SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: September 30, 2002
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
SEC File Number: 000-49980
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SYNERGY FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
United States 22-3798671
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 North Avenue East, Cranford, New Jersey 07016
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(800) 693-3838
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(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes No X
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of common stock as of November 14, 2002:
$0.10 Par Value Common Stock 3,344,252
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Class Shares Outstanding
Transitional Small Business Disclosure Format (check one)
Yes No X
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SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2002 (unaudited)
and December 31, 2001 (audited).................................................................1
Consolidated Statements of Income for the three and nine months
ended September 30, 2002 and 2001 (unaudited)...................................................2
Consolidated Statements of Comprehensive Income for the three and nine months
ended September 30, 2002 and 2001 (unaudited)...................................................3
Consolidated Statement of Changes in Stockholders' Equity for the nine months
ended September 30, 2002 (unaudited)............................................................4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 (unaudited)............................................5
Notes to Consolidated Financial Statements......................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................8
Item 3. Controls and Procedures..............................................................................12
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings.....................................................................................13
Item 2. Changes in Securities and Use of Proceeds.............................................................13
Item 3. Defaults Upon Senior Securities.......................................................................13
Item 4. Submission of Matters to a Vote of Security-Holders...................................................13
Item 5. Other Information.....................................................................................13
Item 6. Exhibits and Reports on Form 8-K......................................................................13
Signatures
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2002 2001
(unaudited) Audited
------------- -------------
Assets
Cash and amounts due from banks $ 2,500,935 $ 2,026,535
Interest-bearing deposits with banks 33,977,303 1,680,969
------------- -------------
Cash and cash equivalents 36,478,238 3,707,504
Equity securities:
Held to maturity - -
Available for sale 8,745 -
Mortgage-backed securities:
Held to maturity 12,202,018 7,152,853
Available for sale 45,568,820 43,894,168
Loans Receivable, net 300,049,610 224,688,651
Accrued interest receivable 1,470,428 1,150,969
Property and equipment, net 15,430,422 11,639,424
Federal Home Loan Bank of New York stock, at cost 1,868,700 1,550,000
Cash surrender value of officer life insurance 2,137,970 2,051,079
Deferred income taxes 59,466 291,062
Other assets 753,025 836,888
------------- -------------
Total assets $ 416,027,442 $ 296,962,598
============= =============
Liabilities and Equity
Liabilities:
Deposits $ 338,938,643 $ 249,813,341
Federal Home Loan Bank of New York advances 37,144,135 22,500,000
Advance payments by borrowers for taxes and insurance 1,337,595 1,045,625
Accrued interest payable on advances 178,747 174,188
Other liabilities 792,608 1,039,073
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Total liabilities 378,391,728 274,572,227
------------- -------------
Commitments and Contingencies - -
Stockholders' equity:
Preferred stock; $.10 par value, 2,000,000 shares authorized;
issued and outstanding - none - -
Common Stock; $.10 par value, 18,000,000 shares authorized;
shares issued and outstanding 3,344,252 (2002) and 100 (2001) 334,425 10
Paid-in-capital 13,964,203 99,990
Unearned ESOP (1,163,800) -
Retained earnings 23,892,703 22,315,215
Accumulated other comprehensive income (loss) -
unrealized gain (loss) on securities available for sale,
net of tax 608,183 (24,844)
------------- -------------
Total stockholders' equity 37,635,714 22,390,371
------------- -------------
Total liabilities and stockholders' equity $ 416,027,442 $ 296,962,598
============= =============
1
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended For the Quarter Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
Interest income:
Loans $ 14,673,303 $ 11,825,600 $ 5,333,138 $ 4,183,675
Investments 0 350,577 0 97,338
Mortgaged-backed securities 2,238,568 1,522,484 680,699 582,366
Other 18,802 313,817 14,847 57,724
------------ ------------ ------------ ------------
Total interest income 16,930,673 14,012,478 6,028,684 4,921,103
------------ ------------ ------------ ------------
Interest expense:
Deposits 5,242,655 5,535,259 1,998,265 2,004,708
Borrowed funds 1,335,521 1,464,304 461,602 456,414
------------ ------------ ------------ ------------
Total interest expense 6,578,176 6,999,563 2,459,867 2,461,122
------------ ------------ ------------ ------------
Net interest income before provision for loan losses 10,352,497 7,012,915 3,568,817 2,459,981
------------ ------------ ------------ ------------
Provision for loan losses 760,086 374,000 209,169 179,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 9,592,411 6,638,915 3,359,648 2,280,981
------------ ------------ ------------ ------------
Other income:
Gain on sale of loans 118,005 30,290 (5,518) 15,423
Dividend on FHLB stock 66,432 82,410 17,185 16,852
Gain/(loss) on sale of investments (5,993) 4,596 0 4,596
Commissions 86,698 273,776 27,141 45,573
Loan servicing fees 128,724 215,745 37,833 76,830
Other fees and service charges 792,623 665,267 317,787 229,455
Insurance investment 86,891 82,092 28,014 26,787
Other 99,910 32,423 65,925 13,129
------------ ------------ ------------ ------------
Total other income 1,373,290 1,386,599 488,367 428,645
------------ ------------ ------------ ------------
Operating expenses:
Compensation and employee benefits 4,375,194 3,589,047 1,669,216 1,116,953
Office operations 1,916,750 1,668,880 625,150 538,674
Office occupancy 911,102 678,863 352,981 222,417
Professional and outside services 258,192 230,895 94,748 73,201
Education and promotion 547,042 263,747 148,151 97,845
Loan servicing 260,766 102,198 122,393 52,535
Deposit insurance 33,466 27,193 11,754 9,370
Other 161,084 138,321 49,808 23,015
------------ ------------ ------------ ------------
Total operating expenses 8,463,596 6,699,144 3,074,201 2,134,010
------------ ------------ ------------ ------------
Income before income tax expense 2,502,105 1,326,370 773,814 575,616
------------ ------------ ------------ ------------
Income tax expense 924,617 454,960 324,735 200,030
------------ ------------ ------------ ------------
Net income $ 1,577,488 $ 871,410 $ 449,079 $ 375,586
============ ============ ============ ============
Earnings per common share - Basic and diluted $ 0.49 N/A $ 0.14 N/A
============ ============
Weighted average number of shares outstanding:
Basic and diluted 3,227,872 N/A 3,227,872 N/A
============ ============
2
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Nine Months Ended For the Quarter Ended
September 30, September 30,
--------------------------------- ------------------------------
2002 2001 2002 2001
(unaudited) (unaudited) (unaudited) (unaudited)
Net Income $ 1,577,488 $ 871,410 $ 449,079 $ 375,586
Other comprehensive income:
Unrealized holding gains on securities available
for sale, net of income taxes of $351,522
$313,285,$152,429, and $170,703, respectively 633,027 557,434 278,777 303,736
----------------- -------------- ---------------- ------------
Comprehensive income $ 2,210,515 $ 1,428,844 $ 727,856 $ 679,322
================= ============== ================ ============
3
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2002
(Unaudited)
Accumulated
Additional Unallocated Other
Common Paid-In Common Stock Retained Comprehensive
Stock Capital Held by ESOP Earnings Income/(Loss) Total Equity
---------- ------------ ------------- -------------------------- ------------
Balance, December 31, 2001 10 99,990 0 22,315,215 (24,844) 22,390,371
Net income for the year ended
September 30, 2002 (unaudited) 1,577,488 1,577,488
Issuance of common stock 334,415 13,864,213 14,198,628
Unallocated common stock
held by ESOP (unaudited) (1,163,800) (1,163,800)
Change in unrealized gain on
securities available for sale,
net of tax (unaudited) 633,027 633,027
--------- ----------- ------------ ----------- --------- ------------
Balance, September 30, 2002 (unaudited) $ 334,425 $13,964,203 $ (1,163,800) $23,892,703 $ 608,183 $ 37,635,714
========= =========== ============ =========== ========= ============
4
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended
September 30,
-------------------------------
2002 2001
(unaudited) (unaudited)
--------------- --------------
Cash flows from operating activities: 1,577,488 871,410
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 646,683 554,268
Provision for loan losses 760,086 374,000
Deferred income taxes (120,739) 149
Amortization of deferred loan fees and costs 34,521 3,942
Amortization of premiums on investments
and mortgaged-backed securities 205,710 57,280
(Gain) loss on sale of investment securities available for sale (257) -
Loss (gain) on sale of mortgaged-backed securities available for sale 6,250 (4,596)
(Gain) on sale of loans (118,005) (30,290)
(Increase) decrease in accrued interest receivable (319,459) (51,531)
Decrease (increase) in other assets 83,863 (88,300)
(Decrease) increase in other liabilities (246,465) 37,877
(Increase) in cash surrender value of officer life insurance (86,891) (82,092)
Increase in accrued interest payable on FHLB advances 4,559 46,767
------------ ------------
Net cash provided by operating activities 2,427,344 1,688,884
------------ ------------
Cash flows from investing activities:
Loan originations, net of principal repayments (67,704,556) (39,714,669)
Purchase of loans (13,684,618) (1,000,000)
Purchase of investment securities - (6,000,000)
Purchase of mortgaged-backed securities available for sale (21,230,700) (22,571,890)
Purchase of mortgaged-backed securities held to maturity (8,104,069) -
Purchase of investment securities available for sale (21,548) -
Maturity and principal repayments of investment securities - 13,500,000
Maturity and principal repayments of mortgaged-backed securities
available for sale 18,341,555 5,854,199
Maturity and principal repayments of mortgaged-backed securities
held to maturity 3,018,621 2,810,636
Purchase of property and equipment (4,437,681) (582,068)
(Purchase) redemption of FHLB stock (318,700) 435,000
Proceeds from sale of mortgaged-backed securities available for sale 2,025,625 1,000,000
Proceeds from sale of investment securities available for sale 10,800 -
Proceeds from sale of loans 5,352,426 9,335,682
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Net cash used in investing activities (86,752,845) (36,933,110)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 89,125,302 51,417,487
Advances from FHLB 20,100,000 1,500,000
Maturity of advances from FHLB (5,000,000) (5,500,000)
Principal repayment of advances from FHLB (455,865) -
Increase (decrease) in advance payments by borrowers for
taxes and insurance 291,970 196,741
Proceeds from stock offering 13,034,828 -
Capitalization of Mutual Holding Company - (100,000)
------------ ------------
Net cash provided by financing activities 117,096,235 47,514,228
------------ ------------
Net increase in cash and cash equivalents 32,770,734 12,270,002
Cash and cash equivalents at beginning of year 3,707,504 6,138,745
------------ ------------
Cash and cash equivalents at end of period 36,478,238 18,408,747
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes 1,087,236 444,878
============ ============
Interest paid on deposits 5,243,250 5,538,576
============ ============
Interest paid on borrowed funds 1,330,962 1,417,537
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5
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Synergy Financial Group, Inc. (the "Company") and its wholly-owned
subsidiaries, Synergy Bank (the "Bank") and Synergy Financial Services, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation. 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 non-residential loans, including multi-family credits.
NOTE 2 - Basis of Presentation and Interim Financial Statements
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These unaudited statements have been prepared in accordance with instructions
for Form 10-QSB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, such information presented reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of the Company's management, necessary for a fair presentation of
the financial position and results of operations and cash flows for these
periods.
The results of operations for the three and nine months ended September 30, 2002
are not necessarily indicative of the results to be expected for the year ending
December 31, 2002 or any other period. The unaudited consolidated financial
statements and notes thereto should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 2001.
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.
NOTE 3 - Net Income Per Common Share
---------------------------
Basic net income per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding, adjusted for the
unallocated portion of shares held by the ESOP in accordance with the American
Institute of Certified Public Accountants' Statement of Position 93-6. Diluted
net income per share is calculated by adjusting the weighted average number of
shares of common stock outstanding to include the effect of unallocated ESOP
shares, unearned restricted stock shares and stock options, if dilutive, using
the treasury stock method. At September 30, 2002, the Company had no restricted
stock plan or stock option plan.
6
For the three and nine month periods ended September 30, 2002, per share amounts
were calculated based upon income for the respective entire periods. Although
the Company completed its minority stock offering on September 17, 2002, the
weighted average number of shares outstanding and earnings per share were
calculated as if such shares were outstanding during the entire periods.
NOTE 4 - Subsequent Event
----------------
On July 2, 2002, the State of New Jersey enacted changes in its corporate
business tax law. Among these are two changes which significantly impact the
bank: (a) an increase in the tax rate, from 3% to 9%, applicable to the Bank's
pre-tax income and (b) the elimination of the previously permitted exclusion
from pre-tax income of certain dividends received. These changes are retroactive
to January 1, 2002. The company has determined that the cumulative effect of the
tax law change, through July 2, 2002, was a decrease to net income of
approximately $25,166, which includes the net effect of federal income taxes,
the recording of additional current state tax for the six months ended June 30,
2002, and the adjustment of state deferred tax assets. This adjustment was
recorded in July 2002.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains certain forward looking statements within the meaning of
Section 21 E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Reform Act of 1995, and is including this statement for purpose of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identified by use of the words "believe", "expect",
"intend", "anticipate", "estimate", "project", or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations of the Company and its subsidiaries include, but are
not limited to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles and guidelines. These risks
and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that could
materially effect the Company's financial results, is included in the Company's
filings with the Securities and Exchange Commission.
General
Management's discussion and analysis of financial condition and results
of operations is intended to provide assistance in understanding our
consolidated financial condition and results of operations. The information in
this section should be read with the consolidated interim financial statements
and the notes thereto included in this Form 10-QSB.
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 (losses) on the sale of loans and investments. 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
also 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.
8
Comparison of Financial Condition at September 30, 2002 and December 31, 2001
Assets. Total assets increased $119.1 million, or 40.1%, to $416.0
million at September 30, 2002 from approximately $297.0 million at December 31,
2001. The increase in total assets resulted primarily from a $32.8 million
increase in cash and cash equivalents, and a $75.4 million increase in net loans
receivables. The increase in cash and cash equivalents was primarily the direct
result of the initial public stock offering and the positive impact of
operations. Additionally, the cash balance as of September 30, 2002 includes
approximately $1.6 million to be reimbursed as a result of oversubscription to
the initial public stock offering. The increase in loans primarily resulted from
growth in the residential mortgage loan, auto loan and non-residential mortgage
loan portfolios of $37.2 million, $17.5 million and $17.7 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. Non-residential loans and multi-family loans
increased as a result of an effort to further diversify the loan portfolio by
promoting these types of credits.
Liabilities. Total liabilities increased $103.8 million, or 37.8% to
$378.4 million at September 30, 2002 from $274.6 million at December 31, 2001.
The increase in total liabilities resulted primarily from an increase of $89.1
million in deposits, of which $20.5 million was in core deposits, and a $14.6
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 this period and for other investing activities. It is
projected that the deposit flow from existing and new branches will be used to
fund our loan demand and possibly pay down the intermediate FHLB advances.
Equity. Total equity increased approximately $15.2 million to $37.6
million at September 30, 2002 from $22.4 million at December 31, 2001. The
increase in equity reflects approximately $14.3 million in proceeds from the
initial stock offering, approximately $1.6 million in net income for the nine
months ended September 30, 2002 and a $633,027 increase in accumulated other
comprehensive income on securities available for sale.
Comparison of Operating Results for Nine Months Ended September 30, 2002 and
2001
Net Income. Net income increased by $706,079 to approximately $1.6
million for the nine months ended September 30, 2002 compared to $871,410 for
the same period in 2001, an 81% increase. The increase was attributable
primarily to a $3.3 million increase in net interest income, offset by a
$386,086 increase in the provision for loan losses, a $13,309 decrease in other
income, an approximately $1.8 million increase in operating expenses, and a
$469,657 increase in income tax expense.
9
Net Interest Income. Net interest income grew $3.3 million, or 47.6%
for the nine months ended September 30, 2002 compared to the same period in
2001. Total interest income increased by $2.9 million to $16.9 million for the
nine months ended September 30, 2002, while total interest expense fell by
$421,387 to approximately $6.6 million for the nine months ended September 30,
2002.
The 20.8% increase in total interest income was primarily due to a
$110.5 million, or 39.6%, increase in the average balance of interest-earning
assets, offset by a 100 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 and the above average balance of
low yielding cash and cash equivalents resulting from the initial stock
offering, positive operating results and strong deposit inflows.
The 6.0% decrease in total interest expense resulted primarily from a
107 basis point decrease in the average cost of interest-bearing liabilities,
offset by a $115.7 million, or 43.3%, 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 interest-bearing liabilities for the 2002 period was
comprised of a $52.3 million increase in the average balance of certificates of
deposit, which was offset by a 34.7% decline in the average cost thereof, and a
$6.2 million or 40.5% increase in the average balance of the Money Market
accounts.
Provision for Loan Losses. The provision for loan losses was $760,086
for the nine months ended September 30, 2002 compared to $374,000 for the same
period in 2001. We had net charge-offs of $51,525 for the nine months ended
September 30, 2002 compared to net charge-offs of $176,798 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 amount of new loan growth of
which the majority is less seasoned credits. The total loan portfolio grew to
$300.1 million at September 30, 2002 from $220.1 million at September 30, 2001,
representing a 36.3% increase. The growth in the loan portfolio included a
significant growth in multi-family and non-residential loans (which are
considered to have a higher risk of default than one- to four-family residential
loans), from 7.9% of the portfolio at September 30, 2001 to 12.6% at September
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 $760,086 provision for the 2002 period reflects a
$75.4 million, or 33.5%, increase in the loan portfolio between December 31,
2001 and September 30, 2002, which includes a $9.9 million, or 72.2%, increase
in non-residential mortgage loans. Furthermore, during the second quarter of
2002, the Bank 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. These credits were
acquired at different price levels to provide us an estimated rate of return
given the level of risk inherent with these types of credits. Consequently, a
higher loan loss reserve percentage has been established on these purchased
loans.
Our allowance for loan losses stood at $2.1 million at September 30,
2002 compared to $1.4 million at September 30, 2001. There can be no assurance
that the amount of the allowance will be sufficient to adequately cover possible
future loan losses.
Other Income. Other income, which is primarily composed of deposit
account fees, ATM fees, loan fees and service charges, decreased by $13,309 to
$1.4 million for the nine months ended September 30, 2002. The decrease was
primarily due to a $187,000 decrease in commission fees from Synergy Financial
Group,
10
Inc.'s wholly-owned subsidiary, Synergy Financial Services, Inc., due to lower
commissions earned from securities and insurance sales. The decrease in
commission fees was offset by an increase in gain on sales of loans of $87,715,
which includes settlement gains of $74,000 from the sale of the credit card
portfolio recognized in the quarter ended June 30, 2002. There was also an
increase of $127,356 in other fees and service charges in the 2002 period as
compared to the same period in 2001.
Operating Expenses. Operating expenses increased to $8.5 million for
the nine months ended September 30, 2002, a $1.8 million increase compared to
the same period in 2001. The increase resulted mostly from an increase in
compensation and employee benefits expense and 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.
Historically, we have had a high level of operating expense because of
the large number of branch offices relative to our asset size. At September 30,
2002, Synergy Bank operated six on-site branch offices located on the corporate
premises of its former credit union sponsor. Although we do not incur rent
expense for these facilities, 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 continue 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 $469,657, or
103.2%, during the nine months ended September 30, 2002 as compared to the same
period in 2001, reflecting higher income for the 2002 period.
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.
11
Regulatory Capital Requirements
The Bank is subject to federal regulations that impose certain minimum
capital requirements. Quantitative measures, established by regulation to ensure
capital adequacy, require the Bank to maintain amounts and ratios of tangible
and core capital to adjusted total assets and of total risk-basked capital to
risk-weighted assets. On September 30, 2002, the Bank was in compliance with all
of its regulatory capital requirements.
Item 3. Controls and Procedures.
------------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-QSB, the Registrant's principal executive officer and
principal financial officer have concluded that the Registrant's disclosure
controls and procedures (as defined in Rules 13a-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in
the Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The Company and its subsidiaries, from time to time, may be 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, the wholly-owned subsidiary of the Company, holds security interests,
claims involving the making and servicing of real property loans, and other
issues incident to its business. There were no lawsuits pending or known to be
contemplated at September 30, 2002 that would have a material effect on its
operations or income.
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
On September 17, 2002, the Company completed a minority stock offering
and issuance of 43.5% of its outstanding common stock. A total of 1,454,750
shares were sold, at $10.00 per share, to eligible depositors of Synergy Bank in
a subscription offering. The majority of shares continue to be owned by Synergy,
MHC, the Company's mutual holding company parent, which owned 100% of the
outstanding stock of the Company prior to the minority offering. The Company's
stock commenced trading on the OTC Electronic Bulletin Board under the symbol
"SYNF" on September 18, 2002.
Item 3. Defaults Upon Senior Securities.
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
----------------------------------------------------
None.
Item 5. Other Information.
------------------
On October 14, 2002, the Company entered into an agreement to acquire
First Bank of Central Jersey ("FBCJ") for $2.1 million in cash. The Company will
pay $2.82 per share for approximately 744,000 shares. As of September 30, 2002,
FBCJ had total assets of approximately $57.5 million, deposits of approximately
$54.7 million and stockholders' equity of approximately $2.6 million. The
transaction will add two branch offices to the Company's franchise. It is
anticipated that this acquisition will be completed in the first quarter of
2003.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a) Exhibits:
99.1 Certification pursuant to 18 U.S.C.ss.1350, as adopted
pursuant toss.906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K:
During the quarter ended September 30, 2002, the Company filed a Report
on Form 8-K, dated September 17, 2002, to report the completion of its minority
stock offering.
13
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNERGY FINANCIAL GROUP, INC.
Date: November 14, 2002 By: /s/John S. Fiore
-------------------------------------
John S. Fiore
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/John S. Fiore /s/Ralph A. Fernandez
- ------------------------------------- --------------------------------------------
John S. Fiore Ralph A. Fernandez
President and Chief Executive Officer Vice President and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: November 14, 2002 Date: November 14, 2002
SECTION 302 CERTIFICATION
I, John S. Fiore, President and Chief Executive Officer of Synergy
Financial Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Synergy Financial
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/John S. Fiore
-------------------------------------
John S. Fiore
President and Chief Executive Officer
SECTION 302 CERTIFICATION
I, Ralph A. Fernandez, Vice President and Chief Financial Officer of
Synergy Financial Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Synergy Financial
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/Ralph A. Fernandez
------------------------------------------
Ralph A. Fernandez
Vice President and Chief Financial Officer