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: June 30, 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
- ------------------------------- ----------------
(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) 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 July 31, 2003:
$0.10 Par Value Common Stock 3,344,252
- ---------------------------- ---------
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 June 30, 2003 (unaudited),
and December 31, 2002 (audited)..................................................................1
Consolidated Statements of Income for the three and six months ended
June 30, 2003 and 2002 (unaudited)...............................................................2
Consolidated Statements of Comprehensive Income for the three and six months ended
June 30, 2003 and 2002 (unaudited)...............................................................3
Consolidated Statement of Changes in Stockholders' Equity for the six months ended
June 30, 2003 (unaudited)........................................................................4
Consolidated Statements of Cash Flows for the six months ended June 30, 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..............................................................11
Item 3. Controls and Procedures...............................................................................18
PART II OTHER INFORMATION
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Item 1. Legal Proceedings....................................................................................19
Item 2. Changes in Securities and Use of Proceeds............................................................19
Item 3. Defaults Upon Senior Securities......................................................................19
Item 4. Submission of Matters to a Vote of Security-Holders..................................................19
Item 5. Other Information....................................................................................19
Item 6. Exhibits and Reports on Form 8-K.....................................................................19
Signatures.......................................................................................................20
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, December 31,
2003 2002
------------- -------------
(unaudited) (audited)
ASSETS
Cash and amounts due from banks $ 3,816,262 $ 3,064,302
Interest-bearing deposits with banks 3,080,736 4,821,926
------------- -------------
Cash and cash equivalents 6,896,998 7,886,228
Investment securities available for sale, at fair value 112,137,200 62,303,108
Investment securities held to maturity (fair value of $35,963,418
and $17,668,930, respectively) 35,498,841 17,407,365
Loans receivable, net 376,269,685 319,423,198
Accrued interest receivable 2,008,458 1,533,305
Property and equipment, net 18,048,865 17,646,759
Federal Home Loan Bank of New York stock, at cost 3,760,100 1,856,200
Cash surrender value of officer life insurance 2,250,084 2,109,678
Other assets 4,495,252 1,109,869
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Total assets $ 561,365,483 $ 431,275,710
============= =============
LIABILITIES
Deposits $ 443,417,662 $ 354,141,633
Federal Home Loan Bank of New York advances 75,201,565 36,455,639
Advance payments by borrowers for taxes and insurance 1,606,732 1,414,339
Accrued interest payable on advances 115,593 165,157
Other liabilities 1,429,567 1,226,793
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Total liabilities 521,771,119 393,403,561
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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; 2003 334,425 334,425
Additional paid-in capital 14,888,297 13,643,090
Unearned ESOP shares (1,066,817) (1,125,007)
Unearned RSP compensation (1,130,724) -
Treasury stock acquired for the RSP (102,809) -
Retained earnings 26,008,772 24,446,145
Accumulated other comprehensive income, net of tax 663,220 573,496
------------- -------------
Total stockholders' equity 39,594,364 37,872,149
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Total liabilities and stockholders' equity $ 561,365,483 $ 431,275,710
============= =============
1
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the quarter ended For the six months ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income
Loans, including fees $ 6,276,690 $ 4,999,009 $ 12,543,779 $ 9,340,165
Investment securities 1,078,238 787,274 2,274,766 1,557,869
Other 63,773 906 108,130 3,955
------------ ------------ ------------ ------------
Total interest income 7,418,701 5,787,189 14,926,675 10,901,989
Interest expense
Deposits 2,210,804 1,679,179 4,496,880 3,244,390
Borrowed funds 408,820 459,967 825,105 873,919
------------ ------------ ------------ ------------
Total interest expense 2,619,624 2,139,146 5,321,895 4,118,309
Net interest income before provision for loan losses 4,799,077 3,648,043 9,604,690 6,783,680
------------ ------------ ------------ ------------
Provision for loan losses 352,605 280,965 470,140 550,917
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 4,446,472 3,367,078 9,134,550 6,232,763
------------ ------------ ------------ ------------
Other income
Service charges and other fees on deposit accounts 420,842 252,710 731,912 474,836
Net gains on sales of loans - 123,523 - 123,523
Net (losses) gains on sales of investments - - - (5,993)
Commissions 16,431 61,487 51,060 59,557
Other 214,404 128,359 250,825 233,000
------------ ------------ ------------ ------------
Total other income 651,677 566,079 1,033,797 884,923
Other expenses
Salaries, wages and employee benefits 1,826,911 1,478,466 3,688,810 2,705,978
Premises and equipment 1,155,016 709,420 1,948,120 1,291,600
Occupancy 456,319 297,841 963,460 558,121
Professional services 117,836 79,265 276,091 163,444
Marketing 196,582 325,453 358,330 398,891
Other 267,919 88,885 527,758 271,361
------------ ------------ ------------ ------------
Total other expenses 4,020,583 2,979,330 7,762,569 5,389,395
Income before income tax expense 1,077,566 953,827 2,405,778 1,728,291
------------ ------------ ------------ ------------
Income tax expense 350,573 334,410 843,151 599,882
------------ ------------ ------------ ------------
Net income $ 726,993 $ 619,417 $ 1,562,627 $ 1,128,409
============ ============ ============ ============
Per share of common stock
Basic earnings per share $ 0.22 N/M $ 0.48 N/M
============ ============ ============ ============
Diluted earnings per share $ 0.22 N/M $ 0.48 N/M
============ ============ ============ ============
Basic weighted average shares outstanding 3,234,866 N/M 3,233,946 N/M
============ ============ ============ ============
Diluted weighted average shares outstanding 3,236,289 N/M 3,234,668 N/M
============ ============ ============ ============
2
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the six months ended For the six months ended
June 30, 2003 June 30, 2002
------------------------------------- -------------------------------------
Before Tax Net of Before Tax Net of
tax (expense) tax tax (expense) tax
amount benefit amount amount benefit amount
------ ------- ------ ------ ------- ------
Unrealized gains on investment securities:
Unrealized holding gains arising
during period $ 156,704 $ (66,980) $ 89,724 $587,643 $ (229,393) $ 358,250
Less reclassification adjustment for
losses realized in net income - - - (6,250) 2,250 (4,000)
--------- -------- -------- -------- ---------- ---------
Other comprehensive income, net $ 156,704 $(66,980) $ 89,724 $581,393 $ (227,143) $ 354,250
========= ======== ======== ======== ========== =========
3
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes In Stockholders' Equity
for the six months ended June 30, 2003
Treasury
Common Stock Additional Unearned Stock Unrealized
Shares Paid-in Retained Unearned Compensation acquired Gain
Issued Par Value capital Earnings ESOP RSP for the RSP (Loss) Total
--------- -------- ----------- ----------- ----------- ------------ ----------- ----------- ----------
BALANCE AT DECEMBER 31, 2002 3,344,252 $334,425 $13,643,090 $24,446,145 $(1,125,007) - $573,496 $37,872,149
(Audited)
Net Income for the six
months ended June 30,
2003 (unaudited) 1,562,627 1,562,627
Other comprehensive income
(loss), net of
reclassification
adjustment and taxes 89,724 89,724
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,652,351
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock held by ESOP
committed to be released
(5,818 shares) (unaudited) 54,822 58,190 113,012
Common stock awarded through 1,190,385 (1,190,385) -
RSP plan (56,685 shares)
(unaudited)
Compensation recognized under
RSP plan (unaudited) 59,661 59,661
Common stock held by RSP
(5,000 shares) (unaudited) (102,809) (102,809)
--------- -------- ----------- ----------- ----------- ----------- --------- -------- -----------
BALANCE AT JUNE 30, 2003 3,344,252 $334,425 $14,888,297 $26,008,772 $(1,066,817) $(1,130,724) $(102,809) $663,220 $39,594,364
(unaudited) ========= ======== =========== =========== =========== =========== ========= ======== ===========
4
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended
June 30,
2003 2002
------------ ------------
(unaudited) (unaudited)
Operating activities
Net income $ 1,562,617 $ 1,128,409
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 755,567 387,691
Provision for loan losses 470,140 550,917
Deferred income taxes 48,344 12
Amortization of deferred loan fees 29,864 62,671
Amortization of premiums on investment securities 747,459 118,730
Net loss on sale of investment securities - 6,250
Gain on sale of loans - (123,523)
Release of ESOP shares 113,011 -
Compensation under RSP plan 59,661 -
Increase in accrued interest receivable (375,477) (377,029)
(Increase) decrease in other assets (1,769,878) 58,925
(Decrease) in other liabilities (170,478) (63,074)
Increase in cash surrender value of officer life insurance (140,406) (58,877)
(Decrease) in accrued interest payable on advances (49,564) (16,810)
------------ ------------
Net cash provided by operating activities 1,280,590 1,674,292
------------ ------------
Investing activities
Purchase of investment securities held to maturity (10,650,469) (10,950)
Purchase of investment securities available for sale (67,660,757) (19,978,937)
Maturity and principal repayments of investment securities
held to maturity 9,422,240 -
Maturity and principal repayments of investment securities
available for sale 22,747,649 13,110,080
Purchase of property and equipment (933,809) (2,390,771)
Purchase of FHLB Stock (1,903,900) (1,300,000)
Proceeds from sale of investment securities available for sale - 2,025,625
Loan originations, net of principal repayments (34,649,230) (57,642,720)
Purchase of loans - (13,716,682)
Proceeds from sale of loans - 5,322,426
Cash consideration paid to acquire First Bank Central Jersey (2,269,463) -
Cash and equivalents acquired from First Bank Central Jersey 7,773,021 -
------------ ------------
Net cash used in investing activities (78,124,719) (74,581,929)
------------ ------------
Financing activities
Net increase in deposits 37,019,389 51,921,857
Net advances from Federal Home Loan Bank of New York 38,745,926 20,700,000
Increase in advance payments by borrowers for taxes
and insurance 192,393 403,655
Purchase of treasury stock for the RSP (102,809) -
------------ ------------
Net cash provided by financing activities 75,854,899 73,025,512
------------ ------------
Net increase (decrease) in cash and cash equivalents (989,230) 117,875
Cash and cash equivalents at beginning of year 7,886,228 3,707,504
------------ ------------
Cash and cash equivalents at end of period $ 6,896,998 $ 3,825,379
============ ============
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes $ 907,000 $ 719,939
============ ============
Interest paid on deposits and borrowed funds $ 5,129,592 $ 4,130,264
============ ============
5
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated 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 six-month period ended June 30, 2003 are not
necessarily indicative of the results to be expected for the full year or any
other period.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock (such as stock
options) were exercised or resulted in the issuance of common stock. These
potentially dilutive shares would then be included in the weighted number of
shares outstanding for the period using the treasury stock method. Shares issued
and shares reacquired during any period are weighted for the portion of the
period that they were outstanding.
In computing both basic and diluted earnings per share, the weighted average
number of common shares outstanding includes all 1,889,502 shares issued to
Synergy, MHC. Also included are the ESOP shares previously allocated to
participants and shares committed to be released for the allocation to
participants and RSP shares which have vested or have been alocated to
participants. ESOP and RSP shares that have been purchased but not committed to
be released have not been considered in computing basic and diluted earnings per
share.
3. STOCK BASED COMPENSATION
At the annual meeting held on April 22, 2003, the stockholders of Synergy
Financial Group, Inc. (the "Company") approved the Company's 2003 Stock Option
Plan and the 2003 Restricted Stock Plan. A total of 165,746 and 66,297 shares of
common stock have been made available for granting under the Stock Option and
Restricted Stock Plans, respectively. During the quarter, the Company granted
165,746 options to purchase common shares of the Company and issued 56,685
shares of restricted stock. Prior to April 22, 2003, the Company did not have a
Stock Option Plan or a Restricted Stock Plan.
The Company's stock option plan and the restricted stock plan are accounted for
in accordance with the provisions of Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees", and released
Interpretations. Accordingly, no compensation expense has been recognized for
the stock option plan. Expense for the restricted stock plan in the amount of
the fair value of the common stock at the date of grant is recognized ratable
over the vesting period.
Had an expense for the Company's stock option plan been determined based on the
fair value at the grant date for the Company's stock options consistent with the
method outline in Statement of Financial Accounting Standards (SFAS) No. 123,
the Company's net income and earnings per share for all expenses related to
stock options and stock granted in our restricted stock plan would have been
reduced to the pro forma amounts that follow.
6
SYNERGY FINANCIAL GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(unaudited)
For the six months ended
June 30, 2003
-------------------------------------
(in thousands, except per share date)
Net income, as reported $1,563
Add: Expense recognized for the restricted stock plan,
net of related tax effect 36
Less: total stock option and restricted stock plan
expense, determined under the fair value method, net of
related tax effect (84)
------
Pro forma net income $1,517
======
Basic earnings per share As reported 0.48
Pro forma 0.47
Diluted earnings per share As reported 0.48
Pro forma 0.47
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options price model with the following weighted average
assumptions used for grants in 2003: dividend yield of 0.00%; expected
volatility of 29.44 %; risk-free interest rate of 3.01% and expected life of 5
years.
4. GOODWILL AND INTANGIBLE ASSETS
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."
7
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(unaudited)
5. ACQUISITIONS
On January 10, 2003, Synergy Bank (the "Bank"), a wholly-owned subsidiary,
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. The acquisition resulted in the
recording of approximately $42,000 of goodwill and approximately $668,000 of
core deposit intangible, which is being amortized over 8 years.
6. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation. Earnings per share information
for the periods ended June 30, 2002 are not presented, as it is not meaningful.
For the three months ended June 30, 2003
------------------------------------------------
Income Shares Per Income
Share Amount
----------- --------- ------------ ----------
Net income $ 726,993 $619,417
---------- ----------
Basic earnings per share:
Income available to common $ 726,993 3,234,866 $ 0.22 $619,417
stockholders ---------- --------- --------- --------
Effect of dilutive common
stock equivalents 1,423
-----
Diluted earnings per share:
Income available to common $ 726,993 3,236,289 $ 0.22 $619,417
stockholders ---------- --------- --------- ----------
For the six months ended June 30, 2003
------------------------------------------------
Income Shares Per Income
Share Amount
----------- ----------- ------------ ----------
Net income $1,562,627 $1,128,409
---------- ----------
Basic earnings per share:
Income available to common $1,562,627 3,233,946 $ 0.48 $1,128,409
stockholders ---------- --------- --------- ----------
Effect of dilutive common
stock equivalents 722
---
Diluted earnings per share:
Income available to common $1,562,627 3,234,668 $ 0.48 $1,128,409
stockholders ---------- --------- --------- ----------
8
7. RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities, on
July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for implementation
issues raised by constituents or includes the conclusions reached by the
Financial Accounting Standards Board (FASB) on certain FASB Staff Implementation
Issues. Statement No. 149 also amends SFAS No. 133 to require a lender to
account for loan commitments related to mortgage loans that will be held for
sale as derivatives. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The Company periodically enters into commitments
with its customers, which it intends to sell in the future. Management does not
anticipate the adoption of SFAS No. 149 to have a material impact on the
Company's financial position or results of operations.
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150
changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. As a result,
management does not anticipate the adoption of SFAS No. 150 to have a material
impact on the Company's financial position or results of operations.
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. 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
obligations. 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. At June 30, 2003, the
Company was not contingently liable for any financial and performance letters of
credit. It is the Bank's practice to generally hold collateral and/or obtain
personal guarantees supporting any outstanding letter of credit commitments. In
the event that the Bank is required to fulfill its contingent liability under a
standby letter of credit, it could liquidate the collateral held, if any, and
enforce the personal guarantee(s) held, if any, to recover all or a portion of
the amount paid under the letter of credit.
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").
9
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 does not anticipate FIN 46 to have a material impact on its
consolidated financial position and results of operations.
10
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.
11
Income Taxes
- ------------
Under the liability method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax basis 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 the Company's
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.
The Company's results of operations are primarily dependent on its 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, results of operations are also affected by the
relative levels of non-interest income and operating expenses. Non-interest
income consists primarily of fees and service charges, and to a lesser extent,
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. 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 June 30, 2003 and December 31, 2002
Assets. Total assets increased $130.1 million, or 30.2%, to $561.4 million at
June 30, 2003 from $431.3 million at December 31, 2002. The increase in total
assets resulted primarily from a $67.9 million increase in investment securities
and a $56.8 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 to reflect their
fair market value. These credits were predominantly commercial and
non-residential mortgage loans.
For the six-month period ended June 30, 2003, the Bank originated approximately
$119.7 million in loans compared with $102.6 million for the corresponding 2002
period. These originations were primarily concentrated in mortgages loans, auto
loans, home equity loans, and multifamily and nonresidential mortgages. The low
market interest rate environment in 2002 and the first six months of 2003
accelerated our loan originations due to increased loan refinancing.
The outstanding balances in auto loans, home equity loans, and multifamily and
nonresidential mortgage loans increased by $25.3 million, $13.3 million and
$12.7 million, respectively, over December 31, 2002 balances. First mortgage
loans decreased by $3.4 million, as a result of an increase in prepayments and
refinancing during this same period. Auto loans increased due to increased loan
refinancing activity. Home equity 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 these credits to our
total loan portfolio. Commercial loans also increased by $5.9 million over the
last six months as a direct result of our acquisition of First Bank of Central
Jersey.
Liabilities. Total liabilities increased $128.4 million, or 32.6%, to $521.8
million at June 30, 2003 from $393.4 million at December 31, 2002. The increase
in total liabilities resulted primarily from an increase of $89.3 million in
deposits, of which $35 million was in core deposits. Approximately $52.2 million
or 58.5% of the 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
12
of deposit, with terms predominantly in excess of one year, which were offered
at competitive rates to lock in prevailing low interest rates. Total Federal
Home Loan Bank ("FHLB") advances increased by $38.7 million or 106.3% over the
December 31, 2002 balance. 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.
Equity. Total equity increased $1.7 million to $39.6 million at June 30, 2003
from $37.9 million at December 31, 2002. This increase is primarily attributable
to $1.6 million in net income for the six months ended June 30, 2003 and an
increase of $89,724 in accumulated other comprehensive income, net of tax.
Comparison of Operating Results for the Three Months Ended June 30, 2003 and
2002
Net Income. Net income increased by $108,000 to $727,000, for the three months
ended June 30, 2003 compared to $619,000 for the same period in 2002, a 17.4%
increase. The increase was primarily attributable to a $1.1 million increase in
net interest income and an $86,000 increase in total other income, offset by a
$1.0 million increase in total other expenses and a $16,000 increase in income
tax expense as a result of higher taxable income.
Net Interest Income. Net interest income grew $1.1 million, or 31.6%, for the
three months ended June 30, 2003 compared to the same period in 2002. Total
interest income increased by $1.6 million to $7.4 million for the three months
ended June 30, 2003, while total interest expense increased by $480,000 to
approximately $2.6 million for the three months ended June 30, 2003.
The 28.2% increase in total interest income was primarily due to a $162.7
million, or 48.4%, increase in the average balance of interest-earning assets,
offset by a 99 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 an external acquisition.
The average balance of interest-earning loans increased by $84.9 million, to
$358 million, or 31.1% over last year's comparable period. The decrease in the
average yield was primarily attributable to lower market interest rates
throughout the last twelve months.
The 22.5% increase in total interest expense resulted primarily from a 50.1%
increase in the average balance of interest-bearing liabilities, offset by a 48
basis point decrease in the average cost of these funds. The increase in the
average balance of interest-bearing liabilities reflects organic growth as well
as the acquisition of First Bank of Central Jersey during the first-quarter of
2003. More specifically, the average balance of both certificates of deposit and
core deposits increased by $107.3 million and $48.3 million, respectively. Total
deposits acquired from First Bank of Central Jersey totaled $52.2 million.
Further, the average balance of interest-costing liabilities reflects an
increased level of borrowings, with the average balance increasing by $8.3
million for this period. The decrease in the average cost of interest-bearing
liabilities is primarily attributable to lower market rates during this time
horizon, as well as the acquisition of core deposits from First Bank of Central
Jersey.
Provision for Loan Losses. The Bank maintains 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 method or
assumptions during
13
either period. The credits acquired from First Bank of Central Jersey were
recorded at fair market value at the 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 $353,000 for the quarter ended June 30, 2003,
compared to $280,965 for the same period in 2002. The increase in the provision
was 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. The allowance for loan losses was $3
million at June 30, 2003 compared to $1.9 million at June 30, 2002. The
allowance represented 0.79% of total loans outstanding without recourse as of
June 30, 2003 compared to 0.66% at June 30, 2002.
The Bank experienced an increase in charge-offs as a direct result of the
purchase and the acquisition of indirect auto loans from First Bank of Central
Jersey. During the first six months of 2003 net charge-offs were $524,000 as
compared to $8,000 for the same period last year. However, the balance of this
indirect auto loan portfolio is steadily decreasing through regular principal
amortization and the Bank is maintaining a higher percentage of valuation
allowances against these higher risk credits. These credits are closely
monitored through an in-house collection process as well as within the Asset
Liability Committee. However, there can be no assurance that the Bank will not
recognize additional future losses on its indirect auto loan portfolio.
Other Income. Other income, which is primarily composed of deposit account fees,
ATM fees, loan fees, service charges and a bank-owned life insurance policy,
increased by $86,000, to $652,000, for the three months ended June 30, 2003 from
$566,000 reported during the same period in 2002. Excluding the $124,000 gain on
sale of loans recognized during the second-quarter of last year, the increase
over the comparable period is $209,000. The increase is primarily due to a
$168,000 increase in fees and charges associated with an expanding account base
and a $132,000 increase in the cash surrender value of bank-owned life insurance
policy, offset by a $45,000 decrease in commission fees.
Other Expenses. Other expenses increased to $4.0 million for the three months
ended June 30, 2003, a $1 million increase when compared to the same period in
2002. The increase resulted primarily from higher operating expenses associated
with six additional full service branch offices opened in 2002 and the
acquisition of two full service branches in 2003 from the First Bank of Central
Jersey transaction. This included total salary compensation and office premises
expenses increases of $348,000 and $446,000, respectively.
Historically, the Bank has had a high level of operating expense because of the
large number of branch offices relative to its asset size. In future periods,
management anticipates a similar impact on future earnings resulting from the
continued expected expansion of the Bank's branch office network consistent with
implementation of the Company's strategic plan.
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 stockholder meetings, 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 $16,000 for the three months
ended June 30, 2003 compared to same period in 2002, reflecting higher taxable
income for the 2003 period.
Comparison of Operating Results for the Six Months Ended June 30, 2003 and 2002
Net Income. Net income increased by $434,000 to $1.6 million for the six months
ended June 30,2003 compared to $1.1 million for the same period in 2002, a 38.5%
increase. The increase was primarily attributable to a $2.8 million increase
14
in net interest income and a $149,000 increase in total other income, offset by
a $2.4 million increase in total other expenses and a $243,000 increase in
income tax expense as a result of higher taxable income.
Net Interest Income. Net interest income grew $2.8 million, or 41.6%, for the
six months ended June 30, 2003 compared to the same period in 2002. Total
interest income increased by $4.0 million, to $15.0 million, for the six months
ended June 30, 2003, while total interest expense increased by $1.2 million, to
$5.3 million, for the six months ended June 30, 2003.
The 36.9% increase in total interest income was primarily due to a $162.0
million, or 50.3%, increase in the average balance of interest-earning assets,
offset by a 60 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 an external acquisition.
The average balance of interest earning loans increased by $89.6 million to
$350.8 million, or 34.3% over last year's comparable period. The decrease in the
average yield was primarily attributable to lower market interest rates during
the 2003 period.
The 29.2% increase in total interest expense resulted primarily from a 46.9%
increase in the average balance of interest-bearing liabilities, offset by a 31
basis point decrease in the average cost of these funds. The increase in the
average balance of interest-bearing liabilities during this period reflects
organic growth as well as the acquisition of First Bank of Central Jersey in the
first-quarter of 2003. More specifically, the average balance of both
certificates of deposit and core deposits increased by $100.2 million and $36.9
million, respectively. As previously discussed, deposits acquired from First
Bank of Central Jersey totaled $52.2 million. Further, the average balance of
interest-bearing liabilities reflects an increased level of borrowings, with the
average balance increasing by $12.5 million for this period. The decrease in the
average cost of interest-bearing liabilities is primarily attributable to lower
market yields during this time period, as well as the acquisition of core
deposits from First Bank of Central Jersey.
Provision for Loan Losses. The Bank maintains 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
method or assumptions during either period. The credits acquired from First Bank
of Central Jersey were recorded at fair market value at the 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 $470,140 for the six months ended June 30,
2003, compared to $550,917 for the same period in 2002. The decrease in the
provision reflects our present level of allowance requirements based on our
credit risk exposure utilizing the above noted allowance for loan and lease
methodologies. The allowance for loan losses was $3.0 million at June 30, 2003
compared to $1.9 million at June 30, 2002. The allowance represented 0.79% of
total loans outstanding without recourse as of June 30, 2003 compared to 0.66%
at June 30, 2002.
As previously noted, the Bank experienced an increase in charge-offs as a direct
result of the purchase and the acquisition of indirect auto loans from First
Bank of Central Jersey. It had net charge-offs of $524,000 during the first six
months of 2003 as compared to $8,000 for the same period last year. However, the
balance of this indirect auto loan portfolio is
15
steadily decreasing through regular principal amortization and the Bank is
maintaining a higher percentage of valuation allowances against these higher
risk credits. These credits are closely monitored through an in-house collection
process as well as within the Asset Liability Committee. However, there can be
no assurance that the Bank will not recognize additional future losses on its
indirect auto loan portfolio.
Other Income. Other income, which is primarily composed of deposit account fees,
ATM fees, loan fees, service charges and a bank-owned life insurance policy,
increased by $149,000, to $1.034 million, for the six months ended June 30, 2003
from $885,000 reported during the same period in 2002. Excluding a net gain from
the sale of assets of $118,000 during the comparable period last year, other
income increased $267,000 primarily due an increase in other service charges.
Other Expenses. Other expenses increased by $2.4 million, to $7.8 million, for
the six months ended June 30, 2003, when compared to the same period in 2002.
The increase resulted mostly from higher operating expenses associated with six
additional full service branch offices opened in 2002 and the acquisition of two
full service branches in 2003 from the First Bank of Central Jersey transaction.
This included total salary compensation and office premises expenses increases
of $983,000 and $657,000, respectively.
Income Tax Expense. Income tax expense increased by $243,000 for the six months
ended June 30, 2003 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
capital to adjusted total assets and of total risk-based capital to
risk-weighted assets. On June 30, 2003, the Bank was in compliance with all of
its regulatory capital requirements.
Recently Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities, on
July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for implementation
issues raised by constituents or includes the conclusions reached by the
Financial Accounting Standards Board (FASB) on certain FASB Staff Implementation
Issues. Statement No. 149 also amends SFAS No. 133 to require a lender to
account for loan commitments related to mortgage loans that will be held for
sale as derivatives. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The Company periodically enters into commitments
with its customers, which it intends to sell in the future. Management does not
anticipate the adoption of SFAS No. 149 to have a material impact on the
Company's financial position or results of operations.
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150
changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. As a result,
management does not anticipate the adoption of SFAS No. 150 to have a material
impact on the Company's financial position or results of operations.
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
16
record a liability for the fair value of the obligation undertaken in issuing
the guarantee. 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 obligations.
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. At June 30, 2003, the Company was not
contingently liable for any financial and performance letters of credit. It is
the Bank's practice to generally hold collateral and/or obtain personal
guarantees supporting any outstanding letter of credit commitments. In the event
that the Bank is required. to fulfill its contingent liability under a standby
letter of credit, it could liquidate the collateral held, if any, and enforce
the personal guarantee(s) held, if any, to recover all or a portion of the
amount paid under the letter of credit.
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 does not
anticipate FIN 46 to have a material impact on its consolidated financial
position and results of operations.
17
Item 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
------------------------------------------------
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), the
Company's principal executive officer and principal financial officer have
concluded that, as of the end of the period covered by this Quarterly Report on
Form 10-QSB, such disclosure controls and procedures 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 control over financial reporting. During the quarter
-------------------------------------------------------
under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
18
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 June 30, 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 re-elected 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:
31.1 Certification pursuant to ss.302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification pursuant to ss.302 of the Sarbanes-Oxley Act
of 2002.
32.1 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 June 30, 2003, the Company filed a Report on
Form 8-K dated April 23, 2003 to report consolidated earnings for the
first-quarter ended March 31, 2003 and a Report on Form 8-K dated June
4, 2003 announcing that it intends to initiate a repurchase of up to
56,685 shares of its stock in the open market in accordance with its
2003 Restricted Stock Plan.
19
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: August 14, 2003 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: August 14, 2003 Date: August 14, 2003
20