SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: September 30, 2004
------------------
[ ] 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: 000-50467
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SYNERGY FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 52-2413926
- ------------------------------- ----------------
(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)
(908) 272-3838
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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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of common stock as of November 5, 2004:
$0.10 Par Value Common Stock 12,452,011
- ---------------------------- ----------
Class Shares Outstanding
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2004 (unaudited) and
December 31, 2003 (audited)..............................................1
Consolidated Statements of Income for the three and nine months ended
September 30, 2004 and 2003 (unaudited)..................................2
Consolidated Statement of Changes in Stockholders' Equity for the
nine months ended September 30, 2004 (unaudited).........................3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004 and 2003 (unaudited)..................................4
Notes to Consolidated Financial Statements (unaudited).......................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................26
Item 4. Controls and Procedures.....................................................27
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings...........................................................28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................28
Item 3. Defaults Upon Senior Securities.............................................29
Item 4. Submission of Matters to a Vote of Security Holders.........................29
Item 5. Other Information...........................................................29
Item 6. Exhibits....................................................................29
Signatures................................................................................30
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2004 2003
----------- -----------
(unaudited) (audited)
Assets:
Cash and amounts due from banks $ 4,750 $ 4,481
Interest-bearing deposits with banks 3,750 2,811
----------- -----------
Cash and cash equivalents 8,500 7,292
Investment securities available-for-sale,
at fair value 146,151 123,779
Investment securities held-to-maturity (fair
value of $116,618 and $33,216, respectively) 115,888 33,214
Federal Home Loan Bank of New York
stock, at cost 10,506 3,644
Loans receivable, net 519,575 434,585
Accrued interest receivable 2,774 2,021
Property and equipment, net 17,083 17,620
Cash surrender value of bank-owned life insurance 12,525 2,475
Other assets 4,778 3,988
----------- -----------
Total assets $ 837,780 $ 628,618
=========== ===========
Liabilities:
Deposits $ 522,358 $ 473,535
Federal Home Loan Bank advances 205,675 72,873
Advance payments by borrowers
for taxes and insurance 1,496 1,582
Accrued interest payable on advances 395 119
Stock subscriptions payable - 38,322
Dividend payable 492 -
Other liabilities 1,650 1,259
----------- -----------
Total liabilities 732,066 587,690
----------- -----------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock; $.10 par value, 5,000,000 shares
authorized; issued and outstanding - none - -
Common stock; $.10 par value, 20,000,000 shares
authorized; issued September 30, 2004 - 12,452,011,
December 31, 2003 - 3,344,252 1,245 334
Additional paid-in-capital 86,063 15,008
Retained earnings 29,913 27,858
Unearned ESOP shares (6,131) (1,009)
Unearned RSP compensation (3,594) (1,011)
Treasury stock acquired for the RSP (1,503) (103)
Accumulated other comprehensive
income (loss), net of taxes (279) (149)
----------- -----------
Total stockholders' equity 105,714 40,928
----------- -----------
Total liabilities and stockholders' equity $ 837,780 $ 628,618
=========== ===========
The accompanying notes are an integral part of these statements.
-1-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- -------- --------- ---------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income:
Loans, including fees $ 7,278 $ 6,351 $ 20,647 $ 18,882
Investment securities 2,463 882 5,626 3,173
Other 42 11 88 104
--------- -------- --------- ---------
Total interest income 9,783 7,244 26,361 22,159
--------- -------- --------- ---------
Interest expense:
Deposits 2,329 2,288 6,615 6,785
Borrowed funds 1,432 441 2,538 1,266
--------- -------- --------- ---------
Total interest expense 3,761 2,729 9,153 8,051
--------- -------- --------- ---------
Net interest income before provision for loan losses 6,022 4,515 17,208 14,108
--------- -------- --------- ---------
Provision for loan losses 429 253 1,133 723
--------- -------- --------- ---------
Net interest income after provision for loan losses 5,593 4,262 16,075 13,385
--------- -------- --------- ---------
Other income:
Service charges and other fees on deposit accounts 556 479 1,604 1,211
Net gain on sale of loans - 18 - 18
Net gain on sale of investments 38 148 38 148
Commissions 153 38 186 89
Other 205 89 336 352
--------- -------- --------- ---------
Total other income 952 772 2,164 1,818
--------- -------- --------- ---------
Other expenses:
Salaries and employee benefits 2,687 2,021 7,180 5,710
Premises and equipment 939 903 2,854 2,851
Occupancy 490 458 1,436 1,422
Professional services 156 86 403 362
Advertising 241 226 603 584
Other operating 384 105 974 633
--------- -------- --------- ---------
Total other expenses 4,897 3,799 13,450 11,562
--------- -------- --------- ---------
Income before income tax expense 1,648 1,235 4,789 3,641
--------- -------- --------- ---------
Income tax expense 554 496 1,780 1,339
--------- -------- --------- ---------
Net income $ 1,094 $ 739 $ 3,009 $ 2,302
========= ======== ========= =========
Per share of common stock:
Basic earnings per share $ 0.10 $ 0.23 $ 0.28 $ 0.71
Diluted earnings per share $ 0.09 $ 0.23 $ 0.27 $ 0.71
Basic weighted average shares outstanding 11,496,365 3,234,025 10,886,342 3,234,116
Diluted weighted average shares outstanding 11,743,123 3,266,038 11,113,381 3,239,900
The accompanying notes are an integral part of these statements.
-2-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 2004
(Unaudited)
(Dollars in thousands, except share amounts)
Treasury
Common Stock stock Accumulated
------------ Additional Unearned Unearned acquired comprehensive
Shares Par paid-in- Retained ESOP RSP for the income (loss),
issued value capital earnings shares compensation RSP net TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2004 3,344,252 $334 $15,008 $27,858 $(1,009) $(1,011) $(103) $(149) $40,928
Net income - - - 3,009 - - - - 3,009
Other comprehensive
income, net of
reclassification
adjustment and taxes - - - - - - - (130) (130)
- -------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,879
- -------------------------------------------------------------------------------------------------------------------------------
Net proceeds of stock
offering and
issuance of
common stock 9,107,759 911 68,349 - - - - - 69,260
Dividends declared - - - (954) - - - - (954)
Common stock acquired by
ESOP (562,873 shares) - - - - (5,628) - - - (5,628)
Common stock held
by ESOP committed
to be released
(74,718 shares) - - 257 - 506 - - - 763
Compensation recognized
under RSP Plan - - - - - 274 - - 274
Common stock
repurchased for RSP Plan
(149,742 shares) - - - - - - (1,808) - (1,808)
Common stock awarded
through RSP plan
(281,436 shares) - - 2,857 - - (2,857) - - -
Common stock issued
by RSP (41,573 shares) - - (408) - - - 408 - -
BALANCE AT SEPTEMBER 30, 2004 12,452,011 $1,245 $86,063 $29,913 $(6,131) $(3,594) $(1,503) $(279) $105,714
===============================================================================================================================
The accompanying notes are an integral part of these statements.
-3-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
For the Nine Months
Ended September 30,
--------------------------
2004 2003
-------- ---------
(unaudited) (unaudited)
Operating activities
Net income ....................................................... $ 3,009 $ 2,302
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................... 1,086 1,162
Provision for loan losses ........................................... 1,133 723
Deferred income taxes ............................................... (83) (801)
Amortization of deferred loan fees .................................. (9) 2
Amortization of premiums on investment securities ................... 1,099 1,416
Net (gains) on sale of investment securities ........................ (38) (148)
Mortgage loans originated for sale .................................. - 2,307
Mortgage loan sales ................................................. - (2,325)
Release of ESOP shares .............................................. 763 183
Compensation under RSP plan ......................................... 274 119
Increase in accrued interest receivable ............................. (753) (338)
Increase in other assets ............................................ (707) (1,477)
Increase (decrease) in other liabilities ............................ 391 1,952
Increase in cash surrender value of bank-owned life insurance ....... (50) (144)
Increase (decrease) in accrued interest payable on advances ......... 276 (46)
--------- ---------
Net cash provided by operating activities ........................... 6,391 4,887
--------- ---------
Investing activities
Purchase of investment securities held-to-maturity ............... (93,010) (12,603)
Purchase of investment securities available-for-sale ............. (63,482) (107,139)
Maturity and principal repayments of investment
securities held-to-maturity .................................... 9,650 15,539
Maturity and principal repayments of investment
securities available-for-sale .................................. 39,721 43,526
Purchase of property and equipment ............................... (549) (1,095)
Purchase of FHLB Stock ........................................... (6,862) (2,614)
Purchase of bank-owned life insurance ............................ (10,000) -
Proceeds from the sale of investment securities available for sale 885 9,029
Loan originations, net of principal repayments ................... (59,462) (59,126)
Purchase of loans ................................................ (26,653) -
Cash consideration paid to acquire First Bank of Central Jersey .. - (2,269)
Cash and equivalents acquired from First Bank of Central Jersey .. - 7,773
--------- ---------
Net cash used in investing activities ...................... (209,762) (108,979)
--------- ---------
Financing activities
Net increase in deposits ......................................... 48,823 56,737
Net advances from FHLB ........................................... 132,801 47,475
Increase in advance payments by borrowers
for taxes and insurance ........................................ (86) (86)
Dividends payable ................................................ (462) -
Decrease in stock subscriptions payable .......................... (38,322) -
Net proceeds from issuance of common stock ....................... 69,261 -
Purchase of common stock for ESOP ................................ (5,628) -
Purchase of treasury stock for the RSP Plan ...................... (1,808) (103)
--------- ---------
Net cash provided by financing activities ........................ 204,579 104,023
--------- ---------
Net increase (decrease) in cash and cash equivalents ....... 1,208 (69)
Cash and cash equivalents at beginning of year ...................... 7,292 7,886
--------- ---------
Cash and cash equivalents at end of period .......................... $ 8,500 $ 7,817
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for income taxes ..................... $ 1,866 $ 957
========= =========
Interest paid on deposits and borrowed funds ..................... $ 8,876 $ 8,097
========= =========
The accompanying notes are an integral part of these statements.
-4-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting policies followed by Synergy Financial Group, Inc. (the
"Company") conform to accounting principles generally accepted in the United
States of America and to predominant practice within the banking industry.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Synergy Bank, and its subsidiary Synergy Capital
Investments, Inc, and Synergy Financial Services, Inc. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions to Form 10-Q, and therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations, changes in equity and cash flows in
conformity with accounting principles generally accepted in the United States of
America. However, all normal recurring adjustments that, in the opinion of
management, are necessary for a fair presentation of the consolidated financial
statements have been included. These financial statements should be read in
conjunction with the audited consolidated financial statements and the
accompanying notes thereto included in the Company's Annual Report on Form 10-K
for the period ended December 31, 2003. The results for the three and nine
months ended September 30, 2004 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2004 or any other
period.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the balance
sheets, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The principal estimates that are susceptible to significant change in the near
term relate to the allowance for loan and lease losses. The evaluation of the
adequacy of the allowance for loan and lease losses includes an analysis of the
individual loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations, as well
as current loan collateral values. However, actual losses on specific loans,
which also are encompassed in the analysis, may vary from estimated losses.
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About
Segments of an Enterprise and Related Information, establishes standards for the
way business enterprises report information about operating segments in annual
financial statements. The Bank has one operating segment and, accordingly, has
one reportable segment, "Community Banking." All of the Bank's activities are
interrelated, and each activity is dependent and assessed based on how each of
the activities of the Bank supports the others. For example, commercial lending
is dependent upon the ability of the Bank to fund itself with retail deposits
and other borrowings and to manage interest rate and credit risk. This situation
is also similar for consumer, residential, multi-family and non-residential
mortgage lending. Accordingly, all significant operating decisions are based
upon analysis of the Bank as one operating segment.
-5-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
2. REORGANIZATION AND STOCK CONVERSION
The Company completed its second-step conversion from the mutual holding company
form of organization to a full stock corporation (the "Conversion") on January
20, 2004. Upon closing, Synergy, MHC and the former Mid-Tier Stock Holding
Company were eliminated.
The Company sold 7,035,918 shares of its common stock in the Conversion at
$10.00 per share. In addition, each share of common stock held by the public
stockholders of its former Mid-Tier Stock Holding Company was converted into
3.7231 shares of common stock of the Company, resulting in an aggregate of
5,416,093 exchange shares. Cash was issued in lieu of fractional shares.
Accordingly, the Company now has 12,452,011 total shares of common stock
outstanding following the Conversion, which was the adjusted maximum of the
estimated valuation range.
3. 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 re-acquired during any period are weighted for the portion of the
period that they were outstanding.
The computation of both basic and diluted earnings per share includes the
Employee Stock Ownership Plan ("ESOP") shares previously allocated to
participants and shares committed to be released for allocation to participants
and Restricted Stock Plans ("RSP") shares that have vested or have been
allocated 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.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the three months ended
September 30, 2004 (dollars in thousands, except per share data):
Weighted
Income average shares Per
(numerator) (denominator) share amount
----------- ------------- ------------
Basic earnings per share:
Income available to common stockholders $ 1,094 11,496,365 $ 0.10
Effect of dilutive common stock equivalents 246,758 0.01
--------- ---------- ---------
Diluted earnings per share:
Income available to common stockholders $ 1,094 11,743,123 $ 0.09
========= ========== =========
-6-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the nine months ended
September 30, 2004 (dollars in thousands, except per share data):
Weighted
Income average shares Per
(numerator) (denominator) share amount
----------- ------------- ------------
Basic earnings per share:
Income available to common stockholders $ 3,009 10,886,342 $ 0.28
Effect of dilutive common stock equivalents 227,039 0.01
--------- ---------- ---------
Diluted earnings per share:
Income available to common stockholders $ 3,009 11,113,381 $ 0.27
========= ========== =========
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the three months ended
September 30, 2003 (dollars in thousands, except per share data):
Weighted
Income average shares Per
(numerator) (denominator) share amount
----------- ------------- ------------
Basic earnings per share:
Income available to common stockholders $ 739 3,234,025 $ 0.23
Effect of dilutive common stock equivalents 32,013 -
--------- --------- ---------
Diluted earnings per share:
Income available to common stockholders $ 739 3,266,038 $ 0.23
========= ========= =========
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the nine months ended
September 30, 2003 (dollars in thousands, except per share data):
Weighted
Income average shares Per
(numerator) (denominator) share amount
----------- ------------- ------------
Basic earnings per share:
Income available to common stockholders $ 2,302 3,234,116 $ 0.71
Effect of dilutive common stock equivalents 5,784 -
--------- --------- ---------
Diluted earnings per share:
Income available to common stockholders $ 2,302 3,239,900 $ 0.71
========= ========= =========
-7-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
4. STOCK-BASED COMPENSATION
At the annual meeting held on August 25, 2004, and reconvened on August 31,
2004, stockholders of Synergy Financial Group, Inc. approved the Company's 2004
Stock Option Plan and the 2004 Restricted Stock Plan. A total of 703,591 and
281,436 shares of common stock have been made available for granting under the
2004 Stock Option and 2004 Restricted Stock Plans, respectively. During the
quarter, the Company granted 694,569 options to purchase common shares of the
Company and issued 277,283 shares of restricted stock.
The Company's Stock Option Plan and the Restricted Stock Plan are accounted for
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and released Interpretations.
Accordingly, no compensation expense has been recognized for the stock option
plans. Expense for the Restricted Stock Plans in the amount of the fair value of
the common stock at the date of grant is recognized ratable over the vesting
period. Prior to April 22, 2003, the Company did not have a Stock Option Plan or
a Restricted Stock Plan.
Had an expense for the Company's Stock Option Plans been determined based on the
fair value at the grant date for the Company's stock options consistent with the
method outlined in SFAS No. 123, the Company's net income and earnings per share
for all expenses related to stock options and stock granted in its Restricted
Stock Plans would have been reduced to the pro forma amounts that follow (in
thousands, except per share data):
For the Three Months For Nine Months
ended September 30, ended September 30,
------------------- -------------------
2004 2003 2004 2003
--------- --------- -------- ---------
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------- -----------------------
Net income, as reported $ 1,094 $ 739 $ 3,009 $ 2,302
Add expense recognized for the Restricted Stock Plans,
net of related tax effect 99 36 176 72
Less total Stock Option Plan and Restricted Stock Plan
expense, determined under the fair value method,
net of related tax effect (226) (84) (405) (167)
--------- --------- -------- ---------
Net income, pro forma $ 967 $ 691 $ 2,780 $ 2,207
========= ========= ======== =========
Basic earnings per share:
As reported $ 0.10 $ 0.23 $ 0.28 $ 0.71
Pro forma $ 0.08 $ 0.21 $ 0.26 $ 0.68
Diluted earnings per share:
As reported $ 0.09 $ 0.23 $ 0.27 $ 0.71
Pro forma $ 0.08 $ 0.21 $ 0.25 $ 0.68
-8-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options price model. The following weighted average assumptions
were utilized 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 five years.
The following weighted average assumptions were utilized for grants in 2004:
dividend yield of 1.60%; expected volatility of 32.85%; risk-free interest rate
of 3.33%; and, expected life of five years.
The Company has established an Employee Stock Ownership Plan ("ESOP") covering
eligible employees with one year of service, as defined by the ESOP. The Company
accounts for the ESOP in accordance with the American Institute of Certified
Public Accountants' Statement of Position (SOP) No. 93-6, Employers' Accounting
for Employee Stock Ownership Plans. SOP No. 93-6 addresses the accounting for
shares of stock issued to employees by an ESOP. SOP No. 93-6 requires that the
employer record compensation expense in the amount equal to the fair value of
shares committed to be released from the ESOP to employees.
Compensation expense for the ESOP is recorded at an amount equal to the shares
allocated by the ESOP multiplied by the average fair market value of the shares
during the year. The Company recognizes compensation expense ratably over the
year for the ESOP shares to be allocated based upon the Company's current
estimate of the number of shares expected to be allocated by the ESOP during
each calendar year. The difference between the average fair market value and the
cost of the shares allocated by the ESOP is recorded as an adjustment to
additional paid-in-capital.
5. RECENT ACCOUNTING PRONOUNCEMENTS
The SEC recently released Staff Accounting Bulletin (SAB) No. 105, Application
of Accounting Principles to Loan Commitments. SAB 105 provides guidance about
the measurement of loan commitments recognized at fair value under Financial
Accounting Standards Board (FASB) Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. SAB No. 105 also requires companies to
disclose their accounting policy for those loan commitments including methods
and assumptions used to estimate fair value and associated hedging strategies.
SAB No. 105 is effective for all loan commitments accounted for as derivatives
that are entered into after September 30, 2004. The adoption of SAB No. 105 is
not expected to have a material effect on the Company's consolidated financial
statements.
On September 30, 2004, the FASB issued a proposed Statement, Share-Based Payment
an Amendment of FASB Statements No. 123 and APB No. 25, that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Under the FASB proposal, all forms of share-based payments to employees,
including employee stock options, would be treated the same as other forms of
compensation by recognizing the related cost in the income statement. The
expense of the award would generally be measured at fair value at the grant
date. Current accounting guidance requires that the expense relating to
so-called fixed plan employee stock options only be disclosed in the footnotes
to the financial statements. The proposed Statement would eliminate the ability
to account for share-based compensation transactions using APB Opinion No. 25,
Accounting for Stock Issued to Employees. The Company is currently evaluating
this proposed statement and its effects on its results of operations.
-9-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). In general, a variable interest entity
(VIE) is a corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain VIEs
to be consolidated by the primary beneficiary if the investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. For public companies, the
consolidation requirements of FIN 46 applied immediately to interest entities
created after September 15, 2003. In December 2003, the FASB issued FIN 46R with
respect to VIEs, which among other things revised the implementation date for
small business filers to the first fiscal year or interim period ending after
December 15, 2004, with the exception of Special Purpose Entities (SPEs). The
Bank currently has no SPEs. The adoption of this statement did not have a
material impact on the financial condition or results of operations of the
Company.
The Bank adopted EITF 03-1, The Meaning of Other than Temporary Impairment and
Its Application to Certain Investments, as of December 31, 2003. EITF 03-1
includes certain disclosures regarding quantitative and qualitative disclosures
for investment securities accounted for under FAS 115, Accounting for Certain
Investments in Debt and Equity Securities, that are impaired at the balance
sheet date, but an other-than-temporary impairment has not been recognized.
Paragraphs 10-20 of EITF Issue No.03-1 give guidance on how to evaluate and
recognize an impairment loss that is other than temporary. On September 15, 2004
the FASB issued a proposed staff position EITF Issue 03-1-a to address the
implementation guidance to evaluate and recognize other than temporary
impairment. On September 30, 2004, the FASB issued a staff position EITF Issue
03-1-1 which delayed the effective date of paragraphs 10-20 of EITF Issue 03-1.
The Company is in the process of determining the impact that this EITF will have
on its financial statements.
-10-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
6. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of the
Company's investment securities available for sale and held to maturity are as
follows (in thousands):
September 30, 2004 (unaudited)
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------------------------------------------------------
Available-for-sale
U.S. government obligations $ 3,004 $ 1 $ 50 $ 2,955
Mortgage-backed securities
FHLMC 89,020 242 485 88,777
FNMA 53,536 183 292 53,427
Equity securities 1,029 5 42 992
----------- --------- --------- -----------
Total $ 146,589 $ 431 $ 869 $ 146,151
=========== ========= ========= ===========
September 30, 2004 (unaudited)
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------------------------------------------------------
Held-to-maturity
Mortgage-backed securities
FHLMC $ 49,866 $ 346 $ 227 $ 49,985
FNMA 61,514 692 137 62,069
GNMA 4,498 56 - 4,554
Other debt securities 10 - - 10
----------- --------- -------- -----------
Total $ 115,888 $ 1,094 $ 364 $ 116,618
=========== ========= ======== ===========
December 31, 2003
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------------------------------------------------------
Available-for-sale
U.S. government obligations $ 3,527 $ 9 $ (69) $ 3,467
Mortgage-backed securities
FHLMC 64,136 282 (320) 64,098
FNMA 55,332 241 (324) 55,249
Equity securities 1,017 3 (55) 965
----------- --------- -------- -----------
Total $ 124,012 $ 535 $ (768) $ 123,779
=========== ========= ======== ===========
-11-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
December 31, 2003
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------
Held-to-maturity
Mortgage-backed securities
FHLMC $ 5,623 $ 20 $ (84) $ 5,559
FNMA 20,285 69 (98) 20,256
GNMA 7,296 95 - 7,391
Other debt securities 10 - - 10
----------- --------- -------- -----------
Total $ 33,214 $ 184 $ (182) $ 33,216
=========== ========= ======== ===========
7. LOANS RECEIVABLE
Major groupings of loans are as follows (in thousands):
September 30, December 31,
2004 2003
-------------------------------
Mortgages
Residential, 1-4 family $ 246,073 $ 226,085
Residential, multi-family 43,477 33,971
Non-residential 88,415 56,694
Automobile 132,203 109,277
Commercial 9,623 7,838
Credit card 46 71
Other loans 3,618 3,745
----------- -----------
Loans receivable 523,455 437,681
Deferred loan fees and costs 250 178
Allowance for loan and lease losses (4,130) (3,274)
----------- -----------
Loans receivable, net $ 519,575 $ 434,585
=========== ===========
A summary of the activity in the allowance for loan and lease losses is as
follows (in thousands):
Nine Months Ended
-------------------------------
September 30, September 30,
2004 2003
-------------------------------
Balance, beginning of period $ 3,274 $ 2,231
Provision for loan and lease losses 1,133 723
Acquisition of First Bank of Central Jersey - 824
Recoveries 321 351
Loans charged-off (598) (1,071)
----------- -----------
Balance, end of period $ 4,130 $ 3,058
=========== ===========
-12-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
8. DEPOSITS
Deposits are summarized as follows (in thousands):
September 30, December 31,
2004 2003
--------------------------------
Checking accounts $ 48,905 $ 45,259
Interest-bearing checking 3,861 708
Money market accounts 165,986 139,121
Savings and club accounts 69,276 72,061
Certificate of deposit accounts 234,330 216,386
----------- -----------
$ 522,358 $ 473,535
=========== ===========
9. FEDERAL HOME LOAN BANK ("FHLB") OF NEW YORK ADVANCES
1. Short-term FHLB Advances
------------------------
Short-term FHLB advances generally have maturities of less than one year. The
details of these advances are presented below (in thousands, except
percentages):
At or For The
------------------------------
Nine Months Twelve Months
Ended Ended
September 30, December 31,
2004 2003
------------------------------
Average balance outstanding $ 37,040 $ 35,413
Maximum amount outstanding
at any month end during the period 48,975 69,300
Balance outstanding at period end 42,475 38,299
Weighted average interest rate during the period 2.13% 1.21%
Weighted average interest rate at period end 2.00% 1.17%
2. Long-term FHLB Advances
-----------------------
At September 30, 2004, long-term advances from the FHLB totaled $163,200,000.
Advances consist of fixed-rate advances that will mature within one to nine
years. The advances are collateralized by FHLB stock and certain first mortgage
loans and mortgage-backed securities. These advances had a weighted average
interest rate of 3.20%.
-13-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
As of September 30, 2004 long-term FHLB advances mature as follows (in
thousands):
2004 $ 13,185
2005 37,565
2006 35,150
2007 38,000
2008 29,600
Thereafter 9,700
-----------
$ 163,200
===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Management's discussion and analysis of financial condition and results
of operations is intended to provide assistance in understanding 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-Q.
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 other income and other expenses. Our other income
consists primarily of fees and service charges and gains (losses) on the sale of
loans and investments. The other 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 and lease losses which, in turn, are dependent
upon, among other things, the size and makeup of the loan portfolio, loan
quality and loan trends.
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,
-14-
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 Loan and Lease Losses. The Company recognizes that the
determination of the allowance for loan and lease losses involves a higher
degree of judgment and complexity than its other significant accounting
policies. The balance in the allowance for loan and lease 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 and
lease losses may be required that would adversely impact earnings in future
periods.
Intangible Assets. Intangible assets, such as goodwill and the core
deposit intangible associated with the January 2003 acquisition of First Bank of
Central Jersey, are subject to annual impairment tests and, in the case of the
core deposit intangible, amortization of the asset through a charge to expense.
To the extent the outcome of the impairment tests differ from the carrying
value, additional charges to expense could be required to reduce the carrying
value, which would adversely impact earnings in future periods.
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 the net deferred tax assets to the expected realizable amount,
thereby impacting earnings.
Comparison of Financial Condition at September 30, 2004 and December 31, 2003
Assets. Total assets reached $837.8 million on September 30, 2004, an
increase of 33.3%, or $209.2 million, from $628.6 million on December 31, 2003.
This growth is attributable to increases in the investment securities and loan
portfolios during the nine month period.
-15-
Between December 31, 2003 and September 30, 2004, investment securities
increased $105.0 million, or 66.9%, from $157.0 million to $262.0 million. This
increase primarily reflects $156.5 million in purchases offset by $49.3 million
in maturities and principal repayments, along with $1.1 million in net discount
and premium amortization, and security sale proceeds of $885,000. The security
sale generated a net gain of $38,000. Additionally, there was a $205,000
decrease in the unrealized market value associated with investment securities
designated available-for-sale.
Net loans increased 19.6 %, or $85.0 million, to $519.6 million at
September 30, 2004, from $434.6 million at December 31, 2003. This growth
includes $59.5 million in originations, net of principal repayments, and $26.7
million in purchases, offset by amortization of the premium on purchased loans
and an increase in provisions for loan and lease losses. The majority of
purchased loans were in our market area. The most significant growth during the
nine months ended September 30, 2004 was in non-residential and multi-family
mortgage loans of $41.2 million, or 45.5%.
On September 30, 2004, total loans of $523.7 million were comprised of
25.1% in single-family real estate loans, 21.6% in home equity loans, 24.8% in
non-residential and multi-family mortgage loans, 25.9% in consumer loans and
1.8% in commercial loans. At the end of the second quarter of 2004, Synergy Bank
expanded its lending product line to include commercial and industrial loans via
the addition of two experienced lenders who were previously employed by a local
commercial bank. As a result, the Company expects to experience an increase in
this loan category in future periods.
The allowance for loan and lease losses was $4.1 million, or 0.79% of
total loans, at September 30, 2004 as compared to $3.3 million, or 0.75% of
total loans, at December 31, 2003. This reflects a provision for loan and lease
losses of $1.1 million for the nine month period, offset by net charge-offs of
$277,000. Non-performing assets to total assets decreased to 0.02%, at September
30, 2004 from 0.06% at December 31, 2003.
During the quarter ended September 30, 2004, the Company invested $10.0
million in bank-owned life insurance. The return on this investment is utilized
to fund the cost of officer benefit plans. The Company's investment in
bank-owned life insurance totaled $12.5 million on September 30, 2004 compared
to $2.5 million on December 31, 2003.
Liabilities. Total liabilities increased $144.4 million, or 24.6%, to
$732.1 million at September 30, 2004 from $587.7 million at December 31, 2003.
The increase in total liabilities resulted primarily from an increase of $48.8
million, or 10.3%, in deposits and a $132.8 million, or 182.2%, increase in FHLB
advances, offset by the elimination of $38.3 million in stock subscriptions
payable. The balance of the change is attributable to increases associated with
escrow payments for taxes and insurance, accrued interest payable and the
establishment of an obligation as a result of the September 29, 2004 dividend
declaration.
Deposits reached $522.4 million at September 30, 2004, an increase of
$48.8 million, or 10.3%, from the $473.5 million reported at December 31, 2003.
Core deposits, consisting of checking, savings and money market accounts,
represented 55.1% of total deposits at September 30, 2004, up from 54.3% at
December 31, 2003. The majority of deposit growth consisted of an increase in
money market deposit accounts of $26.9 million, or 19.3%, for the nine months
ended September 30, 2004.
-16-
The increase in FHLB of New York advances was to fund both the purchase
of investment securities and the origination of loans during this period. A
significant portion of the increase was attributable to the funding of $50.0
million in investment securities purchased at the close of the quarter ended
June 30, 2004. It is projected that the deposit flow from existing and new
branches will be used to fund the Bank's loan demand and pay down the balance of
FHLB advances.
Equity. Stockholders' equity totaled $105.7 million on September 30,
2004, an increase of 158.3 %, or $64.8 million, from $40.9 million on December
31, 2003. The increase in stockholders' equity is largely attributable to $69.2
million in net proceeds from the completion of a second-step stock conversion on
January 20, 2004 and $3.0 million in earnings for the nine-month period ended
September 30, 2004. This was offset by a $5.1 million increase in unearned
Employee Stock Ownership Plan shares, a $1.4 million increase in treasury shares
associated with the 2003 Restricted Stock Plan, a $1.0 million reduction in
retained earnings associated with the payment of dividends and a decrease in
accumulated other comprehensive income, net of tax effect, of $131,000.
Additionally, there was a $2.6 million net increase in unearned compensation
associated with restricted stock plans to reflect shareholder approval of the
2004 Restricted Stock Plan on August 31, 2004.
-17-
Average Balance Sheet. The following table sets forth certain information for
the three months ended September 30, 2004 and 2003. The average yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily average balances. The table does not include the allowance
for loan and lease losses in the average balances of loans receivable.
Management does not believe that this causes any material differences in the
information presented.
---------------------------------------------------------------------------
For the Three Months Ended September 30,
---------------------------------------------------------------------------
2004 2003
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------------------
Interest-earning assets:
Loans receivable, net(1) $501,801 $7,278 5.80% $383,377 $6,351 6.63%
Securities(2) 274,567 2,463 3.59 146,194 882 2.41
Other interest-earning assets(3) 9,991 42 1.68 9,438 11 0.47
-------- ------ -------- ------
Total interest-earning assets 786,359 9,783 4.98 539,009 7,244 5.38
Non-interest-earning assets 37,726 26,453
-------- --------
Total assets $824,085 $565,462
======== ========
Interest-bearing liabilities:
Checking accounts $51,422 $10 0.08 $49,420 $3 0.02
Savings and club accounts 70,759 89 0.50 73,460 65 0.35
Money market accounts 167,494 719 1.72 82,645 270 1.31
Certificates of deposit 227,993 1,511 2.65 244,930 1,950 3.18
FHLB advances 198,409 1,432 2.89 75,475 441 2.34
Stock subscriptions payable - - 0.00 - - 0.00
-------- ------ -------- ------
Total interest-bearing liabilities 716,077 3,761 2.10 525,930 2,729 2.08
------ ------
Non-interest-bearing liabilities 2,814 1,956
-------- --------
Total liabilities 718,891 527,886
Stockholders' equity 105,194 37,576
-------- --------
Total liabilities and stockholders' equity $824,085 $565,462
======== ========
Net interest income $6,022 $4,515
Interest rate spread(4) 2.88% 3.30%
====== ======
Net yield on interest-earning assets(5) 3.06% 3.35%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.81% 102.49%
====== ======
_______________________________
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes U.S. government obligations, mortgage-backed securities and
interest-bearing deposits in banks.
(3) Includes FHLB stock at cost and term deposits with other financial
institutions.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
-18-
Average Balance Sheet. (continued) The following table sets forth certain
information for the nine months ended September 30, 2004 and 2003. The average
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods presented.
Average balances are derived from daily average balances. The table does not
include the allowance for loan and lease losses in the average balances of loans
receivable. Management does not believe that this causes any material
differences in the information presented.
-----------------------------------------------------------------------
For the Nine Months Ended September 30,
-----------------------------------------------------------------------
2004 2003
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ---------------- ----------
Interest-earning assets:
Loans receivable, net(1) $467,935 $20,647 5.88% $359,319 $18,882 7.01%
Securities(2) 224,445 5,626 3.34 137,567 3,157 3.06
Other interest-earning assets(3) 6,263 88 1.87 5,424 120 2.95
-------- ------- -------- -------
Total interest-earning assets 698,643 26,361 5.03 502,310 22,159 5.88
Non-interest-earning assets 32,070 25,445
-------- --------
Total assets $730,713 $527,755
======== ========
Interest-bearing liabilities:
Checking accounts $ 49,105 $ 14 0.04 $ 50,643 $ 57 0.15
Savings and club accounts 71,054 265 0.50 72,321 413 0.76
Money market accounts 156,924 1,996 1.70 66,807 670 1.34
Certificates of deposit 222,666 4,340 2.60 240,700 5,645 3.13
FHLB advances 122,407 2,515 2.74 60,053 1,266 2.81
Stock subscriptions payable 7,569 23 0.41 - - 0.00
-------- ------- -------- -------
Total interest-bearing liabilities 629,725 9,153 1.94 490,524 8,051 2.19
------- -------
Non-interest-bearing liabilities 2,735 3,456
-------- --------
Total liabilities 632,460 493,980
Stockholders' equity 98,253 33,775
-------- --------
Total liabilities and stockholders' equity $730,713 $527,755
======== ========
Net interest income $17,208 $14,108
======= =======
Interest rate spread(4) 3.09% 3.69%
====== ======
Net yield on interest-earning assets(5) 4.93% 5.62%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 110.94% 102.40%
====== ======
_______________________________
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes U.S. government obligations, mortgage-backed securities and
interest-bearing deposits in banks.
(3) Includes FHLB stock at cost and term deposits with other financial
institutions.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
-19-
Comparison of Operating Results for Three Months Ended September 30, 2004 and
2003
Net Income. Net income increased by $355,000, to $1.1 million, for the
three months ended September 30, 2004 compared to $739,000 for the same period
in 2003, a 48.1% increase. The increase was attributable primarily to a $1.5
million increase in net interest income and a $180,000 increase in other income,
offset by a $176,000 increase in the provisions for loan and lease losses, a
$1.1 million increase in other expenses and a $58,000 increase in income tax
expense as a result of higher earnings.
Net Interest Income. Net interest income grew $1.5 million, or 33.4%,
to $6.0 million for the three months ended September 30, 2004 compared to $4.5
million for the same period in 2003. Total interest income increased by $2.5
million, to $9.8 million, for the three months ended September 30, 2004, while
total interest expense increased by $1.0 million, to $3.8 million, for the three
months ended September 30, 2004.
The 35.1% increase in total interest income was primarily due to a
$247.4 million, or 45.9%, increase in the average balance of interest-earning
assets, offset by a 40 basis point decrease in the average yield earned on these
investments when compared to the same period of the prior year. The increase in
interest-earning assets was a direct result of management's growth strategy. The
decrease in the average yield was primarily attributable to lower market
interest rates on loans originated to replace higher yielding loans that were
satisfied by the borrowers.
The 37.8% increase in total interest expense resulted primarily from a
$190.1 million, or 36.2%, increase in the average balance of interest-bearing
liabilities with a 2 basis point increase in the average cost of funds when
compared to the same period of the prior year. The increase in the average cost
of interest-bearing liabilities was primarily attributable to higher market
interest rates, as well as a significant increase in higher cost borrowings. The
majority of the increase in the average balance of interest-bearing liabilities
for the 2004 period was comprised of a $122.9 million, or 162.9%, increase in
the average balance of advances from the Federal Home Loan Bank and an $84.8
million, or 102.7%, increase in the average balance of money market accounts
over the same period of the prior year.
Provision for Loan and Lease Losses. We maintain an allowance for loan
and lease losses through provisions for loan and lease losses that are charged
to earnings. The provision is made to adjust the total allowance for loan and
lease 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 losses
in the loan portfolio that are both probable and reasonable to estimate,
management considers factors such as an internal analysis of credit quality,
general levels of loan delinquencies, collateral values, the Bank's historical
loan and lease 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 and lease 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 and lease 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 assessment
did not change either in estimation method or assumptions during either period.
The provision for loan and lease losses increased by $176,000, or
69.5%, to $429,000 for the three months ended September 30, 2004, from $253,000
for the same period in 2003. Total charge-offs amounted to $212,000 and
recoveries amounted to $113,000, resulting in a net charge-off amount of $99,000
for the
-20-
three months ended September 30, 2004. This represents a decrease in net
charge-offs of $66,000 over the same period in 2003.
Other Income. Other income increased $180,000, or 23.3%, to $952,000
for the three months ended September 30, 2004 compared to $772,000 for the same
period in 2003. This is primarily the result of an additional $108,000 in income
from the expanded investment in bank-owned life insurance, and increases of
$114,000 and $77,000 in commission income, and fees and charges associated with
deposit accounts, respectively. This was offset by a $129,000 decrease in gains
realized on asset sales during the prior year period.
Other Expenses. Other expenses increased $1.1 million, or 28.9%, to
$4.9 million for the three months ended September 30, 2004 compared to $3.8
million for the same period in 2003. The increase was primarily attributable to
wage and benefits associated with the Company's growth strategy, as well as to
equity-based employee compensation plans.
Income Tax Expense. Income tax expense increased by $58,000, or 11.6%,
during the three months ended September 30, 2004 when compared to the same
period in 2003, reflecting higher taxable income for the 2004 period.
Comparison of Operating Results for Nine Months Ended September 30, 2004 and
2003
Net Income. Net income increased by $708,000, to $3.0 million, for the
nine months ended September 30, 2004 compared to $2.3 million for the same
period in 2003, a 30.8% increase. The increase was primarily attributable to a
$3.1 million increase in net interest income and a $346,000 increase in other
income, offset by a $410,000 increase in the provisions for loan and lease
losses, a $1.9 million increase in other expenses and a $441,000 increase in
income tax expense as a result of higher earnings.
Net Interest Income. Net interest income during the nine months ended
September 30, 2004 was $17.2 million compared to $14.1 million during the same
period last year, an increase of 21.2%. Total interest income increased by $4.2
million, to $26.4 million, while total interest expense increased by $1.1
million, to $9.2 million, for the nine months ended September 30, 2004 when
compared to the same period of the prior year. This increase was attributable to
management's growth strategy including the investing of the proceeds from the
additional capital raised in the second-step stock conversion.
The 19.0% increase in total interest income was primarily due to a
$196.3 million, or 39.1%, increase in the average balance of interest-earning
assets, offset by an 85 basis point decrease in the average yield earned on
these investments when compared to the same period of the prior year. The
increase in interest-earning assets was a direct result of management's growth
strategy which included investing the capital raised in the second-step stock
conversion. The decrease in the average yield was primarily attributable to
lower market interest rates on loans originated to replace higher yielding loans
that were satisfied by the borrowers.
The 13.7% increase in total interest expense resulted primarily from a
$139.2 million, or 28.4%, increase in the average balance of interest-bearing
liabilities, offset by a 25 basis point decrease in the average cost of funds
when compared to the same period of the prior year. The majority of the increase
in the average balance of interest-bearing liabilities for the 2004 period was
comprised of a $90.1 million, or 134.9%, increase in the average balance of
money market accounts and a $62.4 million, or 103.8%, increase
-21-
in the average balance of advances from the Federal Home Loan Bank. The decrease
in the average cost of interest-bearing liabilities was primarily attributable
to pricing strategies and lower market interest rates.
Provision for Loan and Lease Losses. The provision for loan and lease
losses increased by $410,000, or 56.7%, to $1.1 million, for the nine months
ended September 30, 2004 from $723,000 for the same period in 2003. Total
charge-offs amounted to $598,000 and recoveries amounted to $321,000 for a net
charge-off amount of $277,000 for the nine months ended September 30, 2004. This
represents a decrease in net charge-offs of $443,000 when compared to the same
period in 2003. The positive trend is directly correlated with the aging of the
indirect automobile loans associated with the former First Bank of Central
Jersey.
Other Income. Other income during the nine months ended September 30,
2004 totaled $2.2 million compared to $1.8 million for the same period in 2003.
This represents an increase of $346,000, or 19.1%. The increase was attributable
to a $393,000 increase in charges and fees on deposit accounts and a $96,000
increase in commission income generated by annuity sales, offset by a $128,000
decline in income associated with loan and investment security sales.
Other Expenses. During the nine months ended September 30, 2004, other
expenses totaled $13.4 million compared to $11.6 million for the same period in
2003, an increase of $1.9 million, or 16.3%. The increase was primarily
attributable to wage and benefits associated with the Company's growth strategy,
as well as to equity-based employee compensation plans.
Income Tax Expense. Income tax expense increased by $441,000, or 32.9%,
during the nine months ended September 30, 2004 when compared to the same period
in 2003, reflecting higher taxable income for the 2004 period.
-22-
Liquidity
The Bank maintains liquid assets at levels it considers adequate to meet
liquidity needs. The liquidity of the Bank reflects its ability to provide funds
to meet loan requests, accommodate possible outflows in deposits, fund current
and planned expenditures and take advantage of interest rate market
opportunities in connection with asset and liability management objectives.
Funding of loan requests, providing for liability outflows and management of
interest rate fluctuations require continuous analysis in order to match the
maturities of earning assets with specific types of deposits and borrowings.
Bank liquidity is normally considered in terms of the nature and mix of the
Bank's sources and uses of funds.
The Bank's primary sources of liquidity are deposits, scheduled
amortization and prepayment of loans and mortgage-backed securities. In
addition, the Bank invests excess funds in overnight federal funds investments,
which provide liquidity. Its cash and cash equivalents, defined as cash and
deposits in other financial institutions with original maturities of three
months or less, totaled $8.5 million at September 30, 2004. To a lesser extent,
the earnings and funds provided from operating activities are a source of
liquidity.
Liquidity management is both a daily and long-term function of business
management. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
and securities prepayments are greatly influenced by general interest rates,
economic conditions and competition. If the Bank requires funds beyond its
ability to generate them internally, it has the ability to obtain advances from
the FHLB of New York, which provides an additional source of funds. At September
30, 2004, the Bank's borrowing limit with the FHLB of New York was $203.8
million, excluding repurchase agreement advances. At September 30, 2004, the
Bank had $205.7 million of borrowings outstanding, including $99.7 million in
repurchase agreement advances.
Management is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on the Company's
liquidity, capital or operations nor is it aware of any current recommendation
by regulatory authorities, which, if implemented, would have a material effect
on liquidity, capital or operations. The total amount of the Bank's commitments
to extend credit for mortgage and consumer loans as of September 30, 2004 was
$49.8 million, excluding commitments on unused lines of credit, which totaled
$23.8 million.
Management intends to expand the Bank's branch network either through
opening or acquiring branch offices. It currently plans to open six additional
new branch locations over the next two years. The Bank also intends to actively
consider the acquisition of local financial institutions as part of expanding
its banking operations. It does not, however, have any current understandings,
agreements or arrangements for the expansion of its business, other than opening
new branch office locations.
-23-
The following table discloses the Bank's contractual obligations as of September
30, 2004:
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
---------- ---------- --------- --------- --------
FHLB advances (1) $205,675 $93,225 $73,150 $36,600 $2,700
Rental under operating leases 4,458 188 1,608 839 1,823
-------- ------- ------- ------- ------
Total $210,133 $93,413 $74,758 $37,439 $4,523
======== ======= ======= ======= ======
________________
(1) At September 30, 2004, the Bank had $205.7 million of borrowings, including
$99.7 million in repurchase agreement advances, outstanding with the FHLB. At
September 30, 2004, its borrowing limit with the FHLB was $203.8 million,
excluding repurchase agreement advances.
The following table discloses the Bank's commercial commitments as of
September 30, 2004:
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
---------- ---------- --------- --------- --------
Lines of Credit (1) $23,811 $ 3 $ 164 $ 126 $23,518
Other commitments to extend credit 49,774 49,774 - - -
------- ------- ----- ----- -------
Total $73,585 $49,777 $ 164 $ 126 $23,518
======= ======= ===== ===== =======
________________
(1) Represents amounts committed to customers.
-24-
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 September 30, 2004, the Bank was in compliance with all
of its regulatory capital requirements. The following table sets forth the
Bank's capital position and relativity to regulatory requirements as of
September 30, 2004:
OTS Requirements
------------------------------------------------------------------------
Regulatory
Minimum for classification as
Bank actual capital adequacy well-capitalized
----------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total risk-based capital (to risk-weighted assets) $91,991 17.51% $42,029 8.00% $52,537 10.00%
Tier 1 capital (to risk-weighted assets) 87,860 16.72% N/A N/A 31,522 6.00%
Tier 1 capital (to adjusted total assets) 87,860 10.64% 33,041 4.00% 41,301 5.00%
Tangible capital (to adjusted total assets) 87,860 10.64% 12,390 1.50% N/A N/A
Impact of Inflation and Changes Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with Generally
Accepted Accounting Principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations, primarily those at the Bank. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are financial. As a
result, interest rates have a greater impact on the Bank's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
-25-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of the Bank's interest-earning assets
and interest-bearing liabilities are sensitive to changes in interest rates, a
significant form of market risk for the Bank is interest rate risk, or changes
in interest rates. The Bank is vulnerable to an increase in interest rates to
the extent that interest-bearing liabilities mature or re-price more rapidly
than interest-earning assets. Our assets include long-term, fixed-rate loans and
investments, while our primary sources of funds are deposits and borrowings with
substantially shorter maturities. Although having interest-bearing liabilities
that re-price more frequently than interest-earning assets is generally
beneficial to net interest income during a period of declining interest rates,
this type of asset/liability mismatch is generally detrimental during periods of
rising interest rates.
The Board of Directors has established an Asset and Liability Management and
Budget Committee that consists of Directors Scott (Chairman), De Perez, Fiore,
Kasper and Putvinski. The Committee meets quarterly with management to review
current investments: average lives, durations and re-pricing frequencies of
loans and securities; loan and deposit pricing and production volumes and
alternative funding sources; interest rate risk analysis; liquidity and
borrowing needs; and a variety of other assets and liability management topics.
The executive session of the Committee is held monthly with Director Fiore
presiding and senior management in attendance. The results of the quarterly and
monthly meetings of the Committee are reported to the full Board at its regular
meetings. In addition, the Committee generally meets during October and November
each year with the goal of developing an annual business and operating plan for
presentation to the full Board.
To reduce the effect of interest rate changes on net interest income, the Bank
has adopted various strategies to enable it to improve the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
main elements of these strategies include seeking to:
o originate loans with adjustable-rate features or fixed-rate loans with
short maturities, such as home equity and consumer loans;
o lengthen the maturities of time deposits and borrowings when it would
be cost effective through the aggressive pricing and promotion of
certificates of deposits and utilization of FHLB advances;
o increase core deposits (i.e., transaction and savings accounts) which
tend to be less interest rate sensitive; and
o purchase intermediate and adjustable-rate investment securities that
provide a stable cash flow, thereby providing investable funds in
varying interest rate cycles.
Quantitative Analysis. Management actively monitors its interest rate risk
exposure. The Bank's objective is to maintain a consistent level of
profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Bank uses the Office of Thrift
Supervision Net Portfolio Value (NPV) Model to monitor its exposure to interest
rate risk, which calculates changes in net portfolio value. Reports generated
from assumptions provided and modified by management are reviewed by the Asset
and Liability Management Committee and reported to the Board of Directors
quarterly. The Interest Rate Sensitivity of Net Portfolio Value Report shows the
degree to which balance sheet line items and the net portfolio value are
potentially affected by a 100 to 300 basis point (1/100th of a percentage point)
upward and downward shift (shock) in the Treasury yield curve.
Management of the Company believes that there has not been a material adverse
change in market risk during the three- and nine-month periods ended September
30, 2004.
-26-
Item 4. Controls and Procedures
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-Q 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.
Changes in internal controls. During the quarter under report, there
was no change in the Company's internal control over financial reporting that
has materially affected, or is reasonable likely to materially affect, the
Company's internal control over financial reporting.
-27-
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 September 30, 2004 that would be expected to have a material
effect on the Company's operations or income.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
- --------------------- --------------- ---------------- ------------------------- ----------------------------
Period (a) Total (b) Average (c) Total Number of (d) Maximum Number (or
Number of Price Paid per Shares (or Units) Approximate Dollar Value)
Shares (or Share (or Unit) Purchased as Part of of Shares (or Units) that
Units) Publicly Announced May Yet Be Purchased Under
Purchased Plans or Programs the Plans or Programs
- --------------------- --------------- ---------------- ------------------------- ----------------------------
July 1-31, 2004 - - - 120,428
- --------------------- --------------- ---------------- ------------------------- ----------------------------
August 1-31, 2004 6,670 10.15 - 113,758
- --------------------- --------------- ---------------- ------------------------- ----------------------------
September 1-30, 2004 94,031 10.39 - 19,727
- --------------------- --------------- ---------------- ------------------------- ----------------------------
Total 100,701 10.33 -
- --------------------- --------------- ---------------- ------------------------- ----------------------------
- ---------------
1 On June 4, 2003, Synergy Financial Group, Inc. (the "Company") announced
its plans to purchase shares of its common stock in open market
transactions for use by the Company's 2003 Restricted Stock Plan.
2 Currently there is no expiration date for the repurchase of the Company's
stock.
3 There has been no expiration of any plan during the period covered by the
table above.
4 The Company has determined not to terminate any plan prior to expiration.
-28-
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of SecurityHolders.
--------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
Item 6. Exhibits.
--------
a) Exhibits:
31 Certification pursuant to ss.302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to ss.906 of the Sarbanes-Oxley Act of 2002
-29-
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNERGY FINANCIAL GROUP, INC.
Date: November 15, 2004 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 Senior Vice President and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: November 15, 2004 Date: November 15, 2004
-30-