for loan losses........ 3,366 2,111 6,232 4,358
Other income............................................... 566 605 885 958
Operating expense.......................................... 2,979 2,327 5,389 4,565
Income before income tax expense........................... 953 389 1,728 751
Income tax expense......................................... 334 131 600 255
Net income................................................. 619 258 1,128 496
23
Selected Financial Ratios At or For the At or For the
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2002 2001 2002 2001
-------- ------ ------ ------
Performance Ratios (1):
Return on average assets (net income divided by
average total assets)................................... 0.69% 0.38% 0.66% 0.38%
Return on average equity (net income divided by
average equity)......................................... 10.64 4.96 9.82 4.78
Net interest rate spread................................... 4.28 3.40 4.20 3.54
Net interest margin on average interest-earning
assets.................................................. 4.32 3.48 4.24 3.68
Average interest-earning assets to average
interest-bearing liabilities............................ 101.25 103.52 101.64 103.77
Efficiency ratio (operating expenses divided
by the sum of net interest income and
other income)........................................... 70.70 81.20 70.28 82.84
Asset Quality Ratios:
Non-performing loans to total loans, net................... 0.04 0.09 0.04 0.09
Non-performing assets to total assets...................... 0.03 0.07 0.03 0.07
Net charge-offs to average loans outstanding............... 0.00 0.03 0.00 0.04
Allowance for loan losses to total loans................... 0.66 0.62 0.66 0.62
Capital Ratios:
Average equity to average assets ratios
(average equity divided by average total assets)........ 6.48 7.70 6.77 8.00
Equity to assets at period end............................. 6.43 7.54 6.43 7.54
________________
(1) Asset quality ratios and capital ratios are end of period ratios.
Performance ratios for the three and six month periods ended June 30, 2002
and 2001 are annualized, where appropriate.
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
Assets. Total assets increased $74.4 million, or 25.1%, to $371.4 million
at June 30, 2002 from approximately $297.0 million at December 31, 2001. The
increase in total assets resulted primarily from a $65.5 million increase in net
loans receivable and a $5.3 million increase in securities. The increase in
securities was due primarily to an increase in mortgage backed securities which
increased by $8.9 million, in connection with our strategies to conservatively
leverage capital and invest excess cash flow derived from financing activities.
The increase in loans primarily resulted from growth in the residential mortgage
loan, auto loan and non-residential mortgage loan portfolios of $47.1 million,
$14.1 million and $5.7 million, respectively.
Residential loans increased due to historically low interest rates
resulting in an increased volume of refinancing activity as well as promotional
efforts aimed at increasing the proportion of short to medium term home equity
loans to total loans in our portfolio. Auto loans increased due to a purchase of
$13.7 million of indirect auto loans from a local financial institution during
the quarter ended June 30, 2002.
24
Non-residential loans increased as a result of an effort to further diversify
the loan portfolio by promoting the product line.
Liabilities. Total liabilities increased $72.9 million, or 26.6% to $347.5
million at June 30, 2002 from $274.6 million at December 31, 2001. The increase
in total liabilities resulted primarily from an increase of $51.9 million in
deposits, of which $17.9 million was in core deposits, and a $20.7 million
increase in FHLB advances. The majority of the deposit growth consisted of an
increase in certificates of deposit, with terms predominantly in excess of one
year, which were offered at competitive rates to lock in prevailing low interest
rates. The increase in FHLB advances was to fund strong loan originations during
the quarter and for other investing activities. It is projected that the deposit
flow from existing and new branches will be used to pay down the intermediate
FHLB advances.
Equity. Total equity increased $1.5 million to $23.9 million at June 30,
2002 from $22.4 million at December 31, 2001. The increase in equity reflects
$1.1 million in net income for the six months ended June 30, 2002, and a net
increase in accumulated other comprehensive income of $355,000, attributable to
an unrealized gain on available-for-sale securities.
Comparison of Operating Results for Six Months Ended June 30, 2002 and 2001
Net Income. Net income increased by $632,000 to $1.1 million for the six
months ended June 30, 2002 compared to $496,000 for the same period in 2001, a
127% increase. The increase was attributable primarily to a $2.2 million
increase in net interest income, offset by a $356,000 increase in the provision
for loan losses, a $73,000 decrease in other income, an $824,000 increase in
operating expenses, and a $345,000 increase in income tax expense.
Net Interest Income. Net interest income grew $2.2 million, or 49.0% for
the six months ended June 30, 2002 compared to the same period in 2001. Total
interest income increased by $1.8 million to $10.9 million for the six months
ended June 30, 2002, while total interest expense fell by $419,000 to $4.1
million for the six months ended June 30, 2002.
The 19.9% increase in total interest income was primarily due to a $72.9
million, or 29.5%, increase in the average balance of interest-earning assets,
offset by a 54 basis point decrease in the average yield earned thereon. The
decrease in the average yield was primarily attributable to lower market
interest rates during the 2002 period, offset by a greater growth in the balance
of loans relative to the growth in securities which generally earn a lower
yield.
The 9.2% decrease in total interest expense resulted primarily from a 93
basis point decrease in the average cost of interest-bearing liabilities, offset
by a $76.7 million, or 32.2%, increase in the average balance of
interest-bearing liabilities. The decrease in the average cost of
interest-bearing liabilities is primarily attributable to our pricing strategies
and lower market interest rates in the 2002 period. The majority of the increase
in the average balance of liabilities for the 2002 period was comprised of a
$47.5 million increase in the average balance of certificates of deposit, the
cost of which was offset by a 196 basis point decline in the average cost
thereof.
Provision for Loan Losses. We maintain an allowance for loan losses through
provisions for loan losses which are charged to operations. The provision is
made to adjust the total allowance for loan losses to an amount that represents
management's best estimate of losses known and inherent in the loan portfolio at
the balance sheet date that are both probable and reasonable to estimate. In
estimating the known and inherent loan losses in the loan portfolio that are
both probable and reasonable to estimate, management
25
considers factors such as internal analysis of credit quality, general levels of
loan delinquencies, collateral values, Synergy Bank's historical loan loss
experience, changes in loan concentrations by loan category, peer group
information and economic and market trends affecting our market area. See
Business of Synergy Bank - Non-Performing Loans and Problem Assets - Allowance
for Loan Losses on page 54. The provision established for loan losses each month
reflects management's assessment of these factors in relation to the level of
the allowance at such time. Management's estimation did not change either in
estimation methods or assumptions during either period.
The provision for loan losses was $551,000 for the six months ended June
30, 2002 compared to $195,000 for the same period in 2001. We had net
charge-offs of $8,000 for the six months ended June 30, 2002 compared to net
charge-offs of $80,000 for the same period in 2001. The increase in the
provision for loan losses for the 2002 period as compared to the 2001 period
reflects a significant presence of less seasoned loans at June 30, 2002. The
total loan portfolio grew to $290.2 million at June 30, 2002 from $206.8 million
at June 30, 2001, representing a 40.3% increase. The growth in the loan
portfolio included a significant growth in non-residential loans, from 4.0% of
the portfolio at June 30, 2001 to 6.7% at June 30, 2002, and this change in loan
concentrations by loan category was also considered in management's loan loss
analysis and its decision to increase the provision for the 2002 period.
In addition, the $551,000 provision for the 2002 period reflects a $65.5
million, or 29.2%, increase in the loan portfolio between December 31, 2001 and
June 30, 2002, which includes a $5.7 million, or 41.5%, increase in
non-residential mortgage loans. Furthermore, during the second quarter the
institution acquired approximately $13.7 million of indirect auto loans from a
local financial institution. The loans acquired consisted of $9.9 million of
performing loans, $2.9 million of loans past due one to twenty-nine days and
$867,000 of loans past due thirty to fifty-nine days. Consequently, a higher
loan loss reserve percentage has been established on these purchased loans.
Our allowance for loan losses stood at $1.9 million at June 30, 2002
compared to $1.3 million at June 30, 2001. Management allocates the allowance to
various categories based on its assessment of the risk characteristics of each
loan category and the relative balances at month end of each loan category. The
allocation did not change materially from June 30, 2002 to June 30, 2001. See
Business of Synergy Bank - Non-Performing Loans and Problem Assets - Allowance
for Loan Losses on page 54, and - Allocation of Allowance for Loan Losses on
page 57.
Other Income. Other income, which is primarily composed of deposit account
fees, ATM fees, loan fees and service charges, decreased by $73,000 to $885,000
for the six months ended June 30, 2002 from $958,000 the same period in 2001.
The decrease was primarily due to a $170,000 decrease in commission fees from
Synergy Financial Group, Inc.'s wholly-owned subsidiary, Synergy Financial
Services, Inc., due to lower commissions from securities and insurance sales.
The decrease in commission fees was offset by an increase in gain on sales of
mortgages of $60,000 and settlement gains of $74,000 from the sale of the credit
card portfolio recognized in the quarter ended June 30, 2002. There was also a
$6,000 loss on the sale of a mortgage-backed security held as available for sale
in the 2002 period as compared to a $6,000 gain on the sale of a mortgage-backed
security held as available for sale in the 2001 period.
Operating Expenses. Operating expenses increased to $5.4 million for the
six months ended June 30, 2002, an $824,000 increase compared to the same period
in 2001. The increase resulted mostly from higher operating expenses associated
with two additional branch offices opened in the first half of 2002 and record
volume of loan originations during the period.
26
Historically, we have had a high level of operating expense because of the
large number of branch offices relative to our asset size. Synergy Bank
currently operates six on-site branch offices located on the corporate premises
of its former credit union sponsor. Although we do not compensate such company
for the use of this office space, higher personnel costs are needed to operate
these facilities along with our independent branch offices and main office.
We also expect increased expenses in the future as a result of the
establishment of the employee stock ownership plan, stock benefit plans, and
directors' retirement plan, as well as increased costs associated with being a
public company, such as periodic reporting, annual meeting materials, retention
of a transfer agent and professional fees.
Furthermore, we intend to expand our branch office network, and expenses
related to such expansion will impact earnings in future periods.
Income Tax Expense. Income tax expense increased by $345,000, or 135%,
during the six months ended June 30, 2002 as compared to the same period in
2001, reflecting higher income for the 2002 period.
27
SELECTED FINANCIAL AND OTHER DATA
The following financial information and other data in this section is
derived from Synergy Financial Group, Inc.'s audited consolidated financial
statements for the years ended December 31, 2001 and 2000 and unaudited
consolidated financial statements for the three months ended March 31, 2002 and
2001, and should be read together with Synergy Financial Group, Inc.'s
consolidated financial statements and the notes thereto beginning on page F-2 of
this prospectus. In the opinion of management, all adjustments consisting of
normal recurring adjustments that are necessary for a fair presentation of the
interim periods have been reflected.
Selected Financial Highlights
(Dollars in thousands)
Balance Sheet:
At March 31, At December 31,
2002 2001 2000
------------ ---------- ----------
Assets............................ $344,928 $296,963 $244,742
Loans receivable, net............. 261,434 224,689 189,098
Securities........................ 61,636 51,047 38,225
Cash and cash equivalents......... 1,942 3,708 6,139
Deposits.......................... 276,762 249,813 191,144
FHLB advances..................... 41,500 22,500 31,500
Total equity...................... 22,639 22,390 20,362
Summary of Operations:
For the Three
Months Ended For the Years Ended
March 31, December 31,
----------------------- ------------------------
2002 2001 2001 2000
-------- -------- --------- ---------
Interest income....................................... $5,115 $4,426 $18,954 $16,960
Interest expense...................................... 1,979 2,134 9,296 7,959
Net interest income................................... 3,136 2,292 9,658 9,001
Provision for loan losses............................. 270 45 363 480
Net interest income after provision for loan losses... 2,866 2,247 9,295 8,521
Other income.......................................... 319 427 2,632 1,930
Operating expense..................................... 2,410 2,315 9,001 8,209
Income before income tax expense...................... 775 359 2,926 2,242
Income tax expense.................................... 266 121 1,024 712
Net income............................................ 509 238 1,902 1,530
Actual number (not in thousands):
Loans............................................. 7,266 11,545 7,029(1) 11,345
Deposit accounts.................................. 40,888 41,595 41,566 42,177
Full service offices (2).......................... 11 11 11 11
________________
(1) The decrease in the number of loan accounts is primarily attributable to
the sale of the credit card portfolio in the fourth quarter of 2001, which
held 4,222 individual accounts.
(2) At March 31, 2002, we had eleven office locations, including our main
office. Subsequent to March 31, 2002, one branch office was closed, and two
new branch offices were opened in April and May 2002. Two additional new
branch offices are expected to open in the third quarter of 2002. We
currently plan to open four additional new branch locations over the next
year.
28
Selected Financial Ratios
At or For the At or For
Three Months Ended the Year Ended
March 31, December 31,
--------------------- ---------------------
2002 2001 2001 2000
------- ------ ------ ------
Performance Ratios (1):
Return on average assets (net income divided by
average total assets).................................. 0.63% 0.38% 0.69% 0.65%
Return on average equity (net income divided by
average equity)........................................ 9.00 4.61 8.95 7.52
Net interest rate spread.................................. 4.09 3.72 3.53 3.88
Net interest margin on average interest-earning
assets................................................. 4.15 3.88 3.67 4.03
Average interest-earning assets to average
interest-bearing liabilities........................... 102.24 104.43 104.17 104.37
Efficiency ratio (operating expenses divided
by the sum of net interest income and
other income).......................................... 69.77 85.15 73.24 75.10
Asset Quality Ratios:
Non-performing loans to total loans, net.................. 0.18 0.09 0.03 0.10
Non-performing assets to total assets..................... 0.14 0.06 0.02 0.08
Net charge-offs to average loans outstanding.............. 0.01 0.01 0.08 0.17
Allowance for loan losses to total loans.................. 0.62 0.63 0.61 0.62
Capital Ratios:
Average equity to average assets ratios
(average equity divided by average total assets)....... 7.03 8.31 7.70 8.12
Equity to assets at period end............................ 6.56 7.97 7.54 8.32
________________
(1) Asset quality ratios and capital ratios are end of period ratios.
Performance ratios for the three month periods ended March 31, 2002 and
2001 are annualized, where appropriate.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to provide assistance in understanding the consolidated
financial condition and results of operations of Synergy Financial Group, Inc.
The information in this section should be read with the consolidated financial
statements and the notes thereto beginning on page F-2.
Our results of operations are primarily dependent on our net interest
income. Net interest income is a function of the balances of loans and
investments outstanding in any one period, the yields earned on those loans and
investments and the interest paid on deposits and borrowed funds that were
outstanding in that same period. To a lesser extent, our results of operations
are also affected by the relative levels of our non-interest income and
operating expenses. Our non-interest income consists primarily of fees and
service charges, dividends on our Federal Home Loan Bank ("FHLB") of New York
stock, and gains on the sale of loans and investments. Our results of operations
are significantly impacted by the amount of provisions for loan losses which, in
turn, are dependent upon, among other things, the size and makeup of the loan
portfolio, loan quality and loan trends. The operating expenses consist
primarily of employee compensation and benefits, occupancy and equipment
expenses, data processing costs, marketing costs, professional fees, office
supplies, and telephone and postage costs. Our results of operations are
affected by general economic, regulatory and competitive conditions, including
changes in prevailing interest rates and the policies of regulatory agencies.
Forward-Looking Statements
This document contains statements that project our future operations, which
involve risks and uncertainties. Our actual results may differ significantly
from the results discussed in these forward- looking statements. Factors that
might cause a difference in results include, but are not limited to, those
discussed in "Risk Factors" beginning on page 8 of this document.
Business Strategy
Our business strategy has been to operate as a well-capitalized independent
financial institution dedicated to providing convenient access and quality
service at competitive prices. Generally, we have sought to implement this
strategy by maintaining a substantial part of our assets in loans secured by
one- to four-family residential real estate located in our market area and home
equity and consumer loans. During recent years, we have significantly increased
our origination of automobile loans and non- residential mortgage loans. To the
extent that new deposits have exceeded loan originations, we have invested these
deposits primarily in mortgage-backed securities.
We intend to continue to emphasize a variety of deposit and loan products,
with the latter consisting primarily of residential mortgages, non-residential
mortgages and consumer loans. We may use the proceeds of the offering to expand
our business beyond traditional retail banking to include other financial
services such as insurance products, as well as trust and asset management
services, either through internal development of such lines of business, third
party affiliations or through acquisitions. We intend to grow our branch office
network, which will expand our geographic reach. We do not, however, have any
current understandings, agreements or arrangements for the expansion of our
business, other than opening new branch office locations. Initially, we will
invest the proceeds in short term securities.
30
Synergy Bank converted its charter in May of 1998 from a credit union,
known as Synergy Federal Credit Union, to a federal savings bank. As a credit
union, Synergy Bank was primarily limited to serving employees of its former
credit union sponsor corporation and its operations consisted primarily of
accepting deposits and originating residential mortgages and consumer loans.
Since its conversion from a credit union, Synergy Bank has implemented a
strategy to grow into a full service financial institution offering a variety of
financial products to the general public. The highlights of this strategy
include the following:
o In May 1998, Synergy Bank had nine offices, including its main office,
eight of which were located on various corporate premises of its former
credit union sponsor corporation. Subsequent to its conversion to a federal
savings bank, Synergy Bank opened one additional branch office accessible
to the general public in each of the years 1998, 1999, and 2001. Subsequent
to March 31, 2002, the Bank opened two new branch offices in April and May
2002. Two additional branch offices are expected to open in the third
quarter of 2002 and four additional branch locations will open over the
next year in an expansion of its geographic reach.
o As a credit union, Synergy Bank's only source of funds was deposits from
members. As of December 31, 1997, the credit union had $158.8 million of
deposits. As a result of its conversion to a federal savings bank, Synergy
Bank is able to accept deposits from the general public and to obtain
borrowings from the FHLB. At March 31, 2002, Synergy Bank had $276.8
million of deposits and $41.5 million of FHLB borrowings.
o Synergy Bank has actively increased its volume of loan originations and the
size of its loan portfolios. It began to originate automobile loans through
an Internet source in late 1999 and began to originate non-residential
mortgage loans in 2000. As of March 31, 2002, Synergy Bank had total
automobile loans of approximately $53.2 million and total non-residential
mortgage loans of approximately $17.1 million. Automobile loans and
non-residential mortgage loans generally have higher interest rates and
shorter terms than residential mortgages.
o In order to enhance non-interest income, Synergy Financial Services, Inc.,
a subsidiary of Synergy Financial Group, Inc., began operations in 1998 for
the purpose of providing securities brokerage, insurance and investment
services and products, including mutual funds and annuities, to customers
of Synergy Bank and the general public. See Subsidiary Activity on page 65.
Analysis of Net Interest Income
Our earnings have historically been significantly affected by our net
interest income, which is the difference between interest income earned on loans
and investments ("interest-earning assets") and interest paid on deposits and
any borrowed funds ("interest-bearing liabilities"). Net interest income is
affected by (a) the difference between rates of interest earned on our
interest-earning assets and rates paid on our interest-bearing liabilities
("interest rate spread") and (b) the relative amounts of our interest-earnings
assets and interest-bearing liabilities.
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of our assets and liabilities
are sensitive to changes in interest rates, a significant form of market risk
for us is interest rate risk, or changes in interest rates. We are vulnerable to
an increase in interest rates to the extent that interest-bearing liabilities
mature or reprice more rapidly than interest-earning assets. Our assets include
long-term, fixed rate loans and
31
investments, while our primary source of funds is deposits with substantially
shorter maturities. Although having interest-bearing liabilities that reprice
more frequently than interest-earnings assets is generally beneficial to net
interest income during a period of declining interest rates, this type of an
asset/liability mismatch is generally detrimental during periods of rising
interest rates.
The Board of Directors has established a Budget and Asset/Liability
Management Committee which consists of Directors Putvinski (Chairman), De Perez,
Fiore, Scott and Stender. The Committee meets generally during October and
November each year with the goal of developing an annual business and operating
plan for presentation to the full Board at the regular November meeting. In
addition, at least one non-employee member of the Committee meets monthly with
management to review current investments; average lives, durations and repricing
frequencies of loans and securities; loan and deposit pricing and production
volumes and alternative funding sources; interest rate risk analysis; liquidity
and borrowing needs; and a variety of other assets and liability management
topics. The results of the monthly meetings of the committee are reported to the
full Board at its regular monthly meeting.
To reduce the effect of interest rate changes on net interest income, we
have adopted various strategies to enable us to improve the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
main elements of these strategies include seeking to:
o market consumer loan type products and originate loans with adjustable rate
features or fixed rate loans with short maturities;
o lengthen the maturities of our liabilities when it would be cost effective
through the aggressive pricing and promotion of certificates of deposit and
utilization of FHLB advances;
o attract low cost checking and transaction accounts which tend to be less
interest rate sensitive; and
o purchase intermediate securities and maintain a securities portfolio that
provides a stable cash flow, thereby providing investable funds in varying
interest rate cycles.
We have made a significant effort to maintain our level of lower cost
deposits as a method of enhancing profitability. At March 31, 2002, we had
approximately 51% of deposits in lower cost savings and checking accounts. These
deposits have traditionally remained relatively stable and are expected to be
only moderately affected in periods of rising interest rates.
Quantitative Analysis. Exposure to interest rate risk is actively monitored
by management. The Bank's objective is to maintain a consistent level of
profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Bank uses the OTS Net Portfolio Value
("NPV") Model to monitor its exposure to interest rate risk which calculates
changes in net portfolio value. Reports generated from assumptions provided and
modified by management are reviewed by the Asset/Liability Management Committee
and reported to the Board of Directors quarterly. The Interest Rate Sensitivity
of Net Portfolio Value Report shows the degree to which balance sheet line items
and net portfolio value are potentially affected by a 100 to 300 basis point
(1/100th of a percentage point) upward and downward shift (shock) in the
Treasury yield curve.
The following table presents Synergy Bank's NPV as of March 31, 2002. The
NPV was calculated by the OTS, based on information provided by Synergy Bank.
32
Net Portfolio Value NPV as % of Present Value of Assets
---------------------- -----------------------------------
Changes in Basis Point
Rates $ Amount $ Change % Change NPV Ratio Change
- ----------- --------- --------- -------- --------- -----------
(Dollars in thousands)
+300 bp 19,587 - 17,336 - 47% 5.78% - 446 bp
+200 bp 24,865 - 12,058 - 33% 7.20% - 304 bp
+100 bp 30,571 - 6,352 - 17% 8.67% - 157 bp
0 bp 36,923 10.24%
- -100 bp 39,883 2,959 + 8% 10.92% + 68 bp
- -200 bp(1) - 0 0% 0% 0 bp
- -300 bp(1) - 0 0% 0% 0 bp
__________
(1) The -200bp and -300bp scenarios are not shown due to the low prevailing
interest rate environment.
Future interest rates or their effect on NPV or net interest income are not
predictable. Nevertheless, Synergy Bank's management does not expect current
interest rates to have a material adverse effect on Synergy Bank's NPV or net
interest income in the near future. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in this type of computation. Although certain assets and
liabilities may have similar maturity or periods of repricing, they may react at
different times and in different degrees to changes in the market interest
rates. The interest rate on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while rates on other
types of assets and liabilities may lag behind changes in market interest rates.
Certain assets such as adjustable rate mortgages, generally have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In the event of a change in interest rates, prepayments and early
withdrawal levels could deviate significantly from those assumed in making
calculations set forth above. Additionally, an increased credit risk may result
as the ability of many borrowers to service their debt may decrease in the event
of an interest rate increase.
Comparison of Financial Condition at March 31, 2002 and December 31, 2001
Assets. Total assets increased $47.9 million, or 16.1%, to $344.9 million
at March 31, 2002 from approximately $297.0 million at December 31, 2001. The
increase in total assets resulted primarily from a $36.7 million increase in net
loans receivable and a $10.6 million increase in securities. The increase in
loans primarily resulted from growth in the residential and non-residential
mortgage portfolios of $33.1 million and $3.3 million, respectively.
The increase in residential loans is attributable to a combination of
factors: historically low interest rates leading to an increased volume of
refinancing activity and promotional efforts aimed at increasing the proportion
of short to medium term home equity loans to total loans in our portfolio. The
increase in non-residential loans is primarily due to our effort to further
diversify the loan portfolio utilizing experienced senior loan officers and
business development specialists who focus on promoting the product
33
line. Finally, growth in the loan portfolio is also due to increased referrals
from both new borrowers and attorneys.
The increase in securities was due primarily to an increase in FNMA
mortgage backed securities and CMO/REMIC securities, which increased by $6.2
million, or 30.5%, and $3.7 million, or 25%, respectively. The increases in FNMA
mortgage backed securities and CMO/REMIC securities resulted from our strategies
to conservatively leverage capital and invest excess liquidity derived from cash
flows.
Liabilities. Total liabilities increased $47.7 million, or 17.4%, to $322.3
million at March 31, 2002 from $274.6 million at December 31, 2001. The increase
in total liabilities resulted primarily from an increase of $26.9 million in
deposits and a $19.0 million increase in FHLB advances. The majority of the
deposit growth consisted of an increase in certificates of deposit, with terms
predominantly in excess of one year, which were offered at competitive rates to
lock in prevailing low interest rates. The increase in FHLB advances was to fund
strong loan originations during the quarter and in anticipation of opening new
offices. It is projected that the deposit flow from existing and new branches
will be used to pay down the intermediate FHLB advances.
Equity. Total equity increased $249,000 to $22.6 million at March 31, 2002
from $22.4 million at December 31, 2001. The increase in equity reflects
$509,000 in net income for the three months ended March 31, 2002, offset by a
net increase in accumulated other comprehensive loss of $260,000, attributable
to a $406,000 increase in unrealized loss on available-for-sale securities.
Comparison of Financial Condition at December 31, 2001 and 2000
Assets. Total assets increased $52.3 million, or 21.3%, to $297.0 million
at December 31, 2001 from $244.7 million at December 31, 2000. The increase was
primarily attributable to a $35.6 million increase in net loans receivable, and
a $12.8 million increase in securities, partially offset by a $2.4 million
decrease in cash and cash equivalents. The increase in loans receivable at
December 31, 2001 resulted primarily from a $25.3 million increase in
residential loans and a $13.5 million increase in non-residential mortgage
loans.
The increase in residential loans is attributable to a combination of
factors: historically low interest rates leading to an increased volume of
refinancing activity and promotional efforts aimed at increasing the proportion
of short to medium term home equity loans to total loans in our portfolio. The
increase in non-residential loans is primarily due to our effort to further
diversify the loan portfolio utilizing experienced senior loan officers and
business development specialists who focus on promoting the product line.
Finally, growth in the loan portfolio is also due to increased referrals from
both new borrowers and attorneys.
The increase in securities was due primarily to an increase in FNMA
mortgage backed securities and CMO/REMIC securities, which increased by $11.3
million, or 170%, and $4.5 million, or 41%, respectively. The increases in FNMA
mortgage backed securities and CMO/REMIC securities resulted from our strategies
to conservatively leverage capital and invest excess liquidity derived from cash
flows.
Liabilities. Total liabilities increased $50.2 million, or 22.4%, to $274.6
million at December 31, 2001 from $224.4 million at December 31, 2000. The
increase in total liabilities was primarily attributable to a $58.7 million
increase in deposits, partially offset by a $9.0 million decrease in FHLB
advances. The majority of the deposit growth at December 31, 2001 was
attributable to a $46 million increase in certificates of deposit from $75.0
million at December 31, 2000 to $121 million for the same period in
34
2001. The increase in certificates of deposit, with terms predominantly in
excess of one year, resulted from an effort to offer competitive rates to lock
in prevailing low interest rates.
Equity. Stockholders' equity increased $2.0 million to $22.4 million at
December 31, 2001 from $20.4 million for the same period in 2000. The increase
in stockholders' equity reflects net income of $1.9 million for 2001 along with
a $227,000 improvement in accumulated other comprehensive loss.
Liquidity and Capital Resources
We maintain liquid assets at levels we consider adequate to meet liquidity
needs. The liquidity of a savings institution reflects its ability to provide
funds to meet loan requests, accommodate possible outflows in deposits, fund
current and planned expenditures and take advantage of interest rate market
opportunities in connection with asset and liability management objectives.
Funding of loan requests, providing for liability outflows, and management of
interest rate fluctuations require continuous analysis in order to match the
maturities of earning assets with specific types of deposits and borrowings.
Savings institution liquidity is normally considered in terms of the nature and
mix of the savings institution's sources and uses of funds.
Our primary sources of liquidity are deposits, scheduled amortization and
prepayment of loans and mortgage-backed securities. In addition, we invest
excess funds in overnight federal funds investments, which provide liquidity.
Our cash and cash equivalents, defined as cash and deposits in other financial
institutions with original maturities of three months or less, totaled
approximately $1.9 million at March 31, 2002. To a lesser extent, the earnings
and funds provided from our operating activities are a source of liquidity.
For the three months ended March 31, 2002, purchases of securities totaled
approximately $20.0 million, proceeds from sales of mortgage-backed securities
totaled $2.0 million and principal repayments of mortgage-backed securities
totaled approximately $6.9 million.
Loan originations, net of principal repayments, totaled approximately $37.5
million for the three months ended March 31, 2002. There were no loan purchases.
Loan sales totaled approximately $500,000.
For the year ended December 31, 2001, purchases of securities totaled
approximately $42.9 million, proceeds from sales of mortgage-backed securities
totaled $1.0 million, maturities and principal repayments of investment
securities totaled approximately $14.5 million, and principal repayments of
mortgage-backed securities totaled approximately $14.8 million.
Loan originations, net of principal repayments, totaled approximately $48.3
million for the year ended December 31, 2001. Loan purchases totaled
approximately $4.0 million. Loan sales totaled approximately $17.4 million, of
which $6.2 million pertained to the sale of the credit card portfolio. The sale
of mortgage loans is part of management's strategy to mitigate interest rate
risk. Management also offers loan participations to local financial institutions
to mitigate credit risk exposure on larger credits primarily secured by
multi-family properties and non-residential properties. Approximately $9.3
million of the loan sales during 2001 consisted of residential mortgages, $8.6
million of which were 30 year fixed- rate loans. We may continue to sell loans
in the future when doing so will mitigate interest rate risk.
For the year ended December 31, 2001, we experienced a net increase of
deposits of approximately $58.7 million, as compared to a net increase of
approximately $10.2 million for the prior
35
year. At March 31, 2002, certificates of deposit of $100,000 or more scheduled
to mature in less than one year totaled approximately $16.1 million. Based on
prior experience, management believes that a significant portion of such
deposits will remain with Synergy Bank upon maturity, although there can be no
assurance that this will be the case. In addition, the cost of such deposits may
be significantly higher upon renewal in a rising interest rate environment.
Liquidity management is both a daily and long-term function of business
management. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. If we require funds beyond our ability to generate
them internally, we have the ability to obtain advances from the Federal Home
Loan Bank of New York, which provides an additional source of funds. At March
31, 2002, our borrowing limit with the Federal Home Loan Bank of New York was
approximately $88.1 million. See Business of Synergy Bank - Sources of Funds -
Borrowings on page 64. At March 31, 2002, we had $41.5 million of borrowings
outstanding.
Synergy Bank is subject to federal regulations that impose minimum capital
requirements. For a discussion on these capital levels, see Historical and Pro
Forma Capital Compliance on page 22 and Regulation - Regulation of Synergy Bank
- - Regulatory Capital Requirements on page 68.
We are not aware of any trends, events or uncertainties that will have or
are reasonably likely to have a material effect on our liquidity, capital or
operations nor are we aware of any current recommendation by regulatory
authorities, which, if implemented, would have a material effect on liquidity,
capital or operations. The total amount of our commitments to extend credit for
mortgage and consumer loans as of March 31, 2002, was approximately $28.1
million, excluding commitments on unused lines of credit which totaled
approximately $9.7 million.
For additional information about cash flows from our operating, financing,
and investing activities, see the statements of cash flows included in the
consolidated financial statements beginning on page F-2.
Comparison of Operating Results for Three Months Ended March 31, 2002 and 2001
Net Income. Net income increased by $271,000 to $509,000 for the three
months ended March 31, 2002 compared to the same period in 2001, a nearly 114%
increase. The increase was attributable primarily to an $843,000 increase in net
interest income, offset by a $225,000 increase in the provision for loan losses,
a $108,000 decrease in other income, and a $95,000 increase in operating
expenses.
Net Interest Income. Net interest income grew $843,000 or 36.8% for the
three months ended March 31, 2002 compared to the same period in 2001. Total
interest income increased by $688,000 to $5.1 million for the three months ended
March 31, 2002, while total interest expense fell by $155,000 to $2.0 million
for the three months ended March 31, 2002.
The 15.6% increase in total interest income was primarily due to a $66.3
million, or 28.1%, increase in the average balance of interest-earning assets,
offset by a 73 basis point decrease in the average yield earned thereon.
The 7.2% decrease in total interest expense resulted primarily from a 110
basis point decrease in the average cost of interest-bearing liabilities, offset
by a $69.6 million, or 30.8%, increase in the average balance of
interest-bearing liabilities. The decrease in the average cost of
interest-bearing liabilities reflects lower market interest rates in the 2002
period. The majority of the increase in the average balance
36
of liabilities for the 2002 period was comprised of a $47.5 million increase in
the average balance of certificates of deposit, on which the average cost
declined 182 basis points.
Provision for Loan Losses. We maintain an allowance for loan losses through
provisions for loan losses which are charged to operations. The provision is
made to adjust the total allowance for loan losses to an amount that represents
management's best estimate of losses known and inherent in the loan portfolio at
the balance sheet date that are both probable and reasonable to estimate. In
estimating the known and inherent loan losses in the loan portfolio that are
both probable and reasonable to estimate, management considers factors such as
internal analysis of credit quality, general levels of loan delinquencies,
collateral values, Synergy Bank's historical loan loss experience, changes in
loan concentrations by loan category, peer group information and economic and
market trends affecting our market area. See Business of Synergy Bank -
Non-Performing Loans and Problem Assets - Allowance for Loan Losses on page 54.
The provision established for loan losses each month reflects management's
assessment of these factors in relation to the level of the allowance at such
time. Management's estimation did not change either in estimation methods or
assumptions during either period.
The provision for loan losses was $270,000 for the three months ended March
31, 2002 and $45,000 for the same period in 2001. We had net charge-offs of
$24,000 for the three months ended March 31, 2002 compared to net charge-offs of
$28,000 for the same period in 2001. The increase in the provision for loan
losses for the 2002 period as compared to the 2001 period reflects a significant
presence of less seasoned loans at March 31, 2002. The total loan portfolio grew
to $263.1 million from $188.6 million at March 31, 2001, representing a 39.5%
increase. A larger loan portfolio resulted in a greater amount of known and
inherent loan losses in the loan portfolio that are both probable and reasonable
to estimate, as well as a greater volume of non-performing loans and delinquent
loans. The growth in the loan portfolio included a significant growth in
non-residential loans, from 1.5% of the portfolio at March 31, 2001 to 6.5% at
March 31, 2002, and this change in loan concentrations by loan category
contributed to the increase in the provision for loan losses for the 2002
period.
In addition, the $270,000 provision for the 2002 period reflects a $36.7
million, or 16.4%, increase in the loan portfolio between December 31, 2001 and
March 31, 2002, which includes a $3.3 million, or 24.3%, increase in
non-residential mortgage loans. The amount of the provision also reflects the
increase in non-performing loans from $71,000 at December 31, 2001 to $449,000
at March 31, 2002, an increase of more than 500%. Excluding one non-residential
mortgage loan in the amount of $345,000 that was fully repaid subsequent to
March 31, 2002, non-performing loans increased 46.5% during the quarter ended
March 31, 2002. This factor was also considered when making the $270,000
provision.
Our allowance for loan losses stood at $1.6 million at March 31, 2002
compared to $1.2 million at March 31, 2001. Management allocates the allowance
to various categories based on its assessment of the risk characteristics of
each loan category and the relative balances at month end of each loan category.
The allocation did not change materially from March 31, 2002 to March 31, 2001.
See Business of Synergy Bank - Non-Performing Loans and Problem Assets -
Allowance for Loan Losses on page 54, and - Allocation of Allowance for Loan
Losses on page 57.
Other Income. Other income, which is primarily composed of deposit account
fees, ATM fees, loan fees, service charges and commission fees, decreased by
$108,000 to $319,000 for the three months ended March 31, 2002 from $427,000 the
same period in 2001. The decrease was primarily due to a $70,000 decrease in
commission fees from Synergy Financial Group, Inc.'s wholly-owned subsidiary,
Synergy Financial Services, Inc., due to lower commissions from securities and
insurance sales. In addition, loan servicing fees and dividends on FHLB stock
decreased by $22,000 and $17,000,
37
respectively, and there was a $6,000 loss on the sale of a mortgage-backed
security held as available for sale in the 2002 period, but not present in the
2001 period.
Operating Expenses. Operating expenses increased to $2.4 million for the
three months ended March 31, 2002, a $95,000 increase compared to the same
period in 2001. The increase resulted mostly from an $81,000 increase in loan
servicing expenses associated with the management of a larger loan portfolio
during the 2002 period.
We expect increased expenses in the future as a result of the establishment
of the employee stock ownership plan, potential stock benefit plans, and
directors' retirement plan, as well as increased costs associated with being a
public company such as periodic reporting, annual meeting materials, retention
of a transfer agent, and professional fees.
Furthermore, we intend to expand our branch office network, and expenses
related to such expansion will impact earnings in future periods.
Income Tax Expense. Income tax expense increased by $145,000, or 120%,
during the three months ended March 31, 2002 as compared to the same period in
2001, reflecting higher income for the 2002 period.
Comparison of Operating Results for Years Ended December 31, 2001 and 2000
Net Income. Net income for 2001 increased $371,000 to $1.9 million compared
to net income of $1.5 million for 2000. This increase was primarily attributable
to a $656,000 increase in net interest income, a $703,000 increase in other
income, and a $117,000 decrease in the provision for loan losses, partially
offset by a $792,000 increase in operating expenses and a $312,000 increase in
income tax expense.
Net Interest Income. Net interest income increased by $656,000, or 7.3%, to
$9.7 million for 2001 compared to $9.0 million for 2000. This increase was
attributable to a $2.0 million increase in total interest income, partially
offset by a $1.3 million increase in interest expense.
Total interest income increased by 11.8% to $19.0 million for 2001 compared
to $17.0 million for 2000 as a result of a $40.0 million increase in the average
balance of interest-earning assets, consisting of a $28.0 million, or 15.6%,
increase in the average balance of loans and a $12.0 million, or 27.1%, increase
in the average balance of securities. Interest income on loans increased by $1.7
million, reflecting the increase in the average balance of loans, offset by a
decrease in the average yield thereon of 25 basis points, from 7.97% for 2000 to
7.72% for 2001. Interest income on securities increased by $265,000, or 9.8%,
for 2001, reflecting the increase in the average balance of securities, offset
by a decrease in the average yield thereon of 83 basis points, from 6.11% for
2000 to 5.28% for 2001.
Total interest expense increased by 16.8%, to $9.3 million in 2001,
primarily as a result of a $38.8 million increase in the average balance of
interest-bearing liabilities to $252.5 million for 2001 as compared to $213.7
million for 2000. The majority of this increase was in certificates of deposit,
the average balance of which increased by 52.4%. The average cost of total
interest-bearing liabilities fell 4 basis points to 3.68% for 2001 as compared
to 3.72% for 2000, with the decrease primarily attributable to a 59 basis point
decrease in the average rate paid on FHLB advances.
38
Provision for Loan Losses. We maintain an allowance for loan losses through
provisions for loan losses which are charged to operations. The provision is
made to adjust the total allowance for loan losses to an amount that represents
management's best estimate of losses known and inherent in the loan portfolio at
the balance sheet date that are both probable and reasonable to estimate. In
estimating the known and inherent loan losses in the loan portfolio that are
both probable and reasonable to estimate, management considers factors such as
internal analysis of credit quality, general levels of loan delinquencies,
collateral values, Synergy Bank's historical loan loss experience, changes in
loan concentrations by loan category, peer group information and economic and
market trends affecting our market area. See Business of Synergy Bank -
Non-Performing Loans and Problem Assets - Allowance for Loan Losses on page 54.
The provision established for loan losses each month reflects management's
assessment of these factors in relation to the level of the allowance at such
time. Management's estimation did not change either in estimation methods or
assumptions during either period.
The provision for loan losses was $363,000 for the year ended December 31,
2001 and $480,000 for the same period in 2000. We had net charge-offs of
$167,000 for the year ended December 31, 2001 compared to net charge-offs of
$299,000 for the same period in 2000. The major changes in the loan portfolio
during 2001 were an increase in loans secured by real estate from 68% of total
loans at December 31, 2000 to 74% at December 31, 2001 and a drop in our
unsecured loan portfolio from 8.2% of total loans at December 31, 2000 to 2.7%
at December 31, 2001 resulting from the sale of the credit card portfolio.
Our allowance for loan losses stood at $1.4 million at December 31, 2001
compared to $1.2 million at December 31, 2000. Management allocates the
allowance to various categories based on its assessment of the risk
characteristics of each loan category and the relative balances at month end of
each loan category. The allocation did not change materially from December 31,
2001 to December 31, 2000. See Business of Synergy Bank - Non-Performing Loans
and Problem Assets - Allowance for Loan Losses on page 54 and - Allocation of
Allowance for Loan Losses on page 57.
Other Income. Other income, which is primarily composed of deposit account
fees, ATM fees, loan fees, service charges and commission fees, increased
$703,000 to $2.6 million for 2001 from $1.9 million for 2000, primarily
attributable to the gain on the sale of loans of $888,000 comprised mostly of
the sale of the credit card portfolio, partially offset by a $345,000 decrease
in commissions on securities and insurance sales through Synergy Financial
Group, Inc.'s wholly-owned subsidiary, Synergy Financial Services, Inc. Other
income for 2001 also includes $274,000 in loan servicing fees for 2001 as
compared to $256,000 for 2000, and a $5,000 gain in 2001 on the sale of a
mortgage-backed security held as available for sale.
Operating Expense. Operating expense increased $792,000, or 9.7%, to $9.0
million for 2001 compared to $8.2 million for 2000. This increase was primarily
due to a $425,000, or 9.6%, increase in compensation and employee benefits and a
$385,000, or 13.8%, increase in office operation and office occupancy expenses
due primarily to the opening of one new branch and the costs associated with
renovating our main office.
Historically, we have had a high level of operating expense because of the
large number of branch offices relative to our asset size. Synergy Bank
currently operates six on-site branch offices located on the corporate premises
of its former credit union sponsor. Although we do not compensate such company
for the use of this office space, higher personnel costs are needed to operate
these facilities along with our independent branch offices and main office.
39
We also expect increased expenses in the future as a result of the
establishment of the employee stock ownership plan, stock benefit plans, and
directors' retirement plan, as well as increased costs associated with being a
public company, such as periodic reporting, annual meeting materials, retention
of a transfer agent and professional fees.
Provision for Income Taxes. Income tax expense increased by $312,000, or
43.9%, to $1.0 million for 2001 compared to $712,000 for 2000, reflecting higher
income for 2001.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations,
effective for all business combinations initiated after June 30, 2001, as well
as all business combinations accounted for by the purchase method that are
completed after June 30, 2001. The new statement requires that the purchase
method of accounting be used for all business combinations and prohibits the use
of the pooling-of-interests method. The adoption of Statement No. 141 is not
expected to have a material effect on our financial position or results of
operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. The new statement changes the accounting for
goodwill from an amortization method to an impairment-only approach. Thus,
amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement. The adoption of
Statement No. 142 is not expected to have a material effect on our financial
position or results of operations.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, effective for fiscal years beginning after June 15,
2002. This statement requires entities to record the fair value of a liability
for an asset retirement obligation ("ARO") in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The adoption of
Statement No. 143 is not expected to have a material effect on our financial
position or results of operations.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment of Long- Lived Assets, effective for fiscal years beginning after
December 15, 2001. This statement replaces FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. The primary objectives of this project were to develop one accounting model
for long-lived assets to be disposed of by sale and to address significant
implementation issues using the framework established in Statement of Financial
Accounting Standards ("SFAS") No. 121. The adoption of Statement No. 144 is not
expected to have a material effect on our financial position or results of
operations.
In April 2002, the FASB issued Statement No. 145, Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends FASB Statement No.
13, Accounting for Leases, to eliminate an inconsistency
40
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. Most
of the provisions of this Statement must be applied to financial statements
issued on or after May 15, 2002, except for certain provisions related to
Statement 13, which are effective for transactions occurring after May 15, 2002,
with early application encouraged. The adoption of Statement No. 145 is not
expected to have a material effect on our financial position or results of
operations.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying notes presented
elsewhere in this document have been prepared in accordance with generally
accepted accounting principles which generally require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. As a result, interest rates have a greater impact on our
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction, or to the same extent, as prices
of goods and services.
41
Average Balance Sheet. The following tables set forth certain information
at March 31, 2002 and for the three months ended March 31, 2002 and 2001 and for
the years ended December 31, 2001, 2000 and 1999. The average yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived primarily from month- end balances. Management does not believe that the
use of month-end balances instead of daily average balances has caused any
material differences in the information presented. The table does not include
the allowance for loan losses in the average balances of loans receivable.
Management does not believe that this causes any material differences in the
information presented.
For the Three Months Ended March 31,
At March 31, -----------------------------------------------------------------
2002 2002 2001
------------------- -----------------------------------------------------------------
Average Average Average Average
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1).............. $261,434 7.11% $243,767 $4,341 7.12 % $189,471 $3,780 7.98%
Securities(2).................... 61,636 5.41 58,526 774 5.29 46,562 646 5.56
-------- -------- ------ -------- ------
Total interest-earning
assets..................... 323,070 6.79 302,293 5,115 6.77 236,033 4,426 7.50
------ ------
Non-interest-earning assets....... 21,858 19,850 12,095
-------- -------- --------
Total assets................. $344,928 $322,143 $248,128
======== ======== ========
Interest-bearing liabilities:
Checking accounts................ $ 34,963 - $ 33,114 - - $ 29,567 - -
Savings and club accounts........ 62,274 1.24 58,561 175 1.20 51,615 246 1.91
Money market accounts............ 43,823 1.79 42,555 187 1.76 33,863 279 3.30
Certificates of deposit.......... 135,702 3.73 125,483 1,203 3.83 77,985 1,100 5.65
FHLB advances.................... 41,500 3.77 35,950 414 4.61 33,000 509 6.17
-------- -------- -------- ------
Total interest-bearing
liabilities................ 318,262 2.57 295,663 1,979 2.68 226,030 2,134 3.78
------ ------
Non-interest-bearing
liabilities..................... 4,027 3,848 1,476
-------- -------- --------
Total liabilities............ 322,289 299,511 227,506
Stockholders' equity.............. 22,639 22,632 20,622
-------- -------- --------
Total liabilities and
stockholders' equity....... $344,928 $322,143 $248,128
======== ======== ========
Net interest income............... $3,136 $2,292
====== ======
Interest rate spread(3)........... 4.22% 4.09% 3.72%
====== ====== ======
Net yield on interest-earning
assets(4)....................... 4.15% 3.88%
====== ======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities.................... 101.51% 102.24% 104.43%
====== ====== ======
_______________________________
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes U.S. government obligations, mortgage-backed securities,
interest-bearing deposits in banks, and FHLB stock.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
42
For the Year Ended December 31,
-------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ------------------------------ ----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)....... $206,612 $15,975 7.72% $178,686 $14,247 7.97% $147,109 $12,004 8.16%
Securities(2).................. 56,440 2,979 5.28 44,396 2,713 6.11 59,170 3,424 5.79
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................... 263,052 18,954 7.21 223,082 16,960 7.60 206,279 15,428 7.48
------- ------- -------
Non-interest-earning assets..... 12,709 11,373 9,289
-------- -------- --------
Total assets............... $275,761 $234,455 $215,568
======== ======== ========
Interest-bearing liabilities:
Checking accounts ............. $ 31,252 - - $ 29,070 - - $ 26,829 177 0.66
Savings and club accounts...... 54,047 970 1.80 52,414 1,095 2.09 51,023 1,069 2.10
Money market accounts.......... 36,359 1,040 2.86 34,425 1,131 3.29 37,324 1,351 3.62
Certificates of deposit........ 101,488 5,453 5.37 66,610 3,601 5.41 63,809 3,265 5.12
FHLB advances.................. 29,385 1,833 6.24 31,227 2,132 6.83 17,208 968 5.63
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.............. 252,531 9,296 3.68 213,746 7,959 3.72 196,193 6,830 3.48
------- ------- -------
Non-interest-bearing
liabilities................... 1,992 1,676 1,507
-------- -------- --------
Total liabilities.......... 254,523 215,422 197,700
Stockholders' equity............ 21,238 19,033 17,868
-------- -------- --------
Total liabilities and
stockholders' equity..... $275,761 $234,455 $215,568
======== ======== ========
Net interest income............. $9,658 $ 9,001 $ 8,598
====== ======= =======
Interest rate spread(3)......... 3.53% 3.88% 4.00%
====== ====== ======
Net yield on interest-earning
assets(4)..................... 3.67% 4.03% 4.17%
====== ====== ======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................... 104.17% 104.37% 105.14%
====== ====== ======
_______________________________
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes U.S. government obligations, mortgage-backed securities,
interest-bearing deposits in banks, and FHLB stock.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
43
Rate/Volume Analysis. The relationship between the volume and rates of our
interest-earning assets and interest-bearing liabilities influences our net
interest income. The following table reflects the sensitivity of our interest
income and interest expense to changes in volume and in prevailing interest
rates during the periods indicated. Each category reflects the: (1) changes in
volume (changes in volume multiplied by old rate); (2) changes in rate (changes
in rate multiplied by old volume); (3) changes in rate/volume (change in rate
multiplied by the change in volume); and (4) net change. The net change
attributable to the combined impact of volume and rate has been allocated
proportionally to the absolute dollar amounts of change in each.
For the Three Months Ended For the Year Ended
March 31, December 31,
--------------------------------------- ----------------------------------------
2002 vs. 2001 2001 vs. 2000
--------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------- ------- ------- ------- ------- ------- ------- -------
(In thousands)
Interest and dividend income:
Loans receivable ...................... $ 1,083 $ (407) $ (115) $ 561 $ 2,226 $ (447) $ (51) $ 1,728
Investments, mortgage-backed securities
and other ........................... 166 (31) (7) 128 736 (368) (102) 266
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets ...... $ 1,249 $ (438) $ (122) $ 689 $ 2,962 $ (815) $ (153) $ 1,994
======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
Checking accounts ..................... $ - $ - $ - $ - $ - $ - $ - $ -
Savings and club accounts ............. 33 (92) (12) (71) 34 (152) (7) (125)
Money market accounts ................. 72 (130) (34) (92) 64 (148) (7) (91)
Certificate accounts .................. 671 (355) (213) 103 1,887 (27) (8) 1,852
FHLB advances ......................... 46 (129) (12) (95) (126) (184) 11 (299)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities . $ 822 $ (706) $ (271) $ (155) $ 1,859 $ (511) $ (11) $ 1,337
======= ======= ======= ======= ======= ======= ======= =======
Change in net interest income ............ $ 427 $ 268 $ 149 $ 844 $ 1,103 $ (304) $ (142) $ 657
======= ======= ======= ======= ======= ======= ======= =======
44
BUSINESS OF SYNERGY, MHC
Synergy, MHC is a federal mutual holding company and is subject to
regulation by the Office of Thrift Supervision. Synergy, MHC currently owns 100%
of the outstanding common stock of Synergy Financial Group, Inc. So long as
Synergy, MHC is in existence, it will at all times own at least a majority of
the outstanding common stock of Synergy Financial Group, Inc.
The only business activity of Synergy, MHC going forward will be to own a
majority of Synergy Financial Group, Inc.'s common stock. Synergy, MHC, however,
will be authorized to engage in any other business activities that are
permissible for mutual holding companies under federal law, including investing
in loans and securities. Synergy, MHC does not maintain offices separate from
those of Synergy Bank or employ any persons other than certain of Synergy Bank's
officers. Officers of Synergy, MHC are not separately compensated for their
service.
BUSINESS OF SYNERGY FINANCIAL GROUP, INC.
Synergy Financial Group, Inc. is a federal mutual holding company
subsidiary and is subject to regulation by the Office of Thrift Supervision. It
was organized for the purpose of acquiring all of the capital stock that Synergy
Bank issued upon its mutual holding company reorganization from the mutual to
stock form of ownership in 2001. Synergy Financial Group, Inc. acquired all of
the shares of Synergy Financial Services, Inc. later in 2001. Synergy Financial
Services, Inc. is engaged in offering insurance and securities products.
Synergy Financial Group, Inc. has not engaged in any significant business
to date. Its primary activity is holding all of the stock of Synergy Bank and
Synergy Financial Services, Inc. Synergy Financial Group, Inc. will invest the
proceeds of the offering as discussed under Use of Proceeds on page 13. In the
future, it may pursue other business activities, including mergers and
acquisitions, investment alternatives and diversification of operations. There
are, however, no current understandings or agreements for these activities.
Synergy Financial Group, Inc. does not maintain offices separate from those of
Synergy Bank or employ any persons other than certain of Synergy Bank's
officers. Officers of Synergy Financial Group, Inc. are not separately
compensated for their service.
BUSINESS OF SYNERGY BANK
General
Synergy Bank was originally founded in 1952 as a federal credit union for a
pharmaceutical research and manufacturing company. Synergy Bank undertook a
charter conversion in 1998 to become a federal savings bank and in 2001 became a
federal stock savings bank upon the completion of its mutual holding company
reorganization. Synergy Bank's deposits are federally insured by the Savings
Association Insurance Fund ("SAIF") as administered by the Federal Deposit
Insurance Corporation ("FDIC"). Synergy Bank is regulated by the OTS and the
FDIC.
Synergy Bank is in the business of offering financial services, including
offering retail banking services, one- to four-family residential mortgage
loans, home equity loans, multi-family and non- residential loans, and consumer
loan products, including auto and personal loans.
We attract deposits from the general public and borrow money from the FHLB
and use these deposits and FHLB borrowings primarily to originate loans and to
purchase investment, mortgage-backed
45
and other securities. Our principal sources of funds for lending and investing
activities are deposits, FHLB borrowings, the repayment and maturity of loans
and the sale, maturity, and call of securities. Our principal source of income
is interest on loans and mortgage-backed and other securities. Our principal
expense is interest paid on deposits and FHLB borrowings.
Market Area
Our main office is located in Cranford, New Jersey, and our branches are
located in Middlesex, Monmouth, Morris and Union counties, New Jersey. Our
primary market area is Essex, Middlesex, Monmouth, Morris, Somerset and Union
counties, New Jersey. Essex and Union counties are highly urbanized and densely
populated counties in the New York City metropolitan area, lying at the heart of
the northeast corridor, one of the largest population and industrial areas in
the country. The remaining counties are suburban areas located in central New
Jersey. The market areas surrounding each of Synergy Bank's branches are mostly
growth markets, with population densities and income levels generally above the
average levels for New Jersey.
Our business of attracting deposits and making loans is primarily conducted
within our market area. A downturn in the local economy could reduce the amount
of funds available for deposit and the ability of borrowers to repay their
loans. As a result, our profitability could be hurt.
Competition
We face substantial competition in our attraction of deposits, which are
our primary source of funds for lending, and in the origination of loans. Many
of our competitors are significantly larger institutions and have greater
financial and managerial resources. Our ability to compete successfully is a
significant factor affecting our profitability.
Our competition for deposits and loans historically has come from other
insured financial institutions such as local and regional commercial banks,
savings institutions, and credit unions located in our primary market area. At
June 30, 2001, we had a 1.56% market share of FDIC-insured deposits in Union
County and a 0.05% market share of FDIC-insured deposits in Morris County. We
also compete with mortgage banking companies for real estate loans, and
commercial banks and savings institutions for consumer loans; and face
competition for funds from investment products such as mutual funds, short-term
money funds and corporate and government securities.
Lending Activities
General. We primarily originate real estate loans, including one- to
four-family first mortgage loans, multi-family and non-residential mortgages,
and consumer loans, comprised mostly of direct auto loans, both new and used.
The loan portfolio is predominately comprised of one- to four-family residential
real estate loans, most of which have fixed rates of interest.
46
Loan Portfolio Composition. The following table analyzes the composition of
the loan portfolio by loan category at the dates indicated.
At December 31,
At March 31, -------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998 1997
--------------- ---------------- --------------- --------------- --------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loans:
Mortgage loans:
Residential...... $187,192 71.15% $154,107 68.15% $128,845 67.65% $116,727 70.95% $ 91,746 68.07% $ 70,872 58.69%
Non-Residential.. 17,108 6.50 13,763 6.09 231 0.12 - - - - - -
Automobile......... 53,237 20.24 52,206 23.08 45,812 24.06 30,171 18.34 22,475 16.68 23,959 19.84
Credit Card........ 21 0.01 30 0.01 6,969 3.66 7,260 4.41 8,093 6.01 8,863 7.34
Other(1)........... 5,526 2.10 6,033 2.67 8,594 4.51 10,363 6.30 12,457 9.24 17,057 14.13
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans... 263,084 100.00% 226,139 100.00% 190,451 100.00% 164,521 100.00% 134,771 100.00% 120,751 100.00%
====== ====== ====== ====== ====== ======
Less:
Deferred loan
fees and costs. (32) (78) (177) (353) (257) (163)
Allowance for
loan losses..... (1,618) (1,372) (1,176) (995) (1,148) (1,041)
-------- -------- -------- -------- -------- --------
Total
loans, net.. $261,434 $224,689 $189,098 $163,173 $133,366 $119,547
======== ======== ======== ======== ======== ========
________________
(1) This category consists of personal loans (unsecured) and savings secured
loans.
47
Loan Maturity Schedule. The following table sets forth the maturity or
repricing of the loan portfolio at March 31, 2002. Demand loans, loans having no
stated maturity and overdrafts are shown as due in one year or less.
Residential Non-Residential Other
Mortgages Mortgages Automobile Credit Card Consumer(1) Total
--------- --------- ---------- ----------- ----------- -----
(In thousands)
Amounts Due:
Within 1 Year........................ $ 297 $ - $ 1,383 $ 21 $ 520 $ 2,221
After 1 year:
1 to 3 years....................... 2,138 - 13,235 - 2,178 17,551
3 to 5 years....................... 8,677 102 35,514 - 2,734 47,027
5 to 10 years...................... 21,008 332 3,083 - 29 24,452
10 to 15 years..................... 83,973 4,642 - - 55 88,670
Over 15 years...................... 71,099 12,032 22 - 10 83,163
Total due after one year........ 186,895 17,108 51,854 - 5,006 260,863
Total amount due................ $187,192 $17,108 $53,237 $ 21 $5,526 $263,084
________________
(1) This category consists of personal loans (unsecured) and savings secured
loans.
The following table sets forth the dollar amount of all loans at March 31,
2002 due after March 31, 2003, which have fixed interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- ----------
(In thousands)
Mortgage loans:
Residential............ $140,194 $46,701 $186,895
Non-Residential........ 2,505 14,603 17,108
Other Consumer(1).......... 5,006 - 5,006
Automobile................. 51,854 - 51,854
Total................. $199,559 $61,304 $260,863
________________
(1) This category consists of personal loans (unsecured) and savings secured
loans.
Residential Lending. Our primary lending activity consists of the
origination of one- to four- family mortgage loans, the majority of which are
secured by property located in New Jersey. We will generally originate a
mortgage loan in an amount up to 80% of the lesser of the appraised value or the
purchase price of a mortgaged property. For loans exceeding this guideline,
private mortgage insurance for the borrower is required.
The majority of our residential loans are originated with fixed rates and
have terms of fifteen to thirty years. Our adjustable rate loans have terms of
fifteen to thirty years and adjustment periods of one, three, five or ten years
according to the terms of the loan. These loans provide for an interest rate
that is tied to a U.S. treasury security index.
We generally make fixed rate mortgage loans that meet the secondary
mortgage market standards of the Federal Home Loan Mortgage Corporation
("FHLMC"). In accordance with our interest rate risk
48
management policies, we occasionally sell qualifying one- to four-family
residential mortgages in the secondary market to the FHLMC without recourse and
with servicing retained. During the year ended December 31, 2001, we sold
approximately $9.3 million of residential mortgages, $8.6 million of which were
30 year fixed-rate loans. The sale of mortgage loans is part of management's
strategy to mitigate interest rate risk. We may continue to sell loans in the
future when doing so will mitigate interest rate risk.
Substantially all of our residential mortgages include "due on sale"
clauses, which are provisions giving us the right to declare a loan immediately
payable if the borrower sells or otherwise transfers an interest in the property
to a third party. Property appraisals on real estate securing our one- to
four-family residential loans are made by state certified or licensed
independent appraisers approved by the Board of Directors. Appraisals are
performed in accordance with applicable regulations and policies. We require
title insurance policies on all first mortgage real estate loans originated. All
property secured loans require fire and casualty insurance. Loans made on
property located in designated flood zones require minimum flood insurance
coverage based on the amount of the loan.
Our residential loan portfolio includes home equity loans, which are
originated in our market area and have maturities of up to fifteen years. At
March 31, 2002, home equity loans totaled $56.0 million, or 21%, of total loans.
Collateral value is determined through the use of an Internet based on-line
value estimator, a drive-by appraisal or a full appraisal. All loans over
$250,000 require a full appraisal and title insurance policy.
Non-Residential Mortgage Loans. Starting in 2000, we began to originate
non-residential mortgage loans, including loans on multi-family dwellings,
retail/service space, and other income- producing properties. We require no less
than a 25% down payment or equity position for non-residential mortgage loans.
Typically these loans are made with variable rates of interest with terms of up
to twenty years. Essentially all of our non-residential mortgage loans are on
properties located within our market area and all are within New Jersey. We
occasionally sell participation interests in non-residential mortgage loans
originated by us that would otherwise exceed our loans-to-one-borrower limit.
The non-residential mortgage loans portfolio grew by $13.5 million during
the year ended December 31, 2001. It is our intention to continue emphasizing
the origination of non-residential mortgage loans, with the goal of growing this
portfolio to approximately one-third of our total loans outstanding.
Non-residential mortgage loans generally are considered to entail
significantly greater risk than that which is involved with one- to four-family
real estate lending. The repayment of these loans typically is dependent on the
successful operations and income stream of the real estate and the borrower.
These risks can be significantly affected by economic conditions. In addition,
non-residential real estate lending generally requires substantially greater
evaluation and oversight efforts compared to residential real estate lending.
Consumer Loans. At March 31, 2002, consumer loans amounted to approximately
$58.8 million, or 22% of the total loan portfolio, the vast majority of which
are auto loans. At March 31, 2002, auto loans totaled $53.2 million.
In late 1999, we began to originate direct auto loans over the Internet
through an independent online loan referral web site. A bank participating in
the referral program sets certain criteria with the referral company to select
those borrowers who meet that bank's lending standards. The borrower completes a
qualification form online and submits it via the web site. The referral
company's automated system screens the borrower's qualification form and if it
meets our preset criteria, we receive the
49
borrower's qualification form. The borrower's qualification form is sent to no
more than four of the more than two hundred participating banks. Once we receive
a qualification form, we check the borrower's credit report by an automated
computer system. If the credit report is consistent with our criteria, the
automated system sends a notice to the borrower that he or she is pre-approved
and we make the borrower a loan offer. The borrower then decides whether to
apply for the loan with us. We pay a fee to the referral company for each
qualification form we receive (even if that borrower does not apply for a loan
with us) and for each loan that is originated.
Currently, an average of $2.0 million, or 65% of our monthly auto loan
originations are generated from this referral source. All of these loans are
made as direct loans through new and used auto dealers. We intend to continue to
grow the auto loan portfolio as part of our plan to increase the consumer loan
portfolio to approximately one-third of our total loans outstanding.
Consumer loans also consist of personal loans (unsecured) and savings
secured loans. Consumer loans generally have maturities of up to six years. For
all secured consumer loans, we will generally lend up to 100% of the account
balance on a savings secured loan and 100% of the purchase price on a new,
leased or used auto loan.
Consumer loans generally have shorter terms and higher interest rates than
residential loans. The consumer loan market can be helpful in improving the
spread between the average loan yield and the cost of funds and at the same time
improve the matching of rate sensitive assets and liabilities.
Consumer loans entail greater risks than residential mortgage loans,
particularly consumer loans secured by rapidly depreciable assets such as
automobiles or loans that are unsecured. In these cases, any repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance, since there is a greater likelihood of damage,
loss or depreciation of the underlying collateral. Further, consumer loan
repayment is dependent on the borrower's continuing financial stability and are
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Finally, the application of various federal laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on consumer loans in the event of a default.
Our underwriting standards for consumer loans include a determination of
the applicant's credit history and an assessment of the applicant's ability to
meet existing obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment, and additionally from any verifiable
secondary income. Creditworthiness of the applicant is of primary consideration;
however, the underwriting process also includes a comparison of the value of the
collateral in relation to the proposed loan amount. Certain of our officers are
authorized to approve unsecured consumer loan applications of up to $20,000.
Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the institution's unimpaired capital and
surplus. Accordingly, as of March 31, 2002, our loans to one borrower limit was
approximately $3.4 million, and we had twenty-three borrowers with loan balances
in excess of $500,000.
At March 31, 2002, our largest single borrower had an aggregate balance of
$3.0 million, representing three non-residential mortgage loans secured by
apartment buildings located in our market area. The loans were originated in
March 2002 with an original loan-to-value ratio of less than 65%. Our second
largest single borrower had an aggregate balance of $2.8 million, representing
two non-residential
50
mortgage loans secured by retail strip mall shopping centers located in our
market area. The total balance for these two loans at March 31, 2002 was $3.8
million, of which we sold a $1.0 million participation interest pursuant to our
loans-to-one-borrower limit. Our third largest borrower had an aggregate balance
of approximately $2.7 million, representing five separate loans secured by
multi-family real estate and non- residential properties located in our market
area. At March 31, 2002, all of these three lending relationships were current
and performing in accordance with the terms of their loan agreements.
Loan Originations, Purchases, Sales, Solicitation and Processing. Our
customary sources of loan applications include repeat customers, on-line
applications through Synergy Bank's Internet site, real- estate broker
referrals, and "walk-in" customers. A significant source for our auto loan
originations is an independent online loan referral web site, through which we
currently originate an average of approximately $2.0 million, or 65% of our
monthly auto loan originations.
Loan originations, net of principal repayments, totaled approximately $48.3
million for the year ended December 31, 2001. Loan purchases totaled
approximately $4.0 million. Loan sales totaled approximately $17.4 million, of
which $6.2 million represented the sale of the credit card portfolio.
The sale of mortgage loans is part of management's strategy to mitigate
interest rate risk. Approximately $9.3 million of the loan sales during 2001
consisted of residential mortgages, $8.6 million of which were 30 year
fixed-rate loans. We occasionally sell participation interests in
non-residential mortgage loans originated by us that are considered large
credits to reduce credit exposure. We may continue to sell loans in the future
when doing so will mitigate interest rate risk.
We generally sell loans on a non-recourse basis, with servicing retained
and with an average loan servicing fee of 0.25% of the loan balance. At March
31, 2002, loans serviced for the benefit of other lenders totaled $17.4 million,
which included $5.5 million of credit card loans for which servicing was
released in April 2002.
We occasionally purchase loans through other financial institutions'
participation programs. During the year ended December 31, 2001, we purchased
approximately $4.0 million of loans. At March 31, 2002, we had participations in
three indirect auto loan pools (each a 90% participation interest). Two of the
three indirect auto loan pools were purchased with full recourse and totaled
approximately $3.9 million at March 31, 2002. The third auto loan pool was
purchased without recourse and at March 31, 2002 had a remaining balance of
approximately $400,000. On each of these three auto loan participations, the
seller retained servicing, however, we do not pay a servicing fee on these
loans.
Subsequent to March 31, 2002, we purchased a $13.7 million indirect auto
loan portfolio without recourse from a local financial institution.
In addition, at March 31, 2002, we had a $990,000 participation in one
non-residential mortgage loan secured by real estate in our market area, which
was purchased without recourse and on which we pay a servicing fee of 0.25% of
the loan balance.
Loan Commitments. We give written commitments to prospective borrowers on
all residential and non-residential mortgage loans. The total amount of
commitments to extend credit for mortgage and consumer loans as of March 31,
2002, was approximately $28.1 million, excluding commitments on unused lines of
credit of $9.7 million.
51
Loan Origination and Other Loan Fees. In addition to interest earned on
loans, we receive commitment fees, loan origination fees and points on certain
loans. We also receive other fees and charges relating to existing loans, which
include late charges, and fees collected in connection with a change in borrower
or other loan modifications. These fees and charges have not constituted a
material source of income.
Non-Performing Loans and Problem Assets
Collection Procedures. The borrower is notified by mail when a loan is ten
days delinquent. If the delinquency continues, subsequent efforts are made to
contact the delinquent borrower and additional collection notices and letters
are sent. When a loan is ninety days delinquent, it is referred to an attorney
for repossession or foreclosure. All reasonable attempts are made to collect
from borrowers prior to referral to an attorney for collection. In certain
instances, we may modify the loan or grant a limited moratorium on loan payments
to enable the borrower to reorganize his or her financial affairs and we attempt
to work with the borrower to establish a repayment schedule to cure the
delinquency.
As to mortgage loans, if a foreclosure action is taken and the loan is not
reinstated, paid in full or refinanced, the property is sold at judicial sale at
which we may be the buyer if there are no adequate offers to satisfy the debt.
Any property acquired as the result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until it is sold or
otherwise disposed of. When REO is acquired, it is recorded at the lower of the
unpaid principal balance of the related loan or its fair market value less
estimated selling costs. The initial writedown of the property is charged to the
allowance for loan losses. Adjustments to the carrying value of the properties
that result from subsequent declines in value are charged to operations in the
period in which the declines occur. At March 31, 2002, we held no real estate
owned.
Loans are reviewed on a regular basis and are placed on a non-accrual
status when they are more than ninety days delinquent. Loans may be placed on a
non-accrual status at any time if, in the opinion of management, the collection
of additional interest is doubtful. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At March 31, 2002, we had approximately $449,000 of
loans that were held on a non-accrual basis. Subsequent to March 31, 2002,
$345,000 of this amount, attributable to one non-residential mortgage loan, was
repaid in full.
52
Non-Performing Assets. The following table provides information regarding
our non-performing loans and other non-performing assets as of the dates
indicated. As of each of the dates indicated, we did not have any troubled debt
restructurings within the meaning of SFAS 15 or any impaired loans within the
meaning of SFAS 114, as amended by SFAS 118, other than one nonaccrual
non-residential mortgage loan in the amount of $345,000 at March 31, 2002, which
was repaid in full subsequent to March 31, 2002. After evaluating this loan, and
in consideration of the fact that a sale of the property was scheduled to close
in early April 2002, management determined that no additional reserve was
warranted for this loan.
At December 31,
At March 31, ------------------------------------------------
2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Residential mortgages............................ $ - $ - $ 57 $ 58 $ 113 $ -
Non-Residential mortgages........................ 345 - - - - -
Automobile....................................... 49 32 19 55 45 130
Credit Card...................................... 1 22 32 67 38 73
Other Consumer(1)................................ 54 17 79 112 125 335
---- ---- ----- ----- ----- -----
Total......................................... $449 $ 71 $ 187 $ 292 $ 321 $ 538
==== ==== ===== ===== ===== =====
Accruing loans which are contractually past
due 90 days or more:
Residential mortgages............................ $ - $ - $ - $ - - -
Non-Residential mortgages........................ - - - - - -
Automobile....................................... - - - - - -
Credit Card...................................... - - - - - -
Other Consumer(1)................................ - - - - - -
---- ---- ----- ----- ----- -----
Total......................................... $ - $ - $ - $ - - -
==== ==== ===== ===== ===== =====
Total non-performing loans.................... $449 $ 71 $ 187 $ 292 $ 321 $ 538
==== ==== ===== ===== ===== =====
Other non-performing assets........................ $ - $ - - - - -
==== ==== ===== ===== ===== =====
Total non-performing assets................... $449 $ 71 $ 187 $ 292 $ 321 $ 538
==== ==== ===== ===== ===== =====
Total non-performing loans to net loans....... 0.17% 0.03% 0.10% 0.18% 0.24% 0.45%
==== ==== ===== ===== ===== =====
Total non-performing loans to total assets.... 0.13% 0.02% 0.08% 0.13% 0.16% 0.30%
==== ==== ===== ===== ===== =====
Total non-performing assets to total assets... 0.13% 0.02% 0.08% 0.13% 0.16% 0.30%
==== ==== ===== ===== ===== =====
________________
(1) This category consists of personal loans (unsecured) and savings secured
loans.
53
For the year ended December 31, 2001, the amount of interest that would
have been recorded on loans accounted for on a non-accrual basis if those loans
had been current according to the original loan agreements for the entire period
was $5,000. This amount was not included in our interest income for the period.
No interest income on loans accounted for on a non-accrual basis was included in
income during the year ended December 31, 2001.
Classified Assets. Management, in compliance with OTS guidelines, has
instituted an internal loan review program, whereby non-performing loans are
classified as substandard, doubtful or loss. It is our policy to review the loan
portfolio, in accordance with regulatory classification procedures, on at least
a monthly basis. When a loan is classified as substandard or doubtful,
management is required to establish a valuation reserve for loan losses in an
amount considered prudent by management. When management classifies a portion of
a loan as loss, a reserve equal to 100% of the loss amount is required to be
established or the loan is to be charged-off.
An asset is considered "substandard" if it is inadequately protected by the
paying capacity and net worth of the obligor or the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
Assets classified as loss are those considered uncollectible and of so little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted. Assets which do not currently expose the insured
institution to a sufficient degree of risk to warrant classification in one of
the aforementioned categories but which have credit deficiencies or potential
weaknesses are required to be designated special mention by management.
Management's classification of assets and its estimation of the amount of
known and inherent loan losses in the loan portfolio is reviewed by the Board on
a regular basis and by the regulatory agencies as part of their examination
process. At March 31, 2002, classified loans totaled $142,000. This amount
included $38,000 of loans classified as "substandard." None of the loans
classified as substandard are included under non-performing assets, as shown in
the table on page 53. At March 31, 2002, we had approximately $104,000 of loans
classified as "doubtful," all of which amount is included under non- performing
assets, as shown in the table on page 53. At March 31, 2002, we had no loans
classified as "loss." At December 31, 2001, classified loans totaled $190,000.
This amount included $136,000 of loans classified as "substandard," of which
$18,000 is included under non-performing assets, as shown in the table on page
53. At December 31, 2001, we had approximately $54,000 of loans classified as
"doubtful," all of which amount is included under non-performing assets, as
shown in the table on page 53. At December 31, 2001, we had no loans classified
as "loss."
Allowance for Loan Losses. The allowance for loan losses is a valuation
account that reflects our estimation of the losses known and inherent in our
loan portfolio that are both probable and reasonable to estimate associated both
with lending activities and particular problem assets. The allowance is
maintained through provisions for loan losses that are charged to income in the
period they are established. We charge losses on loans against the allowance for
loan losses when we believe the collection of loan principal is unlikely.
Recoveries on loans previously charged-off are added back to the allowance.
Our estimation of known and inherent loan losses in the loan portfolio
includes a separate review of all loans on which the collectibility of principal
may not be reasonably assured. We evaluate all classified loans individually and
base our determination of a loss factor on the likelihood of collectibility
54
of principal including consideration of the value of the underlying collateral
securing the loan. Larger loans, which would generally include multi-family
mortgages and other non-residential mortgage loans, are also generally evaluated
for impairment individually. We also segregate loans by loan category and
evaluate homogenous loans as a group.
Although there may be other factors that also warrant consideration in
estimating the amount of known and inherent loan losses in the loan portfolio,
we consider the following factors in connection with our determination of loss
factors and as part of our overall estimation of the amount of known and
inherent loan losses in the loan portfolio:
o our historical loan loss experience;
o internal analysis of credit quality;
o general levels of non-performing loans and delinquencies;
o changes in loan concentrations by loan category;
o current estimated collateral values;
o peer group information;
o analysis of credit quality conducted in bank regulatory
examinations; and
o economic and market trends impacting our lending area.
In recent years, our charge-offs have been low and, consequently, our
estimation of the amount of known and inherent loan losses in the loan portfolio
has been more reflective of other factors.
This estimation is inherently subjective as it requires estimates and
assumptions that are susceptible to significant revisions as more information
becomes available or as future events change. Future additions to the allowance
for loan losses may be necessary if economic and other conditions in the future
differ substantially from the current operating environment. In addition, the
OTS as an integral part of its examination process, periodically reviews our
loan and foreclosed real estate portfolios and the related allowance for loan
losses and valuation allowance for foreclosed real estate. The OTS may require
the allowance for loan losses or the valuation allowance for foreclosed real
estate to be increased based on its review of information available at the time
of the examination, which would negatively affect our earnings.
55
The following table sets forth information with respect to our allowance
for loan losses at the dates indicated:
For the Three Months For the Year Ended
Ended March 31, December 31,
-------------------- --------------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Allowance balance
(at beginning of period).............. $ 1,372 $ 1,176 $ 1,176 $ 995 $ 1,148 $ 1,041 $ 1,019
-------- -------- -------- -------- -------- -------- --------
Charge-offs:
Residential mortgages................. - - - - 35 - 60
Non-Residential mortgages............. - - - - - - -
Automobile............................ 30 17 61 101 27 141 93
Credit Card........................... 4 38 108 127 135 264 266
Other Consumer(1)..................... 44 46 248 267 329 902 974
-------- -------- -------- -------- -------- -------- --------
Total.............................. 78 101 417 495 526 1,307 1,393
Recoveries
Residential mortgages................. - - 2 1 5 - 2
Non-Residential mortgages............. - - - - - - -
Automobile............................ 10 7 39 26 36 32 9
Credit Card........................... 9 23 49 25 25 14 16
Other Consumer(1)..................... 35 43 160 144 182 158 138
-------- -------- -------- -------- -------- -------- --------
Total.............................. 54 73 250 196 248 204 165
-------- -------- -------- -------- -------- -------- --------
Net (charge-offs) recoveries............ (24) (28) (167) (299) (278) (1,103) (1,228)
Provision for loan losses............... 270 45 363 480 125 1,210 1,250
-------- -------- -------- -------- -------- -------- --------
Allowance balance (at end of period).... $ 1,618 $ 1,193 $ 1,372 $ 1,176 $ 995 $ 1,148 $ 1,041
======== ======== ======== ======== ======== ======== ========
Total gross loans outstanding
(at end of period)............... $263,084 $188,739 $226,139 $190,451 $164,521 $134,771 $120,751
======== ======== ======== ======== ======== ======== ========
Allowance for loan losses as a
percent of total loans outstanding... 0.62% 0.63% 0.61% 0.62% 0.60% 0.85% 0.86%
==== ==== ==== ==== ==== ==== ====
Net loans charged off as a percent of
average loans outstanding during
the period........................... 0.01% 0.01% 0.08% 0.17% 0.19% 0.87% 1.04%
==== ==== ==== ==== ==== ==== ====
________________
(1) This category consists of personal loans (unsecured) and savings secured
loans.
56
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of our allowance for loan losses by collateral and the percent of
loans in each category to total loans receivable, net, at the dates indicated.
Management determines the allocation of our allowance for loan losses based on
its assessment of the risk characteristics of each loan category. The change in
allocation of the allowance from period to period also reflects the relative
balances of each loan category. The portion of the loan loss allowance allocated
to each loan category does not represent the total available for losses which
may occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio. The allocation is
subject to change as management's assessment of the risk characteristics of each
loan category may change from time to time.
At December 31,
At March 31, ---------------------------------------------------------------------------------------
2002 2001 2000 1999 1998 1997
---------------- ---------------- ------------------ ---------------- ---------------- ---------------
Percent Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
At end of period
allocated to:
Residential mortgages... $ 947 71.15% $ 813 68.15% $ 409 67.65% $312 70.95% $ 293 68.07% $ 48 58.69%
Non-Residential
mortgages............. 163 6.50 105 6.09 8 0.12 - - - - - -
Automobile.............. 296 20.24 319 23.08 158 24.06 86 18.34 96 16.68 52 19.84
Credit Card............. 1 0.01 - 0.01 268 3.66 216 4.41 198 6.01 218 7.34
Other Consumer(1)....... 211 2.10 135 2.67 333 4.51 381 6.30 561 9.24 723 14.13
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance...... $1,618 100.00% $1,372 100.00% $1,176 100.00% $995 100.00% $1,148 100.00% $1,041 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ------ ======
________________
(1) This category consists of personal loans (unsecured) and savings secured
loans.
57
Securities Portfolio
General. Federally chartered savings banks have the authority to invest in
various types of liquid assets, including U.S. government and government agency
obligations, securities of various federal agencies and government-sponsored
entities (including securities collateralized by mortgages), certificates of
deposits of insured banks and savings institutions, municipal securities and
corporate debt securities.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that securities be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold these securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity."
We do not currently use or maintain a trading account. Securities not
classified as "held to maturity" are classified as "available for sale." These
securities are reported at fair value, and unrealized gains and losses on the
securities are excluded from earnings and reported, net of deferred taxes, as a
separate component of equity. On occasion, we sell available for sale securities
based on the evaluation of price levels obtained through multiple dealers. Our
analysis in selling available for sale securities includes tracking the treasury
yield curve through Bloomberg and tracking the price of similar securities
offered through dealers inventory listing using their individual web sites.
All of our securities carry market risk insofar as increases in market
rates of interest may cause a decrease in their market value. Investments in
securities are made based on certain considerations, which include the interest
rate, tax considerations, yield, settlement date and maturity of the security,
our liquidity position, and anticipated cash needs and sources. The effect that
the proposed security would have on our credit and interest rate risk and
risk-based capital is also considered. We purchase securities to provide
necessary liquidity for day-to-day operations, and when investable funds exceed
loan demand.
Our investment policy, which is established by the Board of Directors, is
designed to foster earnings and liquidity within prudent interest rate risk
guidelines, while complementing our lending activities. Generally, our
investment policy is to invest funds in various categories of securities and
maturities based upon our liquidity needs, asset/liability management policies,
investment quality, marketability and performance objectives. The Budget and
Asset/Liability Management Committee reviews the securities portfolio on a
monthly basis. The results of the committee's monthly review are reported to the
full Board at its regular monthly meeting.
We do not participate in hedging programs, interest rate swaps, or other
activities involving the use of off-balance sheet derivative financial
instruments. Further, we do not invest in securities which are not rated
investment grade.
Mortgage-backed Securities. Mortgage-backed securities represent a
participation interest in a pool of one- to four-family or multi-family
mortgages, although we focus primarily on mortgage-backed securities secured by
one- to four-family mortgages.
The mortgage originators use intermediaries (generally U.S. government
agencies and government- sponsored enterprises) to pool and repackage the
participation interests in the form of securities, with investors such as us
receiving the principal and interest payments on the mortgages. Such U.S.
58
government agencies and government-sponsored entities guarantee the payment of
principal and interest to investors. At March 31, 2002, all of our
mortgage-backed securities were issued by either U.S. government agencies or
government-sponsored entities.
Mortgage-backed securities are typically issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a specific range and have varying
maturities. The life of a mortgage-backed pass-through security thus
approximates the life of the underlying mortgages. The characteristics of the
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. Mortgage-backed
securities are generally referred to as mortgage participation certificates or
pass-through certificates. Our mortgage-backed securities consist primarily of
securities issued by the Government National Mortgage Association ("GNMA" or
"Ginnie Mae"), the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie
Mac") and the Federal National Mortgage Association ("FNMA" or "Fannie Mae").
Mortgage- backed securities generally yield less than the mortgage loans
underlying such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk to the security holder.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because issuers may have the right to call or prepay
obligations with and without prepayment penalties.
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage
Investment Conduits ("REMICs"). We also invest in CMOs and REMICs, issued or
sponsored by GNMA, FNMA and FHLMC. CMOs and REMICs are mortgage-derivative
products that aggregate pools of mortgages and mortgage-backed securities and
create different classes of securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage-backed securities as opposed to pass through
mortgage-backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage-backed securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage-backed securities underlying CMOs and
REMICs are paid in accordance with a predetermined priority to investors holding
various tranches of the securities or obligations. A particular tranche or class
may carry prepayment risk which may be different from that of the underlying
collateral and other tranches. Investing in CMOs and REMICs allows us to
moderate reinvestment risk resulting from unexpected prepayment activity
associated with conventional mortgage- backed securities. Management believes
these securities represent attractive alternatives relative to other investments
due to the wide variety of maturity, repayment and interest rate options
available.
At March 31, 2002, we had $18.6 million of CMOs and REMICs.
Other Securities. In addition, at March 31, 2002 we held an approximate
investment of $2.6 million in FHLB of New York common stock (this amount is not
shown in the securities portfolio). As a member of the FHLB of New York,
ownership of FHLB of New York common shares is required.
59
The following table sets forth the carrying value of our securities
portfolio at the dates indicated. For additional information, see Notes 2 and 3
of the Notes to the Consolidated Financial Statements beginning on page F-8.
At December 31,
At March 31, ---------------------------
2002 2001 2000 1999
------- ------- ------- -------
(In thousands)
Securities Held to Maturity:
- ----------------------------
U.S. Government Agency and
Government-Sponsored Entity Securities . $ - $ - $ 2,491 $ 2,490
Mortgage-Backed Securities ................ 8,374 7,153 9,759 11,102
Collateralized Mortgage Obligations and
Real Estate Mortgage Investment Conduits 3,724 - - -
------- ------- ------- -------
Total Securities Held to Maturity ..... 12,098 7,153 12,250 13,592
------- ------- ------- -------
Securities Available for Sale:
- ------------------------------
U.S. Government Agency and
Government-Sponsored Entity Securities . - - 5,952 7,798
Mortgage-Backed Securities ................ 34,663 28,314 9,370 11,081
Collateralized Mortgage Obligations and
Real Estate Mortgage Investment Conduits 14,875 15,580 10,653 13,907
------- ------- ------- -------
Total Securities Available for Sale . 49,538 43,894 25,975 32,786
------- ------- ------- -------
Total ............................... $61,636 $51,047 $38,225 $46,378
======= ======= ======= =======
60
Carrying Values, Yields and Maturities. The following table sets forth
certain information regarding the carrying values, weighted average yields and
maturities of our investment and mortgage-backed securities portfolio at the
dates indicated.
At March 31, 2002
--------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Securities
---------------- ----------------- ----------------- ------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
U.S. Government
Obligations and
Government-Sponsored
Entity Securities..... $ - -% $ - -% $ - -% $ - -% $ - -% $ -
Mortgage-Backed
Securities,
Collateralized
Mortgage
Obligations and
Real Estate
Mortgage Investment
Conduits............. 227 5.59 14,980 4.92 26,649 5.35 19,780 5.87 61,636 5.41 61,586
---- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------
Total.............. $227 5.59% $14,980 4.92% $26,649 5.35% $19,780 5.87% $61,636 5.41% $61,586
==== ==== ======= ==== ======= ==== ======= ==== ======= ==== =======
61
Sources of Funds
General. Deposits are our major source of funds for lending and other
investment purposes. In addition, we derive funds from loan and mortgage-backed
securities principal repayments, and proceeds from the maturity, call and sale
of mortgage-backed securities and investment securities. Loan and securities
payments are a relatively stable source of funds, while deposit inflows are
significantly influenced by general interest rates and money market conditions.
Borrowings (principally from the FHLB) are also periodically used to supplement
the amount of funds for lending and investment.
Deposits. Our current deposit products include checking, savings, money
market, club accounts, certificates of deposit accounts ranging in terms from
three months to ten years, and individual retirement accounts ("IRAs"). Deposit
account terms vary, primarily as to the required minimum balance amount, the
amount of time that the funds must remain on deposit and the applicable interest
rate.
Deposits are obtained primarily from within New Jersey. Traditional methods
of advertising are used to attract new customers and deposits, including print
media, radio, direct mail and inserts included with customer statements. We do
not utilize the services of deposit brokers. Premiums or incentives for opening
accounts are generally not offered. Periodically we select a particular
certificate of deposit term for promotion.
We pay interest rates on certificates of deposits that are toward the high
range of rates offered by our competitors. Rates on savings and money market
accounts are generally priced toward the middle range of rates offered in our
market. The determination of interest rates is based upon a number of factors,
including: (1) our need for funds based on loan demand, current maturities of
deposits and other cash flow needs; (2) a current survey of a selected group of
competitors' rates for similar products; (3) our current cost of funds and yield
on assets; and (4) the alternate cost of funds on a wholesale basis, in
particular the cost of advances from the FHLB. Interest rates are reviewed by
senior management on at least a weekly basis.
A significant percentage of our deposits are in certificates of deposit
(49% at March 31, 2002). Our liquidity could be reduced if a significant amount
of certificates of deposit, maturing within a short period of time, were not
renewed. A significant portion of the certificates of deposit remain with us
after they mature and we believe that this will continue. However, the need to
retain these time deposits could result in an increase in our cost of funds.
62
The following table sets forth the distribution of deposits in Synergy Bank
at the dates indicated and the weighted average nominal interest rates for each
period on each category of deposits presented.
At March 31, At December 31,
---------------------------- --------------------------------------------------------------------------------------
2002 2001 2000 1999
---------------------------- ---------------------------- --------------------------- --------------------------
Weighted Weighted Weighted Weighted
Percent Average Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- -------- ------ -------- -------- ------ -------- -------- ------ -------- --------
(Dollars in thousands)
Money market
accounts.... $ 43,823 15.83% 1.79% $ 40,811 16.34% 2.00% $ 33,596 17.58% 3.35% $ 37,522 20.74% 3.47%
Savings and
club
accounts.... 62,274 22.51 1.24 56,816 22.74 1.24 52,257 27.34 1.98 51,409 28.41 2.12
Certificates
of deposit
and other
time
deposit
accounts.... 135,702 49.03 3.73 121,038 48.45 4.41 74,989 39.23 5.79 65,143 36.00 5.17
Non-interest-
bearing
checking
accounts.... 34,963 12.63 - 31,148 12.47 - 30,301 15.85 - 26,868 14.85 -
-------- ------ ---- -------- ------ ---- -------- ------ ---- -------- ------ ----
Total
deposits. $276,762 100.00% 2.39% $249,813 100.00% 2.74% $191,143 100.00% 3.40% $180,942 100.00% 3.18%
======== ====== ==== ======== ====== ==== ======== ====== ==== ======== ====== ====
63
The following table sets forth the time deposits in Synergy Bank classified
by interest rate as of the dates indicated.
At March 31, At December 31,
-------------------- ----------------------
2002 2001 2000 1999
-------- -------- --------- ---------
(In thousands)
Interest Rate
2.00-2.99%............. $ 33,127 $ 11,816 $ 95 $ 3
3.00-3.99%............. 54,994 26,303 832 1,052
4.00-4.99%............. 35,583 51,783 5,436 27,804
5.00-5.99%............. 11,193 25,626 45,182 32,856
6.00-6.99%............. 783 5,414 23,019 2,865
7.00-7.99%............. 22 96 425 563
Total................ $135,702 $121,038 $74,989 $65,143
The following table sets forth the amount and maturities of time deposits
at March 31, 2002.
Amount Due
---------------------------------------------------------------------------------
After
March 31, March 31, March 31, March 31, March 31, March 31,
Interest Rate 2003 2004 2005 2006 2007 2007 Total
- ------------- ---------- --------- ---------- ---------- ---------- ---------- ---------
(In thousands)
2.00-2.99%............ $ 33,127 $ - $ - $ - $ - $ - $33,127
3.00-3.99%............ 19,989 33,438 1,567 - - - 54,994
4.00-4.99%............ 19,352 10,277 4,951 - 888 115 35,583
5.00-5.99%............ 7,442 2,310 407 524 410 100 11,193
6.00-6.99%............ 175 179 333 96 - - 783
7.00-7.99%............ - 22 - - - - 22
------- ------- ------ ----- ------ ----- --------
Total............... $80,085 $46,226 $7,258 $ 620 $1,298 $ 215 $135,702
======= ======= ====== ===== ====== ===== ========
The following table shows the amount of our certificates of deposit of
$100,000 or more by time remaining until maturity as of March 31, 2002.
Certificates
Remaining Time Until Maturity of Deposits
--------------
(In thousands)
Within three months................................... $ 5,768
Three through six months.............................. 6,810
Six through twelve months............................. 3,509
Over twelve months.................................... 8,088
-------
$24,175
=======
Borrowings. As the need arises or in order to take advantage of funding
opportunities or to supplement our deposits as a source of funds, we borrow
funds in the form of advances from the FHLB to supplement our supply of lendable
funds and to meet deposit withdrawal requirements. Advances from the FHLB are
typically secured by the FHLB stock we own and a portion of our residential
mortgage loans
64
and may be secured by other assets, mainly securities which are obligations of
or guaranteed by the U.S. government. We use convertible FHLB advances for a
portion of our funding needs. These borrowings are fixed rate advances that can
be called at the option of the FHLB. At March 31, 2002, our borrowing limit with
the FHLB was approximately $88.1 million.
At March 31, 2002, we had a line of credit for $26.0 million from the FHLB,
maturing July 2, 2002. We had draws of $13.0 million on this line of credit at
March 31, 2002, and no draws at December 31, 2001 and 2000, respectively. See
Notes 7 and 12 of the Notes to the Consolidated Financial Statements beginning
on page F-8.
The following table sets forth certain information regarding our borrowed
funds.
Three Months At or for the
Ended Year Ended December 31,
March 31, 2002 2001 2000 1999
------------- -------- --------- --------
(Dollars in thousands)
FHLB Advances:
Average balance outstanding................... $35,950 $29,385 $31,227 $17,208
Maximum amount outstanding
at any month-end during the period.......... $43,150 $34,500 $43,046 $21,700
Balance outstanding at end of period.......... $41,500 $22,500 $31,500 $21,700
Weighted average interest rate during the
period..................................... 4.61% 6.24% 6.83% 5.63%
Weighted average interest rate at end of
period..................................... 3.77% 6.02% 6.24% 5.99%
Subsidiary Activity
In addition to Synergy Bank, Synergy Financial Group, Inc. has one service
corporation subsidiary, Synergy Financial Services, Inc., which was incorporated
under New Jersey law in June 1997 and began operation in May 1998. It was
organized for the purpose of providing securities brokerage, insurance and
investment services and products, including mutual funds and annuities, to
customers of Synergy Bank and the general public. In April 1999, Synergy
Financial Services, Inc. entered into an agreement with INVEST Financial
Corporation of Tampa, Florida, one of the nation's largest full-service
providers of investment and insurance products through financial institutions,
and continues to offer services and products through such company. At March 31,
2002, Synergy Financial Services, Inc. had total assets of $72,000. At March 31,
2002, Synergy Financial Services, Inc. had approximately $17.0 million of assets
under management. For the year ended December 31, 2001, it had commission income
of $270,000, however, it reported a net operating loss of approximately $30,000.
65
Personnel
As of March 31, 2002, we had seventy-nine full-time employees and
thirty-eight part-time employees. The employees are not represented by a
collective bargaining unit. We believe our relationship with our employees is
satisfactory.
Properties and Equipment
Our main office is located at 310 North Avenue East, Cranford, New Jersey.
At March 31, 2002, we had eleven locations, including our main office.
Subsequent to March 31, 2002, our branch office in Shelby County, Tennessee was
closed. Two new branch offices were opened in April and May 2002. All of our
branch offices are located in Middlesex, Monmouth, Morris and Union counties,
New Jersey. We use an outside service company for data processing.
The following table sets forth the location of our main office and branch
offices, the year the offices were opened and the net book value of each office.
Year Facility Leased or Net Book Value at
Office Location Opened Owned March 31, 2002
- --------------- ------------- --------- -----------------
Main Office 1991 Owned $2,572,000
310 North Avenue East
Cranford, New Jersey
Branch Offices:
2000 Galloping Hill Road 1989 Leased(1) -
Kenilworth, New Jersey
-
2000 Galloping Hill Road 1978 Leased(1)
Kenilworth, New Jersey
1011 Morris Avenue 1952 Leased(1) -
Union, New Jersey
One Giralda Farms 1983 Leased(1) -
Madison, New Jersey
1095 Morris Avenue 1993 Leased(1) -
Union, New Jersey
2000 Galloping Hill Road 1993 Leased(1) -
Kenilworth, New Jersey
15 Market Street 1998 Leased(2) 686,000
Kenilworth, New Jersey
315 Central Avenue 1999 Leased(3) 434,000
Clark, New Jersey
225 North Wood Avenue 2001 Leased(4) 231,000
Linden, New Jersey
1162 Green Street 2002 Owned 1,645,000
Iselin, New Jersey(5)
168-170 Main Street 2002 Owned 2,027,000
Matawan, New Jersey(5)
66
Year Facility Leased or Net Book Value at
Office Location Opened Owned March 31, 2002
- --------------- ------------- --------- -----------------
Land and buildings acquired N/A Owned 3,164,000
for future branch sites(6)
________________
(1) Branch is located within a corporate facility of Synergy Bank's former
credit union sponsor. Synergy Bank makes no rent payments for such branch.
These branch locations are occupied pursuant to a written agreement that
provides for two-year terms that are automatically renewed upon expiration
unless written notice of termination is given by either party.
(2) Lease term of fifteen years to expire in 2013. Terms provide for four
five-year renewal options.
(3) Lease term of ten years to expire in 2009. Terms provide for one ten-year
renewal option.
(4) Lease term of five-years to expire in 2005. Terms provide for one five-year
renewal option.
(5) Opened in second quarter of 2002.
(6) Consists of two branches to be opened in second half of 2002.
Legal Proceedings
Synergy Financial Group, Inc. and its subsidiaries, from time to time, are
a party to routine litigation, which arises in the normal course of business,
such as claims to enforce liens, condemnation proceedings on properties in which
Synergy Bank holds security interests, claims involving the making and servicing
of real property loans, and other issues incident to the business of Synergy
Bank. There were no lawsuits pending or known to be contemplated against us at
March 31, 2002 that would have a material effect on our operations or income.
REGULATION
Set forth below is a brief description of certain laws that relate to the
regulation of Synergy Bank and Synergy Financial Group, Inc. The description
does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations. Synergy Bank and Synergy Financial Group, Inc.
operate in a highly regulated industry. This regulation and supervision
establishes a comprehensive framework of activities in which a federal savings
bank may engage and is intended primarily for the protection of the deposit
insurance fund and depositors.
Any change in applicable statutory and regulatory requirements, whether by
the OTS, the FDIC or the United States Congress, could have a material adverse
impact on Synergy Financial Group, Inc. and Synergy Bank, and their operations.
The adoption of regulations or the enactment of laws that restrict the
operations of Synergy Bank and/or Synergy Financial Group, Inc. or impose
burdensome requirements upon one or both of them could reduce their
profitability and could impair the value of Synergy Bank's franchise which could
hurt the trading price of Synergy Financial Group, Inc. common stock.
Regulation of Synergy Bank
General. As a federally chartered, SAIF-insured savings bank, Synergy Bank
is subject to extensive regulation by the OTS and the FDIC. This regulatory
structure gives the regulatory authorities extensive discretion in connection
with their supervisory and enforcement activities and examination policies,
including policies regarding the classification of assets and the level of the
allowance for loan losses. The activities of federal savings banks are subject
to extensive regulation including restrictions or requirements with respect to
loans to one borrower, the percentage of non-mortgage loans or investments to
total assets, capital distributions, permissible investments and lending
activities, liquidity, transactions with affiliates and community reinvestment.
Federal savings banks are also subject to reserve requirements of the Federal
Reserve System. A federal savings bank's relationship with its depositors and
borrowers
67
is regulated by both state and federal law, especially in such matters as the
ownership of savings accounts and the form and content of the bank's mortgage
documents.
Synergy Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, and must obtain regulatory approvals prior
to entering into certain transactions such as mergers with or acquisitions of
other financial institutions. The OTS regularly examines Synergy Bank and
prepares reports to Synergy Bank's Board of Directors on deficiencies, if any,
found in its operations.
Insurance of Deposit Accounts. The FDIC administers two separate deposit
insurance funds. Generally, the Bank Insurance Fund ("BIF") insures the deposits
of commercial banks and the Savings Association Insurance Fund ("SAIF") insures
the deposits of savings institutions. The FDIC is authorized to increase deposit
insurance premiums if it determines such increases are appropriate to maintain
the reserves of either the BIF or SAIF or to fund the administration of the
FDIC. In addition, the FDIC is authorized to levy emergency special assessments
on BIF and SAIF members. The assessment rate for most savings institutions,
including Synergy Bank, is currently 0%.
In addition, all FDIC-insured institutions are required to pay assessments
to the FDIC at an annual rate of approximately .0212% of insured deposits to
fund interest payments on bonds issued by the Financing Corporation ("FICO"), an
agency of the Federal government established to recapitalize the predecessor to
the SAIF. These assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) "Tier 1" or "core" capital equal to at least 4%
(3% if the institution has received the highest possible rating on its most
recent examination) of total adjusted assets, and (3) risk-based capital equal
to 8% of total risk-weighted assets. For Synergy Bank's compliance with these
regulatory capital standards, see Historical and Pro Forma Capital Compliance on
page 22.
In addition, the OTS may require that a savings institution that has a
risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total
adjusted assets of less than 4% (3% if the institution has received the highest
rating on its most recent examination) take certain action to increase its
capital ratios. If the savings institution's capital is significantly below the
minimum required levels of capital or if it is unsuccessful in increasing its
capital ratios, the OTS may restrict its activities.
For purposes of the OTS capital regulations, tangible capital is defined as
core capital less all intangible assets except for certain mortgage servicing
rights. Tier 1 or core capital is defined as common stockholders' equity,
non-cumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of consolidated subsidiaries, and certain
non-withdrawable accounts and pledged deposits of mutual savings banks. Synergy
Bank does not have any non-withdrawable accounts or pledged deposits. Tier 1 and
core capital are reduced by an institution's intangible assets, with limited
exceptions for certain mortgage and non-mortgage servicing rights and purchased
credit card relationships. Both core and tangible capital are further reduced by
an amount equal to the savings institution's debt and equity investments in
"non-includable" subsidiaries engaged in activities not permissible to national
banks other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total capital of 8% of risk-weighted assets. Total capital equals
the sum of core and supplementary capital. The
68
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, the portion of the
allowance for loan losses not designated for specific loan losses and up to 45%
of unrealized gains on equity securities. The portion of the allowance for loan
and lease losses includable in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100%
of core capital. For purposes of determining total capital, a savings
institution's assets are reduced by the amount of capital instruments held by
other depository institutions pursuant to reciprocal arrangements and by the
amount of the institution's equity investments (other than those deducted from
core and tangible capital) and its high loan-to-value ratio land loans and
non-residential construction loans.
A savings institution's risk-based capital requirement is measured against
risk-weighted assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance- sheet item after being multiplied
by an assigned risk weight. These risk weights range from 0% for cash to 100%
for delinquent loans, property acquired through foreclosure, commercial loans,
and other assets.
OTS rules require a deduction from capital for savings institutions with
certain levels of interest rate risk. The OTS calculates the sensitivity of an
institution's net portfolio value based on data submitted by the institution in
a schedule to its quarterly Thrift Financial Report and using the interest rate
risk measurement model adopted by the OTS. The amount of the interest rate risk
component, if any, deducted from an institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. The OTS has
indefinitely postponed implementation of the interest rate risk component, and
Synergy Bank has not been required to determine whether it will be required to
deduct an interest rate risk component from capital.
Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective Action
regulations, the OTS is required to take supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's level of capital. Generally, a savings institution that has total
risk-based capital of less than 8.0%, or a leverage ratio or a Tier 1 core
capital ratio that is less than 4.0%, is considered to be undercapitalized. A
savings institution that has total risk-based capital less than 6.0%, a Tier 1
core risk-based capital ratio of less than 3.0% or a leverage ratio that is less
than 3.0% is considered to be "significantly undercapitalized." A savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Generally, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within forty-five days of
the date an institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." In addition,
numerous mandatory supervisory actions become immediately applicable to the
institution, including, but not limited to, restrictions on growth, investment
activities, capital distributions, and affiliate transactions. The OTS may also
take any one of a number of discretionary supervisory actions against
undercapitalized institutions, including the issuance of a capital directive and
the replacement of senior executive officers and directors.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan holding
company, such as Synergy Bank, must file an application or a notice with the OTS
at least thirty days before making a capital distribution. A savings institution
must file an application for prior approval of a capital distribution if: (i) it
is not eligible for expedited treatment under the applications processing rules
of the OTS; (ii) the total
69
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings bank's net income for that year to date plus the institution's
retained net income for the preceding two years; (iii) it would not adequately
be capitalized after the capital distribution; or (iv) the distribution would
violate an agreement with the OTS or applicable regulations.
Synergy Bank will be required to file a capital distribution notice or
application with the OTS before paying any dividend to Synergy Financial Group,
Inc. However, capital distributions by Synergy Financial Group, Inc., as a
savings and loan holding company, will not be subject to the OTS capital
distribution rules.
The OTS may disapprove a notice or deny an application for a capital
distribution if: (i) the savings institution would be undercapitalized following
the capital distribution; (ii) the proposed capital distribution raises safety
and soundness concerns; or (iii) the capital distribution would violate a
prohibition contained in any statute, regulation or agreement. In addition, a
federal savings institution cannot distribute regulatory capital that is
required for its liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet a
qualified thrift lender ("QTL") test or they become subject to the business
activity restrictions and branching rules applicable to national banks. To
qualify as a QTL, a savings institution must either (i) be deemed a "domestic
building and loan association" under the Internal Revenue Code by maintaining at
least 60% of its total assets in specified types of assets, including cash,
certain government securities, loans secured by and other assets related to
residential real property, educational loans and investments in premises of the
institution or (ii) satisfy the statutory QTL test set forth in the Home Owners'
Loan Act by maintaining at least 65% of its "portfolio assets" in certain
"Qualified Thrift Investments" (defined to include residential mortgages and
related equity investments, certain mortgage-related securities, small business
loans, student loans and credit card loans, and 50% of certain community
development loans). For purposes of the statutory QTL test, portfolio assets are
defined as total assets minus intangible assets, property used by the
institution in conducting its business, and liquid assets equal to 20% of total
assets. A savings institution must maintain its status as a QTL on a monthly
basis in at least nine out of every twelve months. Synergy Bank met the QTL test
as of March 31, 2002 and in each of the last twelve months and, therefore,
qualifies as a QTL.
Transactions with Affiliates. Generally, federal banking law requires that
transactions between a savings institution or its subsidiaries and its
affiliates must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, certain types of these
transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. In
addition, a savings institution may not extend credit to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The OTS has the discretion
to treat subsidiaries of savings institutions as affiliates on a case-by-case
basis.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
every insured depository institution, including Synergy Bank, has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the OTS to assess the
depository institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications by
such institution, such as a merger or the establishment
70
of a branch office by Synergy Bank. An unsatisfactory CRA examination rating may
be used as the basis for the denial of an application by the OTS.
Federal Home Loan Bank System. Synergy Bank is a member of the FHLB of New
York, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by financial institutions and proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes loans to members
pursuant to policies and procedures established by the board of directors of the
FHLB.
As a member, Synergy Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to the greater of 1% of our aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of FHLB advances. We are in compliance with
this requirement. The FHLB imposes various limitations on advances such as
limiting the amount of certain types of real estate related collateral to 30% of
a member's capital and limiting total advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future.
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest-bearing reserves at specified levels
against their checking accounts and non-personal certificate accounts. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve System may be used to satisfy the OTS liquidity requirements.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System.
Regulation of Synergy Financial Group, Inc.
General. Synergy Financial Group, Inc. is a federal mutual holding company
subsidiary within the meaning of Section 10(o) of the Home Owners' Loan Act. It
is required to file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
Synergy Financial Group, Inc. and any non-savings institution subsidiaries. This
permits the OTS to restrict or prohibit activities that it determines to be a
serious risk to Synergy Bank. This regulation is intended primarily for the
protection of the depositors and not for the benefit of stockholders of Synergy
Financial Group, Inc.
Activities Restrictions. As a savings and loan holding company formed after
May 4, 1999, Synergy Financial Group, Inc. is not a grandfathered unitary
savings and loan holding company under the Gramm-Leach-Bliley Act (the "GLB
Act"). As a result, Synergy Financial Group, Inc. and its non- savings
institution subsidiaries are subject to statutory and regulatory restrictions on
their business activities. Under the Home Owners' Loan Act, as amended by the
GLB Act, the non-banking activities of Synergy Financial Group, Inc. are
restricted to certain activities specified by OTS regulation, which include
performing services and holding properties used by a savings institution
subsidiary, activities authorized for savings and loan holding companies as of
March 5, 1987, and non-banking activities permissible for bank holding companies
pursuant to the Bank Holding Company Act of 1956 (the "BHC
71
Act") or authorized for financial holding companies pursuant to the GLB Act.
Furthermore, no company may acquire control of Synergy Bank unless the acquiring
company was a unitary savings and loan holding company on May 4, 1999 (or became
a unitary savings and loan holding company pursuant to an application pending as
of that date) or the company is only engaged in activities that are permitted
for multiple savings and loan holding companies or for financial holding
companies under the BHC Act as amended by the GLB Act.
Mergers and Acquisitions. Synergy Financial Group, Inc. must obtain
approval from the OTS before acquiring more than 5% of the voting stock of
another savings institution or savings and loan holding company or acquiring
such an institution or holding company by merger, consolidation or purchase of
its assets. In evaluating an application for Synergy Financial Group, Inc. to
acquire control of a savings institution, the OTS would consider the financial
and managerial resources and future prospects of Synergy Financial Group, Inc.
and the target institution, the effect of the acquisition on the risk to the
insurance funds, the convenience and the needs of the community and competitive
factors.
Waivers of Dividends by Synergy, MHC. OTS regulations require Synergy, MHC
to notify the OTS of any proposed waiver of its receipt of dividends from
Synergy Financial Group, Inc. The OTS reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (i)
the mutual holding company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for as long as the savings association subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with SFAS 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; and (iv) the
amount of any waived dividend is considered as having been paid by the savings
association in evaluating any proposed dividend under OTS capital distribution
regulations.
We anticipate that Synergy, MHC will waive dividends paid by Synergy
Financial Group, Inc. , if any. Under OTS regulations, our public stockholders
would not be diluted because of any dividends waived by Synergy, MHC (and waived
dividends would not be considered in determining an appropriate exchange ratio)
in the event Synergy, MHC converts to stock form.
Conversion of Synergy, MHC to Stock Form. OTS regulations permit Synergy,
MHC to convert from the mutual form of organization to the capital stock form of
organization (a "Conversion Transaction"). There can be no assurance when, if
ever, a Conversion Transaction will occur, and the Board of Directors has no
current intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to Synergy
Financial Group, Inc. (the "New Holding Company"), Synergy, MHC's corporate
existence would end, and certain depositors of Synergy Bank would receive the
right to subscribe for additional shares of the New Holding Company. In a
Conversion Transaction, each share of common stock held by stockholders other
than Synergy, MHC ("Minority Stockholders") would be automatically converted
into a number of shares of common stock of the New Holding Company determined
pursuant to an exchange ratio that ensures that Minority Stockholders own the
same percentage of common stock in the New Holding Company as they owned in
Synergy Financial Group, Inc. immediately prior to the Conversion Transaction.
Under OTS regulations, Minority Stockholders would not be diluted because of any
dividends waived by Synergy, MHC (and waived dividends would not be considered
in determining an appropriate exchange ratio), in
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the event Synergy, MHC converts to stock form. The total number of shares held
by Minority Stockholders after a Conversion Transaction also would be increased
by any purchases by Minority Stockholders in the stock offering conducted as
part of the Conversion Transaction.
TAXATION
Federal Taxation
Savings institutions are subject to the Internal Revenue Code of 1986, as
amended (the "Code"), in the same general manner as other corporations.
All thrift institutions are now subject to the same provisions as banks
with respect to deductions for bad debts. Thrift institutions that are treated
as "small banks" (the average adjusted bases for all assets of such institution
equals $500 million or less) under the Code may account for bad debts by using
the experience method for determining additions to their bad debt reserve.
Thrift institutions that are not treated as small banks must now use the
specific charge-off method.
Synergy Financial Group, Inc. may exclude from its income 100% of dividends
received from Synergy Bank as a member of the same affiliated group of
corporations. A 70% dividends received deduction generally applies with respect
to dividends received from corporations that are not members of such affiliated
group.
Synergy Financial Group, Inc.'s and Synergy Bank's federal income tax
returns have not been audited by the IRS during the past five years.
State Taxation
Synergy Financial Group, Inc. and its subsidiaries file New Jersey income
tax returns and are subject to a state income tax that is calculated based on
federal taxable income, subject to certain adjustments. In July 2002, New Jersey
eliminated the 3% tax rate formerly applicable to thrift institutions located in
New Jersey, and such institutions are now subject to the 9% tax rate applicable
to New Jersey corporations. Such change is retroactive to January 1, 2002. The
net effect of the retroactive tax increase on Synergy Financial Group, Inc. is
not material, however, the increased tax rate will have an effect on future tax
periods.
The state income tax returns of Synergy Financial Group, Inc. and its
subsidiaries have not been audited during the past five years. For additional
information, see Note 10 of the Notes to the Consolidated Financial Statements
beginning on page F-8.
MANAGEMENT
Directors and Executive Officers of Synergy Financial Group, Inc.
Synergy Financial Group, Inc.'s Board of Directors is composed of nine
members each of whom serves for a term of three years. Synergy Financial Group,
Inc.'s bylaws require that directors be divided into three classes, as nearly
equal in number as possible, with approximately one-third of the directors
elected each year. Synergy Financial Group, Inc.'s executive officers are
appointed annually by the Board and serve at the Board's discretion.
73
The following table sets forth information with respect to the directors
and executive officers of Synergy Financial Group, Inc.
Age at Current
March 31, Director Term
Name 2002 Position Since(1) Expires
- ---- --------- -------- -------- -------
Kenneth S. Kasper 47 Chairman of the Board 1993 2005
Nancy A. Davis 62 Director 1977 2003
Magdalena M. De Perez 51 Director 2001 2005
John S. Fiore 44 President, Chief Executive Officer 2000 2003
and Director
David H. Gibbons, Jr. 32 Director 2001 2004
Paul T. LaCorte 49 Director 2001 2004
George Putvinski 53 Director 1993 2005
W. Phillip Scott 50 Director 1996 2003
Albert N. Stender 56 Director 1999 2004
Kevin M. McCloskey 44 Senior Vice President and Chief N/A N/A
Operating Officer
Kevin A. Wenthen 47 Senior Vice President, Chief N/A N/A
Administrative Officer and Secretary
Ralph A. Fernandez 37 Vice President and Chief Financial N/A N/A
Officer
______________________
(1) Indicates the year the individual first became a director of Synergy Bank
or Synergy Financial Group, Inc. Following the completion of Synergy Bank's
mutual holding company reorganization and the formation of Synergy
Financial Group, Inc. in 2001, each director of Synergy Bank automatically
became a director of Synergy Financial Group, Inc.
The business experience of each of our directors and executive officers is
set forth below. Each has held his or her present position for at least the past
five years, except as otherwise indicated.
Kenneth S. Kasper has served as Chairman of the Board of Directors of
Synergy Financial Group, Inc. since its formation in 2001. He has been a
director of Synergy Bank since 1993, and has served as Chairman of the Board of
Directors of Synergy Bank since 1998. Mr. Kasper is Director of Corporate EHST
Audits for Schering-Plough Corporation, a pharmaceutical research and
manufacturing company, a position he has held since 1991. Prior to that time,
Mr. Kasper was Senior Counsel for Schering-Plough. Mr. Kasper is also actively
involved in civic activities, serving as chairman for the Chester Borough Board
of Adjustment, Director of the Board of Environmental Health & Safety Auditor
Certifications ("BEAC"), board liaison for the BEAC Ethics Committee and
Director of the Council of Engineering and Scientific Specialty Boards.
Nancy A. Davis has served on the Board of Directors of Synergy Financial
Group, Inc. since its formation in 2001, and Synergy Bank since 1977. Ms. Davis
is employed as the Senior Legal Assistant for Schering-Plough Corporation. She
has been employed by Schering-Plough Corporation since 1965.
Magdalena M. De Perez has served on the Board of Directors of Synergy
Financial Group, Inc. and Synergy Bank since 2001. Ms. De Perez is Vice
President of Investments and a Quantum Portfolio
74
Manager for Prudential Securities Inc. She has worked in the financial services
industry since 1983 and acts as a financial advisor to several community service
organizations in Union County.
John S. Fiore has been the President and Chief Executive Officer of Synergy
Financial Group, Inc. since its formation in 2001 and has served as President
and Chief Executive Officer of Synergy Bank since 1995. He also serves as a
member of both Boards of Directors. He has been employed by Synergy Bank since
1989. Mr. Fiore also serves as Chairman of the Board of Directors of Synergy
Financial Services, Inc., a wholly-owned subsidiary of Synergy Financial Group,
Inc. Prior to 2002, Mr. Fiore was Secretary for the Central Jersey County
Savings League.
David H. Gibbons, Jr. has served on the Board of Directors of Synergy
Financial Group, Inc. and Synergy Bank since 2001. Mr. Gibbons is Executive Vice
President and General Counsel of David O. Evans, Inc., Vestal Development Co.,
Elberon Development Co., Gibbons Realty Group, Inc., and Portview Properties,
LLC, all of which are commercial real estate companies. Mr. Gibbons joined
Portview Properties, LLC in 2001 and Gibbons Realty Group, Inc. in 1999. Since
1999, Mr. Gibbons has been a salesperson with Kay Realty Services, LLC, a real
estate brokerage company. Mr. Gibbons is also active in the community and serves
as Chairman of the Board of Directors of Elizabeth Development Co., as a Trustee
for Trinitas Hospital and as a Director of the YMCA of Eastern Union County, the
Union County Alliance and Elizabeth Chamber of Commerce. In addition, Mr.
Gibbons serves as a Trustee for the National Association of Office and
Industrial Properties, a commercial real estate trade and lobbying organization.
Paul T. LaCorte has served on the Board of Directors of Synergy Financial
Group, Inc. and Synergy Bank since 2001. Mr. LaCorte is currently President of
Hamilton Holding Company and V & F, Inc., and a partner with Ditullio and
LaCorte Associates, LLC, all of which are real estate management service
companies. He is currently a member of the Union County Tax Board and is a
member and former Chairman of the Cranford Downtown Management Corporation and
the Union County Economic Development Corporation. He is also a member and
former President of the Cranford Chamber of Commerce.
George Putvinski has served on the Board of Directors of Synergy Financial
Group, Inc. since its formation in 2001, and Synergy Bank since 1993. Mr.
Putvinski is employed as the Director of Manufacturing Finance for
Schering-Plough Corporation. He has been employed by Schering-Plough Corporation
since 1979.
W. Phillip Scott has served on the Board of Directors of Synergy Financial
Group, Inc. since its formation in 2001, and Synergy Bank since 1996. Mr. Scott
is employed as the Manager of Sales and Logistics Accounting for Schering-Plough
Corporation. He has been employed by Schering-Plough Corporation since 1980.
Albert N. Stender has served on the Board of Directors of Synergy Financial
Group, Inc. since its formation in 2001, and Synergy Bank since 1999. Mr.
Stender is a partner with the law firm of Stender & Hernandez where he has
practiced law since 1985. He is also a partner in Mid-October Company. Mr.
Stender serves as a Director of the Cranford Chamber of Commerce, is municipal
attorney for the Township of Cranford and prosecutor for the Boroughs of
Kenilworth and Roselle Park.
Kevin M. McCloskey has served as Senior Vice President and Chief Operating
Officer since 2000. Prior to that time, Mr. McCloskey was the Vice President and
Chief Operating Officer for Lakeview Savings Bank. Mr. McCloskey is a Board
member and Treasurer of the YMCA of Eastern
75
Union County, a member of the Board of Trustees for Union County Economic
Development Corporation and is a Trustee of the Trinitas Health Foundation.
Kevin A. Wenthen has served as Senior Vice President and Chief
Administrative Officer since 1996 and as Secretary since 2002. Mr. Wenthen is
also President and Chief Executive Officer of Synergy Financial Services, Inc.,
a wholly-owned subsidiary of Synergy Financial Group, Inc. Mr. Wenthen serves on
the advisory board of the Center for Kids and Family, a division of Union
Hospital.
Ralph A. Fernandez has served as Vice President and Chief Financial Officer
for Synergy Financial Group, Inc. and Synergy Bank since 2000 and was Vice
President of Finance for Synergy Bank from 1999. Prior to that time, Mr.
Fernandez was a regional executive policy committee member, a senior examiner
and a senior analyst for the Office of Thrift Supervision.
Meetings and Committees of the Board of Directors
The Board of Directors conducts its business through meetings of the Board
and through activities of its committees. During the year ended December 31,
2001, the Board of Directors met thirteen times. No director attended fewer than
75% of the total meetings of the Board of Directors and committees on which he
or she served during the year ended December 31, 2001. The Board maintains an
Audit Committee, as well as an Executive and Compensation Committee, a Budget
and Asset/Liability Management Committee and a Nominating Committee.
The Audit Committee consists of Directors Gibbons (Chair), Davis, De Perez,
Kasper and LaCorte. This committee typically meets every other month with the
internal auditor and periodically as needed with the external auditors. This
committee's main responsibilities include oversight of the internal and external
auditors and monitoring of management and staff compliance with the Board's
audit policies, and applicable laws and regulations. During the year ended
December 31, 2001, this committee met seven times.
The Executive and Compensation Committee consists of Directors Kasper
(Chair), Gibbons, Fiore, Putvinski and Stender. This committee serves as an
interim decision-making body to address matters that arise between regularly
scheduled meetings of the full Board. This committee also makes recommendations
to the Board of Directors on corporate governance matters and exercises
supervision of major agenda items for and periodic reports presented at full
Board meetings. The responsibilities of this committee with regard to
compensation include appraisal of the chief executive officer's performance,
administration of management incentive compensation plans and review of the
directors' compensation. During the year ended December 31, 2001, this committee
met five times.
The Budget and Asset/Liability Management Committee consists of Directors
Putvinski (Chair), De Perez, Fiore, Scott and Stender. This committee oversees
Synergy Bank's investments, loans, other assets and its liabilities, primarily
its sources of funds, for the purpose of maintaining profitable spreads between
the cost of liabilities and the yield on assets consistent with prudent risk.
This committee meets generally during October and November each year with the
goal of developing an annual business and operating plan for presentation to the
full Board at the regular November meeting. In addition, at least one
non-employee member of this committee meets monthly with management to review
investment policies, loan and deposit pricing and production volumes, interest
rate risk analysis, liquidity and borrowing needs, and a variety of other asset
and liability management topics. The results of each monthly meeting are
presented to the full Board at its regular monthly meeting. During the year
ended December 31, 2001, this committee met twelve times.
76
The Nominating Committee consists of Directors Stender (Chair), De Perez,
Gibbons, Kasper, LaCorte and Putvinski. This committee recommends candidates for
election to the Board of Directors. This committee is not required to consider
nominees recommended by stockholders. During the year ended December 31, 2001,
this committee met one time.
Director Compensation
Board Fees. Each director is paid a fee of $1,000 per Board meeting and
$300 per committee meeting for each such meeting attended. The Chairman receives
an additional annual fee of $3,000. The total fees paid to the directors for the
year ended December 31, 2001 were approximately $155,000. Directors who also
serve as employees of Synergy Bank do not receive compensation as directors.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our President and Chief Executive
Officer and certain other executive officers for the years ended December 31,
2001, 2000, and 1999. No other officer received a total annual salary and bonus
in excess of $100,000 during the reporting period.
Annual Compensation(1)
---------------------------------------------
Fiscal Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation(2) Compensation(3)
- --------------------------- ------ --------- --------- --------------- ---------------
John S. Fiore, President and 2001 $189,000 $68,040 $2,069 $19,532
Chief Executive Officer 2000 175,000 94,500 1,812 17,133
1999 165,000 75,075 1,485 -
Kevin M. McCloskey, Senior 2001 $122,000 $37,820 $1,198 -
Vice President and Chief 2000 115,000 42,263 807 -
Operating Officer 1999 - - - -
Kevin A. Wenthen, Senior Vice 2001 $115,000 $35,650 $1,792 -
President and Chief 2000 103,000 49,870 1,767 -
Administrative Officer 1999 95,000 40,850 1,391 -
Ralph A. Fernandez, Vice 2001 $88,000 $27,280 - -
President and Chief Financial 2000 80,000 39,200 - -
Officer 1999 65,000 27,950 - -
______________
(1) All compensation set forth in the table was paid by Synergy Bank
(2) Taxable compensation attributed to personal use of company vehicle.
(3) Contributions by Synergy Bank in 2000 and 2001 to the account of Mr. Fiore
under the Bank's Supplemental Executive Retirement Plan.
Employment Agreements. Synergy Bank has entered into an employment
agreement with Mr. Fiore. Mr. Fiore's base salary under the employment agreement
for the year ended December 31, 2001 was $189,000. Mr. Fiore's employment
agreement has a term of three years and may be terminated by Synergy Bank for
"cause" as defined in the agreement. If Synergy Bank terminates Mr. Fiore's
employment without just cause, he will be entitled to a continuation of his
salary from the date of termination through the remaining term of the agreement.
The employment agreement contains a provision stating that after Mr. Fiore's
employment is terminated in connection with any change in control, he will be
paid a lump sum amount equal to 2.99 times his base salary and the highest rate
of bonus awarded to him during the three years prior to such termination. If
payments had been made under the agreements as of December 31, 2001, the
payments would have equaled approximately $660,000. In addition, the Board
77
has entered into Change in Control Severance Agreements with Officers Wenthen,
McCloskey and Fernandez. Under such agreements, if their employment is
terminated within eighteen months of a change in control of Synergy Bank, such
individuals would receive severance benefits equal to approximately three times
their average annual compensation. At December 31, 2001, such payments would
have equaled $313,000, $355,500 and $233,000, respectively, upon termination
following a change in control. All payments to be made under these agreements
shall be reduced as may be necessary so that such payments will not exceed the
tax deductible limits under Section 280G of the Code.
401(k) Savings Plan
Synergy Financial Group, Inc. sponsors a tax-qualified defined contribution
savings plan ("401(k) Plan") for the benefit of its employees and employees of
its subsidiaries. Employees become eligible to participate under the 401(k) Plan
on the first day of any calendar quarter following the completion of twelve
months of service. Under the 401(k) Plan, employees may voluntarily elect to
defer between 1% and 15% of compensation, not to exceed applicable limits under
the Code. In calendar year 2001, an employee could defer up to the lower of
$11,000 or 15% of his or her salary. In addition, the 401(k) Plan provides for
matching contributions up to a maximum of 5% of such person's salary for each
participant under the 401(k) Plan. Employee contributions are immediately fully
vested under the 401(k) Plan and matching contributions are vested at a rate of
20% per year and completely vested after five years of service. Participants
under the 401(k) Plan may direct Plan assets to be invested in company stock in
the offering. See Note 9 of the Notes to the Consolidated Financial Statements
beginning on page F-8.
It is intended that the 401(k) Plan will operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the requirements of Section 401(a) of the Code. Contributions to
the 401(k) Plan for employees may be reduced in the future or eliminated as a
result of contributions made to the Employee Stock Ownership Plan. See
Management - Potential Stock Benefit Plans - Employee Stock Ownership Plan on
page 79.
Supplemental Executive Retirement Plan. Synergy Bank has adopted a
Supplemental Executive Retirement Plan ("SERP" or "Plan") and Phantom Stock Plan
for the benefit of John S. Fiore, President and Chief Executive Officer.
Annually, the Bank accrues an expense of approximately 11% of his salary
including projected increases through his retirement at age 60, plus projected
earnings on prior year accruals at the rate of 7% per annum. Such accruals are
projected to furnish Mr. Fiore with an annual pension benefit upon retirement at
age 60 of $102,366 per year for a period of fifteen years. In addition, on
January 1, 2002, Synergy Bank implemented a SERP for the benefit of executive
officers Wenthen, McCloskey and Fernandez. In accordance with the Plan for
Messrs. Wenthen, McCloskey and Fernandez, an annual accrual equal to 10% of each
participant's base salary will be credited to the Plan reserve. The accumulated
deferred compensation account for each participant will be payable to such
participant at anytime following termination of employment after three years
following Plan implementation, the death or disability of the participant, or
termination of employment following a change in control of Synergy Bank whereby
Synergy Bank or Synergy Financial Group, Inc. is not the resulting entity. In
addition, the Bank previously adopted a Phantom Stock and Phantom Option Plan
for the benefit of John S. Fiore. Under such plan, Mr. Fiore was awarded phantom
options and phantom stock, the value of which is determined annually based upon
a valuation of Synergy Financial Group, Inc. assuming that it was a stock
company.
78
Potential Stock Benefit Plans
Employee Stock Ownership Plan. We intend to establish an employee stock
ownership plan for the exclusive benefit of participating employees of Synergy
Financial Group, Inc. and its subsidiaries, to be implemented after the
completion of the offering. Participating employees are employees who have
completed one year of service and have attained the age of 21. An application
for a letter of determination as to the tax-qualified status of the employee
stock ownership plan will be submitted to the IRS. Although no assurances can be
given, we expect that the employee stock ownership plan will receive a favorable
letter of determination from the IRS.
The employee stock ownership plan is to be funded by contributions made by
Synergy Financial Group, Inc. in cash or common stock. Benefits may be paid
either in shares of the common stock or in cash. The plan will borrow funds with
which to acquire up to 8% of the common stock to be issued in the offering. The
employee stock ownership plan intends to borrow funds from Synergy Financial
Group, Inc. The loan is expected to be for a term of ten years at an annual
interest rate equal to the prime rate as published in The Wall Street Journal.
Presently it is anticipated that the employee stock ownership plan will purchase
up to 8% of the common stock to be issued in the offering. The loan will be
secured by the shares purchased and earnings of employee stock ownership plan
assets. Shares purchased with loan proceeds will be held in a suspense account
for allocation among participants as the loan is repaid. It is anticipated that
all contributions will be tax-deductible. This loan is expected to be fully
repaid in approximately ten years.
Contributions to the employee stock ownership plan and shares released from
the suspense account will be allocated among participants on the basis of total
compensation. All participants must be employed at least 1,000 hours in a plan
year, or have terminated employment following death, disability or retirement,
in order to receive an allocation. Participant benefits become fully vested in
plan allocations following five years of service. Employment before the adoption
of the employee stock ownership plan shall be credited for the purposes of
vesting. Contributions to the employee stock ownership plan by Synergy Financial
Group, Inc. and Synergy Bank are discretionary and may cause a reduction in
other forms of compensation, including our 401(k) Plan. As a result, benefits
payable under this plan cannot be estimated.
The Board of Directors has appointed the non-employee directors to a
committee that will administer the plan and serve as the plan's trustees. The
trustees must vote all allocated shares held in the plan as directed by plan
participants. Unallocated shares and allocated shares for which no timely
direction is received will be voted as directed by the Board of Directors or the
plan's committee, subject to the trustees' fiduciary duties.
Stock Option Plan. We intend to adopt a stock option plan for directors and
officers after the offering. Any plan adopted will be subject to stockholder
approval and applicable laws. Up to 10% of the shares of common stock sold in
the offering will be reserved for issuance under the stock option plan. No
determinations have been made as to the specific terms of, or awards under, the
stock option plan.
The purpose of the stock option plan will be to attract and retain
qualified personnel in key positions, provide officers and directors with a
proprietary interest in Synergy Financial Group, Inc. as an incentive to
contribute to our success and reward directors and officers for outstanding
performance. Although the terms of the stock option plan have not yet been
determined, it is expected that the stock option plan will provide for the grant
of: (1) options to purchase the common stock intended to qualify as incentive
stock options under the Code (incentive stock options); and (2) options that do
not so qualify
79
(non-statutory stock options). Any stock option plan would be in effect for up
to ten years from the earlier of adoption by the Board of Directors or approval
by the stockholders. Options would expire no later than 10 years from the date
granted and would expire earlier if the option committee so determines or in the
event of termination of employment. Options would be granted based upon several
factors, including seniority, job duties and responsibilities and job
performance.
Restricted Stock Plan. After the passage of at least one year subsequent to
the offering, we also intend to establish a restricted stock plan to provide our
officers and directors with a proprietary interest in Synergy Financial Group,
Inc. The restricted stock plan is expected to provide for the award of common
stock, subject to vesting restrictions, to eligible officers and directors.
We expect to contribute funds to the restricted stock plan to acquire, in
the aggregate, up to 4% of the shares of common stock sold in the offering,
provided, however, that, pursuant to the regulations of the OTS, the plan will
be limited to up to 3% if Synergy Bank does not have in excess of 10% tangible
capital at the time the plan is established. Shares used to fund the restricted
stock plan may be acquired through open market purchases or provided from
authorized but unissued shares. No determinations have been made as to the
specific terms of the restricted stock plan.
Transactions with Management and Others
No directors, officers or their immediate family members were engaged in
transactions with Synergy Financial Group, Inc. or any subsidiary involving more
than $60,000 (other than through a loan) during the year ended December 31,
2001.
Synergy Bank makes loans to its officers, directors and employees in the
ordinary course of business and on substantially the same terms and conditions
as those of comparable transactions prevailing at the time with other persons,
other than a 1% discount on the interest rate paid on loans other than first
mortgages, automobile leases and credit cards, while the person remains an
employee, and do not include more than the normal risk of collectibility or
present other unfavorable features. No discounts are offered to directors.
Proposed Stock Purchases by Management
The following table sets forth for each of the directors and executive
officers of Synergy Financial Group, Inc. (including in each case all
"associates" of the directors and executive officers) the number of shares of
common stock which each director and officer intends to purchase, assuming the
sale of 1,100,000 shares of common stock at $10.00 per share. The table does not
include purchases by the employee stock ownership plan (8% of the common stock
sold in the offering), and does not take into account any stock benefit plans to
be adopted following the stock offering. See Management - Potential Stock
Benefit Plans on page 79.
Percentage if
Total Number Total Dollar 1,100,000 Total
of Shares Amount of Shares Shares Sold in
Name to be Purchased(1) to be Purchased the Offering(2)
- ------------------------- ------------------ ---------------- ----------------
Kenneth S. Kasper 10,000 $100,000 0.9%
Nancy A. Davis 10,000 100,000 0.9
Magdalena M. De Perez 1,000 10,000 0.1
John S. Fiore 15,000 150,000 1.4
David H. Gibbons, Jr. 10,000 100,000 0.9
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Percentage if
Total Number Total Dollar 1,100,000 Total
of Shares Amount of Shares Shares Sold in
Name to be Purchased(1) to be Purchased the Offering(2)
- ------------------------- ------------------ ---------------- ----------------
Paul T. LaCorte 10,000 100,000 0.9
George Putvinski 5,000 50,000 0.5
W. Phillip Scott 5,000 50,000 0.5
Albert N. Stender 5,000 50,000 0.5
Kevin McCloskey 10,000 100,000 0.9
Kevin A. Wenthen 6,500 65,000 0.6
Ralph A. Fernandez 10,000 100,000 0.9
------- -------- ----
Total 97,500 $975,000 8.9%
======= ======== ====
_________________
(1) Purchases of common stock in the offering by directors and executive
officers will be counted toward the minimum of 935,000 shares required to
be sold to complete the offering. Management may, but is not required to,
purchase additional shares in the offering to satisfy the 935,000 share
minimum. Shares of common stock purchased by directors and executive
officers cannot be sold for a period of one year following the offering,
and stock certificates issued to directors and executive officers will bear
a legend restricting their sale. See The Stock Offering - Restrictions on
Transferability by Directors and Executive Officers on page 94.
(2) In the event the stockholders of Synergy Financial Group, Inc. approve the
stock benefit plans as discussed in this prospectus (the restricted stock
plan (4% of the common stock sold in the offering) and the stock option
plan (10% of the common stock sold in the offering)), and all of the shares
of common stock available for award under the restricted stock plan are
awarded and all of the options available under the stock option plan are
awarded and exercised, directors and executive officers would own 251,500
shares or 22.9% of the shares of common stock outstanding, or 20.0% if the
option plan and restricted stock plan were funded with newly issued shares
instead of shares acquired in open market purchases. If fewer than
1,100,000 shares were publicly sold, these percentage ownership estimates
would increase. See Management - Potential Stock Benefit Plans on page 79.
Security Ownership of Certain Beneficial Owners and Management
Currently, all of the outstanding common stock of Synergy Financial Group,
Inc. is held by Synergy, MHC, the federal mutual holding company parent of
Synergy Financial Group, Inc. After the stock offering, Synergy, MHC will hold
56.5% of the outstanding common stock of Synergy Financial Group, Inc.
Information regarding the planned purchases of common stock in the stock
offering by directors and executive officers of Synergy Financial Group, Inc.
(including in each case all "associates" of the directors and executive
officers) is set forth above under Proposed Stock Purchases by Management. The
following table sets forth information regarding Synergy, MHC's ownership of
Synergy Financial Group, Inc. common stock.
Name and Address Percent of Shares of
of Beneficial Owner Number of Shares Common Stock Outstanding
- ------------------- ---------------- ------------------------
Synergy, MHC
310 North Avenue East
Cranford, New Jersey 07016 100 100%
THE STOCK OFFERING
The Board of Directors adopted the plan authorizing the stock offering on
May 1, 2002, subject to the approval of the OTS. We received authorization from
the Office of Thrift Supervision ("OTS") to conduct the stock offering on August
7, 2002. OTS authorization does not constitute a recommendation or endorsement
of an investment in our stock by the OTS.
General
On May 1, 2002, the Board of Directors adopted the plan of stock issuance,
pursuant to which Synergy Financial Group, Inc. will sell its common stock to
eligible depositors of Synergy Bank in a
81
subscription offering and, if necessary, to the general public if a community
and/or a syndicated community offering is held. The Board of Directors
unanimously adopted the plan after consideration of the advantages and the
disadvantages of the stock offering. After we receive the required authorization
from the OTS, the stock will be issued. The stock offering will be accomplished
in accordance with the procedures set forth in the plan, the requirements of
applicable laws and regulations, and the policies of the OTS.
We are offering between a minimum of 935,000 shares and an anticipated
maximum of 1,265,000 shares of common stock in the offering (subject to
adjustment to up to 1,454,750 shares if our estimated pro forma market value has
increased at the conclusion of the offering), which will expire at 12:00 noon,
eastern time, on September 4, 2002 unless extended. The minimum purchase is 25
shares of common stock (minimum investment of $250). Our common stock is being
offered at a fixed price of $10.00 per share in the offering.
We may hold subscription funds for up to 45 days after the last day of the
subscription offering in order to complete the offering and thus, unless waived
by us, all orders will be irrevocable until October 19, 2002. In addition, the
offering may not be completed until we receive authorization from the OTS to do
so. The authorization of the OTS is not a recommendation of the offering.
Completion of the offering will be delayed, and resolicitation will be required,
if the OTS does not issue a letter of approval within 45 days after the last day
of the subscription offering, or in the event the OTS requires a material change
to the offering prior to the issuance of its approval letter. If the offering is
not completed by October 19, 2002, subscribers will have the right to modify or
rescind their subscriptions and to have their subscription funds returned with
interest at Synergy Bank's regular savings account rate and all withdrawal
authorizations will be canceled.
We may cancel the offering at any time, and if we do, orders for common
stock already submitted would be canceled.
In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
pending completion or termination of the offering, subscription funds received
by us will be invested only in investments permissible under Rule 15c2-4.
Purposes of the Stock Offering
Synergy Financial Group, Inc. is offering for sale its common stock in the
stock offering at an aggregate price based on an independent valuation. The
proceeds from the sale of common stock of Synergy Financial Group, Inc. will
provide Synergy Bank with new equity capital, which will support future deposit
growth and expanded operations. While Synergy Bank currently exceeds all
regulatory capital requirements to be considered adequately capitalized, the
sale of stock, coupled with the accumulation of earnings, less dividends or
other reductions in capital, from year to year, represents a means for the
orderly preservation and expansion of Synergy Bank's capital base. If our
current growth continues at the same rate, and if we expand further as we
currently plan, we will need the additional capital to remain adequately
capitalized under regulatory capital requirements. After the stock offering,
Synergy Financial Group, Inc. may repurchase shares of its common stock. The
investment of the net proceeds of the offering also will provide additional
income to further enhance Synergy Bank's future capital position.
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Conduct of the Offering
Subject to the limitations of the plan of stock issuance adopted by our
Board of Directors, shares of common stock are being offered in descending order
of priority in the subscription offering to:
o Eligible Account Holders (depositors at the close of business on April 30,
2001 with deposits of at least $50.00);
o the employee stock ownership plan; and
o Supplemental Eligible Account Holders (depositors at the close of business
on June 30, 2002 with deposits of at least $50.00).
To the extent that shares remain available and depending on market
conditions at or near the completion of the subscription offering, we may
conduct a community offering and possibly a syndicated community offering. The
community offering, if any, may commence simultaneously with, during or
subsequent to the completion of the subscription offering. A syndicated
community offering, if we conduct one, would commence just prior to, or as soon
as practicable after, the termination of the subscription offering. In any
community offering or syndicated community offering, we will first fill orders
for our common stock in an equitable manner as determined by the Board of
Directors in order to achieve a wide distribution of the stock. If an
oversubscription occurs in the offering by Eligible Account Holders, the
employee stock ownership plan may, in whole or in part, fill its order through
open market purchases subsequent to the closing of the offering, subject to any
required regulatory approval.
Shares sold above the maximum of the offering range may be sold to the
employee stock ownership plan before satisfying remaining unfilled orders of
Eligible Account Holders to fill the plan's subscription, or the plan may
purchase some or all of the shares covered by its subscription after the
offering in the open market, subject to any required regulatory approval.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe for
the purchase of common stock have been granted under the plan of stock issuance
to the following persons:
Priority 1: Eligible Account Holders. Each Eligible Account Holder shall be
given the opportunity to purchase up to 10,000 shares, or $100,000, of common
stock offered in the subscription offering; subject to the overall limitations
described under The Stock Offering - Limitations on Purchases of Stock, see page
86. If there are insufficient shares available to satisfy all subscriptions of
Eligible Account Holders, shares will be allocated to Eligible Account Holders
so as to permit each subscribing Eligible Account Holder to purchase a number of
shares sufficient to make his or her total allocation equal to the lesser of 100
shares or the number of shares ordered. Thereafter, unallocated shares will be
allocated to remaining subscribing Eligible Account Holders whose subscriptions
remain unfilled in the same proportion that each subscriber's qualifying deposit
bears to the total amount of qualifying deposits of all subscribing Eligible
Account Holders, in each case on April 30, 2001, whose subscriptions remain
unfilled. Subscription rights received by officers and directors, based on their
increased deposits in Synergy Bank in the one year preceding the eligibility
record date will be subordinated to the subscription rights of other eligible
account holders. To ensure proper allocation of stock, each Eligible Account
Holder must list on his or her order form all accounts in which he or she had an
ownership interest as of the Eligibility Record Date.
83
Priority 2: The Employee Plans. The tax qualified employee plans may be
given the opportunity to purchase in the aggregate up to 10% of the common stock
issued in the subscription offering. It is expected that the employee stock
ownership plan will purchase up to 8% of the common stock issued in the
offering. If an oversubscription occurs in the offering by Eligible Account
Holders, the employee stock ownership plan may, in whole or in part, fill its
order through open market purchases subsequent to the closing of the offering,
subject to any required regulatory approval.
Priority 3: Supplemental Eligible Account Holders. If there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account Holders
and the employee stock ownership plan and other tax-qualified employee stock
benefit plans, each Supplemental Eligible Account Holder shall have the
opportunity to purchase up to 10,000 shares, or $100,000, of common stock
offered in the subscription offering, subject to the overall limitations
described under The Stock Offering - Limitations on Purchases of Common Stock,
see page 86. If Supplemental Eligible Account Holders subscribe for a number of
shares which, when added to the shares subscribed for by Eligible Account
Holders and the employee stock ownership plan and other tax-qualified employee
stock benefit plans, if any, is in excess of the total number of shares offered
in the offering, the shares of common stock will be allocated among subscribing
Supplemental Eligible Account Holders first so as to permit each subscribing
Supplemental Eligible Account Holder to purchase a number of shares sufficient
to make his or her total allocation equal to the lesser of 100 shares or the
number of shares ordered. Thereafter, unallocated shares will be allocated to
each subscribing Supplemental Eligible Account Holder whose subscription remains
unfilled in the same proportion that each subscriber's qualifying deposits bear
to the total amount of qualifying deposits of all subscribing Supplemental
Eligible Account Holders, in each case on June 30, 2002, whose subscriptions
remain unfilled. To ensure proper allocation of stock each Supplemental Eligible
Account Holder must list on his or her order form all accounts in which he or
she had an ownership interest as of the Supplemental Eligibility Record Date.
State Securities Laws. We, in our sole discretion, will make reasonable
efforts to comply with the securities laws of any state in the United States in
which Synergy Bank account holders at the eligibility record date or the
supplemental eligibility record date reside, and will only offer the common
stock in states in which the offers and sales comply with state securities laws.
However, subject to our discretion, no person will be offered common stock if he
or she resides in a foreign country or in a state of the United States with
respect to which:
o a small number of persons otherwise eligible to purchase shares reside in
that state; or
o the offer or sale of shares of common stock to these persons would require
us or our employees to register, under the securities laws of that state,
as a broker or dealer or to register or otherwise qualify its securities
for sale in that state; or
o registration or qualification would be impracticable for reasons of cost or
otherwise.
Restrictions on Transfer of Subscription Rights and Shares. The plan of
stock issuance prohibits any person with subscription rights, including Eligible
Account Holders and Supplemental Eligible Account Holders, from transferring or
entering into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights or the shares of common stock to be issued
when subscription rights are exercised. Subscription rights may be exercised
only by the person to whom they are granted and only for his or her account.
Each person subscribing for shares will be required to certify that he or she is
purchasing shares solely for his or her own account and that he or she has no
agreement or understanding regarding the sale or transfer of the shares. The
regulations also prohibit any person
84
from offering or making an announcement of an offer or intent to make an offer
to purchase subscription rights or shares of common stock before the completion
of the offering.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
which we determine involve the transfer of subscription rights.
Deadlines for Purchasing Stock
The subscription offering will terminate at 12:00 noon, eastern time, on
September 4, 2002 unless extended. The subscription offering may be extended to
September 29, 2002. A community offering and a syndicated community offering, if
such offerings are conducted, may terminate at any time without notice but no
later than October 19, 2002. See The Stock Offering on page 81.
Community Offering and Syndicated Community Offering
Community Offering. If less than the total number of shares of common stock
to be subscribed for in the offering are sold in the subscription offering and
depending on market conditions at or near the completion of the subscription
offering, shares remaining unsubscribed may be made available for purchase in
the community offering to certain members of the general public. The maximum
amount of common stock that any person may purchase in the community offering is
10,000 shares, or $100,000. In the community offering, if any, shares will be
available for purchase by the general public, and preference may be given to
natural persons residing in counties in which Synergy Bank has branch offices,
and second to natural persons residing in New Jersey. We will attempt to issue
the shares in a manner that would promote a wide distribution of common stock.
If purchasers in the community offering, whose orders would otherwise be
accepted, subscribe for more shares than are available for purchase, the shares
available to them will be allocated among persons submitting orders in the
community offering in an equitable manner we determine.
The community offering, if any, may commence simultaneously with, during or
subsequent to the completion of the subscription offering. The community
offering, if any, must be completed within 45 days after the completion of the
subscription offering unless otherwise extended by the OTS.
We, in our absolute discretion, reserve the right to reject any or all
orders in whole or in part which are received in the community offering, at the
time of receipt or as soon as practicable following the completion of the
community offering.
Syndicated Community Offering. If shares remain available after the
subscription offering, and depending on market conditions at or near the
completion of the subscription offering, we may offer shares to selected persons
through a syndicated community offering on a best-efforts basis conducted
through Trident Securities in accordance with such terms, conditions and
procedures as may be determined by our Board of Directors. A syndicate of
broker-dealers (selected dealers) may be formed to assist in the syndicated
community offering. A syndicated community offering, if we conduct one, would
commence just prior to, or as soon as practicable after, the termination of the
subscription offering.
Orders received in connection with the syndicated community offering, if
any, will receive a lower priority than orders received in the subscription
offering and community offering. Common stock sold in the syndicated community
offering will be sold at the same price as all other shares in the subscription
85
offering. A syndicated community offering would be open to the general public
beyond the local community, however, we have the right to reject orders, in
whole or in part, in our sole discretion in the syndicated community offering.
No person will be permitted to purchase more than 10,000 shares, or $100,000, of
common stock in the syndicated community offering.
The date by which orders must be received in the syndicated community
offering will be set by us at the time the syndicated community offering
commences; but if the syndicated community offering is extended beyond October
19, 2002, each purchaser will have the opportunity to maintain, modify, or
rescind his or her order. In that event, all funds received in the syndicated
community offering will be promptly returned with interest at Synergy Bank's
regular savings account rate to each purchaser unless he or she requests
otherwise.
Limitations on Purchases of Common Stock
The following additional limitations have been imposed on purchases of
shares of common stock:
1. The maximum number of shares which may be purchased in the offering by
any individual (or individuals through a single account) shall not
exceed 10,000 shares, or $100,000. This limit applies to stock
purchases in total in the subscription, community and syndicated
community offerings.
2. The maximum number of shares that may be purchased by any individual
together with any associate or group of persons acting in concert is
15,000 shares, or $150,000. This limit applies to stock purchases in
total in the subscription, community and syndicated community
offerings. This limit does not apply to our employee stock benefit
plans, which in the aggregate may subscribe for up to 10% of the
common stock issued in the offering.
3. The maximum number of shares which may be purchased in all categories
in the offering by our officers and directors and their associates in
the aggregate shall not exceed 31% of the total number of shares
issued in the offering.
4. The minimum order is 25 shares, or $250.
5. If the number of shares otherwise allocable to any person or that
person's associates would be in excess of the maximum number of shares
permitted as set forth above, the number of shares allocated to that
person shall be reduced to the lowest limitation applicable to that
person, and then the number of shares allocated to each group
consisting of a person and that person's associates shall be reduced
so that the aggregate allocation to that person and his or her
associates complies with the above maximums, and the maximum number of
shares shall be reallocated among that person and his or her
associates in proportion to the shares subscribed by each (after first
applying the maximums applicable to each person, separately).
6. Depending on market or financial conditions, we may decrease or
increase the purchase limitations, provided that the maximum purchase
limitations may not be increased to a percentage in excess of 5% of
the offering. If we increase the maximum purchase limitations, we are
only required to resolicit persons who subscribed for the maximum
purchase amount and may, in our sole discretion, resolicit certain
other large subscribers.
86
7. If the total number of shares offered increases in the offering due to
an increase in the maximum of the estimated valuation range of up to
15% (the adjusted maximum) the additional shares will be used in the
following order of priority: (a) to fill the employee stock ownership
plan's subscription up to 8% of the adjusted maximum; (b) if there is
an oversubscription at the Eligible Account Holder level, to fill
unfilled subscriptions of Eligible Account Holders exclusive of the
adjusted maximum; (c) if there is an oversubscription at the
Supplemental Eligible Account Holder level, to fill unfilled
subscriptions of Supplemental Eligible Account Holders exclusive of
the adjusted maximum; (d) to fill orders received in a community
offering exclusive of the adjusted maximum, with preference given to
persons who live in the local community; and (e) to fill orders
received in the syndicated community offering exclusive of the
adjusted maximum.
8. No person will be allowed to purchase any stock if that purchase would
be illegal under any federal law or state law or regulation or would
violate regulations or policies of the NASD, particularly those
regarding free riding and withholding. We and/or our representatives
may ask for an acceptable legal opinion from any purchaser regarding
the legality of the purchase and may refuse to honor any purchase
order if that opinion is not timely furnished.
9. We have the right to reject any order submitted by a person whose
representations we believe are untrue or who we believe is violating,
circumventing, or intends to violate, evade, or circumvent the terms
and conditions of the plan of stock issuance, either alone or acting
in concert with others.
10. The above restrictions also apply to purchases by persons acting in
concert under applicable regulations of the OTS. Under regulations of
the OTS, our directors are not considered to be affiliates or a group
acting in concert with other directors solely as a result of
membership on our Board of Directors.
11. In addition, in any community offering or syndicated community
offering, we must first fill orders for our common stock up to a
maximum of 2% of the total shares issued in the offering in a manner
that will achieve a wide distribution of the stock, and thereafter any
remaining shares will be allocated on an equal number of shares per
order basis, until all orders have been filled or the shares have been
exhausted.
The term "associate" of a person is defined in the plan of stock issuance
to mean:
(1) any corporation or organization of which a person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities;
(2) any trust or other estate in which a person has a substantial
beneficial interest or as to which a person serves as trustee or in a
similar fiduciary capacity; or
(3) any relative or spouse of a person or any relative of a spouse, who
has the same home as that person.
87
For example, a corporation for which a person serves as an officer would be
an associate of that person and all shares purchased by that corporation would
be included with the number of shares which that person individually could
purchase under the above limitations.
The term "acting in concert" means:
(1) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an
express agreement; or
(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether
written or otherwise.
A person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also acting in concert with that other party, except that any
tax-qualified employee stock benefit plan will not be deemed to be acting in
concert with its trustee or a person who serves in a similar capacity solely for
the purpose of determining whether stock held by the trustee and stock held by
the plan will be aggregated. We will presume that certain persons are acting in
concert based upon various facts, including the fact that persons have joint
account relationships or the fact that such persons have filed joint Schedules
13D with the Securities and Exchange Commission with respect to other companies.
We reserve the right to make an independent investigation of any facts or
circumstances brought to our attention that indicate that one or more persons
acting independently or as a group acting in concert may be attempting to
violate or circumvent the regulatory prohibition on the transferability of
subscription rights.
We have the right, in our sole discretion, to determine whether prospective
purchasers are "associates" or "acting in concert." These determinations are in
our sole discretion and may be based on whatever evidence we believe to be
relevant, including joint account relationships or shared addresses on the
records of Synergy Bank.
Each person purchasing shares of the common stock in the offering will be
considered to have confirmed that his or her purchase does not conflict with the
maximum purchase limitation. If the purchase limitation is violated by any
person or any associate or group of persons affiliated or otherwise acting in
concert with that person, we will have the right to purchase from that person at
the $10.00 purchase price per share all shares acquired by that person in excess
of that purchase limitation or, if the excess shares have been sold by that
person, to receive the difference between the purchase price per share paid for
the excess shares and the price at which the excess shares were sold by that
person. Our right to purchase the excess shares will be assignable.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by our directors and executive
officers. For certain restrictions on the common stock purchased by our
directors and executive officers, see The Stock Offering - Restrictions on
Transferability by Directors and Executive Officers on page 94. In addition,
under guidelines of the NASD, members of the NASD and their associates are
subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements after
the purchase.
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Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by completion
of an order form. Any person receiving an order form who desires to subscribe
for shares of common stock must do so prior to the applicable expiration date by
delivering by mail or in person a properly executed and completed order form,
together with full payment of the purchase price for all shares for which
subscription is made; provided, however, that if the employee plans subscribe
for shares during the subscription offering, the employee plans will not be
required to pay for the shares at the time they subscribe but rather may pay for
the shares upon completion of the offering. All subscription rights will expire
on the expiration date, whether or not we have been able to locate each person
entitled to subscription rights. Once tendered, subscription orders cannot be
revoked without our consent.
If a stock order form:
o is not delivered and is returned to us by the United States Postal
Service or we are unable to locate the addressee;
o is not received or is received after the applicable expiration date;
o is not completed correctly or executed;
o is not accompanied by the full required payment for the shares
subscribed for, including instances where a savings account or
certificate balance from which withdrawal is authorized is
unavailable, uncollected or insufficient to fund the required payment,
but excluding subscriptions by the employee plans; or
o is not mailed pursuant to a "no mail" order placed in effect by the
account holder;
then the subscription rights for that person will lapse as though that person
failed to return the completed order form within the time period specified.
However, we may, but will not be required to, waive any irregularity on any
order form or require the submission of corrected order forms or the remittance
of full payment for subscribed shares by a date that we may specify. The waiver
of an irregularity on an order form in no way obligates us to waive any other
irregularity on any other order form. Waivers will be considered on a case by
case basis. We will not accept orders received on photocopies or facsimile order
forms, or for which payment is to be made by wire transfer or payment from
private third parties. Our interpretation of the terms and conditions of the
plan of stock issuance and of the acceptability of the order forms will be
final, subject to the authority of the OTS.
To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to the expiration date or hand delivered any later than two days
prior to the expiration date. Execution of the order form will confirm receipt
or delivery in accordance with Rule 15c2-8. Order forms will only be distributed
with a prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. Employee plans subscribing for shares during the subscription
89
offering may pay for those shares upon completion of the offering. Payment for
shares of common stock may be made:
o in cash, if delivered in person;
o by check or money order made payable to Synergy Bank; or
o for shares subscribed for in the subscription offering, by
authorization of withdrawal from deposit accounts maintained with
Synergy Bank.
Payment for subscriptions of $25,000 or more must be paid by account
withdrawal, certified or cashier's check, or money order. In accordance with
Rule 15c2-4 of the Securities Exchange Act of 1934, subscribers' checks must be
made payable to Synergy Bank, and checks received by the Stock Information
Center will be transmitted by noon of the following business day directly to the
segregated deposit account at Synergy Bank established to hold funds received as
payment for shares.
Appropriate means by which account withdrawals may be authorized are
provided on the order form. Once a withdrawal has been authorized, none of the
designated withdrawal amount may be used by a subscriber for any purpose other
than to purchase the common stock for which a subscription has been made until
the offering has been completed or terminated. In the case of payments
authorized to be made through withdrawal from savings accounts, all sums
authorized for withdrawal will continue to earn interest at the contract rate
until the offering has been completed or terminated. Interest penalties for
early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares, however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal, without penalty, and the remaining balance will earn
interest at the regular savings account rate subsequent to the withdrawal. In
the case of payments made in cash or by check or money order, funds will be
placed in a segregated account and interest will be paid by Synergy Bank at the
regular savings account rate from the date payment is received until the
offering is completed or terminated. An executed order form, once we receive it,
may not be modified, amended, or rescinded without our consent, unless the
offering is not completed within 45 days after the conclusion of the
subscription offering, in which event subscribers may be given the opportunity
to increase, decrease, or rescind their subscription for a specified period of
time. If the offering is not completed for any reason, all funds submitted
pursuant to the offerings will be promptly refunded with interest as described
above.
Owners of self-directed IRAs may use the assets of their IRAs to purchase
shares of common stock in the offerings, provided that their IRAs are not
maintained on deposit at Synergy Bank. Persons with IRAs maintained at Synergy
Bank must have their accounts transferred to an unaffiliated institution or
broker to purchase shares of common stock in the offerings. There is no early
withdrawal or IRS interest penalties for these transfers. Instructions on how to
transfer self-directed IRAs maintained at Synergy Bank can be obtained from the
Stock Information Center. Depositors interested in using funds in a Synergy Bank
IRA to purchase common stock should contact the Stock Information Center as soon
as possible so that the necessary forms may be forwarded, executed and returned
prior to the expiration date.
Federal regulations prohibit Synergy Bank from lending funds or extending
credit to any person to purchase the common stock in the offering.
Stock Information Center. Our Stock Information Center is located at 310
North Avenue East, Cranford, New Jersey, 07016. The phone number is (908)
956-4011. The Stock Information Center's hours of operation are 9:00 a.m. to
5:00 p.m., eastern time, Monday through Friday.
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Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed to the persons entitled thereto at the
address noted on the order form, as soon as practicable following completion of
the offering. Any certificates returned as undeliverable will be held until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for the common stock are
available and delivered to subscribers, subscribers may not be able to sell the
shares of stock for which they subscribed.
Restriction on Sales Activities
Our directors, officers and other employees may participate in the offering
in ministerial capacities and have been instructed not to solicit offers to
purchase common stock or provide advice regarding the purchase of common stock.
Questions of prospective purchasers will be directed to registered
representatives of McDonald Investments Inc. None of our officers, directors or
other employees will be compensated in connection with his or her participation
in the offering by the payment of commissions or other remuneration based either
directly or indirectly on transactions in the common stock.
Restrictions on Repurchase of Shares
Generally, during the first year following the offering, we will not be
permitted to repurchase shares of our stock unless we can show extraordinary
circumstances. If extraordinary circumstances exist and if we can show a
compelling and valid business purpose for the repurchase, the OTS may approve
repurchases of up to 5% of the outstanding stock during the first year after the
offering. After the first year following the offering, we can repurchase any
amount of stock so long as the repurchase would not cause us to become
undercapitalized. If, in the future, the rules and regulations regarding the
repurchase of stock are liberalized, we may utilize the rules and regulations
then in effect.
Stock Pricing and the Number of Shares to be Offered
FinPro, Inc. which is experienced in the valuation and appraisal of
business entities, including savings institutions, has been retained to prepare
an independent valuation of the estimated pro forma market value of the common
stock (the "independent valuation"). This independent valuation will express our
pro forma market value in terms of an aggregate dollar amount. FinPro will
receive fees of $30,000 for its appraisal services, including the independent
valuation and any subsequent update, and assistance in preparation of our
business plan, plus up to $2,400 for reasonable out-of-pocket expenses incurred
in connection with the independent valuation and business plan. We have agreed
to indemnify FinPro under certain circumstances against liabilities and expenses
arising out of or based on any misstatement or untrue statement of a material
fact contained in the information supplied by us to FinPro, except where FinPro
is determined to have been negligent or failed to exercise due diligence in the
preparation of the independent valuation.
The number of shares of common stock to be offered in the offering will be
based on the estimated pro forma market value of the common stock and the
purchase price of $10.00 per share. FinPro has determined that as of July 29,
2002, our estimated aggregate pro forma market value was $25,287,350. Pursuant
to regulations, this estimate must be included within a range with a minimum of
$21,494,250 and a maximum of $29,989,450. We have determined to offer shares of
common stock in the offering at a price of $10.00 per share. We are offering a
maximum of 1,265,000 shares in the offering, subject to adjustment. In
determining the offering range, the Board of Directors reviewed FinPro's
independent valuation. The independent valuation contains an analysis of a
number of factors, including but not limited to our financial condition and
results of operations as of March 31, 2002, our operating trends, the
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competitive environment in which we operate, operating trends of certain savings
institutions and savings and loan holding companies, relevant economic
conditions both nationally and in New Jersey which affect the operations of
savings institutions, stock market values of certain institutions, and stock
market conditions for publicly traded savings institutions and savings and loan
holding companies. In addition, FinPro has advised us that it has considered and
will consider the effect of the additional capital raised by the sale of the
common stock on the estimated pro forma market value. The Board also reviewed
the methodology and the assumptions used by FinPro in preparing its independent
valuation. The number of shares is subject to change if the independent
valuation changes at the conclusion of the offering.
The number of shares and price per share of common stock was determined by
the Board of Directors based on the independent valuation. The actual number of
shares to be sold in the offering may be increased or decreased before
completion of the offering, subject to approval and conditions that may be
imposed by the OTS, to reflect any change in our estimated pro forma market
value.
Depending on market and financial conditions at the time of the completion
of the offering, we may increase or decrease the number of shares to be issued
in the offering. No resolicitation of purchasers will be made and purchasers
will not be permitted to modify or cancel their purchase orders unless the
change in the number of shares to be issued in the offering results in fewer
than 935,000 shares or more than 1,454,750 shares being sold in the offering at
the purchase price of $10.00, in which event we may also elect to terminate the
offering. If we terminate the offering, purchasers will receive a prompt refund
of their purchase orders, together with interest earned thereon from the date of
receipt to the date of termination of the offering. Furthermore, any account
withdrawal authorizations will be terminated. If we receive orders for less than
935,000 shares, at the discretion of the Board of Directors and subject to
approval of the OTS, we may establish a new offering range and resolicit
purchasers. If we resolicit, purchasers will be allowed to modify or cancel
their purchase orders. Any adjustments in our pro forma market value as a result
of market and financial conditions or a resolicitation of prospective purchasers
must be approved by the OTS.
The independent valuation will be updated at the time of the completion of
the offering, and the number of shares to be issued may increase or decrease to
reflect the changes in market conditions, the results of the offering, or our
estimated pro forma market value. If the updated independent valuation
increases, we may increase the number of shares sold in the offering to up to
1,454,750 shares. Subscribers will not be given the opportunity to change or
withdraw their orders unless more than 1,454,750 shares or fewer than 935,000
shares are sold in the offering. Any adjustment of shares of common stock sold
will have a corresponding effect on the estimated net proceeds of the offering
and the pro forma capitalization and per share data. An increase in the total
number of shares to be issued would decrease a subscriber's percentage ownership
interest and pro forma net worth (book value) per share and increase the pro
forma net income and net worth (book value) on an aggregate basis. In the event
of a reduction in the valuation, we may decrease the number of shares to be
issued to reflect the reduced valuation. A decrease in the number of shares to
be issued would increase a subscriber's percentage ownership interest and the
pro forma net worth (book value) per share and decrease the pro forma net income
and net worth on an aggregate basis. For a presentation of the possible effects
of an increase or decrease in the number of shares to be issued, see Pro Forma
Data on page 17.
The independent valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the common
stock. In preparing the independent valuation, FinPro has relied on and assumed
the accuracy and completeness of financial and statistical information provided
by us. FinPro did not independently verify the consolidated financial statements
and other information provided by us, nor did FinPro value independently our
assets and
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liabilities. The independent valuation considers us only as a going concern and
should not be considered as an indication of our liquidation value. Moreover,
because the independent valuation is based on estimates and projections on a
number of matters, all of which are subject to change from time to time, no
assurance can be given that persons purchasing the common stock will be able to
sell their shares at a price equal to or greater than the purchase price.
A copy of the independent valuation report is available for your review at
our main office. In addition, our Board of Directors does not make any
recommendation as to whether or not the stock will be a good investment for you.
No sale of shares of common stock may be completed unless FinPro confirms
that, to the best of its knowledge, nothing of a material nature has occurred
that, taking into account all relevant factors, would cause FinPro to conclude
that the independent valuation is incompatible with its estimate of our pro
forma market value at the conclusion of the offering. Any change that would
result in an aggregate value of the shares being offered to the public that is
below $9,350,000 or above $14,547,500 would be subject to OTS approval. If
confirmation from FinPro is not received, we may extend the offering, reopen or
commence a new offering, request a new independent valuation, establish a new
offering range and commence a resolicitation of all purchasers with the approval
of the OTS, or take other action as permitted by the OTS in order to complete
the offering.
Plan of Distribution/Marketing Arrangements
The common stock will be offered in the offering principally by the
distribution of this prospectus and through activities conducted at our Stock
Information Center. It is expected that a registered representative employed by
Trident Securities will be working at, and supervising the operation of, the
Stock Information Center. Trident Securities will provide assistance in
responding to questions regarding the offering and processing order forms.
We have entered into an agency agreement with Trident Securities under
which Trident Securities will provide financial advisory services and assist, on
a best efforts basis, in the solicitation of subscriptions and purchase orders
for the common stock in the offering. Trident Securities is a division of
McDonald Investments Inc., which is a broker-dealer registered with the National
Association of Securities Dealers, Inc. Specifically, Trident Securities will
assist in the offering in the following manner:
o keeping records of subscriptions and orders for common stock;
o training and educating our employees regarding the mechanics and regulatory
requirements of the stock offering process; and
o providing other general advice and assistance as may be requested to
promote the successful completion of the offering.
Trident Securities will receive, as compensation, a financial advisory fee
of $25,000, which was paid when Trident Securities was retained. Trident
Securities will also receive a success fee of $125,000 for stock sold in the
subscription and community offerings. For stock sold by other NASD member firms
under a selected dealer agreement if a syndicate of broker-dealers (selected
dealers) is formed to assist in the syndicated community offering, the
commission paid to those firms shall not exceed 6%. A syndicate will be formed
only with our consent.
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Trident Securities will also be reimbursed up to $45,000 for its
out-of-pocket expenses, including the fees and expenses of its legal counsel. We
have agreed to indemnify Trident Securities, to the extent allowed by law, for
reasonable costs and expenses in connection with certain claims or liabilities,
including certain liabilities under the Securities Act of 1933, as amended. See
Pro Forma Data on page 17 for further information regarding expenses of the
offering.
Restrictions on Transferability by Directors and Executive Officers
Shares of the common stock purchased by our directors or executive officers
cannot be sold for a period of one year following completion of the offering,
except for a disposition of shares after death. To ensure this restriction is
upheld, shares of the common stock issued to directors and executive officers
will bear a legend restricting their sale. Any shares issued to directors and
executive officers as a stock dividend, stock split, or otherwise with respect
to restricted stock will be subject to the same restriction.
For a period of three years following the offering, our directors and
executive officers and their associates may not, without the prior approval of
the OTS, purchase our common stock except from a broker or dealer registered
with the SEC. This prohibition does not apply to negotiated transactions
including more than 1% of our common stock or purchases made for tax qualified
or non-tax qualified employee stock benefit plans which may be attributable to
individual directors or executive officers.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the offering, no depositor may transfer or enter
into an agreement or understanding to transfer any subscription rights or the
legal or beneficial ownership of the shares of common stock to be purchased in
the offering. Depositors who submit an order form will be required to certify
that their purchase of common stock is solely for their own account and there is
no agreement or understanding regarding the sale or transfer of their shares. We
intend to pursue any and all legal and equitable remedies after we become aware
of any agreement or understanding, and will not honor orders we reasonably
believe to involve an agreement or understanding regarding the sale or transfer
of shares.
Effects of the Stock Offering
General. The stock offering will not have any effect on Synergy Bank's
present business of accepting deposits and investing its funds in loans and
other investments permitted by law. The stock offering will not result in any
change in the existing services provided to depositors and borrowers, or in
existing offices, management, and staff. After the stock offering, Synergy Bank
will continue to be subject to regulation, supervision, and examination by the
OTS and the FDIC.
Deposits and Loans. Each holder of a deposit account in Synergy Bank at the
time of the stock offering will continue as an account holder in Synergy Bank
after the stock offering, and the stock offering will not affect the deposit
balance, interest rate, or other terms. Each deposit account will be insured by
the FDIC to the same extent as before the stock offering. Depositors will
continue to hold their existing certificates, savings records, checkbooks, and
other evidence of their accounts. The stock offering will not affect the loans
of any borrower from Synergy Bank. The amount, interest rate, maturity, security
for, and obligations under each loan will remain contractually fixed as they
existed prior to the stock offering.
Voting Rights. As a federally chartered stock savings bank, all voting
rights of Synergy Bank are held solely by its sole stockholder, Synergy
Financial Group, Inc. All voting rights of Synergy Financial Group, Inc. are
held solely by its sole stockholder, Synergy, MHC. All voting rights of Synergy,
MHC are held by the depositors of Synergy Bank at the applicable record date.
After the stock offering, the
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voting rights of Synergy Financial Group, Inc. will be held by stockholders.
Synergy, MHC will own a majority of the outstanding common stock of Synergy
Financial Group, Inc., and thus the Board of Directors of Synergy, MHC, which is
comprised of the same individuals who are directors of Synergy Financial Group,
Inc., will control the affairs of Synergy Financial Group, Inc, including the
election of directors of Synergy Financial Group, Inc.
Tax Effects. We have received an opinion from Malizia Spidi & Fisch, PC,
and from Fontanella and Babitts on the federal and New Jersey tax consequences
of the stock offering. The opinion has been filed as an exhibit to the
registration statement of which this prospectus is a part and covers those
federal tax matters that are material to the transaction. Such opinion is made
in reliance upon various statements, representations and declarations as to
matters of fact made by us, as detailed in the opinion. The opinion provides
that:
o we will recognize no gain or loss upon the receipt of money in
exchange for shares of common stock; and
o no gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon the distribution to them of
the nontransferable subscription rights to purchase shares of common
stock.
The opinion in the second bullet above is predicated on representations
from Synergy Bank, Synergy Financial Group, Inc. and Synergy, MHC that no person
shall receive any payment, whether in money or property, in lieu of the issuance
of subscription rights. The opinion in the second bullet above is based on the
position that the subscription rights to purchase shares of common stock
received by Eligible Account Holders and Supplemental Eligible Account Holders
have a fair market value of zero. In reaching their opinion stated in the second
bullet above, Malizia Spidi & Fisch, PC has noted that the subscription rights
will be granted at no cost to the recipients, will be legally non-transferable
and of short duration, and will provide the recipients with the right only to
purchase shares of common stock at the same price to be paid by members of the
general public in any community offering. Malizia Spidi & Fisch, PC believes
that it is more likely than not that the fair market value of the subscription
rights to purchase common stock is zero.
If the non-transferable subscription rights to purchase common stock are
subsequently found to have a fair market value, income may be recognized by
various recipients of the subscription rights (in certain cases, whether or not
the rights are exercised), and we may be taxed on the distribution of the
subscription rights.
We are also subject to New Jersey income taxes and have received an opinion
from Fontanella and Babitts that the stock offering will be treated for New
Jersey state tax purposes similar to the treatment of the stock offering for
federal tax purposes.
Unlike a private letter ruling from the IRS, the federal and state tax
opinions have no binding effect or official status, and no assurance can be
given that the conclusions reached in any of those opinions would be sustained
by a court if contested by the IRS or the New Jersey tax authorities. Eligible
Account Holders and Supplemental Eligible Account Holders are encouraged to
consult with their own tax advisers as to the tax consequences in the event the
subscription rights are determined to have any market value.
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Amendment or Termination of the Plan of Stock Offering
If determined to be necessary or desirable by the Board of Directors, the
plan may be amended by a two-thirds vote of the full Board, with the concurrence
of the OTS. The plan may be terminated by the Board of Directors, by a
two-thirds vote with the concurrence of the OTS.
Conditions to the Offering
Completion of the offering is subject to:
1. the receipt of all the required approvals of the OTS for the issuance of
common stock in the offering, and
2. the sale of a minimum of 935,000 shares of common stock.
If such conditions are not met before we complete the offering, all funds
received will be promptly returned with interest at Synergy Bank's regular
savings account rate and all withdrawal authorizations will be canceled. The
stock purchases of our officers and directors will be counted for purposes of
meeting the minimum number of shares.
RESTRICTIONS ON ACQUISITION OF SYNERGY FINANCIAL GROUP, INC.
General
The principal federal regulatory restrictions which affect the ability of
any person, firm or entity to acquire Synergy Financial Group, Inc., Synergy
Bank or their respective capital stock are described below. Also discussed are
certain provisions in Synergy Financial Group, Inc.'s charter and bylaws which
may be deemed to affect the ability of a person, firm or entity to acquire
Synergy Financial Group, Inc.
Statutory and Regulatory Restrictions on Acquisition
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings institution unless the Office of Thrift Supervision has
been given 60 days prior written notice. The Home Owners' Loan Act provides that
no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock of a savings institution, where certain enumerated "control factors" are
also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control if:
o it would result in a monopoly or substantially lessen competition;
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o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o the competence, experience or integrity of the acquiring person indicates
that it would not be in the interest of the depositors or of the public to
permit the acquisition of control by such person.
These restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plans do not have beneficial ownership of more than 25%
of any class of equity security of the savings institution.
For a period of three years following completion of the stock issuance,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of Synergy Financial Group, Inc. or Synergy Bank without Office of
Thrift Supervision approval.
Charter and Bylaws of Synergy Financial Group, Inc.
The following discussion is a summary of certain provisions of the charter
and bylaws of Synergy Financial Group, Inc. that relate to corporate governance.
The description is necessarily general and qualified by reference to the charter
and bylaws.
Classified Board of Directors. The Board of Directors of Synergy Financial
Group, Inc. is required by the charter and bylaws to be divided into three
staggered classes which are as equal in size as is possible. One class is
required to be elected annually by stockholders of Synergy Financial Group, Inc.
for three-year terms, and classes are elected in series. A classified board
promotes continuity and stability of management of Synergy Financial Group,
Inc., but makes it more difficult for stockholders to change a majority of the
directors because it generally takes at least two annual elections of directors
for this to occur.
Authorized but Unissued Shares of Capital Stock. Following the stock
offering, Synergy Financial Group, Inc. will have authorized but unissued shares
of preferred stock and common stock. See Description of Capital Stock of Synergy
Financial Group, Inc. on page 99. Although these shares could be used by the
Board of Directors of Synergy Financial Group, Inc. to make it more difficult or
to discourage an attempt to obtain control of Synergy Financial Group, Inc.
through a merger, tender offer, proxy contest or otherwise, it is unlikely that
we would use or need to use shares for these purposes since Synergy, MHC owns a
majority of the common stock.
Special Meetings of Stockholders. Synergy Financial Group, Inc.'s charter
provides that for a period of five years after completing the stock offering,
special meetings of stockholders may be called only by Synergy Financial Group,
Inc.'s Board of Directors, for matters relating to changes in control of Synergy
Financial Group, Inc. or amendments to its charter.
How Shares are Voted. Synergy Financial Group, Inc.'s charter provides that
there will not be cumulative voting by stockholders for the election of Synergy
Financial Group, Inc.'s directors. No cumulative voting rights means that
Synergy, MHC, as the holder of a majority of the shares eligible to be voted at
a meeting of stockholders, may elect all directors of Synergy Financial Group,
Inc. to be elected at that meeting. This could prevent minority stockholder
representation on Synergy Financial Group, Inc.'s Board of Directors.
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Restrictions on Acquisitions of Shares. Synergy Financial Group, Inc.'s
charter provides that for a period of five years from the date of completion of
this stock offering, no person other than Synergy, MHC may offer to acquire or
acquire the beneficial ownership of more than 10% of any class of equity
security of Synergy Financial Group, Inc. This provision does not apply to any
tax-qualified employee benefit plan of Synergy Financial Group, Inc. or to an
underwriter or member of an underwriting or selling group involving the public
sale or resale of securities of Synergy Financial Group, Inc. or any of its
subsidiaries so long as after the sale or resale, no underwriter or member of
the selling group is a beneficial owner of more than 10% of any class of equity
securities of Synergy Financial Group, Inc. In addition, during this five-year
period, all shares owned over the 10% limit may not be voted in any matter
submitted to stockholders for a vote.
Procedures for Stockholder Nominations. Synergy Financial Group, Inc.'s
bylaws provide that any stockholder wanting to make a nomination for the
election of directors or a proposal for new business at a meeting of
stockholders must send written notice to the Secretary of Synergy Financial
Group, Inc. at least five days before the date of the annual meeting. The bylaws
further provide that if a stockholder wanting to make a nomination or a proposal
for new business does not follow the prescribed procedures, the proposal will
not be considered until an adjourned, special, or annual meeting of the
stockholders taking place 30 days or more thereafter. Management believes that
it is in the best interests of Synergy Financial Group, Inc. and its
stockholders to provide enough time for management to disclose to stockholders
information about a dissident slate of nominations for directors. This advance
notice requirement may also give management time to solicit its own proxies in
an attempt to defeat any dissident slate of nominations if management thinks it
is in the best interest of stockholders generally. Similarly, adequate advance
notice of stockholder proposals will give management time to study such
proposals and to determine whether to recommend to the stockholders that such
proposals be adopted.
Director Qualification Provisions. Synergy Financial Group, Inc.'s bylaws
provide several qualification provisions applicable to members of its board of
directors which serve to ensure the loyalty and professional integrity of each
individual director. In particular, the bylaws provide that each director
reside, at all times, within New Jersey in a county where Synergy Bank maintains
an office, except that such provision does not apply to persons who were serving
as director on December 31, 2001. In addition, the bylaws provide that each
director be a shareholder of Synergy Financial Group, Inc. and, at all times,
hold a minimum of one thousand shares of its stock.
Synergy Financial Group, Inc.'s bylaws also prohibit persons from serving
as director if that individual is currently serving as a management official of
another depository institution or depository holding company, as those terms are
defined by the regulations of the OTS. Further, to ensure the integrity and good
character of Synergy Financial Group, Inc.'s directors, the bylaws prohibit, in
part, an individual who has been subject to conviction for a criminal offense
involving dishonesty or breach of trust or who has been subject to a cease and
desist order for similar conduct, or who has been found by a regulatory agency
or a court to have breached a fiduciary duty involving personal profit or to
have committed certain willful violations of the law from serving as a director.
Any nominations for director of Synergy Financial Group, Inc., in the manner set
forth above, must be accompanied by the nominee's certification, under oath,
before a notary public, that he meets the eligibility requirements of integrity
and good character to be a director.
In addition to discouraging a takeover attempt which a majority of our
public stockholders might determine to be in their best interest or in which our
stockholders might receive a premium over the current market prices for their
shares, the effect of these provisions may render the removal of our management
more difficult.
Indemnification. Synergy Financial Group, Inc.'s bylaws provide for
indemnification of its officers, directors and employees to the fullest extent
authorized by the regulations of the OTS.
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DESCRIPTION OF CAPITAL STOCK
General
Synergy Financial Group, Inc. is authorized to issue 18,000,000 shares of
common stock, par value $0.10 per share and 2,000,000 shares of serial preferred
stock, par value $0.10 per share. We currently expect to have between 935,000
and 1,265,000 shares of common stock, subject to an increase to 1,454,750
shares, outstanding after the stock offering, not including shares that will be
held by Synergy, MHC. Upon payment of the purchase price shares of common stock
issued in the offering will be fully paid and non-assessable. Each share of
common stock will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. The common stock will represent
non- withdrawable capital, will not be an account of insurable type and will not
be insured by the FDIC or any other governmental agency. The Board of Directors
can, without stockholder approval, issue additional shares of common stock,
although Synergy, MHC, so long as it is in existence, must own a majority of
Synergy Financial Group, Inc.'s outstanding shares of common stock.
Common Stock
Distributions. Synergy Financial Group, Inc. can pay dividends if, as and
when declared by its Board of Directors, subject to compliance with limitations
which are imposed by law. See Dividend Policy on page 15. The holders of common
stock of Synergy Financial Group, Inc. will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of
Synergy Financial Group, Inc. out of funds legally available therefor. If
Synergy Financial Group, Inc. issues preferred stock, the holders thereof may
have a priority over the holders of the common stock with respect to dividends.
Voting Rights. The holders of common stock will possess exclusive voting
rights in Synergy Financial Group, Inc. The holder of shares of common stock
will be entitled to one vote for each share held on all matters subject to
stockholder vote and will not have any right to cumulate votes in the election
of directors.
Liquidation Rights. In the event of any liquidation, dissolution, or
winding-up of Synergy Financial Group, Inc., the holders of the common stock
generally would be entitled to receive, after payment of all debts and
liabilities of Synergy Financial Group, Inc. (including all debts and
liabilities of Synergy Bank), all assets of Synergy Financial Group, Inc.
available for distribution. If preferred stock is issued, the holders thereof
may have a priority over the holders of the common stock in the event of
liquidation or dissolution.
Preemptive Rights; Redemption. Because the holders of the common stock do
not have any preemptive rights with respect to any shares Synergy Financial
Group, Inc. may issue, the Board of Directors may sell shares of capital stock
of Synergy Financial Group, Inc. without first offering such shares to existing
stockholders. The common stock will not be subject to any redemption provisions.
99
Preferred Stock
We are authorized to issue up to 2,000,000 shares of serial preferred stock
and to fix and state voting powers, designations, preferences, or other special
rights of preferred stock and the qualifications, limitations and restrictions
of those shares as the Board of Directors may determine in its discretion.
Preferred stock may be issued in distinctly designated series, may be
convertible into common stock and may rank prior to the common stock as to
dividends rights, liquidation preferences, or both, and may have full or limited
voting rights. The issuance of preferred stock could adversely affect the voting
and other rights of holders of common stock.
The authorized but unissued shares of preferred stock and the authorized
but unissued and unreserved shares of common stock will be available for
issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and certain
matters relating to the stock offering and federal and state taxation will be
passed upon for us by Malizia Spidi & Fisch, PC, Washington, D.C. and Fontanella
and Babitts, Totowa Boro, New Jersey. Certain legal matters will be passed upon
for Trident Securities, a Division of McDonald Investments Inc. by Womble
Carlyle Sandridge & Rice, PLLC, Atlanta, Georgia.
EXPERTS
The consolidated financial statements of Synergy Financial Group, Inc. at
December 31, 2001 and 2000 and for each of the years in the two year period
ended December 31, 2001 have been included in this prospectus in reliance upon
the report of Fontanella and Babitts, Totowa Boro, New Jersey, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
FinPro, Inc. has consented to the publication in this document of a summary
of its letter to Synergy Financial Group, Inc. setting forth its conclusion as
to the estimated pro forma market value of the common stock and has also
consented to the use of its name and statements with respect to it appearing in
this document.
REGISTRATION REQUIREMENTS
Our common stock will be registered with the SEC pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We will
be subject to the information, proxy solicitation, insider trading restrictions,
tender offer rules, periodic reporting and other requirements of the SEC under
the Exchange Act. We will not deregister the common stock under the Exchange Act
for a period of at least three years following the stock offering.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, with respect to the common stock offered in
this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
100
statement. This information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of the registration materials can be obtained from the
SEC at prescribed rates. You may obtain information on the operation of the
Public Reference Room by calling 1-800-SEC-0330. The SEC also maintains an
Internet address ("web site") that contains reports, proxy and information
statements and other information regarding registrants, including Synergy
Financial Group, Inc., that file electronically with the SEC. The address for
this web site is "http://www.sec.gov." The statements contained in this document
as to the contents of any contract or other document filed as an exhibit to the
Form SB-2 are, of necessity, brief descriptions, and each statement is qualified
by reference to the complete contract or document.
We have filed an application for approval of the stock issuance with the
OTS. This prospectus omits certain information contained in that application.
That information can be examined without charge at the public reference
facilities of the OTS located at 1700 G Street, N.W., Washington, D.C. 20552.
A copy of our charter and bylaws, as well as those of Synergy Bank and
Synergy, MHC, are available without charge from Synergy Financial Group, Inc.
Copies of the plan of stock issuance are also available without charge.
101
SYNERGY FINANCIAL GROUP, INC.
Index to Consolidated Financial Statements
Independent Auditors' Report F-1
Consolidated Statements of Financial Condition F-2
Consolidated Statements of Income F-3
Consolidated Statements of Comprehensive Income F-4
Consolidated Statements of Changes Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
Other schedules are omitted as they are not required or are not applicable
or the required information is shown in the consolidated financial statements or
related notes.
Financial statements of Synergy, MHC have not been provided because it has
conducted no operations.
102
Fontanella and Babitts
CERTIFIED PUBLIC ACCOUNTANTS 534 Union Boulevard
Totowa, New Jersey 07512
Tel: (973) 595-5300
Fax: (973) 595-5890
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Synergy Financial Group, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition
of Synergy Financial Group, Inc. and Subsidiaries, as of December 31, 2001 and
2000, and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Synergy Financial
Group, Inc. and Subsidiaries, as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/Fontanella and Babitts
January 31, 2002, except for Note 14
as to which the date is May 21, 2002
F-1
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
March 31, December 31,
2002 ------------------------------
(unaudited) 2001 2000
------------- ------------- -------------
Assets
Cash and amounts due from banks $ 1,919,030 $ 2,026,535 $ 1,688,012
Interest-bearing deposits with banks 23,318 1,680,969 4,450,733
------------- ------------- -------------
Cash and cash equivalents 1,942,348 3,707,504 6,138,745
Investment securities: (Notes 1 and 2)
Held to maturity - - 2,491,382
Available for sale - - 5,951,626
Mortgage-backed securities: (Notes 1 and 3)
Held to maturity 12,098,061 7,152,853 9,759,008
Available for sale 49,537,547 43,894,168 20,023,331
Loans Receivable, net (Notes 1 and 4) 261,433,472 224,688,651 189,097,936
Accrued interest receivable (Notes 1 and 5) 1,374,102 1,150,969 1,142,173
Property and equipment, net (Notes 1 and 6) 12,146,332 11,639,424 5,155,086
Federal Home Loan Bank of New York stock, at cost (Note 1) 2,605,000 1,550,000 1,985,000
Cash surrender value of officer life insurance 2,081,942 2,051,079 1,942,200
Deferred income taxes (Notes 1 and 10) 522,955 291,062 384,211
Other assets 1,186,485 836,888 671,469
------------- ------------- -------------
Total Assets $ 344,928,244 $ 296,962,598 $ 244,742,167
============= ============= =============
Liabilities and Equity
Liabilities:
Deposits (Notes 1 and 7) 276,762,123 $ 249,813,341 $ 191,143,505
Federal Home Loan Bank of New York advances (Note 8) 41,500,000 22,500,000 31,500,000
Advance payments by borrowers for taxes and insurance 1,387,924 1,045,625 730,695
Accrued interest payable on advances 177,926 174,188 249,612
Other liabilities 2,460,978 1,039,073 756,225
------------- ------------- -------------
Total liabilities 322,288,951 274,572,227 224,380,037
------------- ------------- -------------
Commitments and Contingencies (Note 12) - - -
Stockholders' equity: (Note 11)
Preferred stock; $.10 par value, 2,000,000 shares authorized;
issued and outstanding - none - - -
Common stock; $.10 par value, 18,000,000 shares authorized;
100 shares issued and outstanding (2001) 10 10 -
Paid-in-capital 99,990 99,990 -
Retained earnings 22,824,207 22,315,215 20,613,504
Accumulated other comprehensive (loss) - unrealized loss
on securities available for sale, net of tax (284,914) (24,844) (251,374)
------------- ------------- -------------
Total stockholders' equity 22,639,293 22,390,371 20,362,130
------------- ------------- -------------
Total liabilities and stockholders' equity $ 344,928,244 $ 296,962,598 $ 244,742,167
============= ============= =============
See accompanying notes to consolidated financial statements.
F-2
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
For the Three Months Ended
March 31, For the Year Ended
-------------------------- December 31,
2002 2001 -------------------------
(unaudited) (unaudited) 2001 2000
----------- ----------- ----------- -----------
Interest income:
Loans $ 4,341,156 $ 3,779,713 $15,974,762 $14,246,605
Investments - 129,191 354,583 585,597
Mortgage-backed securities 770,595 468,470 2,240,746 2,103,738
Other 3,048 48,991 383,721 24,402
----------- ----------- ----------- -----------
Total interest income 5,114,799 4,426,365 18,953,812 16,960,342
----------- ----------- ----------- -----------
Interest expense:
Deposits (Note 7) 1,565,210 1,624,373 7,463,442 5,827,132
Borrowed funds 413,952 509,379 1,832,922 2,131,728
----------- ----------- ----------- -----------
Total interest expense 1,979,162 2,133,752 9,296,364 7,958,860
----------- ----------- ----------- -----------
Net interest income before provision for loan losses 3,135,637 2,292,613 9,657,448 9,001,482
----------- ----------- ----------- -----------
Provision for loan losses (notes 1 and 4) 269,952 45,000 362,692 480,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 2,865,685 2,247,613 9,294,756 8,521,482
----------- ----------- ----------- -----------
Other income:
Gain on sale of loans - - 888,137 -
Dividend on FHLB stock 17,606 34,856 102,788 159,161
Gain/(loss) on sale of investments (6,250) - 4,596 -
Commissions (1,929) 68,457 270,166 614,683
Loan servicing fees 46,082 67,527 274,269 255,993
Other fees and service charges 222,126 209,570 884,585 753,559
Insurance investment 30,863 28,518 98,979 47,005
Other 10,346 17,773 108,879 99,260
----------- ----------- ----------- -----------
Total other income 318,844 426,701 2,632,399 1,929,661
----------- ----------- ----------- -----------
Operating expenses:
Compensation and employee benefits 1,227,512 1,174,024 4,843,916 4,418,953
Office operations 582,180 543,034 2,264,544 2,037,306
Office occupancy 260,280 229,755 903,565 746,124
Professional and outside services 84,179 82,265 301,086 281,326
Education and promotion 73,438 80,362 363,573 321,907
Loan servicing 116,127 34,674 128,379 206,031
Deposit insurance 10,859 8,943 37,351 37,002
Other 55,491 162,461 159,068 160,634
----------- ----------- ----------- -----------
Total operating expenses 2,410,066 2,315,518 9,001,482 8,209,283
----------- ----------- ----------- -----------
Income before income tax expense 774,463 358,796 2,925,673 2,241,860
----------- ----------- ----------- -----------
Income tax expense 265,471 120,790 1,023,962 711,628
----------- ----------- ----------- -----------
Net income $ 508,992 $ 238,006 $ 1,901,711 $ 1,530,232
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
For the Three Months Ended
March 31, For the Year Ended
-------------------------- December 31,
2002 2001 -------------------------
(unaudited) (unaudited) 2001 2000
---------- ---------- ---------- ----------
Net income $ 508,992 $ 238,006 $1,901,711 $1,530,232
Other comprehensive income:
Unrealized holding gains (losses) on securities available
for sale, net of income taxes (benefit) of ($146,162),
$122,319, $127,312, and $357,268, respectively (260,070) 217,645 226,530 635,697
---------- ---------- ---------- ----------
Comprehensive income $ 248,922 $ 455,651 $2,128,241 $2,165,929
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Accumulated
Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss) Total Equity
---------------- --------------- ---------------- ---------------- ----------------
Balance, December 31, 1999 $ - $ - $ 19,083,272 $ (887,071) $ 18,196,201
Net income for the year ended
December 31, 2000 - - 1,530,232 - 1,530,232
Change in unrealized loss on
securities available for sale,
net of tax - - - 635,697 635,697
---------------- --------------- ---------------- ---------------- ----------------
Balance, December 31, 2000 - - 20,613,504 (251,374) 20,362,130
Net income for the year ended
December 31, 2001 - - 1,901,711 - 1,901,711
Distribution to capitalize
Mutual Holding Company and
Stock Holding Company 10 99,990 (200,000) - (100,000)
Change in unrealized loss on
securities available for sale,
net of tax - - - 226,530 226,530
---------------- --------------- ---------------- ---------------- ----------------
Balance, December 31, 2001 10 99,990 22,315,215 (24,844) 22,390,371
Net income for the three months ended
March 31, 2002 (unaudited) - - 508,992 - 508,992
Change in unrealized loss on
securities available for sale,
net of tax (unaudited) - - - (260,070) (260,070)
---------------- --------------- ---------------- ---------------- ----------------
Balance, March 31, 2002 (unaudited) $ 10 $ 99,990 $ 22,824,207 $ (284,914) $ 22,639,293
================ =============== ================ ================ ================
See accompanying notes to consolidated financial statements.
F-5
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Three Months Ended
March 31, For the Year Ended
---------------------------- December 31,
2002 2001 ----------------------------
(unaudited) (unaudited) 2001 2000
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income $ 508,992 $ 238,006 $ 1,901,711 $ 1,530,232
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 178,261 170,897 735,525 682,485
Provision for loan losses 269,952 45,000 362,692 480,000
Deferred income taxes (85,731) 5,893 (34,163) (33,566)
Amortization of deferred loan fees (2,299) (12,309) (123,200) (201,379)
Amortization of premiums on investments and
mortgage-backed securities 90,753 17,188 83,292 38,510
Loss (gain) on sale of mortgage-backed securities 6,250 - (4,596) -
Gain on sale of loans - - (888,137) -
Increase in accrued interest receivable (223,133) 93,140 (8,796) (129,632)
Increase (decrease) in other assets (349,597) (362,351) (165,419) (34,326)
Increase (decrease) in other liabilities 1,421,905 (102,891) 282,848 (474,763)
Increase in cash surrender value of officer life
insurance (30,863) (28,518) (108,879) (99,260)
Increase (decrease) in accrued interest payable on
advances 3,738 1,954 (75,424) 120,952
------------ ------------ ------------ ------------
Net cash provided by operating activities 1,788,228 66,009 1,957,454 1,879,253
------------ ------------ ------------ ------------
Cash flows from investing activities:
Loan originations, net of principal repayments (37,512,474) 1,677,681 (48,322,208) (23,192,590)
Purchase of loans - - (3,998,072) (3,011,250)
Purchase of investment securities held to maturity - (1,000,000) (6,000,000) -
Purchase of mortgage-backed securities held to maturity (5,912,852) - - -
Purchase of mortgage-backed securities available for sale (14,066,085) (990,625) (36,904,849) -
Maturity and principal repayments of investment securities
held to maturity 1,000,000 8,500,000 -
Maturity and principal repayments of investment securities
available for sale - 6,000,000 2,002,640
Maturity of mortgage-backed securities available for sale - - - 1,000,000
Principal repayments of mortgage-backed securities held to
maturity 955,809 955,967 2,557,847 1,323,653
Principal repayments of mortgage-backed securities
available for sale 5,937,556 447,167 12,290,474 4,779,555
Purchase of property and equipment (685,169) (406,513) (7,219,863) (909,566)
(Purchase) redemption of FHLB Stock (1,055,000) - 435,000 (635,000)
Proceeds from sale of mortgage-backed securities 2,006,250 - 1,010,000 -
Proceeds from sale of loans 500,000 - 17,378,810 -
------------ ------------ ------------ ------------
Net cash used in investing activities (49,844,465) 1,683,677 (54,273,461) (18,642,558)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposits 26,948,782 12,769,933 58,669,836 10,200,059
Net change in FHLB overnight lines of credit 4,850,000 - - -
Advances from FHLB 30,250,000 3,000,000 3,000,000 42,000,000
Repayment of advances from FHLB (16,100,000) - (12,000,000) (32,200,000)
Increases in advance payments by borrowers for taxes
and insurance 342,299 61,139 314,930 12,883
Capitalization of Mutual Holding Company - (100,000) (100,000) -
------------ ------------ ------------ ------------
Net cash provided by financing activities 46,291,081 15,731,072 49,884,766 20,012,942
------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
F-6
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
----------------------------------------------
For the Three Months Ended
March 31, For the Year Ended
---------------------------- December 31,
2002 2001 --------------------------
(unaudited) (unaudited) 2001 2000
------------ ------------ ------------ ----------
Net (decrease) increase in cash and cash equivalents (1,765,156) 17,480,758 (2,431,241) 3,249,637
Cash and cash equivalents at beginning of year 3,707,504 6,138,745 6,138,745 2,889,108
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,942,348 $23,619,503 $ 3,707,504 $ 6,138,745
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 169,296 $ 79,000 $ 1,058,125 $ 918,440
=========== =========== =========== ===========
Interest paid on deposits $ 1,565,547 $ 1,625,139 $ 7,467,619 $ 5,820,219
=========== =========== =========== ===========
Interest paid on borrowed funds $ 410,214 $ 507,425 $ 1,908,346 $ 2,010,776
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(ALL DATA RELATED TO MARCH 31, 2002 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND 2001 ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -- ------------------------------------------
Synergy Financial Group, Inc. was organized in March 2001 for the purpose of
becoming the stock holding company for Synergy Federal Savings Bank and Synergy
Financial Services, Inc. All of the outstanding stock of Synergy Financial
Group, Inc. is owned by Synergy MHC, a mutual holding company formed in March
2001 for that purpose.
Synergy Federal Savings Bank was formerly Synergy Federal Credit Union , and
converted from a credit union in May 1998.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Synergy Financial
Group, Inc. and its wholly-owned subsidiaries, Synergy Federal Savings Bank and
Synergy Financial Services, Inc. (collectively the "company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Business
- --------
The Company's primary business is the operation of the Bank. The Bank provides
the usual products and services of banking such as deposits and mortgage,
consumer and commercial loans.
Basis of Presentation
- ---------------------
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. 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 statements of financial condition and revenues and expenses for the
period. Actual results could differ significantly from these estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses. In
connection with the determination of the allowance for loan losses, management
generally obtains independent appraisals for significant properties.
Interim Financial Statements
- ----------------------------
The financial statements for the three months ended March 31, 2002 and 2001, are
unaudited, but in the opinion of management such financial statements have been
presented on the same basis as the audited financial statements for the years
ended December 31, 2001 and 2000. These financial statements include all
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the financial position and results of operations and cash flows
for these periods. The results of operations presented in the accompanying
financial statements are not necessarily representative of operations for an
entire year.
Cash and Cash Equivalents
- -------------------------
The Company considers all cash on hand and in banks and highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Securities
- ----------
The Company classifies investment securities into the following categories: (a)
held to maturity, (b) available for sale, or (c) trading securities. Securities
for which the Company has the ability and intent to hold until maturity are
classified as held to maturity. The securities are stated at cost, adjusted for
amortization of premium and accretion of discount, using a method that
approximates the level yield method over the term of the investments.
Securities that may be held for an indefinite period of time are classified as
available for sale and reported at market value. Unrealized holding gains and
losses (net of related tax effects) on such securities are excluded from
earnings, but are included in equity. Upon realization, such gains or losses are
included in earnings using the specific identification method.
F-8
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- -- ------------------------------------------
Securities (cont'd)
- -------------------
Trading account securities are carried at market value. Gains and losses
resulting from adjusting trading account securities to market value are included
in earnings. As of March 31, 2002, December 31, 2001 and 2000, the Company had
no trading securities.
Loans
- -----
The net amount of all loan origination and commitment fees, and certain loan
origination costs, are deferred and recognized over the contractual life of the
related loans as an adjustment of yield.
The Company defines the population of impaired loans to include nonaccrual loans
in excess of $300,000. Smaller balance homogeneous loans that are collectively
evaluated for impairment, such as residential mortgage loans, are specifically
excluded from the impaired loan portfolio.
Interest income on loans is accrued and credited to interest income as earned.
The accrual of income on loans is discontinued when certain factors indicate
reasonable doubt as to the collectibility of such income. Income on such loans,
including impaired loans, is recognized only when subsequently collected. After
principal and interest payment are brought current, and future collectibility is
reasonable assured, loans are returned to accrual status.
Gains and losses on sales of loans are recorded using the specific
identification method.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A non-residential real estate loan is considered impaired when, based on current
information and events, it is probable that the Corporation will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reason for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans (residential mortgages and
consumer installment loans) are collectively evaluated for impairment.
Accordingly, the Corporation does not separately identify individual consumer
and residential loans for impairment disclosures.
Concentration of Risk
- ---------------------
The lending activities are concentrated in loans secured by real estate located
in the State of New Jersey. In addition, a significant concentration of loans
and deposits continue to be associated with employees of the Bank's former
credit union sponsor organization, a pharmaceutical research and manufacturing
company. At March 31, 2002, approximately 30% of the loan portfolio and 40% of
total deposits were associated with individuals employed by this company.
F-9
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- -- ------------------------------------------
Federal Home Loan Bank of New York Stock
- ----------------------------------------
The Company, as a member of the Federal Home Loan Bank of New York ("FHLB"), is
required to hold shares of capital stock in the FHLB in an amount equal to the
greater of 1% of the outstanding balance of residential mortgage loans and
similar obligations or 5% of FHLB borrowings and advances.
Real Estate Acquired in Settlement of Loans
- -------------------------------------------
When properties are acquired through foreclosure or by deed in lieu of
foreclosure, they are transferred at estimated fair value, and any required
write-downs are charged to the allowance for loan losses. Subsequently, such
properties are carried at the lower of the adjusted cost or fair value less
estimated selling costs. Estimated fair value of the property is usually based
on an appraisal. The Company maintains an allowance for real estate acquired in
settlement of loans for subsequent declines in estimated fair value. Certain
costs incurred in preparing properties for sale are capitalized. Expenses of
holding foreclosed properties, net of other income, are charged to operations as
incurred. Gains and losses from sales of such properties are recognized as
incurred.
Office properties and equipment
- -------------------------------
Depreciation on office properties and equipment, exclusive of land, is computed
using the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs are charged to expense, improvements are capitalized,
and gains and losses on disposal are credited or charged to operations.
Building and improvements 3 to 40 years
Leasehold Improvements 3 to 15 years
Furnishing and equipment 3 to 12 years
Income Taxes
- ------------
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The tax ramifications are determined based upon the
enacted tax laws that will be in effect when the applicable liabilities are
anticipated to be satisfied. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
Interest Rate Risk
- ------------------
The Company is principally engaged in the business of attracting deposits from
the general public and using these deposits, together with borrowings, and other
funds, to purchase securities and to make loans secured by real estate and, to a
lesser extent, consumer loans. The potential for interest-rate risk exists as a
result of the generally shorter duration of interest-sensitive liabilities
compared to the generally longer duration of interest-sensitive assets. In a
rising rate environment, liabilities will reprice faster that assets, thereby
reducing net interest income. For this reason, management regularly monitors the
maturity structure of the Company's interest sensitive assets and liabilities in
order to measure its level of interest-rate risk and to plan for future
volatility.
Financial Statement Presentation
- --------------------------------
Certain amounts in the 2000 consolidated financial statements have been
reclassified to conform with the 2001 presentation.
F-10
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. INVESTMENT SECURITIES
- -- ---------------------
HELD TO MATURITY:
- ----------------
December 31, 2000
------------------------------------------------------------------
Gross Unrealized
Carrying --------------------------------- Fair
Value Gains Losses Value
--------------- ---------------- ---------------- ---------------
U.S. Government obligations
Due after five through ten years $ 2,491,382 $ - $ 28,882 $ 2,462,500
=============== ================ ================ ===============
AVAILABLE FOR SALE:
- ------------------
December 31, 2000
------------------------------------------------------------------
Gross Unrealized
Carrying --------------------------------- Fair
Value Gains Losses Value
--------------- ---------------- ---------------- ---------------
U.S. Government obligations
Due within one year $ 1,002,503 $ - $ 1,877 $ 1,000,626
Due after one through five years 2,996,870 - 19,630 2,977,240
Due after five through ten years 2,000,000 - 26,240 1,973,760
--------------- ---------------- ---------------- ---------------
$ 5,999,373 $ - $ 47,747 $ 5,951,626
=============== ================ ================ ===============
During the periods ended March 31, 2002, December 31, 2001 and 2000, there were
no sales of investment securities.
See Note 8 regarding investment securities pledged as collateral.
3. MORTGAGE-BACKED SECURITIES
- -- --------------------------
HELD TO MATURITY:
- ----------------
March 31, 2002 (unaudited)
------------------------------------------------------------------
Gross Unrealized
Carrying --------------------------------- Fair
Value Gains Losses Value
--------------- ---------------- ---------------- ---------------
FNMA $ 4,171,709 $ 42,902 $ - $ 4,214,611
GNMA 3,185,482 30,355 - 3,215,837
FHLMC 1,016,817 58 - 1,016,875
CMO/REMIC - FHLMC 3,724,053 - 122,391 3,601,662
--------------- ---------------- ---------------- ---------------
$ 12,098,061 $ 73,315 $ 122,391 $ 12,048,985
=============== ================ ================ ===============
December 31, 2001
------------------------------------------------------------------
Gross Unrealized
Carrying --------------------------------- Fair
Value Gains Losses Value
--------------- ---------------- ---------------- ---------------
FNMA $ 2,458,294 $ 37,104 $ - $ 2,495,398
GNMA 4,694,559 40,381 - 4,734,940
--------------- ---------------- ---------------- ---------------
$ 7,152,853 $ 77,485 $ - $ 7,230,338
=============== ================ ================ ===============
F-11
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. MORTGAGE-BACKED SECURITIES (Cont'd)
- ------------------------------
HELD TO MATURITY:
- ----------------
December 31, 2000
------------------------------------------------------------------
Gross Unrealized
Carrying --------------------------------- Fair
Value Gains Losses Value
--------------- ---------------- ---------------- ---------------
FNMA $ 2,374,172 $ - $ 30,368 $ 2,343,804
FHLMC 820,934 - 12,082 808,852
GNMA 6,563,902 - 92,696 6,471,206
--------------- ---------------- ---------------- ---------------
$ 9,759,008 $ - $ 135,146 $ 9,623,862
=============== ================ ================ ===============
AVAILABLE FOR SALE:
- ------------------
March 31, 2002 (unaudited)
------------------------------------------------------------------
Gross Unrealized
Carrying --------------------------------- Fair
Value Gains Losses Value
--------------- ---------------- ---------------- ---------------
FNMA $ 22,451,110 $ 88,931 $ 251,422 $ 22,288,619
FHLMC 12,440,122 26,872 92,986 12,374,008
CMO/REMIC
FNMA 2,499,554 3,193 55,343 2,447,404
FHLMC 12,591,799 51,001 215,284 12,427,516
--------------- ---------------- ---------------- ---------------
$ 49,982,585 $ 169,997 $ 615,035 $ 49,537,547
=============== ================ ================ ===============
December 31, 2001
------------------------------------------------------------------
Gross Unrealized
Carrying --------------------------------- Fair
Value Gains Losses Value
--------------- ---------------- ---------------- ---------------
FNMA $ 17,872,477 $ 103,130 $ 158,936 $ 17,816,671
FHLMC 10,636,551 25,892 165,344 10,497,099
CMO/REMIC
FNMA 1,451,561 30,540 - 1,482,101
FHLMC 13,972,386 153,397 27,486 14,098,297
--------------- ---------------- ---------------- ---------------
$ 43,932,975 $ 312,959 $ 351,766 $ 43,894,168
=============== ================ ================ ===============
December 31, 2000
------------------------------------------------------------------
Gross Unrealized
Carrying --------------------------------- Fair
Value Gains Losses Value
--------------- ---------------- ---------------- ---------------
FNMA $ 6,617,015 $ 6,182 $ 58,806 $ 6,564,391
GNMA 2,841,894 - 35,754 2,806,140
CMO/REMIC
FNMA 7,013,359 - 179,194 6,834,165
FHLMC 3,895,965 2,091 79,421 3,818,635
--------------- ---------------- ---------------- ---------------
$ 20,368,233 $ 8,273 $ 353,175 $ 20,023,331
=============== ================ ================ ===============
F-12
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. MORTGAGE-BACKED SECURITIES (Cont'd)
- -- --------------------------
AVAILABLE FOR SALE:
- ------------------
During the periods ended March 31, 2002 and 2001, and December 31, 2001 and
2000, proceeds from sales of mortgage-backed securities available for sale
amounted to $2,006,250,$-0-, $1,010,000 and $-0-,respectively. Gross realized
gains/(losses) amounted to approximately $(6,250), $-0-, $5,000 and $-0-,
respectively.
See Note 8 regarding mortgage-backed securities pledged as collateral.
4. LOANS RECEIVABLE
- -- ----------------
March 31, December 31,
2002 --------------------------------
(unaudited) 2001 2000
---------------- ---------------- ---------------
Mortgages
1-4 Family $ 177,509,320 $ 148,825,720 $ 127,003,753
5+ Family 9,682,581 5,281,089 1,841,437
Non-residential 17,108,173 13,762,776 230,441
Automobile 53,236,896 52,206,307 45,812,135
Credit card 20,791 30,075 6,968,708
Other loans 5,525,855 6,032,858 8,594,539
---------------- ---------------- ---------------
263,083,616 226,138,825 190,451,013
Deferred loan fees and costs (31,878) (78,353) (176,829)
Allowance for loan losses (1,618,266) (1,371,821) (1,176,248)
---------------- ---------------- ---------------
$ 261,433,472 $ 224,688,651 $ 189,097,936
================ ================ ===============
A summary of the activity in the allowance for loan losses is as follows:
Three Months Ended
March 31, Year Ended
--------------------------------- December 31,
2002 2001 --------------------------------
(unaudited) (unaudited) 2001 2000
--------------- ---------------- ---------------- ---------------
Balance - beginning of period $ 1,371,821 $ 1,176,248 $ 1,176,248 $ 994,941
Provision for loan losses 269,952 45,000 362,692 480,000
Recoveries 53,821 72,922 250,256 196,341
Loans charged-off (77,328) (101,042) (417,375) (495,034)
--------------- ---------------- ---------------- ---------------
Balance - end of period $ 1,618,266 $ 1,193,128 $ 1,371,821 $ 1,176,248
=============== ================ ================ ===============
Loans serviced for the benefit of others amounted to $17,404,000, $2,017,000,
$17,677,000 and $1,858,000 at March 31, 2002 and 2001, and December 31, 2001 and
2000, respectively.
See Note 8 regarding mortgage loans pledged as collateral to secure Federal home
Loan Bank of New York advances.
F-13
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. ACCRUED INTEREST RECEIVABLE
- -- ---------------------------
March 31, December 31,
2002 --------------------------------
(unaudited) 2001 2000
---------------- ---------------- ---------------
Loans $ 1,049,479 $ 872,060 $ 780,115
Mortgage-backed securities 304,787 259,529 164,389
Investment securities - - 163,511
Federal Home Loan Bank Stock 19,836 19,380 34,158
---------------- ---------------- ---------------
$ 1,374,102 $ 1,150,969 $ 1,142,173
================ ================ ===============
6. PROPERTY AND EQUIPMENT
- -- ----------------------
March 31, December 31,
2002 --------------------------------
(unaudited) 2001 2000
---------------- ---------------- ---------------
Land $ 782,370 $ 782,370 $ 782,370
Building and improvements 2,238,582 2,230,102 2,185,188
Furniture, equipment, and automobiles 4,534,125 4,284,051 3,933,814
Leasehold improvements 1,886,910 1,886,910 1,616,090
Property held for future office sites 6,980,509 6,553,894 -
---------------- ---------------- ---------------
16,422,496 15,737,327 8,517,462
Less accumulated depreciation
and amortization (4,276,164) (4,097,903) (3,362,376)
---------------- ---------------- ---------------
$ 12,146,332 $ 11,639,424 $ 5,155,086
================ ================ ===============
7. DEPOSITS
- -- --------
December 31,
March 31, 2002 ------------------------------------------------------------------
(unaudited) 2001 2000
--------------------------------- --------------------------------- --------------------------------
Weighted Weighted Weighted
Amount Average Yield Amount Average Yield Amount Average Yield
---------------- --------------- --------------- ---------------- ---------------- ---------------
Demand accounts:
Non-interest bearing $ 34,963,385 - $ 31,147,966 - $ 30,301,145 -
Interest-bearing 43,822,867 1.79% 40,810,786 2.00% 33,595,920 3.35%
---------------- --------------- ----------------
78,786,252 1.00% 71,958,752 1.13% 63,897,065 1.76%
Savings and club accounts 62,273,899 1.24% 56,816,270 1.24% 52,257,313 1.98%
Certificates of deposit 135,701,972 3.73% 121,038,319 4.41% 74,989,124 5.79%
---------------- --------------- ----------------
$ 276,762,123 2.39% $ 249,813,341 2.74% $ 191,143,502 3.40%
================ =============== ================
F-14
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
7. DEPOSITS (Cont'd)
- -- ----------------
The scheduled maturities of certificates of deposit are as follows:
March 31, December 31,
2002 --------------------------------
(unaudited) 2001 2000
---------------- ---------------- ---------------
(In thousands)
Within one year $ 80,085 $ 78,845 $ 61,494
After one year to two years 46,226 34,082 8,643
After two years to three years 7,258 6,316 3,024
After three years to four years 620 522 941
After four years to five years 1,298 995 495
After five years 215 278 392
---------------- ---------------- ---------------
$ 135,702 $ 121,038 $ 74,989
================ ================ ===============
Interest expense on deposits is as follows:
Three Months Ended
March 31,
--------------------------------- Year Ended
2002 2001 December 31,
2002 2001 --------------------------------
(unaudited) (unaudited) 2001 2000
--------------- ---------------- ---------------- ---------------
Demand $ 186,839 $ 278,094 $ 1,038,124 $ 1,130,613
Savings 174,819 246,041 972,501 1,095,182
Certificates of deposit 1,203,552 1,100,238 5,452,817 3,601,337
--------------- ---------------- ---------------- ---------------
$ 1,565,210 $ 1,624,373 $ 7,463,442 $ 5,827,132
=============== ================ ================ ===============
The aggregate amount of deposits with a balance of $100,000 and more was
approximately $46,994,000, $32,320,000 and $21,336,000 at March 31, 2002,
December 31, 2001 and 2000, respectively. Deposit amounts in excess of $100,000
are generally not federally insured.
8. FEDERAL HOME LOAN BANK OF NEW YORK ADVANCES
- -- -------------------------------------------
December 31,
------------------------------------------------------------------
March 31, 2002 (unaudited) 2001 2000
--------------------------------- --------------------------------- --------------------------------
Weighted Weighted Weighted
Balance Average Rate Balance Average Rate Balance Average Rate
---------------- --------------- --------------- ---------------- ---------------- ---------------
Term advances maturing during the following years:
2001 $ - - $ - - $ 10,500,000 6.53%
2002 6,000,000 4.05% 7,500,000 6.54% 6,000,000 6.93%
2003 6,500,000 5.74% 5,000,000 6.74% 5,000,000 6.74%
2004 2,000,000 3.37% - - - -
2005 1,000,000 5.92% 1,000,000 5.92% 1,000,000 5.92%
2007 4,000,000 3.06% - - - -
2008 9,000,000 5.20% 9,000,000 5.20% 9,000,000 5.20%
Overnight line of credit 4,850,000 1.91% - - - -
One-month lines of credit 8,150,000 1.71% - - - -
---------------- --------------- ----------------
$ 41,500,000 $ 22,500,000 $ 31,500,000
================ =============== ================
F-15
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. FEDERAL HOME LOAN BANK OF NEW YORK ADVANCES (Cont'd)
- -- -------------------------------------------
The advances that mature during 2008 include provisions that allow the interest
rate to adjust.
The advances are secured by the assignment of mortgage loans, investment
securities, and mortgage-backed securities.
9. BENEFIT PLANS
- -- -------------
Profit Sharing Retirement Plan
- ------------------------------
The Company has in effect a trusteed profit sharing retirement plan which covers
all eligible employees and includes and employees' thrift savings plan
established under the provisions of the Internal Revenue Code Section 401(k).
Contributions to the profit sharing plan are at the discretion of the Board of
Directors. The Company's profit sharing retirement plan expense amounted to$
72,000, $61,000, $214,000 and $196,000, for the periods ended March 31, 2002 and
2001, and December 31, 2001 and 2000, respectively.
Supplemental Executive Retirement Plans
- ---------------------------------------
The company adopted a SERP on April 1, 1999 for the benefit of its chief
executive officer. In connection therewith, the company maintains a rabbi trust,
which purchased a life insurance policy to satisfy its benefit obligation
thereunder. The cash surrender value of the life insurance policy related to the
SERP was $2,082,000, $2,051,000 and $1,942,000, at March 31, 2002, December 31,
2001 and 2000, respectively. Annual accruals for expense are paid to a trust for
the benefit of the chief executive officer. The present value of future benefits
is being accrued over the term of employment. SERP expense for the years ended,
December 31, 2001 and 2000 and the three months ended, March 31, 2002 and 2001,
amounted to $19,532, $17,133, $5,547, and $4,883, respectively.
On April 1, 1999 the company adopted a phantom stock and phantom option plan for
the benefit of its chief executive officer. Under the plan, the chief executive
was awarded phantom stock and options, the value of which is determined annually
based upon a valuation of the company assuming it was a stock company. This plan
will terminate upon the issuance of stock by the company. Plan expense for the
years ended December 31, 2001 and 2000 and the three months ended March 31, 2002
and 2001 amounted to $10,461, $11,487, $3,539 and $2,744, respectively.
On January 1, 2002 the company adopted a SERP for the benefit of other executive
officers. This plan requires an annual accrual equal to ten percent of each
participants' base salary to be credited to the plan reserve. Plan expense
amounted to $8,775 for the three months ended March 31, 2002.
10. INCOME TAXES
- --- ------------
The components of income taxes are summarized as follows:
Three Months Ended
March 31, Year Ended
--------------------------------- December 31,
2002 2001 --------------------------------
(unaudited) (unaudited) 2001 2000
--------------- ---------------- ---------------- ---------------
Current tax expense:
Federal income $ 329,807 $ 104,409 $ 964,912 $ 667,545
State income 21,395 10,488 93,213 77,649
--------------- ---------------- ---------------- ---------------
351,202 114,897 1,058,125 745,194
--------------- ---------------- ---------------- ---------------
Deferred tax (benefit) expense:
Federal income (82,796) 5,570 (27,132) (30,455)
State income (2,935) 323 (7,031) (3,111)
--------------- ---------------- ---------------- ---------------
(85,731) 5,893 (34,163) (33,566)
--------------- ---------------- ---------------- ---------------
265,471 120,790 $ 1,023,962 $ 711,628
=============== ================ ================ ===============
F-16
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. INCOME TAXES (Cont'd)
- --- ---------------------
A reconciliation of income taxes computed at the statutory federal income tax
rate (34%) to the reported income tax expense is as follows:
Three Months Ended
March 31, Year Ended
--------------------------------- December 31,
2002 2001 --------------------------------
(unaudited) (unaudited) 2001 2000
--------------- ---------------- ---------------- ---------------
Expected federal income tax expense $ 263,317 $ 121,991 $ 994,729 $ 762,232
Increase (decrease) in federal income tax
expense resulting from:
State income tax, net of federal income tax effect 12,184 7,135 56,880 49,195
Other, net (10,030) (8,336) (27,647) (99,799)
--------------- ---------------- ---------------- ---------------
$ 265,471 $ 120,790 $ 1,023,962 $ 711,628
=============== ================ ================ ===============
Effective rate 34% 34% 35% 32%
=============== ================ ================ ===============
Deferred tax assets and liabilities consisted of the following
March 31, December 31,
2002 --------------------------------
(unaudited) 2001 2000
---------------- ---------------- ---------------
Deferred tax assets:
Deferred loan fees, net of costs $ (43,281) $ (26,560) $ 19,596
Allowance for loan losses 285,064 196,392 134,588
Depreciation 101,782 101,782 89,870
Unrealized loss on available-for-sale securities 160,125 13,963 141,275
Other 19,265 5,485 (1,118)
---------------- ---------------- ---------------
$ 522,955 $ 291,062 $ 384,211
================ ================ ===============
11. REGULATORY MATTERS
- --- ------------------
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Office of Thrift Supervision (the "OTS").
Failure to meet minimum capital requirements can initiate certain mandatory -
and possible additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Bank and the consolidated
financial statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classifications
under the prompt corrective action guidelines are also subject to the
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 risk-based
capital and Tier 1 capital to risk-weighted assets (as defined in the
regulations), Tier 1 capital (as defined) to adjusted total assets (as defined),
and tangible capital to adjusted total assets (as defined). Management believes
that the Bank meets all capital adequacy requirements to which it is subject.
As of March 31, 2002, December 31, 2001 and 2000, the Bank is considered well
capitalized under regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios, as set forth in the
table below. There are no conditions or events that management believes have
changed the institution's prompt corrective action category. The following table
presents a reconciliation of capital per GAAP and regulatory capital at the
dates indicated:
F-17
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. REGULATORY MATTERS (Cont'd)
- --- ---------------------------
March 31, December 31,
--------------- ---------------------------------
2002 2001 2000
--------------- ---------------- ----------------
GAAP capital $ 22,484,000 $ 22,196,000 $ 20,362,000
Less: unrealized loss on debt securities 285,000 24,000 251,000
--------------- ---------------- ----------------
Core and tangible capital 22,769,000 22,220,000 20,613,000
Add: general allowance for loan losses 1,618,000 1,372,000 1,176,000
--------------- ---------------- ----------------
Total regulatory capital $ 24,387,000 $ 23,592,000 $ 21,789,000
=============== ================ ================
The Bank's actual capital amounts and ratios are as follows:
OTS Requirements
-----------------------------------------------------------------------------------------------------
Minimal Capital For Classification
Bank Actual Adequacy As Well Capitalized
--------------------------------- --------------------------------- --------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- --------------- --------------- ---------------- ---------------- ---------------
March 31, 2002 (unaudited):
Total risk-based capital $ 24,387,000 10.76% $ 18,135,000 8.00% $ 22,669,000 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 22,769,000 10.04% N/A N/A 13,602,000 6.00%
(to Risk Weighted Assets)
Tier 1 Capital 22,769,000 6.59% 13,810,000 4.00% 17,263,000 5.00%
(to Adjusted Total Assets)
Tangible Capital 22,769,000 6.59% 5,179,000 1.50% N/A N/A
(to Adjusted Total Assets)
December 31, 2001:
Total risk-based capital 23,592,000 12.00% 15,731,000 8.00% 19,663,000 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 22,220,000 11.30% N/A N/A 11,798,000 6.00%
(to Risk Weighted Assets)
Tier 1 Capital 22,220,000 7.48% 11,883,000 4.00% 14,853,000 5.00%
(to Adjusted Total Assets)
Tangible Capital 22,220,000 7.48% 4,456,000 1.50% N/A N/A
(to Adjusted Total Assets)
December 31, 2000:
Total risk-based capital 21,789,000 13.63% 12,793,000 8.00% 15,991,000 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 20,613,000 12.89% N/A N/A 9,595,000 6.00%
(to Risk Weighted Assets)
Tier 1 Capital 20,613,000 8.40% 9,821,000 4.00% 12,276,000 5.00%
(to Adjusted Total Assets)
Tangible Capital 20,613,000 8.40% 3,683,000 1.50% N/A N/A
(to Adjusted Total Assets)
F-18
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
- --- -----------------------------
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and unused
lines of credit. The instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the financial
statements.
The Company uses the same credit policies and collateral requirements in making
commitments and conditional obligations as it does for recorded loans.
March 31, December 31,
2002 --------------------------------
(unaudited) 2001 2000
---------------- ---------------- ---------------
Commitments to grant loans $ 28,123,000 $ 38,948,000 $ 3,321,000
Unfunded commitments under lines of credit 9,704,000 8,767,000 20,841,000
---------------- ---------------- ---------------
$ 37,827,000 $ 47,715,000 $ 24,162,000
================ ================ ===============
Total commitments to extend credit at March 31, 2002, December 31, 2001 and 2000
include $4,873,000, $5,944,000, and $559,000 in variable rate loan commitments
and $23,250,000, $32,005,000 and $2,762,000 in fixed rate loan commitments,
respectively. Fixed rate loan commitments were at current market rates ranging
from 6.25% to 7.75%, 6.00% to 7.75% and 8.625% to 15.99% at March 31,2002,
December 31, 2001 and 2000, respectively.
Commitments to extend credit are agreements to lend to customers 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 the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company, upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies but primarily includes
residential properties located in NewJersey and the New York metropolitan area.
Lines of Credit
- ---------------
The Company has available an overnight line of credit in the amount of
$13,054,250 and a one-month overnight repricing line of credit in the amount of
$13,054,250 available from the Federal Home Loan Bank of New York. Advances
under these lines of credit are subject to the terms and conditions of the
FHLB's overnight repricing advance program. The lines expire July 11, 2002, and
the Company had no outstanding borrowings, under these lines of credit, as of
December 31, 2001. At March 31, 2002, the Company had outstanding borrowings
against the overnight line of credit and the one-month overnight repricing line
of credit in the amount of $4,850,000 and $8,150,000, respectively.
Lease Commitments
- -----------------
Rental expense under long-term operating leases for the Company's offices
amounted to $98,000, $92,000, $376,000 and $332,000 for the periods ended March
31, 2002 and 2001, and December 31, 2001 and 2000, respectively.
F-19
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. COMMITMENTS AND CONTINGENCIES (Cont'd)
- --- --------------------------------------
Future minimum lease payments under the lease obligations were as follows:
March 31, December 31,
2002 --------------------------------
(unaudited) 2001 2000
---------------- ---------------- ---------------
2001 $ - $ - $ 368,406
2002 277,519 369,938 369,938
2003 378,745 378,745 378,745
2004 406,529 406,529 406,529
2005 401,957 401,957 401,957
Thereafter 2,332,724 2,332,724 2,332,724
---------------- ---------------- ---------------
$ 3,797,474 $ 3,889,893 $ 4,258,299
================ ================ ===============
The Company maintains six office locations within the corporate facilities of
the Company's former credit union sponsor organization. The Company makes no
rental payments for these branch locations. The locations are occupied persuant
to a written agreement that provides for two- year terms that are automatically
renewed upon expiration unless written notice of termination is given by either
party.
The Company also has, in the normal course of business, commitments for services
and supplies. Management does not anticipate any losses on any of these
commitments.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
- --- -----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods and assumptions are set forth below for the Company's financial
instruments.
Cash and Cash Equivalents
- -------------------------
For cash and due from banks, the carrying amount approximates fair value.
Investment Securities and Mortgage-backed Securities
- ----------------------------------------------------
The fair value of investment securities and mortgage-backed securities is
estimated based on bid quotations received from securities dealers, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices of similar instruments, adjusted for differences
between the quoted instruments and the instruments being valued.
FHLB Stock
- ----------
The fair value for FHLB stock is its carrying value, since this is the amount
for which it could be redeemed. There is no active market for this stock, and
the Company is required to maintain a minimum balance based upon the greater of
the unpaid principal of home mortgage loans or its Federal Home Loan Bank
borrowings.
Loans Receivable
- ----------------
The fair value of loans receivable is estimated by discounting future cash
flows, using the current rates at which similar loans with similar remaining
maturities would be made to borrowers with similar credit ratings.
Deposits
- --------
The fair value of deposits with no stated maturity, such as non-interest-bearing
demand deposits, savings, and money market accounts, is equal to the amount
payable on demand. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits with similar remaining maturities.
F-20
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd)
- --- --------------------------------------------
FHLB Borrowings
- ---------------
The fair value of FHLB borrowings is estimated by discounting future cash flows
using the current rates available for borrowings with similar maturities.
Commitments to Extend Credit and to Purchase or Sell Securities
- ---------------------------------------------------------------
The fair value of commitments to extend credit 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. The
fair value of commitments to purchase or sell securities is estimated based on
bid quotations received from securities dealers.
The estimated carrying and fair values of the Company's financial instruments
are presented in the following table:
March 31, 2002 (unaudited) December 31, 2001 December 31, 2000
--------------------------------- --------------------------------- --------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
---------------- --------------- --------------- ---------------- ---------------- ---------------
(in thousands)
Financial assets:
Cash and cash equivalents $ 1,942 $ 1,942 $ 3,708 $ 3,708 $ 6,139 $ 6,139
Investment securities - - - - 8,443 8,414
Mortgage-backed securities 61,636 61,587 51,047 51,125 29,782 29,647
Loans receivable 261,433 261,914 224,689 226,290 189,098 189,290
Accrued interest receivable 1,374 1,374 1,151 1,151 1,142 1,142
FHLB stock 2,605 2,605 1,550 1,550 1,985 1,985
Cash surrender value of
officer life insurance 2,082 2,082 2,051 2,051 1,942 1,942
---------------- --------------- --------------- ---------------- ---------------- ---------------
$ 331,072 $ 331,504 $ 284,196 $ 285,875 $ 238,531 $ 238,559
================ =============== =============== ================ ================ ===============
Financial liabilities:
Deposits $ 276,762 $ 277,405 $ 249,813 $ 251,306 $ 191,144 $ 191,232
FHLB advances 41,500 40,780 22,500 23,498 31,500 31,573
Advance payments by
borrowers for taxes and
insurance 1,388 1,388 1,046 1,046 731 731
Accrued interest payable 178 178 174 174 250 250
---------------- --------------- --------------- ---------------- ---------------- ---------------
$ 319,828 $ 319,751 $ 273,533 $ 276,024 $ 223,625 $ 223,786
================ =============== =============== ================ ================ ===============
Off-Balance-Sheet financial
instruments:
Commitments to extend
credit $ 37,827 $ 37,827 $ 47,715 $ 47,715 $ 24,162 $ 24,162
================ =============== =============== ================ ================ ===============
F-21
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd)
- --- --------------------------------------------
Limitations
- -----------
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale, at one time, the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
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.
Fair value estimates are based in existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets and
premises and equipment. 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 the estimates.
14. SUBSEQUENT EVENTS
- --- -----------------
On April 12, 2002, Synergy Federal Savings Bank changed its name to Synergy
Bank.
On May 1, 2002, the Board of Directors adopted a plan of stock issuance pursuant
to which Synergy Financial Group, Inc. will sell a minority interest of its
common stock to eligible depositors of the Bank in a subscription offering and,
if necessary, to the general public if a community or a syndicated community
offering is held. The majority of the common stock will be owned by Synergy MHC.
The plan is subject to approval by the Office of Thrift Supervision.
As a condition to OTS approval of the conversion, Synergy Financial Group, Inc.
has agreed that it will not initiate any action within one year of completion of
the stock offering in the furtherance of payment of a special distribution or
return of capital to stockholders of Synergy Financial Group, Inc.
The OTS imposes various restrictions or requirements on the ability of savings
institutions to make capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan holding
company, such as Synergy Federal Savings Bank, must file an application or a
notice with the OTS at least thirty days before making a capital distribution. A
savings insitution must file an application for prior approval of a capital
distribution if: (i) it is not eligible for expedited treatment under the
applications processing rules of the OTS; (ii) the total amount of all capital
distributions, including the proposed capital distribution, for the applicable
calendar year would exceed an amount equal to the savings bank's net income for
that year to date plus the insitution's retained net income for the preceeding
two years; (iii) it would not adequately be cpaitalized after the capital
distribution; or (iv) the distribution would violate an agreement with the OTS
or applicable regulaions.
Synergy Federal Savings Bank will be required to file a capital distriubtion
notice or application with the OTS before paying any dividend to Synergy
Financial Group, Inc. However, capital distributions by Synergy Financial Group,
Inc., as a savings and loan holding company, will not be subject to the OTS
capital distribution rules.
The OTS may disapprove a notice or deny an application for a capital
distribution if: (i) the savings institution would be undercapitalized following
the capital distribution; (ii) the proposed capital distribution raises safety
and soundness concerns; or (iii) the capital distribution would violate a
prohibition contained in any statue, regulation or agreement.
F-22
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. SUBSEQUENT EVENTS (Cont'd)
- --- --------------------------
Costs, including underwriting discounts, if any, to complete the conversion are
expected to be deferred and deducted from the proceeds from the sale of capital
stock. If the conversion does not take place all costs incurred will be charged
to expense. Deferred costs aggregated $69,907 and $86,040 at March 31, 2002 and
December 31, 2001, respectively.
F-23
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which the offer or solicitation would be unlawful. The affairs of Synergy
Financial Group, Inc. and its subsidiaries may change after the date of this
prospectus. Delivery of this document and the sales of shares made hereunder
does not mean otherwise.
TABLE OF CONTENTS
Page
----
Summary................................................................ 1
Risk Factors........................................................... 8
Use of Proceeds....................................................... 13
Dividend Policy....................................................... 15
Market for the Stock.................................................. 15
Capitalization........................................................ 16
Pro Forma Data........................................................ 17
Historical and Pro Forma Capital Compliance........................... 22
Recent Developments................................................... 23
Selected Financial and Other Data..................................... 28
Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 30
Business of Synergy, MHC.............................................. 45
Business of Synergy Financial Group, Inc.............................. 45
Business of Synergy Bank ............................................. 45
Regulation............................................................ 67
Taxation.............................................................. 73
Management............................................................ 73
The Stock Offering.................................................... 81
Restrictions on Acquisition of Synergy Financial Group, Inc........... 96
Description of Capital Stock.......................................... 99
Legal and Tax Opinions................................................100
Experts...............................................................100
Registration Requirements.............................................100
Where You Can Find Additional Information.............................100
Index to Consolidated Financial Statements............................102
Until the later of November 7, 2002, or 90 days after commencement of the
offering, all dealers effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
[GRAPHIC OMITTED]
Up to 1,265,000 Shares
Synergy Financial Group, Inc.
PROSPECTUS
TRIDENT SECURITIES
A Division of McDonald Investments Inc.
August 9, 2002
THESE SECURITIES ARE NOT DEPOSITS OR
SAVINGS ACCOUNTS AND ARE NOT FEDERALLY
INSURED OR GUARANTEED.