10-Q 1 f10q_093005-0207.txt FORM SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: September 30, 2005 ------------------ [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ SEC File Number: 000-50467 --------- 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 --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares outstanding of common stock as of October 31, 2005: $0.10 Par Value Common Stock 11,453,266 ---------------------------- ---------------------------- Class Shares Outstanding SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page ------ --------------------- ---- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004 (audited).....................................................................1 Consolidated Statements of Income for the three and nine months ended September 30, 2005 and 2004 (unaudited).........................................................2 Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 2005 (unaudited)................................................3 Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (unaudited).........................................................4 Notes to Consolidated Financial Statements (unaudited)..............................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................13 Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................23 Item 4. Controls and Procedures............................................................................24 PART II OTHER INFORMATION ------- ----------------- Item 1. Legal Proceedings..................................................................................25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................................25 Item 3. Defaults Upon Senior Securities....................................................................26 Item 4. Submission of Matters to a Vote of Security Holders................................................26 Item 5. Other Information..................................................................................26 Item 6. Exhibits...........................................................................................26 Signatures.......................................................................................................27
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share data)
September 30, December 31, 2005 2004 (unaudited) (audited) ----------- --------- Assets: Cash and amounts due from banks $ 4,386 $ 4,687 Interest-bearing deposits with banks 3,554 1,759 ----------- ----------- Cash and cash equivalents 7,940 6,446 Investment securities available-for-sale, at fair value 93,485 134,360 Investment securities held-to-maturity (fair value of $100,203 and $111,154, respectively) 101,155 110,584 Federal Home Loan Bank of New York stock, at cost 13,123 10,771 Loans receivable, net 690,808 561,687 Accrued interest receivable 3,118 2,751 Property and equipment, net 17,752 16,814 Cash surrender value of bank-owned life insurance 13,010 12,637 Other assets 5,172 4,627 ----------- ----------- Total assets $ 945,563 $ 860,677 =========== =========== Liabilities: Deposits $ 581,140 $ 538,916 Federal Home Loan Bank advances 262,450 212,414 Advance payments by borrowers for taxes and insurance 2,140 1,702 Accrued interest payable on advances 780 385 Dividend payable 623 498 Other liabilities 599 2,720 ----------- ----------- Total liabilities 847,732 756,635 ----------- ----------- Stockholders' equity: Preferred stock; $0.10 par value, 5,000,000 shares authorized; issued and outstanding - none - - Common stock; $0.10 par value, 20,000,000 shares authorized; Issued - 12,466,903 in 2005 and 12,452,011 in 2004 Outstanding - 11,453,266 in 2005 and 12,064,968 in 2004 1,247 1,245 Additional paid-in-capital 85,601 86,177 Retained earnings 32,211 30,603 Unearned ESOP shares (5,452) (5,962) Unearned RSP compensation (2,784) (3,391) Treasury stock held for the RSP, at cost; 363,037 and 387,043 shares at September 30, 2005 and December 31, 2004, respectively (4,042) (4,343) Treasury stock, at cost; 650,600 and -0- shares at September 30, 2005 and December 31, 2004, respectively (7,916) - Accumulated other comprehensive loss, net of taxes (1,034) (287) ----------- ----------- Total stockholders' equity 97,831 104,042 ----------- ----------- Total liabilities and stockholders' equity $ 945,563 $ 860,677 =========== ===========
The accompanying notes are an integral part of these statements. -1- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per share data)
For the Three Months For the Nine Months ended September 30, ended September 30, ------------------------ ------------------------- 2005 2004 2005 2004 (unaudited) (unaudited) (unaudited) (unaudited) ----------- ----------- ----------- ----------- Interest income: Loans, including fees $ 9,819 $ 7,278 $ 27,074 $ 20,647 Investment securities 1,934 2,463 6,448 5,626 Other 156 42 391 88 --------- -------- --------- --------- Total interest income 11,909 9,783 33,913 26,361 --------- -------- --------- --------- Interest expense: Deposits 3,292 2,329 9,025 6,615 Borrowed funds 2,517 1,432 6,347 2,538 --------- -------- --------- --------- Total interest expense 5,809 3,761 15,372 9,153 --------- -------- --------- --------- Net interest income before provision for loan losses 6,100 6,022 18,541 17,208 Provision for loan losses 392 429 1,314 1,133 --------- -------- --------- --------- Net interest income after provision for loan losses 5,708 5,593 17,227 16,075 --------- -------- --------- --------- Other income: Service charges and other fees on deposit accounts 550 556 1,562 1,604 Net gain (loss) on sale of investments 8 38 (26) 38 Commissions 211 153 660 186 Other 255 205 665 336 --------- -------- --------- --------- Total other income 1,024 952 2,861 2,164 --------- -------- --------- --------- Other expenses: Salaries and employee benefits 2,784 2,687 8,261 7,180 Premises and equipment 962 939 2,789 2,854 Occupancy 604 490 1,655 1,436 Professional services 165 156 560 403 Advertising 269 241 723 603 Other operating 272 384 828 974 --------- -------- --------- --------- Total other expenses 5,056 4,897 14,816 13,450 --------- -------- --------- --------- Income before income tax expense 1,676 1,648 5,272 4,789 Income tax expense 568 554 1,939 1,780 --------- -------- --------- --------- Net income $ 1,108 $ 1,094 $ 3,333 $ 3,009 ========= ======== ========= ========= Per share of common stock: Basic earnings per share $ 0.10 $ 0.10 $ 0.30 $ 0.28 ========= ======== ========= ========= Diluted earnings per share $ 0.10 $ 0.09 $ 0.29 $ 0.27 ========= ======== ========= ========= Basic weighted average shares outstanding 10,711 11,496 10,993 10,886 ====== ====== ====== ====== Diluted weighted average shares outstanding 11,102 11,743 11,390 11,113 ====== ====== ====== ======
The accompanying notes are an integral part of these statements. -2- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity For the Nine Months Ended September 30, 2005 (Unaudited) (Dollars in thousands, except share amounts)
Treasury Other Common stock stock accumulated ------------------ Additional Unearned Unearned acquired comprehensive Shares Par paid-in- Retained ESOP RSP for the Treasury income (loss), issued value capital earnings shares compensation RSP stock net TOTAL ------ ----- ------- -------- ------ ------------ --- -------- --- ----- BALANCE AT JANUARY 1, 2005 12,452,011 $1,245 $86,177 $30,603 $(5,962) $(3,391) $(4,343) $ -0- $ (287) $104,042 Net income - - - 3,333 - - - - - 3,333 Other comprehensive income, net of reclassification adjustment and taxes - - - - - - - - (747) (747) ----------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 2,586 ----------------------------------------------------------------------------------------------------------------------------------- Dividends declared - - - (1,725) - - - - - (1,725) Common stock issued for options exercised (14,892 shares) 14,892 2 81 83 Common stock held by ESOP committed to be released (74,718 shares) - - 410 - 510 - - - - 920 Compensation recognized under RSP Plan - - - - - 607 - - - 607 Common stock repurchased for RSP (63,851 shares) - - - - - - (766) - - (766) Common stock issued by RSP (87,857 shares) (1,067) 1,067 - Purchase of treasury stock (650,600 shares) - - - - - - - (7,916) - (7,916) ---------- ------ ------- ------- ------- ------- ------- ------- ------- ------- BALANCE AT SEPTEMBER 30, 2005 12,466,903 $1,247 $85,601 $32,211 $(5,452) $(2,784) $(4,042) $(7,916) $(1,034) $97,831 ========== ====== ======= ======= ======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these statements. -3- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)
For the Nine Months Ended September 30, ------------------------ 2005 2004 (unaudited) (unaudited) ----------- ----------- Operating activities: Net income $ 3,333 $ 3,009 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,139 1,086 Provision for loan losses 1,314 1,133 Deferred income taxes (405) (83) Amortization of deferred loan fees and costs (81) (9) Amortization of premiums on investment securities 679 1,099 Net loss (gain) on sale of investment securities 26 (38) Release of ESOP shares 920 763 Compensation under RSP plan 607 274 Increase in accrued interest receivable (367) (753) Increase in other assets (141) (707) (Decrease) increase in other liabilities (2,121) 391 Increase in cash surrender value of bank-owned life insurance (373) (50) Increase in accrued interest payable on advances 395 276 --------- --------- Net cash provided by operating activities 4,925 6,391 --------- --------- Investing activities: Purchase of investment securities held-to-maturity (12,536) (93,010) Purchase of investment securities available-for-sale (2,084) (63,482) Maturity and principal repayments of investment securities held-to-maturity 21,819 9,650 Maturity and principal repayments of investment securities available-for-sale 28,846 39,721 Purchase of property and equipment (2,077) (549) Purchase of FHLB Stock (2,352) (6,862) Purchase of bank owned life insurance - (10,000) Proceeds from the sale of investment securities available for sale 12,808 885 Loan originations, net of principal repayments (120,186) (59,462) Purchase of loans (10,168) (26,653) --------- --------- Net cash used in investing activities (85,930) (209,762) --------- --------- Financing activities: Net increase in deposits 42,224 48,823 Increase in short-term FHLB advances 61,475 17,321 (Decrease) increase in long-term FHLB advances (11,439) 115,480 Increase (decrease) in advance payments by borrowers for taxes and insurance 438 (86) Dividends paid (1,600) (462) Decrease in stock subscriptions payable - (38,322) Net proceeds from issuance of common stock - 69,261 Net purchase of common stock for ESOP - (5,628) Purchase of treasury stock for the RSP Plan (766) (1,808) Purchase of treasury stock (7,916) - Common stock issued for options exercised 83 - --------- --------- Net cash provided by financing activities 82,499 204,579 --------- --------- Net increase in cash and cash equivalents 1,494 1,208 Cash and cash equivalents at beginning of year 6,446 7,292 --------- --------- Cash and cash equivalents at end of period $ 7,940 $ 8,500 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 2,849 $ 1,866 ========= ========= Interest paid on deposits and borrowed funds $ 15,767 $ 8,876 ========= =========
The accompanying notes are an integral part of these statements. -4- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) 1. BASIS OF FINANCIAL STATEMENT PRESENTATION The accounting policies followed by Synergy Financial Group, Inc. (the "Company") conform to accounting principles generally accepted in the United States of America and to predominant practice within the banking industry. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Synergy Bank (the "Bank"), and its subsidiary Synergy Capital Investments, Inc., and Synergy Financial Services, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, changes in equity and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes thereto included in the Company's Annual Report on Form 10-K for the period ended December 31, 2004. The results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2005 or any other period. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal estimates that are susceptible to significant change in the near term relate to the allowance for loan losses. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses. Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures About Segments of an Enterprise and Related Information, establishes standards for the way business enterprises report information about operating segments in annual financial statements. The Bank has one operating segment and, accordingly, has one reportable segment, "Community Banking." All of the Bank's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Bank supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer, residential, multi-family and non-residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Bank as one operating segment. -5- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) 2. EARNINGS PER SHARE Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or resulted in the issuance of common stock. These potentially dilutive shares would then be included in the weighted number of shares outstanding for the period using the treasury stock method. Shares issued and shares re-acquired during any period are weighted for the portion of the period that they were outstanding. The computation of both basic and diluted earnings per share includes the Employee Stock Ownership Plan ("ESOP") shares previously allocated to participants and shares committed to be released for allocation to participants and restricted stock plan ("RSP") shares that have vested or have been allocated to participants. ESOP and RSP shares that have been purchased but not committed to be released have not been considered in computing basic and diluted earnings per share. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation (in thousands, except per share data):
For the Three Months Ended September 30, 2005 --------------------------------------------- Weighted Income average shares Per (numerator) (denominator) share amount --------------- ----------------- --------------- Basic earnings per share: Income available to common stockholders $ 1,108 10,711 $ 0.10 Effect of dilutive common stock equivalents 0 391 0.00 --------- ------ --------- Diluted earnings per share: Income available to common stockholders $ 1,108 11,102 $ 0.10 ========= ====== =========
For the Three Months Ended September 30, 2004 --------------------------------------------- Weighted Income average shares Per (numerator) (denominator) share amount --------------- ----------------- --------------- Basic earnings per share: Income available to common stockholders $ 1,094 11,496 $ 0.10 Effect of dilutive common stock equivalents 0 247 (0.01) --------- ------ --------- Diluted earnings per share: Income available to common stockholders $ 1,094 11,743 $ 0.09 ========= ====== =========
-6- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited)
For the Nine Months Ended September 30, 2005 -------------------------------------------- Weighted Income average shares Per (numerator) (denominator) share amount --------------- ----------------- --------------- Basic earnings per share: Income available to common stockholders $ 3,333 10,993 $ 0.30 Effect of dilutive common stock equivalents 0 397 (0.01) --------- ------ --------- Diluted earnings per share: Income available to common stockholders $ 3,333 11,390 $ 0.29 ========= ====== =========
For the Nine Months Ended September 30, 2004 -------------------------------------------- Weighted Income average shares Per (numerator) (denominator) share amount --------------- ----------------- --------------- Basic earnings per share: Income available to common stockholders $ 3,009 10,886 $ 0.28 Effect of dilutive common stock equivalents 0 227 (0.01) --------- ------ --------- Diluted earnings per share: Income available to common stockholders $ 3,009 11,113 $ 0.27 ========= ====== =========
3. STOCK-BASED COMPENSATION The Company's stock option plans and the restricted stock plans are accounted for in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and released Interpretations. Accordingly, no compensation expense has been recognized for the stock option plans. Expense for the restricted stock plans in the amount of the fair value of the common stock at the date of grant is recognized ratably over the vesting period. Had an expense for the Company's stock option plans been determined based on the fair value at the grant date for the Company's stock options consistent with the method outlined in SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share for all expenses related to stock options and stock granted in its restricted stock plans would have been reduced to the pro forma amounts that follow (in thousands, except per share data): -7- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited)
For the Three Months For the Nine Months ended September 30, ended September 30, ------------------- ------------------- 2005 2004 2005 2004 (unaudited) (unaudited) (unaudited) (unaudited) ----------- ----------------------- ----------- Net income, as reported $ 1,108 $ 1,094 $ 3,333 $ 3,009 Add expense recognized for the restricted stock plans, net of related tax effect 130 99 389 176 Less total stock option plan and restricted stock plan expense, determined under the fair value method, net of related tax effect (227) (226) (683) (405) --------- --------- -------- --------- Net income, pro forma $ 1,011 $ 967 $ 3,039 $ 2,780 ========= ========= ======== ========= Basic earnings per share: As reported $ 0.10 $ 0.10 $ 0.30 $ 0.28 Pro forma $ 0.09 $ 0.08 $ 0.28 $ 0.26 Diluted earnings per share: As reported $ 0.10 $ 0.09 $ 0.29 $ 0.27 Pro forma $ 0.09 $ 0.08 $ 0.27 $ 0.25
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options price model. The following weighted average assumptions were utilized for grants in 2003: dividend yield of 0.00%; expected volatility of 29.44 %; risk-free interest rate of 3.01%; and, expected life of five years. The following weighted average assumptions were utilized for grants in 2004: dividend yield of 1.60%; expected volatility of 32.85%; risk-free interest rate of 3.33%; and, expected life of five years. The following weighted average assumptions were utilized for grants in 2005: dividend yield of 2.00%; expected volatility of 14.97%; risk-free interest rate of 3.83%; and, expected life of five years. The Company has established an ESOP covering eligible employees with one year of service, as defined by the ESOP. The Company accounts for the ESOP in accordance with the American Institute of Certified Public Accountants' Statement of Position ("SOP") No. 93-6, Employers' Accounting for Employee Stock Ownership Plans. SOP No. 93-6 addresses the accounting for shares of stock issued to employees by an ESOP. SOP No. 93-6 requires that the employer record compensation expense in the amount equal to the fair value of shares committed to be released from the ESOP to employees. Compensation expense for the ESOP is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair market value of the shares during the year. The Company recognizes compensation expense ratably over the year for the ESOP shares to be allocated based upon the Company's current estimate of the number of shares expected to be allocated by the ESOP during each calendar year. The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in-capital. -8- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) 4. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 123(R), Share-Based Payment an Amendment of SFAS No. 123 and APB No. 25, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. Under SFAS No. 123(R), all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. The Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees. This statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company is currently evaluating this statement and its effects on the Company's results of operations. On March 29, 2005, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin ("SAB") 107, Share Based Payments. The interpretations in SAB 107 express views of the SEC staff regarding the application of SFAS No. 123(R). Among other things, SAB 107 provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the staff's views regarding the valuation of share-based payment arrangements for public companies. The Company is evaluating the impact that the implementation of SAB 107 and SFAS No. 123(R) will have on future option grants. On April 14, 2005, the SEC voted unanimously to adopt a staff recommendation to delay the effective date of SFAS No. 123(R) for many public companies. Specifically, the new rule states that public companies do not have to comply with Statement No. 123(R) until the first quarter of the first fiscal year beginning after June 15, 2005, rather than the first quarterly or annual period beginning after that date, as originally prescribed by SFAS No. 123(R). As such, calendar year public companies must begin complying with SFAS No. 123(R) for their first quarterly period beginning in 2006, and not in the third quarter of 2005. On June 29, 2005, the FASB issued FASB Staff Position ("FSP") SFAS No. ("FAS") 115-1, The Meaning of Other than Temporary Impairment and Its Application to Certain Investments. This reflects the latest changes to the FASB Emerging Issues Task Force ("EITF") 03-1, which the Bank adopted in December 2003. EITF 03-1 included certain disclosures regarding quantitative and qualitative disclosures for investment securities accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, that are impaired at the balance sheet date, but an other-than-temporary impairment has not been recognized. FSP SFAS No. 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment no later than when the impairment is considered other than temporary, even if a decision to sell has not been made. FSP SFAS No. 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Company is in the process of determining the impact that EITF 03-1 will have on its financial statements. -9- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) 5. INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses, and fair value of the Company's investment securities available-for-sale and held-to-maturity are as follows (in thousands):
September 30, 2005 (unaudited) --------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value --------------------------------------------------------- Available-for-sale ------------------ U.S. government obligations $ 1,999 $ - $ (78) $ 1,921 Mortgage-backed securities: FHLMC 60,823 12 (970) 59,865 FNMA 31,263 16 (525) 30,754 Equity securities 1,000 (55) 945 ----------- --------- --------- ----------- Total $ 95,085 $ 28 $ (1,628) $ 93,485 =========== ========= ========= ===========
September 30, 2005 (unaudited) --------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value --------------------------------------------------------- Held-to-maturity ---------------- Mortgage-backed securities: FHLMC $ 41,212 $ 62 $ (597) $ 40,677 FNMA 56,771 88 (509) 56,350 GNMA 3,162 14 (10) 3,166 Other debt securities 10 - - 10 ----------- --------- --------- ----------- Total $ 101,155 $ 164 $ (1,116) $ 100,203 =========== ========= ========= ===========
December 31, 2004 --------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value --------------------------------------------------------- Available-for-sale ------------------ U.S. government obligations $ 2,500 $ - $ (57) $ 2,443 Mortgage-backed securities: FHLMC 82,597 208 (475) 82,330 FNMA 48,684 123 (213) 48,594 Equity securities 1,029 9 (45) 993 ----------- --------- --------- ----------- Total $ 134,810 $ 340 $ (790) $ 134,360 =========== ========= ======== ===========
-10- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited)
December 31, 2004 --------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value --------------------------------------------------------- Held-to-maturity ---------------- Mortgage-backed securities: FHLMC $ 47,360 $ 229 $ (256) $ 47,333 FNMA 59,121 668 (124) 59,665 GNMA 4,093 53 - 4,146 Other debt securities 10 - - 10 ----------- --------- -------- ----------- Total $ 110,584 $ 950 $ (380) $ 111,154 =========== ========= ======== ===========
6. LOANS RECEIVABLE Major groupings of loans are as follows (in thousands):
September 30, December 31, 2005 2004 -------------------------------------------- Mortgages: Residential, 1-4 family $ 242,823 $ 243,772 Non-residential and multi-family 232,065 154,226 Construction 8,183 5,792 Automobile 187,412 146,148 Commercial 21,985 12,208 Other 3,501 3,720 ----------- ----------- Loans receivable 695,969 565,866 Deferred loan fees and costs 235 248 Allowance for loan losses (5,396) (4,427) ----------- ----------- Loans receivable, net $ 690,808 $ 561,687 =========== ===========
A summary of the activity in the allowance for loan losses is as follows (in thousands):
For the Nine Months Ended -------------------------------------------- September 30, September 30, 2005 2004 -------------------------------------------- Balance, beginning of period $ 4,427 $ 3,274 Provision for loan losses 1,314 1,133 Recoveries 240 321 Loans charged-off (585) (598) ----------- ----------- Balance, end of period $ 5,396 $ 4,130 =========== ===========
-11- SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) 7. DEPOSITS Deposits are summarized as follows (in thousands):
September 30, December 31, 2005 2004 -------------------------------------------- Non-interest-bearing checking accounts $ 56,825 $ 52,019 Interest-bearing checking accounts 4,106 3,946 Savings and club accounts 62,269 67,115 Money market accounts 134,155 163,091 Certificate of deposit accounts 323,785 252,745 ----------- ----------- $ 581,140 $ 538,916 =========== ===========
8. FEDERAL HOME LOAN BANK ("FHLB") OF NEW YORK ADVANCES 1. Short-Term FHLB Advances ------------------------ Short-term FHLB advances generally have maturities of less than one year. The details of these advances are presented below (in thousands, except percentages):
At or For The -------------------------------------------- Nine Months Twelve Months Ended Ended September 30, December 31, 2005 2004 -------------------------------------------- Average balance outstanding $ 56,291 $ 33,618 Maximum amount outstanding at any month end during the period 92,500 48,975 Balance outstanding at period end 92,500 31,025 Weighted average interest rate during the period 3.35% 1.61% Weighted average interest rate at period end 3.76% 2.42%
2. Long-Term FHLB Advances ----------------------- At September 30, 2005, long-term advances from the FHLB totaled $169.9 million. Advances consist of fixed-rate advances that will mature within one to nine years. The advances are collateralized by FHLB stock and certain first mortgage loans, first-lien home equity loans and mortgage-backed securities. These advances had a weighted average interest rate of 3.68%. As of September 30, 2005, long-term FHLB advances mature as follows (in thousands): 2005 $ 16,000 2006 59,150 2007 58,000 2008 26,100 2009 8,000 Thereafter 2,700 ----------- $ 169,950 =========== -12- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Management's discussion and analysis of financial condition and results of operations is intended to provide assistance in understanding our consolidated financial condition and results of operations. The information in this section should be read with the consolidated interim financial statements and the notes thereto included in this Form 10-Q. Our results of operations are primarily dependent on our net interest income. Net interest income is a function of the balances of interest-earning assets outstanding in any one period, the yields earned on those assets and the interest paid on deposits and borrowed funds that were outstanding in that same period. To a lesser extent, the relative levels of our other income and other expenses also affect our results of operations. Our other income consists primarily of fees and service charges, commissions and gains and losses on the sale of loans and investments. The other expenses consist primarily of employee compensation and benefits, occupancy and equipment expenses, data processing costs, marketing costs, professional fees, office supplies, telephone and postage costs. Our results of operations are also significantly impacted by the amount of provisions for loan losses which, in turn, are dependent upon, among other things, the size and makeup of the loan portfolio, loan quality and loan trends. Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21 E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purpose of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially effect the Company's financial results, is included in the Company's filings with the SEC. The Company does not undertake - and specifically disclaims any obligation - to release publicly the results of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. -13- Critical Accounting Policies, Judgments and Estimates The accounting and reporting policies of the Company conform with the accounting principles generally accepted in the United States of America and general practices within the financial services industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Allowance for Loan Losses. The Company recognizes that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management's estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. Intangible Assets. Intangible assets, such as goodwill and the core deposit intangible associated with the January 2003 acquisition of First Bank of Central Jersey, are subject to annual impairment tests and, in the case of the core deposit intangible, amortization of the asset through a charge to expense. To the extent the outcome of the impairment tests differ from the carrying value, additional charges to expense could be required to reduce the carrying value, which would adversely impact earnings in future periods. Income Taxes. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities. Deferred tax assets are subject to management's judgment based upon available evidence that future realization is more likely than not. If management determines that the Company may be unable to realize all or part of the net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax assets to the expected realizable amount, thereby impacting earnings. Comparison of Financial Condition at September 30, 2005 and December 31, 2004 Assets. Total assets reached $945.6 million on September 30, 2005, an increase of 9.9%, or $84.9 million, from $860.7 million on December 31, 2004. This growth was primarily attributable to increases in the loan portfolio and FHLB stock, partially offset by a decrease in investment securities. Between December 31, 2004 and September 30, 2005, investment securities decreased $50.3 million, or 20.5%, from $244.9 million to $194.6 million. This decrease was primarily due to $50.6 million in maturities and principal repayments coupled with the sale of approximately $12.8 million in securities, which resulted in a net loss of $26,000. These decreases were partially offset by $14.7 million in purchases. Additionally, there was a $1.2 million decrease in the unrealized market value associated with investment securities designated available-for-sale. FHLB stock holdings increased 21.6%, or $2.3 million, to $13.1 million at September 30, 2005, from $10.8 million at December 31, 2004. Net loans increased 23.0%, or $129.1 million, to $690.8 million at September 30, 2005, from $561.7 million at December 31, 2004. This growth includes $120.2 million in originations, net of principal repayments, and $10.2 million in purchases, offset by amortization of the premium on purchased loans and -14- deferred loan fees, along with a provision of $1.3 million to the allowance for loan losses. The most significant changes during the nine months ended September 30, 2005 were in non-residential and multi-family mortgage, automobile and commercial loans. Non-residential and multi-family mortgages increased by $77.8 million, or 50.5%, to $232.1 million. Automobile loans increased by $41.3 million, or 28.2%, to $187.4 million. Commercial loans increased by $9.8 million, or 80.1%, to $22.0 million. On September 30, 2005, total loans of $696.2 million were comprised of 33.3% in non-residential and multi-family mortgage loans, 27.4% in consumer loans, comprised mostly of direct automobile loans for both new and used vehicles, 18.4% in one-to-four family real estate loans, 16.5% in home equity loans, 3.2% in commercial loans and 1.2% in construction loans. The allowance for loan losses was $5.4 million at September 30, 2005, compared to $4.4 million at December 31, 2004. This reflects a provision for loan losses of $1.3 million for the nine-month period, offset by net charge-offs of $345,000. The ratio of the allowance to total loans was 0.78% at both September 30, 2005 and December 31, 2004. The ratio of non-performing assets to total assets was 0.06% at September 30, 2005, compared to 0.03% at December 31, 2004. Liabilities. Total liabilities increased $91.1 million, or 12.0%, to $847.7 million at September 30, 2005, from $756.6 million at December 31, 2004. The increase in total liabilities resulted primarily from an increase of $50.0 million, or 23.6%, in FHLB advances and a $42.2 million, or 7.8%, increase in deposits. The balance of the change is attributable to a decline in other liabilities of $1.1 million. Deposits reached $581.1 million at September 30, 2005, an increase of $42.2 million, or 7.8%, from the $538.9 million reported at December 31, 2004. This growth resulted from an increase in certificate of deposit accounts of $71.0 million, or 28.1%, for the nine months ended September 30, 2005. This increase was primarily the result of initiatives directed toward attracting funds with extended maturities in response to the current interest rate environment. Total core deposits, which consist of checking, savings and money market accounts, decreased $28.8 million, or 10.1 percent, and represented 44.3% of total deposits at September 30, 2005, compared to 53.1% at December 31, 2004. Even though total core deposits declined during this period, checking accounts increased by $5.0 million, or 8.9%. The $50.0 million increase in FHLB advances between December 31, 2004 and September 30, 2005 has primarily funded the origination of loans during the nine-month period. Equity. Stockholders' equity totaled $97.8 million at September 30, 2005, a decrease of 6.0%, or $6.2 million, from $104.0 million at December 31, 2004. The decline was attributable to the repurchase of common stock in open market transactions associated with the Company's two stock repurchase programs that were announced on January 26 and August 24, 2005, as well as the effect of the net unrealized investment portfolio market value adjustment, offset by the net income for the period. Additionally, the Company's Board of Directors declared quarterly cash dividends totaling $0.14 per common share. The repurchase of shares associated with the Company's stock repurchase programs resulted in a cumulative reduction in equity of $7.9 million. The decrease in accumulated other comprehensive income, net of tax effect, totaled $747,000. -15- Average Balance Sheet. The following table sets forth certain information for the three months ended September 30, 2005 and 2004. The average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from daily average balances. The table does not include the allowance for loan losses in the average balances of loans receivable. Management does not believe that this causes any material differences in the information presented.
For the Three Months Ended September 30, ------------------------------------------------------------------- 2005 2004 -------------------------------- ------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- Interest-earning assets: Loans receivable, net(1) $669,363 $ 9,819 5.87% $501,801 $7,278 5.80% Securities(2) 206,863 1,934 3.74 274,567 2,463 3.59 Other interest-earning assets(3) 13,510 156 4.62 9,992 42 1.68 -------- ------- ---- -------- ------ ---- Total interest-earning assets 889,736 11,909 5.35 786,360 9,783 4.98 Non-interest-earning assets 40,013 37,725 -------- -------- Total assets $929,749 $824,085 ======== ======== Interest-bearing liabilities: Checking accounts(4) $57,298 $18 0.13 $51,422 $10 0.08 Savings and club accounts 64,423 81 0.50 70,759 87 0.49 Money market accounts 141,421 771 2.18 167,494 719 1.72 Certificates of deposit 295,656 2,422 3.28 227,993 1,513 2.65 FHLB advances 270,193 2,517 3.73 198,409 1,432 2.89 -------- ------- ---- -------- ------ ---- Total interest-bearing liabilities 828,991 5,809 2.80 716,077 3,761 2.10 ------- ------ Non-interest-bearing liabilities 2,409 2,814 -------- -------- Total liabilities 831,400 718,891 Stockholders' equity 98,349 105,194 -------- -------- Total liabilities and stockholders' equity $929,749 $824,085 ======== ======== Net interest income $6,100 $6,023 ====== ====== Interest rate spread(5) 2.55% 2.88% Net yield on interest-earning assets(6) 2.74% 3.06% Ratio of average interest-earning assets to average interest-bearing liabilities 107.33% 109.82%
------------------------------- (1) Non-accruing loans have been included in loans receivable, and the effect of such inclusion was not material. (2) Includes U.S. government obligations, mortgage-backed securities and interest-bearing deposits in banks. (3) Includes FHLB stock at cost. (4) Includes both interest-bearing and non-interest bearing checking accounts. (5) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities (including non-interest bearing checking accounts). (6) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. -16- Average Balance Sheet. The following table sets forth certain information for the nine months ended September 30, 2005 and 2004. The average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from daily average balances. The table does not include the allowance for loan losses in the average balances of loans receivable. Management does not believe that this causes any material differences in the information presented.
For the Nine Months Ended September 30, ------------------------------------------------------------------- 2005 2004 -------------------------------- ------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- Interest-earning assets: Loans receivable, net(1) $624,189 $27,074 5.78% $467,935 $20,647 5.88% Securities(2) 228,497 6,448 3.76 222,006 5,626 3.38 Other interest-earning assets(3) 12,460 391 4.18 6,263 88 1.87 -------- ------- ---- -------- ------- ---- Total interest-earning assets 865,146 33,913 5.23 696,204 26,361 5.05 Non-interest-earning assets 40,444 34,509 -------- -------- Total assets $905,590 $730,713 ======== ======== Interest-bearing liabilities: Checking accounts(4) $56,074 $46 0.11 $49,105 $14 0.04 Savings and club accounts 66,460 248 0.50 71,054 265 0.50 Money market accounts 151,932 2,374 2.08 156,924 1,996 1.70 Certificates of deposit 278,504 6,357 3.04 222,666 4,340 2.60 FHLB advances 247,794 6,347 3.42 122,407 2,515 2.74 Stock subscriptions payable - - - 7,569 23 0.41 -------- ------- ---- -------- ------- ---- Total interest-bearing liabilities 800,764 15,372 2.56 629,725 9,153 1.94 ------- ------- Non-interest-bearing liabilities 3,187 2,735 -------- -------- Total liabilities 803,951 632,460 Stockholders' equity 101,639 98,253 -------- -------- Total liabilities and stockholders' equity $905,590 $730,713 ======== ======== Net interest income $18,541 $17,208 ======= ======= Interest rate spread(5) 2.67% 3.11% Net yield on interest-earning assets(6) 2.86% 3.30% Ratio of average interest-earning assets to average interest-bearing liabilities 108.04% 110.56%
------------------------------- (1) Non-accruing loans have been included in loans receivable, and the effect of such inclusion was not material. (2) Includes U.S. government obligations, mortgage-backed securities and interest-bearing deposits in banks. (3) Includes FHLB stock at cost. (4) Includes both interest-bearing and non-interest bearing checking accounts. (5) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities (including non-interest bearing checking accounts). (6) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. -17- Comparison of Operating Results for Three Months Ended September 30, 2005 and 2004 Net Income. Net income increased by $14,000, to $1.108 million, for the three months ended September 30, 2005, compared to $1.094 million for the same period in 2004, a 1.3% increase. Diluted net income per common share increased 11.1%, to $0.10, from the $0.09 reported for the same period last year. The increase was primarily attributable to a $78,000 increase in net interest income, a $72,000 increase in other income and a $37,000 decrease in the provision for loan losses, partially offset by a $159,000 increase in other expenses and a $14,000 increase in income tax expense as a result of higher pre-tax earnings. Net Interest Income. Net interest income grew $78,000, or 0.2%, to $6.1 million for the three months ended September 30, 2005, compared to $6.0 million for the same period in 2004. Total interest income increased by $2.1 million, to $11.9 million, for the three months ended September 30, 2005, while total interest expense increased by $2.0 million, to $5.8 million, for the same three month period. The net interest margin for the third quarter of 2005 declined to 2.74%, from 3.24% in the third quarter of 2004, due primarily to the flattening of the yield curve over the past year. The 21.7% increase in total interest income was primarily due to a $103.4 million, or 13.1%, increase in the average interest-earning assets, combined with a 46 basis point increase in the average yield earned on these assets when compared to the same quarter of the prior year. The increase in interest-earning assets was a result of the Company's growth strategy. The increase in the average yield was primarily attributable to higher market interest rates on originated loans, a higher yield on investment securities and increased other interest income resulting from higher average FHLB stock balances. The 106.0% increase in total interest expense primarily resulted from a $112.9 million, or 15.8%, increase in average interest-bearing liabilities coupled with a 93 basis point increase in the average cost of funds when compared to the same quarter of the prior year. The increase in the average cost of interest-bearing liabilities was primarily attributable to higher market interest rates, as well as a significant increase in higher cost certificates of deposits and FHLB borrowings. The majority of the increase in average interest-bearing liabilities for the quarter ended September 30, 2005 was comprised of a $71.8 million, or 36.2%, increase in the average balance of FHLB advances along with a $67.7 million, or 34.1%, increase in the average balance of certificate of deposit accounts over the same quarter of the prior year. Provision for loan losses. We maintain an allowance for loan losses through provisions for loan losses that are charged to earnings. The provision is made to adjust the total allowance for loan losses to an amount that represents management's best estimate of losses known and inherent in the loan portfolio at the balance sheet date that are both probable and reasonable to estimate. In estimating the known and inherent losses in the loan portfolio that are both probable and reasonable to estimate, management considers factors such as an internal analysis of credit quality, general levels of loan delinquencies, collateral values, the Bank's historical loan loss experience, changes in loan concentrations by loan category, peer group information and economic and market trends affecting our market area. The provision established for loan losses each month reflects management's assessment of these factors in relation to the level of the allowance at such time. Management allocates the allowance to various categories based on its classified assets, historical loan loss experience and its assessment of the risk characteristics of each loan category and the relative balances at month end of each loan category. Management's assessment did not change either in estimation method or assumptions during either period. The provision for loan losses declined by $37,000, to $392,000, for the three months ended September 30, 2005, from $429,000 for the same quarter in 2004. Total charge-offs amounted to $190,000 and recoveries amounted to $85,000, resulting in a net charge-off amount of $105,000 for the three months ended September 30, 2005. This represents a $5,000 increase in net charge-offs over the same quarter in 2004. -18- Other Income. Other income increased $72,000, or 7.6%, to $1,024,000 for the three months ended September 30, 2005, compared to $952,000 for the same quarter in 2004. This is primarily the result of an increase of $58,000 in commission income generated by sales from Synergy Financial Services, Inc. and a $50,000 increase in other income. These increases were partially offset by a $30,000 decrease in gains on the sale of investment securities and a decline of $6,000 in service charges and fees on deposit accounts. Other Expenses. Other expenses increased $159,000, or 3.2%, to $5.1 million for the three months ended September 30, 2005, compared to $4.9 million for the same quarter in 2004. The increase was primarily attributable to salaries and benefits associated with the Company's growth strategy, which includes equity-based employee compensation plans, coupled with higher operating expenses associated with a larger branch network. Income Tax Expense. Income tax expense increased by $14,000, or 2.5%, during the three months ended September 30, 2005 when compared to the same quarter in 2004, reflecting higher taxable income for the 2005 period. Comparison of Operating Results for Nine Months Ended September 30, 2005 and 2004 Net Income. Net income increased by $324,000, to $3.3 million, for the nine months ended September 30, 2005, compared to $3.0 million for the same period in 2004, a 10.8% increase. The increase was primarily attributable to a $1.3 million increase in net interest income and a $697,000 increase in other income, offset by a $181,000 increase in the provision for loan losses, a $1.4 million increase in other expenses and a $159,000 increase in income tax expense as a result of higher pre-tax earnings. The net interest margin for the nine months ended September 30, 2005 declined to 2.86% from the 3.30% reported for the same period last year, due primarily to the flattening of the yield curve over the past year. Net Interest Income. Net interest income grew $1.3 million, or 7.7%, to $18.5 million for the nine months ended September 30, 2005, compared to $17.2 million for the same period in 2004. Total interest income increased by $7.6 million, to $33.9 million, for the nine months ended September 30, 2005, while total interest expense increased by $6.2 million, to $15.4 million, for the same nine month period. The 28.6% increase in total interest income was primarily due to a $168.9 million, or 24.3, increase in average interest-earning assets, combined with an 18 basis point increase in the average yield earned on these assets when compared to the same period of the prior year. The increase in interest-earning assets was a result of the Company's growth strategy. The increase in the average yield was primarily attributable to higher market interest rates on loans originated, a higher yield on a larger portfolio of average investment securities and increased other interest income resulting from higher FHLB stock balances. The 67.9% increase in total interest expense resulted primarily from a $171.0 million, or 27.2%, increase in the average balance of interest-bearing liabilities coupled with a 62 basis point increase in the average cost of funds when compared to the same period last year. The increase in the average cost of interest-bearing liabilities was primarily attributable to higher market interest rates, as well as a significant increase in higher cost certificates of deposits and FHLB borrowings. The majority of the increase in average interest-bearing liabilities for the first nine months in 2005 was due to an increase of a $125.4 million, or 102.4%, in the average balance of FHLB advances and a $55.8 million, or 25.1%, increase in the average balance of certificate of deposit accounts over the same period of the prior year. -19- Provision for loan losses. We maintain an allowance for loan losses through provisions for loan losses that are charged to earnings. The provision is made to adjust the total allowance for loan losses to an amount that represents management's best estimate of losses known and inherent in the loan portfolio at the balance sheet date that are both probable and reasonable to estimate. In estimating the known and inherent losses in the loan portfolio that are both probable and reasonable to estimate, management considers factors such as an internal analysis of credit quality, general levels of loan delinquencies, collateral values, the Bank's historical loan loss experience, changes in loan concentrations by loan category, peer group information and economic and market trends affecting our market area. The provision established for loan losses each month reflects management's assessment of these factors in relation to the level of the allowance at such time. Management allocates the allowance to various categories based on its classified assets, historical loan loss experience and its assessment of the risk characteristics of each loan category and the relative balances at month end of each loan category. Management's assessment did not change either in estimation method or assumptions during either period. The provision for loan losses increased by $181,000, or 16.0%, to $1.3 million for the nine months ended September 30, 2005, from $1.1 million for the same period in 2004. Total charge-offs amounted to $585,000 and recoveries amounted to $240,000, resulting in a net charge-off amount of $345,000 for the nine months ended September 30, 2005. This represents a $68,000 increase in net charge-offs over the same period in 2004. Other Income. Other income increased $697,000, or 32.2%, to $2.9 million for the nine months ended September 30, 2005, compared to $2.2 million for the same period in 2004. The growth in other income was primarily the result of higher commission income generated by sales from Synergy Financial Services, Inc. of $474,000 and an increase of $322,000 in tax-advantaged income resulting from a larger investment in bank-owned life insurance. These increases were partially offset by a $42,000 decrease in service charges and fees on deposit accounts and a decrease of $64,000 related to investment securities transactions. Other Expenses. Other expenses increased $1.4 million, or 10.2%, to $14.8 million for the nine months ended September 30, 2005, compared to $13.4 million for the same period in 2004. The increase was primarily attributable to salaries and benefits associated with the Company's growth strategy, which includes equity-based employee compensation plans, and higher operating expenses associated with a larger branch network. Income Tax Expense. Income tax expense increased by $159,000, or 8.9%, during the nine months ended September 30, 2005 when compared to the same period in 2004, reflecting higher taxable income for the 2005 period. -20- Liquidity The Bank maintains liquid assets at levels it considers adequate to meet liquidity needs. The liquidity of the Bank reflects its ability to provide funds to meet loan requests, accommodate possible outflows in deposits, fund current and planned expenditures and take advantage of interest rate market opportunities in connection with asset and liability management objectives. Funding loan requests, providing for liability outflows and management of interest rate fluctuations require continuous analysis in order to match the maturities of earning assets with specific types of deposits and borrowings. Bank liquidity is normally considered in terms of the nature and mix of the Bank's sources and uses of funds. The Bank's primary sources of liquidity are deposits, scheduled amortization and prepayment of loans and mortgage-backed securities. In addition, the Bank invests any excess funds in overnight federal funds investments, which provide liquidity. Its cash and cash equivalents, defined as cash and deposits in other financial institutions with original maturities of three months or less, totaled $7.9 million at September 30, 2005. To a lesser extent, the earnings and funds provided from operating activities are a source of liquidity. Liquidity management is both a daily and long-term function of business management. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan and securities prepayments are greatly influenced by general interest rates, economic conditions and competition. If the Bank requires funds beyond its ability to generate them internally, it has the ability to obtain advances from the FHLB, which provides an additional source of funds. At September 30, 2005, the Bank's borrowing limit with the FHLB was $255.7 million, excluding repurchase agreement advances, subject to collateral requirements. At September 30, 2005, the Bank had $154.5 million of FHLB advances outstanding and $108.0 million in repurchase agreement advances. Management is not aware of any trends, events or uncertainties that will have or are reasonably likely to have a material effect on the Company's liquidity, capital or operations nor is it aware of any current recommendation by regulatory authorities, which, if implemented, would have a material effect on liquidity, capital or operations. The total amount of the Bank's commitments to extend credit for mortgage and consumer loans as of September 30, 2005 was $66.4 million, excluding commitments on unused lines of credit, which totaled $29.4 million. Management intends to expand the Bank's branch network either through opening or acquiring branch offices. During April 2005, the Bank opened a branch in Elizabeth, New Jersey. The Bank currently plans to open four additional new branch locations and relocate two branches over the next two years. The Bank also will continue to actively consider the acquisition of local financial institutions as part of expanding its banking operations. It does not, however, have any current understandings, agreements or arrangements for the expansion of its business, other than opening new branch office locations. -21- The following table discloses the Bank's contractual obligations as of September 30, 2005 (in thousands):
Total Less Than 1-3 Years 4-5 Years After 1 Year 5 Years -------- -------- ------- ------- ------- FHLB advances (1) $262,450 $133,650 $93,100 $13,000 $22,700 Rental under operating leases 12,841 614 2,819 1,593 7,815 -------- -------- ------- ------- ------- Total $275,291 $134,264 $95,919 $14,593 $30,515 ======== ======== ======= ======= =======
---------------- (1) At September 30, 2005, the Bank had $262.5 million of FHLB borrowings outstanding, which included $108.0 million in repurchase agreement advances. At September 30, 2005, the Bank's borrowing limit with the FHLB was $255.7 million, excluding repurchase agreement advances, subject to collateral requirements. The following table discloses the Bank's commercial commitments as of September 30, 2005 (in thousands):
Total Less Than 1-3 Years 4-5 Years After 1 Year 5 Years ------- ------- ----- ------ ------- Lines of Credit (1) $29,396 $ 1,208 $ 686 $1,178 $26,324 Other commitments to extend credit 66,439 66,439 - - - ------- ------- ----- ------ ------- Total $95,835 $67,647 $ 686 $1,178 $26,324 ======= ======= ===== ====== =======
---------------- (1) Represents amounts committed to customers. Regulatory Capital Requirements The Bank is subject to federal regulations that impose certain minimum capital requirements. Quantitative measures, established by regulation to ensure capital adequacy, require the Bank to maintain amounts and ratios of tangible and core capital to adjusted total assets and of total risk-based capital to risk-weighted assets. On September 30, 2005, the Bank was in compliance with all of its regulatory capital requirements. The following table sets forth the Bank's capital position and relativity to regulatory requirements as of September 30, 2005:
OTS Requirements --------------------------------------------------------------------------- Regulatory Minimum for classification as Bank actual capital adequacy well-capitalized ----------- ---------------- ---------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total risk-based capital (to risk-weighted assets) $91,084 13.34% $54,612 8.00% $68,265 10.00% Tier 1 capital (to risk-weighted assets) 85,689 12.55% N/A N/A 40,959 6.00% Tier 1 capital (to adjusted total assets) 85,689 9.11% 37,619 4.00% 47,023 5.00% Tangible capital (to adjusted total assets) 85,689 9.11% 14,107 1.50% N/A N/A
-22- Impact of Inflation and Changes Prices The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations, primarily those at the Bank. Unlike most industrial companies, nearly all of the assets and liabilities of the Bank are financial. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Item 3. Quantitative and Qualitative Disclosures About Market Risk Management of Interest Rate Risk and Market Risk Quantitative Analysis. Management actively monitors its interest rate risk exposure. The Bank's objective is to maintain a consistent level of profitability within acceptable risk tolerances across a broad range of potential interest rate environments. The Bank uses the Office of Thrift Supervision Net Portfolio Value (NPV) Model to monitor its exposure to interest rate risk, which calculates changes in net portfolio value. Reports generated from assumptions provided and modified by management are reviewed by the Asset and Liability Management Committee and reported to the Board of Directors quarterly. The Interest Rate Sensitivity of Net Portfolio Value Report shows the degree to which balance sheet line items and the net portfolio value are potentially affected by a 100 to 300 basis point (1/100th of a percentage point) upward and downward shift (shock) in the Treasury yield curve. Management believes that there has not been a material adverse change in market risk during the three month period ended September 30, 2005. Qualitative Analysis. Because the majority of the Bank's interest-earning assets and interest-bearing liabilities are sensitive to changes in interest rates, a significant form of market risk for the Bank is interest rate risk, or changes in interest rates. The Bank is vulnerable to an increase in interest rates to the extent that interest-bearing liabilities mature or re-price more rapidly than interest-earning assets. Our assets include long-term, fixed-rate loans and investments, while our primary sources of funds are deposits and borrowings with substantially shorter maturities. Although having interest-bearing liabilities that re-price more frequently than interest-earning assets is generally beneficial to net interest income during a period of declining interest rates, this type of asset/liability mismatch is generally detrimental during periods of rising interest rates. The Board of Directors has established an Asset and Liability Management and Budget Committee that consists of Directors Scott (Chairman), De Perez, Fiore, Gibbons and Putvinski. The Committee meets quarterly with management to review current investments: average lives, durations and re-pricing frequencies of loans and securities; loan and deposit pricing and production volumes and alternative funding sources; interest rate risk analysis; liquidity and borrowing needs; and a variety of other assets and liability management topics. The management session of the Committee is held monthly with President Fiore presiding and senior management in attendance. The results of the quarterly and monthly meetings of the Committee are reported to the full Board at its regular meetings. In addition, the Committee generally meets during October and November each year with the goal of developing an annual business and operating plan for presentation to the full Board. -23- To reduce the effect of interest rate changes on net interest income, the Bank has adopted various strategies to enable it to improve the matching of interest-earning asset maturities to interest-bearing liability maturities. The main elements of these strategies include seeking to: o originate loans with adjustable-rate features or fixed-rate loans with short maturities, such as home equity and consumer loans, comprised mostly of direct automobile loans for both new and used vehicles; o expand commercial and industrial loans, which predominantly have variable rates of interest; o increase production in higher yielding commercial real estate loans; o lengthen the maturities of time deposits and borrowings when it would be cost effective through the aggressive pricing and promotion of certificates of deposits and utilization of FHLB advances; o increase core deposits (i.e., checking, savings and money market accounts), which tend to be less interest rate sensitive; and o purchase intermediate and adjustable-rate investment securities that provide a stable cash flow, thereby providing investable funds in varying interest rate cycles. Item 4. Controls and Procedures Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company's principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures are effective. Changes in internal controls. During the quarter under report, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonable likely to materially affect, the Company's internal control over financial reporting. -24- PART II - OTHER INFORMATION Item 1. Legal Proceedings. ----------------- The Company and its subsidiaries, from time to time, may be a party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which the Bank, the wholly-owned subsidiary of the Company, holds security interests, claims involving the making and servicing of real property loans and other issues incident to its business. There were no lawsuits pending or known to be contemplated at September 30, 2005 that would be expected to have a material effect on the Company's operations or income. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. ------------------------------------------------------------ ISSUER PURCHASES OF EQUITY SECURITIES The following table reports information regarding repurchases of the Company's common stock during the third quarter of 2005 and the stock repurchase plans approved by the Company's Board of Directors.
-------------------------------------------------------------------------------------------------------------------- Total Number of Shares Maximum Number of Shares Total Number Purchased as Part of that May Yet Be Purchased of Shares Average Price Publicly Announced Under the Plans or Period Purchased Paid per Share Plans or Programs (1) Programs (1) -------------------------------------------------------------------------------------------------------------------- July 1-31, 2005 - - - 121,751 -------------------------------------------------------------------------------------------------------------------- August 1-31, 2005 121,751 12.45 121,751 577,628 -------------------------------------------------------------------------------------------------------------------- September 1-30, 2005 28,000 12.25 28,000 549,628 -------------------------------------------------------------------------------------------------------------------- Total 149,751 12.41 149,751 --------------------------------------------------------------------------------------------------------------------
------------------ (1) On August 24, 2005, the Company announced that it had completed its purchase of 5.0 percent of the Company's outstanding shares of common stock (approximately 622,600 shares) as previously announced on January 26, 2005. The Company also announced that it intends to purchase up to an additional 5.0 percent of the Company's outstanding shares of common stock (approximately 577,628 shares) in open market transactions. Such purchases are to be made from time to time in the open market, based on stock availability, price and the Company's financial performance. This program has no expiration date and has 549,628 shares yet to be purchased. -25- Item 3. Defaults Upon Senior Securities. ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- None. Item 5. Other Information. ----------------- None. Item 6. Exhibits. -------- a) Exhibits: 31 Certification pursuant to ss.302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 -26- SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SYNERGY FINANCIAL GROUP, INC. Date: November 9, 2005 By: /s/John S. Fiore ------------------------------------- John S. Fiore President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/John S. Fiore /s/A. Richard Abrahamian ------------------------------------- ------------------------------------------------- John S. Fiore A. Richard Abrahamian President and Chief Executive Officer Senior Vice President and Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: November 9, 2005 Date: November 9, 2005
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