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: March 31, 2003
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 North Avenue East, Cranford, New Jersey 07016
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(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) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of common stock as of May 14, 2003:
$0.10 Par Value Common Stock 3,344,352
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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 March 31, 2003 (unaudited),
and December 31, 2002 (audited).....................................................................1
Consolidated Statements of Income for the three months ended March 31, 2003
and 2002 (unaudited)................................................................................2
Consolidated Statements of Comprehensive Income for the three months ended
March 31, 2003 and 2002 (unaudited).................................................................3
Consolidated Statement of Changes in Stockholders' Equity for the three months ended
March 31, 2003 (unaudited)..........................................................................4
Consolidated Statements of Cash Flows for the three months ended March 31, 2003
and 2002 (unaudited)................................................................................5
Notes to Consolidated Financial Statements (unaudited)...................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................................8
Item 3. Controls and Procedures..................................................................................13
PART II OTHER INFORMATION
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Item 1. Legal Proceedings.......................................................................................14
Item 2. Changes in Securities and Use of Proceeds...............................................................14
Item 3. Defaults Upon Senior Securities.........................................................................14
Item 4. Submission of Matters to a Vote of Security-Holders.....................................................14
Item 5. Other Information.......................................................................................14
Item 6. Exhibits and Reports on Form 8-K........................................................................14
Signatures .........................................................................................................15
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, December 31,
2003 2002
(unaudited) (audited)
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ASSETS
Cash and amounts due from banks $ 3,543,897 $ 3,064,302
Interest-bearing deposits with banks 2,965,355 4,821,926
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Cash and cash equivalents 6,509,252 7,886,228
Investment securities available for sale, at fair value 99,014,928 62,303,108
Investment securities held to maturity (fair value of $37,262,200
and $17,668,930, respectively) 36,938,081 17,407,365
Loans receivable, net 348,169,851 319,423,198
Accrued interest receivable 2,021,515 1,533,305
Property and equipment, net 18,311,192 17,646,759
Federal Home Loan Bank of New York stock, at cost 3,090,100 1,856,200
Cash surrender value of officer life insurance 2,089,924 2,109,678
Other assets 3,428,477 1,109,869
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Total assets $ 519,573,320 $ 431,275,710
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LIABILITIES
Deposits $ 425,129,238 $ 354,141,633
Federal Home Loan Bank of New York advances 52,101,465 36,455,639
Advance payments by borrowers for taxes and insurance 1,448,904 1,414,339
Accrued interest payable on advances 157,673 165,157
Other liabilities 2,004,783 1,226,793
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Total liabilities 480,842,063 393,403,561
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STOCKHOLDERS' EQUITY
Preferred stock; $0.10 par value, authorized 2,000,000 shares;
none issued and outstanding - -
Common stock; $0.10 par value, authorized 18,000,000 shares;
issued 2002 - 3,344,252; 2001 - 100 334,425 334,425
Additional paid-in capital 13,667,318 13,643,090
Unearned ESOP shares (1,095,912) (1,125,007)
Retained earnings 25,281,779 24,446,145
Accumulated other comprehensive income, net of tax 543,647 573,496
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Total stockholders' equity 38,731,257 37,872,149
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Total liabilities and stockholders' equity $ 519,573,320 $ 431,275,710
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1
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the three months ended
March 31,
-------------------------------
2003 2002
(unaudited) (unaudited)
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Interest income
Loans, including fees $ 6,267,089 $ 4,341,156
Investment securities 1,196,528 770,595
Other 44,357 3,048
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Total interest income 7,507,974 5,114,799
Interest expense
Deposits 2,286,076 1,565,210
Borrowed funds 416,285 413,952
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Total interest expense 2,702,361 1,979,162
Net interest income before provision for loan losses 4,805,613 3,135,637
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Provision for loan losses 117,535 269,952
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Net interest income after provision for loan losses 4,688,078 2,865,685
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Other income
Service charges and other fees on deposit accounts 311,070 222,126
Net gains on sales of loans - 17,606
Net (losses) gains on sales of investments - (6,250)
Commissions 34,629 (1,929)
Other 36,421 87,291
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Total other income 382,120 318,844
Other expenses
Salaries, wages and employee benefits 1,861,899 1,227,512
Premises and equipment 793,104 582,180
Occupancy 507,141 260,280
Professional services 158,255 84,179
Marketing 161,748 73,438
Other operating 259,839 182,477
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Total other expenses 3,741,986 2,410,066
Income before income tax expense 1,328,212 774,463
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Income tax expense 492,578 265,471
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Net income $ 835,634 $ 508,992
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Per share of common stock
Basic and diluted earnings $ 0.26 $ NM
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Basic weighted average shares outstanding 3,233,206 NM
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2
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the three months ended For the three months ended
March 31, 2003 March 31, 2002
--------------------------------------- -------------------------------------
Before tax Tax Net of tax Before Tax Net of
amount (expense) amount tax amount (expense) tax
benefit benefit amount
----------- ----------- ------------ ----------- -------------- ----------
Unrealized gains on investment
securities:
Unrealized holding gains (losses) arising
during period $ (46,639) $ 16,790 $ (29,849) $(399,982) $ 143,912 $(256,070)
Less reclassification adjustment for
gains (losses) realized in net income - - - (6,250) 2,250 (4,000)
--------- ---------- --------- --------- --------- ---------
Other comprehensive income (loss), net $ (46,639) $ 16,790 $ (29,849) $(406,232) $ 146,162 $(260,070)
3
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes In
Stockholders' Equity for the
three months ended March 31, 2003
Common Stock
Shares Par Additional Retained Unearned Unrealized
Issued Value Paid-in-capital Earnings ESOP Gain/(Loss) Total
--------- -------- --------------- ---------- ----------- ----------- ------------
BALANCE AT DECEMBER 31, 2002 (Audited) 3,344,252 $334,425 $13,643,090 $24,446,145 $(1,125,007) $573,496 $37,872,149
Net Income for the three months ended 835,634 835,634
March 31, 2003 (unaudited)
Other comprehensive income (loss), net of
reclassification adjustment and taxes (29,849) (29,849)
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Total comprehensive income 805,785
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Common stock held by ESOP committed
to be released (2,909 shares) (unaudited) 24,228 29,095 53,323
BALANCE AT MARCH 31, 2003 (Unaudited) 3,344,252 $334,425 $13,667,318 $25,281,779 $(1,095,912) $543,647 $38,731,257
========= ======== =========== =========== =========== ======== ===========
4
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended
March 31,
-------------------------------
2003 2002
(unaudited) (unaudited)
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Operating activities
Net income $ 835,634 $ 508,992
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 352,688 178,261
Provision for loan losses 117,535 269,952
Deferred income taxes 917 (85,731)
Amortization of deferred loan fees 16,212 (2,299)
Amortization of premiums on investment securities 266,486 90,753
Net loss (gain) on sale of investment securities - 6,250
Release of ESOP shares 53,323 -
Increase in accrued interest receivable (388,534) (223,133)
Increase in other assets (655,676) (349,597)
Increase in other liabilities 404,457 1,421,905
Decrease (increase) in cash surrender value of officer
life insurance 19,754 (30,863)
(Decrease) increase in accrued interest payable on advances (7,484) 3,738
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Net cash provided by operating activities 1,015,312 1,788,228
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Investing activities
Purchase of investment securities held to maturity (6,514,219) (5,912,852)
Purchase of investment securities available for sale (40,716,096) (14,066,085)
Maturity and principal repayments of investment securities
held to maturity 3,769,184 955,809
Maturity and principal repayments of investment securities
available for sale 10,071,653 5,937,556
Purchase of property and equipment (793,257) (685,169)
(Purchase) of FHLB Stock (1,233,900) (1,055,000)
Proceeds from sale of investment securities available for sale - 1,993,750
Loan originations, net of principal repayments (6,890,567) (37,512,474)
Proceeds from sale of loans - 500,000
Cash and cash equivalents acquired from First Bank of
Central Jersey 5,503,558 -
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Net cash used in investing activities (36,803,644) (49,844,465)
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Financing activities
Net increase in deposits 18,730,965 26,948,782
Net advances from Federal Home Loan Bank of New York 15,645,826 19,000,000
Increases in advance payments by borrowers for taxes and insurance 34,565 342,299
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Net cash provided by financing activities 34,411,356 46,291,081
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Net decrease in cash and cash equivalents (1,376,976) (1,765,156)
Cash and cash equivalents at beginning of year 7,886,228 3,707,504
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Cash and cash equivalents at end of period $ 6,509,252 $ 1,942,348
=========== ============
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes $ 435,000 $ 169,296
=========== ============
Interest paid on deposits and borrowed funds $ 2,667,796 $ 1,975,761
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5
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position and the
results of operations for the interim period presented have been included. These
interim financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in our Annual Report on Form
10-KSB for the fiscal year ended December 31, 2002.
The results of operations for the three-month period ended March 31, 2003 are
not necessarily indicative of the results to be expected for the full year.
2. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted EPS is computed by including the dilutive effect of
additional potential common shares issuable under stock option plans. As of
March 31, 2003, there were no dilutive common shares issuable under stock option
plans. The weighted-average number of common shares outstanding for basic EPS
for the three months ended March 31, 2003 was 3,233,206. Basis and diluted EPS
per share was $.26 for the quarter ended March 31, 2003. EPS was not meaningful
for the period ended March 31, 2002.
3. STOCK BASED COMPENSATION
At the annual meeting held on April 22, 2003, the Company's stockholders'
approved the Company's 2003 Stock Option Plan and the 2003 Restricted Stock
Plan. A total of 165,742 and 66,297 shares of common stock have been made
available for granting under the Stock Option and Restricted Stock Plans,
respectively. Prior to March 31, 2003, the Company did not have a Stock Option
Plan or a Restricted Stock Plan.
4. GOODWILL AND INTANGIBLE ASSETS
The Company accounts for acquisitions under Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations". SFAS No. 141 requires the use
of the purchase method of accounting for all business combinations initiated
after June 30, 2001, thereby eliminating the use of the pooling of interests
method.
The Company accounts for goodwill and intangible assets acquired in a business
combination in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets". Under SFAS No. 142 goodwill is not amortized; instead, the carrying
value of goodwill is evaluated for impairment on an annual basis. Identifiable
intangible assets are amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
6
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(unaudited)
5. ACQUISITIONS
On January 10, 2003, the Bank acquired all of the net assets of First Bank of
Central Jersey for a cash purchase price of approximately $2.1 million. This
transaction was accounted for under the purchase method of accounting and the
results of operations of the Bank for the quarter ended March 31, 2003 include
only the results of operations of First Bank of Central Jersey from and after
January 10, 2003. The acquisition resulted in the recording of approximately $
77,000 of goodwill and approximately $668,000 of core deposit intangible, which
is being amortized over 8 years.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted FASB Interpretation ("FIN") 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others" on January 1, 2003. FIN 45 requires a guarantor entity,
at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company has financial and performance
letters of credit. Financial letters of credit require the Company to make
payment if the customer's financial condition deteriorates, as defined in the
agreements. Performance letters of credit require the Company to make payments
if the customer fails to perform certain non-financial contractual obligation.
The Company previously did not record a liability when guaranteeing obligations
unless it became probable that the Company would have to perform under the
guarantee. FIN 45 applies prospectively to guarantees the Company issues or
modifies subsequent to December 31, 2002. The maximum potential undiscounted
amount of future payments of these letters of credit as of March 31, 2003 is
$435,404, which expires in December 2003. Amounts due under these letters of
credit would be reduced by any proceeds that the Company would be able to obtain
in liquidating the collateral for the loans, which varies depending on the
customer.
In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements," for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is in the process
of determining what impact, if any, the adoption of the provisions of FIN 46
will have upon its financial condition or results of operations. The Company
does not anticipate FIN 46 to have a material impact on its consolidated
financial position and results of operations.
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 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21 E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). 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 the 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 (the "SEC").
The Company does not undertake - and specifically disclaims any obligation - to
release publicly the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with the accounting
principals generally accepted in the United States of America and general
practices within the financial services industry. The preparation of the
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Allowance for Credit Losses
- ---------------------------
The Company considers that the determination of the allowance for loan losses
involves a higher degree of judgment and complexity than its other significant
accounting policies. The balance in the allowance for loan losses is determined
based on management's review and evaluation of the loan portfolio in relation to
past loss experience, the size and composition of the portfolio, current
economic events and conditions, and other pertinent factors, including
management's assumptions as to future delinquencies, recoveries and losses. All
of these factors may be susceptible to significant change. To the extent actual
outcomes differ from management's estimates, additional provisions for loan
losses may be required that would adversely impact earnings in future periods.
8
Income Taxes
- ------------
Under the liability method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities. Deferred tax assets are subject to management's judgment based
upon available evidence that future realization is more likely than not. If
management determines that the Company may be unable to realize all or part of
the net deferred tax assets in the future, a direct charge to income tax expense
may be required to reduce the recorded value of net deferred tax asset to the
expected realizable amount.
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 interest earning assets
outstanding in any one period, the yields earned on those assets 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 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, 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.
Comparison of Financial Condition at March 31, 2003 and December 31, 2002
Assets. Total assets increased $88.3 million, or 20.5%, to $519.6 million at
March 31, 2003 from approximately $431.3 million at December 31, 2002. The
increase in total assets resulted primarily from a $56.2 million increase in
investment securities, and a $28.7 million increase in net loans receivable. The
increase in investment securities was a direct allocation of available funds and
borrowings as well as securities acquired from the First Bank of Central Jersey
acquisition. In addition, the increase in loans was also a result of acquiring
$21.3 million in loans from First Bank of Central Jersey, which were adjusted
for fair market value. These credits were predominantly commercial and
non-residential mortgage loans.
During the first quarter of 2003 the commercial loan, residential mortgage loan
and auto loan portfolios increased by $13.8 million, $8.4 million and $7.3
million, respectively. Commercial loans increased as a direct result of our
acquisition of First Bank of Central Jersey. Residential mortgage loans
increased due to continued low interest rates resulting in an increased volume
of refinancing activity, as well as promotional efforts aimed at increasing the
proportion of home equity loans to total loans in our portfolio. Auto loans
increased due to our alliance with an Internet-based lending referral agent.
Liabilities. Total liabilities increased $87.4 million, or 22.2%, to $480.8
million at March 31, 2003 from $393.4 million at December 31, 2002. The increase
in total liabilities resulted primarily from an increase of $71.0 million in
deposits, of which $28.0 million was in core deposits, and a $15.7 million
increase in FHLB advances. Approximately $52.2 million or 73.5% in deposit
growth was a result of the acquisition of First Bank of Central Jersey. 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 both the purchase of investment securities and the
origination of loans during this period. It is projected that the deposit flow
from existing and new branches will be used to fund our loan demand and pay down
the FHLB advances.
9
Equity. Total equity increased $859,000 to $38.7 million at March 31, 2003 from
$37.9 million at December 31, 2002. The increase in equity reflects $836,000 in
net income for the three months ended March 31, 2003, and adjustments for
allocated ESOP shares that increased equity by $53,000, offset by a $30,000
reduction in accumulated other comprehensive income net of tax effect.
Comparison of Operating Results for Three Months Ended March 31, 2003 and 2002
Net Income. Net income increased by $327,000 to $836,000 for the three months
ended March 31, 2003 compared to $509,000 for the same period in 2002, a 64.2%
increase. The increase was attributable primarily to a $1.7 million increase in
net interest income and a $63,000 increase in non-interest income, offset by a
$1.3 million increase in operating expenses and a $227,000 increase in income
tax expense as a result of higher earnings.
Net Interest Income. Net interest income grew $1.7 million, or 53.3%, for the
three months ended March 31, 2003 compared to the same period in 2002. Total
interest income increased by $2.4 million to $7.5 million for the three months
ended March 31, 2003, while total interest expense increased by $723,000 to
approximately $2.7 million for the three months ended March 31, 2003.
The 46.8% increase in total interest income was primarily due to a $157.1
million, or 52.0%, increase in the average balance of interest-earning assets,
offset by a 26 basis point decrease in the average yield earned on these
investments. The increase in interest-earning assets was a direct result of
management's strategy of combining organic growth with external acquisition. The
decrease in the average yield was primarily attributable to lower market
interest rates during the 2003 period.
The 36.5% increase in total interest expense resulted primarily from a 53.9%
increase in the average balance of interest-bearing liabilities, offset by a 30
basis point decrease in the average cost of these funds. The decrease in the
average cost of interest-bearing liabilities is primarily attributable to our
pricing strategies and lower market interest rates in the 2003 period coupled
with core deposits acquired from the First Bank of Central Jersey acquisition.
The majority of the increase in the average balance of interest-bearing
liabilities for the 2003 period was comprised of a $103.8 million increase in
the average balance of certificates of deposit, offset by a 59 basis point
decline in the average cost thereof, and a $45.7 million or 34.0% increase in
the average balance of core deposits.
Provision for Loan Losses. We maintain an allowance for loan losses through
provisions for loan losses that are charged to earnings. 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, the 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. 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 allocates the allowance to various
categories based on its classified assets, historical loan loss experience, and
its assessment of the risk characteristics of each loan category and the
relative balances at month end of each loan category. Management's estimation
did not change either in estimation methods or assumptions during either period.
The credits acquired from First Bank of Central Jersey were recorded at fair
market value at time of acquisition, based on an independent valuation performed
by a third party of the inherent risk of each type of credit acquired.
The provision for loan losses was $118,000 for the three months ended March 31,
2003, compared to $270,000 for the same period in 2002. Despite the decrease in
the provision, our allowance for loan losses stood at $2.9 million at March 31,
10
2003 compared to $1.6 million at March 31, 2002. Furthermore, the allowance
represented 0.83% of total loans outstanding without recourse as of March 31,
2003 compared to 0.63% at March 31, 2002.
Synergy experienced an increase in charge-offs as a direct result of the prior
year's purchase of indirect auto loans from First Bank of Central Jersey that
were acquired at various prices based on the credits contractual performance
status at the time of purchase and the estimated risk of these credits until
their final maturity. We had net charge-offs of $276,000 for the three months
ended March 31, 2003 compared to net charge-offs of $24,000 for the same period
in 2002. Despite this unfavorable comparison, management believes that it has
significantly mitigated any future risk through a combination of application of
fair market valuation on the additional credits acquired as a result of the
merger with First Bank of Central Jersey, maintaining adequate allowances in
line with the previously discussed methodology, and closely monitoring the
contractual performance of these credits though our in-house collection process.
Other Income. Other income, which is primarily composed of deposit account fees,
ATM fees, loan fees and service charges, increased by $63,000, to $382,000, for
the three months ended March 31, 2003 from the same period in 2002. The increase
was primarily due to a $107,000 increase in fees and charges associated with an
expanding account base, offset by a $20,000 decline in the market value of bank
owned life insurance during the 2003 period, as well as a reclassification of
the dividend income from our Federal Home Loan Bank of New York stock holdings
to interest income.
During the quarter ended March 31, 2003, Synergy introduced its "Overdraft
Privilege" product. Although it is too early to judge the impact on operations,
management believes that this product will add value to future non-interest
income.
Other Expenses. Other expenses increased to $3.7 million for the three months
ended March 31, 2003, a $1.3 million increase compared to the same period in
2002. The increase resulted mostly from higher operating expenses associated
with six additional full service branch offices opened and the closure of one
out-of-state campus branch in the last three quarters of 2002, two in the first
quarter of 2003 from the acquisition of First Bank of Central Jersey, and a
significant increase in the number of auto loans originated 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. In future periods,
management foresees a similar impact on future earnings resulting from the
further expansion of our branch office network consistent with implementing the
Company's strategic plan. At March 31, 2003, Synergy Bank operated six on-site
branch offices located on the corporate premises of its former credit union
sponsor corporation. Although we do not incur rent expense for these facilities,
other operating costs are incurred to operate these sites.
During the 2003 period, the Company also absorbed increased expenses (not
present in the 2002 period) associated with being a public company, such as
periodic reporting, annual meeting materials, retention of a transfer agent and
professional fees associated with complying with the mandated requirements of
the Sarbanes-Oxley Act, as well as management of an employee stock ownership
plan.
Income Tax Expense. Income tax expense increased by $227,000, or 85.5%, during
the three months ended March 31, 2003 as compared to the same period in 2002,
reflecting higher taxable income for the 2003 period.
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
11
capital to adjusted total assets and of total risk-basked capital to
risk-weighted assets. On March 31, 2003, the Bank was in compliance with all of
its regulatory capital requirements.
Recently Issued Accounting Standards
The Company adopted FASB Interpretation ("FIN") 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others" on January 1, 2003. FIN 45 requires a guarantor entity,
at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company has financial and performance
letters of credit. Financial letters of credit require the Company to make
payment if the customer's financial condition deteriorates, as defined in the
agreements. Performance letters of credit require the Company to make payments
if the customer fails to perform certain non-financial contractual obligation.
The Company previously did not record a liability when guaranteeing obligations
unless it became probable that the Company would have to perform under the
guarantee. FIN 45 applies prospectively to guarantees the Company issues or
modifies subsequent to December 31, 2002. The maximum potential undiscounted
amount of future payments of these letters of credit as of March 31, 2003 is
$435,404, which expires in December 2003. Amounts due under these letters of
credit would be reduced by any proceeds that the Company would be able to obtain
in liquidating the collateral for the loans, which varies depending on the
customer.
In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements," for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is in the process
of determining what impact, if any, the adoption of the provisions of FIN 46
will have upon its financial condition or results of operations. The Company
does not anticipate FIN 46 to have a material impact on its consolidated
financial position or results of operations.
12
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.
13
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 the
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 March 31, 2003 that would have a material effect on the
Company's operations or income.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
The Company held its 2003 Annual Meeting of Stockholders on April 22,
2003. At the meeting, stockholders approved the Company's 2003 Stock
Option Plan and the 2003 Restricted Stock Plan. Stockholders also
reelected Nancy A. Davis, John S. Fiore and W. Phillip Scott as
directors, each for a term of three (3) years, and ratified the
appointment of Grant Thornton LLP as the Company's independent auditor
for the fiscal year ending December 31, 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 March 31, 2003, the Company filed a
Report on Form 8-K dated January 10, 2003 to report the
completion of its acquisition of First Bank of Central Jersey
and a Report on Form 8-K dated January 23, 2003 to report
consolidated earnings for the year ended December 31, 2002.
14
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: May 14, 2003 /s/John S. Fiore
By: -------------------------------------------
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: May 14, 2003 Date: May 14, 2003
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: May 14, 2003 /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: May 14, 2003 /s/Ralph A. Fernandez
----------------------------- ---------------------------
Ralph A. Fernandez
Vice President and
Chief Financial Officer