SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MarkOne)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: March 31, 2005
--------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
SEC File Number: 000-50467
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SYNERGY FINANCIAL GROUP, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 52-2413926
- -------------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 North Avenue East, Cranford, New Jersey 07016
-------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(908) 272-3838
------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant: (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of common stock as of May 10, 2005:
$0.10 Par Value Common Stock 12,385,262
- ------------------------------------ ----------------
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 March 31, 2005 (unaudited) and
December 31, 2004 (audited).....................................................................1
Consolidated Statements of Income for the three months ended
March 31, 2005 and 2004 (unaudited).............................................................2
Consolidated Statement of Changes in Stockholders' Equity for the
three months ended March 31, 2005 (unaudited)...................................................3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004 (unaudited).............................................................4
Notes to Consolidated Financial Statements (unaudited)..............................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................21
Item 4. Controls and Procedures............................................................................22
PART II OTHER INFORMATION
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Item 1. Legal Proceedings..................................................................................23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................................23
Item 3. Defaults Upon Senior Securities....................................................................24
Item 4. Submission of Matters to a Vote of Security Holders................................................24
Item 5. Other Information..................................................................................24
Item 6. Exhibits...........................................................................................24
Signatures.......................................................................................................25
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2005 2004
(unaudited) (audited)
----------- ---------
Assets:
Cash and amounts due from banks $ 4,097 $ 4,687
Interest-bearing deposits with banks 2,286 1,759
----------- -----------
Cash and cash equivalents 6,383 6,446
Investment securities available-for-sale,
at fair value 126,290 134,360
Investment securities held-to-maturity (fair
value of $116,586 and $111,154, respectively) 117,573 110,584
Federal Home Loan Bank of New York
stock, at cost 11,250 10,771
Loans receivable, net 596,886 561,687
Accrued interest receivable 2,991 2,751
Property and equipment, net 17,261 16,814
Cash surrender value of bank-owned life insurance 12,760 12,637
Other assets 4,856 4,627
----------- -----------
Total assets $ 896,250 $ 860,677
=========== ===========
Liabilities:
Deposits $ 566,882 $ 538,916
Federal Home Loan Bank advances 220,570 212,414
Advance payments by borrowers
for taxes and insurance 1,840 1,702
Accrued interest payable on advances 412 385
Dividend payable 498 498
Other liabilities 3,232 2,720
----------- -----------
Total liabilities 793,434 756,635
----------- -----------
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; 12,452,011 shares issued; outstanding
shares at March 31, 2005 - 12,385,262,
and December 31, 2004 - 12,452,011 1,245 1,245
Additional paid-in-capital 86,321 86,177
Retained earnings 31,210 30,603
Unearned ESOP shares (5,792) (5,962)
Unearned RSP compensation (3,189) (3,391)
Treasury stock acquired for the RSP (5,109) (4,343)
Treasury stock, at cost; 66,749 and -0- shares at
March 31, 2005 and December 31, 2004, respectively (804) -
Accumulated other comprehensive
income (loss), net of taxes (1,066) (287)
----------- -----------
Total stockholders' equity 102,816 104,042
----------- -----------
Total liabilities and stockholders' equity $ 896,250 $ 860,677
=========== ===========
The accompanying notes are an integral part of these statements.
-1-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
For the Three Months
Ended March 31,
---------------
2005 2004
(unaudited) (unaudited)
----------- -----------
Interest income:
Loans, including fees $ 8,174 $ 6,700
Investment securities 2,270 1,510
Other 91 22
--------- --------
Total interest income 10,535 8,232
--------- --------
Interest expense:
Deposits 2,720 2,095
Borrowed funds 1,793 476
--------- --------
Total interest expense 4,513 2,571
--------- --------
Net interest income before provision for loan losses 6,022 5,661
--------- --------
Provision for loan losses 445 368
--------- --------
Net interest income after provision for loan losses 5,577 5,293
--------- --------
Other income:
Service charges and other fees on deposit accounts 509 484
Net gain on sale of loans - -
Net gain on sale of investments - -
Commissions 248 15
Other 208 189
--------- --------
Total other income 965 688
--------- --------
Other expenses:
Salaries and employee benefits 2,643 2,255
Premises and equipment 872 981
Occupancy 524 473
Professional services 195 128
Advertising 207 176
Other operating 282 299
--------- --------
Total other expenses 4,723 4,312
--------- --------
Income before income tax expense 1,819 1,669
--------- --------
Income tax expense 699 664
--------- --------
Net income $ 1,120 $ 1,005
========= ========
Per share of common stock:
Basic earnings per share $ 0.10 $ 0.10
Diluted earnings per share $ 0.10 $ 0.10
Basic weighted average shares outstanding 11,231,081 10,086,963
Diluted weighted average shares outstanding 11,679,829 10,312,989
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 Three Months Ended March 31, 2005
(Unaudited)
(Dollars in thousands, except share amounts)
Common Stock
------------ Additional Unearned Unearned
Shares Par paid-in- Retained ESOP RSP
issued value capital earnings shares compensation
-----------------------------------------------------------------------
BALANCE AT JANUARY 1, 2005 12,452,011 $1,245 $86,177 $30,603 $(5,962) $(3,391)
Net income - - - 1,120 - -
Other comprehensive
income, net of
reclassification
adjustment and taxes - - - - - -
- ------------------------------------------------------------------------------------------------------
Total comprehensive income
- ------------------------------------------------------------------------------------------------------
Dividends declared - - - (513) - -
Common stock held by ESOP
committed to be released
(24,906 shares) - - 144 - 170 -
Compensation recognized
under RSP Plan - - - - - 202
Common stock
repurchased for RSP Plan
(63,851 shares) - - - - - -
Purchase of treasury stock
(66,749 shares) - - - - - -
-----------------------------------------------------------------------
BALANCE AT MARCH 31, 2005 12,452,011 $1,245 $86,321 $31,210 $(5,792) $(3,189)
=======================================================================
Treasury Other
stock accumulated
acquired comprehensive
for the Treasury income (loss),
RSP stock net TOTAL
--------------------------------------------------------------
BALANCE AT JANUARY 1, 2005 $(4,343) $ -0- $ (287) $104,042
Net income - - - 1,120
Other comprehensive
income, net of
reclassification
adjustment and taxes - - (779) (779)
- ---------------------------------------------------------------------------------------------
Total comprehensive income 341
- ---------------------------------------------------------------------------------------------
Dividends declared - - - (513)
Common stock held by ESOP
committed to be released
(24,906 shares) - - - 314
Compensation recognized
under RSP Plan - - - 202
Common stock
repurchased for RSP Plan
(63,851 shares) (766) - - (766)
Purchase of treasury stock
(66,749 shares) - (804) - (804)
----------------------------------------------------------------
BALANCE AT MARCH 31, 2005 $(5,109) $(804) $(1,066) $102,816
================================================================
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 Three Months
Ended March 31,
---------------
2005 2004
(unaudited) (unaudited)
----------- -----------
Operating activities
Net income $ 1,120 $ 1,005
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 369 369
Provision for loan losses 445 368
Deferred income taxes (450) 73
Amortization of deferred loan fees (20) (5)
Amortization of premiums on investment securities 231 284
Release of ESOP shares 314 263
Compensation under RSP plan 202 60
Increase in accrued interest receivable (240) (261)
Decrease in other assets 221 57
(Decrease) increase in other liabilities (715) 1,580
Increase in cash surrender value of bank-owned life insurance (123) (90)
Increase in accrued interest payable on advances 27 38
------ -------
Net cash provided by operating activities 1,381 3,741
------ -------
Investing activities
Purchase of investment securities held-to-maturity (12,536) (14,269)
Purchase of investment securities available-for-sale (2,047) (38,708)
Maturity and principal repayments of investment
securities held-to-maturity 5,486 2,563
Maturity and principal repayments of investment
securities available-for-sale 9,166 7,775
Purchase of property and equipment (815) (336)
Purchase of FHLB Stock (480) (604)
Loan originations, net of principal repayments (33,367) (13,687)
Purchase of loans (2,257) (811)
------ --------
Net cash used in investing activities (36,850) (58,077)
------- --------
Financing activities
Net increase in deposits 27,966 21,936
Increase in short-term advances from FHLB 17,522 2,796
(Decrease) increase in long-term advances from FHLB (9,366) 9,283
Increase in advance payments by borrowers
for taxes and insurance 137 106
Dividends paid (498) -
Decrease in stock subscriptions payable - (38,322)
Net proceeds from issuance of common stock - 69,262
Purchase of common stock for ESOP - (5,628)
Purchase of treasury stock for the RSP Plan (355) (759)
------ ---------
Net cash provided by financing activities 35,406 58,674
------ ---------
Net (decrease) increase in cash and cash equivalents (63) 4,338
Cash and cash equivalents at beginning of year 6,446 7,292
------ -------
Cash and cash equivalents at end of period $ 6,383 $ 11,630
======= ========
Supplemental disclosure of cash flow information
Cash paid during the period for income taxes $ 771 $ 925
======= ========
Interest paid on deposits and borrowed funds $ 4,398 $ 2,714
======= ========
The accompanying notes are an integral part of these statements.
-4-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting policies followed by Synergy Financial Group, Inc. (the
"Company") conform to accounting principles generally accepted in the United
States of America and to predominant practice within the banking industry.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Synergy Bank (the "Bank"), and its subsidiary
Synergy Capital Investments, Inc, and Synergy Financial Services, Inc. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions to Form 10-Q, and therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations, changes in equity and cash flows in
conformity with accounting principles generally accepted in the United States of
America. However, all normal recurring adjustments that, in the opinion of
management, are necessary for a fair presentation of the consolidated financial
statements have been included. These financial statements should be read in
conjunction with the audited consolidated financial statements and the
accompanying notes thereto included in the Company's Annual Report on Form 10-K
for the period ended December 31, 2004. The results for the three months ended
March 31, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2005 or any other period.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the balance
sheets, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The principal estimates that are susceptible to significant change in the near
term relate to the allowance for loan losses. The evaluation of the adequacy of
the allowance for loan losses includes an analysis of the individual loans and
overall risk characteristics and size of the different loan portfolios, and
takes into consideration current economic and market conditions, the capability
of specific borrowers to pay specific loan obligations, as well as current loan
collateral values. However, actual losses on specific loans, which also are
encompassed in the analysis, may vary from estimated losses.
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About
Segments of an Enterprise and Related Information, establishes standards for the
way business enterprises report information about operating segments in annual
financial statements. The Bank has one operating segment and, accordingly, has
one reportable segment, "Community Banking." All of the Bank's activities are
interrelated, and each activity is dependent and assessed based on how each of
the activities of the Bank supports the others. For example, commercial lending
is dependent upon the ability of the Bank to fund itself with retail deposits
and other borrowings and to manage interest rate and credit risk. This situation
is also similar for consumer, residential, multi-family and non-residential
mortgage lending. Accordingly, all significant operating decisions are based
upon analysis of the Bank as one operating segment.
-5-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock (such as stock
options) were exercised or resulted in the issuance of common stock. These
potentially dilutive shares would then be included in the weighted number of
shares outstanding for the period using the treasury stock method. Shares issued
and shares re-acquired during any period are weighted for the portion of the
period that they were outstanding.
The computation of both basic and diluted earnings per share includes the
Employee Stock Ownership Plan ("ESOP") shares previously allocated to
participants and shares committed to be released for allocation to participants
and restricted stock plans ("RSP") shares that have vested or have been
allocated to participants. ESOP and RSP shares that have been purchased but not
committed to be released have not been considered in computing basic and diluted
earnings per share.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the three months ended
March 31, 2005 (dollars in thousands, except per share data):
Weighted
Income average shares Per
(numerator) (denominator) share amount
--------------- ----------------- ---------------
Basic earnings per share:
Income available to common stockholders $ 1,120 11,231,081 $ 0.10
Effect of dilutive common stock equivalents 448,748 0.00
------- ------------ -------
Diluted earnings per share:
Income available to common stockholders $ 1,120 11,679,829 $ 0.10
========= ============ ========
-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
March 31, 2004 (dollars in thousands, except per share data):
Weighted
Income average shares Per
(numerator) (denominator) share amount
--------------- ----------------- ---------------
Basic earnings per share:
Income available to common stockholders $ 1,005 10,086,963 $ 0.10
Effect of dilutive common stock equivalents 226,026 0.00
------- ------------ -------
Diluted earnings per share:
Income available to common stockholders $ 1,005 10,312,989 $ 0.10
======== ============ ========
3. STOCK-BASED COMPENSATION
The Company's stock option plans and the restricted stock plans are accounted
for in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and released
Interpretations. Accordingly, no compensation expense has been recognized for
the stock option plans. Expense for the restricted stock plans in the amount of
the fair value of the common stock at the date of grant is recognized ratably
over the vesting period. Prior to April 22, 2003, the Company did not have a
stock option plan or a restricted stock plan.
Had an expense for the Company's stock option plans been determined based on the
fair value at the grant date for the Company's stock options consistent with the
method outlined in SFAS No. 123, the Company's net income and earnings per share
for all expenses related to stock options and stock granted in its restricted
stock plans would have been reduced to the pro forma amounts that follow (in
thousands, except per share data):
For the Three Months
ended March 31,
---------------
2005 2004
(unaudited) (unaudited)
----------- -----------
Net income, as reported $ 1,120 $ 1,005
Add expense recognized for the restricted stock plans,
net of related tax effect 130 36
Less total stock option plan and restricted stock plan
expense, determined under the fair value method,
net of related tax effect (294) (84)
------- -------
Net income, pro forma $ 956 $ 957
======== ========
Basic earnings per share:
As reported $ 0.10 $ 0.10
Pro forma $ 0.09 $ 0.09
Diluted earnings per share:
As reported $ 0.10 $ 0.10
Pro forma $ 0.08 $ 0.09
-7-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options price model. The following weighted average assumptions
were utilized for grants in 2003: dividend yield of 0.00%; expected volatility
of 29.44 %; risk-free interest rate of 3.01%; and, expected life of five years.
The following weighted average assumptions were utilized for grants in 2004:
dividend yield of 1.60%; expected volatility of 32.85%; risk-free interest rate
of 3.33%; and, expected life of five years.
The Company has established an Employee Stock Ownership Plan ("ESOP") covering
eligible employees with one year of service, as defined by the ESOP. The Company
accounts for the ESOP in accordance with the American Institute of Certified
Public Accountants' Statement of Position (SOP) No. 93-6, Employers' Accounting
for Employee Stock Ownership Plans. SOP No. 93-6 addresses the accounting for
shares of stock issued to employees by an ESOP. SOP No. 93-6 requires that the
employer record compensation expense in the amount equal to the fair value of
shares committed to be released from the ESOP to employees.
Compensation expense for the ESOP is recorded at an amount equal to the shares
allocated by the ESOP multiplied by the average fair market value of the shares
during the year. The Company recognizes compensation expense ratably over the
year for the ESOP shares to be allocated based upon the Company's current
estimate of the number of shares expected to be allocated by the ESOP during
each calendar year. The difference between the average fair market value and the
cost of the shares allocated by the ESOP is recorded as an adjustment to
additional paid-in-capital.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (the "FASB") issued a
Statement No. 123(R), Share-Based Payment an Amendment of FASB Statements No.
123 and APB No. 25, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under FASB Statement No. 123(R), all
forms of share-based payments to employees, including employee stock options,
would be treated the same as other forms of compensation by recognizing the
related cost in the income statement. The expense of the award would generally
be measured at fair value at the grant date. Current accounting guidance
requires that the expense relating to so-called fixed plan employee stock
options only be disclosed in the footnotes to the financial statements. The
Statement would eliminate the ability to account for share-based compensation
transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees.
This statement is effective for public entities that do not file as small
business issuers as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005. The Company is currently evaluating
this statement and its effects on the Company's results of operations.
On March 29, 2005, the SEC released Staff Accounting Bulletin 107, Share Based
Payments (SAB 107). The interpretations in SAB 107 express views of the SEC
staff regarding the application of Statement No. 123(R). Among other things, SAB
107 provides interpretive guidance related to the interaction between Statement
123(R) and certain SEC rules and regulations, as well as provides the staff's
views regarding the valuation of share-based payment arrangements for public
companies. The Company is evaluating the impact that the implementation of SAB
107 and Statement 123(R) will have on future option grants.
-8-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
In December 2003, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position (SOP) 03-3, Accounting for Certain Loans
or Debt Securities Acquired in a Transfer. SOP 03-3 requires acquired loans,
including debt securities, to be recorded at the amount of the purchaser's
initial investment and prohibits carrying over valuation allowances from the
seller for those individually-evaluated loans that have evidence of
deterioration in credit quality since origination, and it is probable all
contractual cash flows on the loan will be unable to be collected. SOP 03-3 also
requires the excess of all undiscounted cash flows expected to be collected at
acquisition over the purchaser's initial investment to be recognized as interest
income on a level-yield basis over the life of the loan. Subsequent increases in
cash flows expected to be collected are recognized prospectively through an
adjustment of the loan's yield over its remaining life, while subsequent
decreases are recognized as impairment. Loans carried at fair value, mortgage
loans held for sale, and loans to borrowers in good standing under revolving
credit agreements are excluded from the scope of SOP 03-3. The guidance is
effective for loans acquired in fiscal years beginning after December 15, 2004.
The implementation of SOP 03-3 on January 1, 2005 did not have a material impact
on financial condition, results of operations, or liquidity of the Company.
-9-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
5. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of the
Company's investment securities available for sale and held to maturity are as
follows (in thousands):
March 31, 2005 (unaudited)
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------
Available-for-sale
------------------
U.S. government obligations $ 1,999 $ - $ (86) $ 1,913
Mortgage-backed securities:
FHLMC 77,334 48 (1,177) 76,205
FNMA 47,604 78 (489) 47,193
Equity securities 1,029 7 (57) 979
--------- ------- ------- ---------
Total $ 127,966 $ 133 $ (1,809) $ 126,290
========== ======== ======== ==========
March 31, 2005 (unaudited)
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------
Held-to-maturity
----------------
Mortgage-backed securities:
FHLMC $ 49,333 $ 123 $ (724) $ 48,732
FNMA 64,438 144 (543) 64,039
GNMA 3,792 19 (6) 3,805
Other debt securities 10 - - 10
--------- ------- ------ ---------
Total $ 117,573 $ 286 $ (1,273) $ 116,586
========== ======== ======= ==========
December 31, 2004
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------
Available-for-sale
------------------
U.S. government obligations $ 2,500 $ - $ (57) $ 2,443
Mortgage-backed securities:
FHLMC 82,597 208 (475) 82,330
FNMA 48,684 123 (213) 48,594
Equity securities 1,029 9 (45) 993
--------- ------- ------ ---------
Total $ 134,810 $ 340 $ (790) $ 134,360
========== ======== ======= ==========
-10-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
December 31, 2004
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------------------------------------------------------
Held-to-maturity
----------------
Mortgage-backed securities:
FHLMC $ 47,360 $ 229 $ (256) $ 47,333
FNMA 59,121 668 (124) 59,665
GNMA 4,093 53 - 4,146
Other debt securities 10 - - 10
--------- ------- ------ ---------
Total $ 110,584 $ 950 $ (380) $ 111,154
========== ======== ======= ==========
6. LOANS RECEIVABLE
Major groupings of loans are as follows (in thousands):
March 31, December 31,
2005 2004
------------------------------------------
Mortgages:
Residential, 1-4 family $ 245,185 $ 243,772
Residential, multi-family 46,467 45,921
Construction loans 6,308 5,792
Non-residential 120,563 108,305
Automobile 168,221 146,148
Commercial 11,063 12,208
Other loans 3,522 3,720
--------- ---------
Loans receivable 601,329 565,866
Deferred loan fees and costs 262 248
Allowance for loan losses (4,705) (4,427)
--------- ---------
Loans receivable, net $ 596,886 $ 561,687
========== ==========
A summary of the activity in the allowance for loan losses is as follows (in
thousands):
Three Months Ended
--------------------------------------------
March 31, March 31,
2005 2004
--------------------------------------------
Balance, beginning of period $ 4,427 $ 3,274
Provision for loan losses 445 368
Recoveries 70 91
Loans charged-off (237) (260)
--------- ---------
Balance, end of period $ 4,705 $ 3,473
========== ==========
-11-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
7. DEPOSITS
Deposits are summarized as follows (in thousands):
March 31, December 31,
2005 2004
--------------------------------------------
Non-interest bearing checking accounts $ 59,134 $ 52,019
Interest-bearing checking 2,732 3,946
Savings and club accounts 69,779 67,115
Money market accounts 161,589 163,091
Certificate of deposit accounts 273,648 252,745
--------- ---------
$ 566,882 $ 538,916
========== ==========
8. FEDERAL HOME LOAN BANK ("FHLB") OF NEW YORK ADVANCES
1. Short-term FHLB Advances
Short-term FHLB advances generally have maturities of less than one year. The
details of these advances are presented below (in thousands, except
percentages):
At or For The
--------------------------------------------
Three Months Twelve Months
Ended Ended
March 31, December 31,
2005 2004
--------------------------------------------
Average balance outstanding $ 36,190 $ 33,618
Maximum amount outstanding at any month end during the period 41,797 48,975
Balance outstanding at period end 35,922 31,025
Weighted average interest rate during the period 2.78% 1.61%
Weighted average interest rate at period end 2.98% 2.42%
2. Long-term FHLB Advances
At March 31, 2005, long-term advances from the FHLB totaled $184,648,000.
Advances consist of fixed-rate advances that will mature within one to nine
years. The advances are collateralized by FHLB stock and certain first mortgage
loans and mortgage-backed securities. These advances had a weighted average
interest rate of 4.23%.
As of March 31, 2005, long-term FHLB advances mature as follows (in thousands):
2005 $ 40,198
2006 42,150
2007 38,000
2008 29,600
2009 12,000
Thereafter 22,700
---------
$ 184,648
=========
-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 principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of the
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Allowance for Loan Losses. The Company recognizes that the determination of
the allowance for loan losses involves a higher degree of judgment and
complexity than its other significant accounting policies. The balance in the
allowance for loan losses is determined based on management's review and
evaluation of the loan portfolio in relation to past loss experience, the size
and composition of the portfolio, current economic events and conditions, and
other pertinent factors, including management's assumptions as to future
delinquencies, recoveries and losses. All of these factors may be susceptible to
significant change. To the extent actual outcomes differ from management's
estimates, additional provisions for loan 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 March 31, 2005 and December 31, 2004
Assets. Total assets reached $896.3 million on March 31, 2005, an increase
of 4.1%, or $35.6 million, from $860.7 million on December 31, 2004. This growth
is primarily attributable to increases in the loan portfolio, offset by a
decrease in investment securities, during the three month period.
Between December 31, 2004 and March 31, 2005, investment securities
decreased $1.1 million, or 0.4%, from $244.9 million to $243.8 million. This
decrease primarily reflects $14.6 million in purchases offset by $14.7 million
in maturities and principal repayments, along with $1.1 million in net discount
and premium amortization. Additionally, there was a $780,000 decrease in the
unrealized market value associated with investment securities designated
available-for-sale.
Net loans increased 6.3%, or $35.2 million, to $596.9 million at March 31,
2005, from $561.7 million at December 31, 2004. This growth includes $33.4
million in originations, net of principal repayments, and $2.3 million in
purchases, offset by amortization of the premium on purchased loans and deferred
loan fees, along with a provision of $445,000 to the allowance for loan losses.
The most significant growth during the three months ended March 31, 2005 was in
automobile loans, which increased by $22.1 million, or 15.1%, to $168.2 million
and multi-family and non-residential mortgage loans, which increased by $12.8
million, or 8.3%, to $167.0 million.
-14-
On March 31, 2005, total loans of $601.3 million were comprised of 22.0% in
one-to-four family real estate loans, 18.8% in home equity loans, 27.8% in
multi-family and non-residential mortgage loans, 28.6% in consumer loans,
comprised mostly of direct automobile loans for both new and used vehicles, 1.8%
in commercial loans and 1.0% in construction loans.
The allowance for loan losses was $4.7 million at March 31, 2005, compared
to $4.4 million at December 31, 2004. The ratio of allowance to total loans was
0.78% for both periods. This reflects a provision for loan losses of $445,000
for the three-month period, offset by net charge-offs of $167,000.
Non-performing assets to total assets was 0.04% at March 31, 2005, compared to
0.03% at December 31, 2004.
Liabilities. Total liabilities increased $36.8 million, or 4.9%, to $793.4
million at March 31, 2005, from $756.6 million at December 31, 2004. The
increase in total liabilities resulted primarily from an increase of $28.0
million, or 5.2%, in deposits and an $8.2 million, or 3.8%, increase in FHLB
advances. 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 March 22, 2005 quarterly cash
dividend declaration.
Deposits reached $566.9 million at March 31, 2005, an increase of $28.0
million, or 5.2%, from the $538.9 million reported at December 31, 2004. Core
deposits, consisting of checking, savings and money market accounts, increased
$7.1 million, or 2.5 percent, and represented 51.7% of total deposits at March
31, 2005, compared to 53.1% at December 31, 2004. The majority of deposit growth
consisted of an increase in certificate of deposit accounts of $20.9 million, or
8.3%, for the three months ended March 31, 2005. This increase was primarily the
result of competitive pricing initiatives to attract funds with extended
maturities in response to the current interest rate trend.
The $8.2 million, or 3.8%, increase in FHLB advances was to fund both the
purchase of investment securities and the origination of loans during this
period.
Equity. Stockholders' equity totaled $102.8 million on March 31, 2005, a
decrease of 1.2 %, or $1.2 million, from $104.0 million on December 31, 2004.
The decrease in stockholders' equity is largely attributable to the repurchase
of shares to satisfy the Company's restricted stock plans and the stock
repurchase program announced on January 26, 2005, as well as the accumulated
effect, net of tax, of an unrealized investment portfolio market value
adjustment, offset by net income for the quarter. Additionally, on March 22,
2005, the Company's Board of Directors declared a cash dividend of $0.04 per
common share, consistent with the prior quarterly dividend. The dividend was
payable on April 29, 2005 to stockholders of record on April 15, 2005. A
$498,000 reduction in retained earnings was recorded in connection with this
dividend.
The repurchase of shares associated with the Company's restricted stock
plans and the stock repurchase program announced on January 26, 2005 resulted in
reductions in equity of $766,000 and $804,000, respectively. The decrease in
accumulated other comprehensive income, net of tax effect, totaled $779,000.
-15-
Average Balance Sheet. The following table sets forth certain information
for the three months ended March 31, 2005 and 2004. The average yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily average balances. The table does not include the allowance
for loan losses in the average balances of loans receivable. Management does not
believe that this causes any material differences in the information presented.
For the Three Months Ended March 31,
---------------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- --------- ----------
Interest-earning assets:
Loans receivable, net(1) $579,415 $8,174 5.64% $442,045 $6,700 6.06%
Securities(2) 241,378 2,270 3.76 174,772 1,510 3.46
Other interest-earning assets(3) 12,894 91 2.82 3,702 22 2.38
-------- ------ -------- ------
Total interest-earning assets 833,687 10,535 5.05 620,519 8,232 5.31
Non-interest-earning assets 40,974 35,858
-------- --------
Total assets $874,661 $656,377
======== ========
Interest-bearing liabilities:
Checking accounts(4) $52,270 $13 0.10 $44,874 $2 0.02
Savings and club accounts 66,185 82 0.50 70,031 87 0.50
Money market accounts 157,082 769 1.96 145,121 605 1.67
Certificates of deposit 263,026 1,856 2.82 217,417 1,401 2.58
FHLB advances 226,889 1,793 3.16 68,158 453 2.66
Stock subscriptions payable - - 0.00 23,207 23 0.40
-------- ------ -------- ------
Total interest-bearing liabilities 765,452 4,513 2.36 568,808 2,571 1.81
------ ------
Non-interest-bearing liabilities 4,977 3,193
-------- --------
Total liabilities 770,429 572,001
Stockholders' equity 104,232 84,376
-------- --------
Total liabilities and stockholders' equity $874,661 $656,377
======== ========
Net interest income $6,022 $5,661
====== ======
Interest rate spread(5) 2.69% 3.50%
Net yield on interest-earning assets(6) 2.89% 3.65%
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.91% 109.09%
_______________________________
(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) Includes both interest-bearing and non-interest bearing checking accounts.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities. (6) Net yield on interest-earning assets represents net
interest income as a percentage of average interest-earning assets.
-16-
Comparison of Operating Results for Three Months Ended March 31, 2005 and 2004
Net Income. Net income increased by $115,000, to $1.1 million, for the
three months ended March 31, 2005, compared to $1.0 million for the same period
in 2004, an 11.4% increase. The increase was attributable primarily to a
$361,000 increase in net interest income and a $277,000 increase in other
income, offset by a $77,000 increase in the provision for loan and lease losses,
a $411,000 increase in other expenses and a $35,000 increase in income tax
expense as a result of higher pre-tax earnings.
Net Interest Income. Net interest income grew $361,000, or 6.4%, to $6.0
million for the three months ended March 31, 2005, compared to $5.7 million for
the same period in 2004. Total interest income increased by $2.3 million, to
$10.5 million, for the three months ended March 31, 2005, while total interest
expense increased by $1.9 million, to $4.5 million, for the same three month
period.
The 28.0% increase in total interest income was primarily due to a $213.2
million, or 34.4%, increase in the average balance of interest-earning assets,
offset by a 25 basis point decrease in the average yield earned on these
investments when compared to the same period of the prior year. The increase in
interest-earning assets was a direct result of management's growth strategy. The
decrease in the average yield was primarily attributable to lower market
interest rates on loans originated to replace higher yielding loans that were
satisfied by the borrowers.
The 75.5% increase in total interest expense resulted primarily from a
$196.6 million, or 34.6%, increase in the average balance of interest-bearing
liabilities with a 55 basis point increase in the average cost of funds when
compared to the same period of the prior year. The increase in the average cost
of interest-bearing liabilities was primarily attributable to higher market
interest rates, as well as a significant increase in higher cost borrowings. The
majority of the increase in average interest-bearing liabilities for the 2005
period was comprised of a $158.7 million, or 232.9%, increase in the average
balance of advances from the Federal Home Loan Bank and a $45.6 million, or
21.0%, increase in the average balance of certificate of deposit accounts over
the same period of the prior year.
Provision for loan losses. We maintain an allowance for loan losses through
provisions for loan and lease losses that are charged to earnings. The provision
is made to adjust the total allowance for loan losses to an amount that
represents management's best estimate of losses known and inherent in the loan
portfolio at the balance sheet date that are both probable and reasonable to
estimate. In estimating the known and inherent losses in the loan portfolio that
are both probable and reasonable to estimate, management considers factors such
as an internal analysis of credit quality, general levels of loan delinquencies,
collateral values, the Bank's historical loan and lease loss experience, changes
in loan concentrations by loan category, peer group information and economic and
market trends affecting our market area. The provision established for loan and
lease losses each month reflects management's assessment of these factors in
relation to the level of the allowance at such time. Management allocates the
allowance to various categories based on its classified assets, historical loan
and lease loss experience and its assessment of the risk characteristics of each
loan category and the relative balances at month end of each loan category.
Management's assessment did not change either in estimation method or
assumptions during either period.
The provision for loan losses increased by $77,000, or 20.9%, to $445,000
for the three months ended March 31, 2005, from $368,000 for the same period in
2004. Total charge-offs amounted to $237,000 and recoveries amounted to $70,000,
resulting in a net charge-off amount of $167,000 for the three months ended
March 31, 2005. This represents a $2,000 decrease in net charge-offs over the
same period in 2004.
Other Income. Other income increased $277,000, or 40.3%, to $965,000 for
the three months ended March 31, 2005, compared to $688,000 for the same period
in 2004. This is primarily the result of an increase of $233,000 in commission
income generated by annuity sales from Synergy Financial Services, Inc. The
balance of the increase was attributable to charges and fees on deposit and loan
accounts, and tax advantaged income from the Company's bank-owned life insurance
investment.
-17-
Other Expenses. Other expenses increased $411,000, or 9.5%, to $4.7 million
for the three months ended March 31, 2005, compared to $4.3 million for the same
period in 2004. The increase was primarily attributable to wages and benefits
associated with the Company's growth strategy, as well as to equity-based
employee compensation plans.
Income Tax Expense. Income tax expense increased by $35,000, or 5.3%,
during the three months ended March 31, 2005 when compared to the same period in
2004, reflecting higher taxable income for the 2005 period.
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 $6.4 million at March 31, 2005. To a lesser extent, the
earnings and funds provided from operating activities are a source of liquidity.
Liquidity management is both a daily and long-term function of business
management. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
and securities prepayments are greatly influenced by general interest rates,
economic conditions and competition. If the Bank requires funds beyond its
ability to generate them internally, it has the ability to obtain advances from
the FHLB, which provides an additional source of funds. At March 31, 2005, the
Bank's borrowing limit with the FHLB was $203.8 million, excluding repurchase
agreement advances. At March 31, 2005, the Bank had $220.6 million of borrowings
outstanding, including $112.6 million in repurchase agreement advances.
Management is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on the Company's
liquidity, capital or operations nor is it aware of any current recommendation
by regulatory authorities, which, if implemented, would have a material effect
on liquidity, capital or operations. The total amount of the Bank's commitments
to extend credit for mortgage and consumer loans as of March 31, 2005 was $94.6
million, excluding commitments on unused lines of credit, which totaled $27.1
million.
Management intends to expand the Bank's branch network either through
opening or acquiring branch offices. During April 2005, the Bank opened a branch
in Elizabeth, New Jersey. The Bank currently plans to open five additional new
branch locations and relocate one branch over the next two years. The Bank also
will continue to actively consider the acquisition of local financial
institutions as part of expanding its banking operations. It does not, however,
have any current understandings, agreements or arrangements for the expansion of
its business, other than opening new branch office locations.
-18-
The following table discloses the Bank's contractual obligations as of March 31,
2005:
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
---------- ----------- ----------- ---------- ---------
FHLB advances (1) $220,570 $83,120 $77,150 $37,600 $22,700
Rental under operating leases 12,841 614 2,819 1,593 7,815
------- ------ ------ ------ ------
Total $233,411 $83,734 $79,969 $39,193 $30,515
======= ====== ====== ====== ======
___________________
(1) At March 31, 2005, the Bank had $220.6 million of borrowings, including
$112.6 million in repurchase agreement advances, outstanding with the FHLB.
At March 31, 2005, the Bank's borrowing limit with the FHLB was $203.8
million, excluding repurchase agreement advances.
The following table discloses the Bank's commercial commitments as of March 31,
2005:
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
---------- ----------- --------- --------- ---------
Lines of Credit (1) $ 27,105 $ 3 $ 1 $2,274 $24,827
Other commitments to extend credit 94,634 94,634 - - -
------ ------ ------ ----- ------
Total $121,739 $94,637 $ 1 $2,274 $24,827
======= ====== ====== ===== ======
_____________________
(1) Represents amounts committed to customers.
-19-
Regulatory Capital Requirements
The Bank is subject to federal regulations that impose certain minimum
capital requirements. Quantitative measures, established by regulation to ensure
capital adequacy, require the Bank to maintain amounts and ratios of tangible
and core capital to adjusted total assets and of total risk-based capital to
risk-weighted assets. On March 31, 2005, the Bank was in compliance with all of
its regulatory capital requirements. The following table sets forth the Bank's
capital position and relativity to regulatory requirements as of March 31, 2005:
OTS Requirements
---------------------------------------------------------------------------
Regulatory
Minimum for classification as
Bank actual capital adequacy well-capitalized
----------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total risk-based capital $94,782 15.86% $47,813 8.00% $59,766 10.00%
(to risk-weighted assets)
Tier 1 capital 90,077 15.07% N/A N/A 35,860 6.00%
(to risk-weighted assets)
Tier 1 capital 90,077 10.13% 35,554 4.00% 44,443 5.00%
(to adjusted total assets)
Tangible capital 90,077 10.13% 13,333 1.50% N/A N/A
(to adjusted total assets)
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 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.
-20-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of the Bank's interest-earning
assets and interest-bearing liabilities are sensitive to changes in interest
rates, a significant form of market risk for the Bank is interest rate risk, or
changes in interest rates. The Bank is vulnerable to an increase in interest
rates to the extent that interest-bearing liabilities mature or re-price more
rapidly than interest-earning assets. Our assets include long-term, fixed-rate
loans and investments, while our primary sources of funds are deposits and
borrowings with substantially shorter maturities. Although having
interest-bearing liabilities that re-price more frequently than interest-earning
assets is generally beneficial to net interest income during a period of
declining interest rates, this type of asset/liability mismatch is generally
detrimental during periods of rising interest rates.
The Board of Directors has established an Asset and Liability Management
and Budget Committee that consists of Directors Scott (Chairman), De Perez,
Fiore, Kasper and Putvinski. The Committee meets quarterly with management to
review current investments: average lives, durations and re-pricing frequencies
of loans and securities; loan and deposit pricing and production volumes and
alternative funding sources; interest rate risk analysis; liquidity and
borrowing needs; and a variety of other assets and liability management topics.
The 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, comprised
mostly of direct automobile loans for both new and used vehicles;
o lengthen the maturities of time deposits and borrowings when it would
be cost effective through the aggressive pricing and promotion of
certificates of deposits and utilization of FHLB advances;
o increase core deposits (i.e., checking, savings and money market
accounts) which tend to be less interest rate sensitive; and
o purchase intermediate and adjustable-rate investment securities that
provide a stable cash flow, thereby providing investable funds in
varying interest rate cycles.
Quantitative Analysis. Management actively monitors its interest rate risk
exposure. The Bank's objective is to maintain a consistent level of
profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Bank uses the Office of Thrift
Supervision Net Portfolio Value (NPV) Model to monitor its exposure to interest
rate risk, which calculates changes in net portfolio value. Reports generated
from assumptions provided and modified by management are reviewed by the Asset
and Liability Management Committee and reported to the Board of Directors
quarterly. The Interest Rate Sensitivity of Net Portfolio Value Report shows the
degree to which balance sheet line items and the net portfolio value are
potentially affected by a 100 to 300 basis point (1/100th of a percentage point)
upward and downward shift (shock) in the Treasury yield curve.
-21-
Management of the Company believes that there has not been a material
adverse change in market risk during the three-month period ended March 31,
2005.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on his 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 and financial officer has 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.
-22-
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 March 31, 2005 that would be expected to have a material effect
on the Company's operations or income.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table reports information regarding repurchases of the Company's
common stock during the first quarter of 2005 and the stock repurchase plans
approved by the Company's Board of Directors.
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
Total Number of Shares Maximum Number of Shares
Total Number Purchased as Part of that May Yet Be Purchased
of Shares Average Price Publicly Announced Under the Plans or
Period Purchased Paid per Share Plans or Programs(1)(2) Programs (1)(2)
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
January 1-31, 2005 - - - 686,451
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
February 1-28, 2005 500 12.45 500 685,951
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
March 1-31, 2005 130,100 11.90 130,100 555,851
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
Total 130,600 11.94 130,600
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
______________________
(1) On November 9, 2004, the Company announced the adoption of a repurchase
program to fund the Company's 2004 Restricted Stock Plan. This program
specified the purchase of up to 281,436 shares of common stock to be made
from time to time in the open market based on availability, price and the
Company's financial performance. The Company announced the completion of
this repurchase program on March 30, 2005.
(2) On January 26, 2005, the Company announced a share repurchase program. The
program specified the purchase of up to 5.0 percent of the Company's
outstanding shares of common stock (approximately 622,600 shares) in open
market transactions. Such purchases are to be made from time to time in the
open market, based on stock availability, price and the Company's financial
performance. This program has no expiration date and has 555,851 shares yet
to be purchased.
-23-
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
Item 6. Exhibits.
--------
a) Exhibits:
31 Certification pursuant to ss.302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to ss.906 of the Sarbanes-Oxley Act of 2002
-24-
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: May 10, 2005 By: /s/John S. Fiore
-------------------------------------
John S. Fiore
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the Registrant
and in the capacities and on the date indicated.
/s/John S. Fiore
- ------------------------------------------
John S. Fiore
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive and Financial Officer)
Date: May 10, 2005
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