Synergy Financial Group Inc.'s transformation, starting with its then relatively unusual conversion from a credit union to a mutual thrift in 1998 and culminating with a second-step conversion in 2004, gave it a mountain of capital to use for growth.
What the transformation did not necessarily provide was a great deal of time to start growing. So after the $971 million-asset Cranford, N.J., thrift company generated a return on equity of 4.7% last year, it found itself in the crosshairs of something no credit union faces: the demands of an activist investor.
Richard Lashley, a principal in PL Capital Group of Chatham, and his partner, John Palmer, want Synergy to earmark $20 million for share repurchases - enough to buy back more than 1.5 million shares at Monday's closing price of $13.06.
On Feb. 1, Mr. Lashley's group announced that they also plan to nominate two representatives for seats on Synergy's board at the company's annual meeting in April. The group contends that the returns are far short of acceptable levels, even for a capital-rich company that completed its second-step conversion less than two years ago, and that a shake-up is required.
Synergy did not return repeated calls for comment, but it has already taken a step in the direction PL Capital recommended.
In a recent filing with the Securities and Exchange Commission, Synergy said that $20 million is too much to spend on repurchases. However, last week it did announce an expansion of its more modest buyback program, to about 5% of its outstanding shares. At current market prices, buying back that much stock would cost $7 million to $8 million.
The announcement has not satisfied PL Capital, nor does it suggest that Synergy regards the investor group with particularly warm feelings. The company's initial refusal to provide PL Capital with a shareholder list made it difficult for the group to win the support of other investors.
PL Capital filed suit against Synergy on Feb. 1, after it refused to turn over the list, but after a Feb. 15 court hearing the company agreed to provide the names.
The principals of PL Capital, which owns 9.8% of Synergy's shares, have developed a reputation in the bank investor community for buying into underperforming thrifts and pressuring them to sell. Mr. Lashley and Mr. Palmer have not made such a demand of Synergy, but they have blasted it for paying senior executives and board members lavishly while its performance has languished.
In an interview, Mr. Lashley said that PL Capital has no plans to sell any of its shares back to Synergy. Rather, he said a more aggressive buyback program would benefit remaining investors by reducing the number of outstanding shares and increasing the book value of their stock. Such a buyback program would also return capital that Synergy has failed to deploy efficiently, he said.
Synergy's management has to make "some tough decisions," Mr. Lashley said. "Clearly, there are other banks and thrifts that have found a way to earn more" than a 4.7% ROE.
In the first three quarters of this year, the average ROE for thrifts with $500 million to $1 billion of assets was 8.19%, according to Federal Deposit Insurance Corp. statistics.
In its eight years as a thrift, Synergy's ROE and return on assets have lagged those of similar-size institutions. Its best ROE was the 8.49% it posted for 2001.
In an SEC filing, PL Capital said that Synergy's board and top management received $14 million of compensation from 2003 to 2005, a period in which net income totaled just $12.1 million.
(Mr. Lashley said that PL Capital arrived at the $14 million figure by combining salaries, bonuses, and the current market value of stock the directors and top executives received.)
"We're not against compensation, but it's not a free lunch," he said. "The burden is on them. They got paid. Now they have to earn it."
Synergy was founded as a federal credit union in 1952. In May 1998 it became one of the first credit unions to convert to the mutual thrift charter. It sold a minority stake to investors in 2002, when it became a mutual holding company. In January 2004 it sold the rest of the company, raising about $70 million in a secondary offering.
It has largely retained the business model it used as a credit union, focusing on mortgages and automobile loans. At the end of the third quarter those two loan types made up 62% of its $691 million portfolio.
Synergy can point to some positive developments, though. Its assets, loans, and deposits have increased steadily since 1998, as have its net earnings, which rose from $1.45 million in that year to $4.5 million last year. That equates to a compound annual growth rate of 17.6%.
Moreover, asset quality has remained pristine throughout Synergy's history as a thrift. At yearend it had $382,000 of nonperforming assets, or 0.05% of total loans.
In a Feb. 23. news release, Synergy said it would buy back 572,000 shares, including the roughly 175,000 it was still authorized to buy under a program that began in August.
