SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: June 30, 2004
-------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
SEC File Number: 000-50467
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SYNERGY FINANCIAL GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
New Jersey 52-2413926
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 North Avenue East, Cranford, New Jersey 07016
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(800) 693-3838
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant: (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of common stock as of August 6, 2004:
$0.10 Par Value Common Stock 12,452,011
- ---------------------------- ----------
Class Shares Outstanding
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 (unaudited), and
December 31, 2003 (audited).....................................................................1
Consolidated Statements of Income for the three and six months ended June 30, 2004
and 2003 (unaudited)............................................................................2
Consolidated Statement of Changes in Stockholders' Equity for the six months ended
June 30, 2004 (unaudited).......................................................................3
Consolidated Statements of Cash Flows for the six months ended June 30, 2004
and 2003 (unaudited)............................................................................4
Notes to Consolidated Financial Statements (unaudited)..............................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................23
Item 4. Controls and Procedures............................................................................24
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings..................................................................................25
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities..........................................................25
Item 3. Defaults Upon Senior Securities....................................................................25
Item 4. Submission of Matters to a Vote of Security Holders................................................25
Item 5. Other Information..................................................................................25
Item 6. Exhibits and Reports on Form 8-K...................................................................25
Signatures.......................................................................................................27
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
June 30, December 31,
2004 2003
(unaudited) (audited)
----------- ---------
Assets:
Cash and amounts due from banks $ 4,228 $ 4,481
Interest-bearing deposits with banks 4,631 2,811
--------- ---------
Cash and cash equivalents 8,859 7,292
Investment securities available-for-sale,
at fair value 153,350 123,779
Investment securities held-to-maturity (fair
value of $112,935 and $33,216, respectively) 114,345 33,214
Federal Home Loan Bank of New York
stock, at cost 8,874 3,644
Loans receivable, net 486,963 434,585
Accrued interest receivable 2,653 2,021
Property and equipment, net 17,346 17,620
Cash surrender value of officer life insurance 2,414 2,475
Other assets 5,415 3,988
--------- ---------
Total assets $ 800,219 $ 628,618
========= =========
Liabilities:
Deposits $ 520,202 $ 473,535
Federal Home Loan Bank advances 171,704 72,873
Advance payments by borrowers
for taxes and insurance 1,769 1,582
Accrued interest payable on advances 275 119
Stock subscriptions payable - 38,322
Dividend payable 461 -
Other liabilities 1,383 1,259
--------- ---------
Total liabilities 695,794 587,690
--------- ---------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock; $.10 par value, 5,000,000 shares
authorized; issued and outstanding - none - -
Common stock; $.10 par value, 20,000,000 shares
authorized; issued June 30, 2004 - 12,452,011,
December 31, 2003 - 3,344,252 1,245 334
Additional paid-in-capital 83,122 15,008
Retained earnings 29,311 27,858
Unearned ESOP shares (6,302) (1,009)
Unearned RSP compensation (892) (1,011)
Treasury stock acquired for the RSP (454) (103)
Accumulated other comprehensive
income (loss), net of taxes (1,605) (149)
--------- ---------
Total stockholders' equity 104,425 40,928
--------- ---------
Total liabilities and stockholders' equity $ 800,219 $ 628,618
========= =========
The accompanying notes are an integral part of these statements.
-1-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Interest income:
Loans, including fees $ 6,681 $ 6,277 $ 13,397 $ 12,544
Investment securities 1,652 1,078 3,163 2,275
Other 24 64 45 108
----------- ---------- ----------- ----------
Total interest income 8,357 7,419 16,605 14,927
----------- ---------- ----------- ----------
Interest expense:
Deposits 2,191 2,261 4,285 4,597
Borrowed funds 630 409 1,106 825
----------- ---------- ----------- ----------
Total interest expense 2,821 2,670 5,391 5,422
----------- ---------- ----------- ----------
Net interest income before provision for loan losses 5,536 4,749 11,214 9,505
----------- ---------- ----------- ----------
Provision for loan losses 336 353 704 470
----------- ---------- ----------- ----------
Net interest income after provision for loan losses 5,200 4,396 10,510 9,035
----------- ---------- ----------- ----------
Other income:
Service charges and other fees on deposit accounts 564 421 1,048 732
Commissions 18 16 33 51
Other (69) 215 103 251
----------- ---------- ----------- ----------
Total other income 513 652 1,184 1,034
----------- ---------- ----------- ----------
Other expenses:
Salaries and employee benefits 2,239 1,827 4,493 3,689
Premises and equipment 906 1,155 1,915 1,948
Occupancy 473 456 947 964
Professional services 118 118 246 276
Advertising 186 197 362 358
Other operating 319 218 590 428
----------- ---------- ----------- ----------
Total other expenses 4,241 3,971 8,553 7,663
----------- ---------- ----------- ----------
Income before income tax expense 1,472 1,077 3,141 2,406
----------- ---------- ----------- ----------
Income tax expense 562 350 1,226 843
----------- ---------- ----------- ----------
Net income $ 910 $ 727 $ 1,915 $ 1,563
=========== ========== =========== ==========
Per share of common stock:
Basic earnings per share $ 0.08 $ 0.22 0.18 $ 0.48
Diluted earnings per share $ 0.08 $ 0.22 $ 0.18 $ 0.48
Basic weighted average shares outstanding 11,494,581 3,234,866 10,575,334 3,233,946
Diluted weighted average shares outstanding 11,713,264 3,236,289 10,787,136 3,234,668
The accompanying notes are an integral part of these statements.
-2-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2004
(Dollars in thousands, except share amounts)
Treasury
Common stock stock Accumulated
------------ Additional Unearned Unearned acquired comprehensive
Shares Par paid-in- Retained ESOP RSP for the income (loss),
issued value capital earnings shares compensation RSP net TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2004 3,344,252 $334 $15,008 $27,858 $(1,009) $(1,011) $(103) $(149) $40,928
Net income - - - 1,915 - - - - 1,915
Other comprehensive
income, net of
reclassification
adjustment and taxes - - - - - - - (1,456) (1,456)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 459
- ------------------------------------------------------------------------------------------------------------------------------------
Net proceeds of stock
offering and
issuance of common
stock 9,107,759 911 68,349 - - - - - 69,260
Dividends declared (462) (462)
Common stock acquired
by ESOP (562,873
shares) - - - - (5,628) - - - (5,628)
Common stock held by
ESOP committed
to be released
(48,812 shares) - - 173 - 335 - - - 508
Compensation
recognized under
RSP Plan - - - - 119 - - 119
Common stock
repurchased
for RSP Plan
(90,614 shares) (759) (759)
Common stock awarded
by RSP (41,573 shares) (408) 408 0
BALANCE AT JUNE 30, 2004 12,452,011 $1,245 $83,122 $29,311 $(6,302) $ (892) $(454) $(1,605) $104,425
====================================================================================================================================
The accompanying notes are an integral part of these statements.
-3-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
For the Six Months
Ended June 30,
2004 2003
(unaudited) (unaudited)
-----------------------
Operating activities
Net income $ 1,915 $ 1,563
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 730 755
Provision for loan losses 704 470
Deferred income taxes (836) 48
Amortization of deferred loan fees 4 30
Amortization of premiums on investment securities 772 747
Release of ESOP shares 335 113
Compensation under RSP plan 119 60
Increase in accrued interest receivable (632) (375)
Increase in other assets (591) (1,770)
Increase (decrease) in other liabilities 124 (171)
Decrease (increase) in cash surrender value of officer life insurance 61 (140)
Increase (decrease) in accrued interest payable on advances 156 (49)
--------- ---------
Net cash provided by operating activities 2,861 1,281
--------- ---------
Investing activities
Purchase of investment securities held-to-maturity (86,110) (10,650)
Purchase of investment securities available-for-sale (58,664) (67,661)
Purchase and principal repayments of investment
securities held-to-maturity 4,778 9,422
Maturity and principal repayments of investment
securities available-for-sale 27,065 22,748
Purchase of property and equipment (456) (934)
Purchase of FHLB Stock (5,230) (1,904)
Loan originations, net of principal repayments (32,970) (34,649)
Purchase of loans (20,115) -
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 (171,702) (78,124)
--------- ---------
Financing activities
Net increase in deposits 46,667 37,019
Net advances from FHLB 98,831 38,746
Increase in advance payments by borrowers
for taxes and insurance 186 192
Decrease in stock subscriptions payable (38,322) -
Net proceeds from issuance of common stock 69,025 -
Purchase of common stock for ESOP (5,628) -
Purchase of treasury stock for the RSP Plan (759) (103)
Award of RSP stock 408 -
--------- ---------
Net cash provided by financing activities 170,408 75,854
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,567 (989)
Cash and cash equivalents at beginning of year 7,292 7,886
--------- ---------
Cash and cash equivalents at end of year $ 8,859 $ 6,897
========= =========
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes $ 1,095 $ 907
========= =========
Interest paid on deposits and borrowed funds $ 6,654 $ 5,130
========= =========
The accompanying notes are an integral part of these statements.
-4-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting policies followed by Synergy Financial Group, Inc. (the
"Company") conform to accounting principles generally accepted in the United
States of America and to predominant practice within the banking industry.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Synergy Bank, Synergy Financial Services, Inc.
and Synergy Capital Investments, Inc. All significant inter-company 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.
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.
2. REORGANIZATION AND STOCK CONVERSION
The Company completed its second-step conversion from the mutual holding company
form of organization to a full stock corporation (the "Conversion") on January
20, 2004. Upon closing, Synergy, MHC and the former Mid-Tier Stock Holding
Company were eliminated.
The Company sold 7,035,918 shares of its common stock in the Conversion at
$10.00 per share. In addition, each share of common stock held by the public
stockholders of its former Mid-Tier Stock Holding Company was converted into
3.7231 shares of common stock of the Company, resulting in an aggregate of
5,416,093 exchange shares. Cash was issued in lieu of fractional shares.
Accordingly, the Company now has 12,452,011 total shares of common stock
outstanding following the Conversion, which was the adjusted maximum of the
estimated valuation range.
-5-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock (such as stock
options) were exercised or resulted in the issuance of common stock. These
potentially dilutive shares would then be included in the weighted number of
shares outstanding for the period using the treasury stock method. Shares issued
and shares reacquired during any period are weighted for the portion of the
period that they were outstanding.
The computation of both basic and diluted earnings per share includes the ESOP
shares previously allocated to participants and shares committed to be released
for allocation to participants and RSP shares that have vested or have been
allocated to participants. ESOP and RSP shares that have been purchased but not
committed to be released have not been considered in computing basic and diluted
earnings per share.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the three months ended June
30, 2004 (dollars in thousands, except per share data):
Weighted
Income average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Basic earnings per share:
Income available to common stockholders $ 910 11,494,581 $ 0.08
Effect of dilutive common stock equivalents 218,683 -
--------- ---------- ---------
Diluted earnings per share:
Income available to common stockholders $ 910 11,713,264 $ 0.08
========= ========== =========
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the six months ended June
30, 2004 (dollars in thousands, except per share data):
Weighted
Income average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Basic earnings per share:
Income available to common stockholders $ 1,915 10,575,334 $ 0.18
Effect of dilutive common stock equivalents 211,802 -
--------- ---------- ---------
Diluted earnings per share:
Income available to common stockholders $ 1,915 10,787,136 $ 0.18
========= ========== =========
-6-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the three months ended June
30, 2003 (dollars in thousands, except per share data):
Weighted
Income average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Basic earnings per share:
Income available to common stockholders $ 727 3,234,866 $ 0.22
Effect of dilutive common stock equivalents 1,423 -
--------- --------- --------
Diluted earnings per share:
Income available to common stockholders $ 727 3,236,289 $ 0.22
========= ========= ========
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the six months ended June
30, 2003 (dollars in thousands, except per share data):
Weighted
Income average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
Basic earnings per share:
Income available to common stockholders $ 1,563 3,233,946 $ 0.48
Effect of dilutive common stock equivalents 722 -
--------- --------- ---------
Diluted earnings per share:
Income available to common stockholders $ 1,563 3,234,668 $ 0.48
========= ========= =========
4. STOCK-BASED COMPENSATION
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. Prior to April 22, 2003, the Company did not have a Stock Option Plan or
a Restricted Stock Plan.
Had an expense for the Company's Stock Option Plan been determined based on the
fair value at the grant date for the Company's stock options consistent with the
method outlined in SFAS No. 123, the Company's net income and earnings per share
for all expenses related to stock options and stock granted in its Restricted
Stock Plan would have been reduced to the pro forma amounts that follow (in
thousands, except per share data):
-7-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
For the Three Months For Six Months
ended June 30, ended June 30,
-------------- --------------
2004 2003 2004 2003
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------- -----------------------
Net income, as reported $ 910 $ 727 $ 1,915 $ 1,563
Add expense recognized for the restricted stock plan,
net of related tax effect 36 36 71 36
Less total stock option and restricted stock plan expense,
determined under the fair value method,
net of related tax effect (84) (84) (167) (84)
--------- --------- -------- ---------
Net income, pro forma $ 862 $ 679 $ 1,819 $ 1,515
========= ========= ======== =========
Basic earnings per share
As reported $ 0.08 $ 0.22 $ 0.18 $ 0.48
Pro forma $ 0.08 $ 0.21 $ 0.17 $ 0.47
Diluted earnings per share
As reported $ 0.08 $ 0.22 $ 0.18 $ 0.48
Pro forma $ 0.07 $ 0.21 $ 0.17 $ 0.47
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options price model with the following weighted average
assumptions used for grants in 2003: dividend yield of 0.00%; expected
volatility of 29.44 %; risk-free interest rate of 3.01%; and, expected life of
five years.
The Company has established an Employee Stock Ownership Plan (ESOP) covering
eligible employees with one year of service, as defined by the ESOP. The Company
accounts for the ESOP in accordance with the American Institute of Certified
Public Accountants' Statement of Position (SOP) No. 93-6, Employers' Accounting
for Employee Stock Ownership Plans. SOP No. 93-6 addresses the accounting for
shares of stock issued to employees by an ESOP. SOP No. 93-6 requires that the
employer record compensation expense in the amount equal to the fair value of
shares committed to be released from the ESOP to employees.
Compensation expense for the ESOP is recorded at an amount equal to the shares
allocated by the ESOP multiplied by the average fair market value of the shares
during the year. The Company recognizes compensation expense ratably over the
year for the ESOP shares to be allocated based upon the Company's current
estimate of the number of shares expected to be allocated by the ESOP during
each calendar year. The difference between the average fair market value and the
cost of the shares allocated by the ESOP is recorded as an adjustment to
additional paid-in-capital.
5. RECENT ACCOUNTING PRONOUNCEMENTS
The SEC recently released Staff Accounting Bulletin ("SAB") No. 105, Application
of Accounting Principles to Loan Commitments. SAB 105 provides guidance about
the measurement of loan commitments recognized at fair value under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
SAB No. 105 also requires companies to disclose their accounting policy for
those loan commitments including methods and assumptions used to estimate fair
value and associated hedging strategies. SAB No. 105 is effective for all loan
commitments accounted for as derivatives that are entered into after June 30,
2004. The adoption of SAB No. 105 is not expected to have a material effect on
the Company's consolidated financial statements.
-8-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
On June 30, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment an Amendment of FASB Statements No. 123
and APB No. 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance requires that the
expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company
is currently evaluating this proposed statement and its effects on its results
of operations.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). In
general, a variable interest entity (VIE) is a corporation, partnership, trust
or any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN 46 requires certain VIEs to be consolidated by the primary beneficiary if
the investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
For public companies, the consolidation requirements of FIN 46 applied
immediately to interest entities created after September 15, 2003. In December
2003, the FASB issued FIN 46R with respect to VIEs, which among other things
revised the implementation date for small business filers to the first fiscal
year or interim period ending after December 15, 2004, with the exception of
Special Purpose Entities (SPEs). The Bank currently has no SPEs. The adoption of
this statement did not have a material impact on the financial condition or
results of operations of the Company.
6. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of the
Company's investment securities available for sale and held to maturity are as
follows (in thousands):
June 30, 2004 (unaudited)
------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------- -------- -------- --------
Available-for-sale
U.S. government obligations $ 3,510 $ 2 $ (95) $ 3,417
Mortgage-backed securities
FHLMC 92,182 43 (1,591) 90,634
FNMA 59,152 63 (887) 58,327
Equity securities 1,029 3 (60) 972
-------- -------- -------- --------
Total $155,873 $ 111 $ (2,634) $153,350
======== ======== ======== ========
-9-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
June 30, 2004 (unaudited)
------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------- -------- -------- --------
Held-to-maturity
Mortgage-backed securities
FHLMC $ 44,833 $ 3 $ (892) $ 43,944
FNMA 63,843 29 (548) 63,324
GNMA 5,659 49 (51) 5,657
Other debt securities 10 - - 10
-------- -------- -------- --------
Total $114,345 $ 81 $ (1,492) $112,935
======== ======== ======== ========
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
======= ======= ======= =======
-10-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
7. LOANS RECEIVABLE
Major groupings of loans are as follows (in thousands):
June 30, December 31,
2004 2003
--------- ---------
Mortgages
Residential, 1-4 family $ 237,208 $ 226,085
Residential, multi-family 43,711 33,971
Non-residential 77,106 56,694
Automobile 119,958 109,277
Commercial 8,851 7,838
Credit card 54 71
Other loans 3,644 3,745
--------- ---------
Loans receivable 490,532 437,681
Deferred loan fees and costs 232 178
Allowance for loan and lease losses (3,801) (3,274)
--------- ---------
Loans receivable, net $ 486,963 $ 434,585
========= =========
A summary of the activity in the allowance for loan and lease
losses is as follows (in thousands):
Six Months Ended
-----------------------
June 30, June 30,
2004 2003
------- -------
Balance, beginning of period $ 3,274 $ 2,231
Provision for loan and lease losses 704 470
Acquisition of First Bank of Central Jersey - 824
Recoveries 208 219
Loans charged-off (385) (774)
------- -------
Balance, end of period $ 3,801 $ 2,970
======= =======
8. DEPOSITS
Deposits are summarized as follows (in thousands):
June 30, December 31,
2004 2003
-------- --------
Checking accounts $ 57,888 $ 45,259
Interest-bearing checking 457 708
Money market accounts 166,879 139,121
Savings and club accounts 73,390 72,061
Certificates accounts 221,588 216,386
-------- --------
$520,202 $473,535
======== ========
-11-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
9. Federal Home Loan Bank ("FHLB") of New York Advances
1. Short-term FHLB Advances
------------------------
Short-term FHLB advances generally have maturities of less than one year. The
details of these advances are presented below (in thousands, except
percentages):
At or For the Six Months Ended
------------------------------
June 30, December 31,
2004 2003
-------- ------------
Average balance outstanding $ 37,351 $ 35,413
Maximum amount outstanding
at any month-end during the period 48,975 69,300
Balance outstanding at period end 27,200 38,299
Weighted-average interest rate during the period 1.26% 1.21%
Weighted-average interest rate at period end 1.43% 1.17%
2. Long-term FHLB Advances
-----------------------
At June 30, 2004, long-term advances from the FHLB totaled $144,504. Advances
consist of fixed-rate advances that will mature within one to nine years. The
advances are collateralized by FHLB stock and certain first mortgage loans and
mortgage-backed securities. These advances had a weighted average interest rate
of 2.96%.
As of June 30, 2004 long-term FHLB advances mature as follows (in thousands):
2004 $ 14,214
2005 23,839
2006 32,650
2007 38,000
2008 28,800
Thereafter 7,000
-----------
$ 144,504
===========
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Management's discussion and analysis of financial condition and results
of operations is intended to provide assistance in understanding our
consolidated financial condition and results of operations. The information in
this section should be read with the consolidated interim financial statements
and the notes thereto included in this Form 10-Q.
Our results of operations are primarily dependent on our net interest
income. Net interest income is a function of the balances of interest earning
assets outstanding in any one period, the yields earned on those assets and the
interest paid on deposits and borrowed funds that were outstanding in that same
period. To a lesser extent, our results of operations are also affected by the
relative levels of our other income and other expenses. Our other income
consists primarily of fees and service charges and gains (losses) on the sale of
loans and investments. The other expenses consist primarily of employee
compensation and benefits, occupancy and equipment expenses, data processing
costs, marketing costs, professional fees, office supplies, telephone and
postage costs. Our results of operations are also significantly impacted by the
amount of provisions for loan and lease losses which, in turn, are dependent
upon, among other things, the size and makeup of the loan portfolio, loan
quality and loan trends.
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21 E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995, and is
including this statement for the purpose of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and its subsidiaries include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially effect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission (the "SEC").
The Company does not undertake - and specifically disclaims any
obligation - to release publicly the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
-13-
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with the
accounting principals generally accepted in the United States of America and
general practices within the financial services industry. The preparation of the
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Allowance for Loan and Lease Losses. The Company recognizes that the
determination of the allowance for loan and lease losses involves a higher
degree of judgment and complexity than its other significant accounting
policies. The balance in the allowance for loan losses is determined based on
management's review and evaluation of the loan portfolio in relation to past
loss experience, the size and composition of the portfolio, current economic
events and conditions, and other pertinent factors, including management's
assumptions as to future delinquencies, recoveries and losses. All of these
factors may be susceptible to significant change. To the extent actual outcomes
differ from management's estimates, additional provisions for loan and lease
losses may be required that would adversely impact earnings in future periods.
Intangible Assets. Intangible assets, such as goodwill and the core
deposit intangible associated with the January 2003 acquisition of First Bank of
Central Jersey, are subject to annual impairment tests and, in the case of the
core deposit intangible, amortization of the asset through a charge to expense.
To the extent the outcome of the impairment tests differ from the carrying
value, additional charges to expense could be required to reduce the carrying
value, which would adversely impact earnings in future periods.
Income Taxes. Under the liability method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities. Deferred tax assets are
subject to management's judgment based upon available evidence that future
realization is more likely than not. If management determines that the Company
may be unable to realize all or part of the net deferred tax assets in the
future, a direct charge to income tax expense may be required to reduce the
recorded value of the net deferred tax assets to the expected realizable amount,
thereby impacting earnings.
Comparison of Financial Condition at June 30, 2004 and December 31, 2003
Assets. Total assets reached $800.2 million on June 30, 2004, an increase
of 27.3 %, or $171.6 million, from $628.6 million on December 31, 2003. This
growth is attributable to increases in the investment securities and loan
portfolios during the six month period.
Between December 31, 2003 and June 30, 2004, investment securities
increased $110.7 million, or 70.5 %, from $157.0 million to $267.7 million. This
increase primarily reflects $144.8 million in purchases offset by $31.8 million
in maturities and principal repayments, along with $772,000 in premium
amortization. Additionally, there was a $1.5 million increase in the unrealized
market value loss associated with investment securities designated
available-for-sale. At the end of the six-month period ended June 30, 2004, the
Company purchased $50.0 million of investment securities funded with FHLB of New
York long-term advances. This purchase consisted of federal agency
mortgage-backed securities with a weighted average yield of 4.64%. The yield,
net of the cost of funding, was 1.65%, with a net duration of 1.6 years.
Investment securities purchased during the six-month period were exclusively
federal agency issued mortgage-backed securities.
-14-
Net loans increased 12.1 %, or $52.4 million, to $487.0 million at June
30, 2004, from $434.6 million at December 31, 2003. This growth includes $33.0
million in originations, net of principal repayments, and $20.1 million in
purchases, offset by amortization of the premium on purchased loans and an
increase in provisions for loan and lease losses. The majority of purchased
loans were in our market area. The most significant growth during the six months
ended June 30, 2004 was in non-residential and multi-family mortgage loans of
$30.2 million, or 33.3 %.
On June 30, 2004, $490.8 million in total loans were comprised of 26.5%
in single-family real estate loans, 21.6 % in home equity loans, 24.4 % in
non-residential and multi-family mortgage loans, 25.2 % in consumer loans and
1.8 % in commercial loans. At the end of the second quarter of 2004, Synergy
Bank expanded its lending product line to include commercial and industrial
loans via the addition of two experienced lenders who were previously employed
by a local commercial bank. As a result, the Company expects to experience an
increase in this loan category in future periods.
The allowance for loan and lease losses was $3.8 million, or 0.77 % of
total loans, at June 30, 2004 as compared to $3.3 million, or 0.75 % of total
loans, at December 31, 2003. This reflects a provision for loan and lease losses
of $704,000 for the six month period, offset by net charge-offs of $177,000.
Non-performing assets to total assets was unchanged, at 0.06 %, at June 30, 2004
and December 31, 2003.
Liabilities. Total liabilities increased $108.1 million, or 18.4 %, to
$695.8 million at June 30, 2004 from $587.7 million at December 31, 2003. The
increase in total liabilities resulted primarily from an increase of $46.7
million, or 9.9 %, in deposits and a $98.8 million, or 135.6 %, increase in FHLB
advances, offset by the elimination of $38.3 million in stock subscriptions
payable. The balance of the change is attributable to increases associated with
escrow payments for taxes and insurance, accrued interest payable and the
establishment of an obligation as a result of the June 22, 2004 dividend
declaration.
Deposits reached $520.2 million at June 30, 2004, an increase of $46.7
million, or 9.9 %, from the $473.5 million reported at December 31, 2003. Core
deposits, consisting of checking, savings and money market accounts, represented
57.4 % of total deposits at June 30, 2004, up from 54.3 % at December 31, 2003.
The majority of deposit growth consisted of an increase in money market deposit
accounts of $27.8 million or 20.0 % for the six months ended June 30, 2004. This
is primarily the result of successful promotion of this account type.
The increase in FHLB of New York advances was to fund both the purchase
of investment securities and the origination of loans during this period. A
significant portion of the increase was attributable to the funding of $50.0
million in investment securities purchased at the close of the six-month period.
These funds had a weighted average cost of 2.98 %. It is projected that the
deposit flow from existing and new branches will be used to fund the Bank's loan
demand and pay down the balance of FHLB advances.
Equity. Stockholders' equity totaled $104.4 million on June 30, 2004,
an increase of 155.3 %, or $63.5 million, from $40.9 million on December 31,
2003. The increase in stockholders' equity is largely attributable to $69.2
million in net proceeds from the completion of a second-step stock conversion on
January 20, 2004 and $1.9 million in earnings for the six-month period ended
June 30, 2004. This was chiefly offset by a $5.3 million increase in unearned
Employee Stock Ownership Plan shares, and a decrease in accumulated other
comprehensive income, net of tax effect, of $1.5 million. Additionally, there
was a $462,000 reduction in retained earnings to reflect the June 22, 2004
declaration of a quarterly cash dividend of $0.04 per common share by the
Company's Board of Directors, payable on July 16, 2004 to stockholders of record
on July 8, 2004.
-15-
Average Balance Sheet. The following table sets forth certain information for
the three months ended June 30, 2004 and 2003. The average yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily average balances. The table does not include the allowance
for loan and lease losses in the average balances of loans receivable.
Management does not believe that this causes any material differences in the
information presented.
------------------------------------------------------------------
For the Three Months Ended June 30,
------------------------------------------------------------------
2004 2003
------------------------------------------------------------------
Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable, net(1) $459,960 $6,681 5.81% $358,145 $6,277 7.01%
Securities(2) 211,795 1,652 3.12 138,821 1,078 3.11
Other interest-earning assets(3) 10,809 24 0.89 4,153 64 6.16
-------- ------ -------- ------
Total interest-earning assets 682,564 8,357 4.90 501,119 7,419 5.92
Non-interest-earning assets 29,114 28,539
-------- --------
Total assets $711,678 $529,658
======== ========
Interest-bearing liabilities:
Checking accounts $51,018 $2 0.02 $51,776 $52 0.40
Savings and club accounts 72,373 90 0.50 73,735 138 0.75
Money market accounts 158,159 672 1.70 63,525 134 0.84
Certificates of deposit 222,589 1,427 2.56 249,763 1,937 3.10
FHLB advances 100,655 630 2.50 56,909 409 2.87
Stock Subscriptions Payable - - 0.00 - - 0.00
-------- ------ -------- ------
Total interest-bearing liabilities 604,794 2,821 1.87 495,708 2,670 2.15
------ ------
Non-interest-bearing liabilities 1,696 1,559
Total liabilities 606,490 497,267
Stockholders' equity 105,188 32,391
-------- --------
Total liabilities and stockholders' equity $711,678 $529,658
======== ========
Net interest income $5,536 $4,749
Interest rate spread(4) 3.03% 3.77%
====== ======
Net yield on interest-earning assets(5) 3.24% 3.79%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 112.86% 101.07%
====== ======
- ----------------
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes U.S. government obligations, mortgage-backed securities and
interest-bearing deposits in banks.
(3) Includes FHLB stock at cost and term deposits with other financial
institutions.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
-16-
Average Balance Sheet. (continued) The following table sets forth certain
information for the six months ended June 30, 2004 and 2003. The average yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods presented. Average balances
are derived from daily average balances. The table does not include the
allowance for loan and lease losses in the average balances of loans receivable.
Management does not believe that this causes any material differences in the
information presented.
------------------------------------------------------------------
For the Six Months Ended June 30,
------------------------------------------------------------------
2004 2003
------------------------------------------------------------------
Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable, net(1) $451,002 $13,397 5.94% $347,289 $12,544 7.22%
Securities(2) 193,283 3,163 3.27 128,337 2,275 3.55
Other interest-earning assets(3) 10,500 45 0.86 4,711 108 4.59
-------- ------- -------- -------
Total interest-earning assets 654,785 16,605 5.07 480,337 14,927 6.22
Non-interest-earning assets 29,242 28,565
-------- --------
Total assets $684,027 $508,902
======== ========
Interest-bearing liabilities:
Checking accounts $47,946 $4 0.02 $51,255 $54 0.21
Savings and club accounts 71,202 176 0.49 71,751 348 0.97
Money market accounts 151,639 1,277 1.68 58,888 400 1.36
Certificates of deposit 220,003 2,828 2.57 238,586 3,795 3.18
FHLB advances 84,407 1,083 2.57 52,341 825 3.15
Stock Subscriptions Payable 11,603 23 0.40 - - 0.00
-------- ------- -------- -------
Total interest-bearing liabilities 86,800 5,391 1.84 472,918 5,422 2.29
------- -------
Non-interest-bearing liabilities 2,445 4,206
-------- --------
Total liabilities 589,245 477,027
Stockholders' equity 94,782 31,875
-------- --------
Total liabilities and stockholders' equity $684,027 $508,902
======== ========
Net interest income $11,214 $9,505
Interest rate spread(4) 3.23% 3.92%
====== ======
Net yield on interest-earning assets(5) 3.43% 3.96%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 111.59% 101.59%
====== ======
- -------------
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes U.S. government obligations, mortgage-backed securities and
interest-bearing deposits in banks.
(3) Includes FHLB stock at cost and term deposits with other financial
institutions.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets
-17-
Comparison of Operating Results for Three Months Ended June 30, 2004 and 2003
Net Income. Net income increased by $183,000 to $910,000 for the three
months ended June 30, 2004 compared to $727,000 for the same period in 2003, a
25.17 % increase. The increase was attributable primarily to a $787,000 increase
in net interest income and a $17,000 decrease in the provisions for loan and
lease losses, offset by a $139,000 decline in other income, a $270,000 increase
in other expenses and a $212,000 increase in income tax expense as a result of
higher earnings.
Net Interest Income. Net interest income grew $787,000, or 16.57%, for
the three months ended June 30, 2004 compared to the same period in 2003. Total
interest income increased by $938,000 to $8.4 million for the three months ended
June 30, 2004, while total interest expense increased by $151,000 to $2.8
million for the three months ended June 30, 2004.
The 12.64% increase in total interest income was primarily due to a
$181.4 million, or 36.2%, increase in the average balance of interest-earning
assets, offset by a 102 basis point decrease in the average yield earned on
these investments when compared to the same period of the prior year. The
increase in interest-earning assets was a direct result of management's growth
strategy. The decrease in the average yield was primarily attributable to lower
market interest rates, as well as a significant decline in the dividend paid on
FHLB of New York stock, particularly as our stock holdings have increased
proportionately with the increased level of advances.
The 5.66% increase in total interest expense resulted primarily from a
$109.1 million, or 22.01%, increase in the average balance of interest-bearing
liabilities offset by a 29 basis point decrease in the average cost of funds
when compared to the same period of the prior year. The decrease in the average
cost of interest-bearing liabilities was primarily attributable to pricing
strategies and lower market interest rates. The majority of the increase in the
average balance of interest-bearing liabilities for the 2004 period was
comprised of a $94.6 million, or 148.97%, increase in the average balance of
money market accounts and a $43.7 million, or 76.87%, increase in the average
balance of advances from the Federal Home Loan Bank.
Provision for Loan and Lease Losses. We maintain an allowance for loan
and lease losses through provisions for loan and lease losses that are charged
to earnings. The provision is made to adjust the total allowance for loan and
lease losses to an amount that represents management's best estimate of losses
known and inherent in the loan portfolio at the balance sheet date that are both
probable and reasonable to estimate. In estimating the known and inherent loan
losses in the loan portfolio that are both probable and reasonable to estimate,
management considers factors such as an internal analysis of credit quality,
general levels of loan delinquencies, collateral values, the Bank's historical
loan and lease loss experience, changes in loan concentrations by loan category,
peer group information and economic and market trends affecting our market area.
The provision established for loan and lease losses each month reflects
management's assessment of these factors in relation to the level of the
allowance at such time. Management allocates the allowance to various categories
based on its classified assets, historical loan and lease loss experience and
its assessment of the risk characteristics of each loan category and the
relative balances at month end of each loan category. Management's estimation
did not change either in estimation methods or assumptions during either period.
The provision for loan and lease losses decreased by $17,000, or 4.82%,
to $336,000 for the three months ended June 30, 2004 from $353,000 for the same
period in 2003. Total charge-offs amounted to $125,000 and recoveries amounted
to $118,000, resulting in a net charge-off amount of $7,000 for the three months
ended June 30, 2004. This represents a decrease in net charge-offs of $288,000
over the same period in 2003.
-18-
Other Income. Other income decreased $139,000, or 21.32%, to $513,000
for the three months ended June 30, 2004 compared to $652,000 for the same
period in 2003. This unfavorable comparison is tempered by a $143,000, or
33.97%, increase in charges and fees on deposit accounts and a $2,000, or 12.50
%, increase in commission income. The decline in other income is primarily
attributable to a $150,650 decrease in the value of the bank-owned life
insurance ("BOLI") policy during the three months ended June 30, 2004 compared
to a $160,000 gain during the same period in 2003. The change is attributable to
an exposure to equities that was favorable in the 2003 period. Management has
reallocated the BOLI portfolio to an interest-bearing guaranteed principal
investment that should prevent further erosion of value due to market
fluctuations.
Other Expenses. Other expenses increased $270,000 or 6.80% to $4.2
million for the three months ended June 30, 2004 compared to $4.0 million for
the same period in 2003. The increase was primarily attributable to a $412,000,
or 22.55%, increase in compensation expense, specifically the Company's Employee
Stock Ownership Plan and customary employee merit increases, offset by a
$249,000, or 21.56%, decrease in premises and equipment expenditures.
Income Tax Expense. Income tax expense increased by $212,000, or
60.57%, during the three- months ended June 30, 2004 as compared to the same
period in 2003, reflecting higher taxable income for the 2004 period.
Comparison of Operating Results for Six Months Ended June 30, 2004 and 2003
Net Income. Net income increased by $352,000 to $1.9 million for the
six months ended June 30, 2004 compared to $1.6 million for the same period in
2003, a 22.52% increase. The increase was primarily attributable to a $1.7
million increase in net interest income and a $150,000 increase in other income,
offset by a $234,000 increase in the provisions for loan and lease losses, a
$890,000 increase in other expenses and a $383,000 increase in income tax
expense as a result of higher earnings.
Net Interest Income. Net interest income during the six months ended
June 30, 2004 was $11.2 million, compared to $9.5 million during the same period
last year, an increase of 17.98%. Total interest income increased by $1.7
million, to $16.6 million, while total interest expense decreased by $31,000 to
approximately $5.4 million, for the six months ended June 30, 2004 as compared
to the same period of the prior year. This increase was primarily attributable
to the growth in assets.
The 11.24 % increase in total interest income was primarily due to a
$174.4 million, or 36.32%, increase in the average balance of interest-earning
assets, offset by a 114 basis point decrease in the average yield earned on
these investments when compared to the same period of the prior year. The
increase in interest-earning assets was a direct result of management's growth
strategy. The decrease in the average yield was primarily attributable to lower
market interest rates, as well as a significant decline in the dividend paid on
FHLB of New York stock, particularly as our stock holdings have increased
proportionately with the increased level of advances.
The 0.60% decline in total interest expense resulted primarily from a
46 basis point decrease in the average cost of funds, offset by a $114.0
million, or 24.11%, increase in the average balance of interest-bearing
liabilities when compared to the same period of the prior year. The majority of
the increase in the average balance of interest-bearing liabilities for the 2004
period was comprised of a $92.8 million, or 157.50%, increase in the average
balance of money market accounts and a $32.1 million, or 61.26 %, increase in
the average balance of advances from the Federal Home Loan Bank. The decrease in
the average
-19-
cost of interest-bearing liabilities was primarily attributable to pricing
strategies and lower market interest rates.
Provision for Loan and Lease Losses. The provision for loan and lease
losses increased by $234,000, or 49.79%, to $704,000 for the six months ended
June 30, 2004 from $470,000 for the same period in 2003. Total charge-offs
amounted to $385,280 and recoveries amounted to $208,680 for a net charge-off
amount of $176,600 for the six months ended June 30, 2004. This represents a
decrease in net charge-offs of $377,000 when compared to the same period in
2003. The positive trend is directly correlated with the aging of the indirect
automobile loans associated with the former First Bank of Central Jersey.
Other Income. Other income during the six months ended June 30, 2004
totaled $1.2 million compared to $1.0 million for the same period in 2003. This
represents an increase of $150,000, or 14.51%. The increase was attributable to
a $316,000 increase in charges and fees on deposit accounts, offset by a
$148,000 decline in income, which are chiefly associated with the previously
discussed decrease in the value of the BOLI policy.
Other Expenses. During the six months ended June 30, 2004, other
expenses totaled $8.6 million, compared to $7.7 million for the same period in
2003, an increase of $890,000, or 11.61%. The increase was primarily
attributable to expenses associated with the Company's Restricted Stock Plan,
its Employee Stock Ownership Plan, customary employee merit increases and
deposit administration operating losses. Salaries, wages and employee benefits
increased by $804,000, or 21.79%, when compared to the same period of the prior
year, to $4.5 million.
Income Tax Expense. Income tax expense increased by $383,000, or
45.43%, during the six months ended June 30, 2004 as compared to the same period
in 2003, reflecting higher taxable income for the 2004 period.
-20-
Liquidity
The Bank maintains liquid assets at levels it considers adequate to meet
liquidity needs. The liquidity of the Bank reflects its ability to provide funds
to meet loan requests, accommodate possible outflows in deposits, fund current
and planned expenditures and take advantage of interest rate market
opportunities in connection with asset and liability management objectives.
Funding of loan requests, providing for liability outflows and management of
interest rate fluctuations require continuous analysis in order to match the
maturities of earning assets with specific types of deposits and borrowings.
Bank liquidity is normally considered in terms of the nature and mix of the
Bank's sources and uses of funds.
The Bank's primary sources of liquidity are deposits, scheduled
amortization and prepayment of loans and mortgage-backed securities. In
addition, the Bank invests excess funds in overnight federal funds investments,
which provide liquidity. Its cash and cash equivalents, defined as cash and
deposits in other financial institutions with original maturities of three
months or less, totaled $8.9 million at June 30, 2004. To a lesser extent, the
earnings and funds provided from operating activities are a source of liquidity.
Liquidity management is both a daily and long-term function of business
management. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
and securities prepayments are greatly influenced by general interest rates,
economic conditions and competition. If the Bank requires funds beyond its
ability to generate them internally, it has the ability to obtain advances from
the FHLB of New York, which provides an additional source of funds. At June 30,
2004, the Bank's borrowing limit with the FHLB of New York was $156.2 million,
excluding repurchase agreement advances. At June 30, 2004, the Bank had $171.7
million of borrowings outstanding.
Management is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on the Company's
liquidity, capital or operations nor is it aware of any current recommendation
by regulatory authorities, which, if implemented, would have a material effect
on liquidity, capital or operations. The total amount of the Bank's commitments
to extend credit for mortgage and consumer loans as of June 30, 2004 was $48.8
million, excluding commitments on unused lines of credit, which totaled $21.2
million.
Management intends to expand the Bank's branch network either through
opening or acquiring branch offices. It currently plans to open six additional
new branch locations over the next two years. The Bank also intends to actively
consider the acquisition of local financial institutions as part of expanding
its banking operations. It does not, however, have any current understandings,
agreements or arrangements for the expansion of its business, other than opening
new branch office locations.
-21-
The following table discloses the Bank's contractual obligations as of June 30,
2004:
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
-------- ------- ------- ------- ------
FHLB advances (1) $171,703 $41,414 $91,489 $38,000 $ -
Rental under operating leases 4,573 282 1,608 470 2,213
-------- ------- ------- ------- ------
Total $176,276 $41,696 $93,097 $39,270 $2,213
======== ======= ======= ======= ======
- -----------------
(1) At June 30, 2004, the Bank had $171.7 million of borrowings outstanding
with the FHLB. At June 30, 2004, its borrowing limit with the FHLB was
$156.2 million, excluding repurchase agreement advances.
The following table discloses the Bank's commercial commitments as of June
30, 2004:
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
-------- ------- ------- ------- ------
Lines of Credit (1) $21,200 $ 782 $ 11 $ 177 $20,230
Other commitments to extend credit 48,800 48,800 - - -
------- ------- ---- ----- -------
Total $70,000 $49,582 $ 11 $ 177 $20,230
======= ======= ==== ===== =======
- --------------
(1) Represents amounts committed to customers.
Regulatory Capital Requirements
The Bank is subject to federal regulations that impose certain minimum
capital requirements. Quantitative measures, established by regulation to ensure
capital adequacy, require the Bank to maintain amounts and ratios of tangible
and core capital to adjusted total assets and of total risk-basked capital to
risk-weighted assets. On June 30, 2004, the Bank was in compliance with all of
its regulatory capital requirements. The following table sets forth the Bank's
capital position and relativity to regulatory requirements as of June 30, 2004:
OTS Requirements
---------------------------------------------------------------------------
Regulatory
Minimum for classification as
Bank actual capital adequacy well-capitalized
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total risk-based capital $90,608 18.68% $38,813 8.00% $48,517 10.00%
(to risk-weighted assets)
Tier 1 capital (to risk-weighted 86,807 17.89% N/A N/A 29,110 6.00%
assets)
Tier 1 capital (to adjusted total 86,807 10.98% 31,615 4.00% 39,518 5.00%
assets)
Tangible capital (to adjusted total 86,807 10.98% 11,856 1.50% N/A N/A
assets)
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Impact of Inflation and Changes Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with Generally
Accepted Accounting Principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations, primarily those at the Bank. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are financial. As a
result, interest rates have a greater impact on the Bank's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of the Bank's interest-earning assets
and interest-bearing liabilities are sensitive to changes in interest rates, a
significant form of market risk for the Bank is interest rate risk, or changes
in interest rates. The Bank is vulnerable to an increase in interest rates to
the extent that interest-bearing liabilities mature or 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 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 executive session
of the Committee is held monthly with Director Fiore presiding and senior
management in attendance. The results of the quarterly and monthly meetings of
the Committee are reported to the full Board at its regular meetings. In
addition, the Committee generally meets during October and November each year
with the goal of developing an annual business and operating plan for
presentation to the full Board.
To reduce the effect of interest rate changes on net interest income, the Bank
has adopted various strategies to enable it to improve the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
main elements of these strategies include seeking to:
o originate loans with adjustable-rate features or fixed-rate loans with
short maturities, such as home equity and consumer loans;
o lengthen the maturities of time deposits and borrowings when it would be
cost effective through the aggressive pricing and promotion of certificates
of deposits and utilization of FHLB advances;
o increase core deposits (i.e., transaction and savings accounts) which tend
to be less interest rate sensitive; and
o purchase intermediate and adjustable-rate investment securities that
provide a stable cash flow, thereby providing investable funds in varying
interest rate cycles.
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Quantitative Analysis. Management actively monitors its interest rate risk
exposure. The Bank's objective is to maintain a consistent level of
profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Bank uses the Office of Thrift
Supervision ("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.
Management of the Company believes that there has not been a material adverse
change in market risk during the three and six month periods ended June 30,
2004.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")),
the Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
Changes in internal controls. During the quarter under report, there
was no change in the Company's internal control over financial reporting that
has materially affected, or is reasonable likely to materially affect, the
Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company and its subsidiaries, from time to time, may be a party to
routine litigation, which arises in the normal course of business, such as
claims to enforce liens, condemnation proceedings on properties in which the
Bank, the wholly-owned subsidiary of the Company, holds security interests,
claims involving the making and servicing of real property loans and other
issues incident to its business. There were no lawsuits pending or known to be
contemplated at June 30, 2004 that would be expected to have a material effect
on the Company's operations or income.
Item 2. Changes in Securities , Use of Proceeds and Issuer Purchases of Equity
------------------------------------------------------------------------
Securities.
----------
Synergy Financial Group, Inc. (the "Company"), the holding company of
Synergy Bank and Synergy Financial Services, Inc., completed its second-step
conversion from the mutual holding company form of organization to a full stock
corporation (the "Conversion") on January 20, 2004. Upon completion of the
conversion, Synergy, MHC and the former Mid-Tier Stock Holding Company were
eliminated.
Shares of the Company commenced trading on Wednesday, January 21, 2004
on the Nasdaq National Market. The stock trades under the symbol "SYNF," which
is the same symbol formerly used by the Mid-Tier Stock Holding Company on the
OTC Bulletin Board.
The Company's registration statement on Form S-1 (File No. 333-108884)
registering its common stock, par value $0.10 per share, was declared effective
by the Securities and Exchange Commission on November 12, 2003. The subscription
offering commenced on November 20, 2003 and terminated on December 15, 2003. A
community offering commenced on December 18, 2003 and terminated on January 7,
2004. The stock sale occurred on January 20, 2004.
The Company sold 7,035,918 shares of its common stock in the Conversion
at $10.00 per share for an aggregate sales price of $70,359,180. In addition,
each share of common stock held by the public stockholders of its former
Mid-Tier Stock Holding Company were converted into 3.7231 shares of common stock
of the Company, resulting in an aggregate of 5,416,093 exchange shares. Cash was
issued in lieu of fractional shares. Accordingly, the Company now has 12,452,011
total shares outstanding following the Conversion, which was the adjusted
maximum of the estimated valuation range.
Net proceeds of the offering were $69.2 million, reflecting total
offering expenses of approximately $1.2 million, including total underwriter's
fees and expenses of $425,000. The net proceeds have been applied as follows:
(i) $58.0 million was used to make a capital contribution to Synergy Bank, for
general business purposes, including funding the origination of loans and
investments in securities; (ii) $5.6 million was loaned to the Company's
employee stock ownership plan cash to enable the plan to buy 8% of the shares
sold in the offering; and (iii) $5.6 million was retained by the Company as its
initial capitalization to be used for general business purposes which may
include investment in securities, repurchasing shares of the Company's common
stock, or paying cash dividends. The Company initially has invested the portion
of the proceeds retained by it in intermediate term mortgage-backed securities
issued by government sponsored enterprises.
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ISSUER PURCHASES OF EQUITY SECURITIES
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
Period (a) Total (b) Average (c) Total Number of (d) Maximum Number (or
Number of Price Paid per Shares (or Units) Approximate Dollar Value)
Shares (or Share (or Unit) Purchased as Part of of Shares (or Units) that
Units) Publicly Announced May Yet Be Purchased Under
Purchased Plans or Programs the Plans or Programs
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
April 1-30, 2004 - - - 120,428
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
May 1-31, 2004 - - - 120,428
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
June 1-30, 2004 - - - 120,428
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
Total - - -
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
1 On June 4, 2003, Synergy Financial Group, Inc. (Company) announced its
plans to purchase shares of its common stock in open market transactions
for use by the Company's 2003 Restricted Stock Plan.
2 The Company intends to purchase up to 120,428 shares of its common stock.
3 Currently there is no expiration date for the repurchase of the Company's
stock.
4 There has been no expiration of any plan during the period covered by the
table above.
5 The Company has determined not to terminate any plan prior to expiration.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
a) Exhibits:
31 Certification pursuant toss.302 of the Sarbanes-Oxley Act of
2002
32 Certification pursuant toss.906 of the Sarbanes-Oxley Act of
2002
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b) Reports on Form 8-K:
During the quarter ended June 30, 2004, the Company filed two reports
on Form 8-K dated April 28, 2004 and June 22, 2004. The Form 8-K dated April 28,
2004 reported the Company's earnings for the quarter ended March 31, 2004. The
Form 8-K dated June 22, 2004 announced that the Company's Board of Directors
declared a quarterly cash dividend of $0.04 per common share at its June 22,
2004 board meeting. The dividend will be paid on July 16, 2004 to stockholders
of record on July 8, 2004.
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNERGY FINANCIAL GROUP, INC.
Date: August 16, 2004 By: /s/John S. Fiore
-------------------------------------
John S. Fiore
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/John S. Fiore /s/Ralph A. Fernandez
- ------------------------------------- -------------------------------------------------
John S. Fiore Ralph A. Fernandez
President and Chief Executive Officer Senior Vice President and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: August 16, 2004 Date: August 16, 2004
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