SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2006
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-OR-
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to _____________.
Commission File Number: 000-50467
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SYNERGY FINANCIAL GROUP, INC.
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(Name of Issuer in Its Charter)
New Jersey 52-2413926
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
310 North Avenue East, Cranford, New Jersey 07016
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (800) 693-3838
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Securities registered pursuant to Section 12(b) of the
Securities Exchange Act of 1934:
Common Stock, par value $.10 The NASDAQ Stock Market LLC
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(Title of Class) (Name of Exchange)
Securities registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934:
None
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(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES NO X
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Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. YES NO X
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
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The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant as of the last business day of the
Registrant's most recently completed second fiscal quarter was $141.1 million.
As of February 28, 2007, there were 11,382,143 outstanding shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2007 Annual Meeting
of Stockholders (Part III)
TABLE OF CONTENTS
Page
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Part I
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Item 1. Business....................................................................... 1
Item 1A. Risk Factors................................................................... 26
Item 1B. Unresolved Staff Comments...................................................... 29
Item 2. Description of Property........................................................ 29
Item 3. Legal Proceedings.............................................................. 30
Item 4. Submission of Matters to a Vote of Security Holders............................ 30
Part II
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Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities............................ 31
Item 6. Selected Financial Data........................................................ 33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 45
Item 8. Financial Statements and Supplementary Data.................................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................... 86
Item 9A. Controls and Procedures........................................................ 86
Item 9B. Other Information.............................................................. 87
Part III
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Item 10. Directors and Executive Officers of the Registrant............................. 88
Item 11. Executive Compensation......................................................... 88
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.................................................. 88
Item 13. Certain Relationships and Related Transactions................................. 89
Item 14. Principal Accounting Fees and Services......................................... 89
Part IV
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Item 15. Exhibits and Financial Statement Schedules..................................... 90
Signatures..................................................................... 92
i
PART I
Forward-Looking Statements
Synergy Financial Group, Inc. (the "Company") may from time to time
make written or oral "forward-looking statements," including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this Annual Report on Form 10-K and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the Federal
Reserve System, inflation, interest rates, market and monetary fluctuations; the
timely development of and acceptance of new products and services of the Company
and the perceived overall value of these products and services by users,
including the features, pricing and quality as compared to competitors' products
and services; the impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities and insurance);
technological changes; acquisitions; changes in consumer spending and saving
habits; and, the success of the Company at managing the risks resulting from
these factors.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Item 1. Business
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General
In March 2001, Synergy Bank (the "Bank"), formerly Synergy Federal
Savings Bank, reorganized from a federally-chartered mutual savings bank into a
mutual holding company structure. As a result of the reorganization, the Bank
became a federal stock savings bank, which was wholly-owned by a federal stock
corporation, Synergy Financial Group, Inc. (the "Stock Holding Company"), which
in turn, was wholly-owned by Synergy, MHC, a federally-chartered mutual holding
company. The Stock Holding Company completed a minority stock offering in
September 2002, at which time 1,454,750 shares were issued to persons other than
Synergy, MHC, representing 43.5% of the outstanding common stock of the Stock
Holding Company.
In preparation for the conversion and reorganization of Synergy Bank
and its Stock Holding Company from the mutual holding company form of
organization to a full stock corporation, a new corporation with the same name,
Synergy Financial Group, Inc., was incorporated as a New Jersey corporation on
August 27, 2003. Synergy Financial Group, Inc. completed its stock offering in
connection with the conversion and reorganization to a full stock corporation on
January 20, 2004. As part of the conversion and reorganization, the Stock
Holding Company and Synergy, MHC ceased to exist. Synergy Financial Group, Inc.
sold 7,035,918 new shares to the public and the shares held by stockholders of
the Stock Holding Company were exchanged for 5,416,093 shares of Synergy
Financial Group, Inc., with a resulting total of 12,452,011 shares outstanding
at the time the second-step conversion was completed.
1
The Company conducts no significant business or operations of its own
other than holding 100% of the stock of the Bank and Synergy Financial Services,
Inc. References in this Annual Report on Form 10-K to the Company or Registrant
generally refer to the Company and the Bank, unless the context indicates
otherwise. References to "we," "us," or "our" refer to the Bank or Company, or
both, as the context indicates.
We are in the business of offering financial services, including
deposit products, one- to four-family residential mortgage loans, home equity
loans, multi-family / non-residential loans, commercial, and consumer loans,
including automobile and personal loans.
We attract deposits from the general public, as well as from deposit
brokers, and borrow money from the Federal Home Loan Bank (the "FHLB") of New
York. We then use these deposits and FHLB borrowings primarily to originate
loans and to purchase investment securities. Our principal sources of funds for
lending and investing activities are deposits, FHLB borrowings, the repayment
and maturity of loans and the maturity, call and occasional sale of investment
securities. Our principal source of income is interest on loans and investment
securities. Our principal expense is interest paid on deposits and FHLB
borrowings.
The Company's web site address is www.synergyonthenet.com. The
Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and other documents filed by the Company with the Securities
and Exchange Commission are available free of charge on the Company's web site
via a link to www.sec.gov found under the "Investor Relations" menu.
Market Area
Our main office is located in Cranford, New Jersey, and our branches
are located in Middlesex, Monmouth and Union counties, New Jersey. Our primary
market area is Essex, Middlesex, Monmouth, Somerset and Union counties, New
Jersey. Essex and Union counties are highly urbanized and densely populated
counties in the New York City metropolitan area, lying at the heart of the
northeast corridor, one of the largest population and industrial areas in the
country. The remaining counties are suburban areas located in central New
Jersey. The market areas surrounding each of the Bank's branches are mostly
growth markets, with population densities and income levels generally above the
average levels for New Jersey.
Our business of attracting deposits and making loans is primarily
conducted within our market area. A downturn in the local economy could reduce
the amount of funds available for deposit and the ability of borrowers to repay
their loans. As a result, our profitability could be hurt.
Competition
We face substantial competition in our attraction of deposits, which
are our primary source of funds for lending. Many of our competitors are
significantly larger institutions and have greater financial and managerial
resources. Our ability to compete successfully is a significant factor affecting
our profitability.
Our competition for deposits and loans historically has come from other
insured financial institutions such as local and regional commercial banks,
savings institutions and credit unions located in our primary market area. We
also compete with mortgage banking companies for real estate loans and with
commercial banks and savings institutions, as well as Internet-based lenders,
for consumer loans. We, further, face competition for deposits from investment
products such as Internet-based financial institutions, mutual funds, short-term
money funds and corporate and government securities.
2
Lending Activities
General. We primarily originate real estate loans, including one- to
four-family first mortgage loans, home equity loans, multi-family /
non-residential mortgages, commercial loans and consumer loans, comprised mostly
of direct automobile loans for both new and used vehicles. The loan portfolio is
predominately comprised of multi-family / non-residential mortgage loans and
one- to four-family residential real estate loans.
As a result of our recent growth, including growth in our
non-residential mortgage loans, a significant portion of our loan portfolio is
represented by new credits. Generally, loans that are relatively new, referred
to as unseasoned loans, do not have sufficient repayment history to determine
the likelihood of repayment in accordance with their terms. Originations and
purchases of multi-family / non-residential mortgage loans totaled $115.3
million and $159.1 million during the years ended December 31, 2006 and 2005,
respectively.
3
Loan Portfolio Composition. The following table analyzes the
composition of the loan portfolio by loan category at the dates indicated.
At December 31,
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2006 2005 2004 2003 2002
------------------ ------------------ ------------------ ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------
(Dollars in thousands)
Types of Loans:
- ---------------
Mortgage loans:
One-to Four Family
Residential (1)..... $237,857 30.85% $243,188 32.92% $243,772 43.08% $224,734 51.34% $202,325 62.92%
Multi-Family /
Non-Residential .... 326,225 42.32 271,600 36.76 154,226 27.25 89,847 20.53 48,386 15.05
Construction.......... 6,487 0.84 9,525 1.29 5,792 1.02 2,169 0.50 - -
Automobile............... 142,033 18.42 185,812 25.15 146,148 25.83 109,277 24.97 63,796 19.83
Commercial............... 54,854 7.12 24,794 3.36 12,208 2.16 7,838 1.79 2,472 0.77
Other Consumer (2)....... 3,467 0.45 3,830 0.52 3,720 0.66 3,816 0.87 4,590 1.43
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans....... 770,923 100.00% 738,749 100.00% 565,866 100.00% 437,681 100.00% 321,569 100.00%
====== ====== ====== ====== ======
Deferred loan fees
and costs............. 68 197 248 178 85
Less:
Allowance for
loan losses......... (5,990) (5,763) (4,427) (3,274) (2,231)
------- ------- ------- ------- -------
Total loans, net.. $765,001 $733,183 $561,687 $434,585 $319,423
======== ======== ======== ======== ========
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(1) This category includes home equity loans.
(2) This category consists of personal (unsecured) and savings secured loans.
4
Loan Maturity Schedule. The following table sets forth the maturity or
re-pricing of the loan portfolio at December 31, 2006. Demand loans, loans
having no stated maturity and overdrafts are shown as due in one year or less.
One- to
Four-Family Multi-Family / Other
Residential (1) Non-Residential Construction Automobile Commercial Consumer (2) Total
--------------- --------------- ------------ ---------- ---------- ------------ -----
(In thousands)
Amounts Due:
Within 1 year............ $ 1,978 $ 5,671 $5,189 $ 1,978 $ 1,368 $ 300 $ 16,484
After 1 year:
1 to 3 years.......... 5,725 9,345 1,298 39,937 1,590 1,127 59,022
3 to 5 years.......... 5,908 1,034 - 94,828 5,513 2,040 109,323
5 to 10 years......... 33,918 18,555 - 5,290 6,722 - 64,485
10 to 15 years........ 114,794 50,094 - - 3,620 - 168,508
Over 15 years......... 75,534 241,526 - - 36,041 - 353,101
--------- -------- ------ --------- ------- ------ ---------
Total due after
one year.......... 235,879 320,554 1,298 140,055 53,486 3,167 754,439
--------- -------- ------ --------- ------- ------ ---------
Total amount due......... $ 237,857 $326,225 $6,487 $ 142,033 $54,854 $3,467 $ 770,923
========= ======== ====== ========= ======= ====== =========
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(1) This category includes home equity loans.
(2) This category consists of personal (unsecured) and savings secured loans.
The following table sets forth the dollar amount of all loans at
December 31, 2006 that are due after December 31, 2007 that have fixed interest
rates and that have floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Mortgage Loans:
One-to Four-Family
Residential (1)..... $ 182,751 $ 53,128 $ 235,879
Multi-Family /
Non-Residential..... 34,156 286,398 320,554
Construction.......... - 1,298 1,298
Automobile............... 140,055 - 140,055
Commercial............... 11,875 41,611 53,486
Other Consumer (2)....... 3,167 - 3,167
--------- -------- ---------
Total............... $ 372,004 $382,435 $ 754,439
========= ======== =========
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(1) This category includes home equity loans.
(2) This category consists of personal (unsecured) and savings secured loans.
Residential Lending. The majority of our residential lending is secured
by property located in New Jersey. We will generally originate a mortgage loan
in an amount up to 80% of the lesser of the appraised value or the purchase
price of a mortgaged property. For loans exceeding this guideline, private
mortgage insurance for the borrower is required.
The majority of our residential loans are originated with fixed rates
and have terms of fifteen to thirty years. Our adjustable rate loans have terms
of fifteen to thirty years and adjustment periods of one, three, five or ten
years according to the terms of the loan. These loans provide for an interest
rate that is tied to a U.S. Treasury securities index.
We generally make fixed rate mortgage loans that meet the secondary
mortgage market standards of the Federal Home Loan Mortgage Corporation
("FHLMC"). In accordance with our interest rate risk management policy and to
assist in portfolio diversification, we occasionally sell qualifying one- to
four-family residential mortgages in the secondary market to FHLMC without
recourse and with servicing retained.
5
Substantially all of our residential mortgages include "due on sale"
clauses, which are provisions giving us the right to declare a loan immediately
payable if the borrower sells or otherwise transfers an interest in the property
to a third party. Property appraisals on real estate securing our one- to
four-family residential loans are made by state certified or licensed
independent appraisers approved annually by the Board of Directors. Appraisals
are performed in accordance with applicable regulations and policies. We require
title insurance policies on all first mortgage real estate loans originated. All
property secured loans require fire and casualty insurance. Loans made on
property located in designated flood zones require minimum flood insurance
coverage based on the amount of the loan.
Our residential loan portfolio includes home equity loans, which are
originated in our market area and have maturities of up to fifteen years. At
December 31, 2006, home equity loans totaled $109.5 million, or 14.2% of total
loans. Collateral value is determined through the use of an Internet-based value
estimator, a drive-by appraisal or a full appraisal. All loans over $250,000
require a full appraisal and a title insurance policy.
Multi-Family / Non-Residential Mortgage Loans. In 2000, we began to
originate multi-family and non-residential mortgage loans, including loans on
retail / service space and other income-producing properties. We require no less
than a 25% down payment or equity position for multi-family / non-residential
mortgage loans. Typically, these loans are made with variable rates of interest
with terms of up to twenty years. The majority of these mortgage loans are on
properties located within New Jersey. We occasionally sell participation
interests in multi-family / non-residential mortgage loans originated by us that
would otherwise exceed our loans-to-one-borrower limit. At December 31, 2006,
the average balance of a multi-family / non-residential mortgage loan was
$725,000.
Multi-family / non-residential mortgage loans generally are considered
to entail significantly greater risk than that which is involved with
residential real estate lending. The repayment of these loans typically is
dependent on the successful operations and income stream of the real estate and
the borrower. These risks can be significantly affected by economic conditions.
In addition, multi-family / non-residential real estate lending generally
requires substantially greater evaluation and oversight efforts compared to one-
to four-family residential real estate lending.
Consumer Loans. At December 31, 2006, consumer loans amounted to $145.5
million, or 18.9% of the total loan portfolio. The vast majority of these are
automobile loans. At December 31, 2006, automobile loans totaled $142.0 million.
Due to the continued flat to inverted yield curve over the past year, the
Company made a strategic decision to reduce the origination of automobile loans
and deploy its cash to higher-yielding, commercial-based products.
In late 1999, we began to originate direct automobile loans over the
Internet through an independent loan referral web site. A bank participating in
the referral program sets certain criteria with the referral company to select
those borrowers who meet that bank's lending standards. The borrower completes a
qualification form and submits it via the web site. The referral company's
automated system screens the borrower's qualification form and, if it meets our
preset criteria, it is forwarded to us for consideration. The borrower's
qualification form is sent to no more than four of the participating banks. Once
we receive a qualification form, the automated system sends a notice to the
borrower that he or she is conditionally approved and we make the borrower a
loan offer. The borrower then decides whether to accept the loan offer. Upon
acceptance, we disburse the funds. Currently, an average of $2.7 million of new
loans, or 87.6% of our monthly automobile loan originations, are generated from
this referral source. We will generally lend up to 100% of the purchase price of
a new or used vehicle.
6
Consumer loans also consist of personal (unsecured) and savings secured
loans. We will generally lend up to 100% of the account balance on a savings
secured loan.
Consumer loans generally have shorter terms and higher interest rates
than residential loans. Consumer loans generally have maturities of up to six
years. Consumer loans can be helpful in improving the spread between the average
loan yield and the cost of funds and at the same time improve the matching of
rate sensitive assets and liabilities.
Consumer loans entail greater risks than residential mortgage loans,
particularly consumer loans secured by rapidly depreciable assets, such as
automobiles, or loans that are unsecured. In these cases, any repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance, since there is a greater likelihood of damage,
loss or depreciation of the underlying collateral. Further, consumer loan
repayment is dependent on the borrower's continuing financial stability and is
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Finally, the application of various federal laws, including federal
and state bankruptcy and insolvency laws, may limit the amount that can be
recovered on consumer loans in the event of a default.
Our underwriting standards for consumer loans include a determination
of the applicant's credit history and an assessment of the applicant's ability
to meet existing obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment and additionally from any verifiable
secondary income. Credit worthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount. Certain of
our officers are authorized to approve unsecured consumer loan applications of
up to $20,000.
Commercial Loans. At December 31, 2006, the commercial loan portfolio
had grown to $54.9 million, representing 7.1% of the total loan portfolio at
that date. During 2004, we introduced the availability of both commercial lines
of credit and fixed term commercial loans. The commercial lines that are
unsecured are limited to $100,000, secured lines are offered at up to $1.0
million and real estate secured loans are offered at up to $2.5 million. The
term for the unsecured line is no more than five years with an annual renewal,
while fixed term loans are offered for terms of up to ten years; real estate
secured loans are offered for up to 25 years.
Unlike single-family residential mortgage loans, which generally are
made on the basis of the borrower's ability to make repayment from his or her
employment and other income, and which are secured by real property with a value
that tends to be more easily ascertainable, commercial business loans typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself and the general economic environment. Commercial
business loans, therefore, have greater credit risk than residential mortgage
loans. In addition, commercial loans generally carry larger balances to single
borrowers or related groups of borrowers than one- to four-family loans.
Further, commercial lending generally requires substantially greater evaluation
and oversight efforts compared to residential or non-residential real estate
lending.
Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the institution's unimpaired capital and
surplus. Accordingly, as of December 31, 2006, our loans-to-one-borrower limit
was $14.0 million, and we had 118 loans with balances of $1.0 million or more.
7
At December 31, 2006, our largest single borrower had an aggregate
balance of $10.9 million, representing three loans; each loan was secured by
commercial property. At December 31, 2006, our second largest borrower had an
aggregate balance of $10.0 million, representing seven loans that were each
secured by commercial properties. At December 31, 2006, our third largest single
borrower had an aggregate balance of $9.0 million, representing four loans that
were each secured by commercial properties. At December 31, 2006, all of these
three lending relationships were current and performing in accordance with the
terms of their loan agreements.
Loan Originations, Purchases, Sales, Solicitation and Processing. Our
customary sources of loan applications include newspaper advertisements, our
business development officers, repeat customers, applications through Synergy
Bank's Internet site, real-estate broker referrals and "walk-in" customers. A
significant source for our automobile loan originations is an independent
referral web site.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31,
------------------------------------------------
2006 2005 2004
-------- -------- --------
(In thousands)
Loan originations and purchases:
Loan originations:
One- to Four-Family Residential (1).................. $ 45,475 $ 50,627 $ 80,690
Multi-Family / Non-Residential....................... 114,081 149,115 58,936
Construction......................................... 498 1,587 1,026
Automobile........................................... 39,898 124,831 99,532
Commercial........................................... 26,486 13,248 7,171
Other Consumer (2)................................... 1,893 2,525 2,509
-------- -------- --------
Total loan originations................................ 228,331 341,933 249,864
Loan purchases:
One- to Four-Family Residential (1).................. 1,480 2,560 8,772
Multi-Family / Non-Residential....................... 1,215 9,980 16,427
Construction......................................... 1,460 2,770 2,575
Automobile........................................... - - -
Commercial........................................... - 1,287 2,691
Other Consumer (2)................................... - - -
--------- --------- ---------
Total loan purchases................................... 4,155 16,597 30,465
Sales and loan principal repayments:
Loans sold:
One- to Four-Family Residential (1).................. - - -
Multi-Family / Non-Residential....................... 8,092 - -
Construction......................................... - - -
Automobile........................................... - - -
Commercial........................................... 1,025 - -
Other Consumer (2)................................... - - -
--------- --------- ---------
Total loans sold....................................... 9,117 - -
Loan principal repayments.............................. 191,324 185,675 152,296
--------- --------- ---------
Total loans sold and principal repayments............ 200,441 185,675 152,296
Decrease due primarily to change in allowance
for loan losses....................................... 227 1,359 931
--------- --------- ---------
Net increase in loan portfolio......................... $ 31,818 $ 171,496 $ 127,102
========= ========= =========
- ------------------
(1) This category includes home equity loans.
(2) This category consists of personal (unsecured) and savings secured loans.
8
As of December 31, 2006, we serviced $3.0 million in loans for the
Federal Home Loan Mortgage Corporation. We occasionally sell participation
interests in non-residential mortgage loans originated by us that are considered
large credits in order to reduce credit risk exposure and comply with our
loans-to-one-borrower limitation. We may sell loans in the future when doing so
will diversify our loan portfolio composition, mitigate interest rate risk or
reduce our credit risk exposure.
We generally sell loans on a non-recourse basis, with servicing
retained and with a loan servicing fee of 25 basis points of the loan balance.
During the year ended December 31, 2006, we sold approximately $9.1 million of
participation loans that were providing yields below current market levels. At
December 31, 2006, loans serviced for the benefit of other lenders totaled
approximately $10.9 million.
We occasionally purchase loans through other financial institutions'
participation programs. During the year ended December 31, 2006, we purchased an
aggregate of $4.2 million in loans, all of which were funded by year-end. The
participations consisted of one- to four-family residential, construction and
multi-family / non-residential loans of $1.5 million, $1.5 million and $1.2
million, respectively.
Loan Commitments. We give written commitments to prospective borrowers
on all residential and non-residential mortgage loans. The total amount of
commitments to extend credit for mortgage and consumer loans as of December 31,
2006 was approximately $33.7 million, excluding commitments on unused lines of
credit of $28.8 million.
Loan Origination and Other Loan Fees. In addition to interest earned on
loans, we receive commitment fees, loan origination fees and points on certain
loans. We also receive other fees and charges relating to existing loans, which
include late charges and fees collected in connection with loan modifications.
These fees and charges have not constituted a material source of income.
Non-Performing Loans and Problem Assets
Collection Procedures. The borrower is notified by mail when a loan is
sixteen days delinquent. If the delinquency continues, subsequent efforts are
made to contact the delinquent borrower and additional collection notices and
letters are sent. When a collateralized loan is sixty days delinquent, it is
generally referred to an attorney for repossession or foreclosure. All
reasonable attempts are made to collect from borrowers prior to referral to an
attorney for collection. In certain instances, we may modify the loan or grant a
limited moratorium on loan payments to enable the borrower to reorganize his or
her financial affairs and we attempt to work with the borrower to establish a
repayment schedule to cure the delinquency.
In the case of mortgage loans, if a foreclosure action is taken and the
loan is not reinstated, paid in full or refinanced, the property is sold at
judicial sale. We may be the buyer at this sale if there are no adequate offers
to satisfy the debt. Any property acquired as the result of foreclosure or by
receipt of deed in lieu of foreclosure is classified as real estate owned
("REO") until it is sold or otherwise disposed of. When REO is acquired, it is
recorded at the lower of the unpaid principal balance of the related loan or its
fair market value less estimated selling costs. The initial write-down of the
property is charged to the allowance for loan losses. Adjustments to the
carrying value of the property that results from subsequent declines in value
are charged to operations in the period in which the declines occur. At December
31, 2006, we did not hold any real estate owned.
9
Loans are reviewed on a regular basis and are placed on a non-accrual
status when they are more than ninety days delinquent. Loans may be placed on a
non-accrual status at any time if, in the opinion of management, the collection
of additional interest is doubtful. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on our assessment of the ultimate
collectibility of the loan. These payments are accounted for under the cash
method of accounting.
Non-Performing Assets. The following table provides information
regarding our non-performing loans and other non-performing assets as of the
dates indicated.
At December 31,
---------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
One- to Four-Family Residential (1)............. $ - $ - $ - $ - $ -
Multi-Family / Non-Residential.................. 193 - - - -
Construction.................................... - - - - -
Automobile...................................... 214 337 230 298 374
Commercial...................................... - 21 23 33 -
Other Consumer (2).............................. 15 24 11 17 75
----- ----- ----- ----- ----
Total......................................... $ 422 $ 382 $ 264 $ 348 $449
===== ===== ===== ===== ====
Accruing loans which are contractually
past due 90 days or more:
One- to Four-Family Residential (1)............. - - - - -
Multi-Family / Non-Residential.................. - - - - -
Construction.................................... - - - - -
Automobile...................................... - - - - -
Commercial...................................... - - - - -
Other Consumer (2).............................. - - - - -
----- ----- ----- ----- ----
Total......................................... $ - $ - $ - $ - $ -
===== ===== ===== ===== ====
Total non-performing loans.................... $ 422 $ 382 $ 264 $ 348 $449
===== ===== ===== ===== ====
Other non-performing assets........................ $ - $ - $ - $ - $ -
===== ===== ===== ===== ====
Total non-performing assets................... $ 422 $ 382 $ 264 $ 348 $449
===== ===== ===== ===== ====
Total non-performing loans to net loans....... 0.06% 0.05% 0.05% 0.08% 0.14%
===== ===== ===== ===== ====
Total non-performing loans to total assets.... 0.04% 0.04% 0.03% 0.06% 0.10%
===== ===== ===== ===== ====
Total non-performing assets to total assets... 0.04% 0.04% 0.03% 0.06% 0.10%
===== ===== ===== ===== ====
- -------------------
(1) This category includes home equity loans.
(2) This category consists of personal (unsecured) and savings secured loans.
For the year ended December 31, 2006, the amount of interest that would
have been recorded on loans accounted for on a non-accrual basis if those loans
had been current and performing according to the original loan agreements for
the entire period was approximately $11,000. This amount was not included in our
interest income for the period. No interest income on loans accounted for on a
non-accrual basis was included in income during the year ended December 31,
2006.
At December 31, 2006, there were no loans for which management had
serious doubts as to the ability of borrowers to comply with the present
repayment terms that are not included in the table above as loans accounted for
on a non-accrual basis.
Classified Assets. Management, in compliance with Office of Thrift
Supervision ("OTS") guidelines, has instituted an internal loan review program,
whereby non-performing loans are classified as substandard, doubtful or loss. It
is our policy to review the loan portfolio, in accordance with regulatory
classification procedures, on at least a monthly basis. When a loan is
classified as substandard or
10
doubtful, management is required to establish a valuation reserve for loan
losses in an amount considered prudent by management. When management classifies
a portion of a loan as loss, a specific reserve equal to 100% of the loss amount
is required to be established or the loan is charged-off.
An asset is considered "substandard" if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified as substandard, with the added characteristic that the
weaknesses present make collection or liquidation in full highly questionable
and improbable, on the basis of currently existing facts, conditions and values.
Assets classified as "loss" are those considered uncollectible and of so little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted. Assets which do not currently expose the insured
institution to a sufficient degree of risk to warrant classification in one of
the aforementioned categories but which have credit deficiencies or potential
weaknesses are required to be designated as "special mention" by management.
Management's classification of assets and its estimation of the amount
of known and inherent loan losses in the loan portfolio are reviewed by the
Asset/Liability Management Committee on a regular basis and by the OTS as part
of its examination process. At December 31, 2006, classified loans totaled
$744,000. This amount included $515,000 of loans classified as "substandard."
Management has deemed that two of the loans classified as substandard, totaling
$193,000, are non-performing. At December 31, 2006, we had $229,000 of loans
classified as "doubtful," all of which are non-performing assets, as shown in
the table above. At December 31, 2006, we had no loans classified as "loss."
Allowance for Loan Losses. The allowance for loan losses is a valuation
account that reflects our estimation of the losses known and inherent in our
loan portfolio that are both probable and reasonable to estimate associated both
with lending activities and particular problem assets. The allowance is
maintained through provisions for loan losses that are charged to income in the
period they are established. We charge losses on loans against the allowance for
loan losses when we believe the collection of loan principal is unlikely.
Recoveries on loans previously charged-off are added back to the allowance.
Management performs a quarterly evaluation of the allowance for loan
losses. The results of this quarterly process are presented along with
recommendations to the Asset and Liability Management Committee. Based on these
recommendations, the allowance for loan losses is approved by this committee.
Our estimation of known and inherent loan losses in the loan portfolio
includes a separate review of all loans for which collectibility of principal
may or may not be reasonably assured. We evaluate all classified loans
individually and base our determination of a loss factor on the likelihood of
collectibility of principal, including consideration of the value of the
underlying collateral securing the loan. Larger loans, which would generally
include multi-family / non-residential mortgages and commercial loans, are
evaluated annually for impairment individually. We also segregate loans by loan
category and evaluate homogeneous loans as a group.
Although there are many factors that also warrant consideration in
estimating the amount of known and inherent losses in the loan portfolio, we
consider the following points in connection with our determination of loss
factors and as part of our overall estimation of the amount of known and
inherent losses in the loan portfolio:
o our historical loan loss experience;
o internal analysis of credit quality;
o general levels of non-performing loans and delinquencies;
11
o changes in loan concentrations by loan category and property type;
o current estimated collateral values;
o large total credit exposure;
o large single credit risk;
o seasonality of portfolio;
o peer group data;
o analysis of credit quality conducted in bank regulatory examinations;
and
o economic and market trends impacting our lending area
This estimation is inherently subjective as it requires estimates and
assumptions that are susceptible to significant revisions as more information
becomes available or as future events change. Future additions to the allowance
for loan losses may be necessary if economic and other conditions in the future
differ substantially from the current operating environment. In addition, the
OTS (as an integral part of its examination process) periodically reviews our
loan and foreclosed real estate portfolios and the related allowance for loan
losses and valuation allowance for foreclosed real estate. The OTS may require
the allowance for loan losses or the valuation allowance for foreclosed real
estate to be increased based on its review of information available at the time
of the examination, which would negatively affect our earnings.
The following table sets forth information with respect to our
allowance for loan losses at the dates indicated.
For the Year Ended December 31,
-------------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- ------- ------- --------
(Dollars in thousands)
Allowance balance (at beginning of year).............. $ 5,763 $ 4,427 $ 3,274 $ 2,231 $ 1,372
--------- --------- -------- -------- --------
Charge-offs:
One- to Four-Family Residential (1)................ - - - - -
Multi-Family / Non-Residential..................... - - - - -
Construction....................................... - - - - -
Automobile......................................... 1,152 772 727 1,146 280
Commercial......................................... - - - - -
Other Consumer (2)................................. 40 82 46 190 154
--------- --------- -------- -------- --------
Total............................................ 1,192 854 773 1,336 434
Recoveries:
One- to Four-Family Residential (1)................ - - - - 3
Multi-Family / Non-Residential..................... - - - - -
Construction....................................... - - - - -
Automobile......................................... 414 278 345 292 42
Commercial......................................... - - - - -
Other Consumer (2)................................. 36 52 89 149 171
--------- --------- -------- -------- --------
Total............................................ 450 330 434 441 216
--------- --------- -------- -------- --------
Net charge-offs....................................... (742) (524) (339) (895) (218)
Acquisition of First Bank of Central Jersey........... - - - 823 -
Provision for loan losses............................. 969 1,860 1,492 1,115 1,077
--------- --------- -------- -------- --------
Allowance balance (at end of year).................... $ 5,990 $ 5,763 $ 4,427 $ 3,274 $ 2,231
========= ========= ======== ======== ========
Total gross loans outstanding (at end of year)... $ 770,923 $ 738,749 $565,866 $437,681 $321,569
========= ========= ======== ======== ========
Allowance for loan losses as a
percent of total loans............................. 0.78% 0.78% 0.78% 0.75% 0.69%
==== ==== ==== ==== ====
Net loans charged off as a percent of average
loans outstanding during the year.................. 0.10% 0.08% 0.07% 0.24% 0.08%
==== ==== ==== ==== ====
- -----------------
(1) This category includes home equity loans.
(2) This category consists of personal (unsecured) and savings secured loans.
12
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of our allowance for loan losses by collateral and the percent of
loans in each category to total loans receivable, net, at the dates indicated.
Management determines the allocation of our allowance for loan losses based on
its assessment of the risk characteristics of each loan category. The change in
allocation of the allowance from period to period also reflects the relative
balances of each loan category. The portion of the loan loss allowance allocated
to each loan category does not represent the total available for losses which
may occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio. The allocation is
subject to change as management's assessment of the risk characteristics of each
loan category may change from time to time.
At December 31,
--------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
At end of period allocated to:
One-to Four Family
Residential (1)......... $ 975 30.85% $1,030 32.92% $ 797 43.08% $ 571 51.34% $ 517 62.92%
Multi-Family /
Non-Residential......... 1,126 42.32 1,064 36.76 1,330 27.25 860 20.53 256 15.05
Construction.............. 21 0.84 33 1.29 52 1.02 21 0.50 - -
Automobile................ 1,750 18.42 2,489 25.15 2,079 25.83 1,472 24.97 1,113 19.83
Commercial................ 1,879 7.12 865 3.36 80 2.16 73 1.79 9 0.77
Other Consumer (2)........ 239 0.45 282 0.52 89 0.66 277 0.87 336 1.43
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance....... $5,990 100.00% $5,763 100.00% $4,427 100.00% $3,274 100.00% $2,231 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
- ------------------
(1) This category includes home equity loans.
(2) This category consists of personal (unsecured) and savings secured loans.
13
Securities Portfolio
General. Federally chartered savings banks have the authority to invest
in various types of liquid assets, including U.S. government and government
agency obligations, securities of various federal agencies and
government-sponsored enterprises (including securities collateralized by
mortgages), certificates of deposits of insured banks and savings institutions,
municipal securities and corporate debt securities.
Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities, requires that
securities be categorized as "held to maturity," "trading securities" or
"available for sale," based on management's intent as to the ultimate
disposition of each security. SFAS No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold these securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity."
We do not currently use or maintain a trading account. Securities not
classified as "held to maturity" are classified as "available for sale." These
securities are reported at fair value, and unrealized gains and losses on the
securities are excluded from earnings and reported, net of deferred taxes, as a
separate component of equity. On occasion, we sell available for sale securities
based on the evaluation of price levels obtained through multiple dealers. Our
analysis in selling available for sale securities includes tracking the Treasury
yield curve through Internet-based financial data providers and tracking the
price of similar securities offered through dealers' inventory listings using
their individual web sites.
All of our securities carry market risk insofar as increases in market
rates of interest may cause decreases in their market value. Investments in
securities are made based on certain considerations, which include the interest
rate, tax considerations, yield, asset/liability position and maturity of the
security, our liquidity position and anticipated cash needs and sources. The
effect that the proposed security would have on our credit and interest rate
risk and risk-based capital is also considered. We purchase securities to
provide necessary liquidity for day-to-day operations, and when investable funds
exceed loan demand.
Our investment policy, which is established by the Board of Directors,
is designed to foster earnings and liquidity within prudent interest rate risk
guidelines, while complementing our lending activities. Generally, our
investment policy is to invest funds in various categories of securities and
maturities based upon our liquidity needs, asset/liability management policy,
investment quality, marketability and performance objectives. The
Asset/Liability Management Committee reviews the securities portfolio on a
monthly basis. The results of the committee's monthly review are reported to the
full Board at its regular monthly meeting.
We do not participate in hedging programs, interest rate swaps or other
activities involving the use of off-balance-sheet derivative financial
instruments. Further, we do not invest in securities, which are not rated
investment grade.
Mortgage-backed Securities. Mortgage-backed securities represent a
participation interest in a pool of one- to four-family or multi-family
mortgages. We focus primarily on mortgage-backed securities secured by one- to
four-family mortgages.
The mortgage originators use intermediaries (generally U.S. government
agencies and government-sponsored enterprises) to pool and repackage the
participation interests in the form of securities, with investors such as us
receiving the principal and interest payments on the mortgages. Such U.S.
government agencies and government-sponsored enterprises guarantee the payment
of principal and interest to investors. At December 31, 2006, all of our
mortgage-backed securities were issued by either U.S. government agencies or
government-sponsored enterprises.
14
Mortgage-backed securities are typically issued with stated principal
amounts, and pools of mortgages that have loans with interest rates that are
within a specific range and have varying maturities back the securities. The
life of a mortgage-backed pass-through security thus approximates the life of
the underlying mortgages. The characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate) and prepayment risk are passed
on to the certificate holder. Mortgage-backed securities are generally referred
to as "mortgage participation certificates" or "pass-through certificates." Our
mortgage-backed securities consist primarily of securities issued by Government
National Mortgage Association ("GNMA" or "Ginnie Mae"), Federal Home Loan
Mortgage Association ("FHLMA" or "Freddie Mac") and the Federal National
Mortgage Association ("FNMA" or "Fannie Mae"). Mortgage-backed securities
generally yield less than the mortgage loans underlying such securities because
of their payment guarantees or credit enhancements, which offer nominal credit
risk to the security holder.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because the mortgagor may have the right to prepay the
obligation with or without prepayment penalties.
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage
Investment Conduits ("REMICs"). We also invest in CMOs and REMICs, issued or
sponsored by GNMA, FNMA and FHLMC. CMOs and REMICs are mortgage-derivative
products that aggregate pools of mortgages and mortgage-backed securities and
create different classes of securities with varying maturities and amortization
schedules, as well as a residual interest, with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches," or classes, which have descending priorities with
respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage-backed securities, as opposed to pass-through
mortgage-backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage-backed securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage-backed securities underlying CMOs and
REMICs are paid in accordance with a predetermined priority to investors holding
various tranches of the securities or obligations. A particular tranche or class
may carry prepayment risk, which may be different from that of the underlying
collateral and other tranches. Investing in CMOs and REMICs allows us to
moderate reinvestment risk resulting from unexpected prepayment activity
associated with conventional mortgage-backed securities. Management believes
these securities represent attractive alternatives relative to other investments
due to the wide variety of maturity, repayment and interest rate options
available.
Other Securities. In addition, at December 31, 2006, we held equity
investments with a fair market value of $1.9 million, primarily consisting of
interests in Community Reinvestment Act funds. We also held an approximate
investment of $12.0 million in FHLB common stock (this amount is not shown in
the securities portfolio). As a member of the FHLB, ownership of FHLB common
stock is required.
The following table sets forth the carrying value of our investment
securities portfolio at the dates indicated.
At December 31,
------------------------------------------------
2006 2005 2004
-------- -------- -------
(In thousands)
Investment Securities Available-for-Sale:
- -----------------------------------------
U.S. Government Obligations...................... $ 1,928 $ 1,906 $ 2,443
Mortgage-Backed Securities:
FHLMC......................................... 44,849 54,746 82,330
FNMA.......................................... 19,699 27,727 48,594
Equity Securities................................ 1,941 940 993
--------- --------- ---------
Total Available-for-Sale.................... $ 68,417 $ 85,319 $ 134,360
--------- --------- ---------
15
At December 31,
----------------------------------------------
2006 2005 2004
-------- -------- --------
(In thousands)
Investment Securities Held-to-Maturity:
- ---------------------------------------
Other Debt Securities............................ $ 10 $ 10 $ 10
Mortgage-Backed Securities:
FHLMC (1)..................................... 32,397 39,234 47,360
FNMA.......................................... 43,150 53,469 59,121
GNMA.......................................... 2,360 2,908 4,093
-------- -------- --------
Total Held-to-Maturity...................... $ 77,917 $ 95,621 $110,584
-------- -------- --------
Total Investment Securities...................... $146,334 $180,940 $244,944
======== ======== ========
- --------------
(1) At December 31, 2006, includes $3.1 million of agency-issued collateralized
mortgage obligations.
16
Carrying Values, Yields and Maturities. The following table sets forth
certain information regarding the carrying values, weighted average yields and
maturities of our investment securities portfolio at the dates indicated.
At December 31, 2006
-----------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total
----------------- ----------------- ----------------- ------------------- -------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- -------- ------- -------- ------- -------- -------- -------- ------- --------
(Dollars in thousands)
Investment Securities
- ---------------------
Available-for-Sale:
-------------------
U.S. Government Obligations.. $ - -% $ 1,928 3.11% $ - -% $ - -% $ 1,928 3.11% $ 1,928
Mortgage-Backed Securities:
FHLMC..................... 628 3.47 20,672 3.28 1,110 3.92 22,439 3.70 44,849 3.51 44,849
FNMA...................... - - 2,835 3.83 2,047 3.87 14,817 3.78 19,699 3.80 19,699
GNMA...................... - - - - - - - - - - -
Equity Securities............ - - - - - - 1,941 - 1,941 - 1,941
----- ------- -------- -------- -------- --------
Total Available-for-Sale. 628 25,435 3,157 39,197 68,417 68,417
Investment Securities
- ---------------------
Held-to-Maturity:
-----------------
Mortgage-Backed Securities:
FHLMC..................... 31 4.08 9,379 3.63 6,936 3.80 16,051 4.56 32,397 4.13 31,594
FNMA...................... - - 2,498 4.45 22,580 4.31 18,072 4.58 43,150 4.43 42,335
GNMA...................... - - - - 206 5.63 2,154 5.13 2,360 5.18 2,324
Other Debt Securities........ - - 10 5.75 - - - - 10 5.75 10
----- ------- ------- -------- -------- --------
Total Held-to-Maturity... 31 11,887 29,722 36,277 77,917 76,263
----- ------- ------- -------- -------- --------
Total................. $ 659 $37,322 $32,879 $ 75,474 $146,334 $144,680
===== ======= ======= ======== ======== ========
17
Sources of Funds
General. Deposits are our major source of funds for lending and other
investment purposes. In addition, we derive funds from loan and mortgage-backed
securities principal repayments and proceeds from the maturity, call and sale of
mortgage-backed securities and investment securities. Loan and securities
payments are a relatively stable source of funds, while deposit inflows are
significantly influenced by general interest rates and money market conditions.
Borrowings (principally from the FHLB) are also used to supplement the amount of
funds for lending and investment.
Deposits. Our current deposit products include checking, savings, money
market, club, certificates of deposit with terms from three months to ten years
and individual retirement accounts ("IRAs"). Deposit account terms vary,
primarily as to the required minimum balance amount, the amount of time that the
funds must remain on deposit and the applicable interest rate.
Deposits are obtained primarily from within New Jersey. Traditional
methods of advertising are used to attract new customers and deposits, including
print media, direct mail and inserts included with customer statements. Premiums
or incentives for opening accounts are sometimes, but not generally, offered.
Periodically, we select a particular certificate of deposit term for promotion.
We pay interest rates on certificates of deposit that are toward the
high range of rates offered by our competitors. Rates on savings and money
market accounts are generally priced toward the middle and upper range of rates
offered in our market. The determination of interest rates is based upon a
number of factors, including: (1) our need for funds based on loan demand,
current maturities of deposits and other cash flow needs; (2) a current survey
of a selected group of competitors' rates for similar products; (3) our current
cost of funds and yield on assets and asset/liability position; and, (4) the
alternate cost of funds on a wholesale basis, in particular, the cost of
advances from the FHLB. Interest rates are reviewed by senior management on at
least a weekly basis.
Brokered certificates of deposit are also utilized as an additional
source of funding. These deposits are marketed through national brokerage firms
to their customers in $1,000 increments. The Bank maintains only one account for
the total deposit amount, while detailed records related to the owners are
maintained by the Depository Trust Company under the name of CEDE & Co.
Respective customers can open an account by placing a telephone call to his or
her broker, and the deposits are transferable, similar to a stock or bond
investment. Brokered deposits provide a large deposit for the Bank at a lower
operating cost, since the Bank maintains only one account versus several with
multiple interest rates and maturity dates. At December 31, 2006, the Bank had
approximately $43.3 million in brokered deposits with a weighted average
interest rate of 5.18%. Currently, the rates paid for brokered deposits are
comparable to the cost of advances from the FHLB with similar maturities.
A large percentage of our deposits are in certificates of deposit
(64.3%, or $415.4 million, at December 31, 2006 as compared to 60.4%, or $366.5
million, at December 31, 2005). Our liquidity could be reduced if a significant
amount of certificates of deposit, maturing within a short period of time, were
not renewed. A significant portion of the certificates of deposit remain with us
after they mature and we believe that this will continue. However, the need to
retain these time deposits could result in an increase in our cost of funds.
18
The following table sets forth the distribution of the average deposits
in the Company for the periods indicated and the weighted average nominal
interest rates for each period on each category of deposits presented.
For the Year Ended December 31,
--------------------------------------------------------------------------------------------------
2006 2005 2004
----------------------------- ------------------------------- --------------------------------
Percent Percent Percent
Average of Total Average Average of Total Average Average of Total Average
Balance Deposits Rate Paid Balance Deposits Rate Paid Balance Deposits Rate Paid
------- -------- --------- ------- -------- --------- ------- -------- ---------
(Dollars in thousands)
Checking accounts............... $ 61,002 9.48% 0.06% $ 57,107 10.16% 0.11% $ 50,065 9.87% 0.06%
Savings and club accounts....... 54,270 8.43 0.53 65,107 11.59 0.50 70,244 13.84 0.50
Money market accounts........... 119,398 18.55 2.96 145,156 25.83 2.12 158,658 31.27 1.70
Certificates of deposit and
other time deposit accounts.. 408,926 63.54 4.21 294,603 52.42 3.19 228,426 45.02 2.64
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits............. $643,596 100.00% 3.27% $561,973 100.00% 2.29% $507,393 100.00% 1.80%
======== ====== ==== ======== ====== ==== ======== ====== ====
19
The following table sets forth the time deposits in the Bank classified
by interest rate as of the dates indicated.
At December 31,
2006 2005 2004
------- ------- --------
(In thousands)
Interest Rate
Less than 2%...... $ - $ 1,154 $ 41,702
2.00-2.99%........ 2,340 43,629 113,707
3.00-3.99%........ 42,994 218,602 86,084
4.00-4.99%........ 114,914 102,139 9,785
5.00-5.99%........ 255,162 828 1,133
6.00-6.99%........ - 109 334
-------- -------- ---------
Total.......... $415,410 $366,461 $ 252,745
======== ======== =========
The following table sets forth the amount and maturities of time
deposits at December 31, 2006.
After
December 31, December 31,
-----------------------------------------------
2007 2008 2009 2010 2010 Total
------- ------- -------- -------- -------- -------
(In thousands)
Interest Rate
2.00-2.99%........ $ 2,289 $ 51 $ - $ - $ - $ 2,340
3.00-3.99%........ 27,457 11,521 3,520 12 483 42,993
4.00-4.99%........ 100,341 6,942 4,816 2,619 197 114,915
5.00-5.99%........ 244,946 10,213 3 - - 255,162
-------- ------- -------- ------- ------ --------
Total.......... $375,033 $28,727 $ 8,339 $ 2,631 $ 680 $415,410
======== ======= ======== ======= ====== ========
The following table shows the amount of our certificates of deposit and
other time deposits of $100,000 or more by time remaining until maturity as of
December 31, 2006.
Remaining Time Until Maturity Certificates of Deposit
(In thousands)
Within three months......................... $ 25,450
Three through six months.................... 59,664
Six through twelve months................... 49,689
Over twelve months.......................... 21,691
---------
$ 156,494
=========
Borrowings. As the need arises or in order to take advantage of funding
opportunities or to supplement our deposits as a source of funds, we borrow
funds predominantly in the form of advances from the FHLB to supplement our
supply of lendable funds and to meet deposit withdrawal requirements. Advances
from the FHLB are typically secured by the FHLB stock we own and mortgage loans
and may be secured by other assets, mainly securities. We use convertible FHLB
advances for a portion of our funding needs. These borrowings are fixed-rate
advances that can be called at the option of the FHLB. At December 31, 2006, our
total borrowing limit with the FHLB was $290.5 million, subject to collateral
requirements.
The Bank also has a total of $40 million of available unsecured lines
of credit with banks. At December 31, 2006, there was no balance outstanding on
these lines of credit.
20
Short-term borrowings, which consists primarily of FHLB advances,
generally have maturities of less than one year. Unused overnight lines of
credit at the FHLB at December 31, 2006 were $118.3 million. The details of
these borrowings are presented below:
At or For the
Year Ended December 31,
--------------------------------
2006 2005 2004
------- ------- ------
(Dollars in thousands)
Short-Term Borrowings:
Average balance outstanding.............. $ 72,669 $ 75,411 $33,618
Maximum amount outstanding
at any month-end during the period.... $ 93,950 $115,000 $48,975
Balance outstanding at period end........ $ 76,875 $ 86,650 $31,025
Weighted average interest rate
during the period..................... 5.23% 3.59% 1.61%
Weighted average interest rate
at period end......................... 5.38% 4.13% 2.42%
At December 31, 2006, long-term borrowings, which consist of FHLB
advances, totaled $158.8 million. Advances consist of fixed-rate advances that
will mature within one to eight years. The advances are collateralized by FHLB
stock, certain first mortgage loans and mortgage-backed securities. These
advances had a weighted average interest rate of 4.24%.
As of December 31, 2006, long-term advances mature as follows:
(Dollars in thousands)
2007......................... $ 57,000
2008......................... 66,100
2009......................... 8,000
2010......................... 5,000
2011......................... 10,000
Thereafter................... 12,700
---------
Total..................... $ 158,800
=========
Subsidiary Activity
In addition to the Bank, the Company has one service corporation
subsidiary, Synergy Financial Services, Inc., which was incorporated under New
Jersey law in June 1997 and began operation in May 1998. It was organized for
the purpose of providing securities brokerage, insurance and investment services
and products, including mutual funds and annuities, to customers of the Bank and
the general public. In April 1999, Synergy Financial Services, Inc. entered into
an agreement with INVEST Financial Corporation of Tampa, Florida, one of the
nation's largest full-service providers of investment and insurance products
through financial institutions, and continues to offer services and products
through such company. At December 31, 2006, Synergy Financial Services, Inc. had
total assets of $595,000. For the year ended December 31, 2006, it had
commission income of $913,000 and net income of approximately $171,000.
In November 2002, the Bank incorporated a wholly-owned subsidiary,
Synergy Capital Investments, Inc., under New Jersey law, as an investment
company for the primary purpose of holding investment securities. In March 2005,
Synergy Capital Investments, Inc. incorporated a new investment company
subsidiary under Delaware law, Synergy Investment Corporation. At December 31,
2006, Synergy Capital Investments, Inc. and Synergy Investment Corporation had
total assets of $150.3 million and net income of $4.1 million for the year then
ended.
21
Personnel
As of December 31, 2006, the Company had 119 full-time employees and 58
part-time employees. The employees are not represented by a collective
bargaining agreement. We believe our relationship with our employees is
satisfactory.
Regulation
Set forth below is a brief description of certain laws that relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Company
General. The Company, which is a federal savings and loan holding
company, is subject to regulation and supervision by the OTS. In addition, the
OTS has enforcement authority over Synergy Financial Services, Inc. and any
non-savings institution subsidiaries. This permits the OTS to restrict or
prohibit activities that it determines to be a serious risk to the Bank. This
regulation is intended primarily for the protection of the depositors and not
for the benefit of stockholders of the Company.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed
into law the Sarbanes-Oxley Act of 2002 (the "Act"). The Securities and Exchange
Commission (the "SEC") has promulgated new regulations pursuant to the Act and
may continue to propose additional implementing or clarifying regulations as
necessary in furtherance of the Act. The passage of the Act, and the regulations
implemented by the SEC subject publicly-traded companies to additional and more
cumbersome reporting regulations and disclosure. Compliance with the Act and
corresponding regulations may increase the Company's expenses.
Activities Restrictions. As a savings and loan holding company formed
after May 4, 1999, the Company is not a grandfathered unitary savings and loan
holding company under the Gramm-Leach-Bliley Act (the "GLB Act"). As a result,
the Company and its non-savings institution subsidiaries are subject to
statutory and regulatory restrictions on their business activities. Under the
Home Owners' Loan Act, as amended by the GLB Act, the non-banking activities of
the Company are restricted to certain activities specified by OTS regulation,
which include performing services and holding properties used by a savings
institution subsidiary, activities authorized for savings and loan holding
companies as of March 5, 1987 and non-banking activities permissible for bank
holding companies pursuant to the Bank Holding Company Act of 1956 (the "BHC
Act") or authorized for financial holding companies pursuant to the GLB Act.
Furthermore, no company may acquire control of the Bank unless the acquiring
company was a unitary savings and loan holding company on May 4, 1999 (or became
a unitary savings and loan holding company pursuant to an application pending as
of that date) or the company is only engaged in activities that are permitted
for multiple savings and loan holding companies or for financial holding
companies under the BHC Act as amended by the GLB Act.
Mergers and Acquisitions. The Company must obtain approval from the OTS
before acquiring more than 5% of the voting stock of another savings institution
or savings and loan holding company or acquiring such an institution or holding
company by merger, consolidation or purchase of its assets. In evaluating an
application for the Company to acquire control of a savings institution, the OTS
would consider the financial and managerial resources and future prospects of
the Company and the target institution, the effect of the acquisition on the
risk to the insurance funds, the needs of the community and competitive factors.
Regulation of the Bank
General. As a federally chartered savings bank, the Bank is subject to
extensive regulation by the OTS and the Federal Deposit Insurance Corporation
("FDIC"). This regulatory structure gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies regarding the classification of assets
and the level of the allowance for loan losses. The activities of federal
savings banks are subject to extensive regulation
22
including restrictions or requirements with respect to loans to one borrower,
the percentage of non-mortgage loans or investments to total assets, capital
distributions, permissible investments and lending activities, liquidity
management, transactions with affiliates and community reinvestment. Federal
savings banks are also subject to the reserve requirements of the Federal
Reserve System. A federal savings bank's relationship with its depositors and
borrowers is regulated by both state and federal law, especially in such matters
as the ownership of savings accounts and the form and content of its mortgage
documents.
The Bank must file regular reports with the OTS and the FDIC concerning
its activities and financial condition, and must obtain regulatory approvals
prior to entering into certain transactions such as mergers with or acquisitions
of other financial institutions. The OTS regularly examines the Company and the
Bank and prepares reports to the Bank's Board of Directors on deficiencies, if
any, found in its operations.
Deposit Insurance. The Bank's deposits are insured to applicable limits
by the FDIC. Although the FDIC is authorized to assess premiums under a
risk-based system for such deposit insurance, most insured depository
institutions have not been required to pay premiums for the last ten years. The
Federal Deposit Insurance Reform Act of 2005 ("Reform Act"), which was signed
into law on February 15, 2006, has resulted in significant changes to the
federal deposit insurance program: (i) effective March 31, 2006, the Bank
Insurance Fund ("BIF"), which formally insured the deposits of banks, and the
Savings Association Insurance Fund ("SAIF"), which formally insured the deposits
of savings associations like the Bank, were merged into a new combined fund,
called the Deposit Insurance Fund; (ii) the current $100,000 deposit insurance
coverage will be indexed for inflation (with adjustments every five years,
commencing January 1, 2011); and (iii) deposit insurance coverage for retirement
accounts has been increased to $250,000 per participant, subject to adjustment
for inflation. The FDIC has been given greater latitude in setting the
assessment rates for insured depository institutions, which could be used to
impose minimum assessments.
The FDIC is authorized to set the reserve ratio for the Deposit
Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits.
If the Deposit Insurance Fund's reserves exceed the designated reserve ratio,
the FDIC is required to pay out all or, if the reserve ratio is less than 1.5%,
a portion of the excess as a dividend to insured depository institutions based
on the percentage of insured deposits held on December 31, 1996, adjusted for
subsequently paid premiums. Insured depository institutions that were in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) are entitled to a one-time credit against future assessments based
on their past contributions to the BIF or the SAIF. As the Bank was chartered as
a federal credit union back in 1996 and did not pay insurance assessments, it
will not be entitled to receive the one-time assessment credit under the FDIC's
rulemaking.
Pursuant to the Reform Act, the FDIC has determined to maintain the
designated reserve ratio at its current 1.25%. The FDIC has also adopted a new
risk-based premium system that provides for quarterly assessments based on an
insured institution's ranking in one of four risk categories based on their
examination ratings and capital ratios. Beginning in 2007, well-capitalized
institutions with the CAMELS ratings of 1 or 2 will be grouped in Risk Category
I and will be assessed for deposit insurance at an annual rate of between five
and seven basis points with the assessment rate for an individual institution to
be determined according to a formula based on a weighted average of the
institution's individual CAMEL component ratings plus five financial ratios or
the average ratings of its long-term debt. Institutions in Risk Categories II,
III and IV will be assessed at annual rates of 10, 28 and 43 basis points,
respectively.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC to fund interest payments on bonds issued by the
Financing Corporation ("FICO"), an agency of the Federal government established
to recapitalize the predecessor to the SAIF. The FICO assessment rates, which
are determined quarterly, averaged 0.0128% of insured deposits in fiscal 2006.
These assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) "Tier 1" or "core" capital equal to at
least 4% (3% if the institution has received the highest possible rating on its
most
23
recent examination) of total adjusted assets, and (3) risk-based capital equal
to 8% of total risk-weighted assets. At December 31, 2006, the Bank exceeded all
regulatory capital requirements and was classified as "well capitalized."
In addition, the OTS may require that a savings institution that has a
risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total
adjusted assets of less than 4% (3% if the institution has received the highest
rating on its most recent examination) take certain action to increase its
capital ratios. If the savings institution's capital is significantly below the
minimum required levels of capital or if it is unsuccessful in increasing its
capital ratios, the OTS may restrict its activities.
For purposes of the OTS capital regulations, tangible capital is
defined as core capital less all intangible assets except for certain mortgage
servicing rights. Tier 1 or core capital is defined as common stockholders'
equity, non-cumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of consolidated subsidiaries and certain
non-withdrawable accounts and pledged deposits. The Bank does not have any
non-withdrawable accounts or pledged deposits. Tier 1 and core capital are
reduced by an institution's intangible assets, with limited exceptions for
certain mortgage and non-mortgage servicing rights and purchased credit card
relationships. Both core and tangible capital are further reduced by an amount
equal to the savings institution's debt and equity investments in
"non-includable" subsidiaries engaged in activities not permissible to national
banks other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total capital of 8% of risk-weighted assets. Total capital equals
the sum of core and supplementary capital. The components of supplementary
capital include, among other items, cumulative perpetual preferred stock,
perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, the portion of the allowance for loan losses
not designated for specific loan losses and up to 45% of unrealized gains on
equity securities. The portion of the allowance for loan losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, supplementary capital is limited to 100% of core capital. For purposes
of determining total capital, a savings institution's assets are reduced by the
amount of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and by the amount of the institution's equity
investments (other than those deducted from core and tangible capital) and its
high loan-to-value ratio land loans and non-residential construction loans.
A savings institution's risk-based capital requirement is measured
against risk-weighted assets, which equal the sum of each on-balance-sheet asset
and the credit-equivalent amount of each off-balance-sheet item after being
multiplied by an assigned risk weight. These risk weights range from 0% for cash
to 100% for delinquent loans, property acquired through foreclosure, commercial
loans and other assets.
OTS rules require a deduction from capital for savings institutions
with certain levels of interest rate risk. The OTS calculates the sensitivity of
an institution's net portfolio value based on data submitted by the institution
in a Consolidated Maturity Rate Schedule to its quarterly Thrift Financial
Report and using the interest rate risk measurement model adopted by the OTS.
The amount of the interest rate risk component, if any, deducted from an
institution's total capital is based on the institution's Thrift Financial
Report filed two quarters earlier. The OTS has indefinitely postponed
implementation of the interest rate risk component, and the Bank has not been
required to determine whether it will be required to deduct an interest rate
risk component from capital.
Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective
Action regulations, the OTS is required to take supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's level of capital. Generally, a savings institution that has total
risk-based capital of less than 8.0%, or a leverage ratio or a Tier 1 core
capital ratio that is less than 4.0%, is considered to be undercapitalized. A
savings institution that has total risk-based capital of less than 6.0%, a Tier
1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is
less than 3.0% is considered to be "significantly undercapitalized." A savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Generally, the banking
24
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within forty-five days of
the date an institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." In addition,
numerous mandatory supervisory actions become immediately applicable to the
institution, including, but not limited to, restrictions on growth, investment
activities, capital distributions and affiliate transactions. The OTS may also
take any one of a number of discretionary supervisory actions against
undercapitalized institutions, including the issuance of a capital directive and
the replacement of senior executive officers and directors.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan
holding company, such as the Bank, must file an application or a notice with the
OTS at least thirty days before making a capital distribution. A savings
institution must file an application for prior approval of a capital
distribution if: (i) it is not eligible for expedited treatment under the
applications processing rules of the OTS; (ii) the total amount of all capital
distributions, including the proposed capital distribution, for the applicable
calendar year would exceed an amount equal to the savings bank's net income for
that year to date plus the institution's retained net income for the preceding
two years; (iii) it would not adequately be capitalized after the capital
distribution; or (iv) the distribution would violate an agreement with the OTS
or applicable regulations.
The Bank will be required to file a capital distribution notice or
application with the OTS before paying any dividend to the Company. However,
capital distributions by the Company, as a savings and loan holding company,
will not be subject to the OTS capital distribution rules.
The OTS may disapprove a notice or deny an application for a capital
distribution if: (i) the savings institution would be undercapitalized following
the capital distribution; (ii) the proposed capital distribution raises safety
and soundness concerns; or (iii) the capital distribution would violate a
prohibition contained in any statute, regulation or agreement. In addition, a
federal savings institution cannot distribute regulatory capital that is
required for its liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet a
qualified thrift lender ("QTL") test or they become subject to the business
activity restrictions and branching rules applicable to national banks. To
qualify as a QTL, a savings institution must either (i) be deemed a "domestic
building and loan association" under the Internal Revenue Code by maintaining at
least 60% of its total assets in specified types of assets, including cash,
certain government securities, loans secured by and other assets related to
residential real property, educational loans and investments in premises of the
institution or (ii) satisfy the statutory QTL test set forth in the Home Owners'
Loan Act by maintaining at least 65% of its "portfolio assets" in certain
"Qualified Thrift Investments" (defined to include residential mortgages and
related equity investments, certain mortgage-related securities, small business
loans, student loans and credit card loans and 50% of certain community
development loans). For purposes of the statutory QTL test, portfolio assets are
defined as total assets minus intangible assets, property used by the
institution in conducting its business and liquid assets equal to 20% of total
assets. A savings institution must maintain its status as a QTL on a monthly
basis in at least nine out of every twelve months. The Bank met the QTL test as
of December 31, 2006 and in each of the prior twelve months and, therefore,
qualifies as a QTL.
Transactions with Affiliates. Generally, federal banking law requires
that transactions between a savings institution or its subsidiaries and its
affiliates must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, certain types of these
transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. In
addition, a savings institution may not extend credit to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The OTS has the discretion
to treat subsidiaries of savings institutions as affiliates on a case-by-case
basis.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every insured depository institution, including the Bank, has a
continuing and affirmative obligation consistent
25
with its safe and sound operation to help meet the credit needs of its entire
community, including low- and moderate-income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community. The
CRA requires the OTS to assess the depository institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by such institution, such as a merger or the
establishment of a branch office by the Bank. An unsatisfactory CRA examination
rating may be used as the basis for the denial of an application by the OTS.
Federal Home Loan Bank ("FHLB") System. The Bank is a member of the
FHLB, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by financial institutions and proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes loans to members
pursuant to policies and procedures established by the board of directors of the
FHLB. As a member, the Bank is required to purchase and maintain stock in the
FHLB based on its borrowings.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest-bearing reserves at specified
levels against their checking accounts and non-personal certificate accounts.
The balances maintained to meet the reserve requirements imposed by the Federal
Reserve System may be used to satisfy the OTS liquidity requirements.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System.
Item 1A. Risk Factors
- ---------------------
The following is a summary of the material risks to an investment in
the Company's securities.
A relatively large portion of our total loan portfolio consists of
consumer loans, primarily automobile loans. The credit risk related to these
types of loans is considered to be greater than the risk related to residential
lending.
At December 31, 2006, consumer loans amounted to $145.5 million, or
18.9% of the total loan portfolio. The vast majority of these are automobile
loans. At December 31, 2006, automobile loans totaled $142.0 million. Consumer
loans entail greater risks than residential mortgage loans, particularly
consumer loans secured by rapidly depreciable assets, such as automobiles, or
loans that are unsecured. In these cases, any repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance, since there is a greater likelihood of damage, loss or
depreciation of the underlying collateral. Further, consumer loan repayment is
dependent on the borrower's continuing financial stability and is more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal laws, including federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered on
consumer loans in the event of a default.
We originate most of our automobile loans though a single source, and
we would be unable to maintain the current volume of automobile loan
originations if we were no longer able to obtain business though this source.
In late 1999, we began to originate direct automobile loans over the
Internet through an independent online loan referral web site. Currently, an
average of $2.7 million of new loans, or 87.6%, of our monthly automobile loan
originations, are generated from this referral source. We will generally lend up
to 100% of the purchase price of a new or used vehicle.
26
We intend to continue to increase our origination of multi-family /
non-residential mortgage loans as well as commercial loans. These types of loans
traditionally involve a higher degree of repayment risk than residential loans.
At December 31, 2006, our loan portfolio included $326.2 million of
multi-family / non-residential mortgage loans, or 42.3% of our total loan
portfolio, representing a 20.1% increase from December 31, 2005. Multi-family /
non-residential mortgage loans generally are considered to entail significantly
greater risk than that which is involved with residential real estate lending.
The repayment of these loans typically is dependent on the successful operations
and income stream of the real estate and the borrower. These risks can be
significantly affected by economic conditions. In addition, multi-family /
non-residential real estate lending generally requires substantially greater
evaluation and oversight efforts compared to one- to four-family residential
real estate lending.
At December 31, 2006, our loan portfolio included $54.9 million of
commercial loans, or 7.1% of our total portfolio, representing a 121.2% increase
from December 31, 2005. During 2004, we introduced the availability of both
commercial lines of credit and fixed term commercial loans. Commercial business
loans typically are made on the basis of the borrower's ability to make
repayment from the cash flow of the borrower's business. As a result, the
availability of funds for the repayment of commercial business loans may be
substantially dependent on the success of the business itself and the general
economic environment. Commercial business loans, therefore, have greater credit
risk than residential mortgage loans. In addition, commercial loans generally
carry larger balances to single borrowers or related groups of borrowers than
one- to four-family loans. In addition, commercial lending generally requires
substantially greater evaluation and oversight efforts compared to residential
or non-residential real estate lending.
We have a relatively high percentage of unseasoned commercial and
multi-family / non-residential credits, which are considered to pose a
potentially greater repayment risk than loans that have been outstanding for a
longer period of time.
As a result of our strong growth during the past five years, commercial
and multi-family / non-residential mortgage loans represent 7.1% and 42.3%,
respectively, of our total loan portfolio as of December 31, 2006. A significant
portion of these loans are new credits. Generally, loans that are relatively
new, referred to as unseasoned loans, do not have sufficient repayment history
to determine the likelihood of repayment in accordance with their terms. At
December 31, 2006, 88.4% of these loans are considered unseasoned (i.e.,
outstanding for less than three years).
We intend to continue expanding our branch office network and expenses
related to such expansion will negatively impact earnings in future periods.
We intend to grow our branch office network, which will expand our
geographic reach. As of December 31, 2006, we operated nineteen branch offices
(including our main office) in Middlesex, Monmouth and Union counties, New
Jersey. The Bank has plans to open three new branches and relocate one branch
office in 2007. However, there can be no assurance when, or if, these new
offices will open. This growth plan will result in an increase in our fixed
assets over such period. The expenses associated with opening new branch
offices, in addition to the personnel and operating costs that we will have once
such offices open, will significantly increase our non-interest expense in
future periods and decrease earnings.
We may not continue to experience the same rate of growth that we have
in the past, and we may not be able to successfully manage our current growth.
Over the past several years, we have experienced rapid and significant
growth. Our total assets have increased by $555.0 million, or 128.7%, from
$431.3 million at December 31, 2002 to $986.3 million at December 31, 2006.
There can be no assurance that we will continue to experience such rapid
27
growth, or any growth, in the future. If we do experience continued growth, we
can not assure you that we will be able to adequately and profitably manage such
growth or that our earnings will adequately provide the necessary capital to
maintain required regulatory capital levels.
Rising interest rates would likely hurt our profits and may affect our
ability to pay dividends, repurchase stock or undertake other corporate
transactions.
To be profitable, we must earn more in interest and fees than we pay in
interest and expenses. If interest rates rise, the interest we pay on
interest-bearing liabilities, such as deposits and borrowings, may increase more
quickly than interest earned on interest-earning assets, such as loans and
investment securities. This will reduce our net interest income and thereby
reduce our net income in the short-term. In addition, rising interest rates are
likely to reduce our income via a reduction in the demand for loans and the
value of our investment securities and make it more difficult for our borrowers
to repay their loans. As a result, this could restrict the capital resources of
Synergy Bank and could require us to contribute additional capital to Synergy
Bank or may prevent Synergy Bank from paying dividends to us. This could
restrict our ability to pay dividends, repurchase stock or undertake other
corporate transactions. Currently, a material increase in interest rates would
have a material adverse effect on our income and regulatory capital.
Increases in market rates of interest are likely to adversely affect
our stockholders' equity.
At December 31, 2006, Synergy Financial Group, Inc. owned $68.4 million
of marketable securities that were held as available-for-sale. Generally
accepted accounting principles require that these securities be carried at fair
value on the consolidated balance sheet. Unrealized gains or losses on these
securities, that is, the difference between the fair value and the amortized
cost of these securities, is reflected in stockholders' equity, net of deferred
taxes. When interest rates increase, the fair value of Synergy Financial Group,
Inc.'s available-for-sale marketable securities generally decreases, which
decreases stockholders' equity. As of December 31, 2006, Synergy Financial
Group, Inc.'s available-for-sale securities portfolio had an unrealized loss,
net of taxes, of $0.9 million. Our stockholders' equity is likely to be
adversely affected by an increase in market interest rates.
A downturn in our local economy may adversely affect our earnings.
Our business of attracting deposits and making loans (other than
automobile loans) is primarily conducted within our market area. A downturn in
our local economy could reduce the amount of funds available for deposit and the
ability of borrowers to repay their loans and could negatively impact collateral
values. As a result, our earnings could be adversely affected.
We face substantial competition in our attraction of deposits, which is
our primary source of funds for lending.
Many of our competitors are significantly larger institutions and have
greater financial and managerial resources. Our ability to compete successfully
is a significant factor affecting our profitability.
We operate in a highly regulated environment and may be adversely
affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by
the Office of Thrift Supervision and by the Federal Deposit Insurance
Corporation. Such regulation and supervision govern the activities in which a
bank and its holding company may engage and are intended primarily for the
protection of the insurance fund and depositors. Regulatory authorities have
extensive discretion in connection with their supervisory and enforcement
activities, including the imposition of restrictions on the operation of a bank,
the classification of assets by a bank and the adequacy of a bank's allowance
for
28
loan losses. Any change in such regulation and oversight, whether in the form of
regulatory policy, regulations, or legislation could have a material impact on
Synergy Financial Group, Inc., its subsidiaries and their operations.
Item 1B. Unresolved Staff Comments
- ----------------------------------
None
Item 2. Description of Property
- -------------------------------
Our main office is located at 310 North Avenue East, Cranford, New
Jersey. At December 31, 2006, we had nineteen locations, including our main
office. All of our branch offices are located in Middlesex, Monmouth and Union
counties, New Jersey.
The following table sets forth the location of our main and branch
offices, the year the office was opened, the net book value of each office and
the deposits held or matured on December 31, 2006 at each office.
********
Month and Year Leased or Net Book Value at Deposits at
Office Location Facility Opened Owned December 31, 2006 December 31, 2006
- --------------- --------------- ----- ----------------- -----------------
Main Office October 1991 Owned $2,270,158 $ 135,760,320 (1)
310 North Avenue East
Cranford, New Jersey
Branch Offices:
2000 Galloping Hill Road March 1989 Leased(2) $ - $ 26,635,536
Building K-6
Kenilworth, New Jersey
2000 Galloping Hill Road March 1978 Leased(2) $ - $ 9,479,222
Building K-2
Kenilworth, New Jersey
1011 Morris Avenue May 1952 Leased(2) $ - $ 14,685,918
Union, New Jersey
2000 Galloping Hill Road February 1993 Leased(2) $ - $ 35,300,272
Building K-15
Kenilworth, New Jersey
556 Morris Avenue December 2005 Leased(2) $ - $ 7,604,574
Summit, New Jersey
15 Market Street November 1998 Leased(3) $ 439,247 $ 70,607,233
Kenilworth, New Jersey
315 Central Avenue May 1999 Leased(4) $ 156,513 $ 69,052,027
Clark, New Jersey
225 North Wood Avenue March 2001 Leased(5) $ - $ 20,533,520
Linden, New Jersey
1162 Green Street April 2002 Owned $1,828,903 $ 40,738,884
Iselin, New Jersey
168-170 Main Street May 2002 Owned $2,495,787 $ 26,617,390
Matawan, New Jersey
473 Route 79 July 2002 Owned $1,801,013 $ 21,787,986
Morganville, New Jersey
29
Month and Year Leased or Net Book Value at Deposits at
Office Location Facility Opened Owned December 31, 2006 December 31, 2006
- --------------- --------------- ----- ----------------- -----------------
101 Barkalow Avenue July 2002 Owned(6) $1,994,019 $ 21,115,147
Freehold, New Jersey
1887 Morris Avenue November 2002 Owned $1,895,670 $ 30,880,769
Union, New Jersey
Renaissance Plaza December 2002 Leased(7) $ 996,502 $ 21,826,522
3665 Route 9 North
Old Bridge, New Jersey
1727 Route 130 South May 1998 Leased(8) $ 12,738 $ 43,865,306
North Brunswick, New Jersey
337 Applegarth Road April 2000 Leased(9) $ - $ 25,830,813
Monroe Township, New Jersey
142 Broad Street May 2005 Leased(10) $ 633,134 $ 8,662,564
Elizabeth, New Jersey
400 Main Street December 2005 Leased(11) $1,336,123 $ 14,831,670
Spotswood, New Jersey
- ---------------------------------------
(1) Includes brokered certificates of deposit, deposit balances acquired
through our automated services and Call Center.
(2) Branch is located within a corporate facility of Synergy Bank's former
credit union sponsor. Synergy Bank makes no rent payments for such branch.
These branch locations are occupied pursuant to a written agreement that
provides for two-year terms that are automatically renewed upon expiration
unless written notice of termination is given by either party.
(3) Lease term of fifteen years to expire in 2013. Terms provide for four
five-year renewal options.
(4) Lease term of ten years to expire in 2009. Terms provide for one ten-year
renewal option.
(5) Lease term of five years to expire in 2010. Terms provide for one five-year
renewal option.
(6) Synergy Bank leases space in the building to two tenants; one additional
office is available for lease.
(7) Lease term of twenty years to expire in 2022. Terms provide for two
ten-year renewal options.
(8) Branch acquired in the acquisition of First Bank of Central Jersey in
January 2003. Lease term renewed in 2002 and expires in 2007. Synergy Bank
subleases space in the building to one subtenant.
(9) Branch acquired in the acquisition of First Bank of Central Jersey in
January 2003. Lease term renewed in 2006 and expires in 2007. Synergy Bank
entered into an agreement to lease an adjacent site for a term of twenty
years beginning in 2005.
(10) Lease term of ten years will expire in 2014. Terms provide for two ten-year
renewal options.
(11) Lease term of twenty years to expire in 2025. Terms provide for two
ten-year renewal options.
Item 3. Legal Proceedings
- -------------------------
The Company and its subsidiaries, from time to time, are 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 holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to the business of the Bank. In the
opinion of management, no material loss is expected from any of such pending
claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
30
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- --------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------
Upon completion of the Company's first-step minority stock offering in
September 2002, the Company's common stock commenced trading on the
OTC-Electronic Bulletin Board under the symbol "SYNF.OB." On January 20, 2004,
the Company completed a second-step conversion and stock offering in which
Synergy, MHC converted from the mutual form of organization to a full stock
corporation; new shares of common stock of the Company were sold at an initial
public offering price of $10.00 per share and previously outstanding shares of
the Company were exchanged for new shares at an exchange ratio of 3.7231. Upon
completion of that conversion and offering, the Company's common stock commenced
trading on January 21, 2004 on The NASDAQ Stock Market under the symbol "SYNFD";
after twenty days the trading symbol became "SYNF."
The table below shows the reported high and low sales prices of the
common stock and the cash dividends declared per share during the periods
indicated. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not represent actual transactions..
Price Range of
Common Stock Cash Dividends
------------ --------------
High Low Declared
---- --- --------
2005
- ----
First quarter ............. $ 13.44 $ 11.35 $ 0.04
Second quarter............. 12.44 11.01 0.05
Third quarter.............. 12.50 11.70 0.05
Fourth quarter............. 13.00 11.32 0.05
2006
- ----
First quarter ............. $ 14.53 $ 12.36 $ 0.05
Second quarter............. 15.40 13.88 0.06
Third quarter.............. 16.25 14.71 0.06
Fourth quarter............. 16.60 15.75 0.06
Any future determination as to the payment of dividends will be made at
the discretion of the Board of Directors and will depend on a number of factors,
including the Company's capital requirements, financial condition and results of
operations, tax considerations, statutory and regulatory limitations, general
economic conditions and such other factors as the Board of Directors deems
relevant.
Under New Jersey law, the Company may not pay dividends if, after
giving effect thereto, it would be unable to pay its debts as they become due in
the usual course of its business or if its total assets would be less than its
total liabilities. The Company's ability to pay dividends also depends on the
receipt of dividends from Synergy Bank, which is subject to a variety of
regulatory limitations on the payment of dividends.
As of February 28, 2007, there were approximately 910 holders of record
of the Company's common stock.
31
The following table reports information regarding repurchases of the
Company's common stock during the fourth quarter of 2006 and the stock
repurchase plans approved by the Board of Directors.
Maximum
Total Number of Number of Shares
Total Shares Purchased that May Yet Be
Number of Average as Part of Publicly Purchased Under
Shares Price Paid Announced Plans the Plans or
Period Purchased per Share or Programs (1) Programs (1)
- ------ --------- --------- ---------------- -------------
October 1 - October 31, 2006................ - - - 470,401
November 1 - November 30, 2006.............. - - - 470,401
December 1 - December 31, 2006.............. - - - 470,401
- ----------------------
(1) On February 23, 2006, the Company announced that it intends to purchase up
to five percent of its common stock outstanding (approximately 572,294
shares) in open market transactions. This repurchase program incorporates
the 174,628 shares that remained available for repurchase under the
Company's August 2005 repurchase program. 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 470,401 shares yet to be purchased.
Stock Performance Graph. Set forth below is a stock performance graph
comparing the cumulative total shareholder return on the Common Stock with (a)
the cumulative total shareholder return on stocks included in the NASDAQ U.S.
Market Index and (b) the cumulative total shareholder return on stocks included
in the SNL NASDAQ Thrift Index. The NASDAQ U.S. Market Index was prepared by the
Center for Research in Security Prices (CRSP) at the University of Chicago, and
the SNL Nasdaq Thrift Index was prepared by SNL Securities, LC, Charlottesville,
Virginia. The SNL Thrift Index includes all thrift institutions traded on
NASDAQ. The cumulative total return for both indices and for the Company is
computed with the reinvestment of dividends that were paid during the period and
assume the investment of $100 as of January 21, 2004 (the date the Company's
common stock began trading on the NASDAQ Stock Market following the closing of
the Company's second-step mutual-to-stock conversion on January 20, 2004). It is
assumed that the investment in the Company's common stock was made at the
initial public offering price of $10.00 per share.
[GRAPHIC OMITTED]
- ---------------------------------------- ------------ ------------ ----------- -----------
1/21/04 12/31/04 12/31/05 12/31/06
- ---------------------------------------- ------------ ------------ ----------- -----------
NASDAQ U.S. Market Index $100 $102 $104 $114
SNL NASDAQ Thrift Index 100 110 109 130
Synergy Financial Group, Inc. 100 135 128 171
- ---------------------------------------- ------------ ------------ ----------- -----------
There can be no assurance that the Company's future stock performance
will be the same or similar to the historical stock performance shown in the
graph above. The Company neither makes nor endorses any predictions as to stock
performance.
32
Item 6. Selected Financial Data
- -------------------------------
The following tables set forth selected consolidated historical
financial and other data relating to the Company for the years and at the dates
indicated. On September 17, 2002, the Company completed a minority stock
offering. Prior to completion of the minority stock offering, the Company
existed but had no significant assets, liabilities or operations and all of its
outstanding common stock was held by Synergy, MHC. Subsequent to December 31,
2003, the Company completed a second-step conversion from the mutual holding
company structure into a full stock corporation. The MHC was dissolved in this
conversion.
Selected Financial Highlights
(Dollars in thousands)
Balance Sheet: At December 31,
----------------------------------------------------------------------
2006 2005 2004 2003 2002
-------- --------- -------- -------- ---------
Assets................................ $ 986,326 $ 973,887 $ 860,677 $ 628,618 $ 431,275
Loans receivable, net................. 765,001 733,183 561,687 434,585 319,423
Investment securities................. 146,334 180,940 244,944 156,993 79,710
Deposits.............................. 645,816 606,471 538,916 473,535 354,142
Other borrowed funds.................. 235,675 266,600 212,414 72,873 36,456
Total stockholders' equity............ 98,500 95,250 104,042 40,928 37,872
Summary of Operations: For the Year Ended December 31,
----------------------------------------------------------------------
2006 2005 2004 2003 2002
-------- --------- -------- -------- ---------
Interest income....................... $ 55,263 $ 46,761 $ 36,549 $ 30,199 $ 23,454
Interest expense...................... 31,528 21,748 13,192 10,686 9,044
------- -------- ------- ------- -------
Net interest income................... 23,735 25,013 23,357 19,513 14,410
Provision for loan losses............. 969 1,860 1,492 1,115 1,077
------- -------- ------- ------- -------
Net interest income after
provision for loan losses.......... 22,766 23,153 21,865 18,398 13,333
Net (losses) gains on sales of loans
and investment securities.......... - (26) 38 174 112
Other income.......................... 3,835 3,606 3,021 2,275 1,483
Operating expense..................... 20,316 19,680 18,305 15,524 11,697
------- -------- ------- ------- -------
Income before income tax expense...... 6,285 7,053 6,619 5,323 3,231
Income tax expense.................... 2,190 2,560 2,416 1,911 1,200
------- -------- ------- ------- -------
Net income............................ $ 4,095 $ 4,493 $ 4,203 $ 3,412 $ 2,031
======= ======== ======= ======= =======
33
Selected Financial Ratios
Performance Ratios: 2006 2005 2004 2003 2002
-------- --------- -------- -------- ---------
Return on average assets
(net income divided by
average total assets).............. 0.42% 0.49% 0.55% 0.62% 0.55%
Return on average equity
(net income divided
by average equity)................. 4.30 4.46 4.20 9.77 8.11
Dividend payout ratio................. 57.89 45.00 31.57 0.00 0.00
Net interest rate spread.............. 2.34 2.66 3.03 3.71 4.06
Net interest margin .................. 2.53 2.85 3.22 3.76 4.11
Average interest-earning
assets to average
interest-bearing liabilities....... 105.75 107.73 110.53 102.23 101.75
Efficiency ratio (operating
expenses divided by the
sum of net interest income
and other income).................. 73.69 68.83 69.30 70.69 73.08
Asset Quality Ratios:
Non-performing loans to
total loans, net at period end..... 0.06% 0.05% 0.05% 0.08% 0.14%
Non-performing assets to
total assets at period end......... 0.04 0.04 0.03 0.06 0.10
Net charge-offs to average
loans outstanding.................. 0.10 0.08 0.07 0.24 0.08
Allowance for loan losses to
total loans at period end.......... 0.78 0.78 0.78 0.75 0.69
Capital Ratios:
Average equity to average assets
ratio (average equity divided
by average total assets)........... 9.68% 10.97% 13.20% 6.37% 6.74%
Equity to assets at period end........ 9.99 9.78 12.09 6.51 8.78
Full Service Offices: 19 20 18 18 16
34
Item 7. 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 the
consolidated financial condition and results of operations of the Company. The
information in this section should be read with the consolidated financial
statements and the notes thereto included in this Form 10-K.
Our results of operations are primarily dependent on our net interest
income. Net interest income is a function of the balances of loans and
investments outstanding in any one period, the yields earned on those loans and
investments and the interest paid on deposits and borrowed funds that were
outstanding in that same period. To a lesser extent, the relative levels of our
non-interest income and operating expenses also affect our results of
operations. Our other income consists primarily of fees and service charges, and
to a lesser extent, 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 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. Our results of
operations are affected by general economic, regulatory and competitive
conditions, including changes in prevailing interest rates and the policies of
regulatory agencies.
Forward-Looking Statements
This document contains forward-looking statements that project our
future operations, which involve risks and uncertainties. Our actual results may
differ significantly from the results discussed in these forward-looking
statements. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by the 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.
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.
Business Strategy
Our business strategy has been to operate as a well-capitalized,
independent financial institution, dedicated to providing convenient access and
quality service at competitive prices. Generally, we have sought to implement
this strategy by maintaining a substantial part of our assets in loans secured
by one-to-four family mortgages, home equity loans, multi-family /
non-residential mortgages, commercial and consumer loans. At the same time, we
have sought to expand our deposit base, particularly core deposits, and have
availed ourselves of leveraged borrowings to help finance our growth.
We intend to continue to emphasize a variety of loan products
consisting of one-to-four-family mortgages, home equity loans, multi-family /
non-residential mortgages, commercial and consumer loans. During recent years,
we have significantly increased our origination of automobile loans,
multi-family / non-residential mortgage loans and commercial loans, although
over the past year, a concerted effort was made to de-emphasize automobile
lending and focus more on the commercial and non-residential product lines. We
began to originate automobile loans through an Internet source in late 1999 and
to focus efforts on multi-family / non-residential mortgage loans in 2000. In
2004, we expanded our activity to include commercial lending. As of December 31,
2006, we had total automobile loans of $142.0 million, multi-family /
non-residential loans of $326.2 million and commercial loans of $54.9 million.
As of December
35
31, 2005, automobile loans were $185.8 million, multi family / non-residential
loans were $271.6 million, and commercial loans were $24.8 million.
We intend to grow our branch office network, which will expand our
geographic reach, and will consider the acquisition of other financial
institutions. We do not, however, have any current understandings, agreements or
arrangements for the expansion of our business, other than opening new branch
office locations. As of December 31, 2006, we operated nineteen branch offices
(including our main office) in Middlesex, Monmouth and Union counties, New
Jersey. The Bank has plans to open three new branches and relocate an existing
branch office in 2007.
We will continue to evaluate our business beyond traditional retail
banking. To this end, Synergy Financial Services, Inc. ("SFSI"), a subsidiary of
the Company, began operations in 1998 for the purpose of providing securities
brokerage, insurance and investment services and products, including mutual
funds and annuities, to customers of the Bank and the general public.
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 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
delinquency trends, 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 First Bank of Central Jersey acquisition
in January, 2003 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 to fair 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. The realization of deferred tax assets is
assessed and a valuation allowance provided for that portion of the asset for
which the allowance is more likely than not to be realized. 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 December 31, 2006 and December 31, 2005
Assets. Total assets increased $12.4 million, or 1.3%, to $986.3
million at December 31, 2006, from $973.9 million at December 31, 2005. The
increase in total assets resulted primarily from an
36
increase of $31.8 million, or 4.3%, in net loans receivable and $8.7 million in
bank-owned life insurance, partially offset by a decline of $34.6 million, or
19.1%, in investments securities.
The change in the outstanding balance of net loans receivable and
investment securities is the result of the Company's strategy to initially
invest the proceeds of $69.2 million from the second-step stock offering of
January 20, 2004 into investments with short term maturities, expand lending
capacity and then fund the new loan growth with the proceeds from the maturing
or sold investments. Additionally, the prolonged flat to inverted yield curve
has limited any investment purchase opportunities within the securities
portfolio.
Net loans increased 4.3%, or $31.8 million, to $765.0 million at
December 31, 2006, from $733.2 million at December 31, 2005. This growth
includes $37.0 million in originations, net of principal repayments, and $4.1
million in purchases, offset by the sale of $9.1 million of participation loans
and the change in the allowance for loan losses. The most significant loan
growth during the year ended December 31, 2006 was in the multi-family /
non-residential category, which increased $54.6 million, or 20.1%.
On December 31, 2006, total loans of $771.0 million, including deferred
fees and costs, were comprised of 42.3% in multi-family / non-residential
mortgage loans, 18.9% in consumer loans, 16.7% in one- to four-family real
estate loans, 14.2% in home equity loans, 7.1% in commercial loans and 0.8% in
construction loans.
The allowance for loan losses was $6.0 million, or 0.78% of total
loans, at December 31, 2006 as compared to $5.8 million, or 0.78% of total
loans, at December 31, 2005. This reflects a provision for loan losses of $1.0
million for the year, partially offset by net charge-offs of $742,000.
Non-performing assets to total assets was 0.04% on both December 31, 2006 and
December 31, 2005.
The Company decreased its investment in Federal Home Loan Bank ("FHLB")
stock by $1.3 million, or 9.7%, to $12.0 million at December 31, 2006. This was
a direct result of a decreased level of borrowings from the FHLB.
Property and equipment increased $1.5 million during the year ended
December 31, 2006, primarily as a result of the purchase of land for a new
branch office that is scheduled to open in 2007.
The cash surrender value of bank-owned life insurance ("BOLI")
increased $8.7 million in 2006 as the Company purchased $8.0 million of
additional BOLI. The return on this investment is utilized to fund the cost of
benefit plans. The Company's investment in BOLI totaled $21.8 million at
December 31, 2006, as compared to $13.1 million at December 31, 2005.
Liabilities. Total liabilities increased $9.2 million, or 1.0%, to
$887.8 million at December 31, 2006, from $878.6 million at December 31, 2005.
The increase in total liabilities resulted primarily from an increase of $39.3
million, or 6.5%, in deposits, partially offset by a $30.9 million, or 11.6%,
decrease in other borrowed funds. The balance of the change is primarily
attributable to increases associated with escrow payments for taxes and
insurance and in other liabilities.
Deposits reached $645.8 million on December 31, 2006, an increase of
$39.3 million, or 6.5%, from the $606.5 million reported on December 31, 2005.
Certificates of deposit increased by $48.9 million, or 13.4%, from the $366.5
million reported at year-end 2005, while core deposits, which consist of
checking, savings, and money market accounts, decreased $9.6 million, or 4.0%.
The increase in certificates of deposit was the result of initiatives directed
toward maintaining and attracting funds despite strong competition, coupled with
an increase of $19.7 million of brokered certificates of deposit during the
year.
37
The decrease of $30.9 million, or 11.6%, in other borrowed funds was
the result of both deposit growth and cash flow from investment securities
outpacing loan growth during the year. Other borrowed funds, which consist of
FHLB advances, declined to $235.7 million at December 31, 2006, compared to
$266.6 million at December 31, 2005.
Equity. Stockholders' equity totaled $98.5 million on December 31,
2006, an increase of 3.4%, or $3.2 million, from $95.3 million on December 31,
2005. The increase was primarily attributable to net income for the period
coupled with activity relating to our stock benefit plans, partially offset by
the cost of the repurchase of 201,893 shares of common stock and the payment of
cash dividends. On February 23, 2006, the Company announced a new program to
repurchase up to an additional 5% of its outstanding common stock, or
approximately 572,294 shares. As of December 31, 2006, it has completed 18% of
this program, at an average price of $13.69 per share.
Comparison of Financial Condition at December 31, 2005 and December 31, 2004
Assets. Total assets increased $113.2 million, or 13.2%, to $973.9
million at December 31, 2005, from $860.7 million at December 31, 2004. The
increase in total assets resulted primarily from an increase of $171.5 million,
or 30.5%, in net loans receivable offset by a decline of $64.0 million, or
26.1%, in investments securities.
The change in the outstanding balance of net loans receivable and
investment securities is the result of the Company's strategy to initially
invest the proceeds of $69.2 million from the second-step stock offering of
January 20, 2004 into investments with short term maturities, expand lending
capacity and then fund the new loan growth with the proceeds from the maturing
or sold investments.
Net loans increased 30.5%, or $171.5 million, to $733.2 million at
December 31, 2005, from $561.7 million at December 31, 2004. This growth
includes $156.2 million in originations, net of principal repayments, and $16.6
million in purchases, primarily offset by the change in the allowance for loan
losses. The most significant growth during the year ended December 31, 2005 was
in multi-family / non-residential mortgage loans of $117.4 million, or 76.1%.
On December 31, 2005, total loans of $738.9 million, including deferred
fees and expenses, were comprised of 36.8% in multi-family / non-residential
mortgage loans, 25.7% in consumer loans, 17.5% in one- to four-family real
estate loans, 15.3% in home equity loans, 3.4% in commercial loans and 1.3% in
construction loans.
The allowance for loan losses was $5.8 million, or 0.78% of total
loans, at December 31, 2005 as compared to $4.4 million, or 0.78% of total
loans, at December 31, 2004. This reflects a provision for loan losses of $1.9
million for the year, partially offset by net charge-offs of $524,000.
Non-performing assets to total assets increased to 0.04% at December 31, 2005,
from 0.03% at December 31, 2004.
The Company increased its investment in FHLB stock by $2.5 million, or
23.1%, to $13.3 million at December 31, 2005. This was a direct result of FHLB
stock holding requirements associated with the increased level of borrowings
from the institution.
Property and equipment increased $1.8 million during the year ended
December 31, 2005, primarily as the result of two new branch locations in
Elizabeth and Spotswood.
The cash surrender value of bank-owned life insurance increased
$501,000 in 2005. The return on this investment is utilized to fund the cost of
benefit plans. The Company's investment in bank-owned life insurance totaled
$13.1 million at December 31, 2005, as compared to $12.6 million at December 31,
2004.
Liabilities. Total liabilities increased $122.0 million, or 16.1%, to
$878.6 million at December 31, 2005, from $756.6 million at December 31, 2004.
The increase in total liabilities resulted primarily
38
from an increase of $67.6 million, or 12.5%, in deposits and a $54.2 million, or
25.5%, increase in other borrowed funds. The balance of the change is primarily
attributable to increases associated with escrow payments for taxes and
insurance, as well as accrued interest payable, offset by a decrease in other
liabilities.
Deposits reached $606.5 million on December 31, 2005, an increase of
$67.6 million, or 12.5%, from the $538.9 million reported on December 31, 2004.
Certificates of deposit increased by $113.7 million, or 45.0%, from the $252.7
million reported at year-end 2004, while core deposits, which consist of
checking, savings, and money market accounts, decreased $46.1 million, or 16.1%.
The increase in certificates of deposit was the result of initiatives directed
toward attracting funds with extended maturities in response to the current
interest rate environment, coupled with the placement of approximately $23.6
million of brokered certificates of deposit. Despite the decline in total core
deposits during the twelve-month period ended December 31, 2005, checking
accounts increased by $5.5 million or 9.8%.
The increase of $54.2 million, or 25.5%, in other borrowed funds was to
fund the origination of loans during this period. Other borrowed funds, which
consist primarily of FHLB advances, rose to $266.6 million at December 31, 2005,
compared to $212.4 million at December 31, 2004.
Equity. Stockholders' equity totaled $95.3 million on December 31,
2005, a decrease of 8.4%, or $8.8 million, from $104.0 million on December 31,
2004. The decline was attributable to the repurchase of 989,451 shares of common
stock in open market transactions to fund the Company's 2004 Restricted Stock
Plan and its stock repurchase programs, as well as the effect of the net
unrealized investment portfolio market value adjustment, offset by the net
income for the period. On August 24, 2005, the Company announced a new program
to repurchase up to an additional 5% of its outstanding common stock, or
approximately 577,628 shares. During the fourth quarter, the Company repurchased
275,000 shares. As of December 31, 2005, it had completed in excess of 52% of
that program, at an average price of $12.72 per share.
39
Average Balance Sheet. The following table sets forth certain
information for the years ended December 31, 2006, 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 Year Ended December 31,
At December 31, -----------------------------------------------------------------------------------
2006 2006 2005 2004
--------------- -------------------------- -------------------------- ---------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost(1) Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- ------- ------- -------- ---- ------- -------- ---- ------- -------------
(Dollars in thousands)
Interest-
earning assets:
Loans
receivable, net (2)...... $ 765,001 6.73% $758,849 $48,011 6.33% $ 645,361 $37,928 5.88% $ 484,074 $28,407 5.87%
Investment
securities (3)........... 146,334 4.12 165,480 6,538 3.95 218,902 8,261 3.77 227,645 7,980 3.51
Other interest-
earnings assets (4)...... 16,439 4.61 12,244 714 5.83 12,638 572 4.53 13,016 162 1.24
-------- ------- ------ -------- ------ -------- ------
Total interest-
earning assets...... 927,774 6.29 936,573 55,263 5.90 876,901 46,761 5.33 724,735 36,549 5.04
Non-interest-earning
assets................... 58,552 47,172 40,629 33,721
-------- ------- -------- --------
Total assets.......... $ 986,326 $983,745 $ 917,530 $ 758,456
======== ======= ======== ========
Interest-bearing
liabilities:
Checking accounts (5)...... $ 60,667 0.04% $ 61,002 $ 37 0.06% $ 57,107 $ 65 0.11% $ 50,065 $ 30 0.06%
Savings and club accounts.. 46,306 0.56 54,270 289 0.53 65,107 325 0.50 70,244 351 0.50
Money market accounts...... 123,433 3.52 119,398 3,533 2.96 145,156 3,074 2.12 158,658 2,697 1.70
Certificates of deposit.... 415,410 4.92 408,926 17,225 4.21 294,603 9,395 3.19 228,426 6,036 2.64
Other borrowed funds....... 235,675 4.63 242,090 10,444 4.31 251,982 8,889 3.53 142,641 4,055 2.84
Stock subscriptions
payable.................. - 0.00 - - 0.00 - - 0.00 5,677 23 0.41
-------- ------- ------ -------- ------ -------- ------
Total interest-
bearing
liabilities.......... 881,491 4.10 885,686 31,528 3.56 813,955 21,748 2.67 655,711 13,192 2.01
------ ------ ------
Non-interest-bearing
liabilities.............. 6,335 2,823 2,915 2,641
-------- ------- -------- --------
Total liabilities..... 887,826 888,509 816,870 658,352
Stockholders' equity....... 98,500 95,236 100,660 100,104
-------- ------- -------- --------
Total liabilities
and stockholders'
equity.............. $ 986,326 $983,745 $ 917,530 $ 758,456
======== ======= ======== ========
Net interest income........ $23,735 $25,013 $23,357
====== ====== ======
Net interest
rate spread (6).......... 2.19% 2.34% 2.66% 3.03%
Net interest
margin (7)............... 2.39% 2.53% 2.85% 3.22%
Ratio of average
interest-
earning assets
to average
interest-
bearing liabilities...... 105.25% 105.75% 107.73% 110.53%
(1) Interest yields at December 31, 2006 are calculated using the annualized
interest for the month of December divided by the average balance for the
month of December.
(2) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(3) Includes U.S. government obligations, mortgage-backed securities and
interest-bearing deposits in banks.
(4) Includes FHLB stock at cost and deposits with other financial institutions.
(5) Includes both interest-bearing and non-interest-bearing checking accounts
and stock subscriptions received in connection with the Company's
second-step mutual-to-stock conversion completed on January 20, 2004.
(6) Net 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).
(7) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
40
Rate / Volume Analysis. The relationship between the volume and rates
of our interest-earning assets and interest-bearing liabilities influences our
net interest income. The following table reflects the sensitivity of our
interest income and interest expense to changes in volume and in prevailing
interest rates during the periods indicated. Each category reflects the: (1)
changes in volume (changes in volume multiplied by old rate); (2) changes in
rate (changes in rate multiplied by old volume); (3) changes in rate/volume
(change in rate multiplied by the change in volume); and (4) net change. The net
change attributable to the combined impact of volume and rate has been allocated
proportionally to the absolute dollar amounts of change in each.
For the Year Ended December 31, For the Year Ended December 31,
2006 vs. 2005 2005 vs. 2004
-------------------------------------------- ---------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------------------- ---------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(In thousands)
Interest and dividend income:
Loans receivable, net ......... $ 6,670 $ 2,903 $ 510 $ 10,083 $ 9,465 $ 42 $ 14 $ 9,521
Investments, mortgage-backed
securities and other ........ (2,120) 533 (136) (1,723) (495) 827 (51) 281
Other ......................... (18) 165 (5) 142 120 166 124 410
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning assets .... $ 4,532 $ 3,601 $ 369 $ 8,502 $ 9,090 $ 1,035 $ 87 $ 10,212
======== ======== ======== ======== ======== ======== ======== ========
Interest expense:
Checking accounts ............. $ 4 $ (31) $ (1) $ (28) $ 4 $ 27 $ 4 $ 35
Savings and club accounts ..... (54) 21 (3) (36) (26) - - (26)
Money market accounts ......... (545) 1,223 (219) 459 (230) 663 (56) 377
Certificate accounts .......... 3,646 3,014 1,170 7,830 1,748 1,249 362 3,359
FHLB advances ................. (349) 1,982 (78) 1,555 3,108 977 749 4,834
Stock subscriptions payable ... - - - - - - (23) (23)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 2,702 $ 6,209 $ 869 $ 9,780 $ 4,604 $ 2,916 $ 1,036 $ 8,556
======== ======== ======== ======== ======== ======== ======== ========
Change in net interest income .... $ 1,830 $ (2,608) $ (500) $ (1,278) $ 4,486 $ (1,881) $ (949) $ 1,656
======== ======== ======== ======== ======== ======== ======== ========
Comparison of Operating Results for the Years Ended December 31, 2006 and
December 31, 2005
Net Income. Net income declined by $398,000, to $4.1 million, for the
year ended December 31, 2006, compared to $4.5 million for the year ended
December 31, 2005, an 8.9% decrease. Diluted net income per common share was
$0.38 for 2006, compared to $0.40 for the same period in 2005. The decrease in
net income was primarily attributable to a $1.3 million decrease in net interest
income coupled with a $636,000 increase in other expenses, partially offset by a
$255,000 increase in other income, an $891,000 decrease in the provision for
loan losses and a $370,000 decrease in income tax expense. Results for 2006
included $505,000, or $0.05 per diluted share, in after-tax stock option expense
associated with the adoption of SFAS No. 123(R), Share-Based Payment, which
became effective January 1, 2006.
Net Interest Income. Net interest income for the year ended December
31, 2006 was $23.7 million, compared to $25.0 million for last year, a decrease
of 5.1%. Total interest income increased by $8.5 million, to $55.3 million,
while total interest expense increased by $9.8 million, to $31.5 million, for
the year ended December 31, 2006 when compared to the prior year. The net
interest margin for the year ended December 31, 2006 declined 32 basis points,
to 2.53%, from 2.85% in the same period last year. The year-over-year
compression was the result of a series of increases in short-term interest rates
by the Federal Reserve Board and the prolonged, flat to inverted yield curve,
increased funding costs and a slowdown in asset growth, all of which has impeded
the Company's net interest income growth.
The 18.2% increase in total interest income was primarily due to a
$59.7 million, or 6.8%, increase in the average balance of interest-earning
assets, combined with a 57 basis point increase in the average yield earned on
these assets when compared to the prior year. The increase in interest-earning
41
assets was a direct result of management's continued strategy of expanding the
commercial and commercial real estate loan portfolios, while funding part of
that growth through the cash flow generated by the investment portfolio. The
increase in the average yield was primarily attributable to replacing lower
yielding investment securities with higher yielding loans.
Total interest expense increased 45.0%, to $31.5 million, for the year
ended December 31, 2006, compared to $21.8 million for the prior year. The
increase resulted primarily from a $71.7 million, or 8.8%, increase in the
average balance of interest-bearing liabilities, combined with an 89 basis point
increase in the average cost of funds when compared to the prior year. The
majority of the increase in the average balance of interest-bearing liabilities
for 2006 was due to an $81.6 million, or 14.5%, increase in average deposits,
partially offset by a $9.9 million, or 3.9%, decrease in the average balance of
other borrowings, which consist of FHLB advances. The increase in the average
cost of interest-bearing liabilities was primarily attributable to the rising
short-term interest rate environment, as well as a shift in the mix of deposits
from lower-cost core deposits to higher-cost certificates of deposit. Average
certificates of deposit increased $114.3 million, or 38.8%, during 2006 when
compared to the same period last year.
Provision for Loan Losses. The provision for loan losses decreased by
$891,000, or 47.9%, to $1.0 million for the year ended December 31, 2006, from
$1.9 million for 2005. The decrease in the provision was primarily due to lower
loan production during 2006 as compared to 2005. We allocate the allowance to
various categories based on our classified assets, our historical loan loss
experience and our assessment of the risk characteristics of each loan category
and the relative month-end balances of each category. The ratio of the allowance
for loan losses to total loans was 0.78% at year-end 2006 and 2005. Total
charge-offs amounted to $1,192,000 and recoveries amounted to $450,000,
resulting in a net charge-off amount of $742,000 for the year ended December 31,
2006. This represents an increase in net charge-offs of $218,000 when compared
to the previous year.
Other Income. Other income during the year ended December 31, 2006
totaled $3.8 million, compared to $3.6 million for the year ended December 31,
2005. This represents an increase of $255,000, or 7.1%. The increase was
primarily attributable to a $151,000 increase in other income, primarily from
bank-owned life insurance, and an increase of $58,000 in commission income
generated by SFSI. Additionally, service charges and fees on deposit accounts
increased $20,000.
Other Expenses. For the year ended December 31, 2006, other expenses
totaled $20.3 million, compared to $19.7 million for the prior year, an increase
of $636,000 million, or 3.2%. The increase was primarily attributable to
salaries and benefits resulting from the $667,000 of pre-tax stock option
compensation expense associated with the adoption of SFAS No. 123(R).
Income Tax Expense. Income tax expense decreased by $370,000, or 14.5%,
during the year ended December 31, 2006 when compared to the year ended December
31, 2005, reflecting lower taxable income for the 2006 period.
Comparison of Operating Results for the Years Ended December 31, 2005 and
December 31, 2004
Net Income. Net income increased by $290,000, to $4.5 million, for the
year ended December 31, 2005, compared to $4.2 million for the year ended
December 31, 2004, a 6.9% increase. The increase was attributable to a $1.6
million increase in net interest income and a $521,000 increase in other income,
offset by a $368,000 increase in the provision for loan losses, a $1.4 million
increase in other expenses and a $144,000 increase in income tax expense.
Net Interest Income. Net interest income for the year ended December
31, 2005 was $25.0 million, compared to $23.3 million in 2004, an increase of
7.1%. Total interest income increased by $10.2
42
million, to $46.8 million, while total interest expense increased by $8.6
million, to $21.7 million, for the year ended December 31, 2005 when compared to
the prior year. This increase was attributable to management's growth strategy.
The 27.9% increase in total interest income was primarily due to a
$152.2 million, or 21.0%, increase in the average balance of interest-earning
assets, combined with a 29 basis point increase in the average yield earned on
these assets when compared to the prior year. The increase in interest-earning
assets was a direct result of management's growth strategy. The increase in the
average yield was primarily attributable to replacing lower yielding investment
securities with higher yielding loans.
Total interest expense increased 64.9%, to $21.7 million for year ended
December 31, 2005, compared to $13.2 million for the prior year. The increase
resulted primarily from a $158.2 million, or 24.1%, increase in the average
balance of interest-bearing liabilities, combined with a 66 basis point increase
in the average cost of funds when compared to the prior year. The majority of
the increase in the average balance of interest-bearing liabilities for 2005 was
comprised of a $66.3 million, or 29.0%, increase in the average balance of
certificates of deposit and a $109.3 million, or 76.6%, increase in the average
balance of advances from the FHLB. The increase in the average cost of
interest-bearing liabilities was primarily attributable to the rising short-term
interest rate environment, as well as a shift in the mix of deposits from
lower-cost core deposits to higher-cost certificates of deposit.
Provision for Loan Losses. The provision for loan losses increased by
$368,000, or 24.7%, to $1.9 million for the year ended December 31, 2005, from
$1.5 million for 2004. We allocate the allowance to various categories based on
our classified assets, our historical loan loss experience and our assessment of
the risk characteristics of each loan category and the relative month-end
balances of each category. The ratio of the allowance for loan losses to total
loans was 0.78% at year-end 2005 and 2004. Total charge-offs amounted to
$854,000 and recoveries amounted to $330,000, for a net charge-off amount of
$524,000 for the year ended December 31, 2005. This represents an increase in
net charge-offs of $185,000 when compared to the previous year.
Other Income. Other income during the year ended December 31, 2005
totaled $3.6 million, compared to $3.1 million for the year ended December 31,
2004. This represents an increase of $521,000, or 17.0%. The increase was
primarily attributable to a $338,000 increase in commission income generated by
SFSI and a $339,000 increase in the income on bank-owned life insurance,
partially offset by a $77,000 decline in service charges and fees on deposit
accounts and a $64,000 decline in income associated with investment security
sales.
Other Expenses. For the year ended December 31, 2005, other expenses
totaled $19.7 million, compared to $18.3 million for the prior year, an increase
of $1.4 million, or 7.5%. 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 $144,000, or 6.0%,
during the year ended December 31, 2005 when compared to the year ended December
31, 2004, reflecting higher taxable income for the 2005 period.
Liquidity and Capital Resources
We maintain liquid assets at levels we consider adequate to meet
liquidity needs. The liquidity of a savings institution reflects its ability to
provide funds to meet loan requests, accommodate possible outflows in deposits,
fund current and planned expenditures and take advantage of market opportunities
in
43
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. Savings
institution liquidity is normally considered in terms of the nature and mix of
the savings institution's sources and uses of funds
Our primary sources of liquidity are deposits, scheduled amortization
and prepayment of loans and mortgage-backed securities. In addition, we invest
excess funds in overnight federal funds investments, which provide liquidity.
Our cash and cash equivalents, defined as cash and deposits in other financial
institutions with original maturities of three months or less, totaled $10.1
million at December 31, 2006. To a lesser extent, the earnings and funds
provided from our operating activities are a source of liquidity, as well.
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
prepayments are greatly influenced by general interest rates, economic
conditions and competition. If we require funds beyond our ability to generate
them internally, we have the ability to obtain advances from the FHLB, which
provides an additional source of funds. At December 31, 2006, our borrowing
limit with the FHLB was $290.5 million, subject to collateral requirements. At
December 31, 2006, we had $235.7 million of FHLB borrowings outstanding,
including $108.5 million in repurchase agreement advances.
We are not aware of any trends, events or uncertainties that will have,
or are reasonably likely to have, a material effect on our liquidity, capital or
operations, nor are we 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 our commitments to extend credit for
mortgage and consumer loans as of December 31, 2006 was $33.7 million, excluding
commitments on unused lines of credit, which totaled $28.8 million.
We intend to grow the Bank's branch network either through opening or
acquiring branch offices. Three new branch offices and the relocation of one
branch are planned for 2007. We also intend to actively consider the acquisition
of local financial institutions as a means to expand our banking operations. We
do not, however, have any current understandings, agreements or arrangements for
the expansion of our business other than opening new branch office locations.
The following table discloses our contractual obligations as of
December 31, 2006.
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
-------- -------- --------- --------- -------
Certificates of deposit............... $ 415,410 $ 375,033 $ 37,066 $ 2,825 $ 486
Other borrowed funds (1).............. 235,675 133,875 74,100 15,000 12,700
Rentals under operating leases........ 11,515 943 1,675 1,537 7,360
-------- -------- -------- ------ -------
Total.............................. $ 662,600 $ 509,851 $ 112,841 $19,362 $ 20,546
======== ======== ======== ====== =======
- ----------------------
(1) At December 31, 2006, other borrowed funds consisted of FHLB advances. Our
borrowing limit with FHLB was $290.5 million, subject to collateral
requirements.
44
The following table discloses our commitments as of December 31, 2006.
Total
Amounts Less Than Over
Committed 1 Year 1-3 Years 4-5 Years 5 Years
--------- ------ --------- --------- -------
Unused lines of credit (1)............ $ 28,829 $ 2,290 $ 691 $ 208 $ 25,640
Commitments to grant loans (1)........ 33,741 33,741 - - -
Standby letters of credit............. 1,073 1,073 - - -
------- ------- ----- ----- -------
Total.............................. $ 63,643 $ 37,104 $ 691 $ 208 $ 25,640
======= ======= ===== ===== =======
- ----------------------
(1) Represents amounts committed to customers.
For additional information about cash flows from operating, financing
and investing activities, see the Consolidated Statements of Cash Flows.
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 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of our 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. We are 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 a Budget and Asset/Liability
Management Committee. 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 the fourth quarter
each year, with the goal of developing an annual business and operating plan for
presentation to the full Board.
45
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 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.
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 OTS 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/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.
The following table presents the Bank's interest rate risk exposure as
measured by the OTS NPV Model as of December 31, 2006. The net portfolio value
is calculated by the OTS, based on information provided by the Bank. At December
31, 2006, the Bank was in compliance with the interest rate risk limits
established by the Board of Directors, as set forth below:
NPV as % of
Net Portfolio Value (NPV) Present Value of Assets
------------------------- ------------------------ Basis
Changes in Rates $ Amount $ Change % Change NPV Ratio Point Change
- ---------------- -------- -------- -------- --------- ------------
(Dollars in thousands)
+200 basis points.......... 72,751 (27,717) (28) 7.62% (254)
+100 basis points.......... 87,017 (13,451) (13) 8.95% (121)
0 basis points.......... 100,468 - - 10.16% -
- -100 basis points.......... 112,437 11,969 12 11.19% 103
- -200 basis points.......... 122,224 21,756 22 11.99% 183
- ----------------------
The +300 and -300 basis points scenarios are not shown due to the prevailing
interest rate environment.
Future interest rates, or their effect on NPV or net interest income,
are not predictable. Computations of prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit run-offs, and should
not be relied on as indicative of actual results. Certain shortcomings are
inherent in this type of computation. Although certain assets and liabilities
may have similar maturities or periods of re-pricing, they may react at
different times and in different degrees to changes in market interest rates.
The interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while rates on other types of
assets and liabilities may lag behind changes in market interest rates. Certain
assets, such as adjustable-rate mortgages, generally have features that restrict
changes in interest rates on a short-term basis and over the life of the asset.
In the event of a change in interest rates, prepayments and
46
early withdrawals could deviate significantly from those assumed in making
calculations set forth above. Additionally, an increased credit risk may result
as the ability of many borrowers to service their debts may decrease in the
event of an interest rate increase.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
Report on Management's Assessment of Internal Control over Financial Reporting.
The Company is responsible for the preparation, integrity and fair
presentation of the consolidated financial statements included in this annual
report. The consolidated financial statements and notes included in this annual
report have been prepared in conformity with United States generally accepted
accounting principles and necessarily include some amounts that are based on
management's best estimates and judgments.
We, as management of the Company, are responsible for establishing and
maintaining effective internal control over financial reporting that is designed
to produce reliable financial statements in conformity with United States
generally accepted accounting principles. Any system of internal control, no
matter how well designed, has inherent limitations, including the possibility
that a control can be circumvented or overridden and misstatements due to error
or fraud may occur and not be detected. Also, because of changes in conditions,
internal control effectiveness may vary over time. Accordingly, even an
effective system of internal control will provide only reasonable assurance with
respect to financial statement preparation.
[GRAPHIC Management assessed the Company's system of internal control over
financial reporting as of December 31, 2006, in relation to criteria for
effective internal control over financial reporting as described in "Internal
Control - Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
concludes that, as of December 31, 2006, the Company's system of internal
control over financial reporting is effective and meets the criteria of the
"Internal Control - Integrated Framework." Crowe Chizek and Company LLC,
independent registered public accounting firm, has issued their report on
management's assessment of the Company's internal control over financial
reporting.
John S. Fiore A. Richard Abrahamian
- ----------------------------- ----------------------------------
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
March 6, 2007 March 6, 2007
47
Report of Independent Registered Public Accounting Firm
Board of Directors and
Shareholders of Synergy Financial Group, Inc.
We have audited management's assessment, included in the accompanying
Report on Management's Assessment of Internal Control over Financial Reporting,
that Synergy Financial Group, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Synergy Financial Group, Inc.'s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Synergy Financial Group,
Inc. maintained effective internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion,
Synergy Financial Group, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
48
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Synergy Financial Group, Inc. and subsidiaries as of December 31, 2006
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the year then ended and our report dated March 6,
2007 expressed an unqualified opinion on those financial statements.
/s/Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Livingston, New Jersey
March 6, 2007
49
Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------
Board of Directors and
Shareholders of Synergy Financial Group, Inc.
We have audited the accompanying consolidated balance sheet of Synergy
Financial Group, Inc. and subsidiaries as of December 31, 2006 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Synergy
Financial Group, Inc. and subsidiaries as of December 31, 2006 and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
As described in Note A to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 123(R), Share-Based Payment and
SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in the Current Year Financial
Statements.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Synergy
Financial Group, Inc.'s internal control over financial reporting as of December
31, 2006, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 6, 2007 expressed an unqualified
opinion on management's assessment of the effectiveness of internal control over
financial reporting and an unqualified opinion on the effectiveness of internal
control over financial reporting.
/s/Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Livingston, New Jersey
March 6, 2007
50
Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------
Board of Directors and
Shareholders of Synergy Financial Group, Inc.
We have audited the accompanying consolidated balance sheet of Synergy
Financial Group, Inc. and subsidiaries as of December 31, 2005, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the two years in the period ended December 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Synergy Financial
Group, Inc. and subsidiaries as of December 31, 2005, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2005 in conformity with accounting principles generally accepted in
the United States of America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Synergy
Financial Group, Inc.'s internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated February 22, 2006 (not presented herein)
expressed an unqualified opinion on management's assessment of the effectiveness
of internal control over financial reporting and an unqualified opinion on the
effectiveness of internal control over financial reporting.
/s/Grant Thornton LLP
Philadelphia, Pennsylvania
February 22, 2006
51
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
2006 2005
----------- -----------
ASSETS
Cash and amounts due from banks............................................ $ 5,673 $ 4,635
Interest-bearing deposits with banks....................................... 4,458 1,948
--------- ---------
Cash and cash equivalents............................................... 10,131 6,583
Investment securities available-for-sale, at fair value.................... 68,417 85,319
Investment securities held-to-maturity (fair value of
$76,263 and $93,575, respectively)...................................... 77,917 95,621
Federal Home Loan Bank of New York stock, at cost.......................... 11,981 13,263
Loans receivable, net...................................................... 765,001 733,183
Accrued interest receivable................................................ 3,848 3,313
Property and equipment, net................................................ 20,106 18,570
Cash surrender value of bank-owned life insurance.......................... 21,816 13,138
Other assets............................................................... 7,109 4,897
--------- ---------
Total assets.......................................................... $ 986,326 $ 973,887
========= =========
LIABILITIES
Deposits................................................................... $ 645,816 $ 606,471
Other borrowed funds....................................................... 235,675 266,600
Advance payments by borrowers for taxes and insurance...................... 2,701 2,215
Accrued interest payable on advances....................................... 651 611
Other liabilities.......................................................... 2,983 2,740
--------- ---------
Total liabilities..................................................... 887,826 878,637
--------- ---------
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 - 12,509,636 in 2006 and 12,471,481 in 2005
Outstanding - 11,382,143 in 2006 and 11,545,881 in 2005................. 1,251 1,247
Additional paid-in capital................................................. 85,381 85,959
Retained earnings.......................................................... 34,582 32,794
Unearned ESOP shares....................................................... (4,600) (5,282)
Unearned RSP compensation.................................................. - (2,567)
Treasury stock acquired for the RSP, at cost:
271,613 in 2006 and 363,037 in 2005 .................................... (3,086) (4,124)
Treasury stock, at cost:
1,127,493 in 2006 and 925,600 in 2005................................... (14,125) (11,426)
Accumulated other comprehensive loss, net.................................. (903) (1,351)
--------- ---------
Total stockholders' equity............................................ 98,500 95,250
--------- ---------
Total liabilities and stockholders' equity............................ $ 986,326 $ 973,887
========= =========
The accompanying notes are an integral part of these statements.
52
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
For the year ended December 31,
--------------------------------------------
2006 2005 2004
--------- --------- ---------
Interest income
Loans, including fees...................................... $ 48,011 $ 37,928 $ 28,407
Investment securities...................................... 6,538 8,261 7,980
Other ..................................................... 714 572 162
-------- -------- --------
Total interest income.................................... 55,263 46,761 36,549
Interest expense
Deposits................................................... 21,084 12,859 9,114
Other borrowed funds....................................... 10,444 8,889 4,078
-------- -------- --------
Total interest expense................................... 31,528 21,748 13,192
Net interest income before
provision for loan losses.............................. 23,735 25,013 23,357
Provision for loan losses..................................... 969 1,860 1,492
-------- -------- --------
Net interest income after
provision for loan losses.............................. 22,766 23,153 21,865
-------- -------- --------
Other income
Service charges and other fees on
deposit accounts......................................... 2,125 2,105 2,182
Net (losses) gains on sales of investment securities....... - (26) 38
Commissions................................................ 913 855 517
Other ..................................................... 797 646 322
-------- -------- --------
Total other income....................................... 3,835 3,580 3,059
Other expenses
Salaries and employee benefits............................. 12,463 10,801 9,948
Premises and equipment..................................... 2,600 3,046 3,073
Occupancy.................................................. 2,286 2,164 1,835
Professional services...................................... 734 796 703
Advertising................................................ 405 925 781
Other operating............................................ 1,828 1,948 1,965
-------- -------- --------
Total other expenses..................................... 20,316 19,680 18,305
-------- -------- --------
Income before income tax expense........................... 6,285 7,053 6,619
Income tax expense............................................ 2,190 2,560 2,416
-------- -------- --------
Net income............................................... $ 4,095 $ 4,493 $ 4,203
======== ======== ========
Per share of common stock
Basic earnings per share................................... $ 0.39 $ 0.41 $ 0.38
======== ======== ========
Diluted earnings per share................................. $ 0.38 $ 0.40 $ 0.37
======== ======== ========
Basic weighted average shares outstanding.................. 10,376 10,911 11,009
======== ======== ========
Diluted weighted average shares outstanding................ 10,760 11,306 11,276
======== ======== ========
The accompanying notes are an integral part of these statements.
53
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share amounts)
Treasury Accumulated
Common stock stock comprehensive
----------------- Additional Unearned Unearned acquired income
Shares Par paid-in- Retained ESOP RSP for the Treasury (loss),
issued value capital earnings shares compensation RSP stock 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.......... - - - 4,203 - - - - - 4,203
Other comprehensive
loss, net of
reclassification
adjustment and
taxes............. - - - - - - - - (138) (138)
------- --------
Total comprehensive
income............... 4,065
--------
Net proceeds of
stock offering and
issuance of
common stock...... 9,107,759 911 68,348 - - - - - - 69,259
Dividends declared
($0.12 per share). - - - (1,458) - - - - - (1,458)
Common stock
acquired by
ESOP (562,873
shares)........... - - - - (5,628) - - - - (5,628)
Common stock held by
ESOP committed to
be released
(99,624 shares)... - - 372 - 675 - - - - 1,047
Common stock issued
by RSP Plan
(41,573 shares)... - - (408) - - - 408 - - -
Common stock awarded
through RSP Plan
(281,437 shares).. - - 2,857 - - (2,857) - - - -
Compensation
recognized
under RSP Plan.... - - - - - 477 - - - 477
Common stock
repurchased
for RSP plans
(410,001 shares).. - - - - - - (4,648) - - (4,648)
BALANCE AT
DECEMBER 31, 2004.... 12,452,011 1,245 86,177 30,603 (5,962) (3,391) (4,343) - (287) 104,042
========== ======= ======== ======= ======= ======= ====== ======= ========
Net income.......... - - - 4,493 - - - - - 4,493
Other comprehensive
loss, net of
reclassification
adjustment and
taxes............. - - - - - - - - (1,064) (1,064)
------- --------
Total comprehensive
income............... 3,429
--------
Dividends declared
($0.19 per share). - - - (2,302) - - - - - (2,302)
Common stock issued
for options
exercised (19,470
shares)........... 19,470 2 114 - - - - - - 116
54
Treasury Accumulated
Common stock stock comprehensive
--------------- Additional Unearned Unearned acquired income
Shares Par paid-in- Retained ESOP RSP for the Treasury (loss),
issued value capital earnings shares compensation RSP stock net TOTAL
--------------------------------------------------------------------------------------------------------
Common stock held by
ESOP committed
to be released
(99,624 shares)... - - 542 - 680 - - - - 1,222
Common stock issued
by RSP Plan
(87,857 shares)... - - (984) - - - 984 - - -
Other stock
compensation
plan activity,
including tax
benefits.......... - - 110 - - 138 - - - 248
Compensation
recognized
under RSP Plan.... - - - - - 686 - - - 686
Common stock
repurchased for
RSP plans
(63,851 shares)... - - - - - - (765) - - (765)
Treasury stock
purchased
(925,600 shares).. - - - - - - - (11,426) - (11,426)
BALANCE AT
DECEMBER 31, 2005.... 12,471,481 1,247 85,959 32,794 (5,282) (2,567) (4,124) (11,426) (1,351) 95,250
========== ===== ====== ====== ====== ====== ====== ======= ====== ======
SAB 108 adjustment
related to income
taxes............... - - - 216 - - - - - 216
BALANCE AT
JANUARY 1, 2006...... 12,471,481 1,247 85,959 33,010 (5,282) (2,567) (4,124) (11,426) (1,351) 95,466
========== ===== ====== ====== ====== ====== ====== ======= ====== ======
Net income.......... - - - 4,095 - - - - - 4,095
Other comprehensive
loss, net of
reclassification
adjustment and
taxes............. - - - - - - - - 448 448
------- --------
Total comprehensive
income............... 4,543
--------
Dividends declared
($0.23 per share). - - - (2,523) - - - - - (2,523)
Common stock issued
for options.......
exercised
(38,155 shares)... 38,155 4 210 - - - - - - 214
Common stock held by
ESOP committed to
be released
(99,624 shares)... - - 808 - 682 - - - - 1,490
Common stock issued
by RSP Plan
(91,424 shares)... - - (1,038) - - - 1,038 - - -
Other stock
compensation
plan activity,
including tax
benefits.......... - - 507 - - - - - - 507
Transfer due to
adoption of
SFAS 123(R)....... - - (2,567) - - 2,567 - - - -
Compensation
recognized under
stock plans....... - - 1,502 - - - - - - 1,502
Treasury stock
purchased
(201,893 shares)... - - - - - - - (2,699) - (2,699)
BALANCE AT
DECEMBER 31, 2006.... 12,509,636 $1,251 $ 85,381 $ 34,582 $ (4,600) $ - $(3,086)$ (14,125) $ (903) $98,500
========== ====== ========= ======== ======== ======== ======= ========== ======== =======
The accompanying notes are an integral part of this statement.
55
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
For the year ended December 31,
----------------------------------------------
2006 2005 2004
----------- ---------- -----------
Operating activities
Net income................................................... $ 4,095 $ 4,493 $ 4,203
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization.............................. 1,468 1,516 1,442
Provision for loan losses.................................. 969 1,860 1,492
Deferred income taxes...................................... (987) (1,316) (395)
Amortization of deferred loan fees......................... (130) (108) (27)
Amortization of premiums on investment securities.......... 478 864 1,374
Net losses (gains) on sales of investment securities....... - 26 (38)
Release of ESOP shares..................................... 1,490 1,222 1,047
Compensation under stock plans............................. 1,502 686 477
Increase in accrued interest receivable.................... (535) (562) (730)
(Increase) decrease in other assets........................ (747) 1,293 (241)
Increase (decrease) in other liabilities................... 130 (603) 1,461
Increase in cash surrender value of
bank-owned life insurance................................ (678) (501) (162)
Increase in accrued interest payable on advances........... 40 226 266
----------- ---------- -----------
Net cash provided by operating activities................ 7,095 9,096 10,169
----------- ---------- -----------
Investing activities
Purchase of investment securities held-to-maturity........... - (12,536) (93,010)
Purchase of investment securities available-for-sale......... (4,777) (1,911) (63,478)
Maturity and principal repayments of investment
securities held-to-maturity................................ 17,863 27,310 14,447
Maturity and principal repayments of investment
securities available-for-sale.............................. 21,735 36,379 51,287
Purchase of property and equipment........................... (3,004) (3,272) (636)
Redemption (purchases) of FHLB Stock......................... 1,282 (2,492) (7,127)
Purchase of bank-owned life insurance........................ (8,000) - (10,000)
Proceeds from sale of investment securities
held to maturity........................................... - - 883
Proceeds from sale of investment securities
available-for-sale......................................... - 12,808 443
Loan originations, net of principal repayments............... (37,619) (156,650) (98,102)
Purchase of loans............................................ (4,155) (16,597) (30,465)
Proceeds from sale of loans.................................. 9,117 - -
----------- ---------- -----------
Net cash used in investing activities.................... (7,558) (116,961) (235,758)
----------- ---------- -----------
56
For the year ended December 31,
----------------------------------------------
2006 2005 2004
----------- ---------- -----------
Financing activities
Net increase in deposits............................ $ 39,345 $ 67,555 $ 65,381
(Decrease) increase in short-term
Federal Home Loan Bank Advances................... (9,775) 55,625 (7,204)
Proceeds from long-term Federal Home
Loan Bank advances................................ 43,000 40,500 155,650
Repayments of long-term Federal Home
Loan Bank advances................................ (64,150) (41,939) (8,905)
Increase in advance payments by borrowers
for taxes and insurance........................... 486 513 120
Dividends paid...................................... (2,410) (2,177) (959)
Decrease in stock subscriptions payable............. - - (38,322)
Net proceeds from issuance of common stock.......... - - 69,259
Purchase of common stock for ESOP................... - - (5,629)
Purchase of treasury stock.......................... (2,699) (11,426) -
Proceeds from stock options exercised............... 214 116 -
Purchase of treasury stock for the RSP Plan......... - (765) (4,648)
----------- ---------- ------------
Net cash provided by financing activities....... 4,011 108,002 224,743
----------- ---------- -----------
Net increase (decrease) in cash
and cash equivalents.......................... 3,548 137 (846)
Cash and cash equivalents at beginning of year......... 6,583 6,446 7,292
----------- ---------- -----------
Cash and cash equivalents at end of year............... $ 10,131 $ 6,583 $ 6,446
=========== ========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes.......... $ 2,579 $ 3,624 $ 2,555
=========== ========== ===========
Interest paid on deposits and borrowed funds........ $ 31,568 $ 21,973 $ 12,903
=========== ========== ===========
The accompanying notes are an integral part of these statements.
57
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
As part of a reorganization completed in 2001 and described more fully
in Note B, Synergy Financial Group, Inc. (the "Company") was formed as a
federally-chartered corporation and parent of Synergy Bank (the "Bank"),
formerly known as Synergy Federal Savings Bank. On August 27, 2003, the Company
was reorganized as a New Jersey corporation and upon completion of its January
20, 2004 second-step stock conversion became a full stock corporation. The
Company is the parent of Synergy Financial Services, Inc. and the Bank, which
has a wholly-owned subsidiary known as Synergy Capital Investments, Inc.
The Bank has nineteen office locations, including its main office, and
provides a range of financial services to individual and business customers
through its branch network located in Middlesex, Monmouth and Union counties in
New Jersey. Although the Bank offers numerous services, its lending activity has
concentrated on residential, home equity, multi-family / non-residential,
automobile, commercial real estate-secured and commercial loans.
The Bank competes with other banking and financial institutions in its
primary market communities. Commercial banks, savings banks, savings and loan
associations, credit unions and money market funds actively compete for savings
and time deposits and loans. Such institutions, as well as consumer financial
and insurance companies, may be considered competitors of the Bank with respect
to one or more of the services it renders.
The Bank is subject to regulations by certain federal agencies and,
accordingly, it is periodically examined by those regulatory authorities. As a
consequence of the regulation of banking activities, the Bank's business is
particularly susceptible to being affected by future federal legislation and
regulations.
Basis of Financial Statement Presentation
The accounting policies followed by 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, 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.
Certain amounts previously reported have been reclassified to conform to the
current year's presentation.
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.
58
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
Cash and Cash Equivalents
- -------------------------
The Company considers all cash on hand and in banks, and highly liquid
investment securities debt instruments with original maturities of three months
or less, to be cash equivalents. Net cash flows are reported for customer loan
and deposit transactions.
Investment Securities
- ---------------------
At the time of purchase, investments are classified into one of
two categories: held-to-maturity or available-for-sale.
Investment securities are classified as held-to-maturity when the Bank
has the ability and intent to hold those securities to maturity. These
investment securities are carried at cost, adjusted for amortization of premium
and accretion of discount over the term of the security using the interest
method.
Investment securities which are held for indefinite periods of time,
which management intends to use as part of its asset/liability strategy, or
which may be sold in response to changes in interest rates, changes in
prepayment risk, increases in capital requirements, or other similar factors are
classified as available-for-sale and are carried at fair value. Net unrealized
gains and losses for such securities, net of tax, are required to be recognized
as a separate component of stockholders' equity and excluded from determination
of net income. Gains or losses on disposition are based on the net proceeds and
cost of the securities sold, adjusted for amortization of premiums and accretion
of discounts, using the specific identification method.
In determining if and when a market value below amortized cost is
other-than-temporary for its investment securities, the Company considers the
duration and severity of the unrealized loss, the financial condition and near
term prospects of the issuers, and the Company's intent and ability to hold
investments to allow for a recovery in market value in a reasonable period of
time. When such a decline in value is deemed to be other-than-temporary, the
Company recognizes an impairment loss in the current period operating results to
the extent of the decline.
Mortgage Loans Held-For-Sale
- ----------------------------
Mortgages held for sale are carried at the lower of aggregate cost or
market value with market determined on the basis of open commitments for
committed loans. For uncommitted loans, market is determined on the basis of
current delivery prices in the secondary mortgage market. Any resulting
unrealized losses are included in other income.
The Bank accounts for its transfers and servicing of financial assets
in accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 140 revises the
standards for accounting for the securitizations and other transfers of
financial assets and collateral. Transfers of financial assets for which the
Bank has surrendered control of the financial assets are accounted for as sales
to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. Retained interests in a sale or
securitization of financial assets are measured at the date of transfer by
allocating the previous carrying amount between the assets transferred and based
on their relative estimated fair values. The fair values of retained servicing
rights and any other retained interests are determined based on the present
value of expected future cash flows associated with those interests and by
reference to market prices for similar assets. There were no transfers of
financial assets to related or affiliated parties in 2006, 2005 and 2004. At
December 31, 2006, 2005 and 2004, the Bank's servicing loan portfolio
approximated $13.9 million, $5.8 million and $6.2 million, respectively. As of
December 31, 2006, 2005 and 2004, the Bank has not recorded mortgage serving
assets due to the immateriality of amount that would have been capitalized based
upon the limited amount of assets serviced by the Bank.
59
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
Loans and Allowance for Loan Losses
- -----------------------------------
Loans that management has the intent and ability to hold until maturity
or foreseeable future or payoff are stated at the amount of unpaid principal,
reduced by unearned income and an allowance for loan losses. Interest on loans
is calculated based upon the principal amount outstanding. The Company defers
and amortizes certain origination and commitment fees, and certain direct loan
origination costs over the contractual life of the related loans. This results
in an adjustment of the related loan's yield. Generally, loans are placed on a
non-accrual status when they are more than ninety days delinquent. Additionally,
accrual of interest is stopped on a loan when management believes, after
considering economic and business conditions and collection efforts, that
collection of interest is doubtful as a result of the borrower's financial
condition.
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
The Bank accounts for its impaired loans in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118, Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. Accordingly, a non-residential real estate loan is considered
impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reason for the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan by loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans (residential mortgages
and consumer installment loans) are collectively evaluated for impairment.
Accordingly, the Bank does not separately identify individual consumer and
residential loans for impairment disclosures. We evaluate these credits based on
the pool approach and apply an allowance for loan losses based on the historical
loss experience for the pool. Loss experience, which is usually determined by
reviewing the historical loss (charge-off) rate for each pool over a designated
time period, is adjusted for changes in trends and conditions.
Concentration Risk
- ------------------
The lending activities are concentrated in loans primarily secured by
real estate located within the State of New Jersey. In addition, a moderate
concentration of loans and deposits continue to be associated
60
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
with employees of the Bank's former credit union sponsor organization, a
pharmaceutical research and manufacturing company.
Premises and Equipment
- ----------------------
Buildings, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization computed by the straight-line method
over the estimated useful lives of the assets.
Goodwill and Intangible Assets
- ------------------------------
The Company accounts for goodwill and intangible assets acquired in a
business combination in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142 goodwill is not amortized; instead, the
carrying value of goodwill is evaluated for impairment on an annual basis.
Identifiable intangible assets are amortized over their useful lives and
reviewed for impairment.
The Bank has recorded two types of intangible assets associated with
the purchase of First Bank of Central Jersey ("FBCJ") on January 10, 2003 - a
core deposit intangible of approximately $627,000 and goodwill of approximately
$302,000.
The core deposit intangible is being amortized over approximately 8
years. Amortization expense for the year ended December 31, 2006 was
approximately $111,000. The estimated annual amortization expense for the next
four years (2007 through 2010) is $111,000.
The carrying amount of goodwill as of December 31, 2006 was
approximately $225,000. During 2006, an adjustment of $77,000 was made to reduce
goodwill in order to properly account for the deferred taxes associated with the
loans and securities purchased in the FBCJ acquisition as well as the deferred
taxes related to the core deposit intangible. This adjustment had no impact on
the consolidated statements of income, as the offset merely adjusted the
deferred tax accounts, which are classified in other assets. The Company did not
identify any impairment on its outstanding goodwill and its identifiable
intangible assets during its most recent testing for the year ended December 31,
2006.
Income Taxes
- ------------
The Company accounts for 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 as
measured by the enacted tax rates that will be in effect when these differences
reverse. Deferred tax expense is the result of changes in deferred tax assets
and liabilities. The principal types of differences between assets and
liabilities for financial statement and tax return purposes are allowance for
loan losses, deferred loan fees, deferred compensation, investment securities
available for sale and the change in the value of bank-owned life insurance.
Other Real Estate Owned
- -----------------------
Other real estate owned is recorded at the lower of cost or estimated
fair market value less costs of disposal. When property is acquired, the excess,
if any, of the loan balance over fair market value is charged to the allowance
for possible loan losses. Periodically thereafter, the asset is reviewed for
subsequent declines in the estimated fair market value. Subsequent declines, if
any, and holding costs, as well as gains and losses on a subsequent sale, are
included in the consolidated statements of income.
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
61
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
as stock options) were exercised or resulted in the issuance of common stock.
These potentially dilutive shares would then be included in the weighted number
of shares outstanding for the period using the treasury stock method. Shares
issued and shares reacquired during any period are weighted for the portion of
the period that they were outstanding.
In computing both basic and diluted earnings per share, the weighted
average number of common shares outstanding include Employee Stock Ownership
Plan ("ESOP") shares previously allocated to participants and shares committed
to be released for the allocation to participants and Restricted Stock Plan
("RSP") shares which 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 years ended
December 31, 2006, 2005 and 2004 (in thousands, except per share data):
For the year ended December 31, 2006
------------------------------------------
Weighted
Income average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders.......... $ 4,095 10,376 $ 0.39
Effect of dilutive common stock equivalents...... 384 (.01)
------ -----
Diluted earnings per share
Income available to common stockholders
plus assumed conversions...................... $ 4,095 10,760 $ 0.38
====== ====== =====
For the year ended December 31, 2005
------------------------------------------
Weighted
Income average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders.......... $ 4,493 10,911 $ 0.41
Effect of dilutive common stock equivalents...... 395 (.01)
------ -----
Diluted earnings per share
Income available to common stockholders
plus assumed conversions...................... $ 4,493 11,306 $ 0.40
====== ====== =====
62
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
For the year ended December 31, 2004
------------------------------------------
Weighted
Income average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Basic earnings per share
Income available to common stockholders.......... $ 4,203 11,009 $ 0.38
Effect of dilutive common stock equivalents...... 267 (.01)
------ -----
Diluted earnings per share
Income available to common stockholders
plus assumed conversions...................... $ 4,203 11,276 $ 0.37
====== ====== =====
There were 3,447 shares considered to be anti-dilutive for the year
ended December 31, 2006 and no shares considered to be anti-dilutive for the
year ended December 31, 2005.
Stock-Based Compensation
- ------------------------
Effective January 1, 2006, the Company adopted SFAS 123(R), Share-Based
Payment, using the modified prospective transition method. Under the accounting
requirements of SFAS 123(R), the Company must now recognize compensation expense
related to stock options outstanding based upon the fair value of such awards at
the date of grant over the period that such awards are earned. For the year
ended December 31, 2006, adopting this standard resulted in a reduction in
income before income taxes of $667,000, a reduction in net income of $505,000
and a decrease in both basic and diluted earnings per share of $0.05.
Prior to 2006, the Company's stock option plans were accounted for in
accordance with the provisions of Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees and released interpretations.
Accordingly, no compensation expense was recognized for the stock option plans.
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 our restricted stock plans would
have been reduced to the pro forma amounts that follow (in thousands, except per
share data):
For the year ended
December 31,
--------------------
2005 2004
---- ----
Net income, as reported.......................... $4,493 $4,203
Add expense recognized for the Restricted
Stock Plan, net of related tax effect......... 439 305
Less total Stock Option and Restricted Stock Plan
expense, determined under the fair value
method, net of related tax effect............. (835) (699)
----- -----
Net income, pro forma....................... $4,097 $3,809
===== =====
Basic earnings per share:
As reported................................... $0.41 $0.38
Pro forma..................................... $0.38 $0.35
Diluted earnings per share:
As reported................................... $0.40 $0.37
Pro forma..................................... $0.36 $0.34
63
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
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.
Segment Reporting
- -----------------
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 Company
has one operating segment and, accordingly, has one reportable segment,
"Community Banking." All of the Company's activities are interrelated, and each
activity is dependent and assessed based on how each of the activities of the
Company supports the others. For example, commercial lending is dependent upon
the ability of the Company 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 and multi-family / non-residential mortgage
lending. Accordingly, all significant operating decisions are based upon
analysis of the Company as one operating segment.
Advertising Costs
- -----------------
It is the Company's policy to expense advertising costs in the period
in which they are incurred.
Comprehensive Income
- --------------------
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
The components of other comprehensive income and related tax effects
are as follows (in thousands):
For the year ended December 31, 2006
------------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
------ ------- ------
Unrealized gains (losses) on
investment securities
Unrealized holding gains
(losses) arising during period. $ 693 $(245) $ 448
Less reclassification
adjustment for gains (losses)
realized in net income......... - - -
------- ---- -------
Other comprehensive
income gain (loss), net....... $ 693 $(245) $ 448
======= ===== =======
64
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
For the year ended December 31, 2005 For the year ended December 31, 2004
------------------------------------ ------------------------------------
Before Tax Net of Before Tax Net of
tax (expense) tax tax (expense) tax
amount benefit amount amount benefit amount
------ ------- ------ ------ ------- ------
Unrealized gains (losses) on
investment securities
Unrealized holding gains
(losses) arising during period. $(1,699) $ 618 $(1,081) $ (179) $ 65 $ (114)
Less reclassification
adjustment for gains (losses)
realized in net income......... (26) 9 (17) 38 (14) 24
------- ---- --------- ---- ---- ----
Other comprehensive
income gain (loss), net.......... $(1,673) $ 609 $(1,064) $ (217) $ 79 $ (138)
====== ==== ====== ====== ==== ======
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In February 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 155, Accounting for Certain Hybrid Instruments: an amendment of
FASB Statements No. 133 and 140. SFAS No. 155 allows financial instruments that
have embedded derivatives to be accounted for as a whole (eliminating the need
to bifurcate the derivative from its host) if the holder elects to account for
the whole instrument on a fair value basis. This Statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The Company does not
expect the adoption of this Statement to have a material effect on the Company's
results of operations or financial condition.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets. This Statement amends SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
and requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable, and permits the
entities to elect either fair value measurement with changes in fair value
reflected in earnings or the amortization and impairment requirements of SFAS
No. 140 for subsequent measurement. The subsequent measurement of separately
recognized servicing assets and servicing liabilities at fair value eliminates
the necessity for entities that manage the risks inherent in servicing assets
and servicing liabilities with derivatives to qualify for hedge accounting
treatment and eliminates the characterization of declines in fair value as
impairments or direct write-downs. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006.
The Company does not expect the adoption of this Statement to have a material
impact on its financial results.
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48,
Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement
No. 109, to clarify certain aspects of accounting for uncertain tax positions,
including issues related to the recognition and measurement of those tax
positions taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. This interpretation is effective
for fiscal years beginning after December 15, 2006. The Company does not expect
the adoption of this interpretation to have a material impact on the Company's
results of operations and financial condition.
In September 2006, the FASB Emerging Issues Task Force ("EITF")
finalized Issue No. 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. This issue requires that a liability be recorded during the
service period when a split-dollar life insurance agreement continues after
participants' employment or retirement. The required accrued liability will be
based on either the post-employment benefit cost for the continuing life
65
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
insurance or based on the future death benefit depending on the contractual
terms of the underlying agreement. This issue is effective for fiscal years
beginning after December 15, 2007. The Company has not completed its evaluation
of the impact of adoption of EITF 06-4.
In September 2006, the FASB EITF finalized Issue No. 06-5, Accounting
for Purchases of Life Insurance - Determining the Amount That Could Be Realized
in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of
Life Insurance). This issue requires that a policyholder consider contractual
terms of a life insurance policy in determining the amount that could be
realized under the insurance contract. It also requires that if the contract
provides for a greater surrender value if all individual policies in a group are
surrendered at the same time, that the surrender value be determined based on
the assumption that policies will be surrendered on an individual basis. Lastly,
the issue discusses whether the cash surrender value should be discounted when
the policyholder is contractually limited in its ability to surrender a policy.
This issue is effective for fiscal years beginning after December 15, 2006. The
Company does not believe the adoption of this issue will have a material impact
on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. The Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles ("GAAP"), and
expands disclosures about fair value measurements. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The adoption of this
Statement is not expected to have a material effect on the Company's results of
operations or financial condition.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 permits
the Company to adjust for the cumulative effect of immaterial errors relating to
prior years in the carrying amount of assets and liabilities as of the beginning
of the current fiscal year, with an offsetting adjustment to the opening balance
of retained earnings in the year of adoption. SAB 108 also requires the
adjustment of any prior quarterly financial statements within the fiscal year of
adoption for the effects of such errors on the quarters when the information is
next presented. Such adjustments do not require previously filed reports with
the SEC to be amended. Effective December 31, 2006, the Company adopted this
accounting bulletin, which was effective for years ending after November 15,
2006. In accordance with SAB 108, the Company has adjusted its opening retained
earnings for 2006 and its financial results for the three quarters of 2006 to
reflect an over accrual of income tax expense during years prior to 2006. The
Company considers this adjustment to be immaterial to prior periods. The impact
of this adjustment is summarized below (in thousands):
Cumulative effect on stockholders' equity as of January 1, 2006..... $ 216
Cumulative effect on retained earnings as of January 1, 2006........ $ 216
Cumulative effect on other assets as of January 1, 2006............. $ 216
The impact of this adjustment on 2006 quarterly financial statements is the same
as shown above.
NOTE B - MHC REORGANIZATION AND STOCK OFFERING
- ----------------------------------------------
Synergy, MHC (the "MHC") was a federally-chartered corporation
organized in 2001 for the purpose of acquiring all of the capital stock of the
former Synergy Financial Group, Inc. (the "Mid-tier Holding Company") upon
completion of the Bank's reorganization from a mutual savings bank into a mutual
holding company structure.
66
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
The overall reorganization was a change in legal organization and form,
not a change in enterprise. Specifically, SFAS No. 141, Business Combinations,
excludes from the definition of business combination any transfer by an
enterprise of its net assets to a newly-formed corporate entity chartered by the
existing enterprise and a transfer of net assets and an exchange of shares
between enterprises under common control. Accordingly, absent classification as
a business combination as defined under SFAS No. 141, the basis of the MHC's
assets and liabilities subsequent to the reorganization remained unchanged from
the Bank's pre-existing historical basis.
In 2002, the Mid-tier Holding Company offered for sale 43.5% of the
shares of its common stock in an offering fully subscribed for by eligible
depositors of the Bank. The remaining 56.5% of the Mid-tier Holding Company's
shares of common stock were issued to the MHC. The offering was completed on
September 17, 2002. Prior to that date, the Mid-tier Holding Company had not
engaged in any significant business. Completion of the offering resulted in the
issuance of 3,344,252 shares of common stock, 1,889,502 shares (56.5%) of which
were issued to the MHC and 1,454,750 shares (43.5%) of which were sold to
eligible depositors of the Bank at $10.00 per share. Costs related to the
offering (primarily marketing fees paid to an underwriting firm, professional
fees, registration fees, and printing and mailing costs) aggregated
approximately $687,000 and were deducted to arrive at net proceeds of
approximately $13,960,000 from the offering. The Mid-tier Holding Company
contributed 43% of the net proceeds of the offering to the Bank for general
corporate use.
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 completion of the Conversion, the MHC
and the former Mid-tier Holding Company were eliminated.
The Company sold 7,035,918 shares of its common stock in the Conversion
at $10.00 per share for an aggregate sales price of $70,359,180. In addition,
each share of common stock held by the public stockholders of its former
Mid-tier 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 had 12,452,011 total
shares outstanding following the Conversion, which was the adjusted maximum of
the estimated valuation range.
Net proceeds from the offering conducted as part of the Conversion were
$69.2 million, reflecting total offering expenses of approximately $1.2 million,
including total underwriter's fees and expenses of $425,000. The net proceeds
were applied as follows: (i) $45.0 million was used to make a capital
contribution to the Bank, for general business purposes, including funding the
origination of loans and investments in securities; (ii) $5.6 million was loaned
to the Company's ESOP to enable the plan to buy 8% of the shares sold in the
offering; and (iii) $18.6 million was retained by the Company as its initial
capitalization to be used for general business purposes which may include
investment in securities, repurchasing shares of the Company's common stock or
paying cash dividends. A portion of the proceeds retained by the Company was
invested in agency-issued mortgage-backed securities.
NOTE C - INVESTMENT SECURITIES
- ------------------------------
The amortized cost, gross unrealized gains and losses, and fair value
of the Bank's investment securities available for sale and held to maturity are
as follows (in thousands):
67
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
December 31, 2006
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
Available-for-sale
U.S. government obligations............. $ 2,000 $ - $ (72) $ 1,928
Mortgage-backed securities
FHLMC................................ 45,723 34 (908) 44,849
FNMA................................. 20,092 17 (410) 19,699
Equity securities....................... 2,000 - (59) 1,941
------- ---- ------ -------
Total.............................. $ 69,815 $ 51 $(1,449) $ 68,417
======= ==== ====== =======
Held-to-maturity
Mortgage-backed securities
FHLMC................................ $ 32,397 $ 1 $ (804) $ 31,594
FNMA................................. 43,150 1 (816) 42,335
GNMA................................. 2,360 4 (40) 2,324
Other debt securities................... 10 - - 10
------- ---- ------ -------
Total.............................. $ 77,917 $ 6 $(1,660) $ 76,263
======= ==== ====== =======
December 31, 2005
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
Available-for-sale
U.S. Government obligations............. $ 2,000 $ - $ (94) $ 1,906
Mortgage-backed securities
FHLMC................................ 56,076 1 (1,331) 54,746
FNMA................................. 28,334 5 (612) 27,727
Equity securities....................... 1,000 - (60) 940
------- ---- ---- -------
Total.............................. $ 87,410 $ 6 $(2,097) $ 85,319
======= ==== ====== =======
Held-to-maturity
Mortgage-backed securities
FHLMC................................ $ 39,234 $ - $ (976) $ 38,258
FNMA................................. 53,469 4 (1,059) 52,414
GNMA................................. 2,908 11 (26) 2,893
Other debt securities................... 10 - - 10
------- ---- ---- -------
Total.............................. $ 95,621 $ 15 $(2,061) $ 93,575
======= ==== ====== =======
The amortized cost and fair value of investment securities
available-for-sale and held-to-maturity, by contractual maturity, at December
31, 2006 are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
68
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
Available-for-sale Held-to-maturity
------------------------- ------------------------
Amortized Fair Amortized Fair
cost value cost value
---------- -------- --------- --------
Due in one year or less................. $ 633 $ 628 $ 31 $ 31
Due after one through five years........ 26,132 25,435 11,877 11,581
Due after five through ten years........ 3,265 3,157 29,722 28,846
Due after ten years..................... 37,785 37,256 36,277 35,795
Equity securities and other............. 2,000 1,941 10 10
------- ------- ------- -------
$ 69,815 $ 68,417 $ 77,917 $ 76,263
======= ======= ======= =======
Proceeds from the sales of investment securities during the years ended
December 31, 2006, 2005 and 2004 were $0, $12,808,000 and $1,326,000,
respectively. Gross gains realized on those sales were $0, $14,000, and $38,000
for the years ended December 31, 2006, 2005 and 2004, respectively, and gross
losses were $0, $40,000, and $0 for the years ended December 31, 2006, 2005 and
2004, respectively. As of December 31, 2006 and December 31, 2005, investment
securities with a book value of $75,000 and $87,000, respectively, were pledged
to secure public deposits and for other purposes as provided by law.
The tables below indicate the length of time individual securities,
both held-to-maturity and available-for-sale, have been in a continuous
unrealized loss position at December 31, 2006 and 2005 (in thousands):
December 31, 2006 Less than 12 months 12 months or longer Total
- ----------------- Number ------------------- ------------------- --------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities securities value losses value losses value losses
- ------------------------- ---------- ----- ------ ----- ------ ----- ------
U.S. Government agency securities... 1 $ - $ - $ 1,928 $ (72) $ 1,928 $ (72)
Mortgage-backed securities.......... 172 3,111 (29) 131,355 (2,949) 134,466 (2,978)
--- ----- ---- ------- ------- ------- -------
Subtotal, debt investment securities 173 3,111 (29) 133,283 (3,021) 136,394 (3,050)
Equity securities................... 1 - - 1,441 (59) 1,441 (59)
--- ------- ------ ------ ------ ------- ------
Total temporarily impaired
investment securities.......... 174 $ 3,111 $ (29) $134,724 $(3,080) $137,835 $(3,109)
=== ======= ====== ======= ====== ======= ======
December 31, 2005 Less than 12 months 12 months or longer Total
- ----------------- Number ------------------- ------------------- --------------------
of Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities securities value losses value losses value losses
- ------------------------- ---------- ----- ------ ----- ------ ----- ------
U.S. Government agency securities... 1 $ - $ - $ 1,906 $ (94) $ 1,906 $ (94)
Mortgage-backed securities.......... 167 92,048 (1,465) 80,617 (2,539) 172,665 (4,004)
--- ------ ------- ------ ------- ------- -------
Subtotal, debt investment securities 168 92,048 (1,465) 82,523 (2,633) 174,571 (4,098)
Equity securities................... 1 - - 940 (60) 940 (60)
--- ------- ------ ------ ------ ------- ------
Total temporarily impaired
investment securities.......... 169 $ 92,048 $(1,465) $83,463 $(2,693) $175,511 $(4,158)
=== ======= ======= ====== ======= ======= =======
Management has considered factors regarding other than temporarily
impaired securities and determined that there are no securities that are
impaired as of December 31, 2006 and 2005.
69
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
NOTE D - LOANS RECEIVABLE
- -------------------------
Major grouping of loans are as follows (in thousands):
December 31,
----------------------
2006 2005
------- -------
Mortgages:
One- to four-family residential...... $237,857 $243,188
Multi-family / non-residential....... 326,225 271,600
Construction......................... 6,487 9,525
Automobile.............................. 142,033 185,812
Commercial.............................. 54,854 24,794
Other consumer.......................... 3,467 3,830
------- -------
770,923 738,749
Deferred loan fees and costs............ 68 197
Allowance for loan losses............... (5,990) (5,763)
------- -------
$765,001 $733,183
======= =======
A summary of the activity in the allowance for loan losses is as
follows (in thousands):
Year ended December 31,
--------------------------------------
2006 2005 2004
------- ------- -------
Balance, beginning of period......... $ 5,763 $ 4,427 $ 3,274
Provision for loan losses............ 969 1,860 1,492
Recoveries........................... 450 330 434
Loans charged-off.................... (1,192) (854) (773)
------ ----- ------
Balance, end of period............... $ 5,990 $ 5,763 $ 4,427
====== ===== ======
The Bank defines impaired loans using SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, as loans on which, based on current
information and events, it is probable that the Bank will be unable to collect
the scheduled payments of principal or interest when due according to the
contractual terms of the loans. Large groups of smaller balance homogenous loans
(residential mortgages and consumer installment loans) are collectively
evaluated for impairment and accordingly are included in our evaluation of the
allowance for loan losses.
As of December 31, 2006 and 2005, the Bank had $422,000 and $382,000,
respectively, of small homogenous loans that were classified as non-accrual and
are considered impaired. As of December 31, 2006 and 2005, the amount of
allowance for loan losses allocated to these loans was $172,000 and $187,000,
respectively. If interest on non-accrual loans had been accrued, interest income
would have increased by $11,000, $5,000, and $5,000, respectively, for the years
ended December 31, 2006, 2005 and 2004. As of the end of these periods, there
were no loans past due 90 days or more that were not on non-accrual status. The
Bank's allowance for loan losses is attributable to loans held-for-investment
and not loans held-for-sale.
In the normal course of business, the Bank makes loans to certain
officers, directors and their related interests. In management's opinion, such
loans are consistent with sound banking practices and are within applicable
regulatory lending limitations. The balance of these loans at December 31, 2006
and December 31, 2005 was approximately $4.3 million and $4.5 million,
respectively. There were no loans to insiders other than those disclosed above.
70
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
NOTE E - PROPERTY AND EQUIPMENT
- -------------------------------
Premises and equipment are summarized as follows (in thousands):
December 31,
Estimated ---------------------
useful life 2006 2005
------------- -------- --------
Land ................................... Indefinite $ 4,004 $ 2,704
Building and improvements............... 3 to 40 years 11,427 11,335
Furniture, equipment and automobiles.... 3 to 12 years 8,410 8,239
Leasehold improvements.................. 3 to 15 years 5,605 5,429
Property held for future office sites... Indefinite 1,957 692
------- -------
31,403 28,399
Less accumulated depreciation
and amortization..................... (11,297) (9,829)
------- -------
$ 20,106 $ 18,570
======= =======
NOTE F - DEPOSITS
- -----------------
Deposits are summarized as follows (in thousands):
December 31,
------------------------
2006 2005
-------- --------
Demand accounts:
Non-interest bearing................. $ 59,587 $ 58,152
Interest bearing..................... 1,080 3,320
------- -------
60,667 61,472
Savings and club accounts............... 46,306 60,608
Money market deposit accounts........... 123,433 117,930
Certificates of deposit under $100,000.. 258,916 246,778
Certificates of deposit over $100,000... 156,494 119,683
------- -------
$645,816 $606,471
======= =======
The scheduled maturities of certificates of deposit at December 31,
2006 are as follows (in thousands):
2007.................................... $375,033
2008.................................... 28,727
2009.................................... 8,339
2010.................................... 2,631
Thereafter.............................. 680
-------
$415,410
=======
Interest expense on deposits is as follows (in thousands):
Year ended December 31,
----------------------------------
2006 2005 2004
------- -------- --------
Demand accounts......................... $ 37 $ 65 $ 30
Savings, club and money market accounts. 3,822 3,399 3,048
Certificates of deposit................. 17,225 9,395 6,036
------ ------ ------
$21,084 $12,859 $ 9,114
====== ====== ======
71
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
NOTE G - OTHER BORROWED FUNDS
- -----------------------------
1. Short-Term Borrowings
---------------------
Short-term borrowings, which consist primarily of FHLB advances,
generally have maturities of less than one year. Unused overnight lines of
credit at the FHLB at December 31, 2006 were $118.3 million. The details of
these borrowings are presented below (in thousands, except percentages):
At or for the year ended December 31,
-------------------------------------
2006 2005 2004
------- -------- --------
Average balance outstanding............ $ 72,669 $ 75,411 $33,618
Maximum amount outstanding at
any month-end during the period..... 93,950 115,000 48,975
Balance outstanding at period end...... 76,875 86,650 31,025
Weighted-average interest
rate during the period.............. 5.23% 3.59% 1.61%
Weighted-average interest
rate at period end.................. 5.38% 4.13% 2.42%
The Bank also has a total of $40 million of available unsecured lines
of credit with banks. At December 31, 2006, there was no balance outstanding on
these lines of credit.
2. Long-Term Borrowings
--------------------
At December 31, 2006, long-term borrowings, which consist of FHLB
advances, totaled $158.8 million. Advances consist of fixed-rate advances that
will mature within one to eight years. The advances are collateralized by FHLB
stock and qualifying real estate first mortgage loans and mortgage-backed
securities. These advances had a weighted average interest rate of 4.24%.
As of December 31, 2006, long-term FHLB advances mature as follows (in
thousands):
2007.................................... $ 57,000
2008.................................... 66,100
2009.................................... 8,000
2010.................................... 5,000
2011.................................... 10,000
Thereafter.............................. 12,700
-------
$158,800
========
As of December 31, 2005, long-term FHLB advances mature as follows (in
thousands):
2006.................................... $ 49,150
2007.................................... 50,000
2008.................................... 35,100
2009.................................... 8,000
2010.................................... 10,000
Thereafter.............................. 27,700
-------
$179,950
========
NOTE H - BENEFIT PLANS
- ----------------------
1. Supplemental Executive Retirement Plans
---------------------------------------
The Company had established a Supplemental Executive Retirement Plan
("SERP") for the benefit of its Chief Executive Officer ("CEO"). In connection
therewith, the Company purchased a life insurance policy to satisfy its benefit
obligation thereunder. This policy was held within a Rabbi Trust.
72
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
The cash surrender value of the life insurance policy related to this SERP was
approximately $2,475,000, at December 31, 2004. The present value of future
benefits was being accrued over the term of employment. Under the terms of the
SERP, the Bank accrued an annual expense that was projected to furnish the CEO
an annual pension benefit upon retirement at age 60 of approximately $102,000
per year for a period of fifteen years. These annual expense accruals were paid
to the trust for the benefit of the CEO. The SERP expense for the year ended
December 31, 2004 was approximately $34,000.
On December 16, 2004, the Board terminated this SERP agreement, and
paid the accrued plan assets of approximately $48,000 to the CEO. A new SERP
agreement was subsequently adopted with an effective date of January 1, 2005.
The new SERP will provide benefits to the CEO in an amount equal to 70% of his
final salary upon retirement at age 60, payable for life, reduced by the
projected value of benefits payable to the CEO, as follows: (i) 50% of the
estimated benefits from the Federal Social Security system; (ii) the account
value from the 401(k) Savings Plan attributable to any Company contributions or
matching contributions; (iii) the account value from the ESOP; (iv) the account
value from any other Code Section 401(a) tax-qualified retirement plans of the
Company or its affiliates that are implemented at any time after the SERP
effective date; and, (v) the account value from the ESOP benefits equalization
plan. The minimum benefit under the new SERP will be an annual benefit of
approximately $102,000 upon retirement at age 60 for life, but in no event for a
period of less than 15 years. The cash surrender value of the life insurance
policy related to this SERP was approximately $2,644,000 and $2,545,000 at
December 31, 2006 and 2005, respectively. Under the terms of the new SERP, the
Bank will determine annually the projected future benefits and set aside an
annual accrual as determined necessary in accordance with generally accepted
accounting principles. Plan expense for the years ended December 31, 2006 and
2005 was approximately $67,000 and $63,000, respectively.
The Company also adopted a SERP for the benefit of other executive
officers. This plan requires an annual accrual equal to ten percent of each
participant's base salary to be credited to the plan reserve. Plan reserves
earned interest at an annual rate equal to the greater of the Bank's cost of
funds or 4%. The accumulated deferred compensation account for each executive
officer was to be payable to each participant at anytime following termination
of employment after three years following the SERP's implementation, the death
or disability of the executive officer or termination of employment following a
change in control of the Bank, whereby the Bank or the Company is not the
resulting entity. In December, 2004, the Board of Directors adopted a plan
amendment that adjusted the plan reserves annual earnings rate to The Wall
Street Journal "prime rate" plus 100 basis points, with a minimum rate of 4% and
a maximum rate of 10%. The amendment also provides participants the ability to
request that plan assets be invested in Synergy Financial Group, Inc. common
stock. The effective date of this amendment was January 1, 2005. Plan expense
for the years ended December 31, 2006, 2005 and 2004 was approximately $63,000,
$47,000 and $48,000, respectively.
In addition, the Company paid its former chief financial officer
previously-expensed accumulated plan assets of approximately $36,000 in April,
2005.
2. Benefits Equalization Plan
--------------------------
The Company's Retirement Benefits Equalization Plan ("BEP") provides
the participating executives with the same level of benefits that all other
employees are eligible to receive under the Company's Employee Stock Ownership
Plan and 401(k) Savings Plan without regard to the limitations on levels of
compensation and annual benefits imposed under Sections 401(a)(17) and 415 of
the Internal Revenue Code. Specifically, the Plan provides benefits to executive
officers that cannot be provided under the Employee Stock Ownership Plan and
401(k) Savings Plan as a result of limitations imposed by Sections 401(a)(17)
and 415 of the Internal Revenue Code, but that would have been provided under
the Employer Stock Ownership Plan and the 401(k) Savings Plan, but for these
Internal Revenue Code
73
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
limitations. For example, this plan provides participants with a benefit for any
compensation that they may earn in excess of $210,000 per year (as indexed)
comparable to the benefits earned by all participants under the Employee Stock
Ownership Plan and the 401(k) Savings Plan for compensation earned below that
level. The actual value of benefit under this Plan and the annual financial
reporting expense associated with this plan will be calculated annually based
upon a variety of factors, including the annual value of benefits for
participants determined under the Employee Stock Ownership Plan and the 401(k)
Savings Plan each year, the applicable limitations under the Internal Revenue
Service Code that are subject to adjustment annually and the salary of each
participant at such time. Generally, benefits under the plan will be taxable to
each participant at the time of receipt of such payment, and the Company will
recognize a tax-deductible compensation expense at such time. Plan expense for
the years ended December 31, 2006 and 2005 amounted to approximately $67,000 and
$39,000, respectively.
3. Phantom Stock Plan
------------------
Prior to the reorganization and stock offering as described in Note B,
the Company maintained a phantom stock and phantom option plan for the benefit
of its CEO. Under the plan, the CEO was awarded phantom stock and options, the
value of which was determined annually based upon a valuation of the Company
assuming it was a stock company. The phantom stock and phantom option plan for
the benefit of the chief executive officer was replaced by a Deferred
Compensation Plan in September, 2002 and the Company paid the CEO deferred plan
assets of approximately $57,000 in December, 2005.
4. Employee Stock Ownership Plan
-----------------------------
In September, 2002, the Board of Directors approved an ESOP. The ESOP
is designed to provide eligible employees the advantage of ownership of Company
stock. Employees are eligible to participate in the Plan after reaching age
twenty-one, completion of one year of service and working at least one thousand
hours of consecutive service during the year. Contributions are allocated to
eligible participants on the basis of compensation. The ESOP borrowed $1,163,800
from the Bank to fund the purchase of 116,380 shares of common stock in
connection with the September, 2002 initial public offering. As a result of the
second-step mutual-to-stock conversion, the ESOP shares converted to 433,294
shares based on the exchange ratio of 3.7231.
In connection with the January, 2004 second-step mutual-to-stock
conversion, the Company established an additional ESOP for eligible employees.
The ESOP borrowed $5,628,730 from the Company to purchase 562,873 shares in the
offering. These loans are payable in annual installments over ten years at a
fixed annual interest rate equal to the prime rate as published in The Wall
Street Journal on the origination date (4.0%), with interest payable quarterly.
The loans can be prepaid without penalty. Loan payments are principally funded
by cash contributions from the Bank, subject to federal tax law limits.
Shares used as collateral to secure the loans are released and
available for allocation to eligible employees as the principal and interest on
the loan is paid. Employees become fully vested in their ESOP account after five
years of service. Dividends on unallocated shares are applied toward payment of
the loan. ESOP shares committed to be released are considered outstanding in
determining earnings per share. The following table summarizes shares of Company
common stock held by the ESOP at December 31:
2006 2005 2004
----------- --------- ---------
Shares allocated or committed to
be released to Participants........ 356,651 257,027 157,403
Unallocated shares.................... 639,516 739,140 838,764
------- ------- -------
Total ESOP shares.................. 996,167 996,167 996,167
======= ======= =======
Market value of unallocated shares....$ 10,539,224 $9,261,424 $ 11,272,988
74
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
The Company recorded ESOP compensation expense of $1,490,000,
$1,222,000 and $1,047,000 related to the release of 99,624, 99,624 and 99,624
shares, for the years ended December 31, 2006, 2005 and 2004, respectively.
5. 401(k) Plan
-----------
All full-time employees of the Bank that meet certain age and service
requirements are eligible to participate in the Bank-sponsored 401(k) Plan.
Under the plan, participants may make contributions, in the form of salary
reductions, up to the maximum Internal Revenue Code limit. The Bank provides
matching contributions to employee accounts at a rate of $0.50 for every $1.00
of base compensation plus commission that is contributed by employees, to a
maximum employee contribution level of 10%. Matching contributions vest at a
rate of 20% per year of service, with full vesting achieved after five years of
service. The Bank's contribution to these plans amounted to $183,000, $207,000
and $197,000 for 2006, 2005 and 2004, respectively.
6. Stock-Based Compensation
------------------------
(a) Restricted Stock Plans
----------------------
At the Annual Meeting held on April 22, 2003, stockholders of the
Company approved the 2003 Restricted Stock Plan. Prior to April 22, 2003, the
Company did not have a Restricted Stock Plan. During the year ended December 31,
2003, the Company issued 56,685 shares of restricted stock. The shares vest at a
rate of 20% on each of five annual vesting dates, with an initial vesting date
of April 22, 2004. As a result of the January 20, 2004 second-step
mutual-to-stock conversion, the issued shares associated with the 2003
Restricted Stock Plan converted at the exchange ratio of 3.7231 to 211,031
shares. On June 4, 2003, the Company announced a stock repurchase program to
acquire the shares associated with the 2003 Restricted Stock Plan. On November
9, 2004, the Company announced the completion of this repurchase program.
At the Annual Meeting held on August 25, 2004 and reconvened on August
31, 2004, stockholders of the Company approved the Company's 2004 Restricted
Stock Plan making 281,436 shares of common stock available for granting. During
the year, the Company issued 277,283 shares of restricted stock. The shares vest
at a rate of 20% on each of five annual vesting dates, with an initial vesting
date of August 31, 2005. On November 9, 2004, the Company announced a stock
repurchase program to acquire the shares associated with the 2004 Restricted
Stock Plan. On March 30, 2005, the Company announced the completion of this
repurchase program.
Shares issued upon vesting may be either authorized but unissued shares
or reacquired shares held by the Company as treasury shares. The Company has
acquired all the necessary shares of stock for funding the restricted stock
plans; such shares are included in treasury stock. The restricted stock is
generally held in a trust for the benefit of the award recipient until it is
vested. Awards outstanding vest in five annual installments commencing one year
from the date of the award. Expense is recognized for shares awarded over the
vesting period at the fair market value of the shares on the date they were
awarded. Compensation expense attributable to the RSP amounted to $835,000,
$686,000 and $477,000 for the years ended December 31, 2006, 2005 and 2004,
respectively. The total income tax benefit was $333,000, $274,000 and $191,000
for the years ended December 31, 2006, 2005 and 2004, respectively.
The following is a summary of the Company's restricted stock plans for
the year ended December 31, 2006:
75
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
Weighted
Average Grant
Shares Date Fair Value
------ ---------------
Outstanding at beginning of period 334,560 $ 8.84
Granted.......................... 27,450 13.53
Vested........................... (91,424) 8.46
Forfeited........................ (250) 13.50
Expired.......................... - -
-------
Outstanding at end of period 270,336 9.44
======= =======
As of December 31, 2006, there was approximately $2.1 million of total
unrecognized compensation expense relating to unvested restricted stock plan
shares. This cost is expected to be recognized over a weighted average period of
2.3 years.
(b) Stock Option Plans
------------------
At the Annual Meeting held on April 22, 2003, stockholders of the
Company approved the Company's 2003 Stock Option Plan making available 165,746
shares of common stock for granting. Prior to April 22, 2003, the Company did
not have a Stock Option Plan. Under the 2003 Stock Option Plan, each stock
option granted entitles the holder to purchase one share of the Company's common
stock at an exercise price of not less than the fair market value of a share of
common stock at the date of grant. Options granted vest over a five-year period
from the date of grant and will expire no later than 10 years following the
grant date. During the year ended December 31, 2003, the Company granted 165,746
options to purchase common shares of the Company. As a result of the January 20,
2004 second-step mutual-to-stock conversion, the shares associated with the 2003
Stock Option Plan converted at the exchange ratio of 3.7231 to 617,086 shares.
At the Annual Meeting held on August 25, 2004 and reconvened on August
31, 2004, stockholders of the Company approved the Company's 2004 Stock Option
Plan making available 703,591 shares for granting under the plan. During the
year ended December 31, 2004, the Company granted 694,569 options to purchase
common shares of the Company. Under the 2004 Stock Option Plan, each stock
option granted entitles the holder to purchase one share of the Company's common
stock at an exercise price of not less than the fair market value of a share of
common stock at the date of grant. Options granted vest over a five-year period
from the date of grant and will expire no later than 10 years following the
grant date.
Effective January 1, 2006, the Company adopted SFAS 123(R), Share-Based
Payment, using the modified prospective transition method. Under the accounting
requirements of SFAS 123(R), the Company must now recognize compensation expense
related to stock options outstanding based upon the fair value of such awards at
the date of grant over the period that such awards are earned. For the year
ended December 31, 2006, the Company recognized approximately $667,000 of
compensation expense related to its stock option plans and approximately
$162,000 of income tax benefit resulting from this expense for that period.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options price model. Expected volatilities are based on
historical volatilities of the Company's common stock. The expected life of
options granted is based on historical data and represents the period of time
that options granted are expected to be outstanding, which takes into account
that the options are not transferable. The risk-free interest rate for the
expected term of the option is based on the U.S. Treasury yield curve in effect
at the time of the grant.
76
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
The following weighted average assumptions were utilized for grants in
2006, which have a weighted average fair value of $3.60: dividend yield of
1.50%; expected volatility of 25.45%; risk-free interest rate of 4.63%; and an
expected life of five years. The following weighted average assumptions were
utilized for grants in 2005, which have a weighted average fair value of $3.40:
dividend yield of 2.00%; expected volatility of 32.51%; risk-free interest rate
of 3.83%; and an expected life of five years. The following weighted average
assumptions were utilized for grants in 2004, which have a weighted average fair
value of $3.04: dividend yield of 1.60%; expected volatility of 32.85%;
risk-free interest rate of 3.33%; and an expected life of five years.
The following is a summary of the Company's stock option plans as of
and for the year ended December 31, 2006:
Weighted Aggregate
Average Intrinsic
Shares Exercise Price Value
------ -------------- -----
Outstanding at beginning of year. 1,213,301 $ 8.25
Granted.......................... 84,500 13.53
Exercised........................ (38,155) 5.61
Forfeited........................ (2,000) 10.15
Expired.......................... - -
----------
Outstanding at end of year ...... 1,257,646 8.68 $9,809,639
==========
Exercisable at end of year....... 541,032 7.83 4,679,927
==========
The following table summarizes information about the stock options
outstanding at December 31, 2006.
Options Outstanding Options Exercisable
Weighted ---------------------------------------- - --------------------------------
Average Number Remaining Contractual Weighted Average Weighted Average
Outstanding Life in Years Exercise Price Stock Options Exercise Price
----------------- -------------------- ----------------- ------------- ----------------
489,777 6.3 $ 5.59 278,684 $ 5.59
624,369 7.7 10.14 261,948 10.22
143,500 8.9 12.83 400 10.50
--------- -------
1,257,646 7.3 8.68 541,032 7.83
========= =======
As of December 31, 2006, there was approximately $1.6 million of total
unrecognized compensation expense relating to unvested stock options. This cost
is expected to be recognized over a weighted average period of 2.3 years.
7. Bank-Owned Life Insurance Program
---------------------------------
The Bank's Board of Directors approved the establishment of a
bank-owned life insurance program to be implemented and effective September 1,
2004. This program provides death benefit coverage to Bank officers and
directors. This coverage continues after retirement. The Bank is the beneficiary
of any benefit in excess of each officer's and director's death benefit amount.
In order to fund this program, the Bank invested a total of $10,000,000
in two bank-owned life insurance policies on July 14, 2004. During 2006, the
Company invested an additional $8,000,000 in bank-owned insurance with another
carrier. The aggregate cash surrender value of the policies totaled $19,172,000
and $10,593,000 at December 31, 2006 and 2005, respectively, and is reported on
the Company's consolidated balance sheet. The Company reports any income from
the policies as other income on the consolidated statement of operations. This
income is not subject to tax.
77
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
NOTE I - INCOME TAXES
- ---------------------
The components of income taxes are summarized as follows (in
thousands):
Year ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
Current tax expense:
Federal income .............. $ 2,711 $ 3,456 $ 2,509
State income ................ 466 420 302
------- ------- -------
Total current expense .... 3,177 3,876 2,811
------- ------- -------
Deferred tax benefit:
Federal income .............. (764) (1,019) (303)
State income ................ (223) (297) (92)
------- ------- -------
Total deferred expense ... (987) (1,316) (395)
------- ------- -------
Total income tax expense $ 2,190 $ 2,560 $ 2,416
======= ======= =======
A reconciliation of income taxes computed at the statutory federal
income tax rate (34%) to the reported income tax expense is as follows (in
thousands):
Year ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
Expected federal income tax expense .. $ 2,137 $ 2,398 $ 2,251
Increase in federal income tax expense
resulting from state income tax,
net of federal income tax effect .. 160 81 139
Tax exempt income .................... (231) (170) (55)
ESOP adjustment ...................... 231 184 125
Other, net ........................... (107) 67 (44)
------- ------- -------
$ 2,190 $ 2,560 $ 2,416
======= ======= =======
Deferred tax assets and (liabilities) consisted of the following (in
thousands):
December 31,
------------------
2006 2005
------- -------
Deferred tax assets:
Allowance for loan losses................ $ 2,334 $ 2,200
Stock and retirement plans .............. 552 82
New Jersey Alternative Minimum
Assessment carryover ................. 193 32
Depreciation ............................ 475 167
Unrealized losses on available-
for-sale investment securities ....... 495 740
Net operating loss carryover ............ 1,442 1,476
Other ................................... 15 35
------- -------
5,506 4,732
Valuation allowance ..................... (878) (878)
------- -------
Deferred tax assets .................. $ 4,628 $ 3,854
======= =======
Deferred tax liabilities:
Deferred loan costs, net of fees ........ $ 245 $ 196
Purchase accounting, including
core deposit intangibles ............. 160 177
------- -------
Deferred tax liabilities ............. $ 405 $ 373
======= =======
Net deferred tax asset,
included in other assets ........... $ 4,223 $ 3,481
======= =======
78
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
The Company has remaining federal net operating loss carryovers
acquired from First Bank of Central Jersey expiring as follows (in thousands):
Expiring Amount
- -------- ------
2021.................................... $1,574
2022.................................... 2,517
2023.................................... 150
-----
$4,241
======
The Company has provided a valuation allowance against the deferred tax
asset attributable to the net operating loss carryovers in order to adjust that
deferred tax asset to the amount management believes to be realizable taking
into consideration the annual limitation on usage of net operating loss
carryovers following an ownership change and the carryover period currently
permitted under federal tax law. The Company has no state net operating loss
carryover.
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For the
Bank, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments as defined in SFAS No. 107.
However, many such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange transaction.
Therefore, the Bank had to use significant estimates and present value
calculations to prepare this disclosure, as required by SFAS No. 107.
Accordingly, the information presented below does not purport to represent the
aggregate net fair value of the Bank.
Changes in the assumptions or methodologies used to estimate fair
values may materially affect the estimated amounts. Also, management is
concerned that there may not be reasonable comparability between institutions
due to the wide range of permitted assumptions and methodologies in the absence
of active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Estimated fair values have been determined by the Bank using what
management believes to be the best available data and an estimation methodology
suitable for each category of financial instruments. The estimation
methodologies used, the estimated fair values, and recorded book balances at
December 31, 2006 and 2005 are set forth below.
For cash and due from banks and interest-bearing deposits with banks,
the recorded book values of approximately $10,131,000 and $6,583,000 are deemed
to approximate fair values at December 31, 2006, and 2005, respectively. The
estimated fair values of investment and mortgage-backed securities are based on
quoted market prices, if available. If quoted market prices are not available,
the estimated fair values are based on quoted market prices of comparable
instruments.
The fair values of loans are estimated based on a discounted cash flow
analysis using interest rates currently offered for loans with similar loan
characteristics. The carrying value of accrued interest is deemed to approximate
fair value.
79
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
December 31,
----------------------------------------------
2006 2005
-------------------- --------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
(in thousands)
Investment securities ...... $146,334 $144,680 $180,940 $178,894
Federal Home Loan Bank stock 11,981 11,981 13,263 13,263
Loans receivable, net ...... 765,001 752,515 733,183 720,982
Cash surrender value of
bank-owned life insurance 21,816 21,816 13,138 13,138
The estimated fair values of demand deposits, savings and certain money
market deposit accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts of variable-rate, fixed-term money market accounts and certificates of
deposit approximate their fair values at the reporting date. The fair values of
fixed-rate certificates of deposit and other borrowed funds are estimated by
discounting the projected future cash flows using the rates currently offered
for these instruments with similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
December 31,
------------------------------------------------
2006 2005
--------------------- ----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
(in thousands)
Time deposits................ $415,410 $413,873 $366,461 $363,390
Other borrowed funds......... 235,675 234,310 266,600 264,512
The fair value of commitments to extend credit is estimated based on
the amount of unamortized deferred loan commitment fees. The fair value of
letters of credit is based on the amount of unearned fees plus the estimated
cost to terminate the letters of credit. Fair values of unrecognized financial
instruments including commitments to extend credit and the fair value of letters
of credit are considered immaterial.
NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
- ----------------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
unused lines of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and unused lines of credit are represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
The Bank had the following approximate off-balance-sheet financial
instruments whose contract amounts represent credit risk (in thousands):
December 31,
----------------------
2006 2005
------- -------
Commitments to grant loans.............. $ 33,741 $ 79,071
Unused lines of credit.................. 28,829 25,449
Standby letters of credit............... 1,073 622
------- -------
$ 63,643 $105,142
======= =======
80
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held varies but primarily includes
residential real estate located within New Jersey. At December 31, 2006,
commitments to fund fixed rate loans amounted to $3.2 million with interest
rates between 6.74% and 10.25%.
NOTE L - COMMITMENTS AND CONTINGENT LIABILITIES
- -----------------------------------------------
1. Lease Commitments
-----------------
Future approximate lease payments under non-cancelable operating leases
at December 31, 2006 are due as follows (in thousands):
2007.................................... $ 943
2008.................................... 878
2009.................................... 797
2010.................................... 788
2011.................................... 749
Thereafter.............................. 7,360
------
$11,515
=======
Total rent expense was approximately $867,000, $787,000 and $613,000
for the years ended December 31, 2006, 2005, and 2004, respectively.
The Company maintains five office locations within the corporate
facilities of the Company's former credit union sponsor organization. These
sites are available to the organization's employees and access by the general
public is restricted. As a result, the Company makes no rental payments for
these branch locations. Each office is an average of 500 square feet with no
public access and therefore very limited use. Management has evaluated the fair
value of the annual rent which is not considered to have a material impact on
the Bank's financial condition or results of operation. The locations are
occupied pursuant to a written agreement that provides for two-year terms that
are automatically renewed upon expiration unless written notice of termination
is given by either party.
2. Other
-----
In the normal course of business, the Company and the Bank have been
named as defendants in certain lawsuits. Although the ultimate outcome of these
suits cannot be ascertained at this time, it is the opinion of management that
the resolutions of such suits will not have a material adverse effect on the
consolidated financial position or results of operation of the Company.
NOTE M - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY
- ------------------------------------------------------------------
Condensed financial information for Synergy Financial Group, Inc.
(parent corporation only) follows (in thousands):
81
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
CONDENSED BALANCE SHEETS
December 31,
-----------------------
2006 2005
------ ------
ASSETS
Cash and cash equivalents.................................... $ 635 $ 301
Investment securities available for sale..................... 2,855 3,622
Investment securities held to maturity....................... 1,157 1,448
Investment in subsidiaries, at equity ....................... 89,099 86,638
Loan receivable from Bank for ESOP........................... 4,600 5,282
Other assets................................................. 1,092 116
------ ------
Total assets............................................... $99,438 $97,407
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities............................................ 938 2,157
Stockholders' equity......................................... 98,500 95,250
------ ------
Total liabilities and stockholders' equity................. $99,438 $97,407
====== ======
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
-------------------------------------------
2006 2005 2004
------ ------ ------
INCOME
Equity in undistributed net earnings of subsidiaries......... $4,411 $4,396 $3,973
Net losses from sale of investments.......................... - (2) -
Interest income.............................................. 385 465 523
----- ----- -----
Total income............................................... 4,796 4,859 4,496
EXPENSES
Other expenses............................................... 597 366 270
Interest expense............................................. 104 - 23
----- ----- -----
Total expenses............................................. 701 366 293
----- ----- -----
Net income............................................... $4,095 $4,493 $4,203
===== ===== =====
82
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------------------
2006 2005 2004
-------- ------ -------
OPERATING ACTIVITIES
Net income................................................... $ 4,095 $ 4,493 $ 4,203
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiary................. (4,411) (4,396) (3,973)
Dividends received from subsidiary........................... 4,009 6,500 -
Amortization, depreciation and other......................... 37 53 550
Loss on sale of investment securities........................ - 2 -
Decrease in other assets..................................... 969 2,490 65
(Decrease) increase in other liabilities..................... (1,219) 896 952
-------- ------- -------
Net cash provided by operating activities................ 3,480 10,038 1,797
------- ------- -------
INVESTING ACTIVITIES
Additional investment in subsidiaries........................ - - (45,000)
Principal repayments of investment securities
available for sale......................................... 779 1,073 1,026
Principal repayments of investment securities
held to maturity........................................... 288 340 229
Purchase of investment securities available for sale......... - - (5,897)
Purchase of investment securities held to maturity........... - - (2,022)
Proceeds from sale of investment securities
available for sale......................................... - 20 -
Principal collected on ESOP loan............................. 682 679 -
ESOP loan advanced to Bank................................... - - (5,629)
------- ------- --------
Net cash provided by (used in) investing activities...... 1,749 2,112 (57,293)
------- ------- -------
FINANCING ACTIVITIES`
Repayments of stock subscriptions payable.................... - - (38,322)
Purchase of treasury stock for RSP........................... - (765) (4,648)
Purchase of treasury stock................................... (2,699) (11,426) -
Proceeds from stock options exercised........................ 214 116 -
Net proceeds from issuance of common stock................... - - 61,597
Dividends paid............................................... (2,410) (2,177) (959)
Repayments of Bank loan for ESOP............................. - - (1,009)
------- ------- -------
Net cash (used in) provided by financing activities...... (4,895) (14,252) 16,659
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................................. 334 (2,102) (38,837)
Cash and cash (used in) equivalents at beginning of year........ 301 2,403 41,240
------- ------- -------
Cash and cash equivalents at end of year........................ $ 635 $ 301 $ 2,403
======= ======= =======
NOTE N - REGULATORY MATTERS
- ---------------------------
The Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the OTS. Failure to meet minimum
capital requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank and the consolidated financial statements. Under the
regulatory capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory guidelines. The Bank's
capital amounts and classifications under the prompt corrective action
guidelines are also subject to the qualitative judgments by the regulators about
components, risk weightings and other factors.
83
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of total
risk-based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined) and tangible
capital to adjusted total assets (as defined). Management believes that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2006, the Bank is considered well-capitalized under
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios, as set forth in the table below. There
are no conditions or events that management believes have changed the
institution's prompt corrective action category.
The following table presents a reconciliation of GAAP capital and
regulatory capital at the dates indicated for the Bank:
December 31,
-----------------
2006 2005
------- -------
GAAP capital ................................ $88,656 $86,368
Add: net unrealized losses on
investment securities .................. 850 1,268
Less: goodwill and other intangible assets... 631 818
------- -------
Tangible and core capital .............. 88,875 86,818
Add: general allowance for loan losses ...... 5,990 5,763
------- -------
Total regulatory capital ............... $94,865 $92,581
======= =======
The Bank's actual capital amounts and ratios are as follows (in
thousands, except percentages):
OTS Requirements
------------------------------------------------------------------
Regulatory for
Minimum classification as
Bank actual capital adequacy well capitalized
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2006:
Total risk-based capital
(to risk-weighted assets)............ $ 94,865 12.43% $ 61,074 8.00% $ 76,343 10.00%
Tier I capital
(to risk-weighted assets)............ 88,875 11.64% N/A N/A 45,806 6.00%
Tier I capital
(to adjusted total assets)........... 88,875 9.05% 39,275 4.00% 49,093 5.00%
Tangible capital
(to adjusted total assets)........... 88,875 9.05% 14,728 1.50% N/A N/A
As of December 31, 2005:
Total risk-based capital
(to risk-weighted assets)............ 92,581 12.84% 57,687 8.00% 72,108 10.00%
Tier I capital
(to risk-weighted assets)............ 86,818 12.04% N/A N/A 43,265 6.00%
Tier I capital
(to adjusted total assets)........... 86,818 8.96% 38,776 4.00% 48,470 5.00%
Tangible capital
(to adjusted total assets)........... 86,818 8.96% 14,541 1.50% N/A N/A
84
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
NOTE O - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------
Unaudited quarterly financial data is as follows (in thousands, except
share data):
Year ended December 31, 2006
-----------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Interest income......................... $ 13,276 $ 13,747 $ 13,957 $ 14,283
Interest expense........................ 6,899 7,486 8,298 8,845
----- ------- ------- -------
Net interest income before
provision for loan losses.......... 6,377 6,261 5,659 5,438
Provision for loan losses............... 416 252 200 101
------- ------- ------- -------
Net interest income after
provision for losses............... 5,961 6,009 5,459 5,337
Other income............................ 876 884 956 1,119
Other expenses.......................... 5,166 5,179 4,976 4,995
------- ------- ------- -------
Income before income tax expense..... 1,671 1,714 1,439 1,461
Income tax expense...................... 622 654 458 456
------- ------- ------- -------
Net income......................... $ 1,049 $ 1,060 $ 981 $ 1,005
======= ======= ======= =======
Basic earnings per share................ $ 0.10 $ 0.10 $ 0.09 $ 0.10
======= ======= ======= =======
Diluted earnings per share.............. $ 0.10 $ 0.10 $ 0.09 $ 0.09
======= ======= ======= =======
Year ended December 31, 2005
-----------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Interest income......................... $ 10,581 $ 11,509 $ 11,959 $ 12,712
Interest expense........................ 4,513 5,050 5,809 6,376
------- ------- ------- -------
Net interest income before
provision for loan losses.......... 6,068 6,459 6,150 6,336
Provision for loan losses............... 445 477 392 546
------- ------- ------- -------
Net interest income after
provision for losses............... 5,623 5,982 5,758 5,790
Other income............................ 899 811 954 916
Other expenses.......................... 4,703 5,016 5,036 4,925
------- ------- ------- -------
Income before income tax expense..... 1,819 1,777 1,676 1,781
Income tax expense...................... 699 672 568 621
------- ------- ------- -------
Net income......................... $ 1,120 $ 1,105 $ 1,108 $ 1,160
======= ======= ======= =======
Basic earnings per share................ $ 0.10 $ 0.10 $ 0.10 $ 0.11
======= ======= ======= =======
Diluted earnings per share.............. $ 0.10 $ 0.10 $ 0.10 $ 0.10
======= ======= ======= =======
85
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
Item 9. Changes In And Disagreements With Accountants On Accounting And
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
On February 21, 2006, the Audit Committee of the Company's Board of
Directors approved the dismissal of Grant Thornton LLP ("Grant Thornton") as the
Company's independent certifying accountant. The Audit Committee's decision was
ratified by the Board of Directors as a whole.
The reports of Grant Thornton on the consolidated financial statements
of the Company as of and for the fiscal years ended December 31, 2005 and 2004
did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's fiscal years ended December 31, 2005 and 2004, and
in connection with the audit of the Company's consolidated financial statements
for such periods, and for the period from January 1, 2006 to February 21, 2006,
there were no disagreements or reportable events between the Company and Grant
Thornton on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which, if not resolved to
the satisfaction of Grant Thornton, would have caused Grant Thornton to make
reference to such matter in connection with its audit reports on the Company's
consolidated financial statements.
Effective February 21, 2006, the Company engaged Crowe Chizek and
Company LLC as its new independent certifying accountant. During the two most
recent fiscal years and the subsequent interim period to the date hereof, the
Company did not consult with Crowe Chizek and Company LLC regarding either (i)
the application of accounting principles to a specified transaction, either
completed or proposed or (ii) the type of audit opinion that might be rendered
on the Company's financial statements.
Item 9A. Controls And Procedures
- --------------------------------
The Company's management is responsible for establishing and
maintaining effective disclosure controls and procedures, as defined under Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December
31, 2006, an evaluation was performed under the supervision and with the
participation of management, including the President and Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based on that evaluation,
management concluded that disclosure controls and procedures as of December 31,
2006 were effective in ensuring material 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.
Management's responsibilities related to establishing and maintaining
effective disclosure controls and procedures include maintaining effective
internal controls over financial reporting that are designed to produce reliable
financial statements in accordance with accounting principles generally accepted
in the United States. As disclosed in the Report on Management's Assessment of
Internal Control Over Financial Reporting included in this Form 10-K under Item
8 "Financial Statements and Supplementary Data," management assessed the
Corporation's system of internal control over financial reporting as of December
31, 2006, in relation to criteria for effective internal control over financial
reporting as described in "Internal Control - Integrated Framework," issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management believes that, as of December 31, 2006, its system
of internal control over financial reporting met those criteria and is
effective. Management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2006, has been audited by Crowe
Chizek and Company LLC, an independent registered public accounting firm, as
stated in their report included in this Form 10-K under Item 8.
86
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005, 2004
Additionally, there were no changes in the Corporation's internal
control over financial reporting that occurred during the quarter ended December
31, 2006 that have materially affected, or are reasonably likely to materially
affect, the Corporation's internal control over financial reporting. There have
been no significant changes in the Corporation's internal controls or in other
factors that could significantly affect internal controls subsequent to December
31, 2006.
Item 9B. Other Information
- --------------------------
None.
87
PART III
Item 10. Directors, Executive Officers and Corporate Governance
- ---------------------------------------------------------------
The information contained under the section captioned "Proposal I -
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders ("Proxy Statement") is incorporated herein by reference.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. The Company's Code of Ethics
will be provided without charge upon request to the Corporate Secretary, Synergy
Financial Group, Inc., 310 North Avenue East, Cranford, New Jersey 07016.
Item 11. Executive Compensation
- -------------------------------
The information contained under the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
The information contained under the section captioned "Security
Ownership of Certain Beneficial Owners" in the Proxy Statement is incorporated
by reference.
(b) Security Ownership of Management
The information contained under the section captioned "Proposal I -
Election of Directors" in the Proxy Statement is incorporated by reference.
(c) Changes in Control
Management of the Registrant knows no arrangements, including any
pledge by any person of securities of the Registrant, the operation of which may
at a subsequent date result in a change in control of the Registrant.
(d) Securities Authorized for Issuance under Equity Compensation Plans
Set forth below is information as of December 31, 2006 with respect to
compensation plans under which equity securities of the Registrant are
authorized for issuance.
88
Equity Compensation Plan Information
(A) (B) (C)
Number of Securities
Number of Securities Remaining Available for
to be Issued Upon Weighted-average Future Issuance Under
Exercise of Exercise Price of Equity Compensation
Outstanding Options, Outstanding Options, Plans (Excluding Securities
Warrants and Rights Warrants and Rights Reflected in Column (A))
------------------- ------------------- ------------------------
Equity compensation plans approved by shareholders:
2004 Stock Option Plan 696,385 $10.53 5,406
2003 Stock Option Plan 561,261 $ 6.37 -
2004 Restricted Stock Plan (1) N/A N/A 1,277
2003 Restricted Stock Plan (1) N/A N/A -
Equity compensation plans not
Approved by stockholders:
Not applicable. - - -
--------- ----- --------
Total 1,257,646 $ 8.67 6,683
========= ===== ========
- ------------------
(1) Restricted stock awards of 270,336 shares were outstanding as of December
31, 2006, including awards from both the 2003 and 2004 restricted stock
plans. Such awards are earned at the rate of 20% one year after the date of
the grant and 20% annually thereafter.
Item 13. Certain Relationships and Related Transactions, and Director
- --------------------------------------------------------------------------------
Independence
------------
The information contained under the section captioned "Certain
Relationships and Related Transactions and Director Independence" in the Proxy
Statement is incorporated by reference.
Item 14. Principal Accountant Fees and Services
- -----------------------------------------------
The information contained under the section captioned "Principal
Accounting Fees and Services" in the Proxy Statement is incorporated by
reference.
89
PART IV
Item 15. Exhibits and Financial Statement Schedules
- ---------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part of
this report.
1. The consolidated statements of financial condition as of December 31,
2006 and 2005 and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the three years
ended December 31, 2006, together with the related notes and the
reports of independent certified public accountants.
2. There are no financial statement schedules required to be filed.
3. The following exhibits are included in this Report or incorporated
herein by reference:
(a) List of Exhibits:
3 (i) Certificate of Incorporation of Synergy Financial Group, Inc. (1)
3 (ii) Bylaws of Synergy Financial Group, Inc. (1)
4 Specimen Stock Certificate of Synergy Financial Group, Inc. (1)
10.1 Employment Agreement between Synergy Financial Group, Inc. and John S. Fiore(2)
10.2 Employment Agreement between Synergy Bank and John S. Fiore(2)
10.3 Supplemental Executive Retirement Income Agreement for John S. Fiore (3)
10.4 Synergy Bank Supplemental Executive Retirement Plan for the Benefit of
Senior Officers(2)
10.5 Synergy Financial Group, Inc. 2003 Restricted Stock Plan (4)
10.6 Synergy Financial Group, Inc. 2003 Stock Option Plan (4)
10.7 Change in Control Severance Agreement between Synergy Bank and
Kevin M. McCloskey (5)
10.8 Change in Control Severance Agreement between Synergy Bank and
Kevin A. Wenthen (5)
10.9 Change in Control Severance Agreement between Synergy Bank and
A. Richard Abrahamian (5)
10.10 Directors Change in Control Plan (1)
10.11 Synergy Financial Group, Inc. 2004 Restricted Stock Plan (6)
10.12 Synergy Financial Group, Inc. 2004 Stock Option Plan (6)
10.13 Synergy Financial Group, Inc. Retirement Benefits Equalization Plan(2)
21 Subsidiaries of the Company
23.1 Consent of Crowe Chizek and Company LLC
23.2 Consent of Grant Thornton LLP
31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No.
333-108884; filed with the SEC on September 17, 2003).
(2) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 2005 (File No. 00050467; filed with the SEC on February 27, 2006).
(3) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 2004 (File No. 00050467; filed with the SEC on March 16, 2005).
(4) Incorporated by reference to the Definitive Proxy Statement of Synergy Financial Group,
Inc. for the 2003 Annual Meeting of Stockholders (File No.
00049980; filed with the SEC on March 18, 2003).
(5) Incorporated by reference to the Company's Form 8-K dated
July 28, 2005 (File No. 00050467; filed with the SEC on
July 28, 2005).
90
(6) Incorporated by reference to the Definitive Proxy
Statement of Synergy Financial Group, Inc. for the 2004
Annual Meeting of Stockholders (File No. 00050467; filed
with the SEC on July 19, 2004).
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of
March 13, 2007.
SYNERGY FINANCIAL GROUP, INC.
By: /s/ John S. Fiore
-------------------------------------
John S. Fiore
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated as of March 13, 2007.
/s/ David H. Gibbons, Jr. /s/ John S. Fiore
- ----------------------------------------------------- -----------------------------------------------------
David H. Gibbons, Jr. John S. Fiore
Chairman and Director President and Chief Executive Officer
(Principal Executive Officer)
/s/ A. Richard Abrahamian /s/ Nancy A. Davis
- ----------------------------------------------------- -----------------------------------------------------
A. Richard Abrahamian Nancy A. Davis
Senior Vice President and Chief Financial Officer Director
(Principal Financial and Accounting Officer)
/s/ Daniel M. Eliades /s/ Kenneth S. Kasper
- ----------------------------------------------------- -----------------------------------------------------
Daniel M. Eliades Kenneth S. Kasper
Director Director
/s/ Paul T. LaCorte /s/ George Putvinski
- ----------------------------------------------------- -----------------------------------------------------
Paul T. LaCorte George Putvinski
Director Director
/s/ Daniel P. Spiegel /s/ Albert N. Stender
- ----------------------------------------------------- -----------------------------------------------------
Daniel P. Spiegel Albert N. Stender
Director Director
92