-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OlSrURZ63fQWifq1DmQDY70GxzFIYLymr7la7USFQ7ym5HDALsjC79jMdSt9BfSa HQLP7JqvRwWmhFJZkJJw+w== 0000946275-06-000188.txt : 20060227 0000946275-06-000188.hdr.sgml : 20060227 20060227170931 ACCESSION NUMBER: 0000946275-06-000188 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060227 DATE AS OF CHANGE: 20060227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNERGY FINANCIAL GROUP INC /NJ/ CENTRAL INDEX KEY: 0001263766 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 522413926 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-50467 FILM NUMBER: 06647431 BUSINESS ADDRESS: STREET 1: 310 NORTH AVE EAST CITY: CRANFORD STATE: NJ ZIP: 07016 BUSINESS PHONE: 8006933838 10-K 1 f10k_123105-0207.txt FORM SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2005 ----------------- -OR- [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to _____________. Commission File Number: 000-50467 --------- SYNERGY FINANCIAL GROUP, INC. ----------------------------- (Name of Issuer 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) Issuer's Telephone Number, Including Area Code: (800) 693-3838 -------------- Securities registered under Section 12(b) of the Exchange Act: None ------------ Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.10 per share --------------------------------------- (Title of Class) Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO X --- --- Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. YES NO X --- --- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ___ Accelerated filer X Non-accelerated filer ___ --- The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of the last business day of the Registrant's most recently completed second fiscal quarter was $118.8 million. As of February 17, 2006, there were 11,445,881 outstanding shares of the Registrant's common stock. TABLE OF CONTENTS
Page ---- Part I Item 1. Business............................................................. 1 Item 1A. Risk Factors......................................................... 26 Item 1B. Unresolved Staff Comments............................................ 28 Item 2. Description of Property.............................................. 29 Item 3. Legal Proceedings.................................................... 30 Item 4. Submission of Matters to a Vote of Security Holders.................. 30 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.................. 31 Item 6. Selected Financial Data.............................................. 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........... 45 Item 8. Financial Statements and Supplementary Data.......................... 47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................... 86 Item 9A. Controls and Procedures.............................................. 86 Item 9B. Other Information.................................................... 87 Part III Item 10. Directors and Executive Officers of the Registrant................... 88 Item 11. Executive Compensation............................................... 90 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........................................ 96 Item 13. Certain Relationships and Related Transactions....................... 98 Item 14. Principal Accounting Fees and Services............................... 98 Item 15. Exhibits and Financial Statement Schedules........................... 99
i PART I Forward-Looking Statements Synergy Financial Group, Inc. (the "Company") may from time to time make written or oral "forward looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality as compared to competitors' products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and, the success of the Company at managing the risks resulting from these factors. The Company cautions that the listed factors are not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. Item 1. Business - ---------------- General In March 2001, Synergy Bank (the "Bank"), formerly Synergy Federal Savings Bank, reorganized from a federally-chartered mutual savings bank into a mutual holding company structure. As a result of the reorganization, the Bank became a federal stock savings bank, which was wholly-owned by a federal stock corporation, Synergy Financial Group, Inc. (the "Stock Holding Company"), which in turn, was wholly-owned by Synergy, MHC, a federally-chartered mutual holding company. The Stock Holding Company completed a minority stock offering in September 2002, at which time 1,454,750 shares were issued to persons other than Synergy, MHC, representing 43.5% of the outstanding common stock of the Stock Holding Company. In preparation for the conversion and reorganization of Synergy Bank and its Stock Holding Company from the mutual holding company form of organization to a full stock corporation, a new corporation with the same name, Synergy Financial Group, Inc., was incorporated as a New Jersey corporation on August 27, 2003. Synergy Financial Group, Inc. completed its stock offering in connection with the conversion and reorganization to a full stock corporation on January 20, 2004. As part of the conversion and reorganization, the Stock Holding Company and Synergy, MHC ceased to exist and the shares formerly held by Synergy, MHC were canceled. Synergy Financial Group, Inc. sold 7,035,918 new shares to the public and the shares held by stockholders of the Stock Holding Company were exchanged 1 for 5,416,093 shares of Synergy Financial Group, Inc., with a resulting total of 12,452,011 shares outstanding at the time the second-step conversion was completed. The Company conducts no significant business or operations of its own other than holding 100% of the stock of the Bank and Synergy Financial Services, Inc. References in this Annual Report on Form 10-K to the Company or Registrant generally refer to the Company and the Bank, unless the context indicates otherwise. References to "we," "us," or "our" refer to the Bank or Company, or both, as the context indicates. We are in the business of offering financial services, including deposit products, one- to four-family residential mortgage loans, home equity loans, multi-family / non-residential loans, commercial, and consumer loans, including automobile and personal loans. We attract deposits from the general public, as well as from deposit brokers, and borrow money from the Federal Home Loan Bank (the "FHLB") of New York. We then use these deposits and FHLB borrowings primarily to originate loans and to purchase investment securities. Our principal sources of funds for lending and investing activities are deposits, FHLB borrowings, the repayment and maturity of loans and the maturity, call and occasional sale of investment securities. Our principal source of income is interest on loans and investment securities. Our principal expense is interest paid on deposits and FHLB borrowings. The Company's web site address is www.synergyonthenet.com. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed by the Company with the Securities and Exchange Commission are available free of charge on the Company's web site via a link to www.sec.gov found under the "Investor Relations" menu. Market Area Our main office is located in Cranford, New Jersey, and our branches are located in Middlesex, Monmouth, Morris and Union counties, New Jersey. Our primary market area is Essex, Middlesex, Monmouth, Morris, Somerset and Union counties, New Jersey. Essex and Union counties are highly urbanized and densely populated counties in the New York City metropolitan area, lying at the heart of the northeast corridor, one of the largest population and industrial areas in the country. The remaining counties are suburban areas located in central New Jersey. The market areas surrounding each of the Bank's branches are mostly growth markets, with population densities and income levels generally above the average levels for New Jersey. Our business of attracting deposits and making loans is primarily conducted within our market area. A downturn in the local economy could reduce the amount of funds available for deposit and the ability of borrowers to repay their loans. As a result, our profitability could be hurt. Competition We face substantial competition in our attraction of deposits, which are our primary source of funds for lending. Many of our competitors are significantly larger institutions and have greater financial and managerial resources. Our ability to compete successfully is a significant factor affecting our profitability. Our competition for deposits and loans historically has come from other insured financial institutions such as local and regional commercial banks, savings institutions and credit unions located in our primary market area. We also compete with mortgage banking companies for real estate loans and 2 with commercial banks and savings institutions, as well as Internet-based lenders, for consumer loans. We, further, face competition for deposits from investment products such as Internet-based financial institutions, mutual funds, short-term money funds and corporate and government securities. Lending Activities General. We primarily originate real estate loans, including one- to four-family first mortgage loans, home equity loans, multi-family / non-residential mortgages, commercial loans and consumer loans, comprised mostly of direct automobile loans for both new and used vehicles. The loan portfolio is predominately comprised of multi-family / non-residential mortgage loans and one- to four-family residential real estate loans. As a result of our recent growth, including growth in our non-residential mortgage loans, a significant portion of our loan portfolio is represented by new credits. Generally, loans that are relatively new, referred to as unseasoned loans, do not have sufficient repayment history to determine the likelihood of repayment in accordance with their terms. Originations and purchases of multi-family / non-residential mortgage loans totaled $159.1 million and $75.4 million during the years ended December 31, 2005 and 2004, respectively. 3 Loan Portfolio Composition. The following table analyzes the composition of the loan portfolio by loan category at the dates indicated.
At December 31, ----------------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 --------------- --------------- --------------- ---------------- ---------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in thousands) Types of Loans: - --------------- Mortgage loans: One-to Four Family Residential (1)...... $243,188 32.92% $243,772 43.08% $224,734 51.34% $202,325 62.92% $148,826 65.81% Multi-Family / Non-Residential ..... 271,600 36.76 154,226 27.25 89,847 20.53 48,386 15.05 19,044 8.43 Construction........... 9,525 1.29 5,792 1.02 2,169 0.50 - - - - Automobile................ 185,812 25.15 146,148 25.83 109,277 24.97 63,796 19.83 52,206 23.08 Commercial................ 24,794 3.36 12,208 2.16 7,838 1.79 2,472 0.77 - - Other Consumer (2)........ 3,830 .52 3,720 0.66 3,816 0.87 4,590 1.43 6,063 2.68 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans........ 738,749 100.00% 565,866 100.00% 437,681 100.00% 321,569 100.00% 226,139 100.00% ====== ====== ====== ====== ====== Deferred loan fees and costs.............. 197 248 178 85 (78) Less: Allowance for loan losses.......... (5,763) (4,427) (3,274) (2,231) (1,372) -------- -------- -------- -------- -------- Total loans, net... $733,183 $561,687 $434,585 $319,423 $224,689 ======== ======== ======== ======== ========
- ---------------- (1) This category includes home equity loans. (2) This category consists of personal loans (unsecured), credit cards and savings secured loans. 4 Loan Maturity Schedule. The following table sets forth the maturity or re-pricing of the loan portfolio at December 31, 2005. Demand loans, loans having no stated maturity and overdrafts are shown as due in one year or less.
One- to Four-Family Multi-Family / Other Residential (1) Non-Residential Construction Automobile Commercial Consumer (2) Total --------------- --------------- ------------ ---------- ---------- ------------ ----- (In thousands) Amounts Due: Within 1 year............ $ 181 $ 13,115 $7,907 $ 1,670 $ 2,355 $ 423 $ 25,651 After 1 year: 1 to 3 years.......... 4,040 2,695 1,618 31,898 2,374 995 43,620 3 to 5 years.......... 9,269 3,459 - 131,554 4,671 2,403 151,356 5 to 10 years......... 35,002 18,391 - 20,690 4,375 - 78,458 10 to 15 years........ 119,761 50,779 - - 2,417 9 172,966 Over 15 years......... 74,935 183,161 - - 8,602 - 266,698 -------- -------- ------ -------- ------- ------ -------- Total due after one year.......... 243,007 258,485 1,618 184,142 22,439 3,407 713,098 -------- -------- ------ -------- ------- ------ -------- Total amount due......... $243,188 $271,600 $9,525 $185,812 $24,794 $3,830 $738,749 ======== ======== ====== ======== ======= ====== ========
- ------------------ (1) This category includes home equity loans. (2) This category consists of personal loans (unsecured), credit cards and savings secured loans. The following table sets forth the dollar amount of all loans at December 31, 2005 that are due after December 31, 2006 that have fixed interest rates and that have floating or adjustable interest rates. Floating or Fixed Rates Adjustable Rates Total ----------- ---------------- ----- (In thousands) Mortgage Loans: One-to Four-Family Residential (1)..... $186,540 $ 56,467 $243,007 Multi-Family / Non-Residential..... 37,343 221,142 258,485 Construction.......... - 1,618 1,618 Automobile............... 184,142 - 184,142 Commercial............... 9,695 12,744 22,439 Other Consumer (2)....... 3,407 - 3,407 -------- ------- -------- Total............... $421,127 $291,971 $713,098 ======= ======= ======= - ------------------ (1) This category includes home equity loans. (2) This category consists of personal loans (unsecured), credit cards and savings secured loans. Residential Lending. The majority of our residential lending is secured by property located in New Jersey. We will generally originate a mortgage loan in an amount up to 80% of the lesser of the appraised value or the purchase price of a mortgaged property. For loans exceeding this guideline, private mortgage insurance for the borrower is required. The majority of our residential loans are originated with fixed rates and have terms of fifteen to thirty years. Our adjustable rate loans have terms of fifteen to thirty years and adjustment periods of one, three, five or ten years according to the terms of the loan. These loans provide for an interest rate that is tied to a U.S. Treasury securities index. We generally make fixed rate mortgage loans that meet the secondary mortgage market standards of the Federal Home Loan Mortgage Corporation ("FHLMC"). In accordance with our interest rate risk management policy and to assist in portfolio diversification, we occasionally sell qualifying one- to four- 5 family residential mortgages in the secondary market to FHLMC without recourse and with servicing retained. Substantially all of our residential mortgages include "due on sale" clauses, which are provisions giving us the right to declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party. Property appraisals on real estate securing our one- to four-family residential loans are made by state certified or licensed independent appraisers approved annually by the Board of Directors. Appraisals are performed in accordance with applicable regulations and policies. We require title insurance policies on all first mortgage real estate loans originated. All property secured loans require fire and casualty insurance. Loans made on property located in designated flood zones require minimum flood insurance coverage based on the amount of the loan. Our residential loan portfolio includes home equity loans, which are originated in our market area and have maturities of up to fifteen years. At December 31, 2005, home equity loans totaled $112.8 million, or 15.3% of total loans. Collateral value is determined through the use of an Internet-based value estimator, a drive-by appraisal or a full appraisal. All loans over $250,000 require a full appraisal and a title insurance policy. Multi-Family / Non-Residential Mortgage Loans. In 2000, we began to originate multi-family and non-residential mortgage loans, including loans on retail / service space and other income-producing properties. We require no less than a 25% down payment or equity position for multi-family / non-residential mortgage loans. Typically, these loans are made with variable rates of interest with terms of up to twenty years. The majority of these mortgage loans are on properties located within New Jersey. We occasionally sell participation interests in multi-family / non-residential mortgage loans originated by us that would otherwise exceed our loans-to-one-borrower limit. At December 31, 2005, the average balance of a multi-family / non-residential mortgage loan was $674,000. Multi-family / non-residential mortgage loans generally are considered to entail significantly greater risk than that which is involved with residential real estate lending. The repayment of these loans typically is dependent on the successful operations and income stream of the real estate and the borrower. These risks can be significantly affected by economic conditions. In addition, multi-family / non-residential real estate lending generally requires substantially greater evaluation and oversight efforts compared to one- to four-family residential real estate lending. Consumer Loans. At December 31, 2005, consumer loans amounted to $189.6 million, or 25.7% of the total loan portfolio. The vast majority of these are automobile loans. At December 31, 2005, automobile loans totaled $185.8 million. In late 1999, we began to originate direct automobile loans over the Internet through an independent loan referral web site. A bank participating in the referral program sets certain criteria with the referral company to select those borrowers who meet that bank's lending standards. The borrower completes a qualification form and submits it via the web site. The referral company's automated system screens the borrower's qualification form and, if it meets our preset criteria, it is forwarded to us for consideration. The borrower's qualification form is sent to no more than four of the participating banks. Once we receive a qualification form, the automated system sends a notice to the borrower that he or she is conditionally approved and we make the borrower a loan offer. The borrower then decides whether to accept the loan offer. Upon acceptance, we disburse the funds. Currently, an average of $5.7 million of new loans, or 94.4% of our monthly automobile loan originations, are generated from this referral source. We will generally lend up to 100% of the purchase price of a new or used vehicle. 6 Consumer loans also consist of personal loans (unsecured) and savings secured loans. We will generally lend up to 100% of the account balance on a savings secured loan. Consumer loans generally have shorter terms and higher interest rates than residential loans. Consumer loans generally have maturities of up to six years. Consumer loans can be helpful in improving the spread between the average loan yield and the cost of funds and at the same time improve the matching of rate sensitive assets and liabilities. Consumer loans entail greater risks than residential mortgage loans, particularly consumer loans secured by rapidly depreciable assets, such as automobiles, or loans that are unsecured. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance, since there is a greater likelihood of damage, loss or depreciation of the underlying collateral. Further, consumer loan repayment is dependent on the borrower's continuing financial stability and is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Finally, the application of various federal laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on consumer loans in the event of a default. Our underwriting standards for consumer loans include a determination of the applicant's credit history and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. The stability of the applicant's monthly income may be determined by verification of gross monthly income from primary employment and additionally from any verifiable secondary income. Credit worthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount. Certain of our officers are authorized to approve unsecured consumer loan applications of up to $20,000. Commercial Loans. At December 31, 2005, the commercial loan portfolio had grown to $24.8 million, representing 3.4% of the total loan portfolio at that date. During 2004, we introduced the availability of both commercial lines of credit and fixed term commercial loans. The commercial lines that are unsecured are limited to $100,000, secured lines are offered at up to $1.0 million and real estate secured loans are offered at up to $2.5 million. The term for the unsecured line is no more than five years with an annual renewal, while fixed term loans are offered for terms of up to ten years; real estate secured loans are offered for up to 25 years. Unlike single-family residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income, and which are secured by real property with a value that tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. Commercial business loans, therefore, have greater credit risk than residential mortgage loans. In addition, commercial loans generally carry larger balances to single borrowers or related groups of borrowers than one- to four-family loans. In addition, commercial lending generally requires substantially greater evaluation and oversight efforts compared to residential or non-residential real estate lending. Loans to One Borrower. Under federal law, savings institutions have, subject to certain exemptions, lending limits to one borrower in an amount equal to the greater of $500,000 or 15% of the institution's unimpaired capital and surplus. Accordingly, as of December 31, 2005, our loans-to-one-borrower limit was $13.7 million, and we had 88 loans with balances of $1.0 million or more. 7 At December 31, 2005, our largest single borrower had an aggregate balance of $9.1 million, representing real estate mortgage loans collateralized by professional office properties. At December 31, 2005, our second largest borrower had an aggregate balance of $8.4 million, representing various real estate mortgage loans collateralized primarily by multi-family residential properties and land. At December 31, 2005, our third largest single borrower had an aggregate balance of $7.4 million, representing various real estate mortgage loans secured by a strip mall along with a professional office building and a non-residential property. At December 31, 2005, all of these three lending relationships were current and performing in accordance with the terms of their loan agreements. Loan Originations, Purchases, Sales, Solicitation and Processing. Our customary sources of loan applications include newspaper advertisements, our business development officers, repeat customers, applications through Synergy Bank's Internet site, real-estate broker referrals and "walk-in" customers. A significant source for our automobile loan originations is an independent referral web site. The following table shows total loans originated, purchased, sold and repaid during the periods indicated.
Year Ended December 31, ------------------------------------------------ 2005 2004 2003 -------- -------- -------- (In thousands) Loan originations and purchases: Loan originations: One- to Four-Family Residential (1).................. $ 50,627 $ 80,690 $116,149 Multi-Family / Non-Residential....................... 149,115 58,936 36,392 Construction......................................... 1,587 1,026 135 Automobile........................................... 124,831 99,532 89,051 Commercial........................................... 13,248 7,171 920 Other Consumer (2)................................... 2,525 2,509 11,964 -------- -------- -------- Total loan originations................................ 341,933 249,864 254,611 Loans purchased through acquisition of First Bank of Central Jersey ("FBCJ")................ - - 21,880 Loan purchases: One- to Four-Family Residential (1).................. 2,560 8,772 - Multi-Family / Non-Residential....................... 9,980 16,427 5,000 Construction......................................... 2,770 2,575 - Automobile........................................... - - - Commercial........................................... 1,287 2,691 1,486 Other Consumer (2)................................... - - - -------- -------- -------- Total loan purchases................................... 16,597 30,465 28,366 Sales and loan principal repayments: Loans sold: One- to Four-Family Residential (1).................. - - 2,307 Multi-Family / Non-Residential....................... - - - Construction......................................... - - - Automobile........................................... - - - Commercial........................................... - - - Other Consumer (2)................................... - - - -------- -------- -------- Total loans sold....................................... - - 2,307 Loan principal repayments.............................. 185,675 152,296 165,074 -------- -------- -------- Total loans sold and principal repayments............ 185,675 152,296 167,381 Decrease due to change in allowance for loan losses, net amortization of discount/premium on purchased loans and deferred loan fees and costs............... 1,359 931 434 -------- -------- -------- Net increase in loan portfolio......................... $171,496 $127,102 $115,162 ======== ======== ========
8 - ------------------ (1) This category includes home equity loans. (2) This category consists of personal loans (unsecured) and savings secured loans. As of December 31, 2005, we serviced $3.8 million in loans for the Federal Home Loan Mortgage Corporation. We occasionally sell participation interests in non-residential mortgage loans originated by us that are considered large credits in order to reduce credit risk exposure and comply with our loans-to-one-borrower limitation. We may sell loans in the future when doing so will diversify our loan portfolio composition, mitigate interest rate risk or reduce our credit risk exposure. We generally sell loans on a non-recourse basis, with servicing retained and with a loan servicing fee of 25 basis points of the loan balance. At December 31, 2005, loans serviced for the benefit of other lenders totaled approximately $2.0 million. We occasionally purchase loans through other financial institutions' participation programs. During the year ended December 31, 2005, we purchased an aggregate of $16.6 million in loans, all of which were funded by year-end. The participations consisted of multi-family / non-residential of $10.0 million. The remainder was attributable to construction, one- to four-family residential and commercial loans of $2.8 million, $2.5 million and $1.3 million, respectively. Loan Commitments. We give written commitments to prospective borrowers on all residential and non-residential mortgage loans. The total amount of commitments to extend credit for mortgage and consumer loans as of December 31, 2005 was approximately $79.1 million, excluding commitments on unused lines of credit of $25.4 million. Loan Origination and Other Loan Fees. In addition to interest earned on loans, we receive commitment fees, loan origination fees and points on certain loans. We also receive other fees and charges relating to existing loans, which include late charges and fees collected in connection with loan modifications. These fees and charges have not constituted a material source of income. Non-Performing Loans and Problem Assets Collection Procedures. The borrower is notified by mail when a loan is sixteen days delinquent. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower and additional collection notices and letters are sent. When a collateralized loan is sixty days delinquent, it is generally referred to an attorney for repossession or foreclosure. All reasonable attempts are made to collect from borrowers prior to referral to an attorney for collection. In certain instances, we may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his or her financial affairs and we attempt to work with the borrower to establish a repayment schedule to cure the delinquency. In the case of mortgage loans, if a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale. We may be the buyer at this sale if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure or by receipt of deed in lieu of foreclosure is classified as real estate owned ("REO") until it is sold or otherwise disposed of. When REO is acquired, it is recorded at the lower of the unpaid principal balance of the related loan or its fair market value less estimated selling costs. The initial write-down of the property is charged to the allowance for loan losses. Adjustments to the carrying value of the property that results from subsequent declines in value are charged to operations in the period in which the declines occur. At December 31, 2005, we did not hold any real estate owned. 9 Loans are reviewed on a regular basis and are placed on a non-accrual status when they are more than ninety days delinquent. Loans may be placed on a non-accrual status at any time if, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on our assessment of the ultimate collectibility of the loan. These payments are accounted for under the cash method of accounting. Non-Performing Assets. The following table provides information regarding our non-performing loans and other non-performing assets as of the dates indicated.
At December 31, --------------------------------------------------------- 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- (Dollars in thousands) Loans accounted for on a non-accrual basis: One- to Four-Family Residential (1)........... $ - $ - $ - $ - $ - Multi-Family / Non-Residential................ - - - - - Construction.................................. - - - - - Automobile.................................... 337 230 298 374 32 Commercial.................................... 21 23 33 - - Other Consumer (2)............................ 24 11 17 75 39 ----- ----- ----- ----- ---- Total....................................... $ 382 $ 264 $ 348 $ 449 $ 71 ===== ===== ===== ===== ==== Accruing loans which are contractually past due 90 days or more: One- to Four-Family Residential (1)........... - - - - - Multi-Family / Non-Residential................ - - - - - Construction.................................. - - - - - Automobile.................................... - - - - - Commercial.................................... - - - - - Other Consumer (2)............................ - - - - - ----- ----- ----- ----- ---- Total....................................... $ - $ - $ - $ - $ - ===== ===== ===== ===== ==== Total non-performing loans.................. $ 382 $ 264 $ 348 $ 449 $ 71 ===== ===== ===== ===== ==== Other non-performing assets...................... $ - $ - $ - $ - $ - ===== ===== ===== ===== ==== Total non-performing assets................. $ 382 $ 264 $ 348 $ 449 $ 71 ===== ===== ===== ===== ==== Total non-performing loans to net loans..... 0.05% 0.05% 0.08% 0.14% 0.03% ===== ===== ===== ===== ==== Total non-performing loans to total assets.. 0.04% 0.03% 0.06% 0.10% 0.02% ===== ===== ===== ===== ==== Total non-performing assets to total assets. 0.04% 0.03% 0.06% 0.10% 0.02% ===== ===== ===== ===== ====
- ------------------ (1) This category includes home equity loans. (2) This category consists of personal loans (unsecured), credit cards and savings secured loans. For the year ended December 31, 2005, the amount of interest that would have been recorded on loans accounted for on a non-accrual basis if those loans had been current and performing according to the original loan agreements for the entire period was approximately $5,400. This amount was not included in our interest income for the period. No interest income on loans accounted for on a non-accrual basis was included in income during the year ended December 31, 2005. At December 31, 2005, there were no loans for which management had serious doubts as to the ability of borrowers to comply with the present repayment terms that are not included in the table above as loans accounted for on a non-accrual basis. 10 Classified Assets. Management, in compliance with Office of Thrift Supervision ("OTS") guidelines, has instituted an internal loan review program, whereby non-performing loans are classified as substandard, doubtful or loss. It is our policy to review the loan portfolio, in accordance with regulatory classification procedures, on at least a monthly basis. When a loan is classified as substandard or doubtful, management is required to establish a valuation reserve for loan losses in an amount considered prudent by management. When management classifies a portion of a loan as loss, a specific reserve equal to 100% of the loss amount is required to be established or the loan is charged-off. An asset is considered "substandard" if it is inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as loss are those considered uncollectible and of so little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to a sufficient degree of risk to warrant classification in one of the aforementioned categories but which have credit deficiencies or potential weaknesses are required to be designated as "special mention" by management. Management's classification of assets and its estimation of the amount of known and inherent loan losses in the loan portfolio is reviewed by the Asset/Liability Management Committee on a regular basis and by the OTS as part of its examination process. At December 31, 2005, classified loans totaled $753,000. This amount included $391,000 of loans classified as "substandard." Management has deemed no loans classified as substandard as non-performing assets. At December 31, 2005, we had $362,000 of loans classified as "doubtful," all of which are non-performing assets, as shown in the table above. At December 31, 2005, we had no loans classified as "loss." Allowance for Loan Losses. The allowance for loan losses is a valuation account that reflects our estimation of the losses known and inherent in our loan portfolio that are both probable and reasonable to estimate associated both with lending activities and particular problem assets. The allowance is maintained through provisions for loan losses that are charged to income in the period they are established. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. Recoveries on loans previously charged-off are added back to the allowance. Our estimation of known and inherent loan losses in the loan portfolio includes a separate review of all loans on which the collectibility of principal may not be reasonably assured. We evaluate all classified loans individually and base our determination of a loss factor on the likelihood of collectibility of principal, including consideration of the value of the underlying collateral securing the loan. Larger loans, which would generally include multi-family / non-residential mortgages and commercial loans, are also evaluated for impairment individually. We also segregate loans by loan category and evaluate homogenous loans as a group. Although there may be other factors that also warrant consideration in estimating the amount of known and inherent loan losses in the loan portfolio, we consider the following points in connection with our determination of loss factors and as part of our overall estimation of the amount of known and inherent loan losses in the loan portfolio: 11 o our historical loan loss experience; o internal analysis of credit quality; o general levels of non-performing loans and delinquencies; o changes in loan concentrations by loan category; o current estimated collateral values; o peer group information; o analysis of credit quality conducted in bank regulatory examinations; and o economic and market trends impacting our lending area. This estimation is inherently subjective as it requires estimates and assumptions that are susceptible to significant revisions as more information becomes available or as future events change. Future additions to the allowance for loan losses may be necessary if economic and other conditions in the future differ substantially from the current operating environment. In addition, the OTS (as an integral part of its examination process) periodically reviews our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. The OTS may require the allowance for loan losses or the valuation allowance for foreclosed real estate to be increased based on its review of information available at the time of the examination, which would negatively affect our earnings. The following table sets forth information with respect to our allowance for loan losses at the dates indicated.
For the Year Ended December 31, ------------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- ------- ------- -------- (Dollars in thousands) Allowance balance (at beginning of year)........ $ 4,427 $ 3,274 $ 2,231 $ 1,372 $ 1,176 -------- -------- -------- -------- -------- Charge-offs: One- to Four-Family Residential (1).......... - - - - - Multi-Family / Non-Residential............... - - - - - Construction................................. - - - - - Automobile................................... 772 727 1,146 280 61 Commercial................................... - - - - - Other Consumer (2)........................... 82 46 190 154 356 -------- -------- -------- ------- ------- Total...................................... 854 773 1,336 434 417 Recoveries: One- to Four-Family Residential (1).......... - - - 3 2 Multi-Family / Non-Residential............... - - - - - Construction................................. - - - - - Automobile................................... 278 345 292 42 39 Commercial................................... - - - - - Other Consumer (2)........................... 52 89 149 171 209 -------- -------- -------- ------- ------- Total...................................... 330 434 441 216 250 -------- -------- -------- ------- ------- Net charge-offs................................. (524) (339) (895) (218) (167) Acquisition of First Bank of Central Jersey..... - - 823 - - Provision for loan losses....................... 1,860 1,492 1,115 1,077 363 -------- -------- -------- ------- ------- Allowance balance (at end of year).............. $ 5,763 $ 4,427 $ 3,274 $ 2,231 $ 1,372 ======== ======== ======== ======= ======= Total gross loans outstanding (at end of year)......................... $738,749 $565,866 $437,681 $321,569 $226,139 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of total loans....................... 0.78% 0.78% 0.75% 0.69% 0.61% ==== ==== ==== ==== ==== Net loans charged off as a percent of average loans outstanding during the year............ 0.08% 0.07% 0.24% 0.08% 0.08% ==== ==== ==== ==== ====
- ------------------ (1) This category includes home equity loans. (2) This category consists of personal loans (unsecured), credit cards and savings secured loans. 12 Allocation of Allowance for Loan Losses. The following table sets forth the allocation of our allowance for loan losses by collateral and the percent of loans in each category to total loans receivable, net, at the dates indicated. Management determines the allocation of our allowance for loan losses based on its assessment of the risk characteristics of each loan category. The change in allocation of the allowance from period to period also reflects the relative balances of each loan category. The portion of the loan loss allowance allocated to each loan category does not represent the total available for losses which may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio. The allocation is subject to change as management's assessment of the risk characteristics of each loan category may change from time to time.
At December 31, ------------------------------------------------------------------------------------ 2005 2004 2003 2002 2001 --------------- --------------- --------------- --------------- --------------- Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands) At end of period allocated to: One-to Four Family Residential (1)......... $1,030 32.92% $ 797 43.08% $ 571 51.34% $ 517 62.92% $ 813 65.81% Multi-Family / Non-Residential......... 1,064 36.76 1,330 27.25 860 20.53 256 15.05 105 8.43 Construction.............. 33 1.29 52 1.02 21 0.50 - - - - Automobile................ 2,489 25.15 2,079 25.83 1,472 24.97 1,113 19.83 319 23.08 Commercial................ 865 3.36 80 2.16 73 1.79 9 0.77 - - Other Consumer (2)........ 282 0.52 89 0.66 277 0.87 336 1.43 135 2.68 ----- ------ ----- ------ ------ ------ ----- ------ ----- ------ Total allowance....... $5,763 100.00% $4,427 100.00% $ 3,274 100.00% $2,231 100.00% $1,372 100.00% ===== ====== ===== ====== ====== ====== ===== ====== ===== ======
- -------------- (1) This category includes home equity loans. (2) This category consists of personal loans (unsecured), credit cards and savings secured loans. 13 Securities Portfolio General. Federally chartered savings banks have the authority to invest in various types of liquid assets, including U.S. government and government agency obligations, securities of various federal agencies and government-sponsored enterprises (including securities collateralized by mortgages), certificates of deposits of insured banks and savings institutions, municipal securities and corporate debt securities. Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires that securities be categorized as "held to maturity," "trading securities" or "available for sale," based on management's intent as to the ultimate disposition of each security. SFAS No. 115 allows debt securities to be classified as "held to maturity" and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold these securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security's prepayment risk, increases in loan demand, or other similar factors cannot be classified as "held to maturity." We do not currently use or maintain a trading account. Securities not classified as "held to maturity" are classified as "available for sale." These securities are reported at fair value, and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as a separate component of equity. On occasion, we sell available for sale securities based on the evaluation of price levels obtained through multiple dealers. Our analysis in selling available for sale securities includes tracking the Treasury yield curve through Internet-based financial data providers and tracking the price of similar securities offered through dealers' inventory listings using their individual web sites. All of our securities carry market risk insofar as increases in market rates of interest may cause a decrease in their market value. Investments in securities are made based on certain considerations, which include the interest rate, tax considerations, yield, asset/liability position and maturity of the security, our liquidity position and anticipated cash needs and sources. The effect that the proposed security would have on our credit and interest rate risk and risk-based capital is also considered. We purchase securities to provide necessary liquidity for day-to-day operations, and when investable funds exceed loan demand. Our investment policy, which is established by the Board of Directors, is designed to foster earnings and liquidity within prudent interest rate risk guidelines, while complementing our lending activities. Generally, our investment policy is to invest funds in various categories of securities and maturities based upon our liquidity needs, asset/liability management policy, investment quality, marketability and performance objectives. The Asset/Liability Management Committee reviews the securities portfolio on a monthly basis. The results of the committee's monthly review are reported to the full Board at its regular monthly meeting. We do not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance-sheet derivative financial instruments. Further, we do not invest in securities, which are not rated investment grade. Mortgage-backed Securities. Mortgage-backed securities represent a participation interest in a pool of one- to four-family or multi-family mortgages. We focus primarily on mortgage-backed securities secured by one- to four-family mortgages. The mortgage originators use intermediaries (generally U.S. government agencies and government-sponsored enterprises) to pool and repackage the participation interests in the form of securities, with investors such as us receiving the principal and interest payments on the mortgages. Such U.S. government agencies and government-sponsored enterprises guarantee the payment of principal and interest to investors. At December 31, 2005, all of our mortgage-backed securities were issued by either U.S. government agencies or government-sponsored enterprises. 14 Mortgage-backed securities are typically issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a specific range and have varying maturities. The life of a mortgage-backed pass-through security thus approximates the life of the underlying mortgages. The characteristics of the underlying pool of mortgages (i.e., fixed-rate or adjustable-rate) and prepayment risk are passed on to the certificate holder. Mortgage-backed securities are generally referred to as "mortgage participation certificates" or "pass-through certificates." Our mortgage-backed securities consist primarily of securities issued by Government National Mortgage Association ("GNMA" or "Ginnie Mae"), Federal Home Loan Mortgage Association ("FHLMA" or "Freddie Mac") and the Federal National Mortgage Association ("FNMA" or "Fannie Mae"). Mortgage-backed securities generally yield less than the mortgage loans underlying such securities because of their payment guarantees or credit enhancements, which offer nominal credit risk to the security holder. Expected maturities will differ from contractual maturities due to scheduled repayments and because the mortgagor may have the right to prepay the obligation with or without prepayment penalties. Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"). We also invest in CMOs and REMICs, issued or sponsored by GNMA, FNMA and FHLMC. CMOs and REMICs are mortgage-derivative products that aggregate pools of mortgages and mortgage-backed securities and create different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class having different risk characteristics. The cash flows from the underlying collateral are usually divided into "tranches," or classes, which have descending priorities with respect to the distribution of principal and interest repayment of the underlying mortgages and mortgage-backed securities, as opposed to pass-through mortgage-backed securities where cash flows are distributed pro rata to all security holders. Unlike mortgage-backed securities from which cash flow is received and prepayment risk is shared pro rata by all securities holders, cash flows from the mortgages and mortgage-backed securities underlying CMOs and REMICs are paid in accordance with a predetermined priority to investors holding various tranches of the securities or obligations. A particular tranche or class may carry prepayment risk which may be different from that of the underlying collateral and other tranches. Investing in CMOs and REMICs allows us to moderate reinvestment risk resulting from unexpected prepayment activity associated with conventional mortgage-backed securities. Management believes these securities represent attractive alternatives relative to other investments due to the wide variety of maturity, repayment and interest rate options available. Other Securities. In addition, at December 31, 2005, we held equity investments with a fair market value of $0.9 million, primarily consisting of an interest in the Community Reinvestment Act Qualified Investment Fund. We also held an approximate investment of $13.3 million in FHLB common stock (this amount is not shown in the securities portfolio). As a member of the FHLB, ownership of FHLB common stock is required. The following table sets forth the carrying value of our investment securities portfolio at the dates indicated. At December 31, --------------------------------- 2005 2004 2003 -------- --------- --------- (In thousands) Investment Securities Available-for-Sale: - ----------------------------------------- U.S. Government Obligations................. $ 1,906 $ 2,443 $ 3,467 Mortgage-Backed Securities: FHLMC.................................... 54,746 82,330 64,098 FNMA..................................... 27,727 48,594 55,249 GNMA..................................... - - - Equity Securities........................... 940 993 965 -------- --------- --------- Total Available-for-Sale............... $ 85,319 $ 134,360 $ 123,779 -------- --------- --------- 15 At December 31, -------------------------------- 2005 2004 2003 -------- -------- -------- (In thousands) Investment Securities Held-to-Maturity: Other Debt Securities ...................... $ 10 $ 10 $ 10 U.S. Government Obligations ................ - - - Mortgage-Backed Securities: FHLMC (1) ............................... 39,234 47,360 5,623 FNMA .................................... 53,469 59,121 20,285 GNMA .................................... 2,908 4,093 7,296 -------- -------- -------- Total Held-to-Maturity ................ $ 95,621 $110,584 $ 33,214 -------- -------- -------- Total Investment Securities ................ $180,940 $244,944 $156,993 ======== ======== ======== - ------------------ (1) At December 31, 2005, includes $3.7 million of agency-issued collateralized mortgage obligations. 16 Carrying Values, Yields and Maturities. The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of our investment securities portfolio at the dates indicated.
At December 31, 2005 ---------------------------------------------------------------------------------------------------- More than One Year or Less One to Five Years Five to Ten Years Ten Years Total ---------------- ----------------- ---------------- ---------------- ------------------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market Value Yield Value Yield Value Yield Value Yield Value Yield Value ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) Investment Securities Available-for-Sale: - ------------------- U.S. Government Obligations...... $ - -% $ 1,906 3.11% $ - -% $ - -% $ 1,906 3.11% $ 1,906 Mortgage-Backed Securities: FHLMC......................... 44 4.73 27,494 3.58 1,375 3.87 25,833 3.32 54,746 3.46 54,746 FNMA.......................... 65 4.67 2,819 3.89 3,283 3.82 21,560 3.26 27,727 3.40 27,727 GNMA.......................... - - - - - - - - - - - Equity Securities................ - - - - - - 940 - 940 - 940 ----- -------- -------- --------- -------- -------- Total Available-for-Sale.... 109 32,219 4,658 48,333 85,319 85,319 Investment Securities Held-to-Maturity: - ----------------- Mortgage-Backed Securities: FHLMC......................... - - 8,458 3.52 11,776 3.99 19,000 4.55 39,234 4.16 38,258 FNMA.......................... - - 655 4.26 31,001 4.31 21,813 4.45 53,469 4.37 52,414 GNMA.......................... - - - - 129 5.95 2,779 4.65 2,908 4.71 2,893 Other Debt Securities............ - - 10 2.12 - - - - 10 2.12 10 ----- -------- -------- -------- -------- -------- Total Held-to-Maturity...... - 9,123 42,906 43,592 95,621 93,575 ----- -------- -------- --------- -------- -------- Total..................... $ 109 $ 41,342 $ 47,564 $ 91,925 $180,940 $178,894 ===== ======== ======== ========= ======== ========
17 Sources of Funds General. Deposits are our major source of funds for lending and other investment purposes. In addition, we derive funds from loan and mortgage-backed securities principal repayments and proceeds from the maturity, call and sale of mortgage-backed securities and investment securities. Loan and securities payments are a relatively stable source of funds, while deposit inflows are significantly influenced by general interest rates and money market conditions. Borrowings (principally from the FHLB) are also periodically used to supplement the amount of funds for lending and investment. Deposits. Our current deposit products include checking, savings, money market, club, certificates of deposit with terms from three months to ten years and individual retirement accounts ("IRAs"). Deposit account terms vary, primarily as to the required minimum balance amount, the amount of time that the funds must remain on deposit and the applicable interest rate. Deposits are obtained primarily from within New Jersey. Traditional methods of advertising are used to attract new customers and deposits, including print media, radio, direct mail and inserts included with customer statements. Premiums or incentives for opening accounts are sometimes, but not generally, offered. Periodically, we select a particular certificate of deposit term for promotion. We pay interest rates on certificates of deposit that are toward the high range of rates offered by our competitors. Rates on savings and money market accounts are generally priced toward the middle and upper range of rates offered in our market. The determination of interest rates is based upon a number of factors, including: (1) our need for funds based on loan demand, current maturities of deposits and other cash flow needs; (2) a current survey of a selected group of competitors' rates for similar products; (3) our current cost of funds and yield on assets and asset/liability position; and (4) the alternate cost of funds on a wholesale basis, in particular, the cost of advances from the FHLB. Interest rates are reviewed by senior management on at least a weekly basis. Brokered certificates of deposit are also utilized as an additional source of funding. These deposits are marketed through national brokerage firms to their customers in $1,000 increments. The Bank maintains only one account for the total deposit amount, while detailed records related to the owners are maintained by the Depository Trust Company under the name of CEDE & Co. Respective customers can open an account by placing a telephone call to his or her broker, and the deposits are transferable, similar to a stock or bond investment. Brokered deposits provide a large deposit for the Bank at a lower operating cost, since the Bank maintains only one account versus several with multiple interest and maturity dates. At December 31, 2005, the Bank had approximately $23.6 million in brokered deposits with a weighted average interest rate of 4.78%. Currently, the rates paid for brokered deposits are comparable to the cost of advances from the FHLB with similar maturities. A large percentage of our deposits are in certificates of deposit (60.4%, or $366.5 million, at December 31, 2005 as compared to 46.9%, or $252.7 million, at December 31, 2004). Our liquidity could be reduced if a significant amount of certificates of deposit, maturing within a short period of time, were not renewed. A significant portion of the certificates of deposit remain with us after they mature and we believe that this will continue. However, the need to retain these time deposits could result in an increase in our cost of funds. 18 The following table sets forth the distribution of the average deposits in the Company for the periods indicated and the weighted average nominal interest rates for each period on each category of deposits presented.
For the Year Ended December 31, ------------------------------------------------------------------------------------------------ 2005 2004 2003 ------------------------------ ------------------------------ ------------------------------ Percent Percent Percent Average of Total Average Average of Total Average Average of Total Average Balance Deposits Rate Paid Balance Deposits Rate Paid Balance Deposits Rate Paid ------- -------- --------- ------- -------- --------- ------- -------- --------- (Dollars in thousands) Money market accounts........... $145,156 25.83% 2.12% $158,658 31.27% 1.70% $ 81,852 18.62% 1.46% Savings and club accounts....... 65,107 11.59 0.50 70,244 13.84 0.50 71,959 16.37 0.70 Certificates of deposit and other time deposit accounts.. 294,603 52.42 3.19 228,426 45.02 2.64 236,749 53.85 3.03 Checking accounts............... 57,107 10.16 0.11 50,065 9.87 0.06 49,052 11.16 0.12 ------- ------ ---- ------- ------ ---- ------- ------ ---- Total deposits............. $561,973 100.00% 2.29% $507,393 100.00% 1.80% $439,612 100.00% 2.03% ======= ====== ==== ======= ====== ==== ======= ====== ====
19 The following table sets forth the time deposits in the Bank classified by interest rate as of the dates indicated. At December 31, ------------------------------ 2005 2004 2003 -------- -------- -------- (In thousands) Interest Rate - ------------- Less than 2% ..... $ 1,154 $ 41,702 $ 58,441 2.00-2.99% ....... 43,629 113,707 99,368 3.00-3.99% ....... 218,602 86,084 46,439 4.00-4.99% ....... 102,139 9,785 9,516 5.00-5.99% ....... 828 1,133 2,134 6.00-6.99% ....... 109 334 488 7.00-7.99% ....... - - - -------- -------- -------- Total ......... $366,461 $252,745 $216,386 ======== ======== ======== The following table sets forth the amount and maturities of time deposits at December 31, 2005. After December 31, December 31, ----------------------------------------- ------------------- 2006 2007 2008 2009 2009 Total -------- -------- -------- -------- -------- -------- (In thousands) Interest Rate - ------------- Less than 2% . $ 1,154 $ - $ - $ - $ - $ 1,154 2.00-2.99% ... 41,836 1,743 50 - - 43,629 3.00-3.99% ... 180,110 26,190 9,508 2,418 376 218,602 4.00-4.99% ... 45,233 44,332 4,464 5,072 3,038 102,139 5.00-5.99% ... 675 149 2 3 - 829 6.00-6.99% ... 108 - - - - 108 7.00-7.99% ... - - - - - - -------- -------- -------- -------- -------- -------- Total ..... $269,116 $ 72,414 $ 14,024 $ 7,493 $ 3,414 $366,461 ======== ======== ======== ======== ======== ======== The following table shows the amount of our certificates of deposit and other time deposits of $100,000 or more by time remaining until maturity as of December 31, 2005. Remaining Time Until Maturity Certificates of Deposit - ----------------------------- ----------------------- (In thousands) Within three months......................... $ 8,068 Three through six months.................... 23,611 Six through twelve months................... 47,021 Over twelve months.......................... 40,983 -------- $119,683 ======== Borrowings. As the need arises or in order to take advantage of funding opportunities or to supplement our deposits as a source of funds, we borrow funds predominantly in the form of advances from the FHLB to supplement our supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are typically secured by the FHLB stock we own and mortgage loans and may be secured by other assets, mainly securities. We use convertible FHLB advances for a portion of our funding needs. These borrowings are fixed-rate advances that can be called at the option of the FHLB. At December 31, 2005, our borrowing limit with the FHLB was $255.7 million, excluding repurchase agreement advances, subject to collateral requirements, consisting of an overnight line of credit of $61.9 million, an adjustable rate line of credit of $61.9 million and a regular advance limit of $131.9 million. The Bank also has a $30 million line of credit with a correspondent bank. At December 31, 2005, there was no balance outstanding on this line of credit. 20 Short-term borrowing, which consists primarily of FHLB advances, generally have maturities of less than one year. The details of these borrowings are presented below: At or For the Year Ended December 31, -------------------------------- 2005 2004 2003 -------- -------- -------- (Dollars in thousands) Short-Term Borrowings: Average balance outstanding ................ $ 75,411 $ 33,618 $ 35,413 Maximum amount outstanding at any month-end during the period ...... $115,000 $ 48,975 $ 69,300 Balance outstanding at period end .......... $ 86,650 $ 31,025 $ 38,229 Weighted average interest rate during the period ....................... 3.59% 1.61% 1.21% Weighted average interest rate at period end ........................... 4.13% 2.42% 1.17% At December 31, 2005, long-term borrowings, which consist of FHLB advances, totaled $180.0 million. Advances consist of fixed-rate advances that will mature within one to nine years. The advances are collateralized by FHLB stock, certain first mortgage loans and mortgage-backed securities. These advances had a weighted average interest rate of 3.76%. We had $11.6 million of unused overnight lines of credit at the FHLB at December 31, 2005. As of December 31, 2005, long-term advances mature as follows: (Dollars in thousands) 2006........................................ $ 49,150 2007........................................ 50,000 2008........................................ 35,100 2009........................................ 8,000 2010........................................ 10,000 Thereafter.................................. 27,700 -------- Total.................................... $179,950 ======== Subsidiary Activity In addition to the Bank, the Company has one service corporation subsidiary, Synergy Financial Services, Inc., which was incorporated under New Jersey law in June 1997 and began operation in May 1998. It was organized for the purpose of providing securities brokerage, insurance and investment services and products, including mutual funds and annuities, to customers of the Bank and the general public. In April 1999, Synergy Financial Services, Inc. entered into an agreement with INVEST Financial Corporation of Tampa, Florida, one of the nation's largest full-service providers of investment and insurance products through financial institutions, and continues to offer services and products through such company. At December 31, 2005, Synergy Financial Services, Inc. had total assets of $399,000. For the year ended December 31, 2005, it had commission income of $855,000 and net income of approximately $154,000. In November 2002, the Bank incorporated a wholly-owned subsidiary, Synergy Capital Investments, Inc., under New Jersey law, as an investment company for the primary purpose of holding investment securities. In March 2005, Synergy Capital Investments, Inc. incorporated a new investment company subsidiary under Delaware law, Synergy Investment Corporation. At December 31, 2005, Synergy Capital Investments, Inc. and Synergy Investment Corporation had total assets of $178.9 million and net income of $5.1 million for the year then ended. 21 Personnel As of December 31, 2005, the Company had 125 full-time employees and 60 part-time employees. The employees are not represented by a collective bargaining agreement. We believe our relationship with our employees is satisfactory. Regulation Set forth below is a brief description of certain laws that relate to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Regulation of the Company General. The Company, which is a federal savings and loan holding company, is subject to regulation and supervision by the OTS. In addition, the OTS has enforcement authority over Synergy Financial Services, Inc. and any non-savings institution subsidiaries. This permits the OTS to restrict or prohibit activities that it determines to be a serious risk to the Bank. This regulation is intended primarily for the protection of the depositors and not for the benefit of stockholders of the Company. Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"). The Securities and Exchange Commission (the "SEC") has promulgated new regulations pursuant to the Act and may continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act, and the regulations implemented by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act and corresponding regulations may increase the Company's expenses. Activities Restrictions. As a savings and loan holding company formed after May 4, 1999, the Company is not a grandfathered unitary savings and loan holding company under the Gramm-Leach-Bliley Act (the "GLB Act"). As a result, the Company and its non-savings institution subsidiaries are subject to statutory and regulatory restrictions on their business activities. Under the Home Owners' Loan Act, as amended by the GLB Act, the non-banking activities of the Company are restricted to certain activities specified by OTS regulation, which include performing services and holding properties used by a savings institution subsidiary, activities authorized for savings and loan holding companies as of March 5, 1987 and non-banking activities permissible for bank holding companies pursuant to the Bank Holding Company Act of 1956 (the "BHC Act") or authorized for financial holding companies pursuant to the GLB Act. Furthermore, no company may acquire control of the Bank unless the acquiring company was a unitary savings and loan holding company on May 4, 1999 (or became a unitary savings and loan holding company pursuant to an application pending as of that date) or the company is only engaged in activities that are permitted for multiple savings and loan holding companies or for financial holding companies under the BHC Act as amended by the GLB Act. Mergers and Acquisitions. The Company must obtain approval from the OTS before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its assets. In evaluating an application for the Company to acquire control of a savings institution, the OTS would consider the financial and managerial resources and future prospects of the Company and the target institution, the effect of the acquisition on the risk to the insurance funds, the needs of the community and competitive factors. Regulation of the Bank General. As a federally chartered savings bank, the Bank is subject to extensive regulation by the OTS and the Federal Deposit Insurance Corporation ("FDIC"). This regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies regarding the classification of assets and the level of the 22 allowance for loan losses. The activities of federal savings banks are subject to extensive regulation including restrictions or requirements with respect to loans to one borrower, the percentage of non-mortgage loans or investments to total assets, capital distributions, permissible investments and lending activities, liquidity management, transactions with affiliates and community reinvestment. Federal savings banks are also subject to the reserve requirements of the Federal Reserve System. A federal savings bank's relationship with its depositors and borrowers is regulated by both state and federal law, especially in such matters as the ownership of savings accounts and the form and content of its mortgage documents. The Bank must file regular reports with the OTS and the FDIC concerning its activities and financial condition, and must obtain regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. The OTS regularly examines the Company and the Bank and prepares reports to the Bank's Board of Directors on deficiencies, if any, found in its operations. Insurance of Deposit Accounts. The FDIC administers two separate deposit insurance funds. Generally, the Bank Insurance Fund ("BIF") insures the deposits of commercial banks and the Savings Association Insurance Fund ("SAIF") insures the deposits of savings institutions, such as the Bank. The FDIC is authorized to increase deposit insurance premiums if it determines such increases are appropriate to maintain the reserves of either the BIF or SAIF or to fund the administration of the FDIC. In addition, the FDIC is authorized to levy emergency special assessments on BIF and SAIF members. The assessment rate for most savings institutions, including the Bank, is currently 0%. In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017. Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) "Tier 1" or "core" capital equal to at least 4% (3% if the institution has received the highest possible rating on its most recent examination) of total adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted assets. At December 31, 2005 the Bank exceeded all regulatory capital requirements and was classified as "well capitalized." In addition, the OTS may require that a savings institution that has a risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total adjusted assets of less than 4% (3% if the institution has received the highest rating on its most recent examination) take certain action to increase its capital ratios. If the savings institution's capital is significantly below the minimum required levels of capital or if it is unsuccessful in increasing its capital ratios, the OTS may restrict its activities. For purposes of the OTS capital regulations, tangible capital is defined as core capital less all intangible assets except for certain mortgage servicing rights. Tier 1 or core capital is defined as common stockholders' equity, non-cumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of consolidated subsidiaries and certain non-withdrawable accounts and pledged deposits. The Bank does not have any non-withdrawable accounts or pledged deposits. Tier 1 and core capital are reduced by an institution's intangible assets, with limited exceptions for certain mortgage and non-mortgage servicing rights and purchased credit card relationships. Both core and tangible capital are further reduced by an amount equal to the savings institution's debt and equity investments in "non-includable" subsidiaries engaged in activities not permissible to national banks other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies. The risk-based capital standard for savings institutions requires the maintenance of total capital of 8% of risk-weighted assets. Total capital equals the sum of core and supplementary capital. The components of supplementary capital include, among other items, cumulative perpetual preferred stock, 23 perpetual subordinated debt, mandatory convertible subordinated debt, intermediate-term preferred stock, the portion of the allowance for loan losses not designated for specific loan losses and up to 45% of unrealized gains on equity securities. The portion of the allowance for loan losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100% of core capital. For purposes of determining total capital, a savings institution's assets are reduced by the amount of capital instruments held by other depository institutions pursuant to reciprocal arrangements and by the amount of the institution's equity investments (other than those deducted from core and tangible capital) and its high loan-to-value ratio land loans and non-residential construction loans. A savings institution's risk-based capital requirement is measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight. These risk weights range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure, commercial loans and other assets. OTS rules require a deduction from capital for savings institutions with certain levels of interest rate risk. The OTS calculates the sensitivity of an institution's net portfolio value based on data submitted by the institution in a Consolidated Maturity Rate Schedule to its quarterly Thrift Financial Report and using the interest rate risk measurement model adopted by the OTS. The amount of the interest rate risk component, if any, deducted from an institution's total capital is based on the institution's Thrift Financial Report filed two quarters earlier. The OTS has indefinitely postponed implementation of the interest rate risk component, and the Bank has not been required to determine whether it will be required to deduct an interest rate risk component from capital. Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective Action regulations, the OTS is required to take supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's level of capital. Generally, a savings institution that has total risk-based capital of less than 8.0%, or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%, is considered to be undercapitalized. A savings institution that has total risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized." A savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Generally, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within forty-five days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital distributions and affiliate transactions. The OTS may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Dividend and Other Capital Distribution Limitations. The OTS imposes various restrictions or requirements on the ability of savings institutions to make capital distributions, including cash dividends. A savings institution that is a subsidiary of a savings and loan holding company, such as the Bank, must file an application or a notice with the OTS at least thirty days before making a capital distribution. A savings institution must file an application for prior approval of a capital distribution if: (i) it is not eligible for expedited treatment under the applications processing rules of the OTS; (ii) the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the savings bank's net income for that year to date plus the institution's retained net income for the preceding two years; (iii) it would not adequately be capitalized after the capital distribution; or (iv) the distribution would violate an agreement with the OTS or applicable regulations. 24 The Bank will be required to file a capital distribution notice or application with the OTS before paying any dividend to the Company. However, capital distributions by the Company, as a savings and loan holding company, will not be subject to the OTS capital distribution rules. The OTS may disapprove a notice or deny an application for a capital distribution if: (i) the savings institution would be undercapitalized following the capital distribution; (ii) the proposed capital distribution raises safety and soundness concerns; or (iii) the capital distribution would violate a prohibition contained in any statute, regulation or agreement. In addition, a federal savings institution cannot distribute regulatory capital that is required for its liquidation account. Qualified Thrift Lender Test. Federal savings institutions must meet a qualified thrift lender ("QTL") test or they become subject to the business activity restrictions and branching rules applicable to national banks. To qualify as a QTL, a savings institution must either (i) be deemed a "domestic building and loan association" under the Internal Revenue Code by maintaining at least 60% of its total assets in specified types of assets, including cash, certain government securities, loans secured by and other assets related to residential real property, educational loans and investments in premises of the institution or (ii) satisfy the statutory QTL test set forth in the Home Owners' Loan Act by maintaining at least 65% of its "portfolio assets" in certain "Qualified Thrift Investments" (defined to include residential mortgages and related equity investments, certain mortgage-related securities, small business loans, student loans and credit card loans and 50% of certain community development loans). For purposes of the statutory QTL test, portfolio assets are defined as total assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 20% of total assets. A savings institution must maintain its status as a QTL on a monthly basis in at least nine out of every twelve months. The Bank met the QTL test as of December 31, 2005 and in each of the prior twelve months and, therefore, qualifies as a QTL. Transactions with Affiliates. Generally, federal banking law requires that transactions between a savings institution or its subsidiaries and its affiliates must be on terms as favorable to the savings institution as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the savings institution's capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the savings institution. In addition, a savings institution may not extend credit to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of any affiliate that is not a subsidiary. The OTS has the discretion to treat subsidiaries of savings institutions as affiliates on a case-by-case basis. Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every insured depository institution, including the Bank, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OTS to assess the depository institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, such as a merger or the establishment of a branch office by the Bank. An unsatisfactory CRA examination rating may be used as the basis for the denial of an application by the OTS. Federal Home Loan Bank ("FHLB") System. The Bank is a member of the FHLB, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by financial institutions and proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members pursuant to policies and procedures established by the board of directors of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, including mortgage pass-through certificates secured by residential properties (excluding CMOs and REMICs), home purchase contracts or similar obligations at the beginning of each year or 5% of its FHLB advances. We are in compliance with this requirement. The FHLB imposes various limitations on advances such as limiting 25 the amount of certain types of real estate related collateral to 30% of a member's capital and limiting total advances to a member. Federal Reserve System. The Federal Reserve System requires all depository institutions to maintain non-interest-bearing reserves at specified levels against their checking accounts and non-personal certificate accounts. The balances maintained to meet the reserve requirements imposed by the Federal Reserve System may be used to satisfy the OTS liquidity requirements. Savings institutions have authority to borrow from the Federal Reserve System "discount window," but Federal Reserve System policy generally requires savings institutions to exhaust all other sources before borrowing from the Federal Reserve System. Item 1A. Risk Factors - --------------------- The following is a summary of the material risks to an investment in the Company's securities. A relatively large portion of our total loan portfolio consists of consumer loans, primarily automobile loans. The credit risk related to these types of loans is considered to be greater than the risk related to residential lending. At December 31, 2005, consumer loans amounted to $189.6 million, or 25.7% of the total loan portfolio. The vast majority of these are automobile loans. At December 31, 2005, automobile loans totaled $185.8 million. Consumer loans entail greater risks than residential mortgage loans, particularly consumer loans secured by rapidly depreciable assets, such as automobiles, or loans that are unsecured. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance, since there is a greater likelihood of damage, loss or depreciation of the underlying collateral. Further, consumer loan repayment is dependent on the borrower's continuing financial stability and is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Finally, the application of various federal laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on consumer loans in the event of a default. - -------------------------------------------------------------------------------- We originate most of our automobile loans though a single source, and we would be unable to maintain the current high volume of automobile loan originations if we were no longer able to obtain business though this source. In late 1999, we began to originate direct automobile loans over the Internet through an independent online loan referral web site. Currently, an average of $5.7 million of new loans, or 94.4%, of our monthly automobile loan originations, are generated from this referral source. We will generally lend up to 100% of the purchase price of a new or used vehicle. - -------------------------------------------------------------------------------- We intend to continue to increase our origination of multi-family / non-residential mortgage loans as well as commercial loans. These types of loans traditionally involve a higher degree of repayment risk than residential loans. At December 31, 2005, our loan portfolio included $271.6 million of multi-family / non-residential mortgage loans, or 36.8% of our total loan portfolio, representing a 76.1% increase from December 31, 2004. Multi-family / non-residential mortgage loans generally are considered to entail significantly greater risk than that which is involved with residential real estate lending. The repayment of these loans typically is dependent on the successful operations and income stream of the real estate and the borrower. These risks can be significantly affected by economic conditions. In addition, multi-family / non-residential real estate lending generally requires substantially greater evaluation and oversight efforts compared to one- to four-family residential real estate lending. 26 At December 31, 2005, our loan portfolio included $24.8 million of commercial loans, or 3.4% of our total portfolio, representing a 103.1% increase from December 31, 2004. During 2004, we introduced the availability of both commercial lines of credit and fixed term commercial loans. Commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. Commercial business loans, therefore, have greater credit risk than residential mortgage loans. In addition, commercial loans generally carry larger balances to single borrowers or related groups of borrowers than one- to four-family loans. In addition, commercial lending generally requires substantially greater evaluation and oversight efforts compared to residential or non-residential real estate lending. - -------------------------------------------------------------------------------- We have a relatively high percentage of unseasoned commercial and multi-family/non-residential credits, which are considered to pose a potentially greater repayment risk than loans that have been outstanding for a longer period of time. As a result of our strong growth during the past five years, commercial and multi-family / non-residential mortgage loans represent 3.4% and 36.8%, respectively, of our total loan portfolio as of December 31, 2005. A significant portion of these loans are represented as new credits. Generally, loans that are relatively new, referred to as unseasoned loans, do not have sufficient repayment history to determine the likelihood of repayment in accordance with their terms. At December 31, 2005, 87.8% of these loans are considered unseasoned (i.e., less than three years). - -------------------------------------------------------------------------------- We intend to continue expanding our branch office network and expenses related to such expansion will negatively impact earnings in future periods. We intend to grow our branch office network, which will expand our geographic reach. As of December 31, 2005, we operated twenty branch offices (including our main office) in Middlesex, Monmouth, Morris, and Union counties, New Jersey. The Bank has plans to open three new branches and relocate one branch office in 2006. However, there can be no assurance when, or if, these new offices will open. This growth plan will result in an increase in our fixed assets over such period. The expenses associated with opening new branch offices, in addition to the personnel and operating costs that we will have once such offices open, will significantly increase our non-interest expense in future periods and decrease earnings. - -------------------------------------------------------------------------------- We may not continue to experience the same rate of growth that we have in the past, and we may not be able to successfully manage our current growth. Over the past several years, we have experienced rapid and significant growth. Our total assets have increased by $676.9 million, or 227.9%, from $297.0 million at December 31, 2001, to $973.9 million at December 31, 2005. There can be no assurance that we will continue to experience such rapid growth, or any growth, in the future. If we do experience continued growth, we can not assure you that we will be able to adequately and profitably manage such growth or that our earnings will adequately provide the necessary capital to maintain required regulatory capital levels. - -------------------------------------------------------------------------------- Rising interest rates would likely hurt our profits and may affect our ability to pay dividends, repurchase stock or undertake other corporate transactions. To be profitable, we must earn more in interest and fees than we pay in interest and expenses. If interest rates rise, the interest we pay on interest-bearing liabilities, such as deposits and borrowings, may increase more quickly than interest earned on interest-earning assets, such as loans and investment 27 securities. This will reduce our net interest income and thereby reduce our net income in the short-term. In addition, rising interest rates are likely to reduce our income via a reduction in the demand for loans and the value of our investment securities and make it more difficult for our borrowers to repay their loans. As a result, this could restrict the capital resources of Synergy Bank and could require us to contribute additional capital to Synergy Bank or may prevent Synergy Bank from paying dividends to us. This could restrict our ability to pay dividends, repurchase stock or undertake other corporate transactions. Currently, a material increase in interest rates would have a material adverse effect on our income and regulatory capital. - -------------------------------------------------------------------------------- Increases in market rates of interest are likely to adversely affect our stockholders' equity. At December 31, 2005, Synergy Financial Group, Inc. owned $85.3 million of marketable securities that were held as available-for-sale. Generally accepted accounting principles require that these securities be carried at fair value on the consolidated balance sheet. Unrealized gains or losses on these securities, that is, the difference between the fair value and the amortized cost of these securities, is reflected in stockholders' equity, net of deferred taxes. When interest rates increase, the fair value of Synergy Financial Group, Inc.'s available-for-sale marketable securities generally decreases, which decreases stockholders' equity. As of December 31, 2005, Synergy Financial Group, Inc.'s available-for-sale securities portfolio had an unrealized loss, net of taxes, of $1.4 million. Our stockholders' equity is likely to be adversely affected by an increase in market interest rates. - -------------------------------------------------------------------------------- A downturn in our local economy may adversely affect our earnings. Our business of attracting deposits and making loans (other than automobile loans) is primarily conducted within our market area. A downturn in our local economy could reduce the amount of funds available for deposit and the ability of borrowers to repay their loans and could negatively impact collateral values. As a result, our earnings could be adversely affected. - -------------------------------------------------------------------------------- We face substantial competition in our attraction of deposits, which is our primary source of funds for lending. Many of our competitors are significantly larger institutions and have greater financial and managerial resources. Our ability to compete successfully is a significant factor affecting our profitability. - -------------------------------------------------------------------------------- We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations. We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision and by the Federal Deposit Insurance Corporation. Such regulation and supervision govern the activities in which a bank and its holding company may engage and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank and the adequacy of a bank's allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation could have a material impact on Synergy Financial Group, Inc., its subsidiaries and their operations. Item 1B. Unresolved Staff Comments - ---------------------------------- None 28 Item 2. Description of Property - ------------------------------- Our main office is located at 310 North Avenue East, Cranford, New Jersey. At December 31, 2005, we had twenty locations, including our main office. All of our branch offices are located in Middlesex, Monmouth, Morris and Union counties, New Jersey. The following table sets forth the location of our main and branch offices, the year the office was opened, the net book value of each office and the deposits held or matured on December 31, 2005 at each office.
Month and Year Leased or Net Book Value at Deposits at Office Location Facility Opened Owned December 31, 2005 December 31, 2005 - --------------- --------------- ----- ----------------- ----------------- Main Office October 1991 Owned $1,556,991 $ 124,531,079 (1) 310 North Avenue East Cranford, New Jersey Branch Offices: 2000 Galloping Hill Road March 1989 Leased(2) $ - $ 23,632,041 Building K-6 Kenilworth, New Jersey 2000 Galloping Hill Road March 1978 Leased(2) $ - $ 9,428,901 Building K-2 Kenilworth, New Jersey 1011 Morris Avenue May 1952 Leased(2) $ - $ 11,209,217 Union, New Jersey One Giralda Farms April 1983 Leased(2) $ - $ 3,331,701 Madison, New Jersey 2000 Galloping Hill Road February 1993 Leased(2) $ - $ 32,307,741 Building K-15 Kenilworth, New Jersey 556 Morris Avenue December 2005 Leased(2) $ - $ 4,703,045 Summit, New Jersey 15 Market Street November 1998 Leased(3) $ 509,721 $ 67,378,616 Kenilworth, New Jersey 315 Central Avenue May 1999 Leased(4) $ 225,980 $ 70,187,329 Clark, New Jersey 225 North Wood Avenue March 2001 Leased(5) $ - $ 20,728,320 Linden, New Jersey 1162 Green Street April 2002 Owned $1,688,085 $ 38,186,769 Iselin, New Jersey 168-170 Main Street May 2002 Owned $1,780,772 $ 25,868,766 Matawan, New Jersey 473 Route 79 July 2002 Owned $1,370,928 $ 23,502,042 Morganville, New Jersey 101 Barkalow Avenue July 2002 Owned(6) $1,707,613 $ 23,260,616 Freehold, New Jersey 1887 Morris Avenue November 2002 Owned $1,697,253 $ 29,942,394 Union, New Jersey
29
Month and Year Leased or Net Book Value at Deposits at Office Location Facility Opened Owned December 31, 2005 December 31, 2005 - --------------- --------------- ----- ----------------- ----------------- Renaissance Plaza December 2002 Leased(7) $1,063,382 $ 19,262,291 3665 Route 9 North Old Bridge, New Jersey 1727 Route 130 South May 1998 Leased(8) $ 25,576 $ 41,983,945 North Brunswick, New Jersey 337 Applegarth Road April 2000 Leased(9) $ - $ 28,703,460 Monroe Township, New Jersey 142 Broad Street May 2005 Leased(10) $ 712,221 $ 7,205,594 Elizabeth, New Jersey 400 Main Street December 2005 Leased(11) $1,249,573 $ 1,749,202 Spotswood, New Jersey
- ------------------ (1) Includes brokered certificates of deposit, deposit balances acquired through our automated services and Call Center, as well as Synergy Financial Group, Inc.'s checking account. (2) Branch is located within a corporate facility of Synergy Bank's former credit union sponsor. Synergy Bank makes no rent payments for such branch. These branch locations are occupied pursuant to a written agreement that provides for two-year terms that are automatically renewed upon expiration unless written notice of termination is given by either party. (3) Lease term of fifteen years to expire in 2013. Terms provide for four five-year renewal options. (4) Lease term of ten years to expire in 2009. Terms provide for one ten-year renewal option. (5) Lease term of five years to expire in 2010. Terms provide for one five-year renewal option. (6) Synergy Bank leases space in the building to three tenants. (7) Lease term of twenty years to expire in 2022. Terms provide for two ten-year renewal options. (8) Branch acquired in the acquisition of First Bank of Central Jersey in January 2003. Lease term renewed in 2002 and expires in 2007. Synergy Bank subleases space in the building to one subtenant. (9) Branch acquired in the acquisition of First Bank of Central Jersey in January 2003. Lease term renewed in 2005 and expires in 2006. Synergy Bank entered into an agreement to lease an adjacent site for a term of twenty years beginning in 2005. (10) Lease term of ten years will expire in 2014. Terms provide for two ten-year renewal options. (11) Lease term of twenty years to expire in 2025. Terms provide for two ten-year renewal options. Item 3. Legal Proceedings - ------------------------- The Company and its subsidiaries, from time to time, are a party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of the Bank. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- None. 30 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and - -------------------------------------------------------------------------------- Issuer Purchases of Equity Securities ------------------------------------- Upon completion of the Company's first-step minority stock offering in September 2002, the Company's common stock commenced trading on the OTC-Electronic Bulletin Board under the symbol "SYNF.OB." On January 20, 2004, the Company completed a second-step conversion and stock offering in which Synergy, MHC converted from the mutual form of organization to a full stock corporation; new shares of common stock of the Company were sold at an initial public offering price of $10.00 per share and previously outstanding shares of the Company were exchanged for new shares at an exchange ratio of 3.7231. Upon completion of that conversion and offering, the Company's common stock commenced trading on January 21, 2004 on the NASDAQ National Market under the symbol "SYNFD"; after twenty days the trading symbol became "SYNF." The table below shows the reported high and low sales prices of the common stock and the cash dividends declared per share during the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions. Sale prices shown for the periods preceding the second-step conversion have been adjusted to reflect the exchange ratio of 3.7231. Price Range of Common Stock -------------------- Cash Dividends High Low Declared ---- --- -------- 2004 First quarter ............. $ 11.50 $ 10.10 $ 0.00 Second quarter............. 10.35 9.00 0.04 Third quarter.............. 10.71 9.90 0.04 Fourth quarter............. 13.69 10.36 0.04 2005 First quarter ............. $ 13.44 $ 11.35 $ 0.04 Second quarter............. 12.44 11.01 0.05 Third quarter.............. 12.50 11.70 0.05 Fourth quarter............. 13.00 11.32 0.05 Any future determination as to the payment of dividends will be made at the discretion of the Board of Directors and will depend on a number of factors, including the Company's capital requirements, financial condition and results of operations, tax considerations, statutory and regulatory limitations, general economic conditions and such other factors as the Board of Directors deems relevant. Under New Jersey law, the Company may not pay dividends if, after giving effect thereto, it would be unable to pay its debts as they become due in the usual course of its business or if its total assets would be less than its total liabilities. The Company's ability to pay dividends also depends on the receipt of dividends from Synergy Bank which is subject to a variety of regulatory limitations on the payment of dividends. As of February 17, 2006, there were approximately 969 holders of record of the Company's common stock. 31 The following table reports information regarding repurchases of the Company's common stock during the fourth quarter of 2005 and the stock repurchase plans approved by the Board of Directors.
Maximum Total Number of Number of Shares Total Shares Purchased that May Yet Be Number of Average as Part of Publicly Purchased Under Shares Price Paid Announced Plans the Plans or Period Purchased per Share or Programs (1) Programs (1) - ------ --------- --------- ---------------- ------------- October 1 - October 31, 2005..... - - - 549,628 November 1 - November 30, 2005... 40,000 $12.26 40,000 509,628 December 1 - December 31, 2005... 235,000 12.85 235,000 274,628 ------- ------- Total......................... 275,000 $12.76 275,000 ======= =======
- ------------------ (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 274,628 shares yet to be purchased. 32 Item 6. Selected Financial Data - ------------------------------- The following tables set forth selected consolidated historical financial and other data relating to the Company for the years and at the dates indicated. On March 1, 2001, the Bank was reorganized from a mutual savings bank into a mutual holding company structure. Accordingly, the financial and other data prior to March 1, 2001 represents the financial condition and results of operations of only Synergy Bank. On September 17, 2002, the Company completed a minority stock offering. Prior to completion of the minority stock offering, the Company existed but had no significant assets, liabilities or operations and all of its outstanding common stock was held by Synergy, MHC. Subsequent to December 31, 2003, the Company completed a second-step conversion from the mutual holding company structure into a full stock corporation. The MHC was dissolved in this conversion. Selected Financial Highlights (Dollars in thousands)
Balance Sheet: At December 31, ---------------------------------------------------------------------- 2005 2004 2003 2002 2001 -------- --------- -------- -------- --------- Assets................................ $973,887 $860,677 $628,618 $431,275 $296,963 Loans receivable, net................. 733,183 561,687 434,585 319,423 224,689 Investment securities................. 180,940 244,944 156,993 79,710 51,047 Deposits.............................. 606,471 538,916 473,535 354,142 249,813 Other borrowed funds.................. 266,600 212,414 72,873 36,456 22,500 Total stockholders' equity............ 95,250 104,042 40,928 37,872 22,390
Summary of Operations: For the Year Ended December 31, ---------------------------------------------------------------------- 2005 2004 2003 2002 2001 -------- --------- -------- -------- --------- Interest income....................... $46,571 $36,400 $30,066 $23,359 $19,071 Interest expense...................... 21,748 13,192 10,686 9,044 9,296 ------- ------- ------- ------- ------- Net interest income................... 24,823 23,208 19,380 14,315 9,775 Provision for loan losses............. 1,860 1,492 1,115 1,077 363 ------- ------- ------- ------- ------- Net interest income after provision for loan losses.......... 22,963 21,716 18,265 13,238 9,412 Net gains on sales of loans and investment securities.......... (26) 38 174 112 893 Other income.......................... 3,877 3,246 2,460 1,608 1,622 Operating expense..................... 19,761 18,381 15,576 11,727 9,001 ------- ------- ------- ------- ------- Income before income tax expense...... 7,053 6,619 5,323 3,231 2,926 Income tax expense.................... 2,560 2,416 1,911 1,200 1,024 ------- ------- ------- ------- ------- Net income............................ $ 4,493 $ 4,203 $ 3,412 $ 2,031 $ 1,902 ======= ======= ======= ======= =======
33 Selected Financial Ratios
Performance Ratios: 2005 2004 2003 2002 2001 ------ ------ ------ ------ ------ Return on average assets (net income divided by average total assets) ........ 0.49% 0.55% 0.62% 0.54% 0.70% Return on average equity (net income divided by average equity) ........... 4.46 4.20 8.69 8.11 9.09 Dividend payout ratio ........... 45.00 31.57 0.00 0.00 0.00 Net interest rate spread ........ 2.64 3.01 3.69 4.03 3.60 Net interest margin ............. 2.83 3.20 3.74 4.08 3.75 Average interest-earning assets to average interest-bearing liabilities.. 107.73 110.53 102.23 101.75 104.25 Efficiency ratio (operating expenses divided by the sum of net interest income and other income) ............ 68.92 69.38 70.76 72.87 73.24 Asset Quality Ratios: Non-performing loans to total loans, net at period end 0.05% 0.05% 0.08% 0.14% 0.03% Non-performing assets to total assets at period end ... 0.04 0.03 0.06 0.10 0.02 Net charge-offs to average loans outstanding ............ 0.08 0.06 0.21 0.07 0.08 Allowance for loan losses to total loans at period end .... 0.78 0.78 0.75 0.69 0.61 Capital Ratios: Average equity to average assets ratio (average equity divided by average total assets) ..... 10.97% 13.20% 6.37% 6.74% 7.69% Equity to assets at period end .. 9.78 12.09 6.51 8.78 7.54 Full Service Offices: ........... 20 18 18 16 11
34 Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations ------------- General Management's discussion and analysis of financial condition and results of operations is intended to provide assistance in understanding the consolidated financial condition and results of operations of the Company. The information in this section should be read with the consolidated financial statements and the notes thereto included in this Form 10-K. Our results of operations are primarily dependent on our net interest income. Net interest income is a function of the balances of loans and investments outstanding in any one period, the yields earned on those loans and investments and the interest paid on deposits and borrowed funds that were outstanding in that same period. To a lesser extent, the relative levels of our non-interest income and operating expenses also affect our results of operations. Our other income consists primarily of fees and service charges, and to a lesser extent, gains (losses) on the sale of loans and investments. The other expenses consist primarily of employee compensation and benefits, occupancy and equipment expenses, data processing costs, marketing costs, professional fees, office supplies, telephone and postage costs. Our results of operations are significantly impacted by the amount of provisions for loan losses which, in turn, are dependent upon, among other things, the size and makeup of the loan portfolio, loan quality and loan trends. Our results of operations are affected by general economic, regulatory and competitive conditions, including changes in prevailing interest rates and the policies of regulatory agencies. Forward-Looking Statements This document contains forward-looking statements that project our future operations, which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in these forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by the use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The Company does not undertake and specifically disclaims any obligation to release publicly the results of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Business Strategy Our business strategy has been to operate as a well-capitalized, independent financial institution, dedicated to providing convenient access and quality service at competitive prices. Generally, we have sought to implement this strategy by maintaining a substantial part of our assets in loans secured by one-to-four family mortgages, home equity loans, multi-family / non-residential mortgages, commercial and consumer loans. In recent years, we have sought to diversify our loan portfolio with emphasis on shorter maturities and adjustable-rate products. At the same time, we have sought to expand our deposit base, particularly core deposits and have availed ourselves of leveraged borrowings for purposes of financing our growth. We intend to continue to emphasize a variety of loan products consisting of one-to-four-family mortgages, home equity loans, multi-family / 35 non-residential mortgages, commercial and consumer loans. During recent years, we have significantly increased our origination of automobile loans, multi-family / non-residential mortgage loans, and commercial loans. We began to originate automobile loans through an Internet source in late 1999 and multi-family / non-residential mortgage loans in 2000. In 2004, we expanded our activity to include commercial lending. As of December 31, 2005, we had total automobile loans of $185.8 million, multi-family / non-residential loans of $271.6 million, and commercial loans of $24.7 million. We intend to grow our branch office network, which will expand our geographic reach, and will consider the acquisition of other financial institutions. We do not, however, have any current understandings, agreements or arrangements for the expansion of our business, other than opening new branch office locations. As of December 31, 2005, we operated twenty branch offices (including our main office) in Middlesex, Monmouth, Morris, and Union counties, New Jersey. The Bank has plans to open three new branches and relocate one branch office in 2006. We will continue to evaluate our business beyond traditional retail banking. To this end, Synergy Financial Services, Inc. ("SFSI"), a subsidiary of the Company, began operations in 1998 for the purpose of providing securities brokerage, insurance and investment services and products, including mutual funds and annuities, to customers of the Bank and the general public. Critical Accounting Policies, Judgments and Estimates The accounting and reporting policies of the Company conform with the accounting principals generally accepted in the United States of America and general practices within the financial services industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Allowance for Credit 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 First Bank of Central Jersey acquisition in January, 2003 are subject to annual impairment tests and, in the case of the core deposit intangible, amortization of the asset through a charge to expense. To the extent the outcome of the impairment tests differ from the carrying value, additional charges to expense could be required to reduce the carrying value to fair value, which would adversely impact earnings in future periods. Income Taxes. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities. Deferred tax assets are subject to management's judgment based upon available evidence that future realization is more likely than not. The realization of deferred tax assets is assessed and a valuation allowance provided for that portion of the asset for which the allowance is more likely than not to be realized. If management determines that the Company may be unable to realize all or part of the net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax assets to the expected realizable amount, thereby impacting earnings. 36 Comparison of Financial Condition at December 31, 2005 and December 31, 2004 Assets. Total assets increased $113.2 million, or 13.2%, to $973.9 million at December 31, 2005, from $860.7 million at December 31, 2004. The increase in total assets resulted primarily from an increase of $171.5 million, or 30.5%, in net loans receivable offset by a decline of $64.0 million, or 26.1%, in investments securities. The change in the outstanding balance of net loans receivable and investment securities is the result of the Company's strategy to initially invest the proceeds of $69.2 million from the second-step stock offering of January 20, 2004 into investments with short term maturities, expand lending capacity and then fund the new loan growth with the proceeds from the maturing or sold investments. Net loans increased 30.5%, or $171.4 million, to $733.2 million at December 31, 2005, from $561.7 million at December 31, 2004. This growth includes $156.2 million in originations, net of principal repayments, and $16.6 million in purchases, offset by amortization of the premium on purchased loans and an increase in provisions for loan losses. The most significant growth during the year ended December 31, 2005 was in multi-family / non-residential mortgage loans of $117.4 million, or 76.1%. On December 31, 2005, total loans of $733.2 million, including deferred fees and expenses, were comprised of 36.8% in multi-family / non-residential mortgage loans, 25.7% in consumer loans, 17.5% in one- to four-family real estate loans, 15.3% in home equity loans, 3.4% in commercial loans and 1.3% in construction loans. The allowance for loan losses was $5.8 million, or 0.78% of total loans, at December 31, 2005 as compared to $4.4 million, or 0.78% of total loans, at December 31, 2004. This reflects a provision for loan losses of $1.9 million for the year, offset by net charge-offs of $524,000. Non-performing assets to total assets increased to 0.04% at December 31, 2005, from 0.03% at December 31, 2004. The Company increased its investment in Federal Home Loan Bank ("FHLB") stock by $2.5 million, or 23.1%, to $13.3 million at December 31, 2005. This was a direct result of FHLB requirements associated with the increased level of borrowings from the institution. Property and equipment increased $1.8 million during the year ended December 31, 2005, primarily as the result of two new branch locations in Elizabeth and Spotswood. The cash surrender value of bank-owned life insurance increased $501,000 in 2005. The return on this investment is utilized to fund the cost of benefit plans. The Company's investment in bank-owned life insurance totaled $13.1 million at December 31, 2005, as compared to $12.6 million at December 31, 2004. Liabilities. Total liabilities increased $122.0 million, or 16.1%, to $878.6 million at December 31, 2005, from $756.6 million at December 31, 2004. The increase in total liabilities resulted primarily from an increase of $67.6 million, or 12.5%, in deposits and a $54.2 million, or 25.5%, increase in other borrowed funds. The balance of the change is primarily attributable to increases associated with escrow payments for taxes and insurance, as well as accrued interest payable, offset by a decrease in other liabilities. Deposits reached $606.5 million on December 31, 2005, an increase of $67.6 million, or 12.5%, from the $538.9 million reported on December 31, 2004. Certificates of deposit increased by $113.7 million, or 45.0%, from the $252.7 million reported at year-end 2004, while core deposits, which consist of checking, savings, and money market accounts, decreased $46.1 million, or 16.1%. The increase in 37 certificates of deposit was the result of initiatives directed toward attracting funds with extended maturities in response to the current interest rate environment, coupled with the placement of approximately $23.6 million of brokered certificates of deposit. Despite the decline in total core deposits during the twelve-month period ended December 31, 2005, checking accounts increased by $5.5 million or 9.8%. The increase of $54.2 million, or 25.5%, in other borrowed funds was to fund the origination of loans during this period. Other borrowed funds, which consist primarily of FHLB advances, rose to $266.6 million at December 31, 2005, compared to $212.4 million at December 31, 2004. Equity. Stockholders' equity totaled $95.3 million on December 31, 2005, a decrease of 8.4%, or $8.8 million, from $104.0 million on December 31, 2004. The decline was attributable to the repurchase of 989,451 shares of common stock in open market transactions to fund the Company's 2004 Restricted Stock Plan and its stock repurchase programs, as well as the effect of the net unrealized investment portfolio market value adjustment, offset by the net income for the period. On August 24, 2005, the Company announced a new program to repurchase up to an additional 5% of its outstanding common stock, or approximately 577,628 shares. During the fourth quarter, the Company repurchased 275,000 shares. As a result, it has now completed in excess of 52% of the current program, at an average price of $12.72 per share. Comparison of Financial Condition at December 31, 2004 and December 31, 2003 Assets. Total assets increased $232.1 million, or 36.9%, to $860.7 million at December 31, 2004, from $628.6 million at December 31, 2003. The increase in total assets resulted primarily from an $88.0 million, or 56.0%, increase in investment securities and a $127.1 million, or 29.2%, increase in net loans receivable. The increase in investment securities included the purchase of $156.5 million in agency issued mortgage-backed securities. The increase was primarily the result of investing the net capital of $69.2 million from the Company's second-step stock offering that was completed on January 20, 2004. Investment securities purchased were exclusively federal agency issued mortgage-backed securities. These purchases were offset by $65.7 million and $1.4 million in principal repayments and premium amortization of existing investment securities, respectively, and $1.3 million in sales of investment securities, which generated a $38,000 gain on sales. Additionally, there was a $217,000 decrease in the unrealized market value associated with investment securities designated available-for-sale. Net loans increased 29.2%, or $127.1 million, to $561.7 million at December 31, 2004, from $434.6 million at December 31, 2003. This growth includes $98.1 million in originations, net of principal repayments, and $30.5 million in purchases, offset by amortization of the premium on purchased loans and an increase in provisions for loan losses. The most significant growth during the year ended December 31, 2004 was in multi-family / non-residential mortgage loans of $64.9 million, or 71.6%. On December 31, 2004, total loans of $566.1 million, including deferred fees and expenses, were comprised of 26.7% in multi-family / non-residential mortgage loans, 26.7% in consumer loans, 23.2% in one- to four-family real estate loans, 20.2% in home equity loans, 2.2% in commercial loans and 1.0% in construction loans. The allowance for loan losses was $4.4 million, or 0.78% of total loans, at December 31, 2004, as compared to $3.3 million, or 0.75% of total loans, at December 31, 2003. This reflects a provision for loan losses of $1.5 million for the year, offset by net charge-offs of $339,000. Non-performing assets to total assets decreased to 0.03%, at December 31, 2004, from 0.06% at December 31, 2003. 38 The Company increased its investment in Federal Home Loan Bank ("FHLB") stock by $7.1 million, or 195.6%, to $10.8 million at December 31, 2004. This was a direct result of FHLB requirements associated with the increased level of borrowings from the institution. Other assets increased $11.5 million during the year ended December 31, 2004, primarily as the result of increased investment in bank-owned life insurance. The Company invested an additional $10.0 million in bank-owned life insurance during the third quarter. The return on this investment is utilized to fund the cost of benefit plans. The Company's investment in bank-owned life insurance totaled $12.6 million at December 31, 2004, as compared to $2.5 million at December 31, 2003. Liabilities. Total liabilities increased $168.9 million, or 28.8%, to $756.6 million at December 31, 2004, from $587.7 million at December 31, 2003. The increase in total liabilities resulted primarily from an increase of $65.4 million, or 13.8%, in deposits and a $139.5 million, or 191.5%, increase in FHLB advances, offset by the elimination of $38.3 million in stock subscriptions payable held at December 31, 2003. 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 December 21, 2004 quarterly cash dividend declaration. Deposits reached $538.9 million at December 31, 2004, an increase of $65.4 million, or 13.8%, from the $473.5 million reported at December 31, 2003. Core deposits, consisting of checking, savings and money market accounts, represented 53.1% of total deposits at December 31, 2004, compared to 54.3% at December 31, 2003. The majority of deposit growth consisted of an increase in certificates of deposit of $36.4 million, or 16.8%, and an increase in money market deposit accounts of $24.0 million, or 17.2%. The increase in other borrowed funds, which consists primarily of FHLB advances, was to fund both the purchase of investment securities and the origination of loans during this period. A significant portion of the increase was attributable to the funding of a $50.0 million leverage strategy at the close of the quarter ended June 30, 2004. Equity. Stockholders' equity totaled $104.0 million at December 31, 2004, an increase of 154.2%, or $63.1 million, from $40.9 million at December 31, 2003. The increase in stockholders' equity is largely attributable to $69.2 million in net proceeds from the completion of a second-step stock conversion on January 20, 2004 and also reflects $4.2 million in earnings for the year ended December 31, 2004. This was offset by a $5.0 million increase in unearned Employee Stock Ownership Plan shares, a $2.4 million net increase in unearned compensation associated with restricted stock plans, a $4.2 million increase in treasury shares associated with the restricted stock plans buyback, a $1.4 million reduction in retained earnings associated with the payment of dividends and a decrease in accumulated other comprehensive income, net of tax effect, of $139,000. 39 Average Balance Sheet. The following table sets forth certain information for the years ended December 31, 2005, 2004 and 2003. The average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from daily average balances. The table does not include the allowance for loan losses in the average balances of loans receivable. Management does not believe that this causes any material differences in the information presented.
For the Year Ended December 31, At December 31, ------------------------------------------------------------------------------ 2005 2005 2004 2003 ---------------- ------------------------- ------------------------ ------------------------- Average Average Average Yield/ Average Yield/ Average Yield/ Average Yield/ Balance Cost(1) Balance Interest Cost Balance Interest Cost Balance Interest Cost -------- ------ -------- -------- ------ -------- -------- ------ ------- -------- ------ (Dollars in thousands) Interest-earning assets: Loans receivable, net (2)..... $733,183 6.05% $645,361 $37,738 5.85% $484,074 $28,258 5.84% $373,530 $25,548 6.84% Investment securities (3)..... 180,940 3.98 218,902 8,261 3.77 227,645 7,980 3.51 139,262 4,401 3.16 Other interest-earnings assets (4).................. 15,211 4.76 12,638 572 4.53 13,016 162 1.24 5,681 117 2.06 -------- -------- ------- -------- ------- -------- ------- Total interest-earning assets................. 929,334 5.63 876,901 46,571 5.31 724,735 36,400 5.02 518,473 30,066 5.80 Non-interest-earning assets... 44,553 40,629 33,721 29,758 -------- -------- -------- -------- Total assets............. $973,887 $917,530 $758,456 $548,231 ======== ======== ======== ======== Interest-bearing liabilities: Checking accounts (5)......... $ 61,472 0.14% $ 57,107 $ 65 0.11% $ 50,065 $ 30 0.06% $ 49,052 $ 60 0.12% Savings and club accounts..... 60,608 0.51 65,107 325 0.50 70,244 351 0.50 71,959 502 0.70 Money market accounts......... 117,930 2.27 145,156 3,074 2.12 158,658 2,697 1.70 81,852 1,193 1.46 Certificates of deposit....... 366,461 3.49 294,603 9,395 3.19 228,426 6,036 2.64 236,749 7,181 3.03 Other borrowed funds.......... 266,600 4.07 251,982 8,889 3.53 142,641 4,055 2.84 67,557 1,750 2.59 Stock subscriptions payable... - 0.00 - - 0.00 5,677 23 0.41 - - - -------- -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities............ 873,071 3.06 813,955 21,748 2.67 655,711 13,192 2.01 507,169 10,686 2.11 Non-interest-bearing liabilities................. 5,566 2,915 2,641 6,146 -------- -------- -------- -------- Total liabilities........ 878,637 816,870 658,352 513,315 Stockholders' equity.......... 95,250 100,660 100,104 34,916 -------- -------- -------- -------- Total liabilities and stockholders' equity... $973,887 $917,530 $758,456 $548,231 ======== ======== ======== ======== Net interest income........... $24,823 $23,208 $19,380 ======= ======= ======= Net interest rate spread (6).. 2.57% 2.64% 3.01% 3.69% Net interest margin (7)....... 2.76% 2.83% 3.20% 3.74% Ratio of average interest- earning assets to average interest-bearing liabilities................. 106.44% 107.73% 110.53% 102.23%
(1) Interest yields at December 31, 2005 are calculated using the annualized interest for the month of December divided by the average balance for the month of December. (2) Non-accruing loans have been included in loans receivable, and the effect of such inclusion was not material. (3) Includes U.S. government obligations, mortgage-backed securities and interest-bearing deposits in banks. (4) Includes FHLB stock at cost and deposits with other financial institutions. (5) Includes both interest-bearing and non-interest-bearing checking accounts and stock subscriptions received in connection with the Company's second-step mutual-to-stock conversion completed on January 20, 2004. (6) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities (including non-interest-bearing checking accounts). (7) Net interest margin represents net interest income as a percentage of average interest-earning assets. 40 Rate / Volume Analysis. The relationship between the volume and rates of our interest-earning assets and interest-bearing liabilities influences our net interest income. The following table reflects the sensitivity of our interest income and interest expense to changes in volume and in prevailing interest rates during the periods indicated. Each category reflects the: (1) changes in volume (changes in volume multiplied by old rate); (2) changes in rate (changes in rate multiplied by old volume); (3) changes in rate/volume (change in rate multiplied by the change in volume); and (4) net change. The net change attributable to the combined impact of volume and rate has been allocated proportionally to the absolute dollar amounts of change in each.
For the Year Ended December 31, For the Year Ended December 31, 2005 vs. 2004 2004 vs. 2003 ------------------------------------------ ------------------------------------------- Increase (Decrease) Due to Increase (Decrease) Due to ------------------------------------------ ------------------------------------------- Rate/ Rate/ Volume Rate Volume Net Volume Rate Volume Net ------ ---- ------ --- ------ ---- ------ --- (In thousands) Interest and dividend income: Loans receivable, net......... $ 9,415 $ 49 $ 16 $ 9,480 $ 7,561 $ (3,735) $ (1,116) $ 2,710 Investments, mortgage-backed securities and other........ (495) 827 (51) 281 2,974 362 243 3,579 Other......................... 120 167 124 410 32 10 3 45 -------- -------- -------- -------- -------- -------- -------- -------- Total interest-earning assets.... $ 9,040 $ 1,043 $ 89 $ 10,171 $ 10,567 $ (3,363) $ (870) $ 6,334 ======== ======== ======== ======== ======== ======== ======== ======== Interest expense: Checking accounts............. $ 4 $ 27 $ 4 $ 35 $ 1 $ (29) $ (2) $ (30) Savings and club accounts..... (26) - - (26) (12) (144) 5 (151) Money market accounts......... (230) 663 (56) 377 1,121 196 187 1,504 Certificate accounts.......... 1,748 1,249 362 3,359 (252) (923) 30 (1,145) FHLB advances................. 3,108 977 749 4,834 1,944 169 192 2,305 Stock subscriptions payable... - - (23) (23) - - 23 23 -------- -------- -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities .................. $ 4,604 $ 2,916 $ 1,036 $ 8,556 $ 2,802 $ (731) $ 435 $ 2,506 ======== ======== ======== ======== ======== ======== ======== ======== Change in net interest income.... $ 4,436 $ (1,873) $ (947) $ 1,615 $ 7,765 $ (2,632) $ (1,305) $ 3,828 ======== ======== ======== ======== ======== ======== ======== ========
Comparison of Operating Results for the Years Ended December 31, 2005 and December 31, 2004 Net Income. Net income increased by $290,000, to $4.5 million, for the year ended December 31, 2005, compared to $4.2 million for the year ended December 31, 2004, a 6.9% increase. The increase was attributable to a $1.6 million increase in net interest income and a $567,000 increase in other income, offset by a $368,000 increase in the provision for loan losses, a $1.4 million increase in other expenses and a $144,000 increase in income tax expense. Net Interest Income. Net interest income for the year ended December 31, 2005 was $24.8 million, compared to $23.2 million for last year, an increase of 7.0%. Total interest income increased by $10.2 million, to $46.6 million, while total interest expense increased by $8.6 million, to $21.8 million, for the year ended December 31, 2005 when compared to the prior year. This increase was attributable to management's growth strategy. The 27.9% increase in total interest income was primarily due to a $152.2 million, or 21.0%, increase in the average balance of interest-earning assets, combined with a 29 basis point increase in the average yield earned on these investments when compared to the prior year. The increase in interest-earning assets was a direct result of management's growth strategy. The increase in the average yield was primarily attributable to replacing lower yielding investment securities with higher yielding loans. Total interest expense increased 64.9%, to $21.8 million, for year ended December 31, 2005, compared to $13.2 million for the prior year. The increase resulted primarily from a $158.2 million, or 41 24.1%, increase in the average balance of interest-bearing liabilities, combined with a 66 basis point increase in the average cost of funds when compared to the prior year. The majority of the increase in the average balance of interest-bearing liabilities for 2005 was comprised of a $66.3 million, or 29.0%, increase in the average balance of certificates of deposit accounts and a $109.3 million, or 76.6%, increase in the average balance of advances from the FHLB. The increase in the average cost of interest-bearing liabilities was primarily attributable to the rising short-term interest rate environment, as well as a shift in the mix of deposits from lower-cost core deposits to higher-cost certificates of deposit. Provision for Loan Losses. The provision for loan losses increased by $368,000, or 24.7%, to $1.9 million for the year ended December 31, 2005, from $1.5 million for 2004. We allocate the allowance to various categories based on our classified assets, our historical loan loss experience and our assessment of the risk characteristics of each loan category and the relative month-end balances of each category. The ratio of allowance for loan losses to total loans was 0.78% at year-end 2005 and 2004. Total charge-offs amounted to $854,000 and recoveries amounted to $330,000 for a net charge-off amount of $524,000 for the year ended December 31, 2005. This represents an increase in net charge-offs of $185,000 when compared to the previous year. Other Income. Other income during the year ended December 31, 2005 totaled $3.9 million, compared to $3.3 million for the year ended December 31, 2004. This represents an increase of $567,000, or 17.3%. The increase was attributable to a $338,000 increase in commission income generated by SFSI and a $339,000 increase in the income on bank-owned life insurance, partially offset by a $77,000 decline in service charges and fees on deposit accounts and a $64,000 decline in income associated with investment security sales. Other Expenses. For the year ended December 31, 2005, other expenses totaled $19.8 million, compared to $18.4 million for the prior year, an increase of $1.4 million, or 7.5%. The increase was primarily attributable to salaries and benefits associated with the Company's growth strategy, which includes equity-based employee compensation plans, coupled with higher operating expenses associated with a larger branch network. Income Tax Expense. Income tax expense increased by $144,000, or 6.0%, during the year ended December 31, 2005 when compared to the year ended December 31, 2004, reflecting higher income for the 2005 period. Comparison of Operating Results for the Years Ended December 31, 2004 and December 31, 2003 Net Income. Net income increased by $791,000, to $4.2 million, for the year ended December 31, 2004, compared to $3.4 million for the year ended December 31, 2003, a 23.2% increase. The increase was primarily attributable to a $3.8 million increase in net interest income and a $650,000 increase in other income, offset by a $377,000 increase in the provisions for loan losses, a $2.8 million increase in other expenses and a $505,000 increase in income tax expense as a result of higher earnings. Net Interest Income. Net interest income for the year ended December 31, 2004 was $23.2 million compared, to $19.4 million for 2003, an increase of 19.8%. Total interest income increased by $6.3 million, to $36.4 million, while total interest expense increased by $2.5 million, to $13.2 million, for the year ended December 31, 2004 when compared to the prior year. This increase was attributable to management's growth strategy, including the investing of the proceeds from the additional capital raised in the second-step mutual-to-stock conversion. The 21.1% increase in total interest income was primarily due to a $206.3 million, or 39.8%, increase in the average balance of interest-earning assets, offset by a 78 basis point decrease in the 42 average yield earned on these investments when compared to the prior year. The increase in interest-earning assets was a direct result of management's growth strategy, which included investing the capital raised in the second-step mutual-to-stock conversion. The decrease in the average yield was primarily attributable to lower market interest rates on loans originated to replace higher yielding loans that were repaid by the borrowers. The 23.5% increase in total interest expense resulted primarily from a $148.5 million, or 29.3%, increase in the average balance of interest-bearing liabilities, offset by a 10 basis point decrease in the average cost of funds when compared to the prior year. The majority of the increase in the average balance of interest-bearing liabilities for 2004 was comprised of a $76.8 million, or 93.8%, increase in the average balance of money market accounts and a $75.1 million, or 111.1%, increase in the average balance of advances from the FHLB. The decrease in the average cost of interest-bearing liabilities was primarily attributable to pricing strategies and lower market interest rates. Provision for Loan Losses. The provision for loan losses increased by $377,000, or 33.8%, to $1.5 million, for the year ended December 31, 2004, from $1.1 million for 2003. We allocate the allowance to various categories based on our classified assets, our historical loan loss experience and our assessment of the risk characteristics of each loan category and the relative month-end balances of each category. The ratio of allowance for loan losses to total loans without recourse was 0.78% at year-end 2004, an increase of 3 basis points over the year ended December 31, 2003. Total charge-offs amounted to $773,000 and recoveries amounted to $434,000 for a net charge-off amount of $339,000 for the year ended December 31, 2004. This represented a decrease in net charge-offs of $556,000 when compared to the previous year. The positive trend was attributable to the aging of the indirect automobile loans acquired from the former First Bank of Central Jersey. Other Income. Other income during the year ended December 31, 2004 totaled $3.3 million, compared to $2.6 million for the year ended December 31, 2003. This represented an increase of $650,000, or 24.7%. The increase was attributable to a $469,000 increase in charges and fees on deposit accounts and a $400,000 increase in commission income generated by SFSI, offset by a $136,000 decline in income associated with loan and investment security sales. Other Expenses. For the year ended December 31, 2004, other expenses totaled $18.4 million, compared to $15.6 million for the prior year, an increase of $2.8 million, or 18.0%. The increase was primarily attributable to wages and benefits associated with the Company's growth strategy, which includes equity-based employee compensation plans, coupled with an increase in audit and professional expenses. Income Tax Expense. Income tax expense increased by $505,000, or 26.4%, during the year ended December 31, 2004 when compared to the year ended December 31, 2003, reflecting higher income for the 2004 period. Liquidity and Capital Resources We maintain liquid assets at levels we consider adequate to meet liquidity needs. The liquidity of a savings institution reflects its ability to provide funds to meet loan requests, accommodate possible outflows in deposits, fund current and planned expenditures and take advantage of market opportunities in connection with asset and liability management objectives. Funding of loan requests, providing for liability outflows, and management of interest rate fluctuations require continuous analysis in order to match the maturities of earning assets with specific types of deposits and borrowings. Savings institution liquidity is normally considered in terms of the nature and mix of the savings institution's sources and uses of funds 43 Our primary sources of liquidity are deposits, scheduled amortization and prepayment of loans and mortgage-backed securities. In addition, we invest excess funds in overnight federal funds investments, which provide liquidity. Our cash and cash equivalents, defined as cash and deposits in other financial institutions with original maturities of three months or less, totaled $6.6 million at December 31, 2005. To a lesser extent, the earnings and funds provided from our operating activities are a source of liquidity, as well. Liquidity management is both a daily and long-term function of business management. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. If we require funds beyond our ability to generate them internally, we have the ability to obtain advances from the FHLB, which provides an additional source of funds. At December 31, 2005, our borrowing limit with the FHLB was $255.7 million, excluding repurchase agreement advances, subject to collateral requirements. At December 31, 2005, we had $160.8 million of FHLB borrowings outstanding and $105.8 million in repurchase agreement advances. We are not aware of any trends, events or uncertainties that will have, or are reasonably likely to have, a material effect on our liquidity, capital or operations, nor are we aware of any current recommendation by regulatory authorities, which, if implemented, would have a material effect on liquidity, capital or operations. The total amount of our commitments to extend credit for mortgage and consumer loans as of December 31, 2005 was $79.1 million, excluding commitments on unused lines of credit, which totaled $25.4 million. We intend to grow the Bank's branch network either through opening or acquiring branch offices. Three new branch offices and the relocation of one branch are planned for 2006. We also intend to actively consider the acquisition of local financial institutions as a means to expand our banking operations. We do not, however, have any current understandings, agreements or arrangements for the expansion of our business other than opening new branch office locations. The following table discloses our contractual obligations as of December 31, 2005.
Less Than After Total 1 Year 1-3 Years 4-5 Years 5 Years -------- -------- --------- --------- ------- Certificates of deposit............... $366,461 $269,116 $ 86,438 $10,538 $ 369 Other borrowed funds (1).............. 266,600 135,800 85,100 18,000 27,700 Rentals under operating leases........ 12,227 970 1,849 1,593 7,815 -------- -------- ------- ------ ------- Total.............................. $645,288 $405,886 $173,387 $30,131 $35,884 ======== ======== ======= ====== =======
- ------------------ (1) At December 31, 2005, other borrowed funds consisted of FHLB advances. Our borrowing limit with the FHLB was $255.7 million, excluding repurchase agreement advances, subject to collateral requirements, consisting of an overnight line of credit of $61.9 million, an adjustable rate line of credit of $61.9 million and a regular advance limit of $131.9 million. The following table discloses our commitments as of December 31, 2005.
Total Amounts Less Than Over Committed 1 Year 1-3 Years 4-5 Years 5 Years --------- ------ --------- --------- ------- Lines of credit (1)...................... $ 25,449 $ 58 $1,009 $ 334 $ 24,048 Other commitments to extend credit (1).. 79,071 8,370 - 27,442 43,259 -------- ------- ------ ------- -------- Total................................ $104,520 $ 8,428 $1,009 $27,776 $ 67,307 ======== ======= ====== ======= ========
- ------------------ (1) Represents amounts committed to customers. 44 For additional information about cash flows from operating, financing and investing activities, see the Consolidated Statements of Cash Flows. Impact of Inflation and Changes Prices The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations, primarily those at the Bank. Unlike most industrial companies, nearly all of the assets and liabilities of the Bank are financial. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- Management of Interest Rate Risk and Market Risk Qualitative Analysis. Because the majority of our interest-earning assets and interest-bearing liabilities are sensitive to changes in interest rates, a significant form of market risk for the Bank is interest rate risk, or changes in interest rates. We are vulnerable to an increase in interest rates to the extent that interest-bearing liabilities mature or re-price more rapidly than interest-earning assets. Our assets include long-term, fixed-rate loans and investments, while our primary sources of funds are deposits and borrowings with substantially shorter maturities. Although having interest-bearing liabilities that re-price more frequently than interest-earning assets is generally beneficial to net interest income during a period of declining interest rates, this type of asset/liability mismatch is generally detrimental during periods of rising interest rates. The Board of Directors has established an Asset/Liability Management Committee and Budget Committee, both of which consist of Directors Scott (Chairman), De Perez, Fiore, Gibbons and Putvinski. The Asset/Liability Management 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 Budget Committee generally meets during the fourth quarter each year, with the goal of developing an annual business and operating plan for presentation to the full Board. 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; 45 o lengthen the maturities of time deposits and borrowings when it would be cost effective through the aggressive pricing and promotion of certificates of deposits and utilization of FHLB advances; o increase core deposits (i.e., checking, savings and money market accounts), which tend to be less interest rate sensitive; and o purchase intermediate and adjustable-rate investment securities that provide a stable cash flow, thereby providing investable funds in varying interest rate cycles. Quantitative Analysis. Management actively monitors its interest rate risk exposure. The Bank's objective is to maintain a consistent level of profitability within acceptable risk tolerances across a broad range of potential interest rate environments. The Bank uses the OTS Net Portfolio Value (NPV) Model to monitor its exposure to interest rate risk, which calculates changes in net portfolio value. Reports generated from assumptions provided and modified by management are reviewed by the Asset/Liability Management Committee and reported to the Board of Directors quarterly. The Interest Rate Sensitivity of Net Portfolio Value Report shows the degree to which balance sheet line items and the net portfolio value are potentially affected by a 100 to 300 basis point (1/100th of a percentage point) upward and downward shift (shock) in the Treasury yield curve. The following table presents the Bank's interest rate risk exposure as measured by the OTS NPV Model as of December 31, 2005. The net portfolio value is calculated by the OTS, based on information provided by the Bank. At December 31, 2005, the Bank was in compliance with the interest rate risk limits established by the Board of Directors, as set forth below:
NPV as % of Net Portfolio Value (NPV) Present Value of Assets ------------------------- ------------------------ Basis Changes in Rates $ Amount $ Change % Change NPV Ratio Point Change - ---------------- -------- -------- -------- --------- ------------ (Dollars in thousands) +200 basis points...... 75,531 (26,211) (26) 8.03% (238) +100 basis points...... 89,067 (12,674) (12) 9.28% (113) 0 basis points......... 101,741 - - 10.41% - - -100 basis points...... 112,060 10,319 10 11.28% 87 - -200 basis points...... 118,970 17,228 17 11.81% 140
- ------------------ The +300 and -300 basis points scenarios are not shown due to the prevailing interest rate environment. Future interest rates, or their effect on NPV or net interest income, are not predictable. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments and deposit run-offs, and should not be relied on as indicative of actual results. Certain shortcomings are inherent in this type of computation. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react at different times and in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawals could deviate significantly from those assumed in making calculations set forth above. Additionally, an increased credit risk may result as the ability of many borrowers to service their debts may decrease in the event of an interest rate increase. 46 Item 8. Financial Statements and Supplementary Data - --------------------------------------------------- Report on Management's Assessment of Internal Control over Financial Reporting. The Company is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management's best estimates and judgments. We, as management of the Company, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Management assessed the Company's system of internal control over financial reporting as of December 31, 2005, in relation to criteria for effective internal control over financial reporting as described in "Internal Control - Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2005, the Company's system of internal control over financial reporting is effective and meets the criteria of the "Internal Control - Integrated Framework." Grant Thornton LLP, independent registered public accounting firm, has issued their report on management's assessment of the Company's internal control over financial reporting. /s/John S. Fiore /s/A. Richard Abrahamian - ------------------------ ----------------------------- John S. Fiore A. Richard Abrahamian President and Senior Vice President and Chief Executive Officer Chief Financial Officer February 22, 2006 February 22, 2006 47 Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders of Synergy Financial Group, Inc. We have audited management's assessment, included in the accompanying Report on Management's Assessment of Internal Control over Financial Reporting, that Synergy Financial Group, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Synergy Financial Group, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Synergy Financial Group, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, Synergy Financial Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 48 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Synergy Financial Group, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005 and our report dated February 22, 2006 expressed an unqualified opinion on those financial statements. /s/Grant Thornton LLP Philadelphia, Pennsylvania February 22, 2006 49 Report of Independent Registered Public Accounting Firm - ------------------------------------------------------- Board of Directors and Shareholders of Synergy Financial Group, Inc. We have audited the accompanying consolidated balance sheets of Synergy Financial Group, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Synergy Financial Group, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Synergy Financial Group, Inc.'s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 22, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of internal control over financial reporting and an unqualified opinion on the effectiveness of internal control over financial reporting. /s/Grant Thornton LLP Philadelphia, Pennsylvania February 22, 2006 50 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands)
December 31, ---------------------- 2005 2004 --------- --------- ASSETS Cash and amounts due from banks .............................. $ 4,635 $ 4,687 Interest-bearing deposits with banks ......................... 1,948 1,759 --------- --------- Cash and cash equivalents .................................... 6,583 6,446 Investment securities available-for-sale, at fair value ...... 85,319 134,360 Investment securities held-to-maturity (fair value of $93,575 and $111,154, respectively) ....................... 95,621 110,584 Federal Home Loan Bank of New York stock, at cost ............ 13,263 10,771 Loans receivable, net ........................................ 733,183 561,687 Accrued interest receivable .................................. 3,313 2,751 Property and equipment, net .................................. 18,570 16,814 Cash surrender value of bank-owned life insurance ............ 13,138 12,637 Other assets ................................................. 4,897 4,627 --------- --------- Total assets ............................................ $ 973,887 $ 860,677 ========= ========= LIABILITIES Deposits ..................................................... $ 606,471 $ 538,916 Other borrowed funds ......................................... 266,600 212,414 Advance payments by borrowers for taxes and insurance ........ 2,215 1,702 Accrued interest payable on advances ......................... 611 385 Dividends payable ............................................ 623 498 Other liabilities ............................................ 2,117 2,720 --------- --------- Total liabilities ....................................... 878,637 756,635 --------- --------- 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 - 12,471,481 in 2005 and 12,452,011 in 2004 Outstanding - 11,545,881 in 2005 and 12,452,011 in 2004 ... 1,247 1,245 Additional paid-in capital ................................... 85,959 86,177 Retained earnings ............................................ 32,794 30,603 Unearned ESOP shares ......................................... (5,282) (5,962) Unearned RSP compensation .................................... (2,567) (3,391) Treasury stock acquired for the RSP, at cost: 363,037 in 2005 and 387,043 in 2004 ............................... (4,124) (4,343) Treasury stock, at cost: 925,600 in 2005 and -0- in 2004 ..... (11,426) - Accumulated other comprehensive loss, net .................... (1,351) (287) --------- --------- Total stockholders' equity .............................. 95,250 104,042 --------- --------- Total liabilities and stockholders' equity .............. $ 973,887 $ 860,677 ========= =========
The accompanying notes are an integral part of these statements. 51 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per share data)
For the year ended December 31, ------------------------------- 2005 2004 2003 -------- -------- -------- Interest income Loans, including fees .............................. $ 37,738 $ 28,258 $ 25,548 Investment securities .............................. 8,261 7,980 4,401 Other .............................................. 572 162 117 -------- -------- -------- Total interest income ............................ 46,571 36,400 30,066 Interest expense Deposits ........................................... 12,859 9,114 8,936 Other borrowed funds ............................... 8,889 4,078 1,750 -------- -------- -------- Total interest expense ........................... 21,748 13,192 10,686 Net interest income before provision for loan losses ...................... 24,823 23,208 19,380 -------- -------- -------- Provision for loan losses ............................. 1,860 1,492 1,115 -------- -------- -------- Net interest income after provision for loan losses ...................... 22,963 21,716 18,265 -------- -------- -------- Other income Service charges and other fees on deposit accounts ................................. 2,105 2,182 1,713 Net gains on sales of mortgage loans ............... - - 18 Net (losses) gains on sales of investment securities (26) 38 156 Commissions ........................................ 855 517 118 Other .............................................. 917 547 629 -------- -------- -------- Total other income ............................... 3,851 3,284 2,634 Other expenses Salaries and employee benefits ..................... 10,801 9,948 7,739 Premises and equipment ............................. 3,807 3,800 3,757 Occupancy .......................................... 2,245 1,911 1,904 Professional services .............................. 796 703 482 Advertising ........................................ 975 822 794 Other operating .................................... 1,137 1,197 900 -------- -------- -------- Total other expenses ............................. 19,761 18,381 15,576 Income before income tax expense ................... 7,053 6,619 5,323 -------- -------- -------- Income tax expense .................................... 2,560 2,416 1,911 -------- -------- -------- Net income ....................................... $ 4,493 $ 4,203 $ 3,412 ======== ======== ======== Per share of common stock Basic earnings per share ........................... $ 0.41 $ 0.38 $ 1.05 ======== ======== ======== Diluted earnings per share ......................... $ 0.40 $ 0.37 $ 1.05 ======== ======== ======== Basic weighted average shares outstanding .......... 10,911 11,009 3,235 ======== ======== ======== Diluted weighted average shares outstanding ........ 11,306 11,276 3,260 ======== ======== ========
The accompanying notes are an integral part of these statements. 52 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity (Dollars in thousands, except share amounts)
Treasury Accumulated Common stock Unearned stock comprehensive ---------------- Additional Unearned RSP acquired income Shares Par paid-in- Retained ESOP compen- for the Treasury (loss), issued value capital earnings shares sation RSP stock net TOTAL - ------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2003.......... 3,344,252 $334 $13,644 $ 24,446 $(1,125) $ - $ - $ - $ 573 $37,872 Net Income............ - - - 3,412 - - - - - 3,412 Other comprehensive income, net of reclassification adjustment and taxes............... - - - - - - - - (722) (722) ------ ------- Total comprehensive income................. 2,690 ------- Common stock held by ESOP committed to be released (3,879 shares)....... - - 174 - 116 - - - - 290 Common stock awarded through RSP Plan (56,685 shares). - - 1,190 - - (1,190) - - - - Compensation recognized under RSP Plan............. - - - - - 179 - - - 179 Common stock held by RSP (5,000 shares)... - - - - - - (103) - - (103) BALANCE AT DECEMBER 31, 2003......... 3,344,252 334 15,008 27,858 (1,009) (1,011) (103) - (149) 40,928 --------- ---- ------- -------- ------- ------- -------- --------- ------ ------- Net income............. - - - 4,203 - - - - - 4,203 Other comprehensive loss, net of reclassification adjustment and taxes. - - - - - - - - (138) (138) ------ ------- Total comprehensive income.................. 4,065 ------- Net proceeds of stock offering and issuance of common stock......... 9,107,759 911 68,348 - - - - - - 69,259 Dividends declared..... - - - (1,458) - - - - - (1,458) Common stock acquired by ESOP (562,873 shares).............. - - - - (5,628) - - - - (5,628) Common stock held by ESOP committed to be released (99,624 shares)...... - - 372 - 675 - - - - 1,047 Common stock issued by RSP Plan (41,573 shares).............. - - (408) - - - 408 - - - Common stock awarded through RSP Plan (281,437 shares)..... - - 2,857 - - (2,857) - - - -
53
Treasury Accumulated Common stock Unearned stock comprehensive ------------------ Additional Unearned RSP acquired income Shares Par paid-in- Retained ESOP compen- for the Treasury (loss), issued value capital earnings shares sation RSP stock net TOTAL --------------------------------------------------------------------------------------------------- Compensation recognized under RSP Plan.............. - - - - - 477 - - - 477 Common stock repurchased for RSP plans (410,001 shares)............ - - - - - - (4,648) - - (4,648) BALANCE AT DECEMBER 31, 2004..... 12,452,011 1,245 86,177 30,603 (5,962) (3,391) (4,343) - (287) 104,042 ========== ====== ======= ======= ======= ======= ======= ======= ======== Net income.................... - - - 4,493 - - - - - 4,493 Other comprehensive loss, net of reclassification adjustment and taxes........ - - - - - - - - (1,064) (1,064) ------- -------- Total comprehensive income....... 3,429 -------- Dividends declared............ - - - (2,302) - - - - - (2,302) Common stock issued for options exercised (19,470 shares)............. 19,470 2 114 - - - - - - 116 Common stock held by ESOP committed to be released (99,624 shares).... - - 542 - 680 - - - - 1,222 Common stock issued by RSP Plan (87,857 shares)........ - - (984) - - - 984 - - - Other stock compensation plan activity, including tax benefits...... - - 110 - - 138 - - - 248 Compensation recognized under RSP Plan.............. - - - - - 686 - - - 686 Common stock repurchased for RSP plans (63,851 shares)... - - - - - - (765) - - (765) Treasury stock purchased (925,600 shares)............ - - - - - - - (11,426) - (11,426) BALANCE AT DECEMBER 31, 2005..... 12,471,481 $1,247 $85,959 $32,794 $(5,282) $(2,567) $(4,124) $(11,426) $(1,351) $ 95,250 ========== ====== ======= ======= ======= ======= ======= ======== ======= ========
The accompanying notes are an integral part of this statement. 54 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands)
For the year ended December 31, ----------------------------------- 2005 2004 2003 --------- --------- --------- Operating activities Net income ........................................... $ 4,493 $ 4,203 $ 3,412 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization ...................... 1,516 1,442 1,878 Provision for loan losses .......................... 1,860 1,492 1,115 Deferred income taxes .............................. (1,316) (395) (456) Amortization of deferred loan fees ................. (108) (27) 101 Amortization of premiums on investment securities .. 864 1,374 1,788 Net losses (gains) on sales of investment securities 26 (38) (156) Mortgage loans originated for sale ................. - - 2,307 Mortgage loan sales ................................ - - (2,325) Release of ESOP shares ............................. 1,222 1,047 290 Compensation under RSP plan ........................ 686 477 179 Increase in accrued interest receivable ............ (562) (730) (388) Decrease (increase) in other assets ................ 1,293 (241) (933) (Decrease) increase in other liabilities ........... (603) 1,461 (342) Increase in cash surrender value of bank-owned life insurance ........................ (501) (162) (365) Increase (decrease) in accrued interest payable on advances ..................... 226 266 (46) --------- --------- --------- Net cash provided by operating activities ........ 9,096 10,169 6,059 --------- --------- --------- Investing activities Purchase of investment securities held-to-maturity ... (12,536) (93,010) (18,561) Purchase of investment securities available-for-sale . (1,911) (63,478) (119,495) Maturity and principal repayments of investment securities held-to-maturity ........................ 27,310 14,447 19,087 Maturity and principal repayments of investment securities available-for-sale ...................... 36,379 51,287 53,295 Purchase of property and equipment ................... (3,272) (636) (1,313) Purchases of FHLB Stock .............................. (2,492) (7,127) (1,788) Purchase of bank-owned life insurance ................ - (10,000) - Proceeds from sale of investment securities held to maturity ................................... - 883 - Proceeds from sale of investment securities available-for-sale ................................. 12,808 443 9,030 Loan originations, net of principal repayments ....... (156,650) (98,102) (87,868) Purchase of loans .................................... (16,597) (30,465) (6,486) Cash consideration paid to acquire First Bank of Central Jersey .................................. - - (2,269) Cash and equivalents acquired from First Bank of Central Jersey .................................. - - 7,773 --------- --------- --------- Net cash used in investing activities ............ (116,961) (235,758) (148,595) --------- --------- ---------
55
For the year ended December 31, ----------------------------------- 2005 2004 2003 --------- --------- --------- Financing activities Net increase in deposits .................... $ 67,555 $ 65,381 $ 67,137 Increase (decrease) in short-term Federal Home Loan Bank Advances ........... 55,625 (7,204) 35,729 Proceeds from long-term Federal Home Loan Bank advances ........................ 40,500 155,650 10,000 Repayments of long-term Federal Home Loan Bank advances ........................ (41,939) (8,905) (9,311) Increase in advance payments by borrowers for taxes and insurance ................... 513 120 168 Dividends paid .............................. (2,177) (959) - (Decrease) increase in stock subscriptions payable ..................... - (38,322) 38,322 Net proceeds from issuance of common stock .. - 69,259 - Purchase of common stock for ESOP ........... - (5,629) - Purchase of treasury stock .................. (11,426) - - Proceeds from stock options exercised ....... 116 - - Purchase of treasury stock for the RSP Plan . (765) (4,648) (103) --------- --------- --------- Net cash provided by financing activities 108,002 224,743 141,942 --------- --------- --------- Net (decrease) increase in cash and cash equivalents .................. 137 (846) (594) Cash and cash equivalents at beginning of year . 6,446 7,292 7,886 --------- --------- --------- Cash and cash equivalents at end of year ....... $ 6,583 $ 6,446 $ 7,292 ========= ========= ========= Supplemental disclosure of cash flow information Cash paid during the year for income taxes .. $ 3,624 $ 2,555 $ 1,563 ========= ========= ========= Interest paid on deposits and borrowed funds $ 21,973 $ 12,903 $ 10,732 ========= ========= =========
The accompanying notes are an integral part of these statements. 56 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- As part of a reorganization completed in 2001 and described more fully in Note B, Synergy Financial Group, Inc. (the "Company") was formed as a federally-chartered corporation and parent of Synergy Bank (the "Bank"), formerly known as Synergy Federal Savings Bank. On August 27, 2003, the Company was reorganized as a New Jersey corporation and upon completion of its January 20, 2004 second step stock conversion became a full stock corporation. The Company is the parent of Synergy Financial Services, Inc. and the Bank, which has a wholly-owned subsidiary known as Synergy Capital Investments, Inc. The Bank has twenty office locations, including its main office, and provides a range of financial services to individual and business customers through its branch network located in Middlesex, Monmouth, Morris and Union counties in New Jersey. Although the Bank offers numerous services, its lending activity has concentrated on residential, home equity, multi-family / non-residential, automobile, commercial real estate-secured and commercial loans. The Bank competes with other banking and financial institutions in its primary market communities. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and loans. Such institutions, as well as consumer financial and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders. The Bank is subject to regulations by certain federal agencies and, accordingly, it is periodically examined by those regulatory authorities. As a consequence of the regulation of banking activities, the Bank's business is particularly susceptible to being affected by future federal legislation and regulations. Basis of Financial Statement Presentation - ----------------------------------------- The accounting policies followed by the Company conform to accounting principles generally accepted in the United States of America and to predominant practice within the banking industry. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank and its subsidiary Synergy Capital Investments, Inc. and Synergy Financial Services, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation. 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. 57 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 Cash and Cash Equivalents - ------------------------- The Company considers all cash on hand and in banks, and highly liquid investment securities debt instruments with original maturities of three months or less, to be cash equivalents. Investment Securities - --------------------- Investment securities are classified as held-to-maturity when the Bank has the ability and intent to hold those securities to maturity. These investment securities are carried at cost, adjusted for amortization of premium and accretion of discount over the term of the security using the interest method. At the time of purchase, the Bank makes a determination as to whether or not it will hold the investment securities to maturity based upon an evaluation of the probability of the occurrence of future events. Investment securities which are held for indefinite periods of time, which management intends to use as part of its asset/liability strategy, or which may be sold in response to changes in interest rates, changes in prepayment risk, increases in capital requirements, or other similar factors are classified as available-for-sale and are carried at fair value. Net unrealized gains and losses for such securities, net of tax, are required to be recognized as a separate component of shareholders' equity and excluded from determination of net income. Gains or losses on disposition are based on the net proceeds and cost of the securities sold, adjusted for amortization of premiums and accretion of discounts, using the specific identification method. The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), as amended, as of January 1, 2001. The statement requires the Company to recognize all derivative instruments at fair value as either assets or liabilities. Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. The Bank does not have any derivative instruments at December 31, 2005, 2004 or 2003. In determining if and when a market value below amortized cost is other-than-temporary for its investment securities, the Company considers the duration and severity of the unrealized loss, the financial condition and near term prospects of the issuers, and the Company's intent and ability to hold investments to allow for a recovery in market value in a reasonable period of time. When such a decline in value is deemed to be other-than-temporary, the Company recognizes an impairment loss in the current period operating results to the extent of the decline. Mortgage Loans Held-For-Sale - ---------------------------- Mortgages held for sale are carried at the lower of aggregate cost or market value with market determined on the basis of open commitments for committed loans. For uncommitted loans, market is determined on the basis of current delivery prices in the secondary mortgage market. Any resulting unrealized losses are included in other income. The Bank accounts for its transfers and servicing of financial assets in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 revises the standards for accounting for the securitizations and other transfers of financial assets and collateral. Transfers of financial assets for which the Bank has surrendered control of the financial assets are accounted for as sales to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. Retained interests in a sale or securitization of financial assets are measured at the date of transfer by allocating the previous carrying amount between the assets transferred and based on their relative estimated fair values. The fair values of retained servicing rights 58 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 and any other retained interests are determined based on the present value of expected future cash flows associated with those interests and by reference to market prices for similar assets. There were no transfers of financial assets to related or affiliated parties. At December 31, 2005, 2004 and 2003, the Bank's servicing loan portfolio approximated $5.8 million, $6.2 million and $8.1 million, respectively. As of December 31, 2005, 2004 and 2003, the Bank has not recorded mortgage serving assets due to the immateriality of amount that would have been capitalized based upon the limited amount of assets serviced by the Bank. The Company adopted SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, on July 1, 2003. SFAS No. 149 clarifies or amends SFAS No. 133 for implementation issues raised by constituents or includes the conclusions reached by the Financial Accounting Standards Board ("FASB") on certain FASB Staff Implementation Issue. Statement 149 also amends SFAS No. 133 to require a lender to account for loan commitments related to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company periodically enters into commitments with its customers for loans which it intends to sell in the future. The adoption of SFAS No. 149 did not have a material impact on the Company's financial position or results of operations. The Securities and Exchange Commission ("SEC") recently released Staff Accounting Bulletin ("SAB") No. 105, Application of Accounting Principles to Loan Commitments. SAB 105 provides guidance about the measurement of loan commitments recognized at fair value under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB No. 105 also requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies. SAB No. 105 is effective for all loan commitments accounted for as derivatives that are entered into after September 30, 2004. The adoption of SAB No. 105 did not have a material effect on the Company's consolidated financial statements. Loans and Allowance for Loan Losses - ----------------------------------- Loans that management has the intent and ability to hold until maturity are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated based upon the principal amount outstanding. The Company defers and amortizes certain origination and commitment fees, and certain direct loan origination costs over the contractual life of the related loans. This results in an adjustment of the related loan's yield. Generally, loans are placed on a non-accrual status when they are more than ninety days delinquent. Additionally, accrual of interest is stopped on a loan when management believes, after considering economic and business conditions and collection efforts that the borrower's financial condition is such that collection of interest is doubtful. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 59 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 The Bank accounts for its impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. Accordingly, a non-residential real estate loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reason for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogenous loans (residential mortgages and consumer installment loans) are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures. We evaluate these credits based on the pool approach and apply an allowance for loan losses based on the historical loss experience for the pool. Loss experience, which is usually determined by reviewing the historical loss (charge-off) rate for each pool over a designated time period, is adjusted for changes in trends and conditions. The Company adopted FASB Interpretation (FIN) 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, on January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. Financial letters of credit require the Company to make payment if the customer's financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Company to make payments if the customer fails to perform certain non-financial contractual obligations. The Company previously did not record a liability when guaranteeing obligations unless it became probable that the Company would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the Company issues or modifies subsequent to December 31, 2004. At December 31, 2005, the Company was not contingently liable for any financial and performance letters of credit. It is the Bank's practice to generally hold collateral and/or obtain personal guarantees supporting any outstanding letter of credit commitments. In the event that the Bank is required to fulfill its contingent liability under a standby letter of credit, it could liquidate the collateral held, if any, and enforce the personal guarantee(s) held, if any, to recover all or a portion of the amount paid under the letter of credit. In 2001, the SEC issued SAB No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. SAB No. 102 provides guidance on the development, documentation and application of a systematic methodology for determining the allowance for loans and leases in accordance with U.S. GAAP and is effective upon issuance. SAB No. 102 did not have a material impact on the Company's financial position or results of operations. Concentration Risk - ------------------ The lending activities are concentrated in loans primarily secured by real estate located within the State of New Jersey. In addition, a moderate concentration of loans and deposits continue to be associated 60 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 with employees of the Bank's former credit union sponsor organization, a pharmaceutical research and manufacturing company. Premises and Equipment - ---------------------- Buildings, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization computed by the straight-line method over the estimated useful lives of the assets. On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. SFAS No. 144 changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. The adoption of this statement did not have an impact on the financial condition or results of operations of the Company. Goodwill and Intangible Assets - ------------------------------ The Company accounts for goodwill and intangible asset acquired in a business combination in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142 goodwill is not amortized; instead, the carrying value of goodwill is evaluated for impairment on an annual basis. Identifiable intangible assets are amortized over their useful lives and reviewed for impairment. The Bank has recorded two types of intangible assets associated with the purchase of First Bank of Central Jersey on January 10, 2003, a core deposit intangible of approximately $627,000 and goodwill of approximately $302,000. The core deposit intangible is being amortized over approximately 8 years. Amortization expense for the year ended December 31, 2005 was approximately $111,000. The estimated annual amortization expense for the next four years is $111,000 for 2006 through 2009. The carrying amount of goodwill as of December 31, 2005 was approximately $302,000. The Company did not identify any impairment on its outstanding goodwill and its identifiable intangible assets, from its most recent testing, for the year ended December 31, 2005. Income Taxes - ------------ The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are allowance for loan losses, deferred loan fees, deferred compensation, investment securities available for sale and the change in the value of the bank-owned life insurance. Other Real Estate Owned - ----------------------- Other real estate owned is recorded at the lower of cost or estimated fair market value less costs of disposal. When property is acquired, the excess, if any, of the loan balance over fair market value is charged to the allowance for possible loan losses. Periodically thereafter, the asset is reviewed for subsequent declines in the estimated fair market value. Subsequent declines, if any, and holding costs, as well as gains and losses on subsequent sale, are included in the consolidated statements of income. 61 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 Earnings Per Share - ------------------ Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or resulted in the issuance of common stock. These potentially dilutive shares would then be included in the weighted number of shares outstanding for the period using the treasury stock method. Shares issued and shares reacquired during any period are weighted for the portion of the period that they were outstanding. In computing both basic and diluted earnings per share, the weighted average number of common shares outstanding include Employee Stock Ownership Plan ("ESOP") shares previously allocated to participants and shares committed to be released for the allocation to participants and Restricted Stock Plan ("RSP") shares which have vested or have been allocated to participants. ESOP and RSP shares that have been purchased but not committed to be released have not been considered in computing basic and diluted earnings per share. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation for the years ended December 31, 2005, 2004 and 2003 (in thousands, except per share data):
As of December 31, 2005 --------------------------------------- Weighted Income average shares Per share (numerator) (denominator) amount ----------- ------------- ------ Basic earnings per share Income available to common stockholders.......... $ 4,493 10,911 $ 0.41 Effect of dilutive common stock equivalents...... 395 (.01) ------ ------ Diluted earnings per share Income available to common stockholders plus assumed conversions...................... $ 4,493 11,306 $ 0.40 ======= ====== ======
As of December 31, 2004 --------------------------------------- Weighted Income average shares Per share (numerator) (denominator) amount ----------- ------------- ------ Basic earnings per share Income available to common stockholders.......... $ 4,203 11,009 $ .38 Effect of dilutive common stock equivalents...... 267 (.01) ------ ------ Diluted earnings per share Income available to common stockholders plus assumed conversions...................... $ 4,203 11,276 $ 0.37 -====== ====== ======
62 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003
As of December 31, 2003 ----------------------------------------- Weighted Income average shares Per share (numerator) (denominator) amount ----------- ------------- ------ Basic earnings per share Income available to common stockholders.......... $ 3,412 3,235 $ 1.05 Effect of dilutive common stock equivalents...... 25 - ----- ------ Diluted earnings per share Income available to common stockholders plus assumed conversions...................... $ 3,412 3,260 $ 1.05 ======= ===== ======
Stock-Based Compensation - ------------------------ On April 22, 2003, stockholders' of the Company approved the 2003 Stock Option Plan and the 2003 Restricted Stock Plan. A total of 165,746 and 66,297 shares of common stock have been made available for granting under the Stock Option Plan and Restricted Stock Plan, respectively. During the year ended December 31, 2003, the Company granted 165,746 options to purchase common shares of the Company and issued 56,685 shares of restricted stock. Prior to April 22, 2003, the Company did not have a Stock Option Plan or a Restricted Stock Plan. As a result of the second step mutual-to-stock conversion, the shares made available for granting under the 2003 Stock Option Plan and Restricted Stock Plan converted to 617,086 and 211,031, respectively. At the Annual Meeting held on August 25, 2004 and reconvened on August 31, 2004, stockholders of the Company approved the Company's 2004 Stock Option Plan and the 2004 Restricted Stock Plan. A total of 703,591 and 281,436 shares of common stock have been made available for granting under the 2004 Stock Option Plan and 2004 Restricted Stock Plan, respectively. During the year ended December 31, 2004, the Company granted 694,569 options to purchase common shares of the Company and issued 277,283 shares of restricted stock. The Company's stock option plans and restricted stock plans are accounted for in accordance with the provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees and released interpretations. Accordingly, no compensation expense has been recognized for the stock option 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 ratable 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, the Company's net income and earnings per share for all expenses related to stock options and stock granted in our restricted stock plans would have been reduced to the pro forma amounts that follow (in thousands, except per share data): 63 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003
For the year ended December 31, ------------------------------- 2005 2004 2003 ------ ------ ------ Net income, as reported.......................... $4,493 $4,203 $3,412 Add expense recognized for the Restricted Stock Plan, net of related tax effect......... 439 305 107 Less total Stock Option and Restricted Stock Plan expense, determined under the fair value method, net of related tax effect............. (835) (699) (262) ------ ------ ------ Net income, pro forma....................... $4,097 $3,809 $3,257 ====== ====== ====== Basic earnings per share: As reported................................... $0.41 $0.38 $1.05 Pro forma..................................... $0.38 $0.35 $1.01 Diluted earnings per share: As reported................................... $0.40 $0.37 $1.05 Pro forma..................................... $0.36 $0.34 $1.00
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options price model with the following weighted average assumptions utilized for grants in 2005: dividend yield of 2.00%; expected volatility of 32.51%; risk-free interest rate of 3.83%; 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 2003: dividend yield of 0.00%; expected volatility of 29.44%; risk-free interest rate of 3.01%; and, expected life of five years. The Company has established an ESOP covering eligible employees with one year of service, as defined in the plan. The Company accounts for the ESOP in accordance with the American Institute of Certified Public Accountants' Statement of Position ("SOP") No. 93-6, Employers' Accounting for Employee Stock Ownership Plans. SOP No. 93-6 addresses the accounting for shares of stock issued to employees by an ESOP. SOP No. 93-6 requires that the employer record compensation expense in the amount equal to the fair value of shares committed to be released from the ESOP to employees. Compensation expense for the ESOP is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair market value of the shares during the year. The Company recognizes compensation expense ratably over the year for the ESOP shares to be allocated based upon the Company's current estimate of the number of shares expected to be allocated by the ESOP during each calendar year. The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in-capital. Segment Reporting - ----------------- SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the way business enterprises report information about operating segments in annual financial statements. The 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 / non-residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Bank as one operating segment. 64 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 Advertising Costs - ----------------- It is the Company's policy to expense advertising costs in the period in which they are incurred. Comprehensive Income - -------------------- Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are as follows (in thousands): For the year ended December 31, 2005 ------------------------------------ Before Tax Net of tax (expense) tax amount benefit amount ------ ------- ------ Unrealized gains (losses) on investment securities Unrealized holding gains (losses) arising during period. $ (1,699) $ 618 $ (1,081) Less reclassification adjustment for gains (losses) realized in net income......... (26) 9 (17) ------- ---- ------- Other comprehensive income gain (loss), net....... $ (1,673) $ 609 $ (1,064) ======== ===== ========
For the year ended December 31, 2004 For the year ended December 31, 2003 ------------------------------------ ------------------------------------ Before Tax Net of Before Tax Net of tax (expense) tax tax (expense) tax amount benefit amount amount benefit amount ------ ------- ------ ------ ------- ------ Unrealized gains (losses) on investment securities Unrealized holding gains (losses) arising during period. $ (179) $ 65 $ (114) $ (962) $ 343 $ (619) Less reclassification adjustment for gains (losses) realized in net income......... 38 (14) 24 156 (53) 103 ------- ----- ------ ------- ----- ------- Other comprehensive income gain (loss), net.......... $ (217) $ 79 $ (138) $(1,118) $ 396 $ (722) ======= ===== ====== ======= ===== =======
RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- Emerging Issues Task Force ("EITF") Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment's cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the Company began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in 65 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position ("FSP") to provide additional implementation guidance. In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed its staff to issue proposed FSP EITF 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, as final. The final FSP will supersede EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, and EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The final FSP (re-titled FSP FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments) will replace the guidance set forth in paragraphs 10-18 of Issue 03-1 with references to existing other-than temporary impairment guidance, such as FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, SEC Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equity Securities, and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. FASB Staff Position No. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (the "FSP"), was issued on November 3, 2005 and addresses the determination of when an investment is considered impaired; whether the impairment is other than temporary; and how to measure an impairment loss. The FSP replaces the impairment guidance in EITF Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations (principally SFAS No. 115 and SEC Staff Accounting Bulletin 59). Under the FSP, impairment losses must be recognized in earnings equal to the entire difference between the security's cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The Company does not expect that the application of the FSP will have a material impact on its financial condition, results of operations or financial statement disclosures. In December 2004, 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. The Company anticipates adopting SFAS No. 123(R) under the modified prospective method, in which future option grants and existing unvested options will be expensed through the income statement. On March 29, 2005, the SEC released 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. 66 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 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. In December 2004, the FASB issued SFAS 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions. This statement amends the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of non-monetary assets that do not have commercial substance. This Statement is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this statement did not have a material impact on the financial condition of the results of operations of the Company. In December 2003, the AICPA issued 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 adoption of this statement did not have a material impact on the financial condition or results of operations of the Company. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). In general, a variable interest entity ("VIE") is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain VIEs to be consolidated by the primary beneficiary if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. For public companies, the consolidation requirements of FIN 46 applied immediately to interest entities created after September 15, 2003. In December 2003, the FASB issued FIN 46R with respect to VIEs, which among other things revised the implementation date for small business filers to the first fiscal year or interim period ending after December 15, 2004, with the exception of Special Purpose Entities ("SPE"). The Bank currently has no SPEs. The adoption of this statement did not have a material impact on the financial condition or results of operations of the Company. 67 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 NOTE B - MHC REORGANIZATION AND STOCK OFFERING - ---------------------------------------------- Synergy, MHC (the "MHC") was a federally-chartered corporation organized in 2001 for the purpose of acquiring all of the capital stock of the former Synergy Financial Group, Inc. (the "Mid-tier Holding Company") upon completion of the Bank's reorganization from a mutual savings bank into a mutual holding company structure. The overall reorganization was a change in legal organization and form, not a change in enterprise. Specifically, SFAS No. 141, Business Combinations, excludes from the definition of business combination, any transfer by an enterprise of its net assets to a newly-formed corporate entity chartered by the existing enterprise and a transfer of net assets and an exchange of shares between enterprises under common control. Accordingly, absent classification as a business combination as defined under SFAS No. 141, the basis of the MHC's assets and liabilities subsequent to the reorganization will remain unchanged from the Bank's pre-existing historical basis. In 2002, the Company offered for sale 43.5% of the shares of its common stock in an offering fully subscribed for by eligible depositors of the Bank (the "Offering"). The remaining 56.5% of the Company's shares of common stock were issued to the MHC. The Offering was completed on September 17, 2002. Prior to that date, the Company had not engaged in any significant business. Completion of the Offering resulted in the issuance of 3,344,252 shares of common stock, 1,889,502 shares (56.5%) of which were issued to the MHC and 1,454,750 shares (43.5%) of which were sold to eligible depositors of the Bank at $10.00 per share. Costs related to the Offering (primarily marketing fees paid to an underwriting firm, professional fees, registration fees, and printing and mailing costs) aggregated approximately $687,000 and have been deducted to arrive at net proceeds of approximately $13,960,000 from the Offering. The Company contributed 43% of the net proceeds of the Offering to the Bank for general corporate use. The Company completed its second-step conversion from the mutual holding company form of organization to a full stock corporation (the "Conversion") on January 20, 2004. Upon completion of the conversion, Synergy, MHC and the former Mid-tier Holding Company were eliminated. The Company sold 7,035,918 shares of its common stock in the Conversion at $10.00 per share for an aggregate sales price of $70,359,180. In addition, each share of common stock held by the public stockholders of its former Mid-tier Holding Company was converted into 3.7231 shares of common stock of the Company, resulting in an aggregate of 5,416,093 exchange shares. Cash was issued in lieu of fractional shares. Accordingly, the Company had 12,452,011 total shares outstanding following the Conversion, which was the adjusted maximum of the estimated valuation range. Net proceeds from the offering were $69.2 million, reflecting total offering expenses of approximately $1.2 million, including total underwriter's fees and expenses of $425,000. The net proceeds have been applied as follows: (i) $45.0 million was used to make a capital contribution to the Bank, for general business purposes, including funding the origination of loans and investments in securities; (ii) $5.6 million was loaned to the Company's ESOP to enable the plan to buy 8% of the shares sold in the offering; and (iii) $18.6 million was retained by the Company as its initial capitalization to be used for general business purposes which may include investment in securities, repurchasing shares of the Company's common stock or paying cash dividends. A portion of the proceeds retained by the Company was invested in agency-issued mortgage-backed securities. 68 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 NOTE C - INVESTMENT SECURITIES - ------------------------------ The amortized cost, gross unrealized gains and losses, and fair value of the Bank's investment securities available for sale and held to maturity are as follows (in thousands):
December 31, 2005 --------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ---------- ---------- ---------- ---------- Available-for-sale U.S. government obligations............. $ 2,000 $ - $ (94) $ 1,906 Mortgage-backed securities FHLMC................................ 56,076 1 (1,331) 54,746 FNMA................................. 28,334 5 (612) 27,727 Equity securities....................... 1,000 - (60) 940 -------- ----- ------- -------- Total.............................. $ 87,410 $ 6 $(2,097) $ 85,319 ======== ===== ======= ======== Held-to-maturity Mortgage-backed securities FHLMC................................ $ 39,234 $ - $ (976) $ 38,258 FNMA................................. 53,469 4 (1,059) 52,414 GNMA................................. 2,908 11 (26) 2,893 Other debt securities................... 10 - - 10 -------- ----- ------- -------- Total.............................. $ 95,621 $ 15 $(2,061) $ 93,575 ======== ===== ======= ========
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 ======== ===== ===== ======== 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 ======== ===== ===== ========
The amortized cost and fair value of investment securities available-for-sale and held-to-maturity, by contractual maturity, at December 31, 2005 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 69 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003
Available-for-sale Held-to-maturity Amortized Fair Amortized Fair cost value cost value ---------- --------- --------- -------- Due in one year or less................. $ 109 $ 109 $ - $ - Due after one through five years........ 33,040 32,219 9,113 8,872 Due after five through ten years........ 4,831 4,658 42,906 41,701 Due after ten years..................... 48,430 47,393 43,592 42,992 Marketable equity securities and other.. 1,000 940 10 10 -------- --------- -------- -------- $ 87,410 $ 85,319 $ 95,621 $ 93,575 ======== ========= ======== ========
Proceeds from the sales of investment securities during the years ended December 31, 2005, 2004 and 2003 were $12,808,000, $1,326,000 and $9,030,000, respectively. Gross gains realized on those sales were $14,000, $38,000, and $156,000 for the years ended December 31, 2005, 2004 and 2003, respectively, and gross losses were $40,000, $0, and $0 for the years ended December 31, 2005, 2004 and 2003, respectively. As of December 31, 2005 and December 31, 2004, investment securities with a book value of $87,000 and $125,000, respectively, were pledged to secure public deposits and for other purposes as provided by law. The tables below indicate the length of time individual securities, both held-to-maturity and available-for-sale, have been in a continuous unrealized loss position at December 31, 2005 and 2004 (in thousands):
December 31, 2005 Less than 12 months 12 months or longer Total - ----------------- Number ------------------- ------------------- -------------------- of Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities securities value losses value losses value losses - ------------------------- ---------- ----- ------ ----- ------ ----- ------ U.S. Government agency securities..... 1 $ - $ - $ 1,906 $ (94) $ 1,906 $ (94) Mortgage-backed securities............ 167 92,048 (1,465) 80,617 (2,539) 172,665 (4,004) --- ------- ------- ------- ------- -------- ------- Subtotal, debt investment securities.. 168 92,048 (1,465) 82,523 (2,633) 174,571 (4,098) Marketable equity securities.......... 1 - - 940 (60) 940 (60) --- ------- ------- ------- ------- -------- ------- Total temporarily impaired investment securities............ 169 $92,048 $(1,465) $83,463 $(2,693) $175,511 $(4,158) === ======= ======= ======= ======= ======== =======
December 31, 2004 Less than 12 months 12 months or longer Total - ----------------- Number ------------------- ------------------- -------------------- of Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities securities value losses value losses value losses - ------------------------- ---------- ----- ------ ----- ------ ----- ------ U.S. Government agency securities..... 1 $ 1,942 $ (57) $ - $ - $ 1,942 $ (57) Mortgage-backed securities............ 89 87,698 (786) 22,737 (282) 110,435 (1,068) --- ------- ----- ------- ----- -------- ------- Subtotal, debt investment securities.. 90 89,640 (843) 22,737 (282) 112,377 (1,125) Marketable equity securities.......... 1 955 (45) - - 955 (45) --- ------- ----- ------- ----- -------- ------- Total temporarily impaired investment securities............ 91 $90,595 $(888) $22,737 $(282) $113,332 $(1,170) === ======= ===== ======= ===== ======== =======
Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities that are impaired as of December 31, 2005 and 2004. 70 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 NOTE D - LOANS RECEIVABLE - ------------------------- Major grouping of loans are as follows (in thousands): December 31, ----------------------------------- 2005 2004 2003 --------- --------- --------- Mortgages: One- to four-family residential... $ 243,188 $ 243,772 $ 224,734 Multi-family / non-residential.... 271,600 154,226 89,847 Construction ..................... 9,525 5,792 2,169 Automobile .......................... 185,812 146,148 109,277 Commercial .......................... 24,794 12,208 7,838 Other consumer ...................... 3,830 3,720 3,816 --------- --------- --------- 738,749 565,866 437,681 Deferred loan fees and costs ........ 197 248 178 Allowance for loan losses ........... (5,763) (4,427) (3,274) --------- --------- --------- $ 733,183 $ 561,687 $ 434,585 ========= ========= ========= A summary of the activity in the allowance for loan losses is as follows (in thousands): Year ended December 31, ----------------------------- 2005 2004 2003 ------- ------- ------- Balance, beginning of period....... $ 4,427 $ 3,274 $ 2,231 Provision for loan losses ......... 1,860 1,492 1,115 Acquisition of First Bank ......... - - 823 Recoveries ........................ 330 434 441 Loans charged-off ................. (854) (773) (1,336) ------- ------- ------- Balance, end of period ............ $ 5,763 $ 4,427 $ 3,274 ======= ======= ======= The Bank defines impaired loans using SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as loans on which, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loans. Large groups of smaller balance homogenous loans (residential mortgages and consumer installment loans) are collectively evaluated for impairment and accordingly are included in our evaluation of the allowance for loan losses. As of December 31, 2005, 2004 and 2003, the Bank had $382,000, $264,000 and $348,000, respectively, of small homogenous loans that were classified as non-accrual and were collectively evaluated for impairment. If interest on these loans had been accrued, interest income would have increased by $5,000, $5,000, and $7,000, respectively, for the years ended December 31, 2005, 2004 and 2003. As of the end of these periods, there were no loans past due 90 days or more that are not on non-accrual status. The Bank's allowance for loan losses is attributable to loans held-for-investment and not loans held-for-sale. In the normal course of business, the Bank makes loans to certain officers, directors and their related interests. All loan transactions entered into between the Bank and such related parties were made on substantially the same terms and conditions as transactions with all other parties, other than a 1% discount for employees on the interest rate paid while the person remains an employee. In management's opinion, such loans are consistent with sound banking practices and are within applicable regulatory lending limitations. The balance of these loans at December 31, 2005 and December 31, 2004 was approximately $4.5 million and $3.2 million, respectively. There were no loans to insiders other than those disclosed above. 71 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 NOTE E - PROPERTY AND EQUIPMENT - ------------------------------- Premises and equipment are summarized as follows (in thousands):
December 31, Estimated --------------------------------- useful life 2005 2004 2003 ----------- ------- -------- -------- Land ................................... Indefinite $ 2,704 $ 2,704 $ 2,704 Building and improvements............... 3 to 40 years 11,335 11,330 11,304 Furniture, equipment and automobiles.... 3 to 12 years 8,239 7,313 6,843 Leasehold improvements.................. 3 to 15 years 5,429 3,396 3,385 Property held for future office sites... Indefinite 692 431 304 ------- ------- ------- 28,399 25,174 24,540 Less accumulated depreciation and amortization..................... (9,829) (8,360) (6,920) ------- ------- ------- $18,570 $16,814 $17,620 ======= ======= =======
NOTE F - DEPOSITS - ----------------- Deposits are summarized as follows (in thousands): December 31, --------------------------------- 2005 2004 2003 -------- -------- -------- Demand accounts: Non-interest bearing................. $ 58,152 $ 52,019 $ 45,259 Interest bearing..................... 3,320 3,946 708 ------- -------- -------- 61,472 55,965 45,967 Savings and club accounts............... 60,608 67,115 72,061 Money market deposit accounts........... 117,930 163,091 139,121 Certificates of deposit under $100,000.. 246,778 147,984 175,871 Certificates of deposit over $100,000... 119,683 104,761 40,515 ------- -------- -------- $606,471 $538,916 $473,535 ======= ======== ======== Certificates of deposit over $100,000 are not insured by the FDIC. The scheduled maturities of certificates of deposit at December 31, 2005 are as follows (in thousands): 2006.................................... $269,116 2007.................................... 72,414 2008.................................... 14,024 2009.................................... 7,493 Thereafter.............................. 3,414 -------- $366,461 ======== Interest expense on deposits is as follows (in thousands): Year ended December 31, --------------------------- 2005 2004 2003 ------- ------- ------- Demand accounts ........................... $ 65 $ 30 $ 60 Savings, club and money market accounts.... 3,399 3,048 1,695 Certificates of deposit ................... 9,395 6,036 7,181 ------- ------- ------- $12,859 $ 9,114 $ 8,936 ======= ======= ======= 72 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 NOTE G - OTHER BORROWED FUNDS - ----------------------------- 1. Short-Term Borrowings --------------------- Short-term borrowings, which consist primarily of FHLB advances, generally have maturities of less than one year. The details of these borrowings are presented below (in thousands, except percentages): At or for the year ended December 31, ------------------------------------- 2005 2004 2003 -------- -------- -------- Average balance outstanding ......... $ 75,411 $ 33,618 $ 35,413 Maximum amount outstanding at any month-end during the period... 115,000 48,975 69,300 Balance outstanding at period end 86,650 31,025 38,229 Weighted-average interest rate during the period ........... 3.59% 1.61% 1.21% Weighted-average interest rate at period end ............... 4.13% 2.42% 1.17% The Bank also has a $30 million line of credit with a correspondent bank. At December 31, 2005, there was no balance outstanding on this line of credit. 2. Long-Term Borrowings -------------------- At December 31, 2005, long-term borrowings, which consist of FHLB advances, totaled $180.0 million. Advances consist of fixed-rate advances that will mature within one to nine years. The advances are collateralized by FHLB stock and qualifying real estate first mortgage loans and mortgage-backed securities. These advances had a weighted average interest rate of 3.76%. Unused overnight lines of credit at the FHLB at December 31, 2005 were $11.6 million. As of December 31, 2005 long-term FHLB advances mature as follows (in thousands): 2006.................................... $ 49,150 2007.................................... 50,000 2008.................................... 35,100 2009.................................... 8,000 2010.................................... 10,000 Thereafter.............................. 27,700 -------- $179,950 ======== NOTE H - BENEFIT PLANS - ---------------------- 1. Supplemental Executive Retirement Plans --------------------------------------- The Company had established a Supplemental Executive Retirement Plan ("SERP") for the benefit of its Chief Executive Officer ("CEO"). In connection therewith, the Company purchased a life insurance policy to satisfy its benefit obligation thereunder. This policy was held within a Rabbi Trust. The cash surrender value of the life insurance policy related to this SERP was approximately $2,452,000, and $2,475,000 at December 31, 2004 and 2003, respectively. The present value of future benefits was being accrued over the term of employment. Under the terms of the SERP, the Bank accrued an annual expense that was projected to furnish the CEO an annual pension benefit upon retirement at age 60 of approximately $102,000 per year for a period of fifteen years. These annual expense accruals were paid to the trust for the benefit of the CEO. The SERP expense for the years ended December 31, 2004 and 2003 was approximately $34,000 and $24,000, respectively. 73 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 On December 16, 2004, the Board terminated this SERP agreement, and paid the accrued plan assets of approximately $48,000 to the CEO. A new SERP agreement was subsequently adopted with an effective date of January 1, 2005. The new SERP will provide benefits to the CEO in an amount equal to 70% of his final salary upon retirement at age 60, payable for life, reduced by the projected value of benefits payable to the CEO, as follows: (i) 50% of the estimated benefits from the Federal Social Security system; (ii) the account value from the 401(k) Savings Plan attributable to any Company contributions or matching contributions; (iii) the account value from the ESOP; (iv) the account value from any other Code Section 401(a) tax-qualified retirement plans of the Company or its affiliates that are implemented at any time after the SERP effective date; and (v) the account value from the ESOP benefits equalization plan. The minimum benefit under the new SERP will be an annual benefit of approximately $102,000 upon retirement at age 60 for life, but in no event for a period of less than 15 years. The cash surrender value of the life insurance policy related to this SERP was approximately $2,545,000 at December 31, 2005. Under the terms of the new SERP, the Bank will determine annually the projected future benefits and set aside an annual accrual as determined necessary in accordance with generally accepted accounting principles. The plan expense for the year ended December 31, 2005 was approximately $63,000. The Company also adopted a SERP for the benefit of other executive officers. This plan requires an annual accrual equal to ten percent of each participant's base salary to be credited to the plan reserve. Plan reserves earned interest at an annual rate equal to the greater of the Bank's cost of funds or 4%. The accumulated deferred compensation account for each executive officer was to be payable to each participant at anytime following termination of employment after three years following the SERP's implementation, the death or disability of the executive officer or termination of employment following a change in control of the Bank, whereby the Bank or the Company is not the resulting entity. In December, 2004 the Board of Directors adopted a plan amendment that adjusted the plan reserves annual earnings rate to The Wall Street Journal "prime rate" plus 100 basis points, with a minimum rate of 4% and a maximum rate of 10%. The amendment also provides participants the ability to request that plan assets be invested in Synergy Financial Group, Inc. common stock. The effective date of this amendment is January 1, 2005. Plan expense for the years ended December 31, 2005, 2004 and 2003 was approximately $47,000, $48,000 and $38,000, respectively. In addition, the Company paid its former chief financial officer previously-expensed accumulated plan assets of approximately $36,000 in April, 2005. 2. Benefits Equalization Plan -------------------------- The Company's Retirement Benefits Equalization Plan ("BEP") provides the participating executives with the same level of benefits that all other employees are eligible to receive under the Company's Employee Stock Ownership Plan and 401(k) Savings Plan without regard to the limitations on levels of compensation and annual benefits imposed under Sections 401(a)(17) and 415 of the Internal Revenue Code. Specifically, the Plan provides benefits to executive officers that cannot be provided under the Employee Stock Ownership Plan and 401(k) Savings Plan as a result of limitations imposed by Sections 401(a)(17) and 415 of the Internal Revenue Code, but that would have been provided under the Employer Stock Ownership Plan and the 401(k) Savings Plan, but for these Internal Revenue Code limitations. For example, this plan provides participants with a benefit for any compensation that they may earn in excess of $210,000 per year (as indexed) comparable to the benefits earned by all participants under the Employee Stock Ownership Plan and the 401(k) Savings Plan for compensation earned below that level. The actual value of benefit under this Plan and the annual financial reporting expense associated with this plan will be calculated annually based upon a variety of factors, including the annual value of benefits for participants determined under the Employee Stock Ownership Plan and the 401(k) 74 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 Savings Plan each year, the applicable limitations under the Internal Revenue Service Code that are subject to adjustment annually and the salary of each participant at the such time. Generally, benefits under the plan will be taxable to each participant at the time of receipt of such payment, and the Company will recognize a tax-deductible compensation expense at such time. Plan expense for the year ended December 31, 2005 amounted to approximately $39,000. 3. Phantom Stock Plan ------------------ Prior to the reorganization and stock offering as described in Note B, the Company maintained a phantom stock and phantom option plan for the benefit of its CEO. Under the plan, the CEO was awarded phantom stock and options, the value of which was determined annually based upon a valuation of the Company assuming it was a stock company. The phantom stock and phantom option plan for the benefit of the chief executive officer was replaced by a Deferred Compensation Plan in September, 2002 and the Company paid the CEO deferred plan assets of approximately $57,000 in December, 2005. 4. Employee Stock Ownership Plan ----------------------------- In September, 2002, the Board of Directors approved an ESOP. The ESOP is designed to provide eligible employees the advantage of ownership of Company stock. Employees are eligible to participate in the Plan after reaching age twenty-one, completion of one year of service and working at least one thousand hours of consecutive service during the year. Contributions are allocated to eligible participants on the basis of compensation. The ESOP borrowed $1,163,800 from the Bank to fund the purchase of 116,380 shares of common stock in connection with the September, 2002 initial public offering. As a result of the second-step mutual-to-stock conversion, the ESOP shares converted to 433,293 shares based on the exchange ratio of 3.7231. In connection with the January, 2004 second-step mutual-to-stock conversion, the Company established an additional ESOP for eligible employees. The ESOP borrowed $5,629,000 from the Company to purchase 562,873 shares in the offering. These loans are payable in annual installments over ten years at a fixed annual interest rate equal to the prime rate as published in The Wall Street Journal on the origination date (4.0%), with interest payable quarterly. The loans can be prepaid without penalty. Loan payments are principally funded by cash contributions from the Bank, subject to federal tax law limits. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid. Employees become fully vested in their ESOP account after five years of service. Dividends on unallocated shares are applied toward payment of the loan. ESOP shares committed to be released are considered outstanding in determining earnings per share. The following table summarizes shares of Company common stock held by the ESOP at December 31: 2005 2004 2003 (1) ----------- ----------- ----------- Shares allocated or committed to be released to Participants ..... 257,027 157,403 57,778 Unallocated shares ................. 739,140 838,764 375,515 ---------- ----------- ---------- Total ESOP shares ............... 996,167 996,167 433,293 ========== =========== ========== Market value of unallocated shares.. $9,261,424 $11,272,988 $3,772,195 - ------------------ (1) Share and market values for the year ended December 31, 2003 reflect the exchange ratio of 3.7231 associated with the January, 2004 second-step mutual-to-stock conversion. The Company recorded ESOP compensation expense of $1,222,000, $1,047,000 and $290,000 related to the release of 99,624, 99,624 and 43,337 shares, for the years ended December 31, 2005, 2004 and 2003, respectively. 75 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 5. 401 (k) Plan ------------ All full-time employees of the Bank that meet certain age and service requirements are eligible to participate in the Bank-sponsored 401(k) Plan. Under the plan, participants may make contributions, in the form of salary reductions, up to the maximum Internal Revenue Code limit. The Bank contributes an amount to the plan equal to 100% of the first 5% of employee contributions. The Bank's contribution to these plans amounted to $207,000, $197,000 and $157,000 for 2005, 2004 and 2003, respectively. 6. Stock-Based Compensation ------------------------ (a) Restricted Stock Plans ---------------------- At the Annual Meeting held on April 22, 2003, stockholders of the Company approved the 2003 Restricted Stock Plan. Prior to April 22, 2003, the Company did not have a Restricted Stock Plan. During the year ended December 31, 2003, the Company issued 56,685 shares of restricted stock. The shares vest at a rate of 20% on each of five annual vesting dates, with an initial vesting date of April 22, 2004. As a result of the January 20, 2004 second-step mutual-to-stock conversion, the issued shares associated with the 2003 Restricted Stock Plan converted at the exchange ratio of 3.7231 to 211,031 shares. On June 4, 2003, the Company announced a stock repurchase program to acquire the shares associated with the 2003 Restricted Stock Plan. On November 9, 2004, the Company announced the completion of this repurchase program. At the Annual Meeting held on August 25, 2004 and reconvened on August 31, 2004, stockholders of the Company approved the Company's 2004 Restricted Stock Plan making 281,436 shares of common stock available for granting. During the year, the Company issued 277,283 shares of restricted stock. The shares vest at a rate of 20% on each of five annual vesting dates, with an initial vesting date of August 31, 2005. On November 9, 2004, the Company announced a stock repurchase program to acquire the shares associated with the 2004 Restricted Stock Plan. On March 30, 2005, the Company announced the completion of this repurchase program. A deferred compensation account for shares awarded under the restricted stock plans is recorded as a reduction of stockholders' equity. Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company as treasury shares. Through December 31, 2005, the Company acquired all the necessary shares of stock for funding the restricted stock plans; such shares are included in treasury stock. The restricted stock is generally held in a trust for the benefit of the award recipient until it is vested. Awards outstanding vest in five annual installments commencing one year from the date of the award. As of December 31, 2005, 129,430 shares were distributed upon vesting, 28,000 shares were granted and 52,324 shares were forfeited under the RSP. Expense is recognized for shares awarded over the vesting period at the fair market value of the shares on the date they were awarded. Compensation expense attributable to the RSP amounted to $686,000, $477,000 and $179,000 for the years ended December 31, 2005, 2004 and 2003, respectively. (b) Stock Option Plans ------------------ At the Annual Meeting held on April 22, 2003, stockholders of the Company approved the Company's 2003 Stock Option Plan making available 165,746 shares of common stock for granting. Prior to April 22, 2003, the Company did not have a Stock Option Plan. Under the 2003 Stock Option Plan, each stock option granted entitles the holder to purchase one share of the Company's common stock at an exercise price of not less than the fair market value of a share of common stock at the date of grant. Options granted vest over a five-year period from the date of grant and will expire no later than 10 years following the grant date. During the year ended December 31, 2003, the Company granted 165,746 options to purchase common shares of the Company. As a result of the January 20, 2004 second-step 76 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 mutual-to-stock conversion, the shares associated with the 2003 Stock Option Plan converted at the exchange ratio of 3.7231 to 617,086 shares. At the Annual Meeting held on August 25, 2004 and reconvened on August 31, 2004, stockholders of the Company approved the Company's 2004 Stock Option Plan making available 703,591 shares for granting under the plan. During the year ended December 31, 2004, the Company granted 694,569 options to purchase common shares of the Company. Under the 2004 Stock Option Plan, each stock option granted entitles the holder to purchase one share of the Company's common stock at an exercise price of not less than the fair market value of a share of common stock at the date of grant. Options granted vest over a five-year period from the date of grant and will expire no later than 10 years following the grant date. The following is a summary of the Company's stock option plans as of and for the years ended December 31, 2005 and 2004:
2005 2004 2003 ------------------------- ------------------------ ----------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding at beginning of year.... 1,311,209 $ 8.03 609,640 $ 5.59 - $ - Granted............................. 60,000 11.86 704,569 10.14 617,086 5.59 Exercised........................... (19,470) 5.96 - - - - Forfeited........................... (138,438) 8.04 (3,000) 10.15 (7,446) 5.59 Expired............................. - - - - - - --------- ------ --------- ------ ------- ------- Outstanding at end of year ......... 1,213,301 $ 8.25 1,311,209 $ 8.03 609,640 $ 5.59 ========= ====== ========= ====== ======= ======= Exercisable at end of year.......... 337,167 $ 7.29 121,298 $ 5.59 - - ========= ====== ========= ====== ======= =======
- ------------------ (1) The number of options and the exercise price for the 2003 awards were adjusted for the exchange rate of 3.7231 shares in connection with the January 20, 2004 second step mutual-to-stock conversion. (2) The outstanding balance at the end of 2003 includes 7,000 options that were reissued in 2004. The following table summarizes information about the stock options outstanding at December 31, 2005.
Options Outstanding Options Exercisable ---------------------------------------------------------- -------------------------------- Weighted Range of Average Number Remaining Contractual Weighted Average Weighted Average Exercise Outstanding Life in Years Exercise Price Stock Options Exercise Price ------------- ----------------- -------------------- ----------------- ------------- ---------------- $ 5.59 527,732 7.3 $ 5.59 211,093 $ 5.59 9.53 - 10.15 624,569 8.7 10.14 125,874 10.14 10.50 - 11.86 61,000 9.5 11.83 200 10.50 ------------- --------- --- ------ ------- ------ $5.59 - 11.86 1,213,301 8.1 $ 8.25 337,167 $ 7.29 ============= ========= === ====== ======= ======
7. Bank-Owned Life Insurance Program --------------------------------- The Bank's Board of Directors approved the establishment of a bank-owned life insurance program to be implemented and effective September 1, 2004. This program provides death benefit coverage to Bank officers and directors. This coverage continues after retirement. The Bank is the beneficiary of any benefit in excess of each officer's and director's death benefit amount. 77 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 In order to fund this program, the Bank invested a total of $10,000,000 in two bank-owned life insurance policies on July 14, 2004. The cash surrender value of the two policies totaled $10,593,000 and $10,185,000 at December 31, 2005 and 2004, respectively, and is reported on the Company's consolidated balance sheet. The Company reports any income from the policies as other income on the consolidated statement of operations. This income is not subject to tax. NOTE I - INCOME TAXES - --------------------- The components of income taxes are summarized as follows (in thousands): Year ended December 31, -------------------------------------- 2005 2004 2003 ------- -------- -------- Current tax expense Federal income...................... $ 3,456 $2,509 $1,601 State income........................ 420 302 267 ------- ------ ------ Total current expense............ 3,876 2,811 1,868 ------- ------ ------ Deferred tax (benefit) expense Federal income...................... (1,019) (303) 42 State income........................ (297) (92) 1 ------- ------ ------ Total deferred expense........... (1,316) (395) 43 ------- ------ ------ Total income tax expense....... $ 2,560 $2,416 $1,911 ======= ====== ====== A reconciliation of income taxes computed at the statutory federal income tax rate (34%) to the reported income tax expense is as follows (in thousands): Year ended December 31, ------------------------------- 2005 2004 2003 ------- -------- -------- Expected federal income tax expense.......... $2,398 $2,251 $1,809 Increase (decrease) in federal income tax expense resulting from state income tax, net of federal income tax effect.......... 81 139 177 Tax exempt income............................ - (55) (124) Other, net................................... 81 81 49 ------- ------ ------ $2,560 $2,416 $1,911 ======= ====== ======= Deferred tax assets and (liabilities) consisted of the following (in thousands): Year ended December 31, -------------------------------- 2005 2004 2003 ------- -------- -------- Deferred tax assets: Allowance for loan loss................. $ 2,200 $1,266 $ 791 Depreciation............................ 167 - - Unrealized losses on available- for-sale investment securities....... 742 163 84 Net operating loss carry over........... 1,476 1,509 1,542 Other................................... 147 82 48 ------ ----- ------ 4,732 3,020 2,465 Valuation allowance..................... (878) (878) (878) ------ ----- ------ Deferred tax assets.................. $ 3,854 $2,142 $ 1,587 ====== ===== ====== 78 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 Deferred tax liabilities: Deferred loan costs, net of fees........ $ 196 $ 139 $ 123 Depreciation............................ - 167 57 Unrealized gains on available- for-sale investment securities....... - - - Purchase accounting, including core deposit intangibles............. 177 250 295 ------ ------ ------ Deferred tax liabilities............. $ 373 $ 556 $ 475 ====== ===== ====== Net deferred tax asset, included in other assets........... $3,481 $1,586 $1,112 ====== ===== ====== The Company has federal net operating loss carryovers acquired from First Bank of Central Jersey expiring as follows (in thousands): Expiring Amount - -------- ------ 2018.................................... $ 132 2021.................................... 1,833 2022.................................... 2,517 2023.................................... 150 ------ $4,632 ====== The Company has provided a valuation allowance against the deferred tax asset attributable to the net operating loss carryovers in order to adjust that deferred tax asset to the amount management believes to be realizable taking into consideration the annual limitation on usage of net operating loss carryovers following an ownership change and the carryover period currently permitted under federal tax law. The Company has no state net operating loss carryover. NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------- SFAS No. 107 requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Therefore, the Bank had to use significant estimates and present value calculations to prepare this disclosure, as required by SFAS No. 107. Accordingly, the information presented below does not purport to represent the aggregate net fair value of the Bank. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. Estimated fair values have been determined by the Bank using what management believes to be the best available data and an estimation methodology suitable for each category of financial instruments. The estimation methodologies used, the estimated fair values, and recorded book balances at December 31, 2005 and 2004 are set forth below. For cash and due from banks and interest-bearing deposits with banks, the recorded book values of approximately $6,583,000 and $6,446,000 are deemed to approximate fair values at December 31, 79 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 2005, and 2004, respectively. The estimated fair values of investment and mortgage-backed securities are based on quoted market prices, if available. If quoted market prices are not available, the estimated fair values are based on quoted market prices of comparable instruments. The fair values of loans are estimated based on a discounted cash flow analysis using interest rates currently offered for loans with similar loan characteristics. The carrying value of accrued interest is deemed to approximate fair value. December 31, ----------------------------------------- 2005 2004 ------------------- ------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------ ---------- ------ ---------- (in thousands) Investment securities .......... $180,940 $178,894 $244,944 $245,514 Federal Home Loan Bank stock.... 13,263 13,263 10,771 10,771 Loans receivable, net .......... 733,183 720,982 561,687 557,628 Cash surrender value of bank-owned life insurance.... 13,138 13,138 12,637 12,637 The estimated fair values of demand deposits, savings and certain money market deposit accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. The fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly time deposit maturities. The carrying amount of accrued interest payable approximates its fair value. December 31, ----------------------------------------- 2005 2004 ------------------- ------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------ ---------- ------ ---------- (in thousands) Time deposits.................... $366,461 $363,390 $252,745 $252,272 Other borrowed funds............. 266,600 264,512 212,414 212,601 The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial. NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - ---------------------------------------------------------- The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and unused lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and unused lines of credit are represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. 80 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 The Bank had the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk (in thousands): December 31, -------------------------------------- 2005 2004 2003 ------- -------- -------- Commitments to grant loans...... $ 79,071 $ 67,884 $ 45,451 Unfunded commitments under lines of credit.............. 25,449 26,264 22,695 -------- -------- -------- $104,520 $ 94,148 $ 68,146 ======== ======== ======== Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but primarily includes residential real estate located within New Jersey. At December 31, 2005, commitments to fund fixed rate loans amounted to $29.4 million with interest rates between 5.75% and 8.50%. NOTE L - COMMITMENTS AND CONTINGENT LIABILITIES - ----------------------------------------------- 1. Lease Commitments Future approximate lease payments under non-cancelable operating leases at December 31, 2005 are due as follows (in thousands): 2006.................................... $ 970 2007.................................... 922 2008.................................... 927 2009.................................... 803 2010.................................... 790 Thereafter.............................. 7,815 ------- $12,227 ======= Total rent expense was approximately $787,000, $613,000 and $578,000 for the years ended December 31, 2005, 2004, and 2003, respectively. The Company maintains six office locations within the corporate facilities of the Company's former credit union sponsor organization. These sites are available to the organization's employees and access to the public is restricted. As a result, the Company makes no rental payments for these branch locations. Each office is an average of 280 square feet with no public access and therefore very limited use. Management has evaluated the fair value of the annual rent which is not considered to have a material impact on the Bank's financial condition or results of operation. The locations are occupied pursuant to a written agreement that provides for two-year terms that are automatically renewed upon expiration unless written notice of termination is given by either party. 2. Other ----- In the normal course of business, the Company and the Bank have been named as defendants in certain lawsuits. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that the resolutions of such suits will not have a material adverse effect on the consolidated financial position or results of operation of the Company. 81 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 NOTE M - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY - ------------------------------------------------------------------ Condensed financial information for Synergy Financial Group, Inc. (parent corporation only) follows (in thousands): CONDENSED BALANCE SHEETS
December 31, ------------------------------- 2005 2004 2003 -------- -------- -------- ASSETS Cash and cash equivalents ............................. $ 301 $ 2,403 $ 41,240 Investment securities available for sale .............. 3,622 4,882 - Investment securities held to maturity ................ 1,448 1,794 - Investment in subsidiaries, at equity ................. 86,638 89,731 40,791 Loan receivable from Bank for ESOP .................... 5,282 5,962 - Other assets .......................................... 116 742 652 -------- -------- -------- Total assets ........................................ $ 97,407 $105,514 $ 82,683 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Loan payable to Bank for ESOP ......................... $ - $ - $ 1,009 Stock subscriptions payable ........................... - - 38,322 RSP obligation ........................................ - - - Other liabilities ..................................... 2,157 1,472 2,424 Stockholders' equity .................................. 95,250 104,042 40,928 -------- -------- -------- Total liabilities and stockholders' equity .......... $ 97,407 $105,514 $ 82,683 ======== ======== ========
CONDENSED STATEMENTS OF INCOME
Year ended December 31, ------------------------------- 2005 2004 2003 -------- -------- -------- INCOME Equity in undistributed net earnings of subsidiaries... $ 4,396 $ 3,973 $ 3,537 Net losses from sale of investments ................... (2) - - Interest income ....................................... 465 523 1 ... -------- -------- -------- Total income ........................................ 4,859 4,496 3,538 ... EXPENSES Other expenses ........................................ 366 270 81 Interest expenses .................................. - 23 45 -------- -------- -------- Total expenses ................................... 366 293 126 ... -------- -------- -------- Net income ........................................ $ 4,493 $ 4,203 $ 3,412 ======== ======== ========
82 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, ----------------------------------- 2005 2004 2003 -------- -------- -------- OPERATING ACTIVITIES Net income ........................................................ $ 4,493 $ 4,203 $ 3,412 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed income of subsidiary ...................... (4,396) (3,973) (3,537) Dividends received from subsidiary ................................ 6,500 - - Amortization, depreciation and other .............................. 53 550 423 Loss on sale of investment securities ............................. 2 - - Decrease (increase) in other assets ............................... 2,490 65 (538) Increase in other liabilities ..................................... 896 952 1,767 -------- -------- -------- Net cash provided by operating activities ..................... 10,038 1,797 1,527 -------- -------- -------- INVESTING ACTIVITIES Additional investment in subsidiaries ............................. - (45,000) (7,000) Principal repayments of investment securities available for sale... 1,073 1,026 - Principal repayments of investment securities held to maturity .... 340 229 - Purchase of investment securities available for sale .............. - (5,897) - Purchase of investment securities held to maturity ................ - (2,022) - Proceeds from sale of investment securities available for sale .... 20 - Principal collected on ESOP loan .................................. 679 - - ESOP loan advanced to Bank ........................................ - (5,629) - -------- -------- -------- Net cash provided by (used in) investing activities ........... 2,112 (57,293) (7,000) -------- -------- -------- FINANCING ACTIVITIES` (Repayments of) proceeds from stock subscriptions payable ......... - (38,322) 38,322 Purchase of treasury stock for RSP ................................ (765) (4,648) (103) Purchase of treasury stock ........................................ (11,426) - - Proceeds from stock options exercised ............................. 116 - - Net proceeds from issuance of common stock ........................ - 61,597 - Dividends paid .................................................... (2,177) (959) - Repayments of Bank loan for ESOP .................................. - (1,009) (116) -------- -------- -------- Net cash (used in) provided by financing activities ........... (14,252) 16,659 38,103 -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................................................. (2,102) (38,837) 32,630 Cash and cash equivalents at beginning of year ....................... 2,403 41,240 8,610 -------- -------- -------- Cash and cash equivalents at end of year ............................. $ 301 $ 2,403 $ 41,240 ======== ======== ========
NOTE N - REGULATORY MATTERS - --------------------------- The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the OTS. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory guidelines. The Bank's capital amounts and classifications under the prompt corrective action guidelines are also subject to the qualitative judgments by the regulators about components, risk weightings and other factors. 83 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined) and tangible capital to adjusted total assets (as defined). Management believes that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2005, the Bank is considered well-capitalized under regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios, as set forth in the table below. There are no conditions or events that management believes have changed the institution's prompt corrective action category. The following table presents a reconciliation of GAAP capital and regulatory capital at the dates indicated for the Bank: December 31, --------------------------- 2005 2004 2003 ------- ------- ------- GAAP capital ................................ $86,368 $89,615 $40,791 Add: net unrealized losses on investment securities .................. 1,268 280 148 Less: goodwill and other intangible assets... 818 929 776 ------- ------- ------- Tangible and core capital .............. 86,818 88,966 40,163 Add: general allowance for loan losses ...... 5,763 4,427 3,274 ------- ------- ------- Total regulatory capital ............... $92,581 $93,393 $43,437 ======= ======= ======= The Bank's actual capital amounts and ratios are as follows (in thousands, except percentages):
OTS Requirements ------------------------------------------------------------------- Regulatory for Minimum classification as Bank actual capital adequacy well capitalized ----------------- ------------------ ------------------ Amount Ratio Amount Ratio Amount Ratio As of December 31, 2005: Total risk-based capital (to risk-weighted assets)...... $92,581 12.84% $57,687 8.00% $72,108 10.00% Tier I capital (to risk-weighted assets)...... 86,818 12.04% N/A N/A 43,265 6.00% Tier I capital (to adjusted total assets)..... 86,818 8.96% 38,776 4.00% 48,470 5.00% Tangible capital (to adjusted total assets)..... 86,818 8.96% 14,541 1.50% N/A N/A As of December 31, 2004: Total risk-based capital (to risk-weighted assets)...... 93,393 16.57% 45,077 8.00% 56,346 10.00% Tier I capital (to risk-weighted assets)...... 88,966 15.79% N/A N/A 33,808 6.00% Tier I capital (to adjusted total assets)..... 88,966 10.44% 34,075 4.00% 42,594 5.00% Tangible capital (to adjusted total assets)..... 88,966 10.44% 12,778 1.50% N/A N/A
84 SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2005, 2004, 2003 NOTE O - SELECTED QUARTERLY FINANCIAL DATA - ------------------------------------------ Unaudited quarterly financial data is as follows (in thousands, except share data):
Year ended December 31, 2005 ---------------------------------------------- First Second Third Fourth quarter quarter quarter quarter ------- ------- ------- ------- Interest income......................... $10,536 $11,468 $11,909 $12,658 Interest expense........................ 4,513 5,050 5,809 6,376 ------- ------- ------- ------- Net interest income before provision for loan losses.......... 6,023 6,418 6,100 6,282 Provision for loan losses............... 445 477 392 546 ------- ------- ------- ------- Net interest income after provision for losses............... 5,578 5,941 5,708 5,736 Other income............................ 965 872 1,024 990 Other expenses.......................... 4,724 5,036 5,056 4,945 ------- ------- ------- ------- Income before income tax expense..... 1,819 1,777 1,676 1,781 Income tax expense...................... 699 672 568 621 ------- ------- ------- ------- Net income......................... $ 1,120 $ 1,105 $ 1,108 $ 1,160 ======= ======= ======= ======= Basic earnings per share................ $ 0.10 $ 0.10 $ 0.10 $ 0.11 ======= ======= ======= ======= Diluted earnings per share.............. $ 0.10 $ 0.10 $ 0.10 $ 0.10 ======= ======= ======= =======
Year ended December 31, 2004 ---------------------------------------------- First Second Third Fourth quarter quarter quarter quarter ------- ------- ------- ------- Interest income......................... $8,222 $8,357 $9,783 $10,038 Interest expense........................ 2,571 2,821 3,761 4,039 ------ ------ ------ ------- Net interest income before provision for loan losses.......... 5,651 5,536 6,022 5,999 Provision for loan losses............... 369 336 429 358 ------ ------ ------ ------- Net interest income after provision for losses............... 5,282 5,200 5,593 5,641 Other income............................ 699 513 952 1,120 Other expenses.......................... 4,312 4,241 4,897 4,931 ------ ------ ------ ------- Income before income tax expense..... 1,669 1,472 1,648 1,830 Income tax expense...................... 664 562 554 636 ------ ------ ------ ------- Net income......................... $1,005 $ 910 $1,094 $ 1,194 ====== ====== ====== ======= Basic earnings per share................ $ 0.10 $ 0.08 $ 0.10 $ 0.10 ====== ====== ====== ======= Diluted earnings per share.............. $ 0.10 $ 0.08 $ 0.09 $ 0.10 ====== ====== ====== =======
85 Item 9. Changes In And Disagreements With Accountants On Accounting And - -------------------------------------------------------------------------------- Financial Disclosure -------------------- On February 21, 2006, the Audit Committee of the Company's Board of Directors approved the dismissal of Grant Thornton LLP ("Grant Thornton") as the Company's independent certifying accountant. The Audit Committee's decision was ratified by the Board of Directors as a whole. The reports of Grant Thornton on the consolidated financial statements of the Company as of and for the fiscal years ended December 31, 2005 and 2004, did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. During the Company's fiscal years ended December 31, 2005 and 2004, and in connection with the audit of the Company's consolidated financial statements for such periods, and for the period from January 1, 2006 to February 21, 2006, there were no disagreements or reportable events between the Company and Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Grant Thornton, would have caused Grant Thornton to make reference to such matter in connection with its audit reports on the Company's consolidated financial statements. Effective February 21, 2006, the Company engaged Crowe Chizek and Company LLC as its new independent certifying accountant. During the two most recent fiscal years and the subsequent interim period to the date hereof, the Company did not consult with Crowe Chizek and Company LLC regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed or (ii) the type of audit opinion that might be rendered on the Company's financial statements. Item 9A. Controls And Procedures - -------------------------------- The Company's management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2005, an evaluation was performed under the supervision and with the participation of management, including the President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, management concluded that disclosure controls and procedures as of December 31, 2005 were effective in ensuring material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Management's responsibilities related to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States. As disclosed in the Report on Management's Assessment of Internal Control Over Financial Reporting included in this Form 10-K under Item 8 "Financial Statements and Supplementary Data", management assessed the Corporation's system of internal control over financial reporting as of December 31, 2005, in relation to criteria for effective internal control over financial reporting as described in "Internal Control - Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2005, its system of internal control over financial reporting met those criteria and is effective. Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005, has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report included in this Form 10-K under Item 8. 86 Additionally, there were no changes in the Corporation's internal control over financial reporting that occurred during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2005. Item 9B. Other Information - -------------------------- None. 87 PART III Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- Section 16(A) Beneficial Ownership Reporting Compliance The Common Stock of the Company is registered pursuant to Section 12(g) of the Securities and Exchange Act of 1934, as amended. The officers and directors of the Company and beneficial owners of greater than 10% of the Company's Common Stock ("10% beneficial owners") are required by Section 16(a) of such act to file reports of ownership and changes in beneficial ownership of the Common Stock with the SEC and NASDAQ and to provide copies of those reports to the Company. The Company is not aware of any beneficial owner, as defined under Section 16(a), of more than 10% of its Common Stock. To the Company's knowledge, all Section 16(a) filing requirements applicable to its officers and directors were complied with during the 2005 fiscal year. Directors and Executive Officers The Company's certificate of incorporation requires that the Board of Directors be divided into three classes, as nearly equal in number as possible, each class to serve for a three-year period, with approximately one-third of the directors elected each year. The Board of Directors currently consists of nine members. The following table sets forth the names, ages, terms of, and length of service for the directors and the executive officers of the Company.
Age at Year First Elected Current Term Name December 31, 2005 or Appointed (1) to Expire ----------------- ---------------- --------- Directors - --------- David H. Gibbons, Jr. 35 2001 2007 Nancy A. Davis 66 1977 2006 Magdalena M. De Perez 55 2001 2008 John S. Fiore 48 2000 2006 Kenneth S. Kasper 51 1993 2008 Paul T. LaCorte 53 2001 2007 George Putvinski 57 1993 2008 W. Phillip Scott 54 1996 2006 Albert N. Stender 60 1999 2007 Non-Director Executive Officers - ------------------------------- Kevin M. McCloskey 47 N/A N/A Kevin A. Wenthen 51 N/A N/A A. Richard Abrahamian 46 N/A N/A
- ---------------- (1) Refers to the year the individual first became a director of the Bank. All directors of the Bank in March 2001 became directors of the Company at that time. Set forth below is the business experience for the past five years of each of the directors and executive officers of the Company. David H. Gibbons, Jr. was elected Chairman of the Board of Directors of the Company and the Bank in 2005. He has been a director of both organizations since 2001. Mr. Gibbons is a commercial real estate executive who is employed as Senior Vice President of Seagis Property Group, LP. He is also a director of Gibbons Realty Group, Inc. and David O. Evans, Inc., a construction and property management company. Active in the community, Mr. Gibbons serves as a Director of the Union County 88 Alliance and is a Past Chairman of the Board of Directors of Elizabeth Development Co. and the YMCA of Eastern Union County, where he continues to serve as a Director. He also serves as a Trustee for the National Association of Office and Industrial Properties, a commercial real estate trade and lobbying organization. Nancy A. Davis has served on the Board of Directors of the Company since its formation in 2001, and the Bank since 1977. Ms. Davis is a consultant for Schering-Plough Corporation, a company that she retired from in 2002. She was employed by that company since 1965, most recently as a Senior Legal Assistant. Magdalena M. De Perez has served on the Board of Directors of the Company and the Bank since 2001. Ms. De Perez is Vice President-Investments, Financial Advisor for Wachovia Securities, LLC. She has worked in the financial services industry since 1983 and acts as a financial advisor to several community service organizations in Union County. John S. Fiore has been the President and Chief Executive Officer of the Company since its formation in 2001 and has served as President and Chief Executive Officer of the Bank since 1995. He also serves as a member of both Boards of Directors. He has been employed by the Bank since 1989. Mr. Fiore also serves as President and Chief Executive Officer of Synergy Financial Services, Inc., a wholly-owned subsidiary of the Company. Kenneth S. Kasper has served on the Board of Directors of the Company since its formation in 2001. He served as Chairman of the Company from 2001 until April 2005. He has been a director of the Bank since 1993, and served as Chairman of the Board of Directors of the Bank from 1998 to April 2005. Mr. Kasper is the Senior Director, Global Environmental, Health, Safety and Transportation Audits, for Schering-Plough Corporation, a pharmaceutical research and manufacturing company. He has worked for Schering-Plough since 1988. Mr. Kasper is also actively involved in civic activities, serving as Chairman of the Chester Borough Board of Adjustment, Director of the Board of Environmental Health & Safety Auditor Certifications ("BEAC"), and Treasurer of the Council of Engineering and Scientific Specialty Boards. Paul T. LaCorte has served on the Board of Directors of the Company and the Bank since 2001. Mr. LaCorte is an executive officer and partner with Hamilton Holding Company, V & F, Inc. and Ditullio and LaCorte Associates, LLC, all of which are real estate holding companies. He is a member and former Chairman of the Union County Economic Development Corporation and a former Chairman of the Cranford Downtown Management Corporation. He is also a member and former President of the Cranford Chamber of Commerce. George Putvinski has served on the Board of Directors of the Company since its formation in 2001, and the Bank since 1993. Mr. Putvinski is employed as the Director of Global Planning and Reporting for Schering-Plough Corporation. He has been employed by Schering-Plough Corporation since 1979. W. Phillip Scott has served on the Board of Directors of the Company since its formation in 2001, and the Bank since 1996. Mr. Scott is employed as a Finance Manager for Schering-Plough Corporation. He has been employed by Schering-Plough Corporation since 1980. Mr. Scott is a certified public accountant. Albert N. Stender has served on the Board of Directors of the Company since its formation in 2001, and the Bank since 1999. Mr. Stender is a self-employed attorney, who was formerly a partner with the law firm of Stender & Hernandez and Cranford municipal attorney. He is the managing member of 89 URANUT, LLC, a real estate investment company. Mr. Stender is also Corporate Secretary and a Director of the Cranford Chamber of Commerce, and served as Prosecutor for several municipalities in Union County. Kevin M. McCloskey has served as Senior Vice President and Chief Operating Officer since 2000. Prior to that time, Mr. McCloskey was the Vice President and Chief Operating Officer for Lakeview Savings Bank. Mr. McCloskey is the Chairman of the Board of Directors and President of the YMCA of Eastern Union County and is a Trustee of the Trinitas Health Foundation. Kevin A. Wenthen has served as Senior Vice President and Chief Administrative Officer since 1996 and as Secretary since 2002. Prior to joining Synergy, Mr. Wenthen was the President and Chief Executive Officer of KAW Marketing, Inc. and, prior to that, Vice President of Planning for Chemical Bank New Jersey, NA. A. Richard Abrahamian was appointed Senior Vice President and Chief Financial Officer during 2005. He was formerly a senior vice president with PNC Bank, responsible for evaluating opportunities for expansion and performance enhancement within the bank's retail banking network. Prior to that, he was Senior Vice President and Chief Accounting Officer at UnitedTrust Bank and Vice President and Controller at its parent company, United National Bancorp, from August, 1992 until their acquisition by PNC Bank in January, 2004. Audit Committee The Audit Committee consists of Directors Stender (Chair), Davis, Kasper, LaCorte and Putvinski. All members of the Audit Committee are independent under the rules of the NASDAQ stock market. The Board of Directors has determined that Mr. Putvinski is an Audit Committee Financial Expert within the meaning of the regulations of the Securities and Exchange Commission. The Board of Directors has adopted a written charter for the Audit Committee. The Audit Committee typically meets every other month with the internal auditor and periodically as needed with the external auditors. Its main responsibilities include oversight of the internal and external auditors and monitoring of management and staff compliance with the Board's audit policies, and applicable laws and regulations. Code of Ethics The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Company's Code of Ethics will be provided without charge upon request to the Corporate Secretary, Synergy Financial Group, Inc., 310 North Avenue East, Cranford, New Jersey 07016. Item 11. Executive Compensation - ------------------------------- Compensation of Directors Board Fees. For the year ended December 31, 2005, each director was paid an annual retainer of $6,000, which is paid in monthly installments of $500, a fee of $1,500 per Board meeting and a fee of $300 per committee meeting for each such meeting attended. The Chairman received an additional annual fee of $3,000. The total compensation paid to the directors for the year ended December 31, 2005 was approximately $230,400. Directors who also serve as employees of the Bank do not receive compensation as directors. 90 Executive Compensation Summary Compensation Table. The following table sets forth the compensation awarded to or earned by the Company's President and Chief Executive Officer and certain other executive officers for the years shown. No other executive officer received a total annual salary and bonus in excess of $100,000 during the reporting period.
Annual Compensation (1) Long Term Compensation Awards ------------------------------ ----------------------------- Restricted Securities All Fiscal Stock Underlying Other Name and Principal Position Year Salary Bonus Award(s) ($) (2) Options/SARs(#) Compensation - --------------------------- ---- ------ ----- ------------ --------------- ------------ John S. Fiore, 2005 $345,000 $126,788 $ - $ - $156,939(3) President and Chief 2004 288,086 136,841 714,144 175,897 42,510 Executive Officer 2003 220,450 78,260 293,480 152,743 60,953 Kevin M. McCloskey, 2005 $177,000 $ 65,048 $ - - $ 26,983(4) Senior Vice President and 2004 161,000 76,475 253,750 63,200 24,815 Chief Operating Officer 2003 140,000 42,700 133,114 74,462 39,333 Kevin A. Wenthen, 2005 $156,000 $ 57,330 $ - - $ 23,329(5) Senior Vice President and 2004 148,500 70,538 253,750 63,200 23,165 Chief Administrative Officer2003 135,000 41,175 133,114 74,462 37,896 A. Richard Abrahamian, 2005 $ 65,692 $ 25,725 $296,500 60,000 $ 7,333(6) Senior Vice President and Chief Financial Officer
- --------------------------------------- (1) All compensation set forth in the table, other than awards of stock options and restricted, was paid by the Bank (2) Dividend rights associated with the restricted stock are accrued and held in arrears to be paid at the time the shares vest. As of December 31, 2005, the value of the restricted shares held by Messrs. Fiore, McCloskey, Wenthen and Abrahamian was $1,539,824, $611,802, $611,802 and $313,250, respectively. (3) For 2005, includes payment of $56,977, representing all sums deferred and due under a previously-sponsored Phantom Stock and Phantom Option Plan that was terminated in 2002, the Bank's contribution under the individual's Supplemental Executive Retirement Plan of $63,462, the Bank's contribution to the individual's account under a 401(k) Plan of $10,500, the Bank's contribution under the individual's Benefit Equalization Plan of $25,123 and $877 for term life insurance premium. The amount does not include the award of shares under the ESOP program for 2005, as this information was not available at the date of this report. (4) For 2005, includes the Bank's contribution under the individual's Supplemental Executive Retirement Plan of $17,700, the Bank's contribution to the individual's account under a 401(k) Plan of $8,835 and $448 for term life insurance premium. The amount does not include the award of shares under the ESOP program for 2005, as this information was not available at the date of this report. (5) For 2005, includes the Bank's contribution under the individual's Supplemental Executive Retirement Plan of $15,600, the Bank's contribution to the individual's account under a 401(k) Plan of $7,211 and $518 for term life insurance premium. The amount does not include the award of shares under the ESOP program for 2005, as this information was not available at the date of this report. (6) For 2005, includes the Bank's contribution under the individual's Supplemental Executive Retirement Plan of $7,000 and $333 for term life insurance premium. The following table sets forth information concerning options granted during the year ended December 31, 2005. No other options were granted during 2005. 91
Potential Realizable Option Grants in 2005 Fiscal Year Value at Assumed --------------------------------------------------------------- Annual Rates of Stock Price Appreciation for Individual Grants Option Term --------------------------------------------------------------- ----------- Percent of Total Options Number of Granted to Exercise Options Employees in Price Expiration Name Granted Fiscal Year ($/Share) Date 5% ($) 10% ($) - ---- ------- ----------- --------- ---- ------ ------- A. Richard Abrahamian 60,000 100% $11.86 7/7/15 447,521 1,134,107
The following table sets forth information concerning options held as of December 31, 2005.
Aggregated Option Exercises in 2005 Fiscal Year and Fiscal Year End Option Values --------------------------------------------------------------------------------- Value of In-the-money Shares Number of Options Options Acquired On Value at Fiscal Year-end (#) at Fiscal Year-end ($) Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------ ------------ ------------------------- ------------------------- John S. Fiore - - 96,276 / 232,364 $507,739 / $970,932 Kevin M. McCloskey - - 42,425 / 95,237 $236,791 / $430,391 Kevin A. Wenthen - - 42,425 / 95,237 $236,791 / $430,391 A. Richard Abrahamian - - 0 / 60,000 $0 / $40,200
Employment Agreements. The Bank has entered into an employment agreement with Mr. Fiore. Mr. Fiore's base salary under the employment agreement for the year ended December 31, 2005 was $345,000. Mr. Fiore's employment agreement has a term of three years and may be terminated by the Bank for "cause" as defined in the agreement. If the Bank terminates Mr. Fiore's employment without just cause, he will be entitled to a continuation of his salary from the date of termination through the remaining term of the agreement. The employment agreement contains a provision stating that after Mr. Fiore's employment is terminated in connection with any change in control, he will be paid a sum equal to approximately three times the average annual taxable compensation paid by the Bank during the preceding five calendar year period as reported on IRS Form W-2, Box 1 and IRS Form 1099. If payment had been made under the agreement as of December 31, 2005, the payment to Mr. Fiore would have equaled approximately $1,403,246. In addition, the Board has entered into Change in Control Severance Agreements with executive officers McCloskey, Wenthen and Abrahamian. Under such agreements, if their employment is terminated within twelve months of a change in control of the Bank, such individuals would receive severance benefits equal to approximately three times their average annual compensation. At December 31, 2005, such payments would have equaled approximately $717,065, $673,577 and $208,325, respectively, upon termination following a change in control. All payments to be made under these agreements shall be reduced as may be necessary so that such payments will not exceed the tax deductible limits under Section 280G of the Code. Supplemental Executive Retirement Plan. The Bank has established a Supplemental Executive Retirement Plan ("SERP") for the benefit of John S. Fiore, President and Chief Executive Officer which provides benefits to Mr. Fiore in an amount equal to 70% of his final salary upon retirement at age 60, payable for life, reduced by the projected value of benefits payable to Mr. Fiore as follows: (i) 50% of the estimated benefits from Federal Social Security system; (ii) the account value from the 401(k) Savings Plan attributable to any Company contributions or matching contributions; (iii) the account value from the ESOP, (iv) the account value from any other Code Section 401(a) tax-qualified retirement plans of the Company or its Affiliates implemented at any time after the SERP effective date; and (v) the account value from the ESOP benefits equalization plan. The minimum benefit under the SERP is an annual 92 benefit of $102,366 upon retirement at age 60 for life, but in no event for a period of less than fifteen years. The Bank determines annually the projected future benefits and sets aside an annual accrual as determined necessary in accordance with generally accepted accounting principles. The Bank has also adopted a SERP for the benefit of senior officers, including Messrs. McCloskey, Wenthen and Abrahamian. This plan requires an annual accrual equal to ten percent of each participant's base salary to be credited to the plan reserve. Plan reserves earn interest at an annual rate equal to The Wall Street Journal "prime rate" plus 100 basis points, with a minimum rate of 4% and a maximum rate of 10%. Participants have the ability to request that plan assets be invested in the Company's common stock. The accumulated deferred compensation account for each executive officer is payable to each participant at any time following termination of employment after three years following the SERP's implementation, the death or disability of the executive officer or termination of employment following a change in control of the Bank, whereby the Bank or the Company is not the resulting entity. Deferred Compensation Plan. The Bank sponsors a Deferred Compensation Plan that permits directors and officers to defer the receipt of compensation until a future date. Such deferred sums earn interest earnings at The Wall Street Journal "prime rate" plus 100 basis points, with a minimum of 4% and a maximum of 10%. Alternatively, such deferred amounts may be directed for investment in Company stock. Deferred sums are recognized as a financial reporting expense at the time of deferral. Generally, payments under the plan will be taxable to each participant at the time of receipt of such payment, and the Company will recognize a tax-deductible compensation expense at such time. At December 31, 2005, no directors or officers participated in, and no sums were invested in, the Deferred Compensation Plan. Benefits Equalization Plan. The Company's Retirement Benefits Equalization Plan ("BEP") provides the participating executives with the same level of benefits that all other employees are eligible to receive under the Company's Employee Stock Ownership Plan and 401(k) Savings Plan without regard to the limitations on levels of compensation and annual benefits imposed under Sections 401(a)(17) and 415 of the Internal Revenue Code. Specifically, the Plan provides benefits to executive officers that cannot be provided under the Employee Stock Ownership Plan and the 401(k) Savings Plan as a result of limitations imposed by Sections 401(a)(17) and 415 of the Internal Revenue Code, but that would have been provided under the Employee Stock Ownership Plan and the 401(k) Savings Plan, but for these Internal Revenue Code limitations. For example, this plan provides participants with a benefit for any compensation that they may earn in excess of $210,000 per year (as indexed) comparable to the benefits earned by all participants under the Employee Stock Ownership Plan and the 401(k) Savings Plan for compensation earned below that level. The actual value of benefits under this Plan and the annual financial reporting expense associated with this plan will be calculated annually based upon a variety of factors, including the actual value of benefits for participants determined under the Employee Stock Ownership Plan and the 401(k) Savings Plan each year, the applicable limitations under the Internal Revenue Code that are subject to adjustment annually and the salary of each participant at such time. Generally, benefits under the plan will be taxable to each participant at the time of receipt of such payment, and the Company will recognize a tax-deductible compensation expense at such time. Split Dollar Life Insurance Agreement. The Bank has entered into a Life Insurance Agreement with John S. Fiore, President and Chief Executive Officer, which shall provide a death benefit payable to Mr. Fiore's beneficiaries of $2.0 million. 93 Compensation Committee Report On Executive Compensation The Compensation Committee (the "Committee") has furnished the following report on executive compensation: Under the supervision of the Board of Directors, the Company has developed and implemented compensation policies, plans and programs which seek to enhance the profitability of the Company, and thus shareholder value, by aligning closely the financial interests of the Company's employees, including its Chief Executive Officer ("CEO"), Chairman and other senior management, with the interests of its shareholders. All members of the Compensation Committee are independent directors. Compensation Philosophy and Strategy. The executive compensation program of the Company is designed to: o Support a pay-for-performance policy that differentiates compensation based on corporate and individual performance; o Motivate employees to assume increased responsibility and reward them for their achievement; o Provide compensation opportunities that are comparable to those offered by other leading companies, allowing the Company to compete for and retain top quality, dedicated executives who are critical to the Company's long-term success; and o Align the interests of executives with the long-term interests of shareholders through award opportunities that can result in ownership of Common Stock. At present, the executive compensation program is comprised of salary, annual cash incentive opportunities, long-term incentive opportunities in the form of stock options and restricted stock awards, and miscellaneous benefits typically offered to executives in comparable corporations. The Committee considers the total compensation (earned or potentially available) in establishing each element of compensation so that total compensation paid is competitive with the market place, based on an independent consultant's survey of salary competitiveness of other financial institutions. The Committee is advised periodically by independent compensation consultants concerning salary competitiveness. As an executive's level of responsibility increases, a greater portion of his or her potential total compensation opportunity is based on Company performance incentives rather than on salary. Reliance on Company performance causes greater variability in the individual's total compensation from year to year. By varying annual and long-term compensation and basing both on corporate performance, the Company believes executive officers are encouraged to continue focusing on building profitability and shareholder value. The mix of annual and long-term compensation was set subjectively. In determining the mix, the Committee balanced rewards for past corporate performance with incentives for future corporate performance improvement. Base Salary. Annual base salaries for all executive officers are generally set at competitive levels. The salary ranges for each position are determined by evaluating the responsibilities and accountabilities of the position and comparing it with other executive officer positions in the market place on an annual basis. The base salary of each executive officer, including the President and Chief Executive Officer, is reviewed annually and adjusted within the position range based upon a performance evaluation. Long-term Incentive Compensation. The Company relies to a large degree on annual and longer term incentive compensation to attract and retain corporate officers and other employees and to 94 motivate them to perform to the full extent of their abilities. The long-term incentive compensation includes restricted stock awards and stock option awards. The Committee believes that issuing stock options and other stock-based incentives to executives benefits the Company's shareholders by encouraging and enabling executives to own stock of the Company, thus aligning executive pay with shareholder interests. Compensation of the Chief Executive Officer. Mr. Fiore has served as president and chief executive officer of the Company since its formation and as president and chief executive officer of the Bank since 1995. His salary for 2005 of $345,000 reflected the Board's assessment of compensation levels for the industry. Compensation Committee: David H. Gibbons, Jr. (Chair), Nancy A. Davis, Magdalena M. De Perez, Kenneth S. Kasper and Albert N. Stender Stock Performance Graph. Set forth below is a stock performance graph comparing the cumulative total shareholder return on the Common Stock with (a) the cumulative total shareholder return on stocks included in the NASDAQ U.S. Market Index and (b) the cumulative total shareholder return on stocks included in the SNL NASDAQ Thrift Index. The NASDAQ U.S. Market Index was prepared by the Center for Research in Security Prices (CRSP) at the University of Chicago, and the SNL Nasdaq Thrift Index was prepared by SNL Securities, LC, Charlottesville, Virginia. The SNL Thrift Index includes all thrift institutions traded on NASDAQ. The cumulative total return for both indices and for the Company is computed with the reinvestment of dividends that were paid during the period and assume the investment of $100 as of January 21, 2004 (the date the Company's common stock began trading on the NASDAQ Stock Market following the closing of the Company's second-step mutual-to-stock conversion on January 20, 2004). It is assumed that the investment in the Company's common stock was made at the initial public offering price of $10.00 per share. [GRAPHIC OMITTED] - ----------------------------------------------------------------------------- 1/21/04 12/31/04 12/31/05 - ----------------------------------------------------------------------------- NASDAQ U.S. Market Index $100 $102 $104 - ----------------------------------------------------------------------------- SNL NASDAQ Thrift Index 100 107 95 - ----------------------------------------------------------------------------- Synergy Financial Group, Inc. 100 135 128 - ----------------------------------------------------------------------------- There can be no assurance that the Company's future stock performance will be the same or similar to the historical stock performance shown in the graph above. The Company neither makes nor endorses any predictions as to stock performance. 95 Compensation Committee Interlocks and Insider Participation. The Compensation Committee during the year ended December 31, 2005, consisted of Directors Gibbons (Chair), Davis, De Perez, Kasper and Stender. During the year ended December 31, 2005, the Company had no "interlocking" relationships in which (i) an executive officer of the Company served as a member of the compensation committee of another entity, one of whose executive officers served on the Compensation Committee of the Company; (ii) an executive officer of the Company served as a director of another entity, one of whose executive officers served on the Compensation Committee of the Company; and (iii) an executive officer of the Company served as a member of the compensation committee of another entity, one of whose executive officers served as a director of the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- (a) Security Ownership of Certain Beneficial Owners Persons and groups owning in excess of 5% of the outstanding shares of Common Stock are required to file reports regarding such ownership pursuant to the Securities Exchange Act of 1934, as amended. Other than as set forth in the following table, management knows of no person or group that owns more than 5% of the outstanding shares of Common Stock at February 17, 2006.
Percent of Shares Amount and Nature of of Common Name and Address of Beneficial Owner Beneficial Ownership Stock Outstanding - ------------------------------------ -------------------- ----------------- Synergy Financial Group, Inc. Bank Employee Stock Ownership Plan Trust (the "ESOP") 992,141 (1) 8.7% 310 North Avenue East Cranford, New Jersey 07016 Financial Edge Fund, L.P. 20 East Jefferson Avenue, Suite 22 1,129,015 (2) 9.9% Naperville, Illinois 60540 All directors and executive officers of the Company as a group (12 persons) 969,557 (3) 8.3%
- ---------------- (1) These shares are held in a suspense account and are allocated among participants annually on the basis of compensation as the ESOP debt is repaid. Directors De Perez, Gibbons, Kasper, LaCorte, Putvinski and Stender serve as members of the ESOP Trustee Committee and Kevin A. Wenthen, Senior Vice President, and Janice L. Ritz, a Vice President of the Bank, serve as members of the ESOP Plan Committee. Shares which have not yet been allocated, and allocated shares for which no voting direction has been received from ESOP participants in a timely manner, are voted by the ESOP Trustee Committee as directed by the ESOP Plan Committee. Previously allocated shares for which voting direction has been received from ESOP participants and beneficiaries are voted by the ESOP Trustee Committee in accordance with such participant directions. As of February 17, 2006, 838,764 shares have not yet been allocated from the suspense account. (2) As reported in an amended Schedule 13D filed by the beneficial owners with the Securities and Exchange Commission on February 8, 2006. The natural persons who control the Common Stock held by Financial Edge Fund, L.P. are John Palmer and Richard Lashley. (3) Includes shares of Common Stock held directly as well as by spouses or minor children, in trust and other indirect ownership. Excludes shares held by the ESOP (other than shares allocated to executive officers of the Company) over which certain directors, as ESOP Trustee Committee members, exercise shared voting power. Also excludes unvested shares held by the Synergy Financial Group, Inc. 2003 Restricted Stock Plan (the "2003 Restricted Stock Plan") and the Synergy Financial Group, Inc. 2004 Restricted Stock Plan (the "2004 Restricted Stock Plan") over which certain directors, as RSP Trustees, exercise shared voting power. (b) Security Ownership of Management The following table sets forth the number and percentage of shares of Common Stock beneficially owned by the directors and the executive officers of the Company as of February 17, 2006. 96 Shares of Common Stock Beneficially Percent Name Owned (1) of Class - ---- --------- -------- Directors David H. Gibbons, Jr. 64,049(2) (3) (4) * Nancy A. Davis 54,610(3) * Magdalena M. De Perez 24,027(2) (3) * John S. Fiore 256,678(5) 2.2% Kenneth S. Kasper 61,195(2) (3) (6) * Paul T. LaCorte 44,110(2) (3) * George Putvinski 53,411(2) (3) (7) * W. Phillip Scott 42,740(3) (8) * Albert N. Stender 21,153(2) (3) * Executive Officers of the Company Kevin M. McCloskey 245,940(9) (10) 2.1% Kevin A. Wenthen 96,644(9) * A. Richard Abrahamian 5,000 * All directors and executive 969,557(11) 8.3% officers of the Company as a group (12 persons) - --------------------------------------- * Less than 1.0%. (1) Beneficial ownership as of the Record Date. For Messrs. Fiore, McCloskey and Wenthen, includes shares allocated to individual accounts under both the ESOP and the Synergy Financial Group, Inc. 401(k) Savings Plan. An individual is considered to beneficially own shares if he or she directly or indirectly has or shares (1) voting power, which includes the power to vote, or to direct the voting of, the shares; or (2) investment power, which includes the power to dispose, or direct the disposition of, the shares. (2) Excludes 992,141 shares held under the ESOP over which such individual, as an ESOP Trustee Committee member, exercises voting power. Also excludes an aggregate total of 334,560 unvested shares held by the 2003 Restricted Stock Plan and the 2004 Restricted Stock Plan over which such individual, as an RSP trustee, exercises voting power. (3) Includes 14,530 shares which may be acquired pursuant to the exercise of options. (4) Includes 2,457 shares owned by Mr. Gibbon's wife, which Mr. Gibbons may be deemed to beneficially own. (5) Includes 96,275 shares which may be acquired pursuant to the exercise of options. Also includes 26,061 shares owned by Mr. Fiore's wife, which Mr. Fiore may be deemed to beneficially own. (6) Includes 31,537 shares owned by Mr. Kasper's wife, which Mr. Kasper may be deemed to beneficially own. (7) Includes 14,892 shares owned by Mr. Putvinski's wife, which Mr. Putvinski may be deemed to beneficially own. (8) Includes 930 shares owned by Mr. Scott's wife and 3,723 shares held in trust for a minor child, which Mr. Scott may be deemed to beneficially own. (9) Includes 42,424 shares which may be acquired pursuant to the exercise of options. (10) Includes 18,615 shares held by the Kevin McCloskey Family, LLC for which Mr. McCloskey maintains voting control but maintains less than 5% ownership. (11) Includes shares of Common Stock held directly as well as by spouses or minor children, in trust and other indirect ownership. Excludes shares held by the ESOP (other than shares allocated to executive officers of the Company) over which certain directors, as ESOP Trustees, exercise shared voting power. Also excludes shares of Common Stock held under the RSP over which certain directors, as RSP Trustees, exercise shared voting power. (c) Changes in Control Management of the Registrant knows of no arrangements, including any pledge by any person of securities of the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant. 97 (d) Securities Authorized for Issuance under Equity Compensation Plans Set forth below is information as of December 31, 2005 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.
Equity Compensation Plan Information ------------------------------------ (A) (B) (C) Number of Securities Number of Securities Remaining Available for to be Issued Upon Weighted-average Future Issuance Under Exercise of Exercise Price of Equity Compensation Outstanding Options, Outstanding Options, Plans (Excluding Securities Warrants and Rights Warrants and Rights Reflected in Column (A)) ------------------- ------------------- ------------------------ Equity compensation plans approved by shareholders: 2004 Stock Option Plan 618,569 $10.15 83,422 2003 Stock Option Plan 594,732 $ 6.27 4,484 2004 Restricted Stock Plan (1) N/A N/A 21,124 2003 Restricted Stock Plan (1) N/A N/A 7,353 Equity compensation plans not Approved by stockholders: Not applicable. - - - --------- ------ ------- Total 1,213,301 $ 8.25 115,583 ========= ====== =======
- ----------------- (1) Restricted stock awards of 334,560 shares were outstanding as of December 31, 2005, including awards from both the 2003 and 2004 restricted stock plans. Such awards are earned at the rate of 20% one year after the date of the grant and 20% annually thereafter. Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- No directors, officers or their immediate family members were engaged in transactions with the Company or any subsidiary involving more than $60,000 (other than loans with the Bank) during the two years ended December 31, 2005. The Bank, like many financial institutions, has followed the policy of offering residential mortgage loans for the financing of personal residences and consumer loans to its officers, directors and employees. Loans are made in the ordinary course of business and are also made on substantially the same terms and conditions, other than a 1% discount on eligible loans for employees on the interest rate paid while the person remains an employee, as those of comparable transactions prevailing at the time with other persons, and do not include more than the normal risk of collectibility or present other unfavorable features. As of December 31, 2005, all loans outstanding to all directors, nominees and executive officers, and the affiliates of such persons, were current and performing in accordance with their terms. Item 14. Principal Accounting Fees and Services - ----------------------------------------------- Effective July 30, 2002, the Securities and Exchange Act of 1934 was amended by the Sarbanes-Oxley Act of 2002 to require all auditing services and non-audit services provided by an issuer's independent auditor to be pre-approved by the issuer's audit committee. The Company's Audit Committee has adopted a policy of approving all audit and non-audit services prior to the service being rendered. All of the services listed below for 2004 and 2005 were approved by the Audit Committee prior to the service being rendered. 98 Audit Fees. The aggregate fees billed by Grant Thornton LLP for professional services rendered for the audit of the Company's annual consolidated financial statements and for the review of the consolidated financial statements included in the Company's Quarterly Reports on Form 10-Q for the fiscal years ended December 31, 2005 and 2004 were $202,600 and $173,463, respectively. Audit Related Fees. The aggregate fees billed by Grant Thornton LLP for assurance and related services associated with the audit of the annual financial statements and the review of the quarterly financial statements for the years ended December 31, 2005 and 2004 were $3,500 and $8,750, respectively. The services were in connection with a Form S-8 registration statement filed by the Company related to the 2004 Stock Option Plan during both years. Tax Fees. The aggregate fees billed by Fontanella and Babitts for tax preparation services for the year ended December 31, 2005 were $15,500. Grant Thornton LLP provided tax preparation services for the year ended December 31, 2004 at a cost of $20,000. All Other Fees. The aggregate fees billed by Grant Thornton LLP for professional services rendered for services or products other than those listed under the captions "Audit Fees," "Audit-Related Fees," and "Tax Fees" for the years ended December 31, 2005 and 2004 were $0 and $0, respectively. Item 15. Exhibits and Financial Statement Schedules - --------------------------------------------------- (a) Listed below are all financial statements and exhibits filed as part of this report. 1. The consolidated statements of financial condition as of December 31, 2005 and 2004 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the three years ended December 31, 2005, together with the related notes and the report of independent certified public accountants. 2. There are no financial statement schedules required to be filed. 3. The following exhibits are included in this Report or incorporated herein by reference: (a) List of Exhibits:
3 (i) Certificate of Incorporation of Synergy Financial Group, Inc. (1) 3 (ii) Bylaws of Synergy Financial Group, Inc. (1) 4 Specimen Stock Certificate of Synergy Financial Group, Inc. (1) 10.1 Employment Agreement between Synergy Financial Group, Inc. and John S. Fiore 10.2 Employment Agreement between Synergy Bank and John S. Fiore 10.3 Supplemental Executive Retirement Income Agreement for John S. Fiore (2) 10.4 Synergy Bank Supplemental Executive Retirement Plan for the Benefit of Senior Officers 10.5 Synergy Financial Group, Inc. 2003 Restricted Stock Plan (3) 10.6 Synergy Financial Group, Inc. 2003 Stock Option Plan (3) 10.7 Change in Control Severance Agreement between Synergy Bank and Kevin M. McCloskey (4) 10.8 Change in Control Severance Agreement between Synergy Bank and Kevin A. Wenthen (4) 10.9 Change in Control Severance Agreement between Synergy Bank and A. Richard Abrahamian (4) 10.10 Directors Change in Control Plan (1) 99 10.11 Synergy Financial Group, Inc. 2004 Restricted Stock Plan (5) 10.12 Synergy Financial Group, Inc. 2004 Stock Option Plan (5) 10.13 Synergy Financial Group, Inc. Retirement Benefits Equalization Plan 21 Subsidiaries of the Company 23 Consent of Grant Thornton LLP 31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-108884; filed with the SEC on September 17, 2003). (2) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 2004 (File No. 00050467; filed with the SEC on March 16, 2005). (3) Incorporated by reference to the Definitive Proxy Statement of Synergy Financial Group, Inc. for the 2003 Annual Meeting of Stockholders (File No. 00049980; filed with the SEC on March 18, 2003). (4) Incorporated by reference to the Company's Form 8-K dated July 28, 2005 (File No. 00050467; filed with the SEC on July 28, 2005). (5) Incorporated by reference to the Definitive Proxy Statement of Synergy Financial Group, Inc. for the 2004 Annual Meeting of Stockholders (File No. 00050467; filed with the SEC on July 19, 2004).
100 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of February 23, 2006.
SYNERGY FINANCIAL GROUP, INC. By: /s/ John S. Fiore ------------------------------------------------- John S. Fiore President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 23, 2006. /s/ David H. Gibbons, Jr. /s/ John S. Fiore - ----------------------------------------------------- ----------------------------------------------------- David H. Gibbons, Jr. John S. Fiore Chairman and Director President, Chief Executive Officer and Director (Principal Executive Officer) /s/ A. Richard Abrahamian /s/ Nancy A. Davis - ----------------------------------------------------- ----------------------------------------------------- A. Richard Abrahamian Nancy A. Davis Senior Vice President and Chief Financial Officer Director (Principal Financial and Accounting Officer) /s/ Magdalena M. De Perez /s/ Kenneth S. Kasper - ----------------------------------------------------- ----------------------------------------------------- Magdalena M. De Perez Kenneth S. Kasper Director Director /s/ Paul T. LaCorte /s/ George Putvinski - ----------------------------------------------------- ----------------------------------------------------- Paul T. LaCorte George Putvinski Director Director /s/ W. Phillip Scott /s/ Albert N. Stender - ----------------------------------------------------- ----------------------------------------------------- W. Phillip Scott Albert N. Stender Director Director
101 EX-10 2 ex10-1.txt EMPLOYMENT AGREEMENT - JOHN S. FIORE SYNERGY FINANCIAL GROUP, INC. EMPLOYMENT AGREEMENT THIS AGREEMENT, is effective as of this 1st day of January 2005, (hereinafter the ("Effective Date") by and between Synergy Financial Group, Inc., Cranford, New Jersey (hereinafter the "Company") and John S. Fiore (hereinafter the "Executive"). WITNESSETH WHEREAS, the Executive has heretofore been employed by Synergy Bank (the "Savings Bank") and the Company as the President and Chief Executive Officer and is experienced in all phases of the business of the Company; and WHEREAS, the Company desires to be ensured of the Executive's continued active participation in the business of the Company; and WHEREAS, in order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's agreeing to remain in the employ of the Company, the parties desire to specify the continuing employment relationship between the Company and the Executive; NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. Employment. The Company hereby employs the Executive in the capacity ---------- of President and Chief Executive Officer. The Executive hereby accepts said employment and agrees to render such administrative and management services to the Company as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Executive shall promote the business of the Company. The Executive's other duties shall be such as the Board of Directors for the Company (the "Board of Directors" or "Board") may from time to time reasonably direct, including normal duties as an officer of the Company. 2. Term of Employment. The term of employment of Executive under this ------------------ Agreement shall be for the period commencing on the Effective Date and ending thirty-six (36) months thereafter (hereinafter the "Term"). Additionally, on, or before, each annual anniversary date from the Effective Date, the Term of such Agreement shall be extended for an additional year so that the contract is always for a thirty-six (36) month term, unless the Board of Directors makes an affirmative decision not to extend the Term and gives written notice to the Executive of such decision not to extend such Term not later than November 1 of such year. References herein to the Term of this Agreement shall refer both to the initial term and successive terms. 3. Compensation, Benefits and Expenses. ----------------------------------- (a) Base Salary. The Company shall compensate and pay the Executive ----------- during the Term of this Agreement a minimum base salary at the rate of $345,000.00 per annum (hereinafter the "Base Salary"), payable in cash not less frequently than bi-weekly; provided, that the rate of such salary shall be reviewed by the Board of Directors not less often than annually, and the Executive shall be entitled to receive increases at such percentages or in such amounts as determined by the Board of Directors. The Base Salary may not be decreased without the Executive's express written consent. The Base Salary shall be offset by any Base Salary paid to the Executive by the Savings Bank. (b) Discretionary Bonus. The Executive shall be entitled to --------------------- participate in an equitable manner with all other senior management employees of the Company in discretionary bonuses that may be authorized and declared by the Board of Directors to its senior management executives from time to time. No other compensation shall be deemed a substitute for the Executive's right to participate in such discretionary bonuses and as declared by the Board. (c) Participation in Benefit and Retirement Plans. The Executive ----------------------------------------------- shall be entitled to participate in and receive the benefits of any plan of the Company which may be or may become applicable to senior management relating to pension or other retirement benefit plans, supplementary retirement plan, profit-sharing, stock options or incentive plans, or other plans, benefits and privileges given to employees and executives of the Company, to the extent commensurate with his then duties and responsibilities, as fixed by the Board of Directors of the Company. (d) Participation in Medical Plans and Insurance Policies. The --------------------------------------------------------- Executive shall be entitled to participate in and receive the benefits of any plan or policy of the Company which may be or may become applicable to senior management relating to life insurance, short and long term disability, medical, dental, vision, prescription drugs or medical reimbursement plans. During the term of the Executive's employment with the Company, the Executive's dependent family may participate in such programs, with the cost of premiums paid by the Company. Additionally, upon termination with Good Reason, without cause or as a result of a change in control, Executive and Executive's dependent family shall continue to be eligible to participate in medical and dental insurance plans sponsored by the Company for the remaining Term of the Agreement with the total cost of such premiums paid by the Company. (e) Vacations and Sick Leave. The Executive shall be entitled to ------------------------ paid annual vacation leave in accordance with the policies as established from time to time by the Board of Directors, which shall, in no event, be less than five weeks per annum. In the event of termination of employment, Executive shall be paid for unused and accrued vacation at the then-current salary. The Executive shall also be entitled to an annual sick leave benefit as established by the Board for senior management employees of the Company. 2 (f) Expenses. The Company shall reimburse the Executive or otherwise -------- provide for or pay for or pay for all reasonable expenses incurred by the Executive in furtherance of, or in connection with, the business of the Company, including, but not by way of limitation, premium country club dues, automobile and traveling expenses, industry conventions and meetings and all reasonable entertainment expenses, subject to such reasonable documentation and other limitations as may be established by the Board of Directors of the Company. In addition, the Company shall reimburse the Executive for the costs associated with preparation of his federal and state tax returns. (g) Automobile. The Company will provide the Executive with an ----------- automobile for business use. Upon termination of employment of the Executive for any reason, the Company will transfer title of ownership of such automobile to the Executive and the Executive will pay any applicable taxes. (h) Changes in Benefits. The Company shall not make any changes in ------------------- such plans, benefits or privileges previously described in Section 3(c), (d) and (e) which would adversely affect the Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Company and does not result in a proportionately greater adverse change in the rights of, or benefits to the Executive, as compared with any other executive officer of the Company. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to Executive pursuant to Section 3(a) hereof. (i) Other Arrangements. Notwithstanding anything herein to the -------------------- contrary, the Company and the Executive may enter into additional agreements related to compensation, retirement, bonus arrangements, insurance arrangements and the like. No such additional arrangements will reduce or replace any obligations of the Company set forth herein unless specifically provided for in writing as set forth in such additional agreements. 4. Loyalty. ------- (a) The Executive shall devote his full time and attention to the performance of his employment under this Agreement. During the term of the Executive's employment under this Agreement, the Executive shall not engage in any business or activity contrary to the business affairs or interests of the Company. (b) Nothing contained in this Section shall be deemed to prevent or limit the right of Executive to invest in the capital stock or other securities of any business dissimilar from that of the Company, or, solely as a passive or minority investor, in any business. 5. Standards. During the term of this Agreement, the Executive shall --------- perform his duties in accordance with such reasonable standards expected of executives with comparable positions 3 in comparable organizations and as may be established from time to time by the Board of Directors. 6. Termination and Termination Pay. The Executive's employment under -------------------------------- this Agreement shall be terminated upon any of the following occurrences: (a) Death. The death of the Executive during the Term of this ----- Agreement, in which event the Executive's estate shall be entitled to receive the compensation due the Executive through the last day of the calendar month in which Executive's death shall have occurred. (b) Just Cause. The Board of Directors may terminate the Executive's ---------- employment at any time, but any termination by the Board of Directors other than termination for Just Cause, shall not prejudice the Executive's right to compensation or other benefits under this Agreement. The Executive shall have no right to receive compensation or other benefits for any period after termination for "Just Cause". The Board may, within its sole discretion, acting in good faith, terminate the Executive for Just Cause and shall notify such Executive accordingly. Termination for "Just Cause" shall include termination because of the Executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of the Agreement. (c) Without Just Cause. Except as provided pursuant to Section 9 -------------------- hereof, in the event Executive's employment under this Agreement is terminated by the Board of Directors without Just Cause, the Company shall be obligated to continue to pay the Executive the salary provided pursuant to Section 3(a) herein plus the highest rate of bonus granted to the Executive during the prior three calendar years, for a period of thirty six (36) months from the date of termination of employment, and continued participation in all benefit plans, retirement plans and perquisites during such period or comparable compensation for such benefits to the extent that continued participation is not permissible, including, but not limited to the cost of the Executive and Executive's dependent family obtaining all health, life, disability, and other benefits which the Executive would be eligible to participate in through such date based upon the benefit levels substantially equal to those being provided Executive at the date of termination of employment. (d) With Good Reason. ---------------- (i) The Executive may, by written notice to the Board of Directors, terminate this Agreement at any time within sixty (60) days following an event constituting "Good Reason." In the event, the Executive terminates this Agreement with Good Reason, the Company shall be obligated to continue to pay the Executive the salary provided pursuant to Section 3(a) of this Agreement for a period of thirty-six months thereafter, and the cost of the Executive obtaining all health, life, disability and other benefits which the 4 Executive would be eligible to participate in through such date based upon benefit levels substantially equal to those being provided the Executive at the date of termination of employment. (ii) "Good Reason" shall exist if, without the Executive's express written consent, the Company materially breaches any of its obligations under this Agreement. Without limitation, such a material breach shall be deemed to occur upon any of the following: (1) A material reduction in the Executive's function, duties or responsibilities, which change would cause the Executive's position to become one of lesser responsibility, importance or scope from the position and attributes described herein; (2) A liquidation of dissolution of the Company; (3) Failure to appoint or reappoint the Executive as Chief Executive Officer or failure to nominate or re-nominate the Executive to the Board; (4) A reduction in salary or a material reduction in benefits or perquisites contrary to the terms of this Agreement; (5) Termination of incentive and benefit plans, programs or arrangements, or reduction of the Executive's participation to such an extent as to materially reduce their aggregate value below their aggregate value as of the Effective Date; or (6) A requirement that the Executive relocate his principal business office outside of the area consisting of a thirty (30) mile radius from its location at the effective date of this Agreement. (iii) Notwithstanding the foregoing, a reduction or elimination of the Executive's benefits under one or more benefit plans maintained by the Company or its subsidiaries as a part of a good faith, overall reduction or elimination of such plan or plans or benefits thereunder applicable to all participants in a manner that does not discriminate against the Executive (except as such discrimination may be necessary to comply with law) shall not constitute an event of Good Reason or a material breach of this Agreement, provided that benefits of the type or to the elimination are not available to other officers of the Company or its subsidiaries or any company that controls either of them under a plan or plans in or under which the Executive is not entitled to participate. 5 (e) Voluntary Termination. The voluntary termination by the ------------------------ Executive during the Term of this Agreement with the delivery of no less than 60 days written notice to the Board of Directors, other than pursuant to Section 9(b), in which case the Executive shall be entitled to receive only the compensation, vested rights, and all employee benefits up to the date of such termination. 7. Regulatory Exclusion. Notwithstanding anything herein to the --------------------- contrary, any payments made to the Executive pursuant to the Agreement, or otherwise, shall be subject to and conditioned upon compliance with 12 USC ss.1828(k) and any regulations promulgated thereunder. 8. Disability. If the Executive shall become disabled or incapacitated ---------- to the extent that he is unable to perform his duties hereunder, by reason of medically determinable physical or mental impairment, as determined by a doctor engaged by the Board of Directors, the Company will pay Executive, as disability pay, a weekly payment equal to one hundred percent (100%) of Executive's weekly rate of Base Salary, on the effective date of such termination. These disability payments shall commence on the effective date of Executive's termination and will end on the earlier of (i) the date Executive returns to the full-time employment of the Company in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Company; (ii) Executive's full-time employment by another employer; (iii) Executive's death; or (iv) the expiration of the term of Executive's disability insurance policy at age 65 as currently provided by the Company. Such benefits noted herein shall be reduced by any benefits otherwise provided to the Executive during such period under the provisions of disability insurance coverage in effect for the Executive. Executive shall be eligible to receive benefits provided by the Company under the provisions of supplemental disability insurance coverage in effect for Company employees. 9. Change in Control. ------------------ (a) Notwithstanding any provision herein to the contrary, in the event of the involuntary termination of Executive's employment during the Term of this Agreement following any Change in Control of the Savings Bank or Company, or within 24 months thereafter of such Change in Control, absent Just Cause, the Executive shall be paid an amount equal three (3) times the average annual taxable compensation paid by the Savings Bank and the Company to the CEO during the five calendar year period ending on or before such date of a Change in Control as reported on IRS Form W-2, Box 1 and IRS Form 1099, less $1.00. Said sum shall be paid in one (1) lump sum prior to such termination of service, and such payments shall be in lieu of any other future payments which the Executive would be otherwise entitled to receive under Section 6 of this Agreement. Notwithstanding the forgoing, all sums payable hereunder shall be reduced in such manner and to such extent that the Savings Bank shall make payments to the Executive under the Employment Agreement between the Savings Bank and the Executive upon such termination of employment. Notwithstanding the forgoing, all sums payable hereunder shall be reduced in such manner and to such extent so that no such payments made hereunder when aggregated with all other payments to be made to the Executive by the Bank or the Company shall be deemed an "excess parachute payment" in accordance with Section 280G of the Code and be subject to the excise tax provided at Section 4999(a) of the Code. The term "Change in Control" shall refer to: 6 (i) the sale of all, or a material portion, of the assets of the Savings Bank or the Company; (ii) the merger or recapitalization of the Savings Bank or the Company whereby the Savings Bank or the Company is not the surviving entity; (iii) a change in control of the Savings Bank or the Company, as otherwise defined or determined by the Office of Thrift Supervision or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five percent (25%) or more of the outstanding voting securities of the Savings Bank or the Company by any person, trust, entity or group. The term "person" means an individual other than the Executive, or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The provisions of this Section 9(a) shall survive any prior termination or expiration of this Agreement occurring after a Change in Control. (b) Notwithstanding any other provision of this Agreement to the contrary, Executive may voluntarily terminate his employment during the Term of this Agreement following a Change in Control of the Savings Bank or the Company, or within twenty-four (24) months following such Change in Control, and Executive shall thereupon be entitled to receive the payment described in Section 9(a) of this Agreement. The provisions of this Section 9(b) shall survive any prior termination or expiration of this Agreement occurring after a Change in Control. 10. Source of Payments. All payments provided in this Agreement shall ------------------ be timely paid in cash or check from the general funds of the Company. The Company unconditionally guarantees payment and provision of all amounts and benefits due hereunder to Executive. 11. Withholding. All payments required to be made by the Company ----------- hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation. 12. Payment of Costs and Legal Fees. All reasonable costs and legal ------------------------------- fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Company if Executive is successful pursuant to a legal judgment, arbitration or settlement. 13. Successors and Assigns. ---------------------- (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Company. (b) The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation, to all or substantially all the business or assets of the 7 Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Agreement, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. (c) Since the Company is contracting for the unique and personal skills of the Executive, the Executive shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Company. 14. Indemnification. ---------------- (a) The Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) as permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not to be limited to, judgments, court costs, and attorneys' fees and the cost of reasonable settlements. (b) Any payments made to Executive pursuant to this Section 15 are subject to and conditioned upon compliance with 12 C.F.R. Section 545.121 and any rules or regulations promulgated thereunder. (c) The provisions of this Section 14 shall survive any prior termination or expiration of this Agreement. 15. Amendment: Waiver. No provisions of this Agreement may be modified, ----------------- waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Company to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 16. Governing Law. The validity, interpretation, construction and -------------- performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise by the substantive laws of the State of New Jersey. 17. Nature of Obligations. Nothing contained herein shall create or ---------------------- require the Company to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Company hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company. 8 18. Headings. The section headings contained in this Agreement are for -------- reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 19. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect. 20. Non-Exclusivity. This Agreement is not intended to be the exclusive --------------- agreement covering the employment and compensation of the Executive. Any other agreements, contracts or understandings covering the compensation and services between the Executive and the Company or any of its subsidiaries shall remain in effect and unchanged. All sums payable under this Agreement, shall be reduced in such manner and to such extent that the Savings Bank shall make payments to the Executive under the Employment Agreement between the Savings Bank and the Executive. 21. Arbitration. Any controversy or claim arising out of or relating to ----------- this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the rules then in effect of the district office of the American Arbitration Association ("AAA") nearest to the home office of the Company, and judgment upon the award rendered may be entered in any court having jurisdiction thereof, except to the extent that the parties may otherwise reach a mutual settlement of such issue. Furthermore, the settlement of the dispute to be approved by the Board of the Company may include a provision for the reimbursement by the Company to the Executive for all reasonable costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, or the Board of the Company may authorize such reimbursement of such reasonable costs and expenses by separate action upon a written action and determination of the Board following settlement of the dispute. Such reimbursement shall be paid within ten (10) days of Executive furnishing to the Company evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by Executive. The provisions of this Section shall survive any prior termination or expiration of this Agreement. 22. Confidential Information. The Executive acknowledges that during ------------------------- his employment he will learn and have access to confidential information regarding the Company and its customers and businesses (hereinafter "Confidential Information"). The Executive agrees and covenants not to disclose or use for his own benefit, or the benefit of any other person or entity, any such Confidential Information, unless or until the Company consents to such disclosure or use or such information becomes common knowledge in the industry or is otherwise legally in the public domain. The Executive shall not knowingly disclose or reveal to any unauthorized person any Confidential Information relating to the Company, or any subsidiaries or affiliates, or to any of the businesses operated by them, and the Executive confirms that such information constitutes the exclusive property of the Company. The Executive shall not otherwise knowingly act or conduct himself (a) to the material detriment of the Company, or its subsidiaries, or affiliates, or (b) in a manner which is inimical or contrary to the interests of the Company. Executive acknowledges and agrees that the existence of this Agreement and its terms and conditions constitutes Confidential Information of the Company, and the Executive agrees not to disclose the 9 Agreement or its contents without the prior written consent of the Company. Notwithstanding the foregoing, the Company reserves the right in its sole discretion to make disclosure of this Agreement as it deems necessary or appropriate in compliance with its regulatory reporting requirements. Notwithstanding anything herein to the contrary, failure by the Executive to comply with the provisions of this Section 22 may result in the immediate termination of the Agreement within the sole discretion of the Company, disciplinary action against the Executive taken by the Company, including, but not limited to the termination of employment of the Executive for breach of the Agreement and the provisions of this Section 22, and other remedies that may be available in law or in equity. 23. Restrictive Covenant. Executive acknowledges that his services are -------------------- special and of unique value to the Company and therefore covenants and agrees that for a period of one (1) year after termination of this Agreement, or any extensions, for any reason, whether with or without cause, he will not be employed by a financial institution or financial institution holding company whose principal office is located within twenty-five (25) miles of the main office of the Company. As a specific exception to the arbitration provision noted above, Executive acknowledges that the Company shall be entitled to seek injunctive relief in court to enforce the terms and provisions of this restrictive covenant. Nothing contained in this restrictive covenant shall prevent the Executive from serving as a consultant for the purpose of establishing a de novo financial institution provided the Executive is an independent contractor and not an employee of the financial institution. The provisions of this Section 23 shall survive any prior termination or expiration of this Agreement. 24. Entire Agreement. This Agreement together with any understanding or ---------------- modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto. 10 IN WITNESS WHEREOF, the parties have executed this Agreement, effective as of the date written hereinabove. SYNERGY FINANCIAL GROUP, INC. ATTEST: /s/ Paul T. LaCorte By: /s/ Kenneth S. Kasper - ---------------------------- ------------------------------------- Paul T. LaCorte Kenneth S. Kasper, Chairman WITNESS: /s/ Kevin A. Wenthen /s/ John S. Fiore - ---------------------------- ----------------------------------------- Kevin A. Wenthen, Secretary John S. Fiore, Executive President and Chief Executive Officer EX-10 3 ex10-2.txt EMPLOYMENT AGREEMENT - JOHN S. FIORE SYNERGY BANK EMPLOYMENT AGREEMENT As amended and restated This Agreement is made and entered into this 1st of January, 2005, by and between SYNERGY BANK, a federally-chartered savings bank (hereinafter referred to as the SAVINGS BANK) which is a wholly-owned subsidiary of Synergy Financial Group, Inc. ("Company"), with principal offices of the Savings Bank located at 310 North Avenue East, Cranford, New Jersey, and JOHN S. FIORE (hereinafter referred to as "CEO"), currently residing at 102 Four Winds Drive, Middletown, New Jersey, and shall be effective the first day of January, 2005. 1. TERM. ---- The period of CEO's employment under this Agreement shall begin as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, and continuing at each anniversary date thereafter, the Agreement shall renew for an additional year such that the remaining term shall be three (3) years unless written notice is provided to CEO at least ten (10) days and not more than sixty (60) days prior to any such anniversary date, that his employment shall cease at the end of thirty-six (36) months following such anniversary date. Prior to each notice period for non-renewal, the Executive and Compensation Committee (excluding the "CEO") of the Board of Directors ("Board") of the Savings Bank will conduct a comprehensive performance evaluation and review of the CEO for all purposes under this Agreement, including whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting (the "Performance Review"). 2. DUTIES AND RESPONSIBILITIES --------------------------- CEO shall perform the duties and responsibilities of Chief Executive Officer in accordance with applicable federal or state laws and regulations and the bylaws, rules and regulations of the Savings Bank and shall provide executive management services for the Savings Bank. Subject to the direction and approval of the Board of Directors of the Savings Bank, CEO shall formulate, approve, supervise and direct the methods of keeping the records of the Savings Bank, statistical or otherwise; shall prepare all such reports as are required by law or regulation including, but not limited to, statements and reports for the Board of Directors and the members of the Savings Bank; shall prepare the annual budget; and shall, from time to time, and at any time upon request, make reports to the Savings Bank's Board of Directors on the business affairs and financial condition of the Savings Bank. This shall not be deemed to limit the powers of the Board of Directors and/or the Audit Committee of the Savings Bank to engage at any time public accountants to examine end report concerning the accounts and financial affairs of the Savings Bank. CEO shall perform such other duties and services as may be entrusted to him by the Savings Bank in accordance with its bylaws and consistent with this office as Chief Executive Officer. In addition, CEO shall perform those specific duties set forth in Exhibit "A" attached hereto and made a part thereof entitled, Position Description of Chief Executive Officers. 3. COMPENSATION ------------ 3.1.1 Base Compensation: CEO shall be paid a base annual salary of not less ----------------- than $345,000.00 for the remainder of the Agreement ("Base Salary"). The CEO will be paid in twenty-six (26) bi-weekly installments on the Savings Bank's normal paydays for the duration of the Agreement. 3.1.2 The Savings Bank agrees to maintain for the business use of the CEO an appropriate automobile. The Savings Bank also agrees to pay the annual insurance premium, regular maintenance on, and repairs of, the vehicle, reasonable charges for fuel and oils, registration and titling fees. 3.1.3 The Performance Review defined in Section 1 above shall include a determination whether the performance of the CEO met expectations or exceeded expectations. In making this decision the Executive and Compensation Committee shall consider, but not be limited to, an evaluation of the accomplishments of the prior year's EIP goals and other measures of the CEO's managerial and organizational performance. Based upon the results of the Performance Review and a review of peer group data, the Compensation Committee may, in its sole discretion, increase the base salary of the CEO from time to time during the Term of this Agreement. 3.1.4. In addition to the foregoing, the Performance Review shall include an evaluation of the operation of the Savings Bank to determine if diversification activity significantly increased the size and complexity of the Savings Bank. If so, the Executive and Compensation Committee, in its sole discretion, may elect to increase the base salary to be paid to the CEO. 3.2 CEO Bonus: The Performance Review shall also provide the basis for --------- determining any CEO bonus. In the third year of this Agreement, the Performance Review will also form the basis for negotiation of the renewal terms of this Agreement. The Bank Administration Institute Executive Salary Survey, as well as other appropriate sources, may be used as a comparative tool. 3.3 Executive Incentive Program: CEO shall be entitled to participate in an --------------------------- annual Savings Bank Executive Management-Incentive Compensation Program. The Executive Incentive Program bonus, if granted by the Executive and Compensation Committee, shall be a lump sum payment to be made within thirty (30) days of the end of each year of this Agreement. The Executive Incentive Program payment shall not result in a permanent increase in the CEO's salary. 4. OTHER ACTIVITIES ---------------- CEO may serve, for compensation, as a lecturer, consultant to others and may engage in other activities of a short duration which do not interfere with his ability to perform his responsibilities under this Agreement. In all such cases, CEO shall inform the Board of Directors of such activities in advance. Otherwise, CEO during the term of the Agreement, shall not, except as otherwise agreed to by the Board of Directors of the Savings Bank, work with, accept or receive any compensation or consideration from any other organization, firm, savings bank, person, corporation, or otherwise, for services to be performed by CEO. 5. INSURANCE AND EMPLOYEE BENEFITS 5.1 Employee Benefits Generally: CEO shall be entitled to the employee ----------------------------- benefit package currently available to all Savings Bank employees. This benefit package includes: Term Life Insurance Long-Term and Short-Term Disability Hospitalization, Medical and Dental Insurance Retirement Plan 2 as set forth in the booklets previously issued. In addition, Savings Bank will purchase for the benefit of CEO (i) supplemental disability coverage (including long term convalescent care coverage) and (ii) supplemental life insurance protection to provide CEO with the same level of coverage (as a percent of CEO's compensation) as is provided to employees generally. The Savings Bank will be responsible for CEO's share of benefits costs including dependent coverage. 5.2 Retiree Health Benefits: In addition to the benefits provided under ------------------------- subparagraph 5.1 of this Section, CEO shall be entitled to continuing health care coverage upon CEO's retirement from the Savings Bank at anytime after the CEO's attainment of age 55 for the remainder of CEO's life. Prior to attainment of age sixty-five (65), CEO's coverage shall be in substantially the same amount as provided to CEO prior to CEO's retirement. After attainment of age sixty-five (65), Savings Bank shall provide a Medicare supplement to CEO. 5.3 Memberships, Travel and Entertainment Expenses: The Bank shall --------------------------------------------------- reimburse the CEO for his ordinary and necessary business expenses, including, without limitation, fees for such civic clubs and organizations as the CEO and the Board shall mutually agree are necessary and appropriate for business purposes, and travel and entertainment expenses, incurred in connection with the performance of his duties under this Agreement, upon presentation to the Bank of an itemized account of such expenses in such form as the Bank may reasonably require. 5.4 Professional Dues and Educational Expenses: CEO shall be expected to -------------------------------------------- and encouraged to continue his education in subject matters which may be beneficial and advantageous to the current and future operation of the Savings Bank. CEO shall be encouraged to participate in those organizations to which the Savings Bank pays dues or fees, and which will benefit the Savings Bank in an informational, communicative or educational manner. 5.5 Spouses Expenses: The Board of Directors shall designate meetings and ---------------- activities which it deems necessary for the CEO's spouse to attend which are in the best interest of the Savings Bank. Savings Bank will pay for out of town expenses for these meetings. 5.6 Vacation and Leave: CEO shall be entitled to five (5) weeks of paid ------------------- vacation and all holidays designated by the Savings Bank for its employees. In the event of termination of employment, CEO shall be paid for unused earned and accrued vacation at the then-current rate of salary. 5.7 Tax Returns: The Savings Bank will, during the term of this Agreement, ----------- reimburse the CEO for the reasonable expense related to the preparation of CEO's federal and state tax returns. The CEO will arrange for such service in a timely manner. 5.8 Medical Examination: Once annually during term of this Agreement, CEO ------------------- shall obtain a complete medical examination, the reasonable cost of which will be paid by the Savings Bank. The Chairperson of the Savings Bank shall be advised in writing by the physician of the continued fitness of CEO to perform under this Agreement and such report shall be confidential. 5.9. Non-Qualified Deferred Compensation Plans: Within six (6) months of ------------------------------------------- execution of this Agreement, the Bank shall adopt for the benefit of CEO, a Supplemental Executive Retirement Plan to supplement the benefits payable to CEO at retirement from the Bank's tax-qualified plans. 3 6. NON-ASSIGNABILITY ----------------- This is an Agreement for the personal services of CEO and his rights hereunder shall not be assignable by him, provided, however, that in the event of CEO's death while this Agreement is in effect, any salary of benefits due or payable to him to date of death, along with payment for unused earned and accrued vacation and leave days shall be payable to his estate. 7. EFFECT OF AGREEMENT ------------------- This Agreement shall be binding upon the parties and their respective heirs, executors, administrators, successors and assigns. CEO shall not assign any part of CEO's rights under this Agreement without the written consent of Savings Bank. In the event of a merger, transfer, consolidation, or reorganization involving Savings Bank, this Agreement shall continue in force and become an obligation of Savings Bank's successor. 8. TERMINATION ----------- This Agreement may be terminated prior to the expiration date provided in Article 1 as follows: 8.1 The provisions of this Section shall in all respects be subject to the terms and conditions stated in Sections 9 and 10. 8.1.1 The provisions of this Section shall apply upon the occurrence of an Event of Termination (as herein defined) during the CEO's term of employment under this Agreement. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Savings Bank of CEO's full-time employment hereunder for any reason other than (A) disability or retirement, (B) death, or (C) Termination for Cause as defined in Section 8.3 hereof; or (ii) CEO's resignation from the Savings Bank's employ, upon any (A) failure to elect or reelect or to appoint or reappoint CEO as Chief Executive Officer or failure to nominate or re-nominate the CEO to serve on the Board, (B) material change in CEO's function, duties, or responsibilities, which change would cause CEO's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 2, above, (C) a relocation of CEO's principal place of employment by more than 30 miles from its location at the effective date of this Agreement, or a material reduction in the benefits and perquisites to the CEO from those being provided as of the effective date of this Agreement, (D) liquidation or dissolution of the Savings Bank or Company other than liquidations or dissolutions that are caused by reorganizations that do not affect the status of CEO, or (E) breach of this Agreement by the Savings Bank. 4 Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or (E), above, CEO shall have the right to elect to terminate his employment under this Agreement by resignation upon sixty (60) days prior written notice given within a reasonable period of time not to exceed four calendar months after the initial event giving rise to said right to elect. Notwithstanding the preceding sentence, in the event of a continuing breach of this Agreement by the Savings Bank, the CEO, after giving due notice within the prescribed time frame of an initial event specified above, shall not waive any of his rights solely under this Agreement and this Section 8 by virtue of the fact that CEO has submitted his resignation but has remained in the employment of the Savings Bank and is engaged in good faith discussions to resolve any occurrence of an event described in clauses (A), (B), (C), (D) and (E) above. (iii) CEO's voluntary resignation from the Savings Bank's employ on the effective date of, or at any time following a Change in Control during the term of this Agreement. For these purposes, a "Change in Control" shall mean, a change in control of the Savings Bank or the Company of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Savings Bank or the Company within the meaning of the HOLA; or (iii) without limitation, such a change in control shall be deemed to have occurred at such time as (a) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Savings Bank or the Company representing 25% or more of the Savings Bank's or the Company's outstanding securities ordinarily having the right to vote at the election of directors, except for any securities of the Savings Bank issued to the Company in connection with the Reorganization and Stock Offering pursuant to the Savings Bank's Plan of Reorganization and Stock Issuance and securities purchased by the Savings Bank's or the Company's employee stock benefit plans; or (b) the Incumbent Board ceases for any reason to constitute at least a majority of the board of directors of the Savings Bank or the Company; or (c) a reorganization, merger, consolidation, sale of all or substantially all of the assets of the Savings Bank or the Company or similar transaction. 8.1.2 Payments Upon an Event of Termination. -------------------------------------- (a) Upon the occurrence of an Event of Termination other than a Change in Control, on the date of termination, the Savings Bank shall pay CEO, as severance pay or liquidated damages, or both, a sum equal to the sum of (i) the Base Salary in effect as of the date of an Event of Termination for a period of thirty-six months thereafter and (ii) the highest rate of bonus awarded to the CEO during the prior three years. At the election of the CEO, which election is to be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Event of Termination, any payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the CEO's termination. In the event that no election is made, payment to the CEO will be made on a monthly basis during the remaining term of this Agreement. Such payments shall not be reduced in the event the CEO obtains other employment following termination of employment. (b) Upon the occurrence of an Event of Termination in connection with a Change in Control, on the date of termination the Savings Bank shall pay CEO, as severance pay or liquidated damages, or both, a sum equal to three (3) times the average annual taxable compensation paid by the Savings Bank to the CEO during the five calendar year period ending on or before such date of a Change in Control as reported on IRS Form W-2, Box 1 and IRS Form 1099, less $1.00. At the election of the CEO, which election is to be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Event of Termination, any payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the CEO's 5 termination. In the event that no election is made, payment to the CEO will be made on a monthly basis during the remaining term of this Agreement. Such payments shall not be reduced in the event the CEO obtains other employment following termination of employment. (c) Upon the occurrence of an Event of Termination, the Savings Bank will cause to be continued, at the expense of the Savings Bank, life, medical, dental, retiree health, and disability coverage substantially identical to the coverage maintained by the Savings Bank for CEO prior to his termination for a period of thirty-six months thereafter. In addition, the Savings Bank shall continue all other perquisites provided to CEO pursuant to this Agreement. Such coverage and benefits shall continue from the date of termination and for a period of thirty-six months thereafter. The Savings Bank shall also provide executive outplacement services to CEO for a period of one year. (d) Notwithstanding the preceding paragraphs of this Section 8, in the event that: (i) the aggregate payments or benefits to be made or afforded to CEO under said paragraphs (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Code or any successor thereto, and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to the total amount of payments permissible under Section 280G of the Code or any successor thereto, then the Termination Benefits to be paid to CEO shall be so reduced so as to be a Non-Triggering Amount. 8.1.3 Failure to Extend Agreement. --------------------------- (a) In the event that the Savings Bank fails to renew the term of this Agreement (see Paragraph 1 above), and upon the subsequent termination of CEO's full-time employment hereunder by the Savings Bank for any reason other than disability or retirement, death or Termination for Cause as defined in Section 8.3 hereof, the Savings Bank shall pay CEO, as severance pay or liquidated damages, or both, a sum equal to the sum of (i) the Base Salary from the date of termination and ending thirty-six months thereafter and (ii) the highest rate of bonus awarded to the CEO during the prior three years. At the election of the CEO, which election is to be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Event of Termination, any payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the CEO's termination. In the event that no election is made, payment to the CEO will be made on a monthly basis during the remaining term of this Agreement. Such payments shall not be reduced in the event the CEO obtains other employment following termination of employment. At the minimum, the Savings Bank shall pay CEO not less than the Base Salary for the period of one year. In addition, the provisions of Paragraphs 8.1.2 (c) and 8.1.2 (d) shall apply. (b) In the event that the Savings Bank fails to renew the term of this Agreement (see Paragraph 1 above), the notice period for CEO's voluntary termination of this Agreement (see Paragraph 8.2.1) shall be reduced from one hundred and twenty (120) days to sixty (60) days until such time as the Savings Bank extends the Agreement to a remaining term of three years. (c) In the event that the Savings Bank fails to renew the term of this Agreement (see Paragraph 1 above), and upon the subsequent voluntary termination of CEO's full-time employment by 6 CEO, the Savings Bank shall pay to CEO a sum equal to the Base Salary for a period of one year. 8.2 Resignation by CEO ------------------ 8.2.1 Should CEO voluntarily decide to terminate his employment for any reason other than as specifically set forth in Section 8.1, he will provide the Savings Bank with no less than one hundred and twenty (120) days written notice, as defined in Section 8.5.1, of the Date of Termination, as defined in Section 8.5.2. During such one hundred and twenty (120) day period, Executive shall continue to receive the Base Compensation payable under Section 3.1.1, the automobile allowance payable under Section 3.1.2, and shall be entitled to a pro-rata share of any bonus payable under Section 3.1.3. In addition, CEO shall be entitled to the Insurance and Employee Benefits payable for such period under Section 5. 8.2.2 In the event that the CEO gives the Notice of Termination and complies with the 120 day notice period set forth in Section 8.1.1 above, and, at the Savings Bank's option, the Savings Bank decides on an earlier termination date, which does not comply with the 120 day notice provision, then the CEO will be entitled to receive the payments to which he becomes entitled under Section 8.2.1, through the Date of Termination, as defined in Section 8.5.2. 8.3 Termination for Cause: ---------------------- 8.3.1 The Savings Bank's Board of Directors may terminate the officer or employee's employment at any time, but any termination by the Savings Bank's Board of Directors other than termination for cause, shall not prejudice the officer or employee's right to compensation or other benefits under the Agreement. The officer or employee shall have no right to receive compensation or other benefits for any period after termination for cause. Termination for cause shall include termination because of the officer or employee's personal dishonesty, negligence, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of the Agreement. In such event, CEO shall be given prior written notice of the charges against him and an opportunity to respond in writing to the charges before a final decision is made to terminate this Agreement. 8.4 Termination Due to Death: ------------------------ 8.4.1 No termination compensation will be paid in the event that CEO's employment is terminated as a result of death. 8.5 Notice; Date of Termination: --------------------------- 8.5.1 Notice. Any purported termination by the Savings Bank or by CEO shall ------ be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of CEO's employment under the provision so indicated. 8.5.2 Date of Termination shall mean the date specified in the Notice of -------------------- Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). 7 8.5.3 If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, except upon the voluntary termination by the CEO in which case the Date of Termination shall be the date specified in the Notice (which shall conform to the requirements of this Agreement), the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Savings Bank will continue to pay CEO his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Compensation) and continue CEO as a participant in all compensation, benefit and insurance plans in which he was participating when the notice of dispute was given, until the dispute is finally resolved in accordance with this Agreement, provided such dispute is resolved within the term of this Agreement. If such dispute is not resolved within the term of the Agreement, the Savings Bank shall not be obligated, upon final resolution of such dispute, to pay CEO compensation and other payments accruing beyond the term of the Agreement. Amounts paid under this Section shall be offset against or reduce any other amounts due under this Agreement. 9. SUSPENSION AND/OR REMOVAL: -------------------------- 9.1 If the officer or employee is suspended and/or temporarily prohibited from participating in the conduct of the Savings Bank's affairs by a notice served under section 8(e)(3) or (9)(1) of [the] Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the Savings Bank's obligations under the Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Savings Bank may in its discretion (i) pay the officer or employee all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate in whole or in part) any of its obligations which were suspended. 9.2 If the officer or employee is removed and/or permanently prohibited from participating in the conduct of the Savings Bank's affairs by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C, 1818(e)(4) or (g)(1)), all obligations of the Savings Bank under the Agreement shall terminate as of the effective date of the order, but vested rights of the Agreeing parties shall not be affected. 10. TERMINATION OF ALL AGREEMENT OBLIGATIONS: ---------------------------------------- 10.1 If the Savings Bank is in default (as defined in section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under the Agreement shall terminate as of the date of default, but this paragraph 10.1 need not be included in an employment Agreement if prior written approval is secured from the Director or his or her designee. 10.2 All obligations under the Agreement shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Savings Bank. 10.2.1 by the Director or his or her designee, at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Savings Bank under the authority contained in section 13(c) of the Federal Deposit Insurance Act; or 8 10.2.2 by the Director or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Savings Bank or when the Savings Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shell not be affected by such action. 11. PAYMENTS. -------- Any payments made to the employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.ss. 1828(k) and any regulations promulgated thereunder. 12. ENTIRE AGREEMENT: ---------------- This Agreement constitutes the entire understanding of the parties concerning CEO's compensation and may not be modified or amended without the written consent of the parties. 13. ARBITRATION: ----------- Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within twenty-five (25) miles from the location of the Savings Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that CEO shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 14. PAYMENT OF LEGAL FEES: --------------------- Reasonable legal fees paid or incurred by CEO pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Savings Bank, provided that the dispute or interpretation has been resolved in the CEO's favor. 15. INDEMNIFICATION: --------------- The Savings Bank shall provide CEO (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify CEO (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a trustee, director or officer of the Savings Bank (whether or not he continues to be a trustee, director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Savings Bank's Board). If such action, suit or proceeding is brought against CEO in his capacity as an officer, trustee, or director of the Savings Bank, however, such indemnification shall not extend to matters as to which CEO is finally adjudged to be liable for willful misconduct in the performance of his duties. 9 16. SUCCESSOR TO THE SAVINGS BANK: ----------------------------- The Savings Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Savings Bank or the Company, expressly and unconditionally to assume and agree to perform the Savings Bank's obligations under this Agreement, in the same manner and to the same extent that the Savings Bank would be required to perform if no such succession or assignment had taken place. 17. CONFIDENTIAL INFORMATION: ----------------------- During the term of this Agreement, and any extensions thereof, CEO will have access to trade secrets, computer programs, processes, information concerning the Savings Bank's members, marketing strategies, business plans, audit information, regulatory relationships, as well as other confidential information pertaining to the Savings Bank (collectively referred to as "the Savings Bank's Confidential Information"). CEO shall not in any way, commercial or otherwise, except to the extent required by the proper performance of his duties and of this Agreement, disclose to any person, for any reason, at any time, any information relating to the Savings Bank's Confidential Information. Information which is generally available to the public shall not be considered the Savings Bank's Confidential Information. Further, upon the termination of this Agreement, or any extension thereof, for any reason, CEO agrees to continue to treat as private and privileged all such Savings Bank's Confidential Information and will not disclose any such information for at least two (2) years after the termination of this Agreement, except upon the direct written authorization of the Chairman of the Board of the Savings Bank. 18. RESTRICTIVE COVENANT: -------------------- CEO acknowledges that his services are special and of unique value to the Savings Bank and therefore covenants and agrees that for a period of one (1) year after termination of this Agreement, or any extensions, for any reason, whether with or without cause, he will not be employed by a financial institution or financial institution's holding company, whose principal offices are located in Union County, New Jersey. As a specific exception to the arbitration provision noted above, CEO acknowledges that the Savings Bank shall be entitled to seek injunctive relief in court to enforce the terms and provisions of this restrictive covenant. Nothing contained in this restrictive covenant shall prevent the CEO from serving as a consultant for the purpose of establishing a de novo financial institution provided the CEO is an independent contractor and not an employee of the financial institution. 10 The parties hereto subscribe below: ATTEST: SYNERGY BANK /s/ Paul T. LaCorte /s/ Kenneth S. Kasper - ----------------------------- ----------------------------------------- Paul T. LaCorte Kenneth S. Kasper, Chairman WITNESS: CEO: /s/ Kevin A. Wenthen /s/ John S. Fiore - ----------------------------- ----------------------------------------- Kevin A. Wenthen, Secretary John S. Fiore Date: April 26, 2005 EX-10 4 ex10-4.txt SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN [FORM OF] SYNERGY BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR THE BENEFIT OF SENIOR OFFICERS AS AMENDED AND RESTATED WHEREAS, Synergy Bank ("Bank") wishes to reward the years of prior service provided by Senior Officers and to continue to retain and to motivate their performance and dedication to the Bank and its Board of Directors, and WHEREAS, it is deemed advisable and in the best interests of the Bank to offer such Participants with additional financial incentives in the form of deferred compensation to encourage such continued employment service to the Bank, and to remain market competitive in the Bank's ability to offer retirement income security to such Senior Officers; NOW THEREFORE, BE IT RESOLVED that the Bank's Supplemental Executive Retirement Plan for the Benefit of Senior Officers, as amended and restated ("Supplemental Plan"), be adopted and implemented, with the effective date of such amendment and restatement being January 1, 2005, as follows: ARTICLE I DEFINITIONS The following words and phrases as used herein shall, for the purpose of this Plan and any subsequent amendment thereof, have the following meanings unless a different meaning is plainly required by the content, as follows: "Bank" means Synergy Bank, Cranford, New Jersey, or any successor thereto. "Beneficiary" shall mean a Participant's surviving spouse, if any, the Participant's named beneficiary as reflected on the records of the Bank, or the Participant's estate, in descending order of priority. "Board" means the Board of Directors of the Bank, as constituted from time to time and successors thereto. "Change in Control" means : (i) the sale of all, or substantially all, of the assets of the Bank or any parent corporation ("Parent"); (ii) the merger or recapitalization of the Bank or the Parent whereby the Bank or the Parent is not the surviving entity; (iii) a change in control of the Bank or the Parent, as otherwise defined or determined by the Office of Thrift Supervision or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five percent (25%) or more of the outstanding voting securities of the Bank or Parent by any person, trust, entity or group. This limitation shall not apply to the purchase of shares by underwriters in connection with a public offering of the Parent stock, or the purchase of shares of up to twenty-five percent (25%) of any class of securities of the Parent by a tax-qualified employee stock benefit plan. The term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Board as to whether a change in control has occurred shall be conclusive and binding. "Committee" means an administrative committee that may be appointed by the Board pursuant to Section 8.11 herein. "Deferred Compensation Account" shall mean the aggregate accrual of benefits under the Plan for the benefit of the Participant, including earnings credited thereto. "Disability" (total and permanent disability) means a mental or physical disability which prevents the Participant from performing the normal duties of his or her position with the Bank. Such disability must have prevented the Participant from performing his or her duties for at least six months, and a physician satisfactory to both the Participant and the Bank must certify that the Participant is disabled from performing his or her normal duties with the Bank. "Earnings Rate" means the Wall Street Journal, Eastern Edition, "prime rate" in effect as of January 1 of each Plan Year plus 100 basis points, as adjusted quarterly thereafter, with a minimum rate of 4% and a maximum rate of 10%, or such other rate of earnings attributable to the Deferral Account as set forth hereinafter. "Early Retirement Date" shall mean the completion of not less than three (3) years of service with the Bank following the Effective Date, or thereafter, whereby the Participant retires as an employee of the Bank, except as otherwise provided at Section 2.3 herein. "Effective Date" of the initial Supplemental Plan being January 1, 2002, and the effective date of the plan as amended and restated being January 1, 2005. "Participant" means the Senior Officers of the Bank as detailed at Schedule I to the Plan. Such participation shall continue as long as such Participant fulfills all requirements for participation subject to the right of termination, amendment and modification of the Plan hereinafter set forth. "Plan" means the Synergy Bank Supplemental Executive Retirement Plan for the Benefit of Senior Officers, as herein set forth, as may be amended from time to time. "Retirement Date" means the first day of the calendar month following attainment of age 60 of the Participant or thereafter whereby the Participant retires as an employee of the Bank. 2 "Service" means all years of service as an employee of the Bank and all predecessor and successor entities. "Trust" shall mean any trust agreement entered into on behalf of the Plan by the Bank for the purpose of holding assets of the Bank in order to promote the efficient administration of the Plan. ARTICLE II BENEFITS ACCRUALS AND PAYMENTS 2.1 Retirement. Upon a Participant's termination from service as an employee of the Bank on or after the Retirement Date or the Early Retirement Date, the Bank shall pay to the participant the benefits set forth herein at Article II, Section 2.4. Except as provided at Article II, Section 2.2, 2.3 and 2.5 herein, upon a Participant's termination from service as an employee of the Bank prior to the Early Retirement Date, the Bank shall have no financial obligations to the Participant under the Plan. 2.2 Disability. In the event of the Disability of the Participant, the Participant will be entitled to a benefit equal to the Deferred Compensation Account amount specified at Article II, Section 2.4, first payable on the first day of the month following certification of such Disability without regard to any other provisions herein to the contrary. 2.3 Change in Control. All benefits payable, or that would become payable if the Participant were to retire prior to such Change in Control, shall remain payable thereafter. Upon termination of service following a Change in Control, all benefits shall nevertheless be deemed payable immediately in accordance with Article II, Section 2.4, upon (i) the involuntary termination of service of the Participant(absent just cause) or (ii) the voluntary termination of service of the Participant within 12 months of such Change in Control in conjunction with the occurrence of any of the following during such 12 month period: (1) if Participant would be required to move his personal residence or perform his principal executive functions more than thirty-five (35) miles from the Participant's primary office as of the day prior to such Change in Control; (2) if in the organizational structure of the Bank, Participant would be required to report to a person or persons in the management hierarchy at a level below that to which such Participant was reporting to on the day prior to such Change in Control; (3) if the Bank should fail to maintain Participant's compensation in effect as of the day prior to the Change in Control and the existing employee benefits plans, including material fringe benefit, stock option and retirement plans; (4) if Participant would be assigned duties and responsibilities other than those normally associated with Participant's position as in effect on the day prior to such Change in Control; or (5) if Participant's responsibilities or authority have in any way been materially diminished or reduced; provided that if the Participant has not yet attained the Early Retirement Date as of such date of termination of service, such Participant shall nevertheless be deemed to have attained such Early Retirement Date as of the date of such termination following a Change of Control for 3 purposes of calculation of benefits payable in accordance with Section 2.4 herein, including adjustments to the Deferred Compensation Account necessary to reflect annual accruals for each year of service between the date of such Change in Control and the December 31 of the calendar year in which such Participant would attain the Early Retirement Date. Notwithstanding the forgoing, all sums payable hereunder shall be reduced in such manner and to such extent so that no such payments made hereunder when aggregated with all other payments to be made to the Participant by the Bank or the Parent shall be deemed an "excess parachute payment" in accordance with Section 280G of the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder ("Code") and subject the Participant to the excise tax provided at Section 4999(a) of the Code. 2.4 Benefit Payments. The Participant shall be eligible to receive benefit payments under the Plan, as follows: a. Upon termination of employment in accordance with Sections 2.1, 2.2, 2.3 and 2.5 of the Plan, the Participant shall be eligible to receive payment equal to the Deferred Compensation Account, valued as of such date of termination of employment payable in the form of 180 equal monthly payments, commencing on the first of the month next following the date of such termination of employment and calculated utilizing as the interest rate related to future earnings on the Deferred Compensation Account as the interest rate applicable to the ten year U.S. Treasury Bond in effect on the date of termination of employment of the Participant. b. Benefits payable hereunder are exclusive of any benefits to be received under other benefit plans of the Bank. 2.5 Benefit Payments Following Death. Upon death of a Participant prior to the date of termination of employment, a Participant's Deferred Compensation Account shall be immediately payable to the Beneficiary in the form of a lump-sum payment within thirty days of the death of the Participant, in accordance with the provisions of Section 2.4. Upon the death of a Participant after termination of employment, any benefits that would have been payable to such Participant shall thereafter be payable to the Beneficiary in the same amount and manner. Notwithstanding the foregoing, in the event of the death of the Participant while an employee of the Bank, such Participant's Beneficiary shall receive a lump-sum payout within thirty days of the death of the Participant equal to the greater of the payout amount determined in accordance with Section 2.4 herein or the amount detailed at Schedule 2.5 attached hereto. 2.6 Notice of Retirement. A Participant electing to retire in accordance with the Plan shall deliver written notice ("Notice") to the Board not less than sixty (60) days prior to the actual Retirement Date or Early Retirement Date. A Participant who terminates service upon death, Disability, or a Change in Control shall not be required to deliver such Notice in order to be entitled to receive benefits under the Plan. 4 2.7 Deferred Compensation Account Accruals. a. Not later than December 31 of each year after the Effective Date, the Bank shall credit to the Deferred Compensation Account of each Plan Participant an amount equal to not less than the Annual Deferred Compensation Accrual detailed at Schedule I of the Plan for that calendar year (or pro rata portion thereof), plus crediting of an additional accrual calculated as earnings on such Deferred Compensation Account. The provisions set forth at Schedule I shall remain in effect until such time as the Board shall act to amend such Schedule; provided however, no reductions in the Annual Deferred Compensation Accrual for a calendar year may be made by the Board unless written notice of such action is delivered to a Participant not later than October 1 of such applicable calendar year. b. Notwithstanding anything herein to the contrary, no Annual Deferred Compensation Accrual credits (other than accruals calculated as earnings) shall be made to a Participant's Deferred Compensation Account for calendar years commencing after such Participant shall have attained age 65 or for any calendar year in which the Participant has terminated service as an employee of the Bank prior to December 31 of such calendar year, except as otherwise provided in accordance with Section 2.3 herein. c. Such rate of accrual with respect to earnings on the Deferred Compensation Account shall be computed based upon the Earnings Rate. Alternatively, at the written request of the Participant, the Board may at its sole discretion, elect to invest assets of the Bank, not to exceed the Deferred Compensation Account for such Participant, in other investment vehicles, including Synergy Financial Group, Inc. common stock; in which case, the accrued value of the Deferred Compensation Account for such Participant shall be determined thereafter to the extent of such investment in such other investment vehicles as measured by the investment value of such invested assets (including any adjustments for dividend income on such investment assets); provided further, that the Participant shall have no legal claim or right to such invested assets. d. Notwithstanding anything herein to the contrary, to the extent that the Bank shall actually invest assets of the Bank (in accordance with the request of a Participant), then upon the distribution of the Deferred Compensation Account, the Bank may elect to distribute such assets to the Participant in-kind at the time of benefits distribution as settlement of that portion of the Deferred Compensation Account to be distributed to the extent that such in-kind distribution is permissible in accordance with applicable law and regulations, including, but not limited to the Nasdaq listing requirements. 2.8 Alternative Forms of Benefits. Notwithstanding anything herein to the contrary, the Board or the Committee may pay out all or part of a Participant's then accrued Deferred Compensation Account accrued as of the date of such payment within its sole discretion. 5 ARTICLE III INSURANCE AND OTHER INVESTMENTS 3.1 Ownership of Insurance and Other Investments. The Bank, in its sole discretion, may elect to purchase one or more life insurance policies on the lives of Participants in order to provide funds to the Bank to pay part or all of the benefits accrued under this Plan. All rights and incidents of ownership in any life insurance policy that the Bank may purchase insuring the life of the Participant (including any right to proceeds payable thereunder) shall belong exclusively to the Bank or its designated Trust, and neither the Participant, nor any beneficiary or other person claiming under or through him or her shall have any rights, title or interest in or to any such insurance policy or any other assets that may be acquired coincident with investments made in accordance with Section 2.7 of the Plan ("Investment Assets"). The Participant shall not have any power to transfer, assign, hypothecate or otherwise encumber in advance any of the Investment Assets or the benefits payable thereunder, nor shall any benefits be subject to seizure for the benefit of any debts or judgments, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any life insurance policy or other Investment Assets purchased pursuant hereto and any proceeds payable thereunder shall remain subject to the claims of the Bank's general creditors. 3.2 Physical Examination. As a condition of becoming or remaining covered under this Plan, the Participant, as may be requested by the Bank from time to time shall take a physical examination by a physician approved by an insurance carrier. The cost of the examination shall not be borne by the Participant. The report of such examination shall be transmitted directly from the physician to the insurance carrier designated by the Bank to establish certain costs associated with obtaining insurance coverages as may be deemed necessary under this Plan. Such examination shall remain confidential among the Participant, the physician and the insurance carrier and shall not be made available to the Bank in any form or manner. 3.3 Death of Participant. Upon the death of the Participant, the proceeds derived from any such insurance policy or other Investment Assets held by the Bank or any related Trust, if any, shall be paid to the Bank or its designated Trust. 6 ARTICLE IV TRUST / NON-FUNDED STATUS 4.1 Trust. Except as may be specifically provided, nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Bank and the Participant or any other person. Any funds which may be invested under the provisions of this Plan shall continue for all purposes to be a part of the general funds of the Bank. No person other than the Bank shall by virtue of the provisions of this Plan have any interest in such funds. The Bank shall not be under any obligation to use such funds solely to provide benefits hereunder, and no representations have been made to a Participant that such funds can or will be used only to provide benefits hereunder. To the extent that any person acquires a right to receive payments from the Bank under the Plan, such rights shall be no greater than the right of any unsecured general creditor of the Bank. In order to facilitate the accumulation of funds necessary to meet the costs of the Bank under this Plan (including the provision of funds necessary to pay premiums with respect to any life insurance policies purchase pursuant to Article III above and to pay benefits to the extent that the cash value and/or proceeds of any such policies are not adequate to make payments to a Participant or his or her beneficiary as and when the same are due under the Plan), the Bank may enter into a Trust Agreement. The Bank, in its discretion, may elect to place any life insurance policies purchased pursuant to Article III above into the Trust. In addition, such sums shall be placed in said Trust as may from time to time be approved by the Board of Directors, in its sole discretion. To the extent that the assets of said Trust and/or the proceeds of any life insurance policy purchased pursuant to Article III are not sufficient to pay benefits accrued under this Plan, such payments shall be made from the general assets of the Bank. ARTICLE V VESTING 5.1 Vesting. All benefits under this Plan are deemed non-vested and forfeitable prior to the Retirement Date or Early Retirement Date. All benefits payable hereunder shall be deemed 100% earned and non-forfeitable by the Participant and his or her Beneficiary as of the Retirement Date or Early Retirement Date. Notwithstanding the foregoing, all benefits payable hereunder shall be deemed 100% earned and non-forfeitable by the Participant and his or her Beneficiary upon the death or the Disability of the Participant, or upon termination of employment following a Change in Control of the Bank. No benefits shall be deemed payable hereunder for any time period prior to termination of employment prior to the Retirement Date or Early Retirement Date, except in the event of death, Disability or termination of employment following a Change in Control of the Bank. 7 ARTICLE VI TERMINATION 6.1 Termination. All rights of the Participant hereunder shall terminate immediately upon the Participant ceasing to be in the active service of the Bank prior to the time that the benefits payable under the Plan shall be deemed to be 100% earned and non-forfeitable. A leave of absence approved by the Board shall not constitute a cessation of service within the meaning of this paragraph, within the sole discretion of the Board. ARTICLE VII FORFEITURE OR SUSPENSION OF BENEFITS 7.1 Forfeiture or Suspension of Benefits. Notwithstanding any other provision of this Plan to the contrary, benefits shall be forfeited or suspended during any period of paid service with the Bank following the commencement of benefit payments, within the sole discretion of the Board. ARTICLE VIII GENERAL PROVISIONS 8.1 Other Benefits. Nothing in this Plan shall diminish or impair the Participant's eligibility, participation or benefit entitlement under any other benefit, insurance or compensation plan or agreement of the Bank now or hereinafter in effect. 8.2 No Effect on Employment. This Plan shall not be deemed to give any Participant or other person in the employ or service of the Bank any right to be retained in the employment or service of the Bank, or to interfere with the right of the Bank to terminate any Participant or such other person at any time and to treat him or her without regard to the effect which such treatment might have upon him or her as a Participant in this Plan. 8.3 Legally Binding. The rights, privileges, benefits and obligations under this Plan are intended to be legal obligations of the Bank and binding upon the Bank, its successors and assigns. 8.4 Modification. The Bank, by action of the Board, reserves the exclusive right to amend, modify, or terminate this Plan. Any such termination, modification or amendment shall not terminate or diminish any rights or benefits accrued by any Participant prior thereto. The Bank shall give thirty (30) days' notice in writing to any Participant prior to the effective date of 8 any such amendment, modification or termination of this Plan. Notwithstanding the foregoing, in no event shall such benefits payable to a Participant under the Plan be reduced below those provided for in Section 2.4 herein. In the event that the Plan benefits payable under Section 2.4 of the Plan are reduced or the Plan is terminated, a Participant shall be immediately 100% vested in all benefits accrued to the date in accordance with Section 2.4 as of the date of such Plan amendment or Plan termination without regard to such Plan amendment or Plan termination. 8.5 Arbitration. Any controversy or claim arising out of or relating to any contract or the breach thereof shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, with such arbitration hearing to be held at the offices of the American Arbitration Association ("AAA") unless otherwise mutually agreed to by the Participant and the Bank, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 8.6 Limitation. No rights of any Participant are assignable by any Participant, in whole or in part, either by voluntary or involuntary act or by operation of law. Rights of Participants hereunder are not subject to anticipation, alienation, sale, transfer, assignment, pledge, hypothecation, encumbrance or garnishment by creditors of the Participant or a Beneficiary. Such rights are not subject to the debts, contracts, liabilities, engagements, or torts of any Participant or his or her Beneficiary. No Participant shall have any right under this Plan or any Trust referred to in Article IV or against any assets held or acquired pursuant thereto other than the rights of a general, unsecured creditor of the Bank pursuant to the unsecured promise of the Bank to pay the benefits accrued hereunder in accordance with the terms of this Plan. The Bank has no obligation under this Plan to fund or otherwise secure its obligations to render payments hereunder to Participants. No Participant shall have any voice in the use, disposition, or investment of any asset acquired or set aside by the Bank to provide benefits under this Plan. 8.7 ERISA and IRC Disclaimer. It is intended that the Plan be neither an "employee welfare benefit plan" nor an "employee pension benefit plan" for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Further, it is intended that the Plan will not cause the interest of a Participant under the Plan to be includable in the gross income of such Participant or a Beneficiary prior to the actual receipt of a payment under the Plan for purposes of the Internal Revenue Code of 1986, as amended ("IRC"). No representation is made to any Participant to the effect that any insurance policies purchased by the Bank or assets of any Trust established pursuant to this Plan will be used solely to provide benefits under this Plan or in any way shall constitute security for the payment of such benefits. Benefits payable under this Plan are not in any way limited to or governed by the proceeds of any such insurance policies or the assets of any such Trust. No Participant in the Plan has any preferred claim against the proceeds of any such insurance policies or the assets of any such Trust. 8.8 Conduct of Participants. Notwithstanding anything contained to the contrary, no payment of any then unpaid benefits shall be made and all rights under the Plan payable to a Participant, or any other person, to receive payments thereof shall be forfeited if the Participant 9 shall engage in any activity or conduct which in the opinion the Board of the Bank is inimical to the best interests of the Bank. 8.9 Incompetency. If the Bank shall find that any person to whom any payment is payable under the Plan is deemed unable to care for his or her personal affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, a child, a parent, or a brother or sister, or to any person deemed by the Bank to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Board, in its sole discretion, may determine. Any such payments shall constitute a complete discharge of the liabilities of the Bank under the Plan. 8.10 Construction. The Board shall have full power and authority to interpret, construe and administer this Plan and the Board's interpretations and construction thereof, and actions thereunder, shall be binding and conclusive on all persons for all purposes. Directors of the Bank and members of the Committee shall not be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to his or her own willful, gross misconduct or intentional lack of good faith. 8.11 Plan Administration. The Board of the Bank shall administer the Plan; provided, however, that the Board may appoint an administrative committee ("Committee") to provide administrative services or perform duties required by this Plan. The Committee shall have only the authority granted to it by the Board. 8.12 Governing Law. This Plan shall be construed in accordance with and governed by the laws of the State of New Jersey, except to the extent that Federal law shall be deemed to apply. No payments of benefits shall be made hereunder if the Board of the Bank, or counsel retained thereby, shall determine that such payments shall be in violation of applicable regulations, or likely result in imposition of regulatory action, by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or other appropriate banking regulatory agencies. 8.13 Regulatory Matters. (a) The Participant or Beneficiary shall have no right to receive compensation or other benefits in accordance with the Plan for any period after termination of service for Just Cause. Termination for "Just Cause" shall include termination because of the Participant's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of the Plan. 10 (b) Notwithstanding anything herein to the contrary, any payments made to a Participant or Beneficiary pursuant to the Plan shall be subject to and conditioned upon compliance with 12 USC ss.1828(k) and any regulations promulgated thereunder. (c) If the Participant is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank's may within its discretion (i) pay the Participant all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (d) If the Participant is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the FDIA (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but the vested rights of the contracting parties shall not be affected. (e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA) all obligations under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (f) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision ("Director of OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee, at the time that the Director of the OTS, or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 8.14 Successors and Assigns. The Plan shall be binding upon any successor or successors of the Bank, and unless clearly inapplicable, reference herein to the Bank shall be deemed to include any successor or successors of the Bank. 8.15 Sole Agreement. The Plan expresses, embodies, and supersedes all previous agreements, understandings, and commitments, whether written or oral, between the Bank and any Participants and Beneficiaries hereto with respect to the subject matter hereof. 11 IN WITNESS WHEREOF, the Bank has caused the Plan to be executed by its duly authorized officers. Synergy Bank __________________ By: ______________________ Date Title: ___________________ __________________ _________________________ Date Witness Acknowledgement: __________________ __________________________ Date Participant __________________ __________________________ Date Participant __________________ __________________________ Date Participant SCHEDULE I ---------- Participants in the Plan as of January 1, 2005 and Annual Deferred Compensation Accruals are: Annual Deferred Compensation Participant Accrual (1) ----------- ----------- 1. Kevin Wenthen 10% 2. Kevin McCloskey 10% 3. Rich Abrahamian 10% (2) (1) Designation of Percentage of Annual Base Salary in effect as of the December 31 of the applicable Calendar year. (2) Accrual for 2005 will be based upon the Annual Base Salary in effect as of his date of hire (July 7, 2005) times the number of days between his hire date (July 7, 2005) and December 31, 2005 divided by 365 days. SCHEDULE 2.5 - ------------ Upon the death of a Participants listed below while still an employee of the Bank, the Participant's Beneficiary shall receive payment equal to the greater of the amount payable in accordance with Section 2.4 of the Agreement or the amount payable from the proceeds of a life insurance contract or contracts maintained by the Bank on the life of such Participant with a death benefit equal to the amount specified below: Participant Death Benefit (Minimum) ----------- ----------------------- 1. Kevin Wenthen $256,143 2. Kevin McCloskey $433,320 3. Rich Abrahamian $0 SCHEDULE A BENEFICIARY DESIGNATION ----------------------- I, ________________________, hereby name _________________ as my beneficiary under the terms of the Synergy Bank Supplemental Executive Retirement Plan for the Benefit of Senior Officers. In the event that such designated beneficiary does not survive me, I designate ______________, ___________ and ____________ as my contingent beneficiaries to share and share alike and to receive any benefits remaining under the terms of the Agreement at the time of my death. Witness: Participant: ___________________________ ___________________________ Date: ___________________________ EX-10 5 ex10-13.txt RETIREMENT BENEFITS EQUALIZATION PLAN SYNERGY FINANCIAL GROUP, INC. RETIREMENT BENEFITS EQUALIZATION PLAN As Amended Article I Introduction Section 1.01 Purpose, Design and Intent. (a) The purpose of the Synergy Financial Group, Inc. Retirement Benefits Equalization Plan (the "Plan") is to assist Synergy Financial Group, Inc. (the "Company") and its affiliates in retaining the services of key employees, to induce such employees to use their best efforts to enhance the business of the Company and its affiliates, and to provide certain supplemental retirement benefits to such employees. (b) The Plan, in relevant part, is intended to constitute an unfunded "excess benefit plan" as defined in Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended. In this respect, the Plan is specifically designed to provide certain key employees with retirement benefits that would have been provided under various tax-qualified retirement plans sponsored by the Company but for the applicable limitations placed on benefits and contributions under such plans by various provisions of the Internal Revenue Code of 1986, as amended. Article II Definitions Section 2.01 Definitions. In this Plan, whenever the context so indicates, the singular or the plural number and the masculine or feminine gender shall be deemed to include the other, the terms "he," "his," and "him," shall refer to a Participant or a beneficiary of a Participant, as the case may be, and, except as otherwise provided, or unless the context otherwise requires, the capitalized terms shall have the following meanings: "Affiliate" means any corporation, trade or business, which, at the time of reference, is together with the Company, a member of a controlled group of corporations, a group of trades or businesses (whether or not incorporated) under common control, or an affiliated service group, as described in Sections 414(b), 414(c), and 414(m) of the Code, respectively, or any other organization treated as a single employer with the Company under Section 414(o) of the Code. "Applicable Limitations" means one or more of the following, as applicable: (i) the maximum limitations on annual additions to a tax-qualified defined contribution plan under Section 415(c) of the Code; (ii) the maximum limitation on the annual amount of compensation that may, under Section 401(a)(17) of the Code, be taken into account in determining contributions to and benefits under tax-qualified plans; and (iii) the maximum limitations, under Sections 401(k), 401(m), or 402(g) of the Code, on pre-tax contributions that may be made to a qualified defined contribution plan. "Bank" means Synergy Bank, a subsidiary of the Company. "Board of Directors" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the person(s) designated by the Board of Directors, pursuant to Section 9.02 of the Plan, to administer the Plan. "Common Stock" means the common stock of the Company. "Company" means Synergy Financial Group, Inc. and any successors thereto. "Earnings Rate" means the Wall Street Journal, Eastern Edition, "prime rate" in effect as of January 1 of each calendar year plus 100 basis points, as adjusted quarterly thereafter, with a minimum rate of 4% and a maximum rate of 10%, or such other rate of earnings attributable to a Participant's Supplemental Accounts not otherwise invested actually or notionally in Common Stock as set forth herein. "Effective Date" means January 1, 2004. "Eligible Employee" means any Employee who participates in the ESOP or the Savings Plan, and whom the Board of Directors determines is one of a "select group of management or highly compensated employees," as such phrase is used for purposes of Sections 101, 201, and 301 of ERISA. "Employee" means any person employed by the Company or an Affiliate. "Employer" means the Company or Affiliate thereof that employs the Employee. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ESOP" means the Synergy Financial Group, Inc. Employee Stock Ownership Plan and Trust, as amended from time to time. 2 "ESOP Valuation Date" means any day as of which the income, assets and investment experience of the trust fund of the ESOP is determined and individuals' accounts under the ESOP are adjusted accordingly. "Participant" means an Eligible Employee who is entitled to benefits under the Plan. "Plan" means this Synergy Financial Group, Inc. Retirement Benefits Equalization Plan. "Savings Plan" means the Synergy Financial Group, Inc. 401K Savings Plan and Trust. "Supplemental ESOP Account" means an account established by an Employer, pursuant to Section 5.01 of the Plan, with respect to a Participant's Supplemental ESOP Benefit. "Supplemental ESOP Benefit" means the benefit credited to a Participant pursuant to Section 4.01 of the Plan. "Supplemental Savings Plan Account" means an account established by an Employer, pursuant to Section 5.02 of the Plan, with respect to a Participant's Supplemental Savings Plan Benefit. "Supplemental Savings Plan Benefit" means the benefit credited to a Participant pursuant to Section 4.02 of the Plan. Article III Eligibility and Participation Section 3.01 Eligibility and Participation. (a) Each Eligible Employee may participate in the Plan. An Eligible Employee shall become a Participant in the Plan upon designation as such by the Board of Directors. An Eligible Employee whom the Board of Directors designates as a Participant in the Plan shall commence participation as of the date established by the Board of Directors. The Board of Directors shall establish an Eligible Employee's date of participation at the same time it designates the Eligible Employee as a Participant in the Plan. (b) The Board of Directors may, at any time, designate an Eligible Employee as a Participant for any or all supplemental benefits provided for under Article IV of the Plan. 3 Article IV Benefits Section 4.01 Supplemental ESOP Benefit. As of each ESOP Valuation Date of the ESOP, the Employer shall credit the Participant's Supplemental ESOP Account with a Supplemental ESOP Benefit equal to the excess of (I) over (II), where: (a) (I) equals the increase in the amount of cash and stock that would have been allocated to the Participant's Accounts for the respective ESOP Valuation Date in excess of the aggregate amount that would have been credited to such Participant's Accounts as of the prior ESOP Valuation Date based upon the allocation of: 1) current plan year dividends on previously allocated stock, 2) dividends on unallocated stock, 3) other ESOP Trust earnings, 4) plan forfeitures, and 5) Employer contributions under the ESOP, determined as if the provisions of the ESOP were administered for the current ESOP Valuation Date and all prior ESOP Valuation Dates without regard to any of the Applicable Limitations; and (b) (II) equals the amount of cash and stock actually allocated to the Participant's Accounts under the provisions of the ESOP for that particular ESOP Valuation Date, after giving effect to any reduction of such allocation required by any of the Applicable Limitations. Section 4.02 Supplemental Savings Plan Benefit. A Participant's Supplemental Savings Plan Benefit under the Plan shall be equal to the excess of (a) over (b), where: (a) is the sum of the matching contributions and other contributions of the Employer that would otherwise be allocated to an account of the Participant under the 401(k) Plan for a particular year, if the provisions of the 401(k) Plan were administered without regard to any of the Applicable Limitations; and (b) is the sum of the matching contributions and other contributions of the Employer that are actually allocated on account of the Participant under the provisions of the 401(k) Plan for that particular year, after giving effect to any reduction of such allocation required by any of the Applicable Limitations. Provided, however, in order for a Participant to receive a Supplemental Savings Plan Benefit for a Plan Year in accordance with this Section 4.02, such Participant must participate in the Savings Plan through contribution of Employee Salary Deferral Contributions of not less than five percent of such Participant's Plan Year Compensation, or such lesser amount as may be permissible in accordance with the Applicable Limitations. 4 Article V Accounts Section 5.01 Supplemental ESOP Benefit Account. For each Participant who is credited with a benefit pursuant to Section 4.01 of the Plan, the Employer shall establish, as a memorandum account on its books, a Supplemental ESOP Account. Each year, the Committee shall credit to the Participant's Supplemental ESOP Account the amount of benefits determined under Section 4.01 of the Plan for that year. The Committee shall credit the account with an amount equal to the appropriate number of shares of Common Stock or other medium of contribution that would have otherwise been made to the Participant's accounts under the ESOP but for the limitations imposed by the Code. Shares of Common Stock shall be valued under this Plan in the same manner as under the ESOP. Cash contributions credited to a Participant's Supplemental ESOP Account shall be credited annually with interest at a rate equal to the Earnings Rate, except to the extent that such Participant has otherwise elected to have such Earnings Rate determined based upon such assets being deemed to be invested in shares of Common Stock as of the first business day of the calendar month being on or immediately after the date of determination of such contribution credit to the Participant's Supplemental ESOP Account for an applicable ESOP Valuation Date (the "Directed Investment of Supplemental ESOP Account"). . Section 5.02 Supplemental Savings Plan Account. The Employer shall establish a memorandum account, the "Supplemental Savings Plan Account" for each Participant on its books, and each year the Committee will credit the amount of contributions determined under Section 4.02 of the Plan. Contributions credited to a Participant's Supplemental Savings Plan Account shall be credited annually with interest earnings at a rate equal to the Earnings Rate, except to the extent that such Participant has otherwise elected to have such Earnings Rate determined based upon such assets being deemed to be invested in shares of Common Stock as of the first business day of the calendar month being on or immediately after the date of determination of such contribution credit to the Participant's Supplemental Savings Plan Account for an applicable Plan Year "Directed Investment of Supplemental Savings Plan Account"). . Section 5.03 Directed Investment. A Participant may make an investment election with respect to current or future cash credited or to be credited to his or her Supplemental ESOP Account or Supplemental Savings Plan Account by filing a Directed Investment Election Form with the Committee in a form acceptable to such Committee at any time, as set forth as Attachment A to the Plan. 5 Article VI Supplemental Benefit Payments Section 6.01 Payment of Supplemental ESOP Benefit. (a) Except in the case of a Participant's death, disability or unforeseen emergency, a Participant's Supplemental ESOP Benefit shall be paid to the Participant in the form of a lump-sum payment as soon as administratively feasible following six months after the date of separation of service of the Participant in the form of shares of Common Stock of the Company; provided however, if this Plan is unable to make distributions in the form of Common Stock due to regulatory limitations, then distributions of such portion of the Supplemental ESOP Benefit shall be made in cash with such amounts to be valued based upon the fair market value of such Common Stock at the time of such distribution. Distributions upon the death, disability or unforeseen emergency of the Participant shall be made in the form of a lump-sum as soon as administratively feasible. ] (b) A Participant shall have a non-forfeitable right to the Supplemental ESOP Benefit credited to him under this Plan in the same non-forfeitable percentage as such Participant has non-forfeitable benefits allocated to him under the ESOP at the time such benefits under the ESOP become distributable. (c) The Company shall withhold such amounts of cash or stock as it deems necessary with respect to any distributions to be made by the Plan in order to satisfy its tax withholding obligations under applicable Federal, State or local law. Section 6.02 Payment of Supplemental Savings Plan Benefit. (a) Except in the case of a Participant's death, disability or unforeseen emergency, a Participant's Supplemental Savings Plan Benefit shall be paid to the Participant in the form of a lump-sum payment as soon as administratively feasible following six months after the date of separation of service of the Participant in the form of cash or in shares of Common Stock of the Company to the extent that such Supplemental Savings Plan Account is invested in such Common Stock; provided however, if this Plan is unable to make distributions in the form of Common Stock due to regulatory limitations, then distributions of such portion of the Supplemental Savings Plan Benefit shall be made in cash with such amounts to be valued based upon the fair market value of such Common Stock at the time of such distribution. Distributions upon the death, disability or unforeseen emergency of the Participant shall be made in the form of a lump-sum as soon as administratively feasible. (b) A Participant shall have a non-forfeitable right to his Supplemental Savings Plan Benefit under this Plan in the same percentage as he has to his matching contributions under the Savings Plan at the time the benefits become distributable to him under the Savings Plan. 6 Section 6.03 Alternative Payment of Benefits. Notwithstanding the other provisions of this Article VI, a Participant may, with prior written consent of the Committee and upon such terms and conditions as the Committee may impose, request that the Supplemental ESOP Benefit and/or the Supplemental Savings Plan Benefit to which he is entitled be paid commencing at a different time, over a different period, in a different form, or to different persons, than the benefit to which he or his beneficiary may be entitled under the ESOP or the Savings Plan; provided, however, any such request for an alternative distribution time or period (except in the case of death, disability or unforeseen emergency) shall not be effective for one year from the date that such request is filed with the Committee and such election to defer the starting date of a previously elected deferral shall require that such additional deferral shall be for a period of not less than five years from the date that such payment would otherwise have been made. Article VII Claims Procedures Section 7.01 Claims Reviewer. For purposes of handling claims with respect to this Plan, the "Claims Reviewer" shall be the Committee, unless the Committee designates another person or group of persons as Claims Reviewer. Section 7.02 Claims Procedure. (a) An initial claim for benefits under the Plan must be made by the Participant or his beneficiary or beneficiaries in accordance with the terms of this Section 7.02. (b) Not later than ninety (90) days after receipt of such a claim, the Claims Reviewer will render a written decision on the claim to the claimant, unless special circumstances require the extension of such 90-day period. If such extension is necessary, the Claims Reviewer shall provide the Participant or the Participant's beneficiary or beneficiaries with written notification of such extension before the expiration of the initial 90-day period. Such notice shall specify the reason or reasons for the extension and the date by which a final decision can be expected. In no event shall such extension exceed a period of ninety (90) days from the end of the initial 90-day period. (c) In the event the Claims Reviewer denies the claim of a Participant or any beneficiary in whole or in part, the Claims Reviewer's written notification shall specify, in a manner calculated to be understood by the claimant, the reason for the denial; a reference to the Plan or other document or form that is the basis for the denial; a description of any additional material or information necessary for the claimant to perfect the claim; an explanation as to why such information or material is necessary; and an explanation of the applicable claims procedure. 7 (d) Should the claim be denied in whole or in part and should the claimant be dissatisfied with the Claims Reviewer's disposition of the claimant's claim, the claimant may have a full and fair review of the claim by the Committee upon written request submitted by the claimant or the claimant's duly authorized representative and received by the Committee within sixty (60) days after the claimant receives written notification that the claimant's claim has been denied. In connection with such review, the claimant or the claimant's duly authorized representative shall be entitled to review pertinent documents and submit the claimant's views as to the issues, in writing. The Committee shall act to deny or accept the claim within sixty (60) days after receipt of the claimant's written request for review unless special circumstances require the extension of such 60-day period. If such extension is necessary, the Committee shall provide the claimant with written notification of such extension before the expiration of such initial 60-day period. In all events, the Committee shall act to deny or accept the claim within 120 days of the receipt of the claimant's written request for review. The action of the Committee shall be in the form (e) In no event may a claimant commence legal action for benefits the claimant believes are due the claimant until the claimant has exhausted all of the remedies and procedures afforded the claimant by this Article VII. Article VIII Amendment and Termination Section 8.01 Amendment of the Plan. The Company may from time to time and at any time amend the Plan; provided, however, that such amendment may not adversely affect the rights of any Participant or beneficiary with respect to any benefit under the Plan to which the Participant or beneficiary may have previously become entitled prior to the effective date of such amendment without the consent of the Participant or beneficiary. The Committee shall be authorized to make minor or administrative changes to the Plan, as well as amendments required by applicable federal or state law (or authorized or made desirable by such statutes); provided, however, that such amendments must subsequently be ratified by the Board of Directors. Section 8.02 Termination of the Plan. The Company may at any time terminate the Plan; provided, however, that such termination may not adversely affect the rights of any Participant or beneficiary with respect to any benefit under the Plan to which the Participant or beneficiary may have previously become entitled to prior to the effective date of such termination without the consent of the Participant or beneficiary. Any amounts credited to the Supplemental ESOP Account and the Supplemental Savings Plan Account of any Participant shall remain subject to the provisions of the Plan. 8 Article IX General Provisions Section 9.01 Unfunded, Unsecured Promise to Make Payments in the Future. The right of a Participant or any beneficiary to receive a distribution under this Plan shall be an unsecured claim against the general assets of the Company or its Affiliates, and neither a Participant, nor his designated beneficiary or beneficiaries, shall have any rights in or against any amount credited to any account under this Plan or any other assets of the Company or an Affiliate. The Plan at all times shall be considered entirely unfunded both for tax purposes and for purposes of Title I of ERISA. Any funds invested hereunder shall continue for all purposes to be part of the general assets of the Company or an Affiliate and available to its general creditors in the event of bankruptcy or insolvency. Accounts under this Plan and any benefits which may be payable pursuant to this Plan are not subject in any manner to anticipation, sale, alienation, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of a Participant or a Participant's beneficiary. The Plan constitutes a mere promise by the Company or Affiliate to make benefit payments in the future. No interest or right to receive a benefit may be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such Participant or beneficiary, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. Section 9.02 Committee as Plan Administrator. (a) The Plan shall be administered by the Committee designated by the Board of Directors of the Company. (b) The Committee shall have the authority, duty and power to interpret and construe the provisions of the Plan as it deems appropriate. The Committee shall have the duty and responsibility of maintaining records, making the requisite calculations and disbursing the payments hereunder. In addition, the Committee shall have the authority and power to delegate any of its administrative duties to employees of the Company or an Affiliate, as they may deem appropriate. The Committee shall be entitled to rely on all tables, valuations, certificates, opinions, data and reports furnished by any actuary, accountant, controller, counsel or other person employed or retained by the Company with respect to the Plan. The interpretations, determinations, regulations and calculations of the Committee shall be final and binding on all persons and parties concerned. Section 9.03 Expenses. Expenses of administration of the Plan shall be paid by the Company or an Affiliate. 9 Section 9.04 Statements. The Committee shall furnish individual annual statements of accrued benefits to each Participant, or current beneficiary, in such form as determined by the Committee or as required by law. Section 9.05 Rights of Participants and Beneficiaries. (a) The sole rights of a Participant or beneficiary under this Plan shall be to have this Plan administered according to its provisions and to receive whatever benefits he or she may be entitled to hereunder. (b) Nothing in the Plan shall be interpreted as a guaranty that any funds in any trust which may be established in connection with the Plan or assets of the Company or an Affiliate will be sufficient to pay any benefit hereunder. (c) The adoption and maintenance of this Plan shall not be construed as creating any contract of employment or service between the Company or an Affiliate and any Participant or other individual. The Plan shall not affect the right of the Company or an Affiliate to deal with any Participants in employment or service respects, including their hiring, discharge, compensation, and other conditions of employment or service. Section 9.06 Incompetent Individuals. The Committee may, from time to time, establish rules and procedures which it determines to be necessary for the proper administration of the Plan and the benefits payable to a Participant or beneficiary in the event that such Participant or beneficiary is declared incompetent and a conservator or other person is appointed and legally charged with that Participant's or beneficiary's care. Except as otherwise provided for herein, when the Committee determines that such Participant or beneficiary is unable to manage his financial affairs, the Committee may pay such Participant's or beneficiary's benefits to such conservator, person legally charged with such Participant's or beneficiary's care, or institution then contributing toward or providing for the care and maintenance of such Participant or beneficiary. Any such payment shall constitute a complete discharge of any liability of the Company or an Affiliate and the Plan for such Participant or beneficiary. Section 9.07 Sale, Merger or Consolidation of the Company. The Plan may be continued after a sale of assets of the Company, or a merger or consolidation of the Company into or with another corporation or entity only if, and to the extent that, the transferee, purchaser or successor entity agrees to continue the Plan. Additionally, upon a merger, consolidation or other change in control of the Company or its Affiliates any amounts credited to a Participant's Supplemental ESOP Account and Supplemental Savings Plan Account shall be placed in a grantor trust to the extent not already in such a trust. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall be terminated subject to the provisions of Section 8.02 of the Plan. Any legal fees incurred by a Participant in determining benefits to which such Participant is entitled under the Plan following a sale, merger, or consolidation of the Company or an Affiliate of which the Participant is an Employee or, if applicable, a member of the Board of Directors, shall be paid by the resulting or succeeding entity. 10 Section 9.08 Location of Participants. Each Participant shall keep the Company informed of his current address and the current address of his designated beneficiary or beneficiaries. The Company shall not be obligated to search for any person. If such person is not located within three (3) years after the date on which payment of the Participant's benefits payable under this Plan may first be made, payment may be made as though the Participant or his beneficiary had died at the end of such three-year period. Section 9.09 Liability of the Company and its Affiliates. Notwithstanding any provision herein to the contrary, neither the Company nor any individual acting as an employee or agent of the Company shall be liable to any Participant, former Participant, beneficiary, or any other person for any claim, loss, liability or expense incurred in connection with the Plan, unless attributable to fraud or willful misconduct on the part of the Company or any such employee or agent of the Company. Section 9.10 Governing Law. All questions pertaining to the construction, validity and effect of the Plan shall be determined in accordance with the laws of the United States and, to the extent not preempted by such laws, by the laws of the State of New Jersey. Having been adopted by its Board of Directors, this Plan, as amended, is executed by its duly authorized officer this 24th day of January, 2006. SYNERGY FINANCIAL GROUP, INC. Attest: By: /s/Kevin A. Wenthen /s/David H. Gibbons, Jr. - -------------------------------- --------------------------------- Corporate Secretary For the Entire Board of Directors 11 Attachment A. - ------------- SYNERGY FINANCIAL GROUP, INC. RETIREMENT BENEFITS EQUALIZATION PLAN Directed Investment Election Form The undersigned Participant hereby requests that all cash amounts credited under the Synergy Financial Group, Inc. Retirement Benefits Equalization Plan ("Plan"), have the Earnings Rate calculated in accordance with this Plan and this Directed Investment Election Form ("Election Form"), as follows: (a) I hereby request that Company accept my investment election and measure the Earnings Rate for cash assets credited under the Supplemental ESOP Account determined based upon such assets being deemed to be invested in shares of Common Stock as of the first business day of the calendar month being on or immediately after the date of determination of such contribution credit to such Account: (Participant initial and date here: _________) (b) I hereby request that Company accept my investment election and measure the Earnings Rate for cash assets credited under the Supplemental Savings Plan Account determined based upon such assets being deemed to be invested in shares of Common Stock as of the first business day of the calendar month being on or immediately after the date of determination of such contribution credit to such Account: (Participant initial and date here: _________) (c) The Earnings Rate related to such Directed Investments requested at paragraphs (a) and/or (b), above shall be based upon investment earnings and losses as if such assets, or a portion thereof, shall have been invested in the common stock of Synergy Financial Group, Inc. ("Common Stock"); provided that such investment is permissible in accordance with applicable law and regulation. Such investment in accordance with this Election Form shall be made in accordance with the Plan, if such Election Form is deemed acceptable to the Company. Amounts associated with dividends paid on the Common Stock will be credited to such Plan Supplemental Accounts consistent with this Election Form. Such dividend income will be invested in accordance with the Election Form as of the first business day of the calendar month being on or immediately after the date of determination of such additional account credit. The Company may, at its election, actually invest assets equal to amounts in the Supplemental Accounts in the Common Stock either directly or through a trust arrangement, but the Company shall not be obligated to do so, or to make any other investment of its assets in connection with its obligation to payout assets under the Plan. (d) The Participant agrees on behalf of himself/herself and any designated beneficiary to assume all risks in connection with investments requested by this Election Form. (e) Title to and beneficial ownership of any assets of the Company, whether cash or investments which the Company may earmark to pay benefits under the Plan shall at all times remain the property of the Company prior to actual payment to the Participant or beneficiary; and the Participant and his/her designated beneficiary shall not have any property interest whatsoever in any specific assets of the Company. (f) The Participant shall not have voting rights associated with any assets or Directed Investment under the Plan. (g) The Company may elect to distribute any benefits payable in accordance with the Plan to the Participant or beneficiaries in-kind in the form of Common Stock at the time of benefits distribution as settlement of that portion of the Plan Account to be distributed to the extent that such in-kind distribution is permissible in accordance with applicable law and regulations, including, but not limited to the Nasdaq National Market listing requirements. I understand that the Company may within its sole discretion accept this Election Form and also may terminate this investment election in whole, or in part, in its sole discretion at anytime without prior notice or consent from the undersigned. Participant Signature ____________________________ Date: ________ ___, 200_ Accepted by the Company this ___ day of __________ 200_. By: _________________________________ EX-21 6 ex-21.txt SUBSIDIARIES OF THE COMPANY Subsidiaries of the Company Percentage Jurisdiction of Subsidiaries Owned Incorporation - ------------ ----- ------------- Synergy Bank 100% United States Synergy Financial Services, Inc. 100% New Jersey Synergy Capital Investments, Inc. (1) 100% New Jersey Synergy Investment Corporation (2) 100% Delaware (1) Wholly-owned subsidiary of Synergy Bank. (2) Wholly-owned subsidiary of Synergy Capital Investments, Inc. EX-23 7 ex-23.txt CONSENT OF GRANT THORNTON LLP CONSENT OF REGISTERED PUBLIC ACCOUNTING FIRM We have issued our reports dated February 22, 2006, accompanying the consolidated financial statements and management's assessment of the effectiveness of internal control over financial reporting included in the Annual Report of Synergy Financial Group, Inc. and subsidiaries on Form 10-K for the year ended December 31, 2005. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Synergy Financial Group, Inc. on Forms S-8 (File No. 333-120596, effective November 18, 2004; File No. 333-115711, effective May 21, 2004; File No. 333-115710, effective May 21, 2004; File No. 333-105633, effective May 29, 2003; File No. 333-105631, effective May 29, 2003). /s/Grant Thornton LLP Philadelphia, Pennsylvania February 22, 2006 EX-31 8 ex-31.txt CERTIFICATIONS SECTION 302 CERTIFICATION I, John S. Fiore, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Synergy Financial Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: February 22, 2006 /s/John S. Fiore ---------------------------------- John S. Fiore President and Chief Executive Officer SECTION 302 CERTIFICATION I, A. Richard Abrahamian, Senior Vice President and Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Synergy Financial Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: February 22, 2006 /s/A. Richard Abrahamian ------------------------------------- A. Richard Abrahamian Senior Vice President and Chief Financial Officer EX-32 9 ex-32.txt CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. ss.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K for the year ended December 31, 2005 (the "Report") of Synergy Financial Group, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof, we, John S. Fiore, President and Chief Executive Officer, and A. Richard Abrahamian, Senior Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/John S. Fiore /s/A. Richard Abrahamian - ------------------------------ -------------------------------------------- John S. Fiore A. Richard Abrahamian President and Senior Vice President and Chief Executive Officer Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: February 22, 2006 -----END PRIVACY-ENHANCED MESSAGE-----