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, 2003
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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
SYNERGY FINANCIAL GROUP, INC.
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(Name of Small Business 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 under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.10 per share
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Title of Class)
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
--- ---
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 an accelerated filer
(as defined in Rule 12b-2 of the 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 $24.2 million.
As of March 26, 2004, there were 12,452,098 outstanding shares of the
Registrant's common stock.
TABLE OF CONTENTS
Page
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Part I
Item 1. Business............................................................................1
Item 2. Description of Property............................................................31
Item 3. Legal Proceedings..................................................................33
Item 4. Submission of Matters to a Vote of Security Holders................................33
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............34
Item 6. Selected Financial Data............................................................35
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................47
Item 8. Financial Statements and Supplementary Data........................................50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................85
Item 9A. Controls and Procedures............................................................85
Part III
Item 10. Directors and Executive Officers of the Registrant.................................85
Item 11. Executive Compensation.............................................................88
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................94
Item 13. Certain Relationships and Related Transactions.....................................96
Item 14. Principal Accounting Fees and Services.............................................96
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................97
-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.
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
1
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 and
the shares formerly held by Synergy, MHC were cancelled. 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 5,416,180 shares of
Synergy Financial Group, Inc., with a resulting total of 12,452,098 shares
outstanding.
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 and non-residential loans, and consumer loan products,
including automobile and personal loans.
We attract deposits from the general public and borrow money from the
Federal Home Loan Bank of New York (the "FHLB") and 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.
Market Area
Our main office is located in Cranford, New Jersey, and our branches
are located in Middlesex, Monmouth, Morris and Union counties, New Jersey. Our
primary market area is Essex, Middlesex, Monmouth, Morris, 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.
2
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 mutual funds, short-term money funds and corporate
and government securities.
Lending Activities
General. We primarily originate real estate loans, including one- to
four-family first mortgage loans, home equity loans, multi-family and
non-residential mortgages, as well as consumer loans, comprised mostly of direct
automobile loans for both new and used vehicles. The loan portfolio is
predominately comprised of one- to four-family residential real estate loans,
most of which have fixed rates of interest.
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 of
non-residential and multi-family mortgage loans totaled $36.4 million and $31.1
million during the years ended December 31, 2003 and 2002, 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,
------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------ ------------------ ----------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------ ------ -------
(Dollars in thousands)
Type of Loans:
- --------------
Mortgage loans:
One- to Four-Family
Residential(1)........ $226,085 51.66% $202,325 62.92% $148,826 65.81% $127,004 66.69% $116,727 70.95%
Non-Residential and
Multi-Family.......... 90,665 20.71 48,386 15.05 19,044 8.43 2,072 1.08 - -
Automobile................ 109,277 24.97 63,796 19.83 52,206 23.08 45,812 24.06 30,171 18.34
Commercial................ 7,838 1.79 2,472 0.77 - - - - - -
Credit Card............... 71 0.02 136 0.04 30 0.01 6,969 3.66 7,260 4.41
Other Consumer(2)......... 3,745 0.86 4,454 1.39 6,033 2.67 8,594 4.51 10,363 6.30
-------- ------ -------- ------ -------- ------ -------- ------- -------- ------
Total loans.......... 437,681 100.00% 321,569 100.00% 226,139 100.00% 190,451 100.00% 164,521 100.00%
====== ====== ====== ====== ======
Deferred loan
fees and costs........ 178 85 (78) (177) (353)
Less:
Allowance for
loan losses........... (3,274) (2,231) (1,372) (1,176) (995)
-------- -------- -------- -------- --------
Total loans, net..... $434,585 $319,423 $224,689 $189,098 $163,173
======== ======== ======== ======== ========
- ----------------
(1) This category includes home equity loans.
(2) This category consists of personal loans (unsecured) and savings secured
loans.
4
Loan Maturity Schedule. The following table sets forth the maturity
or repricing of the loan portfolio at December 31, 2003. Demand loans, loans
having no stated maturity and overdrafts are shown as due in one year or less.
One- to Non-Residential
Four-Family and Credit Other
Residential(1) Multi-Family Automobile Commercial Card Consumer(2) Total
------------- ------------ ---------- ---------- ------ ----------- -----
(In thousands)
Amounts Due:
Within 1 Year................. $ 1,815 $ 1,849 $ 2,046 $1,306 $ 71 $ 371 $ 7,458
After 1 year:
1 to 3 years................ 1,223 1,798 20,902 1,592 - 1,556 27,070
3 to 5 years................ 10,316 1,422 72,935 272 - 1,818 86,763
5 to 10 years............... 29,121 11,299 13,394 1,378 - - 55,169
10 to 15 years.............. 110,287 25,684 - - - - 135,994
Over 15 years............... 73,323 48,613 - 3,290 - - 125,226
-------- ------- -------- ------ ------ ------- --------
Total due after one year. 224,270 88,816 107,231 6,531 - 3,374 430,222
-------- ------- -------- ------ ------ ------- --------
Total amount due......... $226,085 $90,665 $109,277 $7,838 $ 71 $ 3,745 $437,681
======== ======= ======== ====== ====== ======= ========
- ----------------
(1) This category includes home equity loans.
(2) This category consists of personal loans (unsecured) and savings secured
loans.
The following table sets forth the dollar amount of all loans at
December 31, 2003 that are due after December 31, 2004 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).............. $199,764 $24,506 $224,270
Non-Residential and Multi-
Family...................... 17,737 71,079 88,816
Automobile........................ 107,231 - 107,231
Commercial........................ 6,531 - 6,531
Other Consumer(2)................. 3,374 - 3,374
-------- ------- --------
Total........................ $334,637 $95,585 $430,222
======== ======= ========
- ----------------
(1) This category includes home equity loans.
(2) This category consists of personal loans (unsecured) and savings secured
loans.
Residential Lending. One of our primary lending activities is the
origination of one- to four- family mortgage loans. 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.
5
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, we
occasionally sell qualifying one- to four-family residential mortgages in the
secondary market to FHLMC without recourse and with servicing retained. During
the year ended December 31, 2003, we sold $2.3 million of residential mortgages,
all of which were 30 year fixed-rate loans. We may continue to sell loans in the
future when doing so will assist in portfolio diversification and mitigating
interest rate risk.
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, 2003, home equity loans totaled $96.3 million, or 22.0% 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 title insurance policy.
Non-Residential and Multi-Family Mortgage Loans. In 2000, we began to
originate non- residential mortgage loans, including loans on retail/service
space, and other income-producing properties. Our non-residential loan portfolio
also includes multi-family (five or more units) mortgage loans. We require no
less than a 25% down payment or equity position for non-residential and
multi-family mortgage loans. Typically, these loans are made with variable rates
of interest with terms of up to twenty years. Essentially all of these mortgage
loans are on properties located within New Jersey. We occasionally sell
participation interests in non-residential and multi-family mortgage loans
originated by us that would otherwise exceed our loans-to-one-borrower limit. At
December 31, 2003, the average balance of a multi- family and non-residential
mortgage loan was $424,641 and $619,698, respectively.
Non-residential and multi-family 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, non-residential and multi- family real estate lending generally
requires substantially greater evaluation and oversight efforts compared to one-
to four-family residential real estate lending.
6
Consumer Loans. At December 31, 2003, consumer loans amounted to
$113.1 million, or 25.85% of the total loan portfolio. The vast majority of
these are automobile loans. At December 31, 2003, automobile loans totaled
$109.3 million.
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 more than two hundred
participating banks. Once we receive a qualification form, we check the
borrower's credit score via an automated computer system. If the credit score is
consistent with our criteria, 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. We pay a fee to the referral company for each
qualification form we receive (even if that borrower does not accept our loan
offer) and for each loan that is originated. Currently, an average of $6.8
million, or 92.0% of our monthly automobile loan originations are generated from
this referral source. We intend to continue to originate and purchase automobile
loans at a level necessary to maintain the non-mortgage loan portfolio at
approximately one-fourth of our total loans. We will generally lend up to 100%
of the purchase price of a new or used vehicle.
Consumer loans also consist of personal loans (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.
7
Commercial Loans. At December 31, 2003, the commercial loan portfolio
had grown to $7.8 million, representing 1.79% of the total loan portfolio at
that date. The increase is primarily the result of commercial loans acquired in
connection with our acquisition of First Bank of Central Jersey ("FBCJ").
Additionally, during the fourth quarter of 2003, we participated in a $1.1
million secured commercial loan without recourse with a financial institution
that also operates in the state of New Jersey. The loan is guaranteed by the
borrower, a luxury limousine company that is expanding its business, and is
securitized by vehicles used in the business. Furthermore, in November 2003, we
purchased a one-third interest or $400,000 of a fixed-rate secured commercial
loan participation with a seven year maturity. This loan is secured by
non-residential occupancy leases and equipment.
In addition to these loans, we originated two commercial loans
totaling approximately $1.0 million during the year ended December 31, 2003. The
first loan carried a variable rate indexed to the prime rate of interest with a
term of 5 years and was secured by non-residential real estate. The second was a
fixed-rate loan with a ten year term, and was secured by an assignment of
non-residential occupancy leases.
Subsequent to December 31, 2003, 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, while secured are offered up
to $1.0 million. The term for the unsecured line is no more than five years with
annual renewal, while fixed term loans are offered for terms of up to ten 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 whose value
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. In
addition, 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, 2003, our loans to one borrower limit
was $6.5 million, and we had 48 borrowers with loan balances in excess of $1.0
million. Subsequent to December 31, 2003, we completed a second-step stock
conversion on January 20, 2004, raising approximately $69.2 million in equity
capital, which increased our loans to one borrower limit to $13.2 million.
At December 31, 2003, our largest single borrower had an aggregate
balance of $6.7 million, representing various real estate mortgage loans
collateralized primarily by multi-family residential properties. Consequently,
the Bank briefly exceeded its loan to one borrower limit in connection with this
lending relationship, however, as a result of the new equity capital raised in
the recent stock conversion, the limit increased substantially and the Bank is
now in compliance with the limit. At December 31, 2003, our second largest
single borrower had an aggregate balance of $5.7 million, representing a
mortgage loan and a commercial line of credit, secured by a multi-family and a
mixed use property, respectively, along
8
with a construction loan for a professional office building. At December 31,
2003, our third largest borrower had an aggregate balance of $5.0 million,
representing our interest in a participation loan secured by a hotel property.
At December 31, 2003, 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 loan
referral web site.
9
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended December 31,
---------------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Loan originations and purchases:
Loan originations:
One- to Four-Family Residential............... $116,284 $110,578 $ 60,490
Non-Residential and Multi-Family.............. 36,392 31,116 19,893
Automobile.................................... 89,051 31,820 27,333
Commercial.................................... 920 2,472 -
Credit Card................................... - - -
Other......................................... 11,964 13,026 6,772
-------- -------- --------
Total loan originations........................... 254,611 189,012 114,488
Loans purchased through acquisition of FBCJ: 21,880 - -
Loan purchases:
One- to Four-Family Residential............... - - -
Non-Residential and Multi-Family.............. 5,000 - -
Automobile.................................... - 13,717 2,981
Commercial.................................... 1,486 - -
Credit Card................................... - - -
Other......................................... - - -
-------- -------- --------
Total loan purchases.............................. 28,366 13,717 2,981
Sales and loan principal repayments:
Loans sold:
One- to Four-Family Residential............... 2,307 4,852 9,336
Non-Residential and Multi-Family.............. - 500 1,000
Automobile.................................... - - -
Commercial.................................... - - -
Credit Card................................... - - 6,158
Other......................................... - - -
-------- -------- --------
Total loans sold.................................. 2,307 5,352 16,494
Loan principal repayments......................... 165,074 101,947 65,287
-------- ------- -------
Total loans sold and principal repayments..... 167,381 107,299 81,781
Decrease due to other items........................... 434 696 97
-------- -------- --------
Net increase in loan portfolio........................ $115,162 $ 94,734 $ 35,591
======== ======== ========
10
The sale of mortgage loans is part of management's strategy to
diversify the loan portfolio and mitigate interest rate risk. Approximately $2.3
million of the loan sales during 2003 consisted of residential mortgages, all of
which were 30 year fixed-rate loans. As of December 31, 2003, we serviced $5.9
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 continue to 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 0.25% of the loan balance. At December
31, 2003, loans serviced for the benefit of other lenders totaled approximately
$2.1 million.
We occasionally purchase loans through other financial institutions'
participation programs. During the year ended December 31, 2003, we purchased an
aggregate of $6.5 million of loans. This included a $5.0 million, or 20%,
interest in a loan participation secured by a hotel property that is not in our
defined market during December 2003 and a $400,000, or 33.3%, interest in a
participation secured by fit-up leases and equipment in November 2003. Both of
these participations were purchased without recourse.
Additionally, we purchased a $1.1 million or 90% interest in a
commercial loan participation secured by a fleet of luxury automobile limousines
during December 2003. The participation was without recourse. This participation
was similar in nature to a $2.5 million, or 90% interest, in a commercial loan
secured by a fleet of luxury automobile limousines with the same borrower that
was purchased in 2002. This participation was without recourse and had a
remaining balance of $1.5 million at December 31, 2003.
As of December 31, 2003, we also had participations in three indirect
automobile loan pools (each a 90% participation interest) with a local financial
institution. Two of the three indirect automobile loan pools were purchased with
full recourse, and at December 31, 2003 had a remaining balance of $1.6 million.
The third automobile loan pool was purchased without recourse, and at December
31, 2003 had a remaining balance of $39,270. The seller retained the servicing
of each of these three automobile loan participations. We do not, however, pay a
servicing fee on these loans.
In addition, at December 31, 2003, we had two participations of
$965,000 and $588,000, both of which were non-residential mortgage loans secured
by real estate in our market area. They were purchased without recourse. We pay
a servicing fee of 0.25% of the loan balance for both participations.
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,
2003 was approximately $45.5 million, excluding commitments on unused lines of
credit of $22.7 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
11
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
ten 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 ninety days delinquent, it is 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, 2003, we did not hold any real estate owned.
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.
12
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,
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
One- to Four-Family Residential(1)............ $ - $ - $ - $ 57 $ 58
Non-Residential and Multi-Family.............. - - - - -
Automobile.................................... 298 374 32 19 55
Commercial.................................... 33 - - - -
Credit Card................................... 2 5 22 32 67
Other Consumer(2)............................. 16 70 17 79 112
----- ----- ----- ----- -----
Total...................................... $ 348 $ 449 $ 71 $ 187 $ 292
===== ===== ===== ===== =====
Accruing loans which are contractually past
due 90 days or more:
Residential mortgages......................... $ - $ - $ - $ - $ -
Non-Residential mortgages..................... - - - - -
Automobile.................................... - - - - -
Credit Card................................... - - - - -
Other Consumer(2)............................. - - - - -
----- ----- ----- ----- -----
Total...................................... $ - $ - $ - $ - $ -
===== ===== ===== ===== =====
Total non-performing loans................. $ 348 $ 449 $ 71 $ 187 $ 292
===== ===== ===== ===== =====
Other non-performing assets..................... $ - $ - $ - $ - $ -
===== ===== ===== ===== =====
Total non-performing assets................ $ 348 $ 449 $ 71 $ 187 $ 292
===== ===== ===== ===== =====
Total non-performing loans to net loans.... 0.08% 0.14% 0.03% 0.10% 0.18%
===== ===== ===== ===== =====
Total non-performing loans to total assets. 0.06% 0.10% 0.02% 0.08% 0.13%
===== ===== ===== ===== =====
Total non-performing assets to total assets 0.06% 0.10% 0.02% 0.08% 0.13%
===== ===== ===== ===== =====
- -------------------------
(1) This category includes home equity loans.
(2) This category consists of personal loans (unsecured) and savings secured
loans.
13
For the year ended December 31, 2003, 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 $7,000. 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,
2003.
At December 31, 2003, there were no loans for which management had
serious doubts as to the ability of such 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 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 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 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 is reviewed by the Asset
Liability Committee on a regular basis and by the regulatory agencies as part of
their examination process. At December 31, 2003, classified loans totaled
$511,000. This amount included $232,000 of loans classified as "substandard."
Management has deemed $36,000 of the loans classified as substandard as
non-performing assets. At December 31, 2003, we had $280,000 of loans classified
as "doubtful," all of which amount is included under non-performing assets, as
shown in the table above. At December 31, 2003, 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.
14
Our estimation of known and inherent loan losses in the loan portfolio
includes a separate review of all loans on which the collectibility of principal
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
mortgages and other non-residential mortgage loans, are also generally evaluated
for impairment individually. We also segregate loans by loan category and
evaluate homogenous loans as a group.
Although there may be other factors that also warrant consideration in
estimating the amount of known and inherent loan 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 loan 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;
o changes in loan concentrations by loan category;
o current estimated collateral values;
o peer group information;
o analysis of credit quality conducted in bank regulatory examinations;
and
o economic and market trends impacting our lending area.
In the recent year, our charge-offs were higher than past experience.
This is the direct result of the indirect automobile loans associated with our
acquisition of FBCJ.
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.
15
The following table sets forth information with respect to our
allowance for loan and lease losses at the dates indicated.
For the Year Ended
December 31,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance balance (at beginning of year)........... $ 2,231 $ 1,372 $ 1,176 $ 995 $ 1,148
-------- -------- -------- -------- --------
Charge-offs:
One- to Four Family Residential(1)............... - - - - 35
Non-Residential and Multi-Family................. - - - - -
Automobile....................................... 1,146 280 61 101 27
Credit Card...................................... 11 26 108 127 135
Other Consumer(2)................................ 179 128 248 267 329
-------- -------- -------- -------- --------
Total......................................... 1,336 434 417 495 526
Recoveries:
One- to Four-Family Residential.................. - 3 2 1 5
Non-Residential and Multi-Family................. - - - - -
Automobile....................................... 292 42 39 26 36
Credit Card...................................... 25 27 49 25 25
Other Consumer(2)................................ 124 144 160 144 182
-------- -------- -------- -------- --------
Total......................................... 441 216 250 196 248
-------- -------- -------- -------- --------
Net charge-offs.................................... (895) (218) (167) (299) (278)
Acquisition of FBCJ................................ 823 - - - -
Provision for loan losses.......................... 1,115 1,077 363 480 125
-------- -------- -------- -------- --------
Allowance balance (at end of year)................. $ 3,274 $ 2,231 $ 1,372 $ 1,176 $ 995
======== ======== ======== ======== ========
Total gross loans outstanding (at end of year) $437,681 $321,569 $226,139 $190,451 $164,521
======== ======== ======== ======== ========
Allowance for loan and lease losses as a percent of
total loans outstanding............................. 0.75% 0.69% 0.61% 0.62% 0.60%
==== ==== ==== ==== ====
Net loans charged off as a percent of average
loans outstanding during the year................ 0.21% 0.07% 0.08% 0.17% 0.19%
==== ==== ==== ==== ====
- ------------------------
(1) This category includes home equity loans.
(2) This category consists of personal loans (unsecured) and savings secured
loans.
16
Allocation of Allowance for Loan and Lease Losses. The following table
sets forth the allocation of our allowance for loan and lease 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,
----------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------- ----------------- ---------------- ------------------ ----------------
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)............ $ 921 59.60% $ 517 68.54% $ 813 68.15% $ 409 67.65% $312 70.95%
Non-Residential and
Multi-Family.............. 531 12.77 256 9.43 105 6.09 8 0.12 - -
Automobile................... 1,472 25.00 1,113 19.83 319 23.08 158 24.06 86 18.34
Commercial................... 73 1.81 9 0.77 - - - - - -
Credit Card.................. 2 0.02 - 0.04 - 0.01 268 3.66 216 4.41
Other Consumer(1)............ 275 0.81 336 1.39 135 2.67 333 4.51 381 6.30
------ ------ ------ ------ ------ ------ ------ ------ ---- ------
Total allowance........... $3,274 100.00% $2,231 100.00% $1,372 100.00% $1,176 100.00% $995 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ==== ======
- ----------------
(1) This category includes home equity loans.
(2) This category consists of personal loans (unsecured) and savings secured
loans.
17
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.
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 a decrease 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.
18
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, 2003, all of our
mortgage-backed securities were issued by either U.S. government agencies or
government-sponsored enterprises.
Mortgage-backed securities are typically issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a specific range and have varying
maturities. 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) as well as
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
"GinnieMae"), Federal Home Loan Mortgage Association ("FHLMA" or "FreddieMac")
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, 2003, we held equity
investments with a fair market value of $965,000, primarily consisting of an
interest in the Community Reinvestment Act Qualified Investment Fund and a
$10,000 State of Israel bond associated with the acquisition of FBCJ. We also
held an approximate investment of $3.6 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.
19
Furthermore, we owned shares of two financial institutions totaling
approximately $20,000 in market value at December 31, 2003.
The following table sets forth the carrying value of our investment
securities portfolio at the dates indicated.
At December 31,
-------------------------------
2003 2002 2001
-------------- -------------- ---------
(In thousands)
Investment Securities Available-for-Sale:
U.S. Government Obligations................ $ 3,467 $ - $ -
Mortgage-Backed Securities:
FHLMC(1)........................... 64,098 21,407 24,595
FNMA .......................... 55,249 40,886 19,299
GNMA .......................... - - -
Equity Securities......................... 965 10 -
-------- ------- -------
Total Available-for-Sale.............. 123,779 62,303 43,894
Investment Securities Held-to-Maturity:
Other Debt Securities..................... $ 10 $ - $ -
U.S. Government Obligations............... - - -
Mortgage-Backed Securities:
FHLMC(2)........................... 5,623 3,249 -
FNMA .......................... 20,285 11,395 2,458
GNMA .......................... 7,296 2,763 4,695
-------- ------- -------
Total Held-to-Maturity.................... 33,214 17,407 7,153
-------- ------- -------
Total............................... $156,993 $79,710 $51,047
======== ====== =======
- ---------------
(1) At December 31, 2003, includes $69,000 of agency-issued collateralized
mortgage obligations.
(2) At December 31, 2003, includes $7.8 million of agency-issued collateralized
mortgage obligations.
20
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, 2003
-------------------------------------------------------------------------------------------------------
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 $1,023 1.89% $ 2,444 2.91% $ - -% $ - -% $3,467 2.61% $ 3,467
Mortgage-Backed Securities:
FHLMC................... - - 32,760 3.43 2,175 3.79 29,164 3.29 64,098 3.38 64,098
FNMA.................... - - 1,158 4.38 5,873 4.14 48,217 3.17 55,249 3.30 55,249
GNMA.................... - - - - - - - - - - -
Equity Securities.......... - - - - - - 965 - 965 - 965
------ ------ ------- ------- ------- ------ ------- ------- -------- ----- --------
Total
Available-for-Sale. 1,023 36,362 8,048 78,346 123,779 123,779
Investment Securities
Held-to-Maturity:
Mortgage-Backed Securities:
FHLMC................... - - 1,301 2.91 1,911 3.08 2,411 4.14 5,623 3.74 5,559
FNMA.................... - - - - 10,058 3.86 10,227 3.99 20,285 3.92 20,256
GNMA.................... - - - - 305 5.99 6,991 4.08 7,296 4.16 7,391
Other Debt Securities...... - - 10 2.25 - - - - 10 2.25 10
------ ------ ------- ------- ------- ------ ------- ------- ------- ------ --------
Total
Held-to-Maturity... - 1,311 12,274 19,629 33,214 33,216
------ ------- ------- ------- -------- --------
Total........................ $1,023 $37,673 $20,322 $97,975 $156,993 $156,995
====== ======= ======= ======= ======== ========
21
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 periodically used to supplement
the amount of funds for lending and investment.
Deposits. Our current deposit products include checking, savings, money
market, club accounts, certificate of deposit accounts 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, radio, direct mail and inserts included with customer statements.
We do not utilize the services of deposit brokers. Premiums or incentives for
opening accounts are generally not offered. Periodically, we select a particular
certificate of deposit term for promotion.
We pay interest rates on certificates of deposits 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.
A large percentage of our deposits are in certificates of deposit
(45.7%, or $216.4 million, at December 31, 2003 as compared to 57.1%, or $220.3
million, at December 31, 2002). 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.
22
The following tables set forth the distribution of the average deposits
in Synergy Bank 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,
--------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------- -------------------------------- -----------------------------
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)
Money market accounts........... $ 81,852 18.62% 1.46% $ 44,966 14.78% 1.74% $ 36,325 16.51% 2.86%
Savings and club accounts....... 71,959 16.37 0.70 62,310 20.47 1.23 53,527 24.33 1.82
Certificates of deposit and
other time deposit accounts... 236,749 53.85 3.03 160,305 52.68 3.60 101,594 46.18 5.37
Non-interest-bearing
checking accounts(1).......... 49,052 11.16 0.12 36,743 12.07 - 28,561 12.98 -
-------- ------- ----- --------- ------ ----- -------- ------ -----
Total deposits.............. $439,612 100.00% 2.03% $304,324 100.00% 2.40% $220,007 100.00% 3.39%
======== ====== ===== ======= ====== ===== ======== ====== =====
- ------------------
(1) On March 28, 2003, Synergy Bank converted interest-earning checking
accounts acquired from FBCJ into non-interest-bearing checking accounts.
23
The following table sets forth the time deposits in Synergy Bank
classified by interest rate as of the dates indicated.
At December 31,
-----------------------------------------------
2003 2002 2001
-------------- ------------ -------------
(In thousands)
Interest Rate
- -------------
Less than 2%........... $ 58,441 $ 177 $ -
2.00-2.99%............. 99,368 52,621 11,816
3.00-3.99%............. 46,439 120,057 26,303
4.00-4.99%............. 9,516 22,787 51,783
5.00-5.99%............. 2,134 5,907 25,626
6.00-6.99%............. 488 672 5,414
7.00-7.99%............. - 99 96
-------- -------- --------
Total................ $216,386 $202,320 $121,038
======== ======== ========
The following table sets forth the amount and maturities of time
deposits at December 31, 2003.
After
December 31, December 31, December 31, December 31, December 31,
Interest Rate 2004 2005 2006 2007 2007 Total
- ------------- ---- ---- ---- ---- ---- -----
(In thousands)
Less than 2%...... $50,898 $ 7,543 $ - $ - $ - $ 58,441
2.00-2.99%........ 38,671 51,343 9,292 - 62 99,368
3.00-3.99%........ 30,424 7,400 3,172 547 4,896 46,439
4.00-4.99%........ 5,028 2,338 282 1,645 223 9,516
5.00-5.99%........ 979 310 661 162 22 2,134
6.00-6.99%........ 171 213 104 - - 488
7.00-7.99%........ - - - - - -
------- -------- ------- ------ ------ --------
Total........... $12,171 $126,171 $13,511 $2,354 $5,203 $216,386
======= ======== ======= ====== ====== ========
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, 2003.
Certificates
Remaining Time Until Maturity of Deposits
- ----------------------------- -----------
(In thousands)
Within three months................... $ 6,008
Three through six months.............. 5,532
Six through twelve months............. 10,326
Over twelve months.................... 18,649
-------
$40,515
=======
24
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 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, 2003, our borrowing limit
with the FHLB was $156.2 million, consisting of an overnight line of credit of
$26.0 million, an adjustable rate line of credit of $26.0 million and a regular
advance limit of $104.2 million.
Short-term FHLB advances generally have maturities of less than one
year. The details of these advances are presented below:
At or For the
Year Ended December 31,
---------------------------------
2003 2002 2001
------------ -------------- ---------
(Dollars in thousands)
FHLB Advances:
Average balance outstanding............ $35,413 $ 7,053 $ -
Maximum amount outstanding
at any month-end during the period... $69,300 $19,225 $ -
Balance outstanding at period end...... $38,229 $ 2,500 $ -
Weighted average interest rate during
the period.......................... 1.21% 1.98% -%
Weighted average interest rate at
period end.......................... 1.17% 1.35% -%
At December 31, 2003, long-term FHLB advances totaled $34.6 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 3.91%. We did not have any unused overnight lines of credit at
the FHLB at December 31, 2003.
As of December 31, 2003, long-term advances mature as follows:
(Dollars in thousands)
2004............................. $ 8,904
2005............................. 2,740
2006............................. 7,000
2007............................. 7,000
2008............................. 9,000
Thereafter....................... -
-------
Total..................... $34,644
=======
25
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, 2003, Synergy Financial Services, Inc. had
total assets of $85,000. For the year ended December 31, 2003, it had commission
income of $108,000, however, it reported a net operating loss of approximately
$96,000.
In November 2002, the Bank incorporated a wholly-owned subsidiary,
Synergy Capital Investments, Inc., under New Jersey law, as an investment
company. Its primary purpose is to hold investment securities. At December 31,
2003, Synergy Capital Investments, Inc. had total assets of $158.1 million.
Personnel
As of December 31, 2003, the Company had 113 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 Synergy Bank.
This regulation is intended primarily for the protection of the depositors and
not for the benefit of stockholders of Synergy Financial Group, Inc.
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.
26
Activities Restrictions. As a savings and loan holding company formed
after May 4, 1999, Synergy Financial Group, Inc. is not a grandfathered unitary
savings and loan holding company under the Gramm-Leach-Bliley Act (the "GLB
Act"). As a result, Synergy Financial Group, Inc. 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 Synergy Financial Group, Inc. 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 Synergy 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. Synergy Financial Group, Inc. 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 Synergy Financial Group, Inc. to
acquire control of a savings institution, the OTS would consider the financial
and managerial resources and future prospects of Synergy Financial Group, Inc.
and the target institution, the effect of the acquisition on the risk to the
insurance funds, the convenience and the needs of the community and competitive
factors.
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings bank, the Bank
is subject to extensive regulation by the OTS and the 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 and lease losses. The activities of federal savings banks are
subject to extensive regulation 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.
Insurance of Deposit Accounts. The FDIC administers two separate
deposit insurance funds. Generally, the Bank Insurance Fund ("BIF") insures the
deposits of commercial banks and the Savings
27
Association Insurance Fund ("SAIF") insures the deposits of savings
institutions. The FDIC is authorized to increase deposit insurance premiums if
it determines such increases are appropriate to maintain the reserves of either
the BIF or SAIF or to fund the administration of the FDIC. In addition, the FDIC
is authorized to levy emergency special assessments on BIF and SAIF members. The
assessment rate for most savings institutions, including the Bank, is currently
0%.
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. 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 recent examination) of total adjusted assets, and (3) risk-based capital
equal to 8% of total risk-weighted assets. At December 31, 2003 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 and
lease losses not designated for specific loan losses and up to 45% of unrealized
gains on equity securities. The portion of the allowance for loan and lease
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
28
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
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.
29
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, 2003 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 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.
30
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 in an amount equal to the greater of 1% of its aggregate unpaid residential
mortgage loans, including mortgage pass-through certificates secured by
residential properties (excluding CMOs and REMICs), home purchase contracts or
similar obligations at the beginning of each year or 5% of its FHLB advances. We
are in compliance with this requirement. The FHLB imposes various limitations on
advances such as limiting the amount of certain types of real estate related
collateral to 30% of a member's capital and limiting total advances to a member.
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 2. Description of Property
Our main office is located at 310 North Avenue East, Cranford, New
Jersey. At December 31, 2003, we had eighteen locations, including our main
office. All of our branch offices are located in Middlesex, Monmouth, Morris and
Union counties, New Jersey. All data-processing is performed internally.
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, 2003 at each office.
Month and Leased Net Book Value Deposits
Year Facility or at at
Office Location Opened Owned December 31, 2003 December 31, 2003
- --------------- ------ ----- ----------------- -----------------
Main Office
310 North Avenue East October 1991 Owned $1,679,286 $148,580,391(1)
Cranford, New Jersey
Branch Offices:
2000 Galloping Hill Road March 1989 Leased(2) - $ 26,458,949
Building K-6
Kenilworth, New Jersey
31
Month and Net Book Value Deposits
Year Facility Leased or at at
Office Locations Opened Owned December 31, 2003 December 31, 2003
- ---------------- ------------- --------- ----------------- -----------------
2000 Galloping Hill Road March 1978 Leased(2) - $ 9,537,025
Building K-2
Kenilworth, New Jersey
1011 Morris Avenue May 1952 Leased(2) - $13,210,224
Union, New Jersey
One Giralda Farms April 1983 Leased(2) - $4,297,150
Madison, New Jersey
1095 Morris Avenue May 1993 Leased(2) - $5,250,547
Union, New Jersey
2000 Galloping Hill Road February 1993 Leased(2) - $30,928,502
Building K-15
Kenilworth, New Jersey
15 Market Street November 1998 Leased(3) $ 630,553 $58,175,300
Kenilworth, New Jersey
315 Central Avenue May 1999 Leased(4) $ 354,874 $60,309,052
Clark, New Jersey
225 North Wood Avenue March 2001 Leased(5) $ 124,000 $20,803,913
Linden, New Jersey
1162 Green Street April 2002 Owned $1,959,447 $22,124,491
Iselin, New Jersey
168-170 Main Street May 2002 Owned $2,558,198 $19,117,002
Matawan, New Jersey
473 Route 79 July 2002 Owned $1,922,993 $16,108,537
Morganville, New Jersey
101 Barkalow Avenue July 2002 Owned(6) $2,143,873 $12,273,326
Freehold, New Jersey
1887 Morris Avenue November 2002 Owned $2,045,279 $11,026,966
Union, New Jersey
Renaissance Plaza December 2002 Leased(7) $1,197,143 $ 8,395,981
3665 Route 9 North
Old Bridge, New Jersey
1727 Route 130 South May 1998 Leased(8) $ - $30,680,869
North Brunswick, New Jersey
337 Applegarth Road April 2000 Leased(9) $ - $17,294,089
Monroe Township, New Jersey
- ---------------
(1) Includes deposit balances through our automated services and Call Center,
as well as Synergy Financial Group, Inc.'s checking account.
(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
32
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 2005. Terms provide for one five-year renewal option. (6)
Synergy Bank leases space in the building to three tenants.
(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 FBCJ 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 FBCJ in January 2003. Lease term
renewed in 2002 and expires in 2003. Terms provide for three five-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
- ------------------------------------------------------------
On December 22, 2003, the Company held a Special Meeting of
Stockholders to approve a Plan of Conversion and Reorganization, pursuant to
which Synergy, MHC undertook a second-step conversion from the mutual holding
company form of organization to a full stock corporation.
PROPOSAL FOR AGAINST
- -------- --- -------
Approval of the Plan of Conversion and
Reorganization 2,734,654 6,023
33
PART II
Item 5. Market for registrant's common equity and related stockholder matters
- ------------------------------------------------------------------------------
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." The table below shows
the reported high and low sales prices of the common stock during the periods
indicated. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not represent actual transactions.
High Low
2002 ---- ---
Third quarter (1) 12.95 12.60
Fourth quarter 18.00 12.50
2003
First quarter 19.50 16.50
Second quarter 22.00 19.25
Third quarter 33.00 20.00
Fourth quarter 41.00 31.50
----------
(1) From the date of completion of the minority stock offering (September
19, 2002).
Subsequent to December 31, 2003, Synergy Financial Group, Inc.
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 Synergy Financial Group, Inc. were sold at an initial
public offering price of $10.00 per share and previously outstanding shares of
Synergy Financial Group, Inc. were exchanged for new shares at an exchange ratio
of 3.7231. Upon completion of that conversion and offering, Synergy Financial
Group, Inc. common stock commenced trading on January 21, 2004 on the Nasdaq
National Market under the symbol "SYNFD"; after twenty days the trading symbol
became "SYNF."
Synergy Financial Group, Inc. has not paid cash dividends on its common
stock to date. 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. No assurance can be given that the Company will pay dividends in
the future, or that, if paid, dividends will not be reduced or eliminated in
future periods.
Under New Jersey law, Synergy Financial Group, Inc. 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. Synergy Financial Group, Inc.'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 March 24, 2004, there were approximately 1,285 holders of record
of Synergy Financial Group, Inc. common stock
34
Item 6. Selected Financial Data
- --------------------------------
The following tables set forth selected consolidated historical
financial and other data relating to Synergy Financial Group, Inc. for the years
and at the dates indicated. On March 1, 2001, Synergy Bank was reorganized from
a mutual savings bank into a mutual holding company structure and Synergy
Financial Group, Inc. was formed. Accordingly, the financial and other data
prior to March 1, 2001 represents the financial condition and results of
operations of only Synergy Bank. On September 17, 2002, Synergy Financial Group,
Inc. completed a minority stock offering. Prior to completion of the minority
stock offering, Synergy Financial Group, Inc. 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, Synergy, MHC 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,
---------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Assets................................... $628,618 $431,275 $296,963 $244,742 $222,917
Loans receivable, net.................... 434,585 319,423 224,689 189,098 163,173
Investment securities.................... 156,993 79,710 51,047 38,225 46,377
Deposits................................. 473,535 354,142 249,813 191,144 180,943
FHLB advances............................ 72,873 36,456 22,500 31,500 21,700
Total stockholders' equity............... 40,928 37,872 22,390 20,362 18,196
Summary of Operations: For the Year Ended
December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Interest income.......................... $30,066 $23,359 $19,071 $17,120 $15,575
Interest expense......................... 10,686 9,044 9,296 7,959 6,830
------ ------ ------ ------ ------
Net interest income...................... 19,380 14,315 9,775 9,161 8,745
Provision for loan losses................ 1,115 1,077 363 480 125
------ ------ ------ ------ ------
Net interest income after
provision for loan losses............ 18,265 13,238 9,412 8,681 8,620
Net (losses) gains on sales of loans
and investment securities............ 174 112 893 - 14
Other income............................. 2,460 1,608 1,622 1,770 1,098
Operating expense........................ 15,576 11,727 9,001 8,209 7,876
------ ------ ----- ------ ------
Income before income tax expense......... 5,323 3,231 2,926 2,242 1,856
Income tax expense (benefit)............. 1,911 1,200 1,024 712 670
------ ------ ------ ------ ------
Net income............................... $ 3,412 $ 2,031 $ 1,902 $ 1,530 $ 1,186
====== ====== ====== ====== ======
35
Selected Financial Ratios*
Performance Ratios: 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Return on average assets
(net income divided by
average total assets)................. 0.62% 0.54% 0.70% 0.66% 0.55%
Return on average equity
(net income divided by
average equity)....................... 8.69 8.11 9.09 8.07 6.63
Net interest rate spread................ 3.69 4.03 3.60 3.90 4.06
Net interest margin on
average interest-earning
assets................................ 3.74 4.08 3.75 4.09 4.24
Average interest-earning
assets to average
interest-bearing liabilities......... 102.23 101.75 104.25 105.13 104.85
Efficiency ratio (operating
expenses divided by the
sum of net interest income
and other income).................... 70.76 72.87 73.24 75.09 79.90
Asset Quality Ratios:
Non-performing loans to
total loans, net at period end....... 0.08 0.14 0.03 0.10 0.18
Non-performing assets to
total assets at period end........... 0.06 0.10 0.02 0.08 0.13
Net charge-offs to average
loans outstanding.................... 0.24 0.15 0.08 0.17 0.19
Allowance for loan losses to
total loans at period end............ 0.75 0.70 0.61 0.62 0.60
Capital Ratios:
Average equity to average assets
ratio (average equity divided
by average total assets)............. 6.37 6.74 7.69 8.13 8.29
Equity to assets at period end.......... 6.51 8.78 7.54 8.32 8.16
Full Service Offices: 18 16 11 11 11
- --------------
* Certain ratios were significantly affected by stock subscriptions received
totaling $38.3 million at December 31, 2003 pending completion of the Company's
second-step conversion stock offering, which closed on January 20, 2004.
36
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 Synergy Financial
Group, Inc. 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 non-interest income consists primarily of fees and service
charges, and to a lesser extent, gains (losses) on the sale of loans and
investments. The operating expenses consist primarily of employee compensation
and benefits, occupancy and equipment expenses, data processing costs, marketing
costs, professional fees, office supplies, and 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 Synergy Financial
Group, Inc., are generally identified by the use of the words "believe,"
"expect," "intend," "anticipate," "estimate," "project," or similar expressions.
Synergy Financial Group, Inc.'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 residential real estate located in our market area, and
home equity and consumer loans. In recent years, we have sought to diversify our
loan portfolio with emphasis on shorter maturities and expand our deposit base,
more specifically core deposits. To the extent that new deposits have exceeded
37
loan originations, we have invested these funds primarily in investment
securities. We have also availed ourselves of leveraged borrowings for purposes
of temporarily financing our significant growth.
We intend to continue to emphasize a variety of loan products
consisting primarily of one-to-four-family mortgages, home equity loans,
multi-family and non-residential mortgages, and consumer loans. During recent
years, we have significantly increased our origination of automobile loans
outside our market area and multi-family and nonresidential mortgage loans
within our market area. We began to originate automobile loans through an
internet source in late 1999 and non-residential and multi-family mortgage loans
in 2000. As of December 31, 2003, we had total automobile loans of $109.3
million and non-residential and multi-family loans of $90.7 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, 2003, we operated eighteen branch offices
(including our main office) in Middlesex, Monmouth, Morris, and Union Counties,
New Jersey. Synergy has plans to open two new branches and relocate one branch
office in 2004. We also intend to open four new branch offices over the next
four years.
We will continue to evaluate our business beyond traditional retail
banking to include other financial services such as insurance product sales,
trust and asset management services, either through internal development of such
lines of business, third party affiliations or through acquisitions. To this
end, Synergy Financial Services, Inc., a subsidiary of Synergy Financial Group,
Inc. 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 Synergy Bank and the general public.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of Synergy Financial Group, Inc.
conform with the accounting principals generally accepted in the United States
of America and general practices within the financial services industry. The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Allowance for Credit Losses. Synergy Financial Group, Inc. recognizes
that the determination of the allowance for loan losses involves a higher degree
of judgment and complexity than its other significant accounting policies. The
balance in the allowance for loan losses is determined based on management's
review and evaluation of the loan portfolio in relation to past loss experience,
the size and composition of the portfolio, current economic events and
conditions, and other pertinent factors, including management's assumptions as
to future delinquencies, recoveries and losses. All of these factors may be
susceptible to significant change. To the extent actual outcomes differ from
management's estimates, additional provisions for loan losses may be required
that would adversely impact earnings in future periods.
38
Intangible Assets. Intangible assets such as goodwill and the core
deposit intangible associated with the FBCJ acquisition 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 Synergy Financial Group, Inc. 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, 2003 and December 31, 2002
Assets. Total assets increased $197.3 million, or 45.8%, to $628.6
million at December 31, 2003 from $431.3 million at December 31, 2002. The
increase in total assets resulted primarily from a $77.3 million, or 97.0%,
increase in investment securities and a $115.2 million, or 36.1%, increase in
net loans receivable.
The increase in investment securities included the purchase of $138.0
million in agency issued mortgage-backed securities and $23.1 million of
investment securities acquired in the acquisition of FBCJ. These purchases were
offset by $72.4 million in principal amortization of existing investment
securities and $9.0 million in sales of investment securities.
During the year ended December 31, 2003, the bank originated $256.0
million in loans, and acquired $21.9 million in loans in the acquisition of
FBCJ, which were adjusted to reflect their fair market value. Loan
participations constituted $6.1 million. The bulk of the increase was
attributable to growth in automobile, non-residential and multi-family mortgage
loans of $45.5 million and $42.3 million, respectively. These increases were
offset by $165.1 million in loan principal repayments.
Other assets increased $3.7 million during the year ended December 31,
2003 primarily as the result of increased accounts receivable, the addition of
intangible assets and an increase in the value of our bank-owned life insurance
policy. Accounts receivable increased by approximately $2.7 million as the
growth of the investment security portfolio generated an increase in delayed
principal repayments. The acquisition of FBCJ in January 2003 generated a core
deposit intangible and goodwill which amounted to $737,873 and $38,688,
respectively, as of December 31, 2003. Finally, the appreciation of the value of
our bank-owned life insurance policy measured $365,000 for the year.
Liabilities. Total liabilities increased $194.3 million, or 49.4%, to
$587.7 million at December 31, 2003 from $393.4 million at December 31, 2002.
The increase in liabilities resulted primarily from an increase of $119.4
million in deposits, of which $91.2 million was in money market accounts, $14.1
million in time deposits and $14.1 million was in savings and transaction
accounts. The significant increase in money market accounts was attributable to
the introduction of the Money Maximizer Gold product which
39
was offered at a competitively attractive rate. Deposits acquired in the
acquisition of FBCJ amounted to $51.2 million; at year-end the balance totaled
$48.2 million.
FHLB advances increased by $36.4 million, or 99.9%, over the December
31, 2002 level, to $72.9 million. This represents 11.6% of total assets. The
increase in FHLB advances was to fund both the purchase of investment securities
and loan originations during this period. It is projected that the future
deposit flow from existing and new branches will be used to fund our loan demand
and pay down FHLB advances.
Also adding to the increase in liabilities was the receipt of the funds
of the stock subscriptions for the Company's second step stock conversion which
closed on January 20, 2004. Stock subscriptions payable totaled $38.3 million at
December 31, 2003. The entire amount became capital of the Company at the
closing date of the conversion. The funds received were utilized to pare back
FHLB overnight and short term borrowings.
Equity. Stockholders' equity increased $3.1 million, or 8.1%, to $40.9
million at December 31, 2003 from $37.9 million at December 31, 2002. This
increase was primarily attributable to a $3.4 million increase in net income for
the year, a $1.4 million increase in additional paid-in-capital, offset by $1.1
million in unearned stock compensation and a decline of $721,735 in accumulated
other comprehensive income, net of tax.
Comparison of Financial Condition At December 31, 2002 and December 31, 2001
Assets. Total assets increased $134.3 million, or 45.2%, to $431.3
million at December 31, 2002 from $297.0 million at December 31, 2001, primarily
as a result of increased lending activity and the purchase of investment
securities.
Cash increased $4.2 million, from $3.7 million at December 31, 2001 to
$7.9 million at December 31, 2002. This increase was due primarily to the
initial public offering of equity and the positive impact of operations.
Investment securities available-for-sale increased $18.4 million from
$43.9 million at December 31, 2001 to $62.3 million at December 31, 2002. This
increase was due primarily to the purchase of mortgage-backed securities using
funds from loan repayments and FHLB borrowings, as well as unrealized gains
attributable to market conditions. Securities held to maturity increased from
$7.2 million at December 31, 2001 to $17.4 million due to reinvestment of cash
inflows from loans and investment of borrowed funds.
Net loans receivable increased $94.7 million, or 42.2%, to $319.4
million from $224.7 million at December 31, 2001, due primarily to increased
lending activity, as well as the purchase of or participation in externally
originated loans. These included approximately $13.7 million in indirect auto
loans purchased from FBCJ and a $2.5 million commercial loan participation.
Liabilities. The Bank's deposits increased $104.3 million, or 41.8%, to
$354.1 million at December 31, 2002, from $249.8 million at December 31, 2001.
Increases were due primarily to growth
40
in certificates of deposit, savings and checking accounts. Management's deposit
strategy is focused on growing core deposits.
Advances from the FHLB increased $14.0 million, or 62.0%, to $36.5
million at December 31, 2002. The borrowings were utilized to finance
operations.
Equity. Stockholders' equity increased $15.5 million, or 69.1%, from
$22.4 million at December 31, 2001 to $37.9 million at December 31, 2002, due
primarily to receipt of the proceeds from an initial public offering of stock
and net income.
41
Average Balance Sheet. The following table sets forth certain
information for the years ended December 31, 2003, 2002 and 2001. The average
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods presented.
Average balances are derived from daily average balances. The table does not
include the allowance for loan and lease losses in the average balances of loans
receivable. Management does not believe that this causes any material
differences in the information presented.
At December 31, For the Year Ended December 31,
-------------------------------
2003 2003
---- ----
Average Average
Balance Yield/Cost(1) Balance Interest Yield/Cost
------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(2).............. $434,585 6.28% $373,530 $25,548 6.84%
Investment securities(3).............. 156,993 3.47 139,262 4,401 3.16
Other interest-earnings assets(4)...... 6,455 0.44 5,681 117 2.06
-------- -------- -------
Total interest-earning assets..... 598,033 6.18 518,473 30,066 5.80
Non-interest-earning assets............ 30,585 29,758
-------- --------
Total assets...................... $628,618 $548,231
======= =======
Interest-bearing liabilities:
Checking accounts(5) ................. $ 45,967 0.03 $ 49,052 60 0.12
Savings and club accounts............. 72,062 0.52 71,959 502 0.70
Money market accounts................. 139,121 1.76 81,852 1,193 1.46
Certificates of deposit............... 216,386 2.69 236,749 7,181 3.03
FHLB advances......................... 72,873 2.26 67,557 1,750 2.59
-------- -------- ------
Total interest-bearing liabilities 546,409 1.89 507,169 10,686 2.11
-------
Non-interest-bearing liabilities....... 41,281 6,146
--------- ---------
Total liabilities................. 587,690 513,315
Stockholders' equity................... 40,928 34,916
-------- --------
Total liabilities and stockholders'
equity.......................... $628,618 $548,231
======= =======
Net interest income.................... $19,380
======
Interest rate spread(6)................ 4.29 3.69
Net yield on interest-earning assets(7) 4.22 3.74
Ratio of average interest-earning assets
to average interest-bearing liabilities 102.24 102.23
For the Year Ended December 31,
------------------------------
2002 2001
---- ----
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(2).............. $280,768 $20,191 7.19% $204,494 $15,989 7.82%
Investment securities(3).............. 58,827 2,950 5.01 42,989 2,595 6.04
Other interest-earnings assets(4)...... 11,306 218 1.93 12,950 487 3.76
-------- ------- --------- -------
Total interest-earning assets..... 350,901 23,359 6.66 260,433 19,071 7.32
Non-interest-earning assets............ 20,606 11,612
-------- ---------
Total assets...................... $371,507 $272,045
======= =======
Interest-bearing liabilities:
Checking accounts(5) ................. $ 36,743 - - $ 28,561 - -
Savings and club accounts............. 62,310 765 1.23 53,527 973 1.82
Money market accounts................. 44,966 784 1.74 36,325 1,038 2.86
Certificates of deposit............... 160,305 5,773 3.60 101,594 5,452 5.37
FHLB advances......................... 40,532 1,722 4.25 29,809 1,833 6.15
-------- ------ -------- -----
Total interest-bearing liabilities 344,856 9,044 2.62 249,816 9,296 3.72
------ -----
Non-interest-bearing liabilities....... 1,615 1,308
--------- ---------
Total liabilities................. 346,471 251,124
Stockholders' equity................... 25,036 20,921
-------- --------
Total liabilities and stockholders'
equity.......................... $371,507 $272,045
======= =======
Net interest income.................... $14,315 $9,775
====== =====
Interest rate spread(6)................ 4.03 3.60
Net yield on interest-earning assets(7) 4.08 3.75
Ratio of average interest-earning assets
to average interest-bearing liabilities 101.75 104.25
- ----------------------
(1) Interest yields at December 31, 2003 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 term deposits with other financial
institutions.
(5) Includes stock subscriptions received in connection with the Company's
second-step conversion completed on January 20, 2004.
(6) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(7) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
42
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 For the Year Ended
December 31, December 31,
------------ ------------
2003 vs. 2002 2002 vs. 2001
------------- -------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------ ------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ------ ------ ----- ------ ------ ------ ----
(In thousands)
Interest and dividend income:
Loans receivable, net............ $ 6,670 $ (983) $ (325) $5,362 $5,965 $(1,288) $ (481) $ 4,196
Investments, mortgage-backed
securities and other....... 4,030 (1,088) (1,488) 1,454 957 (443) (168) 351
Other............................ (109) 15 (7) (101) (62) (237) 30 (269)
------- ------- -------- ----- ------ ----- ---- ------
Total interest-earning assets...... $10,591 $(2,056) $(1,820) $6,715 $6,860 $(1,968) $ (614) $(4,278)
====== ====== ====== ===== ===== ====== ===== ======
Interest expense:
Checking accounts................ $ - $ 44 $ 15 $ 59 $ - $ - $ - $ -
Savings and club accounts........ 119 (330) (51) (262) 160 (316) (52) (208)
Money market accounts............ 642 (126) (103) 413 247 (407) (96) (256)
Certificate accounts............. 2,752 (914) (436) 1,402 3,152 (1,798) (1,039) 315
FHLB advances.................... 1,149 (673) (449) 27 659 (566) (204) (111)
------ ------ ------ ----- ------ ------ ------ -----
Total interest-bearing liabilities.. $ 4,662 $(1,999) $(1,024) $1,639 $4,218 $(3,087) $(1,391) $ (260)
====== ====== ====== ===== ===== ====== ====== =====
Change in net interest income....... $ 5,929 $ (57) $ (796) $5,076 $2,642 $ 1,119 $ 777 $4,538
====== ======= ======= ===== ===== ====== ====== =====
Comparison of Operating Results for the Years Ended December 31, 2003 and
December 31, 2002
Net Income. Net income totaled $3.4 million for 2003 compared to $2.0
million for 2002. The increase of $1.4 million, or 67.9%, was primarily due to
an increase in net interest income of $5.1 million, or 35.4%, and an increase in
other income of $913,000, offset by a $37,190 increase in the provision for loan
and lease losses, a $3.9 million increase in other expenses and a $710,544
increase in income taxes.
Net Interest Income. Net interest income grew by $5.1 million, or
35.4%, to $19.4 million for 2003 from $14.3 million for 2002. Total interest
income increased by $6.7 million, to $30.1 million for 2003, while total
interest expense increased by $1.6 million, to $10.7 million.
The 28.7% increase in total interest income was primarily attributable
to an increase of $167.6 million in the average balance of interest-earning
assets, offset by a 94 basis point decrease in the average yield earned on these
assets. The average balance of interest-earning loans increased by $92.8
million, or 33.0%, to $373.5 million. The increase in interest-earning assets
was a direct result of management's strategy of combining
43
internal growth with an acquisition. The decrease in the average yield was
primarily attributable to lower market interest rates during the year ended
December 31, 2003.
The $1.6 million increase in total interest expense resulted primarily
from a $162.3 million, or 47.1%, increase in the average balance of
interest-bearing liabilities, offset by a 51 basis point decrease in the average
cost of these funds. The increase in the average balance of interest-bearing
liabilities during the year reflects organic growth as well as the acquisition
of FBCJ in the first quarter of 2003. Further, the average balance of
interest-bearing liabilities reflected an increased level of borrowings, with
the average balance increasing by $27.0 million during 2003. The decrease in the
average cost of interest-bearing liabilities was primarily attributable to lower
market rates during the year ended December 31, 2003.
Provision for Loan and Lease Losses. The provision for loan losses
increased by $37,000, or 3.5%, to $1.1 million for 2003. The allowance for loan
losses totaled $3.3 million at year-end 2003 compared with $2.2 million at
year-end 2002. 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 allowance for loan losses to total loans without
recourse was 0.75% at year-end 2003, an increase of 6 basis points over the year
ended December 31, 2002. Total charge-offs amounted to $1.3 million and
recoveries amounted to $441,000 for a net charge-off amount of $896,000. This
represents a net charge-off increase over the prior year of $678,000, due
primarily to the indirect-auto loan portfolio acquired in the acquisition of
FBCJ.
Other Income. Other income increased $913,000, or 53.1%, to $2.6
million for 2003 compared to $1.7 million for 2002. The increase is primarily
attributable to higher fees, an increase in the value of the bank-owned life
insurance policy and gains on sale of investment securities, which increased by
$675,000, $307,000, and $48,000, respectively.
Other Expenses. Other expenses increased $3.9 million, or 32.8%, to
$15.6 million for 2003 compared to $11.7 million for 2002. The principal
component of other expenses, compensation and employee benefits, increased to
$7.7 million for 2003 from $6.1 million for 2002.The increase was also
attributable to higher expenses associated with a larger branch network, as
Synergy added two branch offices with the acquisition of FBCJ. Premises and
equipment expense increased to $3.8 million for 2003, from $2.7 million for 2002
and occupancy expenses rose to $1.9 million for 2003 from $1.3 million for 2002.
Income Taxes. Income tax expense totaled $1.9 million for 2003 compared
to $1.2 million for 2002. This represents an increase of $700,000, or 59.2%. The
increase is primarily attributable to higher taxable income.
Comparison of Operating Results for the Years Ended December 31, 2002 and 2001
Net Income. Net income totaled $2.0 million for 2002 compared to $1.9
million for 2001. The $129,000, or 6.8%, increase was primarily due to an
increase in net interest income of $4.5 million, or 46.4%.
Net Interest Income. Net interest income for 2002 was $14.3 million as
compared to $9.8 million for 2001. The net interest rate margin was 4.08% for
2002 and 3.75% for 2001. The increase in margin was primarily due to a lower
cost of funds for both deposits and borrowings during 2002.
44
Total interest income amounted to $23.4 million and $19.1 million for
2002 and 2001, respectively. The $4.3 million, or 22.5%, increase for 2002
compared to 2001 was primarily due to increased interest income from loans and
securities.
Total interest expense was $9.0 million for 2002 and $9.3 million for
2001. The $252,000, or 2.7%, decrease for 2002 compared to 2001 was primarily
due to a 116 basis point drop in deposit interest rates, along with a 190 basis
point drop in FHLB advance rates, for 2002. The average rates paid on
interest-bearing deposits decreased to 2.45% for 2002 from 3.39% for 2001.
Provision for Loan Losses. The provision for loan losses was $1.1
million and $363,000 for the years ended December 31, 2002 and 2001,
respectively. The total loan portfolio grew by $95.4 million, or 42.2%, during
2002, representing a significant increase in the level of unseasoned loans. The
major change in the loan portfolio during 2002 was an increase in
non-residential and multi-family mortgage loans of $28.9 million, or 151.9%.
Non-performing loans increased by $378,000, or 532%, from $71,000 at December
31, 2001 to $449,000 at December 31, 2002. We had net charge-offs of $218,000
for the year ended December 31, 2002 compared to net charge-offs of $167,000 for
2001.
The allowance for loan losses was $2.2 million at December 31, 2002
compared to $1.4 million at December 31, 2001. We allocate the allowance to
various categories based on our classified assets, historical loan loss
experience, our assessment of the risk characteristics of each loan category and
the relative balances at month end of each loan category. The allocation did not
change materially from December 31, 2001 to December 31, 2002.
Other Income. Other income during 2002 and 2001 amounted to $1.7
million and $2.5 million, respectively. Other income was predominantly service
charges and other fees on deposit accounts. The higher income during 2001 was
primarily the result of a one-time gain on the sale of the Bank's credit card
portfolio, which provided a gross gain of $888,000 or $568,000 after tax. The
remaining portion of that portfolio was sold during 2002, with a gross gain of
$66,000, or $40,000 after tax.
Other Expenses. Other expenses were $11.7 million for 2002 and $9.0
million for 2001. The principal component of other expenses, compensation and
employee benefits, increased to $6.1 million for 2002 from $4.8 million for
2001. The increase was also due to higher operating expenses associated with
expansion of the branch network and increased advertising expenses. Total
advertising expenses amounted to $733,000 for 2002 as compared to $364,000 for
2001. This represents an increase of $369,000, or 101.4%, over 2001. In 2002,
Synergy opened six new branch offices, two of which where in New Jersey counties
in which Synergy did not previously have any offices, compared to one branch
opening in 2001. Typically, we incur grand opening costs of $35,000 to $40,000
per branch.
Income Tax Expense. For 2002 and 2001, the Bank incurred income tax
expenses of $1.2 million and $1.0 million, respectively. The increase in taxes
for 2002 reflected higher income and changes in income tax rates. Synergy
Financial Group, Inc. and its subsidiaries file New Jersey income tax returns
and are subject to a state income tax that is calculated based on federal
taxable income, with certain adjustments. In July, 2002, New Jersey eliminated
the 3% tax rate formerly applicable to thrift institutions located in the state,
making thrift institutions subject to the 9% tax rate applicable to New Jersey
corporations. Such change was retroactive to January 1, 2002. Our state tax rate
has been reduced by holding investment securities in Synergy Capital
Investments, Inc., a wholly-owned subsidiary of Synergy Bank, formed in November
2002.
45
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 interest rate market
opportunities in connection with asset and liability management objectives.
Funding of loan requests, providing for liability outflows and management of
interest rate fluctuations require continuous analysis in order to match the
maturities of earning assets with specific types of deposits and borrowings.
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, and 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 $7.3
million at December 31, 2003. 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, 2003, our borrowing
limit with the FHLB was $156.2 million. At December 31, 2003, we had $72.9
million of borrowings outstanding.
Synergy Financial Group, Inc. is subject to federal regulations that impose
minimum capital requirements.
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, 2003 was $45.5 million, excluding
commitments on unused lines of credit, which totaled $22.7 million.
We intend to grow Synergy Financial Group, Inc's. branch network either
through opening or acquiring branch offices. Two new branch offices and the
relocation of one branch are planned for 2004. In addition, we currently plan to
open four additional new branch locations over the next four years. We also
intend to actively consider the acquisition of local financial institutions 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. While we currently exceed
applicable regulatory capital requirements, the sale of stock, coupled with the
accumulation of earnings, less dividends or other reductions in capital, from
year to year, represents a means for the orderly preservation and expansion of
our capital base. If our current growth continues at the same rate, and if we
expand further as we currently plan, we will need the additional capital to
continue to comply with applicable regulatory capital requirements.
46
The following table discloses our contractual obligations as of
December 31, 2003.
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
-------- -------- --------- --------- --------
FHLB advances(1)............................ $72,873 $38,229 $18,644 $16,000 $ -
Rentals under operating leases.............. 5,196 472 1,139 1,039 2,545
------ ------- ------ ----- -----
Total................................... $78,069 $38,701 $19,783 $17,039 $2,545
====== ====== ====== ====== =====
- ----------------
(1) At December 31, 2003, our borrowing limit with the FHLB was $156.2 million,
consisting of an overnight line of credit of $26.0 million, an adjustable
rate line of credit of $26.0 million and a regular advance limit of $104.2
million.
The following table discloses our commercial commitments as of December
31, 2003.
Total
Amounts Less Than Over
Committed 1 Year 1-3 Years 4-5 Years 5 Years
--------- -------- --------- --------- --------
Lines of credit(1).......................... $22,700 $ 74 $ 192 $ 237 $22,197
Other commitments to extend credit(1)....... 45,500 45,500 - - -
------ ------ ---------- ---------- ---------
Total................................... $68,200 $45,574 $ 192 $ 237 $22,197
====== ====== ======== ======== ======
- ----------------
(1) Represents amounts committed to customers.
For additional information about cash flows from operating, financing,
and investing activities, see the Statements of Cash Flows included in the
consolidated financial statements.
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 reprice 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 reprice more frequently than interest-earning assets
47
is generally beneficial to net interest income during a period of declining
interest rates, this type of asset/liability mismatch is generally detrimental
during periods of rising interest rates.
The Board of Directors has established an Asset and Liability Management
and Budget Committee that consists of Directors Scott (Chairman), De Perez,
Fiore, LaCorte and Stender. The Committee meets quarterly with management to
review current investments: average lives, durations and repricing frequencies
of loans and securities; loan and deposit pricing and production volumes and
alternative funding sources; interest rate risk analysis; liquidity and
borrowing needs; and a variety of other assets and liability management topics.
The management session of the Committee is held monthly with President Fiore
presiding and senior management in attendance. The results of the quarterly and
monthly meetings of the Committee are reported to the full Board at its regular
meetings. In addition, the Committee generally meets during October and November
each year with the goal of developing an annual business and operating plan for
presentation to the full Board.
To reduce the effect of interest rate changes on net interest income, the
Bank has adopted various strategies to enable it to improve the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
main elements of these strategies include seeking to:
o originate loans with adjustable-rate features or fixed-rate loans with
short maturities, such as home equity and consumer loans;
o lengthen the maturities of time deposits and borrowings when it would be
cost effective through the aggressive pricing and promotion of certificates
of deposits and utilization of FHLB advances;
o increase core deposits (i.e., transaction and savings accounts) which tend
to be less interest rate sensitive; and
o purchase intermediate and adjustable-rate investment securities that
provide a stable cash flow, thereby providing investable funds in varying
interest rate cycles.
Quantitative Analysis. Management actively monitors its interest rate risk
exposure. The Bank's objective is to maintain a consistent level of
profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Bank uses the 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 and Liability Management
Committee and reported to the Board of Directors quarterly. The Interest Rate
Sensitivity of Net Portfolio Value Report shows the degree to which balance
sheet line items and the net portfolio value are potentially affected by a 100
to 300 basis point (1/100th of a percentage point) upward and downward shift
(shock) in the Treasury yield curve.
The following table presents the Bank's interest rate risk exposure as
measured by the OTS NPV Model as of December 31, 2003. The net portfolio value
is calculated by the OTS, based on information provided by Synergy Bank. At
December 31, 2003, the Bank was in compliance with the interest rate risk limits
established by the Board of Directors with the exception of modeling an increase
of 300 basis points in interest rates. Although the actual effect is unknown at
this time, it is believed that the equity capital infusion resulting from the
second step stock conversion completed subsequent to year end will greatly
contribute to mitigating this Board
48
risk exposure limit exception. Furthermore, management currently views an
instantaneous rise in interest rates of 300 basis points as remote, but is
prudently addressing the exception by implementing strategic initiatives.
Net Portfolio Value NPV as % of Present Value of Assets
------------------- -----------------------------------
Changes in Basis Point
Rates $ Amount $ Change % Change NPV Ratio Change
----- -------- -------- -------- --------- ------
(Dollars in thousands)
+300 bp 41,911 (26,655) (39)% 6.68% (367)bp
+200 bp 51,191 (17,375) (25)% 8.01% (235)bp
+100 bp 60,403 (8,163) (12)% 9.28% (108)bp
0 bp 68,566 - - 10.36% -
- - 100 bp 73,089 4,523 7% 10.91% 56bp
- ----------
(1) The -200bp and -300bp scenarios are not shown due to the prevailing low
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 repricing, 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 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.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Synergy Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of Synergy
Financial Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial position of Synergy Financial
Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/Grant Thornton LLP
Philadelphia, Pennsylvania
January 28, 2004
50
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Synergy Financial Group, Inc.
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity and cash flows of Synergy Financial Group, Inc. and
subsidiaries as of December 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows for
Synergy Financial Group, Inc. and subsidiaries for the year ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
/s/Fontanella and Babitts
Totowa, New Jersey
January 31, 2002, except for Note 14
as to which the date is May 21, 2002
51
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
----------------------
2003 2002
--------- ---------
ASSETS
Cash and amounts due from banks $ 4,481 $ 3,064
Interest-bearing deposits with banks 2,811 4,822
--------- ---------
Cash and cash equivalents 7,292 7,886
Investment securities available-for-sale, at fair value 123,779 62,303
Investment securities held-to-maturity (fair value of $33,216
and $17,689 respectively) 33,214 17,407
Federal Home Loan Bank of New York stock, at cost 3,644 1,856
Loans receivable, net 434,585 319,423
Accrued interest receivable 2,021 1,533
Property and equipment, net 17,620 17,647
Cash surrender value of officer life insurance 2,475 2,110
Other assets 3,988 1,110
--------- ---------
Total assets $ 628,618 $ 431,275
========= =========
LIABILITIES
Deposits $ 473,535 $ 354,142
Federal Home Loan Bank advances 72,873 36,456
Advance payments by borrowers for taxes and insurance 1,582 1,414
Accrued interest payable on advances 119 165
Stock subscriptions payable 38,322 0
Other liabilities 1,259 1,226
--------- ---------
Total liabilities 587,690 393,403
--------- ---------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Preferred stock; $0.10 par value, authorized 2,000,000 shares;
none issued and outstanding - -
Common stock; $0.10 par value, authorized 18,000,000 shares;
issued 2003 - 3,344,252; issued 2002 - 3,344,252 334 334
Additional paid-in capital 15,008 13,644
Retained earnings 27,858 24,446
Unearned ESOP shares (1,009) (1,125)
Unearned RSP compensation (1,011) -
Treasury stock acquired for the RSP (103) -
Accumulated other comprehensive income (loss), net (149) 573
--------- ---------
Total stockholders' equity 40,928 37,872
--------- ---------
Total liabilities and stockholders' equity $ 628,618 $ 431,275
========= =========
The accompanying notes are an integral part of these statements.
52
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands)
For the year ended December 31,
- ------------------------------------------------------------------------------------------
2003 2002 2001
-------- -------- --------
Interest income
Loans, including fees $ 25,548 $ 20,191 $ 15,989
Investment securities 4,401 2,950 2,595
Other 117 218 487
-------- -------- --------
Total interest income 30,066 23,359 19,071
Interest expense
Deposits 8,936 7,322 7,463
Borrowed funds 1,750 1,722 1,833
-------- -------- --------
Total interest expense 10,686 9,044 9,296
Net interest income before
provision for loan losses 19,380 14,315 9,775
-------- -------- --------
Provision for loan losses 1,115 1,077 363
-------- -------- --------
Net interest income after
provision for loan losses 18,265 13,238 9,412
-------- -------- --------
Other income
Service charges and other fees on
deposit accounts 1,713 1,112 885
Net gains on sales of mortgage loans 18 52 -
Net gains on sales of credit card loans - 66 888
Net (losses) gains on sales of investment securities 156 (6) 5
Commissions 118 249 270
Other 629 247 467
-------- -------- --------
Total other income 2,634 1,720 2,515
Other expenses
Salaries and employee benefits 7,739 6,105 4,844
Premises and equipment 3,757 2,651 2,264
Occupancy 1,904 1,291 903
Professional services 482 384 301
Advertising 794 733 364
Other operating 900 563 325
-------- -------- --------
Total other expenses 15,576 11,727 9,001
Income before income tax expense 5,323 3,231 2,926
-------- -------- --------
Income tax expense 1,911 1,200 1,024
-------- -------- --------
Net income $ 3,412 $ 2,031 $ 1,902
======== ======== ========
Per share of common stock
Basic earnings per share $ 1.05 $ NM $ -
======== ======== ========
Diluted earnings per share $ 1.05 $ NM $ -
======== ======== ========
The accompanying notes are an integral part of these statements.
53
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands, except share amounts)
Accumu
lated
Treasury compre-
Common stock Unearned stock hensive
-------------- Additional Unearned RSP acquired income
Shares Par paid-in- Retained ESOP compen- for the (loss),
issued value capital earnings shares sation RSP net TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2001 - - - 20,613 - - - (251) 20,362
Net income - - - 1,902 - - - - 1,902
Other comprehensive income,
net of reclassification
adjustment and taxes - - - - - - - 226 226
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,128
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution to capitalize
mutual holding company and
stock holding company 100 - 100 (200) - - - - (100)
BALANCE AT DECEMBER 31, 2001 100 - 100 22,315 - - - (25) 22,390
Net Income - - - 2,031 - - - - 2,031
Other comprehensive income,
net of reclassification
adjustment and taxes - - - - - - - 598 598
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,629
- -----------------------------------------------------------------------------------------------------------------------------------
Net proceeds of stock
offering and issuance of
common stock 3,344,152 334 13,526 100 - - - - 13,960
Common stock acquired by
ESOP (116,380 shares) - - - - (1,164) - - - (1,164)
Common stock held by ESOP
committed to be released
(3,879 shares) - - 18 - 39 - - - 57
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 3,344,252 334 13,644 24,446 (1,125) - - 573 37,872
Net income for the twelve
months ended
December 31, 2003 - - - 3,412 - - - - 3,412
Other comprehensive income,
net of reclassification
adjustment and taxes - - - - - - - (722) (722)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,690
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock held by ESOP
committed to be released
(11,640 shares) - - 174 - 116 - - - 290
Common stock awarded through
RSP Plan (56,685 shares) - - 1,190 - - (1,190) - - -
Compensation recognized under
RSP Plan - - - - - 179 - - 179
Common stock held by RSP
(5,000 shares) (103) (103)
BALANCE AT DECEMBER 31, 2003 3,344,252 $334 $15,008 $27,858 $(1,009) $(1,011) $(103) $(149) $40,928
===================================================================================================================================
The accompanying notes are an integral part of this statement.
53
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
For the year ended December 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
Operating activities
Net income $ 3,412 $ 2,031 $ 1,902
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,878 944 736
Provision for loan losses 1,115 1,077 363
Deferred income taxes (456) (337) (34)
Amortization of deferred loan fees 101 13 (123)
Amortization of premiums on investment securities 1,788 338 83
Net (gains) losses on sales of investment securities (156) 6 (5)
Mortgage loans originated for sale 2,307 5,352 -
Mortgage loan sales (2,325) (5,404) -
Net gains on sale of credit card loans - (66) (888)
Release of ESOP shares 116 56 -
Compensation under RSP plan 179 - -
Increase in accrued interest receivable (388) (382) (9)
(Increase) decrease in other assets (759) 39 (165)
(Decrease) increase in other liabilities (342) 188 283
Increase in cash surrender value of officer life insurance (365) (59) (109)
Decrease in accrued interest payable on advances (46) (9) (75)
--------- --------- ---------
Net cash provided by operating activities 6,059 3,787 1,959
--------- --------- ---------
Investing activities
Purchase of investment securities held-to-maturity (18,561) (15,217) (6,000)
Purchase of investment securities available-for-sale (119,495) (49,199) (36,905)
Maturity and principal repayments of investment
securities held-to-maturity 19,087 4,900 11,058
Maturity and principal repayments of investment
securities available-for-sale 53,290 29,396 18,290
Purchase of property and equipment (1,313) (6,951) (7,220)
(Purchases) redemption of FHLB Stock (1,788) (306) 435
Proceeds from sale of investment securities available-for-sale 9,030 2,036 1,010
Loan originations, net of principal repayments (87,868) (82,000) (48,323)
Purchase of loans (6,486) (13,717) (3,998)
Proceeds from sale of credit card loans - - 17,379
Cash consideration paid to acquire First Bank of Central Jersey (2,269) - -
Cash and equivalents acquired from First Bank of Central Jersey 7,773 - -
--------- --------- ---------
Net cash used in investing activities (148,595) (131,058) (54,274)
--------- --------- ---------
Financing activities
Net increase in deposits 67,137 104,328 58,670
Net advances from (repayments to) FHLB 36,418 13,956 (9,000)
Increase in advance payments by borrowers
for taxes and insurance 168 369 315
Increase in stock subscriptions payable 38,322 - -
Net proceeds from issuance of common stock - 13,960 -
Purchase of common stock for ESOP - (1,164) -
Capitalization of Mutual Holding Company - - (100)
Purchase of treasury stock for the RSP Plan (103) - -
--------- --------- ---------
Net cash provided by financing activities 141,942 131,449 49,885
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (594) 4,178 (2,430)
Cash and cash equivalents at beginning of year 7,886 3,708 6,138
--------- --------- ---------
Cash and cash equivalents at end of year $ 7,292 $ 7,886 $ 3,708
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes $ 1,563 $ 1,529 $ 1,058
========= ========= =========
Interest paid on deposits and borrowed funds $ 10,732 $ 9,053 $ 9,376
========= ========= =========
The accompanying notes are an integral part of these statements.
54
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
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, formerly known as
Synergy Federal Savings Bank (the Bank).
The Bank has eighteen office locations, including its main office and provides a
range of financial services to individuals and corporate customers through its
branch network located throughout Middlesex, Monmouth, Morris and Union counties
in New Jersey. Although the Bank offers numerous services, its lending activity
has concentrated primarily on residential, home equity, non-residential,
automobile and commercial real estate-secured loan located within New Jersey.
Additionally, a moderate concentration of loans and deposits continue to be
associated with employees of the Bank's former credit union sponsor
organization, a pharmaceutical research and manufacturing company.
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 commercial 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 Synergy Financial Services, Inc.
(SFSI). All significant intercompany accounts and transactions have been
eliminated in consolidation.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the balance
sheets, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The principal estimates that are susceptible to significant change in the near
term relate to the allowance for loan and lease losses. The evaluation of the
adequacy of the allowance for loan and lease losses includes an analysis of the
individual loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations, as well
as current loan collateral values. However, actual losses on specific loans,
which also are encompassed in the analysis, may vary from estimated losses.
56
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information, establishes standards for the
way business enterprises report information about operating segments in annual
financial statements. The Bank has one operating segment and, accordingly, has
one reportable segment, "Community Banking." All of the Bank's activities are
interrelated, and each activity is dependent and assessed based on how each of
the activities of the Bank supports the others. For example, commercial lending
is dependent upon the ability of the Bank to fund itself with retail deposits
and other borrowings and to manage interest rate and credit risk. This situation
is also similar for consumer, residential, multi-family and non-residential
mortgage lending. Accordingly, all significant operating decisions are based
upon analysis of the Bank as one operating segment.
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.
Investment Securities
- ---------------------
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.
At the time of purchase, the Bank makes a determination as to whether or not it
will hold the investment securities to maturity based upon an evaluation of the
probability of the occurrence of future events.
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 shareholders' 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.
The Company adopted the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133), as amended, as of January 1,
2001. The statement requires the Company to recognize all derivative instruments
at fair value as either assets or liabilities. Financial derivatives are
reported at fair value in other assets or other liabilities. The accounting for
changes in the fair value of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship. The Bank does
not have any derivative instruments at December 31, 2003, 2002 or 2001.
The Bank adopted EITF 03-1, The Meaning of Other than Temporary Impairment and
Its Application to Certain Investments, as of December 31, 2003. EITF 03-1
includes certain disclosures regarding quantitative and qualitative disclosures
for investment securities accounted for under FAS 115, Accounting for Certain
Investments in Debt and Equity Securities, that are impaired at the balance
sheet date, but another-than-temporary impairment has not been recognized. The
disclosures under EITF 03-1 are required for financial statements for years
ending after December 15, 2003 and are included in these financial statements.
57
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
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 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. At December 31, 2003, 2002 and 2001, the Bank's
servicing loan portfolio approximated $8.1 million, $13.0 million and $18.0
million, respectively. As of December 31, 2003, 2002 and 2001, 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.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS No.
149) Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies or amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issue. Statement 149 also
amends paragraph SFAS No. 133 to require a lender to account for loan
commitments related to mortgage loans that will be held for sale as derivatives.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003. The Company periodically enters into commitments with its customers for
loans which it intends to sell in the future. The adoption of SFAS No. 149 did
not have a material impact on the Company's financial position or results of
operations.
Loans and Allowance for Loan and Lease Losses
- ---------------------------------------------
Loans that management has the intent and ability to hold until maturity are
stated at the amount of unpaid principal, reduced by unearned income and an
allowance for loan and lease 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 the borrower's financial
condition is such that collection of interest is doubtful.
The allowance for loan and lease losses is established as losses are estimated
to have occurred through a provision for loan and lease 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
58
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
credited to the allowance. The allowance for loan and lease 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 and lease 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.
The Company adopted Financial Accounting Standards Board (FASB) Interpretation
(FIN) 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others, on January 1, 2003. FIN
45 requires a guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for the fair
value of the obligation undertaken in issuing the guarantee. Financial letters
of credit require the Company to make payment if the customer's financial
condition deteriorates, as defined in the agreements. Performance letters of
credit require the Company to make payments if the customer fails to perform
certain non-financial contractual obligations. The Company previously did not
record a liability when guaranteeing obligations unless it became probable that
the Company would have to perform under the guarantee. FIN 45 applies
prospectively to guarantees the Company issues or modifies subsequent to
December 31, 2003. At December 31, 2003, the Company was not contingently liable
for any financial and performance letters of credit. It is the Bank's practice
to generally hold collateral and/or obtain personal guarantees supporting any
outstanding letter of credit commitments. In the event that the Bank is required
to fulfill its contingent liability under a standby letter of credit, it could
liquidate the collateral held, if any, and enforce the personal guarantee(s)
held, if any, to recover all or a portion of the amount paid under the letter of
credit.
59
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
In 2001, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and
Documentation Issues. SAB No. 102 provides guidance on the development,
documentation and application of a systematic methodology for determining the
allowance for loans and leases in accordance with U.S. GAAP and is effective
upon issuance. SAB No. 102 did not have a material impact on the Company's
financial position or results of operations.
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain Debt
Securities Acquired in a Transfer. SOP 03-3 applies to a loan with the evidence
of deterioration of credit quality since origination acquired by completion of a
transfer for which it is probable at acquisition, that the company will be
unable to collect all contractually required payments receivable. SOP 03-3
requires that the Company recognize the excess of all cash flows expected at
acquisition over the investor's initial investment in the loan as interest
income on a level-yield basis over the life of the loan as the accretable yield.
The loan's contractual required payments receivable in excess of the amount of
its cash flows excepted at acquisition (nonaccretable difference) should not be
recognized as an adjustment to yield, a loss accrual or a valuation allowance
for credit risk. SOP 03-3 is effective for loans acquired in fiscal years
beginning after December 31,2004. Early adoption is permitted. Management is
currently evaluating the provisions of SOP 03-3.
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 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.
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. SFAS No. 144 changes the
requirements relating to reporting the effects of a disposal or discontinuation
of a segment of a business. The adoption of this statement did not have an
impact on the financial condition or results of operations of the Company.
Goodwill and Intangible Assets
- ------------------------------
The Company accounts for goodwill and intangible asset 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 on January 10, 2003, a core deposit
intangible of approximately $848,000 and goodwill of approximately $42,000.
60
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
The core deposit intangible is being amortized over approximately 8 years.
Amortization expense for the year ended December 31, 2003 was approximately
$111,000. The estimated annual amortization expense for the next five years is
$111,000 for 2004 through 2008.
The carrying amount of goodwill as of December 31, 2003 was approximately
$39,000. There was a decrease of $3,000 in the carrying value of goodwill from
January 10, 2003 (date of acquisition of First Bank) and December 31, 2003.
On January 10, 2003, the Bank acquired all of the net assets of First Bank for a
cash purchase price of approximately $2.1 million plus expenses directly related
to the acquisition. This transaction was accounted for under the purchase method
of accounting. The acquisition resulted in the recording of approximately
$42,000 of goodwill and approximately $848,000 of core deposit intangible, which
is being amortized over approximately 8 years. The remaining balance of the core
deposit intangible at December 31, 2003 was approximately $738,000. Both of
these amounts are included in other assets on the consolidated financial
statements.
The following are the unaudited pro forma financial information of the Bank as
if the First Bank acquisition occurred on the first date of the periods
indicated. The pro forma information should be read in conjunction with the
related historical information and is not necessarily indicative of the results
that would have been attained had the transaction actually taken place. Earnings
per share are not presented for the years ended December 31, 2002 and 2001 as
the earnings per share calculation for that period is not meaningful because the
date of conversion to a stock company occurred on September 17, 2002. (dollars
in thousands, except per share data):
For the years ended December 31,
-----------------------------------
2002 2001
-------------- ----------------
(Unaudited)
Interest income $ 26,963 $ 23,847
Interest expense 10,755 11,978
--------- ---------
Net interest income 16,208 11,869
Net income (loss) 1,124 (2,295)
Net income per share - basic NM NM
Net income per share - diluted NM NM
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 bases 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 and lease
losses, deferred loan fees, deferred compensation, investment securities
available for sale and the change in the value of the bank owned life insurance.
61
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
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 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 as stock
options) were exercised or resulted in the issuance of common stock. These
potentially dilutive shares would then be included in the weighted number of
shares outstanding for the period using the treasury stock method. Shares issued
and shares reacquired during any period are weighted for the portion of the
period that they were outstanding.
In computing both basic and diluted earnings per share, the weighted average
number of common shares outstanding includes all 1,889,502 shares issued to
Synergy, MHC. Also included are the ESOP shares previously allocated to
participants and shares committed to be released for the allocation to
participants and RSP shares which have vested or have been 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.
Earnings per share are not presented for the period from September 17, 2002 (the
date of conversion to a stock company) though December 31, 2002 as the earnings
per share calculation for that period is not meaningful. The following is a
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computation for the year ended December 31, 2003 (dollars in
thousands, except per share data):
Weighted
Income average shares Per
(numerator) (denominator) share amount
--------------- ----------------- ---------------
Basic earnings per share
Income available to common stockholders $ 3,412 3,234,878 $ 1.05
Effect of dilutive common stock equivalents 25,018 -
--------- --------
Diluted earnings per share
Income available to common stockholders
plus assumed conversions $ 3,412 3,259,896 $ 1.05
======== ========= ========
62
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
Stock-Based Compensation
- ------------------------
On April 22, 2003, stockholders' of the Company approved the 2003 Stock Option
Plan and the 2003 Restricted Stock Plan. A total of 165,746 and 66,297 shares of
common stock have been made available for granting under the Stock Option and
Restricted Stock Plans (RSP), respectively. During the year ended December 31,
2003, the Company granted 165,746 options to purchase common shares of the
Company and issued 56,685 shares of restricted stock. Prior to April 22, 2003,
the Company did not have a Stock Option Plan or a Restricted Stock Plan.
The Company's stock option plan and the restricted stock plan are accounted for
in accordance with the provisions of Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees, and released Interpretations.
Accordingly, no compensation expense has been recognized for the stock option
plan. Expense for the restricted stock plan in the amount of the fair value of
the common stock at the date of grant is recognized ratable over the vesting
period.
Had an expense for the Company's stock option plan been determined based on the
fair value at the grant date for the Company's stock options consistent with the
method outline in SFAS No. 123, the Company's net income and earnings per share
for all expenses related to stock options and stock granted in our restricted
stock plan would have been reduced to the pro forma amounts that follow (in
thousands, except per share data):
For the year ended
December 31, 2003
-----------------
Net income, as reported $ 3,412
Add expense recognized for the restricted stock plan,
net of related tax effect 107
Less total stock option and restricted stock plan expense, determined
under the fair value method, net of related tax effect (262)
----------
Net income, pro forma $ 3,257
=========
Basic earnings per share
As reported $ 1.05
Pro forma $ 1.01
Diluted earnings per share
As reported $ 1.05
Pro forma $ 1.00
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options price model with the following weighted average
assumptions used for grants in 2003: dividend yield of 0.00%; expected
volatility of 29.44 %; risk-free interest rate of 3.01% and expected life of
five years.
The Company has established an Employee Stock Ownership Plan (ESOP) covering
eligible employees with one year of service, as defined by the ESOP. The Company
accounts for the ESOP in accordance with the American Institute of Certified
Public Accountants' Statement of Position (SOP) No. 93-6, Employers'
63
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
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.
Advertising Costs
- -----------------
It is the Company's policy to expense advertising costs in the period in which
they are incurred.
Comprehensive Income
- --------------------
The Company reports comprehensive income, which includes net income as well as
certain other items, which results in a change to equity during the period. The
income tax effects allocated to comprehensive income (loss) are as follows (in
thousands):
For the year ended
December 31, 2003
-------------------------------
Before Tax Net of
tax (expense) tax
amount benefit amount
------ ------- ------
Unrealized losses on investment securities
Unrealized holding gains (losses) arising during period $(1,274) $ 449 $ (825)
Less reclassification adjustment for losses
realized in net income 156 (53) 103
------- ------- -------
Other comprehensive income gain (loss), net $(1,118) $ 396 $ (722)
======= ======= =======
64
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
For the year ended For the year ended
December 31, 2002 December 31, 2001
----------------------------- -------------------------------
Before Tax Net of Before Tax Net of
tax (expense) tax tax (expense) tax
amount benefit amount amount benefit amount
------ ------- -------- ------ -------- --------
Unrealized gains on
investment securities
Unrealized holding gains
arising during period $ 918 $ (324) $ 594 $ 358 $ (129) $ 229
Less reclassification
adjustment for losses
realized in net income (6) 2 (4) 5 (2) 3
---- ------- ----- ------ -------- -----
Other comprehensive
income (loss), net $ 924 $ (326) $ 598 $ 353 $ (127) $ 226
==== ===== ===== ==== ====== ====
Reclassifications
- -----------------
Reclassifications of prior years amounts have been made to conform to the
December 31, 2003 presentation.
NOTE B - MHC REORGANIZATION AND STOCK OFFERING
- ----------------------------------------------
The Company is a federally-chartered corporation that was organized in 2001 for
the purpose of acquiring all of the capital stock of the Bank upon completion of
the Bank's reorganization from a mutual savings bank into a mutual holding
company (MHC) structure.
The overall MHC reorganization was a change in legal organization and form, not
a change in enterprise. Specifically, SFAS No. 141 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 MHC's assets and liabilities subsequent
to the reorganization will remain unchanged from the Bank's pre-existing
historical basis.
In 2002, the 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
Offering). The remaining 56.5% of the Company's shares of common stock were
issued to Synergy, MHC (MHC), a federally-chartered mutual holding company
formed in 2001. The Offering was completed on September 17, 2002. Prior to that
date, the Company had not engaged in any significant business. Completion of the
Offering resulted in the issuance of 3,344,152 shares of common stock, 1,889,402
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 have been deducted to arrive at net proceeds of
approximately $13,960,000 from the Offering. The Company contributed 43% of the
net proceeds of the Offering to the Bank for general corporate use.
65
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
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):
December 31, 2003
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------- -------- -------- --------
Available-for-sale
U.S. government obligations $ 3,527 $ 9 $ (69) $ 3,467
Mortgage-backed securities
FHLMC 64,136 282 (320) 64,098
FNMA 55,332 241 (324) 55,249
Equity securities 1,017 3 (55) 965
-------- -------- -------- --------
Total $124,012 $ 535 $ (768) $123,779
======== ======== ======== ========
December 31, 2003
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------- -------- -------- --------
Held-to-maturity
Mortgage-backed securities
FHLMC $ 5,623 $ 20 $ (84) $ 5,559
FNMA 20,285 69 (98) 20,256
GNMA 7,296 95 - 7,391
Other debt securities 10 - - 10
-------- -------- -------- --------
Total $ 33,214 $ 184 $ (182) $ 33,216
======== ======== ======== ========
66
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
December 31, 2002
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------- -------- -------- --------
Available-for-sale
Mortgage-backed securities
FHLMC $21,140 $ 267 $ - $21,407
FNMA 40,267 619 - 40,886
Equity securities 11 - (1) 10
------- ------- ------- -------
Total $61,418 $ 886 $ (1) $62,303
======= ======= ======= =======
Held-to-maturity
Mortgage-backed securities
FHLMC $ 3,249 $ 19 $ - $ 3,268
FNMA 11,395 124 - 11,519
GNMA 2,763 139 - 2,902
------- ------- ------- -------
Total $17,407 $ 282 $ - $17,689
======= ======= ======= =======
The amortized cost and fair value of investment securities available-for-sale
and held-to-maturity, by contractual maturity, at December 31, 2003 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.
Available-for-sale Held-to-maturity
--------------------- --------------------
Amortized Fair Amortized Fair
cost value cost value
-------- -------- ------- -------
Due in one year or less $ 1,018 $ 1,023 $ - $ -
Due after one through five years 36,331 36,362 1,301 1,303
Due after five through ten years 8,054 8,048 12,274 12,054
Due after ten years 77,593 77,381 19,629 19,849
Marketable equity securities and other 1,017 965 10 10
-------- -------- ------- -------
$124,013 $123,779 $33,214 $33,216
======== ======== ======= =======
Proceeds from the sales of investment securities during the years ended December
31, 2003, 2002 and 2001 were $9,031,000, $2,036,000 and $1,010,000 respectively.
Gross gains realized on those sales were $156,000, $-0-, and $5,000 for the
years ended December 31, 2003, 2002 and 2001, respectively, and gross losses
were $-0-, $6,000, and $-0- for the years ended December 31, 2003, 2002 and
2001, respectively. As
67
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
of December 31, 2003 and December 31, 2002, investment securities with a book
value of $2,698,000 and $291,000, respectively, were pledged to secure public
deposits and for other purposes as provided by law.
The table below indicates 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, 2003 (in thousands):
Number Less than 12 months 12 months or longer Total
----------------------------------------------- ----------------------
Description of of Fair Unrealized Fair Unrealized Fair Unrealized
Securities securities value losses value losses value losses
------------------- ------------ -------- ----------- -------- ----------- -------- ------------
U.S. Government
agency securities 1 $ 1,930 $ (69) $ - $ - $ 1,930 $ (69)
Mortgage-backed
securities 61 80,493 (826) - - 80,493 (826)
----- ------- ------ ------ ------- ------- ------
Subtotal, debt
investment securities 62 82,423 (895) - - 82,423 (895)
Marketable equity
securities 1 945 (55) - - 945 (55)
----- ------- ------ ------ ------- ------- ------
Total temporarily
impaired investment
securities 63 $83,368 $ (950) $ - $ - $83,368 $ (950)
===== ======= ====== ====== ======= ======= ======
Management has considered factors regarding other than temporarily impaired
securities and determined that there are no securities that are impaired as
of December 31, 2003.
NOTE D - LOANS RECEIVABLE
- -------------------------
Major grouping of loans are as follows (in thousands):
December 31,
------------------------
2003 2002
-------- --------
Mortgages
Residential, 1-4 family $226,085 $202,325
Residential, multi-family 33,971 18,069
Non-residential 56,694 30,317
Automobile 109,277 63,796
Commercial 7,838 2,472
Credit card 71 136
Other loans 3,745 4,454
--------- ---------
437,681 321,569
Deferred loan fees and costs 178 85
Allowance for loan and lease losses (3,274) (2,231)
-------- --------
$434,585 $319,423
======== ========
68
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
A summary of the activity in the allowance for loan and lease losses is as
follows (in thousands):
Year ended December 31,
-----------------------------
2003 2002 2001
------- ------- -------
Balance, beginning of period $ 2,231 $ 1,372 $ 1,176
Provision for loan and lease losses 1,115 1,077 363
Acquisition of First Bank 823 - -
Recoveries 441 216 250
Loans charged-off (1,336) (434) (417)
------- ------- -------
Balance, end of period $ 3,274 $ 2,231 $ 1,372
======= ======= =======
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 and lease losses.
As of December 31, 2003, 2002 and 2001, the Bank had $348,000, $449,000 and
$71,000 of small homogenous loans that were classified as non-accrual and were
collectively evaluated for impairment. If interest on these loans had been
accrued, interest income would have increased by $7,000, $17,000, and $2,000
respectively for the years ended December 31, 2003, 2002 and 2001. As of the end
of these periods, there were no loans past due 90 days or more that are not on a
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 Company makes loans to certain officers,
directors and their related interests. All loan transactions entered into
between the Company and such related parties were made on the same terms and
conditions as transactions with all other parties. 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, 2003
and December 31, 2002 was approximately $2, 406,000 and $1,999,000. For the year
ended December 31, 2003 and 2002 new loans to these individuals amounted to
approximately $1,016,000 and $1,562,000, respectively. There were no other loans
to insiders other than those disclosed above.
69
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
NOTE E - PROPERTY AND EQUIPMENT
- -------------------------------
Premises and equipment are summarized as follows (in thousands):
December 31,
Estimated -----------------
useful life 2003 2002
---------------- ------- ---------
Land Indefinite $ 2,704 $ 2,704
Building and improvements 3 to 40 years 11,304 10,986
Furniture, equipment and automobiles 3 to 12 years 6,843 5,596
Leasehold improvements 3 to 15 years 3,385 3,028
Property held for future office sites Indefinite 304 375
------- -------
24,540 22,689
Less accumulated depreciation and amortization (6,920) (5,042)
------- -------
$17,620 $17,647
======= =======
NOTE F - DEPOSITS
- -----------------
Deposits are summarized as follows (in thousands):
December 31,
------------------------
2003 2002
-------- --------
Demand accounts
Non-interest bearing $ 45,967 $ 39,077
Interest bearing 139,121 47,917
-------- --------
185,088 86,994
Savings and club accounts 72,062 64,827
Certificates of deposit under $100,000 175,871 131,463
Certificates of deposit over $100,000 40,515 70,857
-------- --------
$473,535 $354,142
======== ========
Certificates of deposit over $100,000 are not insured by the Federal Deposit
Insurance Corporation (FDIC).
The scheduled maturities of certificates of deposit at December 31, 2003 are as
follows (in thousands):
2003 $126,170
2004 69,147
2005 13,511
2006 2,355
2007 4,440
Thereafter 763
--------
$216,386
========
70
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
Interest expense on deposits is as follows (in thousands):
Year ended December 31,
------------------------------------
2003 2002 2001
------ ------ ------
Demand $1,253 $ 784 $1,038
Savings 502 765 972
Certificates of deposit 7,181 5,773 5,453
------ ------ ------
$8,936 $7,322 $7,463
====== ====== ======
NOTE G - FHLB - New York Advances
1. Short-Term FHLB Advances
------------------------
Short-Term FHLB Advances generally have maturities of less than one year. The
details of these advances are present below (in thousands, except percentages):
At or for the year ended
December 31,
------------------------------
2003 2002 2001
------- ------- ------
Average balance outstanding $35,413 $ 7,053 $ -
Maximum amount outstanding $69,300 $19,225 $ -
at any month-end during the period
Balance outstanding at period end $38,229 $ 2,500 $ -
Weighted-average interest rate during the period 1.21% 1.98% -%
Weighted-average interest rate at period end 1.17% 1.35% -%
2. Long-Term FHLB Advances
-----------------------
At December 31, 2003 and 2002, advances from the Federal Home Loan Bank (FHLB)
totaled $34,600 and $34,000 respectively. 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 3.91% and 4.28% for 2003 and 2002, respectively. Unused overnight lines of
credit at the FHLB at December 31, 2003 totaled $-0-.
71
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
As of December 31, 2003 Long-term FHLB advances mature as follows (in
thousands):
2004 $ 8,905
2005 2,739
2006 7,000
2007 7,000
2008 9,000
Thereafter -
-------
$34,644
=======
NOTE H - Benefit Plans
- ----------------------
1. Profit Sharing Retirement Plan
------------------------------
The Company had a profit sharing plan which covered eligible employees and
included an employees' thrift savings plan established under the provisions of
the Internal Revenue Code Section 401(k). Contributions to the profit sharing
plan were at the discretion of the Board of Directors. The Company's profit
sharing retirement plan expense for the years ended December 31, 2003 , 2002 and
2001 were approximately $-0-, $216,000, $214,000, respectively. This plan was
replaced by the Board of Directors on September 21, 2002 with an Employee Stock
Ownership Plan (ESOP).
2. Supplemental Executive Retirement Plans
---------------------------------------
The Company established a Supplemental Executive Retirement Plan (SERP) for the
benefit of its chief executive officer. In connection therewith, the Company
purchased a life insurance policy to satisfy its benefit obligation there under.
This policy is held within a rabbi trust. The cash surrender value of the life
insurance policy related to the SERP was approximately $ $2,475,000, and
$2,110,000 at December 31, 2003 and 2002, respectively. The annual expense
accruals are paid to a trust for the benefit of the chief executive officer. The
present value of future benefits is being accrued over the term of employment.
SERP expense for the years ended December 31, 2003, 2002 and 2001 were
approximately $24,000, $22,000 and $20,000 respectively.
On January 1, 2002 the Company adopted an 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 expense
for the years ended December 31, 2003 and 2002 was approximately $38,000 and
$35,000, 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 chief executive officer. Under the plan, the chief executive 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. Plan expense for the
years ended December 31, 2003, 2002 and 2001 was approximately $ 0, $8,000 and
$11,000 , respectively. The phantom stock and
72
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
phantom option plan for the benefit of the chief executive officer was replaced
by a Deferred Compensation Plan in September, 2002.
4. Employee Stock Ownership Plan
-----------------------------
On September 24, 2002, the Board of Directors approved an Employee Stock
Ownership Plan (ESOP) that became effective September 12, 2002. The Plan 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 Company to finance the purchase of 116,380
shares in connection with the initial public offering. The loan is payable in
annual installments over ten years at an annual interest rate equal to the prime
rate as published in The Wall Street Journal with interest payable quarterly.
The loan 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 loan 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 generally applied towards payment
of the loan. ESOP shares committed to be released are considered outstanding in
determining earnings per share.
At December 31, 2003, the ESOP held 100,861 unallocated shares at an aggregate
cost of $1,009,000; the market value of such shares at that date was
approximately $3,800,000. For the year ended December 31, 2003, $288,000 was
charged to compensation and employee benefits expense based on the commitment to
release 11,640 shares to eligible employees, as compared with $56,000 charged to
compensation and employee benefit expense in 2002 for the release of 3,879
shares to eligible employees.
5. Stock-Based Compensation
------------------------
At the annual meeting held on April 22, 2003, stockholders' of the Company
approved the Company's 2003 Stock Option Plan and the 2003 Restricted Stock
Plan. A total of 165,746 and 66,297 shares of common stock have been made
available for granting under the Stock Option and Restricted Stock Plans (RSP),
respectively. During the year, the Company granted 165,746 options to purchase
common shares of the Company and issued 56,685 shares of restricted stock. Prior
to April 22, 2003, the Company did not have a Stock Option Plan or a Restricted
Stock Plan.
The purpose of the RSP is to promote the growth and profitability of the Company
by providing Directors and Officers with an equity interest in the Company as an
incentive to achieve corporate goals. Under the RSP, 66,297 shares of the
Company's stock were reserved for issuance as restricted stock awards to
officers, and non-employee directors in recognition of prior service and as an
incentive for such individuals to remain with the Company. A deferred
compensation account for shares awarded under the RSP is recorded as a reduction
of stockholders' equity. Shares issued upon vesting may be either authorized but
unissued shares or reacquired shares held by the Company as treasury shares.
Through December 31, 2003, the Company acquired 5,000 shares of stock that
relates to the RSP; such shares are included in treasury stock. The restricted
stock grants are generally held in a trust for the benefit of the award
recipient until vested. Awards
73
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
outstanding generally vest in five annual installments commencing one year from
the date of the award. As of December 31, 2003, no shares were vested and no
shares were forfeited under the RSP. Expense is recognized for shares awarded
over the vesting period at the fair market value of the shares on the date they
were awarded, or $21.00 per share. Compensation expense attributable to the RSP
amounted to $179,000 for the year ended December 31, 2003.
Under the Stock Option Plan, each stock option granted entitles the holder to
purchase one share of the Company's common stock at an exercise price 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. A summary of the status
of the stock option plan as of December 31, 2003 and changes during the period
ended on that date are presented below (unaudited):
Shares Weighted-average exercise price
------ -------------------------------
Outstanding, beginning of period - $ -
Granted 165,746 20.80
Exercised - -
Forfeited - -
Expired -
----------
Outstanding, end of period 165,746 $ 20.80
----------
Options exercisable at period end - -
Weighted average fair value of options
granted during the period $ 9.66
At December 31, 2003, there were 165,746 options outstanding all with an
exercise price of $20.80. The weighted average remaining contractual life was 9
years 4 months and there were no options exercisable under the plan. At December
31, 2003, there were no option shares available to grant under the 2003 option
plan.
NOTE I - Income Taxes
- ---------------------
The components of income taxes are summarized as follows (in thousands):
Year ended December 31,
-----------------------------
2003 2002 2001
------- ------- -------
Current tax expense
Federal income $ 1,601 $ 1,203 $ 965
State income 267 334 93
------- ------- -------
1,868 1,537 1,058
------- ------- -------
Deferred tax (benefit) expense
Federal income 42 (223) (27)
State income 1 (114) (7)
------- ------- -------
43 (337) (34)
------- ------- -------
$ 1,911 $ 1,200 $ 1,024
======= ======= =======
74
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
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,
-----------------------------
2003 2002 2001
------- ------- -------
Expected federal income tax expense $ 1,809 $ 1,099 $ 995
Increase (decrease) in federal
income tax expense resulting
from state income tax, net of
federal income tax effect 177 145 57
Tax exempt income (124) - -
Other, net 49 (44) (28)
------- ------- -------
$ 1,911 $ 1,200 $ 1,024
======= ======= =======
Deferred tax assets and (liabilities) consisted of the following (in thousands):
Year ended December 31,
----------------------------
2003 2002 2001
------- ------- -------
Deferred tax assets
Allowance for loan and lease losses $ 791 $ 581 $ 196
Depreciation - 121 102
Unrealized losses on available-
for-sale investment securities 84 - 14
Net operating loss carry over 1,542 - -
Other 48 10 6
------- ------- -------
2,465 712 318
Valuation allowance for deferred
tax assets (878) - -
------- ------- -------
$ 1,587 $ 712 $ 318
======= ======= =======
Deferred tax liabilities
Deferred loan costs, net of fees $ 123 $ 98 $ 27
Depreciation 57 - -
Unrealized gains on available-
for-sale investment securities - 312 -
Core deposit intangibles 295 - -
------- ------- -------
Deferred tax liabilities $ 475 $ 410 $ 27
======= ======= =======
Net deferred tax asset, included in other assets $ 1,112 $ 302 $ 291
======= ======= =======
75
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
The Company has federal net operating loss carryovers acquired from First Bank
of Central Jersey expiring as follows (in thousands):
Expiring Amount
-------- ------
2018 $ 34
2021 1,833
2022 2,517
2023 150
-------
$ 4,534
=======
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, 2003 and
2002 are set forth below.
For cash and due from banks and interest-bearing deposits with banks, the
recorded book values of approximately $7,292,000 and $7,886,000 are deemed to
approximate fair values at December 31, 2003, and 2002, 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.
76
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
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.
December 31,
-------------------------------------------------
2003 2002
--------------------- ---------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
(in thousands)
Investment securities $ 156,993 $ 156,995 $ 78,826 $ 79,972
Federal Home Loan Bank stock 3,644 3,644 1,856 1,856
Loans receivable, net 434,585 441,234 319,423 332,740
Cash surrender value of officer life insurance 2,475 2,475 2,110 2,110
The estimated fair values of demand deposits (i.e., interest- and non-interest-
bearing checking accounts, passbook savings and certain types of money market
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 are estimated using a discounted cash flow
calculation that applies interest rates currently being offered to a schedule of
aggregated expected monthly time deposit maturities. The carrying amount of
accrued interest payable approximates its fair value.
December 31,
-------------------------------------------------
2003 2002
--------------------- ---------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
(in thousands)
Time deposits $ 216,386 $ 218,436 $ 202,320 $ 206,047
FHLB advances 72,873 74,254 36,456 38,474
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
77
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
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,
-----------------------
2003 2002
------- -------
Commitments to grant loans $45,451 $31,456
Unfunded commitments under lines of credit 22,695 12,898
------- -------
$68,146 $44,354
======= =======
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, 2003,
commitments to fund fixed rate loans amounted to $ 40.4 million with interest
rates between 5.35% and 7.00%.
NOTE L - Commitments and Contingent Liabilities
- -----------------------------------------------
1. Lease Commitments
-----------------
Future approximate lease payments under non-cancelable operating leases at
December 31, 2003 are due as follows (in thousands):
2004 $ 472
2005 590
2006 549
2007 555
2008 484
Thereafter 2,545
------
$5,195
======
Total rent expense was approximately $578,000, $426,000 and $376,000 for the
years ended December 31, 2003, 2002, and 2001, respectively.
The Company maintains six office locations within the corporate facilities of
the Company's former sponsor organization. These sites are available to the
organization's employees and access to the public is restricted.
78
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
As a result, the Company makes no rental payments for these branch locations.
Each office is an average of 280 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):
CONDENSED BALANCE SHEETS
December 31,
-----------------
2003 2002
------- -------
ASSETS
Cash and cash equivalents $41,240 $ 8,610
Investment in subsidiaries, equity method 40,802 30,956
Other assets 641 98
------- -------
Total assets $82,683 $39,664
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Loan payable to Bank for ESOP $ 1,009 $ 1,135
Stock subscriptions payable 38,322 -
Other liabilities 2,424 657
Stockholders' equity 40,928 37,872
------- -------
Total liabilities and stockholders' equity $82,683 $39,664
======= =======
79
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
------------------------
2003 2002 2001
---- ---- ----
INCOME
Interest income $ 1 $ - $ -
Equity in undistributed net earnings of subsidiaries 3,537 2,068 1,907
------ ------ ------
Total income 3,538 2,068 1,907
------ ------ ------
EXPENSES
Interest expenses 45 - -
Other expenses 76 37 5
------ ------ ------
Total expenses 121 37 5
------ ------ ------
NET INCOME $3,417 $2,031 $1,902
====== ====== ======
80
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 3,417 $ 2,031 $ 1,902
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed income of subsidiary (3,537) (2,068) (1,907)
Amortization, depreciation and other 423 73 -
Increase in other assets (543) (75) (23)
Increase in other liabilities 1,767 629 28
-------- -------- --------
Net cash provided by operating activities 1,527 590 -
-------- -------- --------
INVESTING ACTIVITIES
Additional investment in subsidiaries (7,000) (6,000) -
Purchase of investment securities available for sale 0 (11) -
-------- -------- --------
Net cash (used in) provided by investing activities (7,000) (6,011) -
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock - 13,960 100
Stock subscriptions payable 38,322 - -
Repurchase of treasury stock for RSP (103) - -
Repayments of Bank loan for ESOP (116) (29) -
-------- -------- --------
Net cash provided by financing activities 38,103 13,920 100
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 32,630 8,510 100
Cash and cash equivalents at beginning of year 8,610 100 -
-------- -------- --------
Cash and cash equivalents at end of year $ 41,240 $ 8,610 $ 100
======== ======== ========
NOTE N - Regulatory Matters
- ---------------------------
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Office of Thrift Supervision (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
81
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
the prompt corrective action guidelines are also subject to the qualitative
judgments by the regulators about components, risk weightings, and other
factors.
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 (as defined) 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, 2003, 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,
-------------------------------
2003 2002 2001
-------- -------- --------
GAAP capital $ 40,791 $ 30,879 $ 22,196
Unrealized (losses) gains on investment securities 148 (573) 25
Less: goodwill and other intangible assets 776 - -
-------- -------- --------
Tangible and core capital 40,163 30,306 22,221
Add: general allowance for loan and lease losses 3,274 2,231 1,372
-------- -------- --------
Total regulatory capital $ 43,437 $ 32,537 $ 23,593
======== ======== ========
The Bank's actual capital amounts and ratios are as follows (in thousands,
except percentages):
OTS Requirements
-------------------------------------------------------------------------
Regulatory
Minimum for classification as
Bank actual capital adequacy well capitalized
-------------------- ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2003
Total risk-based capital
(to risk-weighted assets) $43,437 10.41% $33,367 8.00% $41,708 10.00%
Tier I capital
(to risk-weighted assets) 40,163 9.63% N/A N/A 25,025 6.00%
Tier I capital
(to adjusted total assets) 40,163 6.37% 25,223 4.00% N/A N/A
Tangible capital
(to adjusted total assets) 40,163 6.37% 9,459 1.50% N/A N/A
82
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
OTS Requirements
-------------------------------------------------------------------------
Regulatory
Minimum for classification as
Bank actual capital adequacy well capitalized
-------------------- ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2002:
Total risk-based capital
(to risk-weighted assets) $32,537 11.17% $23,294 8.00% $ 29,118 10.00%
Tier I capital
(to risk-weighted assets) 30,306 10.41% N/A N/A 17,471 6.00%
Tier I capital
(to adjusted total assets) 30,306 7.01% 17,286 4.00% N/A N/A
Tangible capital
(to adjusted total assets) 30,306 7.01% 6,482 1.50% N/A N/A
NOTE O - SELECTED QUARTERLY FINANCIAL DATA
- ------------------------------------------
Unaudited quarterly financial data is as follows (in thousands, except share
data):
For the year ended
December 31, 2003
------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Interest income $7,508 $7,419 $7,264 $7,887
Interest expense 2,702 2,620 2,729 2,635
------ ------ ------ ------
Net interest income 4,806 4,799 4,535 5,252
Provision for losses 118 352 253 391
------ ------ ------ ------
Net interest income after provision for losses 4,688 4,447 4,282 4,861
Other income 382 652 752 835
Other expense 3,742 4,021 3,799 4,015
------ ------ ------ ------
Income before income tax provision 1,328 1,078 1,235 1,681
Provision for income taxes 492 351 496 572
------ ------ ------ ------
Net income $ 836 $ 727 $ 739 $1,109
====== ====== ====== ======
Basic earnings per share $ 0.26 $ 0.22 $ 0.23 $ 0.34
====== ====== ====== ======
Diluted earnings per share $ 0.26 $ 0.22 $ 0.23 $ 0.34
====== ====== ====== ======
83
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended
December 31, 2003, 2002, 2001
Year ended December 31, 2002
----------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Interest income $5,115 $5,787 $6,029 $6,428
Interest expense 1,979 2,139 2,460 2,466
------ ------ ------ ------
Net interest income 3,136 3,648 3,569 3,962
Provision for losses 270 281 209 317
------ ------ ------ ------
Net interest income after provision for losses 2,866 3,367 3,360 3,645
Other income 319 566 488 347
Other expense 2,411 2,979 3,074 3,262
------ ------ ------ ------
Income before income tax provision 774 954 774 730
Provision for income taxes 266 334 325 276
Net income $ 508 $ 620 $ 449 $ 454
====== ====== ====== ======
Basic earnings per share NM NM NM NM
== == == ==
Diluted earnings per share NM NM NM NM
== == == ==
NOTE P - SUBSEQUENT EVENT
- -------------------------
On July 28, 2003, Synergy Financial Group, Inc. announced the adoption of a Plan
of Conversion and Reorganization. Pursuant to said plan, a New Jersey stock
holding company ("New Company") was to be formed and all stock of Synergy
Financial Group, Inc. (the "Company"), the middle-tier stock holding company of
Synergy Bank and Synergy Financial Services, Inc., held publicly was to be
converted, subject to an exchange ratio, into shares of the new company.
Furthermore, Synergy, MHC would be eliminated and Synergy Bank and Synergy
Financial Services, Inc. would become wholly-owned subsidiaries of the New
Company, which would be owned entirely by public shareholders.
As of December 31, 2003, the Company had stock subscriptions payable to
qualifying depositors of $38.3 million and had initiated a community offering.
All subscriptions payable to qualifying depositors became capital of the New
Company.
Offering costs were deferred and deducted from the proceeds of the shares sold
in the second step stock conversion. At December 31, 2003, $577,000 of costs
were deferred and included in other assets on the balance sheet.
The Company closed this second step stock conversion at close of business
January 20, 2004, having received $101.7 million in subscriptions of which $69.2
million became capital of the new company, after deducting offering costs of
$1.2 million, and the remainder returned on oversubscriptions. The New Company
then infused $45.0 million in capital to the Bank as working capital.
The regulations of the OTS prohibit the Bank from declaring or paying a cash
dividend if the effect thereof would cause the Bank's regulatory capital to be
reduced below either the amount required for the liquidation account or the
federal regulatory capital requirement in section 567.2 of the Rules and
Regulations of the OTS.
84
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
On December 5, 2002, the Company dismissed Fontanella and Babitts,
Certified Public Accountants, as the Company's independent auditors and
appointed Grant Thornton LLP as its new independent auditors. The decision to
change accountants was approved by the Company's Board of Directors. Fontanella
and Babitts' reports on the Company's consolidated financial statements for the
two fiscal years ended December 31, 2001 did not contain an adverse opinion or
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles. In connection with audits of the two
fiscal years ended December 31, 2001 and any subsequent interim period preceding
the date of dismissal, there were no disagreements or reportable events between
the Company and Fontanella and Babitts on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of Fontanella and Babitts, would have
caused them to make a reference to the subject matter of the disagreements or
reportable events in connection with their reports. During the two fiscal years
ended December 31, 2001 and any subsequent interim period preceding the date of
dismissal, the Company did not consult with Grant Thornton LLP regarding the
application of accounting principals to any transaction or as to any accounting,
auditing or financial reporting issues.
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")),
the Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Annual Report on Form
10-K such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. During the
last quarter of the year under report, there was no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Section 16(A) Beneficial Ownership Reporting Compliance
The Common Stock of the Company is registered pursuant to Section 12(g)
of the Securities and Exchange Act of 1934, as amended. The officers and
directors of the Company and beneficial owners of greater than 10% of the
Company's Common Stock ("10% beneficial owners") are required by Section 16(a)
of such act to file reports of ownership and changes in beneficial ownership of
the Common Stock with the SEC and Nasdaq and to provide copies of those reports
to the Company. The Company is not aware of any beneficial owner, as defined
under Section 16(a), of more than 10% of its Common Stock. To the Company's
knowledge, all Section 16(a) filing requirements applicable to its officers and
directors were complied with during the 2003 fiscal year.
85
Directors and Executive Officers
The Company's certificate of incorporation requires that the Board of
Directors be divided into three classes, as nearly equal in number as possible,
each class to serve for a three-year period, with approximately one-third of the
directors elected each year. The Board of Directors currently consists of nine
members. The following table sets forth the names, ages, terms of, and length of
service for the directors and the executive officers of the Company.
AGE AT YEAR FIRST CURRENT
DECEMBER 31, ELECTED OR TERM TO
NAME 2003 APPOINTED(1) EXPIRE
- ---- ------ ------------ ------
Directors
Kenneth S. Kasper 49 1993 2005
Nancy A. Davis 64 1977 2006
Magdalena M. De Perez 53 2001 2005
John S. Fiore 46 2000 2006
David H. Gibbons, Jr. 33 2001 2004
Paul T. LaCorte 51 2001 2004
George Putvinski 55 1993 2005
W. Phillip Scott 52 1996 2006
Albert N. Stender 58 1999 2004
Executive Officers of the Company
Kevin M. McCloskey 45 N/A N/A
Kevin A. Wenthen 49 N/A N/A
Ralph A. Fernandez 39 N/A N/A
- ----------------
(1) Refers to the year the individual first became a director of the Bank. All
directors of the Bank in March 2001 became directors of the Company at that
time.
Set forth below is the business experience for the past five years of
each of the directors and executive officers of the Company.
Kenneth S. Kasper has served as Chairman of the Board of Directors of
the Company since its formation in 2001. He has been a director of the Bank
since 1993, and has served as Chairman of the Board of Directors of the Bank
since 1998. Mr. Kasper is a Compliance Director with Schering-Plough
Corporation, a pharmaceutical research and manufacturing company, a position he
has held since 1991. Prior to that time, Mr. Kasper served as Senior Counsel for
Schering-Plough. Mr. Kasper is also actively involved in civic activities,
serving as chairman for the Chester Borough Board of Adjustment, Chairman of the
Board of Environmental Health & Safety Auditor Certifications ("BEAC"), and
Director of the Council of Engineering and Scientific Specialty Boards.
Nancy A. Davis has served on the Board of Directors of the Company
since its formation in 2001, and the Bank since 1977. Ms. Davis retired from
Schering-Plough Corporation in 2002. She was employed by that company since
1965, most recently as a Senior Legal Assistant.
86
Magdalena M. De Perez has served on the Board of Directors of the Company
and the Bank since 2001. Ms. De Perez is Vice President-Investments, Financial
Advisor for Wachovia Securities, LLC. She has worked in the financial services
industry since 1983 and acts as a financial advisor to several community service
organizations in Union County.
John S. Fiore has been the President and Chief Executive Officer of the
Company since its formation in 2001 and has served as President and Chief
Executive Officer of the Bank since 1995. He also serves as a member of both
Boards of Directors. He has been employed by the Bank since 1989. Mr. Fiore also
serves as President and Chief Executive Officer of Synergy Financial Services,
Inc., a wholly-owned subsidiary of the Company.
David H. Gibbons, Jr. has served on the Board of Directors of the Company
and the Bank since 2001. Mr. Gibbons is Executive Vice President and General
Counsel of David O. Evans, Inc. and Gibbons Realty Group, Inc., the operating
companies for the affiliate commercial real estate holding companies known as
Vestal Development Co., Elberon Development Co., Pitney Partners, L.P., and
Portview Properties, LLC. Since 1999, Mr. Gibbons has been a salesperson with
Kay Realty Services, LLC, a real estate brokerage company. Mr. Gibbons is also
active in the community and serves as a Trustee for Trinitas Hospital, as a
Director of the YMCA of Eastern Union County, the Union County Alliance and
Elizabeth Chamber of Commerce, and is a Past Chairman of the Board of Directors
of Elizabeth Development Co. In addition, Mr. Gibbons serves as a Trustee for
the National Association of Office and Industrial Properties, a commercial real
estate trade and lobbying organization.
Paul T. Lacorte has served on the Board of Directors of the Company and the
Bank since 2001. Mr. LaCorte is currently President of Hamilton Holding Company
and V & F, Inc., and a partner with Ditullio and LaCorte Associates, LLC, all of
which are real estate management service companies. He is currently a member and
former Chairman of the Cranford Downtown Management Corporation and the Union
County Economic Development Corporation. He is also a member and former
President of the Cranford Chamber of Commerce.
George Putvinski has served on the Board of Directors of the Company since
its formation in 2001, and the Bank since 1993. Mr. Putvinski is employed as the
Director of Global Planning and Reporting-Technical Operations for
Schering-Plough Corporation. He has been employed by Schering-Plough Corporation
since 1979.
W. Phillip Scott has served on the Board of Directors of the Company since
its formation in 2001, and the Bank since 1996. Mr. Scott is employed as the
Manager of Sales Accounting and Logistics Finance for Schering-Plough
Corporation. He has been employed by Schering-Plough Corporation since 1980. Mr.
Scott is a certified public accountant.
Albert N. Stender has served on the Board of Directors of the Company since
its formation in 2001, and the Bank since 1999. Mr. Stender is a partner with
the law firm of Stender & Hernandez where he has practiced law since 1985. He is
also a partner in Mid-October Company. Mr. Stender serves as a Director of the
Cranford Chamber of Commerce, and prosecutor for the Boroughs of Kenilworth and
Roselle Park.
Kevin M. Mccloskey has served as Senior Vice President and Chief Operating
Officer since 2000. Prior to that time, Mr. McCloskey was the Vice President and
Chief Operating Officer for Lakeview Savings Bank. Mr. McCloskey is a Board
member and Treasurer of the YMCA of Eastern Union County, a member of
87
the Board of Trustees for Union County Economic Development Corporation and is a
Trustee of the Trinitas Health Foundation.
Kevin A. Wenthen has served as Senior Vice President and Chief
Administrative Officer since 1996 and as Secretary since 2002. Prior to joining
Synergy, Mr. Wenthen was the President and Chief Executive Officer of KAW
Marketing, Inc. and, prior to that, Vice President of Planning for Chemical Bank
New Jersey, NA.
Ralph A. Fernandez has served as Vice President and Chief Financial Officer
for the Company and the Bank since 2000 and was Vice President of Finance for
the Bank from 1999. Effective January 1, 2004, he was promoted to Senior Vice
President and Chief Financial Officer for the Company and the Bank. Prior to
that time, Mr. Fernandez was a regional executive policy committee member, a
senior examiner and a senior analyst for the Office of Thrift Supervision.
Audit Committee
The Audit Committee consists of Directors Gibbons (Chair), Davis, Kasper,
LaCorte and Putvinski. All members of the Audit Committee are independent under
the rules of the Nasdaq stock market. The Board of Directors has determined that
Mr. Putvinski is an Audit Committee Financial Expert within the meaning of the
regulations of the Securities and Exchange Commission. The Board of Directors
has adopted a written charter for the Audit Committee. The Audit Committee
typically meets every other month with the internal auditor and periodically as
needed with the external auditors. Its main responsibilities include oversight
of the internal and external auditors and monitoring of management and staff
compliance with the Board's audit policies, and applicable laws and regulations.
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
- --------------------------------
Compensation of Directors
Board Fees. For the year ended December 31, 2003, each director was paid a
fee of $1,000 per Board meeting and $300 per committee meeting for each such
meeting attended, and the Chairman received an additional annual fee of $3,000.
For the year ended December 31, 2003, each director also received a profit
sharing award of $3,000. The total compensation paid to the directors for the
year ended December 31, 2003, including profit sharing, was approximately
$161,300. Directors who also serve as employees of the Bank do not receive
compensation as directors.
2003 Stock Awards
- -----------------
2003 STOCK OPTION PLAN. Directors and officers were awarded options to
purchase shares of common stock on April 22, 2003, the date of stockholder
approval of the Synergy Financial Group, Inc. 2003 Stock
88
Option Plan, at an exercise price equal to the fair market value of the Common
Stock on that date. Each non-employee director was awarded 23,139 options.
President and Chief Executive Officer Fiore was awarded 152,743 options.
Officers McCloskey, Wenthen and Fernandez were each awarded 74,462 options.
These options are first exercisable at a rate of 20% one year after the date of
grant and 20% annually thereafter during such period of service as an employee,
director or director emeritus. Upon disability, death, or a change in control,
such awards become 100% exercisable. The number of options and the exercise
price have been adjusted in accordance with the exchange ratio in connection
with the second-step mutual-to-stock conversion completed on January 20, 2004.
As adjusted for the exchange ratio in the exercise price is now $5.5867.
2003 Restricted Stock Plan. Directors and officers were awarded shares
of restricted stock on April 22, 2003, the date of stockholder approval of the
Synergy Financial Group, Inc. 2003 Restricted Stock Plan. Each non-employee
director was awarded 7,911 shares of restricted stock. President and Chief
Executive Officer Fiore was awarded 52,532 shares of restricted stock. Officers
McCloskey, Wenthen and Fernandez were each awarded 23,827 shares of restricted
stock. Restricted stock awards are earned at the rate of 20% one year after the
date of grant and 20% annually thereafter during periods of service as an
employee, director or director emeritus. All awards become immediately 100%
vested upon death or disability or termination of service following a change in
control. The restricted stock awards have been adjusted in accordance with the
exchange ratio in connection with the second-step mutual-to-stock conversion
completed on January 20, 2004. The 2003 Restricted Stock Plan intends to
continue to make stock purchases in the open market from time to time to fund
such plan.
Executive Compensation
Summary Compensation Table. The following table sets forth the
compensation awarded to or earned by the Company's President and Chief Executive
Officer and certain other executive officers for the years shown. No other
officer received a total annual salary and bonus in excess of $100,000 during
the reporting period.
Annual Compensation(1) Long Term Compensation Awards
---------------------- -----------------------------------
Restricted Securities All
Fiscal Stock Underlying Other
Name and Principal Position Year Salary Bonus Award(s) ($)(2) Options/sars(#)(3) Compensation
- --------------------------- ------ ------ ----- --------------- ------------------ ------------
John S. Fiore, 2003 $220,450 $78,260 293,480 152,743 $60,953(4)
President and Chief 2002 204,120 205,140 - - 57,868
Executive Officer 2001 189,000 68,040 - - 50,353
Kevin M. McCloskey, 2003 $140,000 $42,700 133,114 74,462 $39,333(5)
Senior Vice President and 2002 130,000 124,150 - - 27,449
Chief Operating Officer 2001 122,000 37,820 - - 6,992
Kevin A. Wenthen, 2003 $135,000 $41,175 133,114 74,462 $37,896(6)
Senior Vice President and 2002 125,000 119,375 - - 26,420
Chief Administrative Officer 2001 115,000 35,650 - - 12,073
Ralph A. Fernandez, 2003 $105,000 $32,025 133,114 74,462 $29,465(7)
Senior Vice President and 2002 95,000 90,725 - - 20,099
Chief Financial Officer 2001 88,000 27,280 - - 9,250
89
- --------------
(1) All compensation set forth in the table, other than awards under the 2003
Stock Option Plan and the 2003 Restricted Stock Plan, was paid by the Bank
(2) Represents the award of 52,532 shares of restricted stock to Mr. Fiore and
23,827 shares of restricted stock to each of Messrs. McCloskey, Wenthen and
Fernandez under the 2003 Restricted Stock Plan, based upon the last
reported sales price for the common stock as reported on the OTC Electronic
Bulletin Board on April 22, 2003, the date of the award. This award vests
at the rate of 20% per year, beginning on the first anniversary date of the
grant. Dividend rights associated with the restricted stock are accrued and
held in arrears to be paid at the time the shares vest. As of December 31,
2003, no shares had vested and the value of the restricted shares held by
Mr. Fiore was $527,677 and the value of the restricted shares held by each
of Messrs. McCloskey, Wenthen and Fernandez was $239,352.
(3) Mr. Fiore was awarded 152,743 options and Messrs. McCloskey, Wenthen and
Fernandez were each awarded 74,462 options at the exercise price of $5.5867
per share, equal to the fair market value of the Common Stock on April 22,
2003, the date of the award. The number of options and the exercise price
have been adjusted for the exchange ratio in connection with the second-
step conversion completed in January 2004.
(4) For 2003, includes the Bank's contribution under the individual's
Supplemental Executive Retirement Plan of $24,270, the Bank's contribution
to the individual's account under a 401(k) Plan of $11,023, the award of
2,420 shares under the ESOP as of December 31, 2003 and $1,350 for term
life insurance premium.
(5) For 2003, includes the Bank's contribution under the individual's
Supplemental Executive Retirement Plan of $14,520, the Bank's contribution
to the individual's account under a 401(k) Plan of $7,000, and the award of
1,694 shares under the ESOP as of December 31, 2003 and $796 for term life
insurance premium.
(6) For 2003, includes the Bank's contribution under the individual's
Supplemental Executive Retirement Plan of $14,000, the Bank's contribution
to the individual's account under a 401(k) Plan of $6,750, and the award of
1,634 shares under the ESOP as of December 31, 2003 and $765 for term life
insurance premium.
(7) For 2003, includes the Bank's contribution under the individual's
Supplemental Executive Retirement Plan of $10,880, the Bank's contribution
to the individual's account under a 401(k) Plan of $5,250, and the award of
1,270 shares under the ESOP as of December 31, 2003 and $581 for term life
insurance premium.
The following table sets forth information concerning options granted under
the 2003 Stock Option Plan during the year ended December 31, 2003.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
OPTION GRANTS IN 2003 FISCAL YEAR ANNUAL RATES OF STOCK
--------------------------------- PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
------------------------------------------------------------
PERCENT OF
TOTAL OPTIONS
NUMBER GRANTED TO EXERCISE
OF OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ------- ----------- --------- ---- ------ -------
John S. Fiore 152,743 35% $5.5867 4/22/13 536,654 1,359,987
Kevin M. McCloskey 74,462 17% $5.5867 4/22/13 261,618 662,992
Kevin A. Wenthen 74,462 17% $5.5867 4/22/13 261,618 662,992
Ralph A. Fernandez 74,462 17% $5.5867 4/22/13 261,618 662,992
90
The following table sets forth information concerning options held as
of December 31, 2003.
Aggregated Option Exercises in 2003 Fiscal Year and Fiscal Year End Option Values
Value of
Shares Number of Options In-the-money Options
Acquired On Value At Fiscal Year-end (#) At Fiscal Year-end ($)
Name Exercise (#) Realized ($) Exercisable/unexercisable Exercisable/unexercisable (1)
---- ------------ ------------ ------------------------- -----------------------------
John S. Fiore - - - / 152,743 - / $681,034
Kevin M. McCloskey - - - / 74,462 - / $332,003
Kevin A. Wenthen - - - / 74,462 - / $332,003
Ralph A. Fernandez - - - / 74,462 - / $332,003
Employment Agreements. The Bank has entered into an employment
agreement with Mr. Fiore. Mr. Fiore's base salary under the employment agreement
for the year ended December 31, 2003 was $220,450. Mr. Fiore's employment
agreement has a term of three years and may be terminated by the Bank for
"cause" as defined in the agreement. If the Bank terminates Mr. Fiore's
employment without just cause, he will be entitled to a continuation of his
salary from the date of termination through the remaining term of the agreement.
The employment agreement contains a provision stating that after Mr. Fiore's
employment is terminated in connection with any change in control, he will be
paid a lump sum amount equal to 2.99 times his base salary and the highest rate
of bonus awarded to him during the three years prior to such termination. If
payment had been made under the agreement as of December 31, 2003, the payment
to Mr. Fiore would have equaled approximately $818,700. In addition, the Board
has entered into Change in Control Severance Agreements with Officers McCloskey,
Wenthen and Fernandez. Under such agreements, if their employment is terminated
within eighteen months of a change in control of the Bank, such individuals
would receive severance benefits equal to approximately three times their
average annual compensation. At December 31, 2003, such payments would have
equaled approximately $520,000, $483,800 and $351,300, respectively, upon
termination following a change in control. All payments to be made under these
agreements shall be reduced as may be necessary so that such payments will not
exceed the tax deductible limits under Section 280G of the Code.
Supplemental Executive Retirement Plan. Synergy Bank has adopted a
Supplemental Executive Retirement Plan ("SERP" or "Plan") for the benefit of
John S. Fiore, president and chief executive officer. Annually, the Bank accrues
an expense of 11% of his salary including projected increases through his
retirement at age 60, plus projected earnings on prior year accruals at the rate
of 7% per annum. Such accruals are projected to furnish Mr. Fiore with an annual
pension benefit upon retirement at age 60 of $102,366 per year for a period of
fifteen years. In addition, on January 1, 2002, Synergy Bank implemented a SERP
for the benefit of executive officers McCloskey, Wenthen and Fernandez. In
accordance with the Plan for Messrs. McCloskey, Wenthen and Fernandez, an annual
accrual equal to 10% of each participant's base salary will be credited to the
Plan reserve. The accumulated deferred compensation account for each participant
will be payable to such participant at anytime following termination of
employment after three years following Plan implementation, the death or
disability of the participant, or termination of employment following a change
in control of Synergy Bank whereby Synergy Bank or Synergy Financial Group, Inc.
is not the resulting entity.
91
Compensation Committee Report On Executive Compensation
The Compensation Committee (the "Committee") has furnished the
following report on executive compensation:
Under the supervision of the Board of Directors, the Company has
developed and implemented compensation policies, plans and programs which seek
to enhance the profitability of the Company, and thus shareholder value, by
aligning closely the financial interests of the Company's employees, including
its Chief Executive Officer ("CEO"), Chairman and other senior management, with
the interests of its shareholders. All members of the Compensation Committee are
independent directors.
Compensation Philosophy and Strategy. The executive compensation
program of the Company is designed to:
o Support a pay-for-performance policy that differentiates compensation based
on corporate and individual performance;
o Motivate employees to assume increased responsibility and reward them for
their achievement;
o Provide compensation opportunities that are comparable to those offered by
other leading companies, allowing the Company to compete for and retain top
quality, dedicated executives who are critical to the Company's long-term
success; and
o Align the interests of executives with the long-term interests of
shareholders through award opportunities that can result in ownership of
Common Stock.
At present, the executive compensation program is comprised of salary,
annual cash incentive opportunities, long-term incentive opportunities in the
form of stock options, and miscellaneous benefits typically offered to
executives in comparable corporations. The Committee considers the total
compensation (earned or potentially available) in establishing each element of
compensation so that total compensation paid is competitive with the market
place, based on an independent consultant's survey of salary competitiveness of
other financial institutions. The Committee is advised periodically by
independent compensation consultants concerning salary competitiveness.
As an executive's level of responsibility increases, a greater portion
of his or her potential total compensation opportunity is based on Company
performance incentives rather than on salary. Reliance on Company performance
causes greater variability in the individual's total compensation from year to
year. By varying annual and long-term compensation and basing both on corporate
performance, the Company believes executive officers are encouraged to continue
focusing on building profitability and shareholder value. The mix of annual and
long-term compensation was set subjectively. In determining the mix, the
Committee balanced rewards for past corporate performance with incentives for
future corporate performance improvement.
Base Salary. Annual base salaries for all executive officers are
generally set at competitive levels. The salary ranges for each position are
determined by evaluating the responsibilities and accountabilities of the
position and comparing it with other executive officer positions in the market
place on an annual basis. The base
92
salary of each executive officer, including the President and Chief Executive
Officer, is reviewed annually and adjusted within the position range based upon
a performance evaluation.
Long-term Incentive Compensation. The Company relies to a large degree
on annual and longer term incentive compensation to attract and retain corporate
officers and other employees and to motivate them to perform to the full extent
of their abilities. The long-term incentive compensation includes restricted
stock awards and stock option awards. The Committee believes that issuing stock
options and other stock-based incentives to executives benefits the Company's
shareholders by encouraging and enabling executives to own stock of the Company,
thus aligning executive pay with shareholder interests.
Compensation of the Chief Executive Officer. Mr. Fiore has served as
President and Chief Executive Officer of the Company since its formation and as
President and Chief Executive Officer of the Bank since 1995. His salary for
2003 of $220,450 reflected the Board's assessment of compensation levels for the
industry. In addition, during 2003, Mr. Fiore was awarded stock options to
purchase 152,743 shares, as adjusted for the exchange ratio, of common stock on
April 22, 2003, the date of stockholder approval of the Synergy Financial Group,
Inc. 2003 Stock Option Plan, at an exercise price equal to the fair market value
of the Common Stock on that date. These options are first exercisable at a rate
of 20% one year after the date of grant and 20% annually thereafter during such
period of service as an employee, director or director emeritus. Upon
disability, death, or a change in control, such awards become 100% exercisable.
The number of options and the exercise price have been adjusted in accordance
with the exchange ratio in connection with the second-step mutual-to-stock
conversion completed on January 20, 2004. As adjusted for the exchange ratio,
the exercise price is now $5.5867. Additionally, Mr. Fiore was awarded 52,532
shares, as adjusted for the exchange ratio, of restricted stock on April 22,
2003, the date of stockholder approval of the Synergy Financial Group, Inc. 2003
Restricted Stock Plan. Restricted stock awards are earned at the rate of 20% one
year after the date of grant and 20% annually thereafter during periods of
service as an employee, director or director emeritus. All awards become
immediately 100% vested upon death or disability or termination of service
following a change in control. The restricted stock awards have been adjusted in
accordance with the exchange ratio in connection with the second-step
mutual-to-stock conversion completed on January 20, 2004.
Compensation Committee:
Magdalena M. De Perez
David H. Gibbons, Jr.
Kenneth S. Kasper
W. Phillip Scott
Albert N. Stender
Stock Performance Graph. No performance graph is presented for the
Company's common stock because it did not commence trading until January 21,
2004. In future periods, the Company will present information comparing the
cumulative total stockholder return on the Company's common stock with (a) the
cumulative total stockholder return on stocks included in the Nasdaq U.S. Stock
Market Index, (b) the cumulative total stockholder return on stocks included in
a peer group.
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee of the Bank during the year ended December 31, 2003,
consisted of Directors De Perez, Gibbons, Kasper, Scott and Stender. During the
year ended December 31, 2003, the Company had no "interlocking" relationships in
which (i) an executive officer of the Company served as a member of the
compensation committee of another entity,
93
one of whose executive officers served on the compensation committee of the
Company; (ii) an executive officer of the Company served as a director of
another entity, one of whose executive officers served on the compensation
committee of the Company; and (iii) an executive officer of the Company served
as a member of the compensation committee of another entity, one of whose
executive officers served as a director of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Persons and groups owning in excess of 5% of the outstanding
shares of Common Stock are required to file reports regarding such
ownership pursuant to the Securities Exchange Act of 1934, as amended.
Other than as set forth in the following table, management knows of no
person or group that owns more than 5% of the outstanding shares of
Common Stock at the Record Date.
Percent of Shares
Amount and Nature of of Common Stock
Name and Address of Beneficial Owner Beneficial Ownership Outstanding
- ------------------------------------ -------------------- -----------------
Synergy Financial Group, Inc. Bank Employee Stock
Ownership Plan Trust (the "ESOP") 996,167(1) 8.0%
310 North Avenue East
Cranford, New Jersey 07016
--------------------
(1) These shares are held in a suspense account and are allocated among
participants annually on the basis of compensation as the ESOP debt is
repaid. The Board of Directors appointed all non-employee directors to
serve as ESOP Trustees and appointed John S. Fiore, President and Chief
Executive Officer, Kevin A. Wenthen, Senior Vice President, and Janice
L. Ritz, a Vice President of the Bank, as members of the ESOP Plan
Committee. The ESOP Plan Committee directs the vote of all unallocated
shares and shares allocated to participants if timely voting directions
are not received for such shares.
(b) Security Ownership of Management
The following table sets forth the number and percentage of
shares of Common Stock beneficially owned by the directors and the
executive officers of the Company as of March 10, 2004.
Shares of
Common Stock Percent
Beneficially of
Name Owned(1) Class
- ---- --------------- -----
Directors
Kenneth S. Kasper 47,600(2)(3)(4) *
Nancy A. Davis 41,015(2)(3) *
Magdalena M. De Perez 13,432(2)(3) *
John S. Fiore 146,570(5) 1.2%
David H. Gibbons, Jr. 50,454(2)(3)(6) *
Paul T. LaCorte 30,015(2)(3) *
George Putvinski 39,716(2)(3)(7) *
W. Phillip Scott 26,312(2)(3)(8) *
Albert N. Stender 42,321(2)(3)(9) *
94
Executive Officers of the Company
Kevin M. McCloskey 196,972(10)(11) 1.6%
Kevin A. Wenthen 50,265(10) *
Ralph A. Fernandez 61,203(10)(12) *
All directors and executive 745,875(13) 5.9%
officers of the Company as a
group (12 persons)
- ---------------
* Less than 1.0%.
(1) For Messrs. Fiore, McCloskey, Wenthen and Fernandez, includes shares
allocated to individual accounts under both the ESOP and the Synergy
Financial Group, Inc. 401(k) Savings Plan. An individual is considered to
beneficially own shares of Common Stock if he or she directly or indirectly
has or shares (1) voting power, which includes the power to vote, or to
direct the voting of, the shares; or (2) investment power, which includes
the power to dispose, or direct the disposition of, the shares.
(2) Excludes 996,167 shares of Common Stock held under the ESOP over which such
individual, as an ESOP Trustee, exercises shared voting power. Also
excludes 168,834 shares of Common Stock held under the 2003 Restricted
Stock Plan ("RSP") over which such individual, as an RSP Trustee, exercises
shared voting power.
(3) Includes 4,627 shares of Common Stock which may be acquired pursuant to the
exercise of options that become exercisable within 60 days of March 10,
2004. Includes 1,582 shares of Common Stock under the RSP which will vest
on April 22, 2004.
(4) Includes 31,537 shares owned by Mr. Kasper's wife, which Mr. Kasper may be
deemed to beneficially own.
(5) Includes 30,548 shares of Common Stock which may be acquired pursuant to
the exercise of options that become exercisable within 60 days of March 10,
2004. Includes 10,506 shares of Common Stock under the RSP which will vest
on April 22, 2004. Includes 26,061 shares owned by Mr. Fiore's wife, which
Mr. Fiore may be deemed to beneficially own.
(6) Includes 2,457 shares owned by Mr. Gibbon's wife, which Mr. Gibbons may be
deemed to beneficially own. (7) Includes 14,892 shares owned by Mr.
Putvinski's wife, which Mr. Putvinski may be deemed to beneficially own.
(8) Includes 930 shares owned by Mr. Scott's wife and 3,723 shares held in
trust for a minor child, which Mr. Scott may be deemed to beneficially own.
(9) Includes 32,763 shares owned by Mr. Stender's wife, which Mr. Stender may
be deemed to beneficially own.
(10) Includes 14,892 shares of Common Stock which may be acquired pursuant to
the exercise of options that become exercisable within 60 days of the
Record Date. Includes 4,765 shares of Common Stock under the RSP which will
vest on April 22, 2004.
(11) Includes 18,615 shares held by the Kevin McCloskey Family, LLC for which
Mr. McCloskey maintains voting control but maintains less than 5%
ownership.
(12) Includes 744 shares held in trust for minor children, which Mr. Fernandez
may be deemed to beneficially own.
(13) Includes shares of Common Stock held directly as well as by spouses or
minor children, in trust and other indirect ownership. Excludes shares held
by the ESOP (other than shares allocated to executive officers of the
Company) over which directors, as ESOP Trustees, exercise shared voting
power. Also excludes shares of Common Stock held under the RSP over which
directors, as RSP Trustees, exercise shared voting power.
(c) Changes in Control
Management of the Registrant knows of 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, 2003 with
respect to compensation plans under which equity securities of the
Registrant are authorized for issuance.
95
Equity Compensation Plan Information
(A)
(B)
(C)
Number
of
Securities
Number of Securities Weighted-average Remaining Available for
to be Issued Upon Exercise Price of Future Issuance Under
Exercise of Outstanding Equity Compensation
Outstanding Options, Options, Warrants Plans (Excluding Securities
Warrants and Rights and Rights Reflected in Column (A))
------------------- ---------- ------------------------
Equity Compensation Plans
Approved by Shareholders:
2003 Stock Option Plan............. 617,088 $5.5867 -
2003 Restricted Stock Plan(1)...... n/a n/a -
EQUITY COMPENSATION PLANS NOT
APPROVED BY SHAREHOLDERS:
Not applicable..................... - - -
------- ------- -----
TOTAL.......................... 617,088 $5.5867 -
======= ====== =====
- ----------------------
(1) Restricted stock awards of 211,043 shares have been granted. Such awards
are earned at the rate of 20% one year after the date of the grant and 20%
annually thereafter. No shares remain available for issuance under this
plan.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
No directors, officers or their immediate family members were engaged
in transactions with the Company or any subsidiary involving more than $60,000
(other than loans with the Bank) during the two years ended December 31, 2003.
The Bank, like many financial institutions, has followed the policy of
offering residential mortgage loans for the financing of personal residences and
consumer loans to its officers, directors and employees. Loans are made in the
ordinary course of business and are also made on substantially the same terms
and conditions, other than a 1% discount for employees on the interest rate paid
while the person remains an employee, as those of comparable transactions
prevailing at the time with other persons, and do not include more than the
normal risk of collectibility or present other unfavorable features. As of
December 31, 2003, all loans outstanding to all directors, nominees and
executive officers, and the affiliates of such persons, were current and
performing in accordance with their terms.
Item 14. Principal Accounting Fees and Services
- ------------------------------------------------
Effective July 30, 2002, the Securities and Exchange Act of 1934 was
amended by the Sarbanes-Oxley Act of 2002 to require all auditing services and
non-audit services provided by an issuer's independent auditor to be
pre-approved by the issuer's audit committee. The Company's Audit Committee has
adopted a policy of approving all audit and non-audit services prior to the
service being rendered.
96
All of the services listed below for 2002 and 2003 were approved by the
Audit Committee prior to the service being rendered, other than tax services
totaling $7,950 for the year ended December 31, 2002, rendered by the Company's
former auditor, Fontanella and Babitts, which was engaged to render and which
rendered such services during 2002 prior to the pre-approval requirement created
by the Sarbanes-Oxley Act of 2002.
Audit Fees. The aggregate fees billed by Grant Thornton LLP for
professional services rendered for the audit of the Company's annual
consolidated financial statements and for the review of the consolidated
financial statements included in the Company's Quarterly Reports on Form 10-Q
for the fiscal years ended December 31, 2003 and 2002 were $78,489 and $51,500,
respectively. Additionally, for the year ended December 31, 2002, the Company
paid $6,535 for professional services rendered by its former auditor, Fontanella
and Babitts, Certified Public Accountants, in connection with the review of the
quarterly financial statements.
Audit Related Fees. The aggregate fees billed by Grant Thornton LLP for
assurance and related services related to the audit of the annual financial
statements and to the review of the quarterly financial statements for the years
ended December 31, 2003 and 2002 were $123,085 and $0, respectively and
consisted of services in connection with the Company's second-step stock
offering completed on January 20, 2004.
Tax Fees. The aggregate fees billed by Grant Thornton LLP for
professional services rendered for tax compliance, tax advice or tax planning
for the years ended December 31, 2003 and 2002 were $25,132 and $0,
respectively. Additionally, for the year ended December 31, 2002, the Company
paid $7,950 to its former auditor, Fontanella and Babitts, for professional
services rendered for tax compliance, tax advice or tax planning.
All Other Fees. The aggregate fees billed by Grant Thornton LLP for
professional services rendered for services or products other than those listed
under the captions "Audit Fees," "Audit-Related Fees," and "Tax Fees" for the
years ended December 31, 2003 and 2002 were $1,000 and $0, respectively, and
consisted of services in connection with the Company's second-step stock
offering completed on January 20, 2004. Additionally, the aggregate fees billed
by the Company's former auditor, Fontanella and Babitts, for the year ended
December 31, 2002 included $50,037 for services in connection with the Company's
stock offering completed in September 2002 and $7,250 for services in connection
with the Bank's acquisition of FBCJ completed in January 2003.
Item 15. Exhibits, Financial Statement Schedules, and Reports On Form 8-K
- --------------------------------------------------------------------------------
(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, 2003 and 2002 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the three years ended December 31,
2003, together with the related notes and the report of independent certified
public accountants.
2. There are no financial statement schedules required to be filed.
97
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.*
3(ii) Bylaws of Synergy Financial Group, Inc.*
4 Specimen Stock Certificate of Synergy Financial Group, Inc.*
10.1 Employment Agreement between Synergy Bank and John S. Fiore**
10.2 Supplemental Executive Retirement Income Agreement for John S. Fiore**
10.3 Synergy Federal Savings Bank Supplemental Executive Retirement Plan for the Benefit
of Senior Officers**
10.4 Synergy Financial Group, Inc. 2003 Restricted Stock Plan***
10.5 Synergy Financial Group, Inc. 2003 Stock Option Plan***
10.6 Change in Control Severance Agreement between Synergy Bank and Kevin M.
McCloskey*
10.7 Change in Control Severance Agreement between Synergy Bank and Kevin A. Wenthen*
10.8 Change in Control Several Agreement between Synergy Bank and Ralph A. Fernandez*
10.9 Directors Change in Control Plan*
16 Letter of concurrence from Fontanella and Babitts, Certified Public Accountants,
regarding change in certifying accountant
21 Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
23.2 Consent of Fontanella and Babitts
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
* 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)
** Incorporated by reference to the Company's Registration Statement
on Form SB-2 (File No. 333-89384 filed with the SEC on May 30,
2002). Synergy Bank changed its name from Synergy Federal Savings
Bank after these agreements were entered into.
*** 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)
(b) Reports on Form 8-K.
A Report on Form 8-K was filed with the SEC on October 30,
2003 to announce earnings for the quarter ended September 30,
2003. (Items 7 and 12)
A Report on Form 8-K was filed with the SEC on December 16,
2003 to announce completion of the Company's Subscription
Offering and commencement of the Company's Community Offering
in connection with the second-step mutual-to-stock conversion
of Synergy, MHC.
(Items 5 and 7)
98
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 30, 2004.
SYNERGY FINANCIAL GROUP, INC.
By: /s/ John S. Fiore
------------------------------------
John S. Fiore
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, 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 30, 2004.
/s/ Kenneth S. Kasper /s/ John S. Fiore
- ------------------------------------ ---------------------------------------
Kenneth S. Kasper John S. Fiore
Chairman and Director President, Chief Executive Officer and
Director (Principal Executive Officer)
/s/ Ralph A. Fernandez /s/ Paul T. LaCorte
- ------------------------------------ ---------------------------------------
Ralph A. Fernandez Paul T. LaCorte
Senior Vice President and Chief Director
Financial Officer
(Principal Financial and Accounting
Officer)
/s/ Nancy A. Davis /s/ George Putvinski
- ------------------------------------ ---------------------------------------
Nancy A. Davis George Putvinski
Director Director
/s/ W. Phillip Scott /s/ Albert N. Stender
- ------------------------------------ ---------------------------------------
W. Phillip Scott Albert N. Stender
Director Director
/s/ David H. Gibbons, Jr. /s/ Magdalena M. De Perez
- ------------------------------------ ---------------------------------------
David H. Gibbons, Jr. Magdalena M. De Perez
Director Director