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, 2005
------------------
[ ] 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 X No
--- ---
Indicate by check mark whether the registrant is a shell company (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 October 31, 2005:
$0.10 Par Value Common Stock 11,453,266
- ---------------------------- ----------------------------
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, 2005 (unaudited) and
December 31, 2004 (audited).....................................................................1
Consolidated Statements of Income for the three and nine months ended
September 30, 2005 and 2004 (unaudited).........................................................2
Consolidated Statement of Changes in Stockholders' Equity for the
nine months ended September 30, 2005 (unaudited)................................................3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2005 and 2004 (unaudited).........................................................4
Notes to Consolidated Financial Statements (unaudited)..............................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................23
Item 4. Controls and Procedures............................................................................24
PART II OTHER INFORMATION
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Item 1. Legal Proceedings..................................................................................25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................................25
Item 3. Defaults Upon Senior Securities....................................................................26
Item 4. Submission of Matters to a Vote of Security Holders................................................26
Item 5. Other Information..................................................................................26
Item 6. Exhibits...........................................................................................26
Signatures.......................................................................................................27
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
September 30, December 31,
2005 2004
(unaudited) (audited)
----------- ---------
Assets:
Cash and amounts due from banks $ 4,386 $ 4,687
Interest-bearing deposits with banks 3,554 1,759
----------- -----------
Cash and cash equivalents 7,940 6,446
Investment securities available-for-sale,
at fair value 93,485 134,360
Investment securities held-to-maturity (fair
value of $100,203 and $111,154, respectively) 101,155 110,584
Federal Home Loan Bank of New York
stock, at cost 13,123 10,771
Loans receivable, net 690,808 561,687
Accrued interest receivable 3,118 2,751
Property and equipment, net 17,752 16,814
Cash surrender value of bank-owned life insurance 13,010 12,637
Other assets 5,172 4,627
----------- -----------
Total assets $ 945,563 $ 860,677
=========== ===========
Liabilities:
Deposits $ 581,140 $ 538,916
Federal Home Loan Bank advances 262,450 212,414
Advance payments by borrowers
for taxes and insurance 2,140 1,702
Accrued interest payable on advances 780 385
Dividend payable 623 498
Other liabilities 599 2,720
----------- -----------
Total liabilities 847,732 756,635
----------- -----------
Stockholders' equity:
Preferred stock; $0.10 par value, 5,000,000 shares
authorized; issued and outstanding - none - -
Common stock; $0.10 par value, 20,000,000 shares authorized;
Issued - 12,466,903 in 2005 and 12,452,011 in 2004
Outstanding - 11,453,266 in 2005 and 12,064,968 in 2004 1,247 1,245
Additional paid-in-capital 85,601 86,177
Retained earnings 32,211 30,603
Unearned ESOP shares (5,452) (5,962)
Unearned RSP compensation (2,784) (3,391)
Treasury stock held for the RSP, at cost; 363,037 and
387,043 shares at September 30, 2005 and
December 31, 2004, respectively (4,042) (4,343)
Treasury stock, at cost; 650,600 and -0- shares at
September 30, 2005 and December 31, 2004, respectively (7,916) -
Accumulated other comprehensive loss, net of taxes (1,034) (287)
----------- -----------
Total stockholders' equity 97,831 104,042
----------- -----------
Total liabilities and stockholders' equity $ 945,563 $ 860,677
=========== ===========
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,
------------------------ -------------------------
2005 2004 2005 2004
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Interest income:
Loans, including fees $ 9,819 $ 7,278 $ 27,074 $ 20,647
Investment securities 1,934 2,463 6,448 5,626
Other 156 42 391 88
--------- -------- --------- ---------
Total interest income 11,909 9,783 33,913 26,361
--------- -------- --------- ---------
Interest expense:
Deposits 3,292 2,329 9,025 6,615
Borrowed funds 2,517 1,432 6,347 2,538
--------- -------- --------- ---------
Total interest expense 5,809 3,761 15,372 9,153
--------- -------- --------- ---------
Net interest income before provision for loan losses 6,100 6,022 18,541 17,208
Provision for loan losses 392 429 1,314 1,133
--------- -------- --------- ---------
Net interest income after provision for loan losses 5,708 5,593 17,227 16,075
--------- -------- --------- ---------
Other income:
Service charges and other fees on deposit accounts 550 556 1,562 1,604
Net gain (loss) on sale of investments 8 38 (26) 38
Commissions 211 153 660 186
Other 255 205 665 336
--------- -------- --------- ---------
Total other income 1,024 952 2,861 2,164
--------- -------- --------- ---------
Other expenses:
Salaries and employee benefits 2,784 2,687 8,261 7,180
Premises and equipment 962 939 2,789 2,854
Occupancy 604 490 1,655 1,436
Professional services 165 156 560 403
Advertising 269 241 723 603
Other operating 272 384 828 974
--------- -------- --------- ---------
Total other expenses 5,056 4,897 14,816 13,450
--------- -------- --------- ---------
Income before income tax expense 1,676 1,648 5,272 4,789
Income tax expense 568 554 1,939 1,780
--------- -------- --------- ---------
Net income $ 1,108 $ 1,094 $ 3,333 $ 3,009
========= ======== ========= =========
Per share of common stock:
Basic earnings per share $ 0.10 $ 0.10 $ 0.30 $ 0.28
========= ======== ========= =========
Diluted earnings per share $ 0.10 $ 0.09 $ 0.29 $ 0.27
========= ======== ========= =========
Basic weighted average shares outstanding 10,711 11,496 10,993 10,886
====== ====== ====== ======
Diluted weighted average shares outstanding 11,102 11,743 11,390 11,113
====== ====== ====== ======
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, 2005
(Unaudited)
(Dollars in thousands, except share amounts)
Treasury Other
Common stock stock accumulated
------------------ Additional Unearned Unearned acquired comprehensive
Shares Par paid-in- Retained ESOP RSP for the Treasury income (loss),
issued value capital earnings shares compensation RSP stock net TOTAL
------ ----- ------- -------- ------ ------------ --- -------- --- -----
BALANCE AT
JANUARY 1, 2005 12,452,011 $1,245 $86,177 $30,603 $(5,962) $(3,391) $(4,343) $ -0- $ (287) $104,042
Net income - - - 3,333 - - - - - 3,333
Other comprehensive
income, net of
reclassification
adjustment and
taxes - - - - - - - - (747) (747)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive
income 2,586
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends declared - - - (1,725) - - - - - (1,725)
Common stock issued for
options exercised
(14,892 shares) 14,892 2 81 83
Common stock held by
ESOP committed
to be released
(74,718 shares) - - 410 - 510 - - - - 920
Compensation
recognized under
RSP Plan - - - - - 607 - - - 607
Common stock
repurchased for RSP
(63,851 shares) - - - - - - (766) - - (766)
Common stock issued by
RSP (87,857 shares) (1,067) 1,067 -
Purchase of treasury
stock (650,600 shares) - - - - - - - (7,916) - (7,916)
---------- ------ ------- ------- ------- ------- ------- ------- ------- -------
BALANCE AT
SEPTEMBER 30, 2005 12,466,903 $1,247 $85,601 $32,211 $(5,452) $(2,784) $(4,042) $(7,916) $(1,034) $97,831
========== ====== ======= ======= ======= ======= ======= ======= ======= =======
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,
------------------------
2005 2004
(unaudited) (unaudited)
----------- -----------
Operating activities:
Net income $ 3,333 $ 3,009
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,139 1,086
Provision for loan losses 1,314 1,133
Deferred income taxes (405) (83)
Amortization of deferred loan fees and costs (81) (9)
Amortization of premiums on investment securities 679 1,099
Net loss (gain) on sale of investment securities 26 (38)
Release of ESOP shares 920 763
Compensation under RSP plan 607 274
Increase in accrued interest receivable (367) (753)
Increase in other assets (141) (707)
(Decrease) increase in other liabilities (2,121) 391
Increase in cash surrender value of bank-owned life insurance (373) (50)
Increase in accrued interest payable on advances 395 276
--------- ---------
Net cash provided by operating activities 4,925 6,391
--------- ---------
Investing activities:
Purchase of investment securities held-to-maturity (12,536) (93,010)
Purchase of investment securities available-for-sale (2,084) (63,482)
Maturity and principal repayments of investment
securities held-to-maturity 21,819 9,650
Maturity and principal repayments of investment
securities available-for-sale 28,846 39,721
Purchase of property and equipment (2,077) (549)
Purchase of FHLB Stock (2,352) (6,862)
Purchase of bank owned life insurance - (10,000)
Proceeds from the sale of investment securities available for sale 12,808 885
Loan originations, net of principal repayments (120,186) (59,462)
Purchase of loans (10,168) (26,653)
--------- ---------
Net cash used in investing activities (85,930) (209,762)
--------- ---------
Financing activities:
Net increase in deposits 42,224 48,823
Increase in short-term FHLB advances 61,475 17,321
(Decrease) increase in long-term FHLB advances (11,439) 115,480
Increase (decrease) in advance payments by borrowers
for taxes and insurance 438 (86)
Dividends paid (1,600) (462)
Decrease in stock subscriptions payable - (38,322)
Net proceeds from issuance of common stock - 69,261
Net purchase of common stock for ESOP - (5,628)
Purchase of treasury stock for the RSP Plan (766) (1,808)
Purchase of treasury stock (7,916) -
Common stock issued for options exercised 83 -
--------- ---------
Net cash provided by financing activities 82,499 204,579
--------- ---------
Net increase in cash and cash equivalents 1,494 1,208
Cash and cash equivalents at beginning of year 6,446 7,292
--------- ---------
Cash and cash equivalents at end of period $ 7,940 $ 8,500
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 2,849 $ 1,866
========= =========
Interest paid on deposits and borrowed funds $ 15,767 $ 8,876
========= =========
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 (the "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, 2004. The results for the nine months ended
September 30, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2005 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 losses. The evaluation of the adequacy of
the allowance for loan 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. 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 plan ("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 (in thousands, except per share
data):
For the Three Months Ended September 30, 2005
---------------------------------------------
Weighted
Income average shares Per
(numerator) (denominator) share amount
--------------- ----------------- ---------------
Basic earnings per share:
Income available to common stockholders $ 1,108 10,711 $ 0.10
Effect of dilutive common stock equivalents 0 391 0.00
--------- ------ ---------
Diluted earnings per share:
Income available to common stockholders $ 1,108 11,102 $ 0.10
========= ====== =========
For the Three Months Ended September 30, 2004
---------------------------------------------
Weighted
Income average shares Per
(numerator) (denominator) share amount
--------------- ----------------- ---------------
Basic earnings per share:
Income available to common stockholders $ 1,094 11,496 $ 0.10
Effect of dilutive common stock equivalents 0 247 (0.01)
--------- ------ ---------
Diluted earnings per share:
Income available to common stockholders $ 1,094 11,743 $ 0.09
========= ====== =========
-6-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
For the Nine Months Ended September 30, 2005
--------------------------------------------
Weighted
Income average shares Per
(numerator) (denominator) share amount
--------------- ----------------- ---------------
Basic earnings per share:
Income available to common stockholders $ 3,333 10,993 $ 0.30
Effect of dilutive common stock equivalents 0 397 (0.01)
--------- ------ ---------
Diluted earnings per share:
Income available to common stockholders $ 3,333 11,390 $ 0.29
========= ====== =========
For the Nine Months Ended September 30, 2004
--------------------------------------------
Weighted
Income average shares Per
(numerator) (denominator) share amount
--------------- ----------------- ---------------
Basic earnings per share:
Income available to common stockholders $ 3,009 10,886 $ 0.28
Effect of dilutive common stock equivalents 0 227 (0.01)
--------- ------ ---------
Diluted earnings per share:
Income available to common stockholders $ 3,009 11,113 $ 0.27
========= ====== =========
3. STOCK-BASED COMPENSATION
The Company's stock option plans and the restricted stock plans 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 ratably
over the vesting period.
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, Accounting for Stock-Based Compensation, 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):
-7-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
For the Three Months For the Nine Months
ended September 30, ended September 30,
------------------- -------------------
2005 2004 2005 2004
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------------------- -----------
Net income, as reported $ 1,108 $ 1,094 $ 3,333 $ 3,009
Add expense recognized for the restricted stock plans,
net of related tax effect 130 99 389 176
Less total stock option plan and restricted stock plan
expense, determined under the fair value method,
net of related tax effect (227) (226) (683) (405)
--------- --------- -------- ---------
Net income, pro forma $ 1,011 $ 967 $ 3,039 $ 2,780
========= ========= ======== =========
Basic earnings per share:
As reported $ 0.10 $ 0.10 $ 0.30 $ 0.28
Pro forma $ 0.09 $ 0.08 $ 0.28 $ 0.26
Diluted earnings per share:
As reported $ 0.10 $ 0.09 $ 0.29 $ 0.27
Pro forma $ 0.09 $ 0.08 $ 0.27 $ 0.25
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 following weighted average
assumptions were utilized for grants in 2005: dividend yield of 2.00%; expected
volatility of 14.97%; risk-free interest rate of 3.83%; and, expected life of
five years.
The Company has established an 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.
-8-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
4. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 123(R), Share-Based Payment an Amendment of SFAS 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 SFAS No. 123(R), 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 Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25,
Accounting for Stock Issued to Employees. This statement is effective for public
entities that do not file as small business issuers as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
The Company is currently evaluating this statement and its effects on the
Company's results of operations.
On March 29, 2005, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") 107, Share Based Payments. The interpretations in
SAB 107 express views of the SEC staff regarding the application of SFAS No.
123(R). Among other things, SAB 107 provides interpretive guidance related to
the interaction between SFAS No. 123(R) and certain SEC rules and regulations,
as well as provides the staff's views regarding the valuation of share-based
payment arrangements for public companies. The Company is evaluating the impact
that the implementation of SAB 107 and SFAS No. 123(R) will have on future
option grants.
On April 14, 2005, the SEC voted unanimously to adopt a staff recommendation to
delay the effective date of SFAS No. 123(R) for many public companies.
Specifically, the new rule states that public companies do not have to comply
with Statement No. 123(R) until the first quarter of the first fiscal year
beginning after June 15, 2005, rather than the first quarterly or annual period
beginning after that date, as originally prescribed by SFAS No. 123(R). As such,
calendar year public companies must begin complying with SFAS No. 123(R) for
their first quarterly period beginning in 2006, and not in the third quarter of
2005.
On June 29, 2005, the FASB issued FASB Staff Position ("FSP") SFAS No. ("FAS")
115-1, The Meaning of Other than Temporary Impairment and Its Application to
Certain Investments. This reflects the latest changes to the FASB Emerging
Issues Task Force ("EITF") 03-1, which the Bank adopted in December 2003. EITF
03-1 included certain disclosures regarding quantitative and qualitative
disclosures for investment securities accounted for under SFAS No. 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. FSP SFAS No. 115-1 will codify the guidance set forth in
EITF Topic D-44 and clarify that an investor should recognize an impairment no
later than when the impairment is considered other than temporary, even if a
decision to sell has not been made. FSP SFAS No. 115-1 will be effective for
other-than-temporary impairment analysis conducted in periods beginning after
September 15, 2005. The Company is in the process of determining the impact that
EITF 03-1 will have on its financial statements.
-9-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
5. 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, 2005 (unaudited)
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------
Available-for-sale
------------------
U.S. government obligations $ 1,999 $ - $ (78) $ 1,921
Mortgage-backed securities:
FHLMC 60,823 12 (970) 59,865
FNMA 31,263 16 (525) 30,754
Equity securities 1,000 (55) 945
----------- --------- --------- -----------
Total $ 95,085 $ 28 $ (1,628) $ 93,485
=========== ========= ========= ===========
September 30, 2005 (unaudited)
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------
Held-to-maturity
----------------
Mortgage-backed securities:
FHLMC $ 41,212 $ 62 $ (597) $ 40,677
FNMA 56,771 88 (509) 56,350
GNMA 3,162 14 (10) 3,166
Other debt securities 10 - - 10
----------- --------- --------- -----------
Total $ 101,155 $ 164 $ (1,116) $ 100,203
=========== ========= ========= ===========
December 31, 2004
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------
Available-for-sale
------------------
U.S. government obligations $ 2,500 $ - $ (57) $ 2,443
Mortgage-backed securities:
FHLMC 82,597 208 (475) 82,330
FNMA 48,684 123 (213) 48,594
Equity securities 1,029 9 (45) 993
----------- --------- --------- -----------
Total $ 134,810 $ 340 $ (790) $ 134,360
=========== ========= ======== ===========
-10-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
December 31, 2004
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------
Held-to-maturity
----------------
Mortgage-backed securities:
FHLMC $ 47,360 $ 229 $ (256) $ 47,333
FNMA 59,121 668 (124) 59,665
GNMA 4,093 53 - 4,146
Other debt securities 10 - - 10
----------- --------- -------- -----------
Total $ 110,584 $ 950 $ (380) $ 111,154
=========== ========= ======== ===========
6. LOANS RECEIVABLE
Major groupings of loans are as follows (in thousands):
September 30, December 31,
2005 2004
--------------------------------------------
Mortgages:
Residential, 1-4 family $ 242,823 $ 243,772
Non-residential and multi-family 232,065 154,226
Construction 8,183 5,792
Automobile 187,412 146,148
Commercial 21,985 12,208
Other 3,501 3,720
----------- -----------
Loans receivable 695,969 565,866
Deferred loan fees and costs 235 248
Allowance for loan losses (5,396) (4,427)
----------- -----------
Loans receivable, net $ 690,808 $ 561,687
=========== ===========
A summary of the activity in the allowance for loan losses is as follows (in
thousands):
For the Nine Months Ended
--------------------------------------------
September 30, September 30,
2005 2004
--------------------------------------------
Balance, beginning of period $ 4,427 $ 3,274
Provision for loan losses 1,314 1,133
Recoveries 240 321
Loans charged-off (585) (598)
----------- -----------
Balance, end of period $ 5,396 $ 4,130
=========== ===========
-11-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
7. DEPOSITS
Deposits are summarized as follows (in thousands):
September 30, December 31,
2005 2004
--------------------------------------------
Non-interest-bearing checking accounts $ 56,825 $ 52,019
Interest-bearing checking accounts 4,106 3,946
Savings and club accounts 62,269 67,115
Money market accounts 134,155 163,091
Certificate of deposit accounts 323,785 252,745
----------- -----------
$ 581,140 $ 538,916
=========== ===========
8. 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,
2005 2004
--------------------------------------------
Average balance outstanding $ 56,291 $ 33,618
Maximum amount outstanding at any month end during the period 92,500 48,975
Balance outstanding at period end 92,500 31,025
Weighted average interest rate during the period 3.35% 1.61%
Weighted average interest rate at period end 3.76% 2.42%
2. Long-Term FHLB Advances
-----------------------
At September 30, 2005, long-term advances from the FHLB totaled $169.9 million.
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, first-lien home equity loans and mortgage-backed securities. These
advances had a weighted average interest rate of 3.68%.
As of September 30, 2005, long-term FHLB advances mature as follows (in
thousands):
2005 $ 16,000
2006 59,150
2007 58,000
2008 26,100
2009 8,000
Thereafter 2,700
-----------
$ 169,950
===========
-12-
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, the relative levels of our other income and other
expenses also affect our results of operations. Our other income consists
primarily of fees and service charges, commissions and gains and 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 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, 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 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.
-13-
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with the
accounting principles 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 Losses. The Company recognizes 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.
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, 2005 and December 31, 2004
Assets. Total assets reached $945.6 million on September 30, 2005, an
increase of 9.9%, or $84.9 million, from $860.7 million on December 31, 2004.
This growth was primarily attributable to increases in the loan portfolio and
FHLB stock, partially offset by a decrease in investment securities.
Between December 31, 2004 and September 30, 2005, investment securities
decreased $50.3 million, or 20.5%, from $244.9 million to $194.6 million. This
decrease was primarily due to $50.6 million in maturities and principal
repayments coupled with the sale of approximately $12.8 million in securities,
which resulted in a net loss of $26,000. These decreases were partially offset
by $14.7 million in purchases. Additionally, there was a $1.2 million decrease
in the unrealized market value associated with investment securities designated
available-for-sale. FHLB stock holdings increased 21.6%, or $2.3 million, to
$13.1 million at September 30, 2005, from $10.8 million at December 31, 2004.
Net loans increased 23.0%, or $129.1 million, to $690.8 million at
September 30, 2005, from $561.7 million at December 31, 2004. This growth
includes $120.2 million in originations, net of principal repayments, and $10.2
million in purchases, offset by amortization of the premium on purchased loans
and
-14-
deferred loan fees, along with a provision of $1.3 million to the allowance for
loan losses. The most significant changes during the nine months ended September
30, 2005 were in non-residential and multi-family mortgage, automobile and
commercial loans. Non-residential and multi-family mortgages increased by $77.8
million, or 50.5%, to $232.1 million. Automobile loans increased by $41.3
million, or 28.2%, to $187.4 million. Commercial loans increased by $9.8
million, or 80.1%, to $22.0 million.
On September 30, 2005, total loans of $696.2 million were comprised of
33.3% in non-residential and multi-family mortgage loans, 27.4% in consumer
loans, comprised mostly of direct automobile loans for both new and used
vehicles, 18.4% in one-to-four family real estate loans, 16.5% in home equity
loans, 3.2% in commercial loans and 1.2% in construction loans.
The allowance for loan losses was $5.4 million at September 30, 2005,
compared to $4.4 million at December 31, 2004. This reflects a provision for
loan losses of $1.3 million for the nine-month period, offset by net charge-offs
of $345,000. The ratio of the allowance to total loans was 0.78% at both
September 30, 2005 and December 31, 2004. The ratio of non-performing assets to
total assets was 0.06% at September 30, 2005, compared to 0.03% at December 31,
2004.
Liabilities. Total liabilities increased $91.1 million, or 12.0%, to
$847.7 million at September 30, 2005, from $756.6 million at December 31, 2004.
The increase in total liabilities resulted primarily from an increase of $50.0
million, or 23.6%, in FHLB advances and a $42.2 million, or 7.8%, increase in
deposits. The balance of the change is attributable to a decline in other
liabilities of $1.1 million.
Deposits reached $581.1 million at September 30, 2005, an increase of
$42.2 million, or 7.8%, from the $538.9 million reported at December 31, 2004.
This growth resulted from an increase in certificate of deposit accounts of
$71.0 million, or 28.1%, for the nine months ended September 30, 2005. This
increase was primarily the result of initiatives directed toward attracting
funds with extended maturities in response to the current interest rate
environment. Total core deposits, which consist of checking, savings and money
market accounts, decreased $28.8 million, or 10.1 percent, and represented 44.3%
of total deposits at September 30, 2005, compared to 53.1% at December 31, 2004.
Even though total core deposits declined during this period, checking accounts
increased by $5.0 million, or 8.9%.
The $50.0 million increase in FHLB advances between December 31, 2004 and
September 30, 2005 has primarily funded the origination of loans during the
nine-month period.
Equity. Stockholders' equity totaled $97.8 million at September 30,
2005, a decrease of 6.0%, or $6.2 million, from $104.0 million at December 31,
2004. The decline was attributable to the repurchase of common stock in open
market transactions associated with the Company's two stock repurchase programs
that were announced on January 26 and August 24, 2005, as well as the effect of
the net unrealized investment portfolio market value adjustment, offset by the
net income for the period. Additionally, the Company's Board of Directors
declared quarterly cash dividends totaling $0.14 per common share.
The repurchase of shares associated with the Company's stock repurchase
programs resulted in a cumulative reduction in equity of $7.9 million. The
decrease in accumulated other comprehensive income, net of tax effect, totaled
$747,000.
-15-
Average Balance Sheet. The following table sets forth certain information for
the three months ended September 30, 2005 and 2004. 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 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,
-------------------------------------------------------------------
2005 2004
-------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable, net(1) $669,363 $ 9,819 5.87% $501,801 $7,278 5.80%
Securities(2) 206,863 1,934 3.74 274,567 2,463 3.59
Other interest-earning assets(3) 13,510 156 4.62 9,992 42 1.68
-------- ------- ---- -------- ------ ----
Total interest-earning assets 889,736 11,909 5.35 786,360 9,783 4.98
Non-interest-earning assets 40,013 37,725
-------- --------
Total assets $929,749 $824,085
======== ========
Interest-bearing liabilities:
Checking accounts(4) $57,298 $18 0.13 $51,422 $10 0.08
Savings and club accounts 64,423 81 0.50 70,759 87 0.49
Money market accounts 141,421 771 2.18 167,494 719 1.72
Certificates of deposit 295,656 2,422 3.28 227,993 1,513 2.65
FHLB advances 270,193 2,517 3.73 198,409 1,432 2.89
-------- ------- ---- -------- ------ ----
Total interest-bearing liabilities 828,991 5,809 2.80 716,077 3,761 2.10
------- ------
Non-interest-bearing liabilities 2,409 2,814
-------- --------
Total liabilities 831,400 718,891
Stockholders' equity 98,349 105,194
-------- --------
Total liabilities and stockholders' equity $929,749 $824,085
======== ========
Net interest income $6,100 $6,023
====== ======
Interest rate spread(5) 2.55% 2.88%
Net yield on interest-earning assets(6) 2.74% 3.06%
Ratio of average interest-earning assets to
average interest-bearing liabilities 107.33% 109.82%
- -------------------------------
(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.
(4) Includes both interest-bearing and non-interest bearing checking accounts.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities (including non-interest bearing checking accounts).
(6) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
-16-
Average Balance Sheet. The following table sets forth certain information for
the nine months ended September 30, 2005 and 2004. 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 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,
-------------------------------------------------------------------
2005 2004
-------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable, net(1) $624,189 $27,074 5.78% $467,935 $20,647 5.88%
Securities(2) 228,497 6,448 3.76 222,006 5,626 3.38
Other interest-earning assets(3) 12,460 391 4.18 6,263 88 1.87
-------- ------- ---- -------- ------- ----
Total interest-earning assets 865,146 33,913 5.23 696,204 26,361 5.05
Non-interest-earning assets 40,444 34,509
-------- --------
Total assets $905,590 $730,713
======== ========
Interest-bearing liabilities:
Checking accounts(4) $56,074 $46 0.11 $49,105 $14 0.04
Savings and club accounts 66,460 248 0.50 71,054 265 0.50
Money market accounts 151,932 2,374 2.08 156,924 1,996 1.70
Certificates of deposit 278,504 6,357 3.04 222,666 4,340 2.60
FHLB advances 247,794 6,347 3.42 122,407 2,515 2.74
Stock subscriptions payable - - - 7,569 23 0.41
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 800,764 15,372 2.56 629,725 9,153 1.94
------- -------
Non-interest-bearing liabilities 3,187 2,735
-------- --------
Total liabilities 803,951 632,460
Stockholders' equity 101,639 98,253
-------- --------
Total liabilities and stockholders' equity $905,590 $730,713
======== ========
Net interest income $18,541 $17,208
======= =======
Interest rate spread(5) 2.67% 3.11%
Net yield on interest-earning assets(6) 2.86% 3.30%
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.04% 110.56%
- -------------------------------
(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.
(4) Includes both interest-bearing and non-interest bearing checking accounts.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities (including non-interest bearing checking accounts).
(6) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
-17-
Comparison of Operating Results for Three Months Ended September 30, 2005 and
2004
Net Income. Net income increased by $14,000, to $1.108 million, for the
three months ended September 30, 2005, compared to $1.094 million for the same
period in 2004, a 1.3% increase. Diluted net income per common share increased
11.1%, to $0.10, from the $0.09 reported for the same period last year. The
increase was primarily attributable to a $78,000 increase in net interest
income, a $72,000 increase in other income and a $37,000 decrease in the
provision for loan losses, partially offset by a $159,000 increase in other
expenses and a $14,000 increase in income tax expense as a result of higher
pre-tax earnings.
Net Interest Income. Net interest income grew $78,000, or 0.2%, to $6.1
million for the three months ended September 30, 2005, compared to $6.0 million
for the same period in 2004. Total interest income increased by $2.1 million, to
$11.9 million, for the three months ended September 30, 2005, while total
interest expense increased by $2.0 million, to $5.8 million, for the same three
month period. The net interest margin for the third quarter of 2005 declined to
2.74%, from 3.24% in the third quarter of 2004, due primarily to the flattening
of the yield curve over the past year.
The 21.7% increase in total interest income was primarily due to a
$103.4 million, or 13.1%, increase in the average interest-earning assets,
combined with a 46 basis point increase in the average yield earned on these
assets when compared to the same quarter of the prior year. The increase in
interest-earning assets was a result of the Company's growth strategy. The
increase in the average yield was primarily attributable to higher market
interest rates on originated loans, a higher yield on investment securities and
increased other interest income resulting from higher average FHLB stock
balances.
The 106.0% increase in total interest expense primarily resulted from a
$112.9 million, or 15.8%, increase in average interest-bearing liabilities
coupled with a 93 basis point increase in the average cost of funds when
compared to the same quarter 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 certificates of
deposits and FHLB borrowings. The majority of the increase in average
interest-bearing liabilities for the quarter ended September 30, 2005 was
comprised of a $71.8 million, or 36.2%, increase in the average balance of FHLB
advances along with a $67.7 million, or 34.1%, increase in the average balance
of certificate of deposit accounts over the same quarter of the prior year.
Provision for loan losses. We maintain an allowance for loan losses
through provisions for loan losses that are charged to earnings. The provision
is made to adjust the total allowance for loan losses to an amount that
represents management's best estimate of losses known and inherent in the loan
portfolio at the balance sheet date that are both probable and reasonable to
estimate. In estimating the known and inherent 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 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 assessment
did not change either in estimation method or assumptions during either period.
The provision for loan losses declined by $37,000, to $392,000, for the
three months ended September 30, 2005, from $429,000 for the same quarter in
2004. Total charge-offs amounted to $190,000 and recoveries amounted to $85,000,
resulting in a net charge-off amount of $105,000 for the three months ended
September 30, 2005. This represents a $5,000 increase in net charge-offs over
the same quarter in 2004.
-18-
Other Income. Other income increased $72,000, or 7.6%, to $1,024,000
for the three months ended September 30, 2005, compared to $952,000 for the same
quarter in 2004. This is primarily the result of an increase of $58,000 in
commission income generated by sales from Synergy Financial Services, Inc. and a
$50,000 increase in other income. These increases were partially offset by a
$30,000 decrease in gains on the sale of investment securities and a decline of
$6,000 in service charges and fees on deposit accounts.
Other Expenses. Other expenses increased $159,000, or 3.2%, to $5.1
million for the three months ended September 30, 2005, compared to $4.9 million
for the same quarter in 2004. The increase was primarily attributable to
salaries and benefits associated with the Company's growth strategy, which
includes equity-based employee compensation plans, coupled with higher operating
expenses associated with a larger branch network.
Income Tax Expense. Income tax expense increased by $14,000, or 2.5%,
during the three months ended September 30, 2005 when compared to the same
quarter in 2004, reflecting higher taxable income for the 2005 period.
Comparison of Operating Results for Nine Months Ended September 30, 2005 and
2004
Net Income. Net income increased by $324,000, to $3.3 million, for the
nine months ended September 30, 2005, compared to $3.0 million for the same
period in 2004, a 10.8% increase. The increase was primarily attributable to a
$1.3 million increase in net interest income and a $697,000 increase in other
income, offset by a $181,000 increase in the provision for loan losses, a $1.4
million increase in other expenses and a $159,000 increase in income tax expense
as a result of higher pre-tax earnings. The net interest margin for the nine
months ended September 30, 2005 declined to 2.86% from the 3.30% reported for
the same period last year, due primarily to the flattening of the yield curve
over the past year.
Net Interest Income. Net interest income grew $1.3 million, or 7.7%, to
$18.5 million for the nine months ended September 30, 2005, compared to $17.2
million for the same period in 2004. Total interest income increased by $7.6
million, to $33.9 million, for the nine months ended September 30, 2005, while
total interest expense increased by $6.2 million, to $15.4 million, for the same
nine month period.
The 28.6% increase in total interest income was primarily due to a
$168.9 million, or 24.3, increase in average interest-earning assets, combined
with an 18 basis point increase in the average yield earned on these assets when
compared to the same period of the prior year. The increase in interest-earning
assets was a result of the Company's growth strategy. The increase in the
average yield was primarily attributable to higher market interest rates on
loans originated, a higher yield on a larger portfolio of average investment
securities and increased other interest income resulting from higher FHLB stock
balances.
The 67.9% increase in total interest expense resulted primarily from a
$171.0 million, or 27.2%, increase in the average balance of interest-bearing
liabilities coupled with a 62 basis point increase in the average cost of funds
when compared to the same period last 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 certificates of
deposits and FHLB borrowings. The majority of the increase in average
interest-bearing liabilities for the first nine months in 2005 was due to an
increase of a $125.4 million, or 102.4%, in the average balance of FHLB advances
and a $55.8 million, or 25.1%, increase in the average balance of certificate of
deposit accounts over the same period of the prior year.
-19-
Provision for loan losses. We maintain an allowance for loan losses
through provisions for loan losses that are charged to earnings. The provision
is made to adjust the total allowance for loan losses to an amount that
represents management's best estimate of losses known and inherent in the loan
portfolio at the balance sheet date that are both probable and reasonable to
estimate. In estimating the known and inherent 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 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 assessment
did not change either in estimation method or assumptions during either period.
The provision for loan losses increased by $181,000, or 16.0%, to $1.3
million for the nine months ended September 30, 2005, from $1.1 million for the
same period in 2004. Total charge-offs amounted to $585,000 and recoveries
amounted to $240,000, resulting in a net charge-off amount of $345,000 for the
nine months ended September 30, 2005. This represents a $68,000 increase in net
charge-offs over the same period in 2004.
Other Income. Other income increased $697,000, or 32.2%, to $2.9
million for the nine months ended September 30, 2005, compared to $2.2 million
for the same period in 2004. The growth in other income was primarily the result
of higher commission income generated by sales from Synergy Financial Services,
Inc. of $474,000 and an increase of $322,000 in tax-advantaged income resulting
from a larger investment in bank-owned life insurance. These increases were
partially offset by a $42,000 decrease in service charges and fees on deposit
accounts and a decrease of $64,000 related to investment securities
transactions.
Other Expenses. Other expenses increased $1.4 million, or 10.2%, to
$14.8 million for the nine months ended September 30, 2005, compared to $13.4
million for the same period in 2004. The increase was primarily attributable to
salaries and benefits associated with the Company's growth strategy, which
includes equity-based employee compensation plans, and higher operating expenses
associated with a larger branch network.
Income Tax Expense. Income tax expense increased by $159,000, or 8.9%,
during the nine months ended September 30, 2005 when compared to the same period
in 2004, reflecting higher taxable income for the 2005 period.
-20-
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 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 any 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 $7.9 million at September 30, 2005. 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, which provides an additional source of funds. At September 30, 2005,
the Bank's borrowing limit with the FHLB was $255.7 million, excluding
repurchase agreement advances, subject to collateral requirements. At September
30, 2005, the Bank had $154.5 million of FHLB advances outstanding and $108.0
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, 2005 was
$66.4 million, excluding commitments on unused lines of credit, which totaled
$29.4 million.
Management intends to expand the Bank's branch network either through
opening or acquiring branch offices. During April 2005, the Bank opened a branch
in Elizabeth, New Jersey. The Bank currently plans to open four additional new
branch locations and relocate two branches over the next two years. The Bank
also will continue 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.
-21-
The following table discloses the Bank's contractual obligations as of September
30, 2005 (in thousands):
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
-------- -------- ------- ------- -------
FHLB advances (1) $262,450 $133,650 $93,100 $13,000 $22,700
Rental under operating leases 12,841 614 2,819 1,593 7,815
-------- -------- ------- ------- -------
Total $275,291 $134,264 $95,919 $14,593 $30,515
======== ======== ======= ======= =======
- ----------------
(1) At September 30, 2005, the Bank had $262.5 million of FHLB borrowings
outstanding, which included $108.0 million in repurchase agreement
advances. At September 30, 2005, the Bank's borrowing limit with the FHLB
was $255.7 million, excluding repurchase agreement advances, subject to
collateral requirements.
The following table discloses the Bank's commercial commitments as of September
30, 2005 (in thousands):
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
------- ------- ----- ------ -------
Lines of Credit (1) $29,396 $ 1,208 $ 686 $1,178 $26,324
Other commitments to extend credit 66,439 66,439 - - -
------- ------- ----- ------ -------
Total $95,835 $67,647 $ 686 $1,178 $26,324
======= ======= ===== ====== =======
- ----------------
(1) Represents amounts committed to customers.
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, 2005, 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, 2005:
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) $91,084 13.34% $54,612 8.00% $68,265 10.00%
Tier 1 capital
(to risk-weighted assets) 85,689 12.55% N/A N/A 40,959 6.00%
Tier 1 capital
(to adjusted total assets) 85,689 9.11% 37,619 4.00% 47,023 5.00%
Tangible capital
(to adjusted total assets) 85,689 9.11% 14,107 1.50% N/A N/A
-22-
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 accounting
principles generally accepted in the United States of America, 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 of 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management of Interest Rate Risk and Market Risk
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 believes that there has not been a material adverse change
in market risk during the three month period ended September 30, 2005.
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, Gibbons 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 management session of the Committee is held monthly with
President 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.
-23-
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,
comprised mostly of direct automobile loans for both new and used
vehicles;
o expand commercial and industrial loans, which predominantly have
variable rates of interest;
o increase production in higher yielding commercial real estate
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., checking, savings and money market
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.
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.
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.
-24-
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, 2005 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
The following table reports information regarding repurchases of the Company's
common stock during the third quarter of 2005 and the stock repurchase plans
approved by the Company's Board of Directors.
- --------------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of Shares
Total Number Purchased as Part of that May Yet Be Purchased
of Shares Average Price Publicly Announced Under the Plans or
Period Purchased Paid per Share Plans or Programs (1) Programs (1)
- --------------------------------------------------------------------------------------------------------------------
July 1-31, 2005 - - - 121,751
- --------------------------------------------------------------------------------------------------------------------
August 1-31, 2005 121,751 12.45 121,751 577,628
- --------------------------------------------------------------------------------------------------------------------
September 1-30, 2005 28,000 12.25 28,000 549,628
- --------------------------------------------------------------------------------------------------------------------
Total 149,751 12.41 149,751
- --------------------------------------------------------------------------------------------------------------------
- ------------------
(1) On August 24, 2005, the Company announced that it had completed its
purchase of 5.0 percent of the Company's outstanding shares of common stock
(approximately 622,600 shares) as previously announced on January 26, 2005.
The Company also announced that it intends to purchase up to an additional
5.0 percent of the Company's outstanding shares of common stock
(approximately 577,628 shares) in open market transactions. Such purchases
are to be made from time to time in the open market, based on stock
availability, price and the Company's financial performance. This program
has no expiration date and has 549,628 shares yet to be purchased.
-25-
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
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
-26-
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 9, 2005
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 date indicated.
/s/John S. Fiore /s/A. Richard Abrahamian
- ------------------------------------- -------------------------------------------------
John S. Fiore A. Richard Abrahamian
President and Chief Executive Officer Senior Vice President and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: November 9, 2005 Date: November 9, 2005
-27-