SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: September 30, 2006
------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
SEC File Number: 000-50467
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SYNERGY FINANCIAL GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
New Jersey 52-2413926
---------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 North Avenue East, Cranford, New Jersey 07016
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(Address of principal executive offices) (Zip Code)
(908) 272-3838
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant: (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___
Indicate by check mark whether the Registrant is 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 __
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___ No X_
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of common stock as of October 31, 2006:
$0.10 Par Value Common Stock 11,382,143
- ---------------------------- ----------
Class Shares Outstanding
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2006 and
December 31, 2005........................................................1
Consolidated Statements of Income for the three and nine months ended
September 30, 2006 and 2005..............................................2
Consolidated Statement of Changes in Stockholders' Equity for the
nine months ended September 30, 2006.....................................3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005..............................................4
Notes to Consolidated Financial Statements...................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................23
Item 4. Controls and Procedures.....................................................24
PART II OTHER INFORMATION
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Item 1. Legal Proceedings...........................................................25
Item 1A. Risk Factors................................................................25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................25
Item 3. Defaults Upon Senior Securities.............................................26
Item 4. Submission of Matters to a Vote of Security Holders.........................26
Item 5. Other Information...........................................................26
Item 6. Exhibits....................................................................26
Signatures................................................................................27
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
September 30, December 31,
2006 2005
---- ----
Assets:
Cash and amounts due from banks $ 5,108 $ 4,635
Interest-bearing deposits with banks 414 1,948
----------- -----------
Cash and cash equivalents 5,522 6,583
Investment securities available-for-sale,
at fair value 72,640 85,319
Investment securities held-to-maturity (fair
value of $79,359 and $93,575, respectively) 81,582 95,621
Federal Home Loan Bank of New York
stock, at cost 12,840 13,263
Loans receivable, net 769,135 733,183
Accrued interest receivable 3,785 3,313
Property and equipment, net 19,504 18,570
Cash surrender value of bank-owned life insurance 21,581 13,138
Other assets 6,655 4,897
----------- -----------
Total assets $ 993,244 $ 973,887
=========== ===========
Liabilities:
Deposits $ 635,329 $ 606,471
Other borrowed funds 254,750 266,600
Advance payments by borrowers for taxes and insurance 2,737 2,215
Accrued interest payable on advances 674 611
Other liabilities 3,293 2,740
----------- -----------
Total liabilities 896,783 878,637
----------- -----------
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 - 12,509,636 in 2006 and 12,471,481 in 2005
Outstanding - 11,382,143 in 2006 and 11,545,881 in 2005 1,251 1,247
Additional paid-in-capital 84,447 85,959
Retained earnings 33,953 32,794
Unearned ESOP shares (4,770) (5,282)
Unearned RSP compensation - (2,567)
Treasury stock acquired for the RSP, at cost;
271,613 in 2006 and 363,037 in 2005 (3,086) (4,124)
Treasury stock, at cost; 1,127,493 in 2006
and 925,600 in 2005 (14,125) (11,426)
Accumulated other comprehensive loss, net of taxes (1,209) (1,351)
----------- -----------
Total stockholders' equity 96,461 95,250
----------- -----------
Total liabilities and stockholders' equity $ 993,244 $ 973,887
=========== ===========
The accompanying notes are an integral part of these statements.
-1-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
For the Three Months For the Nine Months
ended September 30, ended September 30,
------------------- -------------------
2006 2005 2006 2005
---- ---- ---- ----
Interest income:
Loans, including fees $ 12,199 $ 9,868 $ 35,456 $ 27,210
Investment securities 1,577 1,934 4,998 6,448
Other 181 157 526 391
--------- -------- --------- ---------
Total interest income 13,957 11,959 40,980 34,049
--------- -------- --------- ---------
Interest expense:
Deposits 5,671 3,292 15,085 9,025
Borrowed funds 2,627 2,517 7,598 6,347
--------- -------- --------- ---------
Total interest expense 8,298 5,809 22,683 15,372
--------- -------- --------- ---------
Net interest income before provision for loan losses 5,659 6,150 18,297 18,677
Provision for loan losses 200 392 868 1,314
--------- -------- --------- ---------
Net interest income after provision for loan losses 5,459 5,758 17,429 17,363
--------- -------- --------- ---------
Other income:
Service charges and other fees on deposit accounts 557 550 1,570 1,562
Net gain (loss) on sale of investments - 8 - (26)
Commissions 211 211 625 660
Other 188 185 521 468
--------- -------- --------- ---------
Total other income 956 954 2,716 2,664
--------- -------- --------- ---------
Other expenses:
Salaries and employee benefits 3,080 2,784 9,204 8,261
Premises and equipment 634 765 1,967 2,226
Occupancy 589 583 1,715 1,595
Professional services 149 165 608 559
Advertising 81 262 341 677
Other operating 443 477 1,486 1,437
--------- -------- --------- ---------
Total other expenses 4,976 5,036 15,321 14,755
--------- -------- --------- ---------
Income before income tax expense 1,439 1,676 4,824 5,272
Income tax expense 458 568 1,734 1,939
--------- -------- --------- ---------
Net income $ 981 $ 1,108 $ 3,090 $ 3,333
========= ======== ========= =========
Per share of common stock:
Basic earnings per share $ 0.09 $ 0.10 $ 0.30 $ 0.30
========= ======== ========= =========
Diluted earnings per share $ 0.09 $ 0.10 $ 0.29 $ 0.29
========= ======== ========= =========
Basic weighted average shares outstanding 10,379 10,711 10,350 10,993
========= ======== ========= =========
Diluted weighted average shares outstanding 10,874 11,102 10,824 11,390
========= ======== ========= =========
The accompanying notes are an integral part of these statements.
-2-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 2006
(In thousands, except share amounts)
(unaudited)
Treasury Accumulated
stock comprehensive
Common stock Additional Unearned Unearned acquired income
Shares Par paid-in- Retained ESOP RSP for the Treasury (loss),
issued value capital earnings shares compensation RSP Stock net TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2006 12,471,481 $1,247 $85,959 $32,794 $(5,282) $(2,567) $(4,124) $(11,426) $(1,351) $95,250
Net income - - - 3,090 - - - - - 3,090
Other comprehensive income,
net of reclassification
adjustment and taxes - - - - - - - - 142 142
------
Total comprehensive income 3,232
Dividends declared - - - (1,931) - - - - - (1,931)
Common stock issued for
options exercised 38,155 4 210 - - - - - - 214
Common stock held by
ESOP committed to be
released (74,718 shares) - - 576 - 512 - - - - 1,088
Other stock compensation
plan activity, including
tax benefits - - 186 - - - - - - 186
Transfer due to adoption
of SFAS 123(R) - - (2,567) - - 2,567 - - - -
Compensation recognized
under stock plans - - 1,121 - - - - - - 1,121
Purchase of treasury
stock (201,893 shares) - - - - - - - (2,699) - (2,699)
Common stock issued by
RSP (91,424) - - (1,038) - - - 1,038 - - -
----------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2006 12,509,636 $1,251 $84,447 $33,953 $(4,770) $ - $(3,086) $(14,125) $(1,209) $96,461
====================================================================================================
The accompanying notes are an integral part of these statements.
-3-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
For the Nine Months
Ended September 30,
-------------------
2006 2005
---- ----
Operating activities:
Net income $ 3,090 $ 3,333
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,110 1,139
Provision for loan losses 868 1,314
Deferred income taxes (1,787) (405)
Amortization of deferred loan fees and costs (110) (81)
Amortization of premiums on investment securities 387 679
Net loss on sale of investment securities - 26
Release of ESOP shares 1,088 920
Compensation recognized under stock plans 1,121 607
Increase in accrued interest receivable (472) (367)
Increase in other assets (38) (141)
Increase (decrease) in other liabilities 505 (2,121)
Increase in cash surrender value of bank-owned life insurance (443) (373)
Increase in accrued interest payable on advances 63 395
-------- ---------
Net cash provided by operating activities 5,382 4,925
-------- ---------
Investing activities:
Purchase of investment securities held-to-maturity - (12,536)
Purchase of investment securities available-for-sale (4,607) (2,084)
Maturity and principal repayments of investment
securities held-to-maturity 17,112 21,819
Maturity and principal repayments of investment
securities available-for-sale 13,968 28,846
Purchase of property and equipment (2,044) (2,077)
Sale (purchase) of FHLB stock 423 (2,352)
Proceeds from the sale of investment securities available for sale - 12,808
Purchase of bank owned life insurance (8,000) -
Loan originations, net of principal repayments (42,887) (120,186)
Purchase of loans (2,940) (10,168)
Proceeds from sale of loans 9,117 -
-------- ---------
Net cash used in investing activities (19,858) (85,930)
-------- ---------
Financing activities:
Net increase in deposits 28,858 42,224
Increase in short-term FHLB advances 7,300 61,475
Proceeds from long-term FHLB advances 22,000 25,500
Repayments of long-term FHLB advances (41,150) (36,939)
Increase in advance payments by borrowers
for taxes and insurance 522 438
Dividends paid (1,816) (1,600)
Purchase of treasury stock for the RSP Plan - (766)
Purchase of treasury stock (2,699) (7,916)
Common stock issued for options exercised 400 83
-------- ---------
Net cash provided by financing activities 13,415 82,499
-------- ---------
Net (decrease) increase in cash and cash equivalents (1,061) 1,494
Cash and cash equivalents at beginning of year 6,583 6,446
-------- ---------
Cash and cash equivalents at end of period $ 5,522 $ 7,940
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 2,206 $ 2,849
======== =========
Interest paid on deposits and borrowed funds $ 22,747 $ 15,767
======== =========
The accompanying notes are an integral part of these statements.
-4-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting policies followed by Synergy Financial Group, Inc. (the
"Company") conform to accounting principles generally accepted in the United
States of America and to predominant practice within the banking industry.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Synergy Bank (the "Bank") and Synergy Financial
Services, Inc. All significant inter-company accounts and transactions have been
eliminated in consolidation. Certain amounts previously reported have been
reclassified to conform to the current year's presentation.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions to Form 10-Q, and, therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations, changes in equity and cash flows in
conformity with accounting principles generally accepted in the United States of
America. However, all normal recurring adjustments that, in the opinion of
management, are necessary for a fair presentation of the consolidated financial
statements have been included. These financial statements should be read in
conjunction with the audited consolidated financial statements and the
accompanying notes thereto included in the Company's Annual Report on Form 10-K
for the period ended December 31, 2005. The results for the nine months ended
September 30, 2006 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2006 or any other period.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the balance
sheets, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The principal estimates that are susceptible to significant change in the near
term relate to the allowance for loan losses. The evaluation of the adequacy of
the allowance for loan losses includes an analysis of the individual loans and
overall risk characteristics and size of the different loan portfolios, and
takes into consideration current economic and market conditions, the capability
of specific borrowers to pay specific loan obligations, as well as current loan
collateral values. However, actual losses on specific loans, which also are
encompassed in the analysis, may vary from estimated losses.
Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures About
Segments of an Enterprise and Related Information, establishes standards for the
way business enterprises report information about operating segments in annual
financial statements. The Company has one operating segment and, accordingly,
has one reportable segment, "Community Banking." All of the Company's activities
are interrelated, and each activity is dependent and assessed based on how each
of the activities of the Company supports the others. For example, commercial
lending is dependent upon the ability of the Bank to fund itself with retail
deposits and other borrowings and to manage interest rate and credit risk. This
situation is also similar for consumer, residential, multi-family and
non-residential mortgage lending. Accordingly, all significant operating
decisions are based upon analysis of the Company as one operating segment.
-5-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock (such as stock
options) were exercised or resulted in the issuance of common stock. These
potentially dilutive shares would then be included in the weighted number of
shares outstanding for the period using the treasury stock method. Shares issued
and shares re-acquired during any period are weighted for the portion of the
period that they were outstanding.
The computation of both basic and diluted earnings per share includes the
Employee Stock Ownership Plan ("ESOP") shares previously allocated to
participants and shares committed to be released for allocation to participants
and restricted stock plan ("RSP") shares that have vested or have been allocated
to participants. ESOP and RSP shares that have been purchased but not committed
to be released have not been considered in computing basic and diluted earnings
per share.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation (in thousands, except per share
data):
For the Three Months Ended September 30, 2006
---------------------------------------------
Weighted
Income average shares Per
(numerator) (denominator) share amount
----------- ------------- ------------
Basic earnings per share:
Income available to common stockholders $ 981 10,379 $ 0.09
Effect of dilutive common stock equivalents 0 495 0.00
--------- ------ ---------
Diluted earnings per share:
Income available to common stockholders $ 981 10,874 $ 0.09
========= ====== =========
For the Three Months Ended September 30, 2005
---------------------------------------------
Weighted
Income average shares Per
(numerator) (denominator) share amount
----------- ------------- ------------
Basic earnings per share:
Income available to common stockholders $ 1,108 10,711 $ 0.10
Effect of dilutive common stock equivalents 0 391 0.00
--------- ------ ---------
Diluted earnings per share:
Income available to common stockholders $ 1,108 11,102 $ 0.10
========= ====== =========
-6-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
For the Nine Months Ended September 30, 2006
--------------------------------------------
Weighted
Income average shares Per
(numerator) (denominator) share amount
----------- ------------- ------------
Basic earnings per share:
Income available to common stockholders $ 3,090 10,350 $ 0.30
Effect of dilutive common stock equivalents 0 474 (0.01)
--------- ------ ---------
Diluted earnings per share:
Income available to common stockholders $ 3,090 10,824 $ 0.29
========= ====== =========
For the Nine Months Ended September 30, 2005
--------------------------------------------
Weighted
Income average shares Per
(numerator) (denominator) share amount
----------- ------------- ------------
Basic earnings per share:
Income available to common stockholders $ 3,333 10,993 $ 0.30
Effect of dilutive common stock equivalents 0 397 (0.01)
--------- ------ ---------
Diluted earnings per share:
Income available to common stockholders $ 3,333 11,390 $ 0.29
========= ====== =========
3. STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted SFAS 123(R), "Share-Based
Payment." Under the accounting requirements, the Company is now required to
recognize compensation expenses related to stock options outstanding based upon
the fair value of such awards at the date of grant over the period that such
awards are earned. For the three months ended September 30, 2006, the Company
recognized approximately $169,000 of compensation expense relating to its stock
option plans and approximately $40,000 of income tax benefit resulting from this
expense for that period. For the nine months ended September 30, 2006, the
Company recognized approximately $497,000 of compensation expense relating to
its stock option plans and approximately $121,000 of income tax benefit
resulting from this expense for that period.
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 under the plan. 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 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.
-7-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
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 fair value of each option grant is estimated on the date of grant using the
Black-Scholes options price model. The following weighted average assumptions
were utilized for grants in 2006, which have a weighted average fair value of
$3.59: dividend yield of 1.50%; expected volatility of 25.47%; risk-free
interest rate of 4.63%; and, an expected life of five years. The following
weighted average assumptions were utilized for grants in 2005, which have a
weighted average fair value of $3.40: dividend yield of 2.00%; expected
volatility of 32.51%; risk-free interest rate of 3.83%; and, an expected life of
five years. The following weighted average assumptions were utilized for grants
in 2004, which have a weighted average fair value of $3.04: dividend yield of
1.60%; expected volatility of 32.85%; risk-free interest rate of 3.33%; and, an
expected life of five years. The following weighted average assumptions were
utilized for grants in 2003, which have a weighted average fair value of $1.80:
dividend yield of 0.00%; expected volatility of 29.44 %; risk-free interest rate
of 3.01%; and, an expected life of five years.
As of September 30, 2006, there were approximately $1.8 million and $2.3 million
of total unrecognized compensation expense relating to unvested stock options
and unvested restricted stock plan shares, respectively. These costs are
expected to be recognized over a weighted average period of 2.6 years for both
the stock option plans and restricted stock plans.
The Company continues to recognize compensation expense for shares of common
stock awarded under the restricted stock plans over the vesting period at the
fair market value of the shares on the dates they are awarded. For the three
months ended September 30, 2006 and 2005, the Company recognized approximately
$212,000 and $202,000, respectively, of compensation expense relating to the
restricted stock plans, and approximately $76,000 and $73,000, respectively, of
income tax benefit resulting from this expense for these periods. For the nine
months ended September 30, 2006 and 2005, the Company recognized approximately
$623,000 and $608,000, respectively, of compensation expense relating to the
restricted stock plans, and approximately $224,000 and $219,000, respectively,
of income tax benefit resulting from this expense for these periods.
-8-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
The following is a summary of the Company's stock option plans for the nine
months ended September 30, 2006:
Weighted
Average
Shares Exercise Price
------ --------------
Outstanding at beginning of period 1,213,301 $ 8.25
Granted 83,500 13.50
Exercised (38,155) 5.61
Forfeited (2,000) 10.15
Expired - -
--------- ---------
Outstanding at end of period 1,256,646 $ 8.68
========= =========
Exercisable at end of period 541,032 $ 7.57
========= =========
Weighted average remaining
contractual life 7.5 years
Aggregate intrinsic value for
exercisable options $ 8.27
The following is a summary of the Company's restricted stock plans for the nine
months ended September 30, 2006:
Weighted
Average
Grant Date
Shares Fair Value
------ ----------
Outstanding at beginning of period 334,560 $ 8.84
Granted 27,200 13.50
Vested (91,424) 8.46
Forfeited (250) 13.50
Expired - -
------- ---------
Outstanding at end of period 270,086 $ 9.43
======= =========
The Company has established an ESOP covering eligible employees with one year of
service, as defined by the ESOP. The Company accounts for the ESOP in accordance
with the American Institute of Certified Public Accountants' Statement of
Position ("SOP") No. 93-6, Employers' Accounting for Employee Stock Ownership
Plans. SOP No. 93-6 addresses the accounting for shares of stock issued to
employees by an ESOP. SOP No. 93-6 requires that the employer record
compensation expense in the amount equal to the fair value of shares committed
to be released from the ESOP to employees.
Compensation expense for the ESOP is recorded at an amount equal to the shares
allocated by the ESOP multiplied by the average fair market value of the shares
during the year. The Company recognizes compensation expense ratably over the
year for the ESOP shares to be allocated based upon the Company's current
estimate of the number of shares expected to be allocated by the ESOP during
each calendar year. The difference between the average fair market value and the
cost of the shares allocated by the ESOP is recorded as an adjustment to
additional paid-in-capital.
-9-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
4. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, "Accounting for Certain Hybrid Instruments: an amendment of FASB
Statements No. 133 and 140." SFAS No. 155 allows financial instruments that have
embedded derivatives to be accounts ofr as a whole (eliminating the need to
bifurcate the derivative from its host) if the holder elects to account for the
whole instruments on a fair value basis. This Statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The Company does not
expect the adoption of this Statement to have a material effect on the Company's
results of operations or financial condition.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets." This Statement amends SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," and
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable, and permits the
entities to elect either fair value measurement with changes in fair value
reflected in earnings or the amortization and impairment requirements of SFAS
No. 140 for subsequent measurement. The subsequent measurement of separately
recognized servicing assets and servicing liabilities at fair value eliminates
the necessity for entities that manage the risks inherent in servicing assets
and servicing liabilities with derivatives to qualify for hedge accounting
treatment and eliminates the characterization of declines in fair value as
impairments or direct write-downs. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006.
The Company is evaluating the impact, if any, of the adoption of this Statement
on its financial results.
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48 "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," to
clarify certain aspects of accounting for uncertain tax positions, including
issues related to the recognition and measurement of those tax positions taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation is effective for fiscal
years beginning after December 15, 2006. The Company is in the process of
evaluating the impact of the adoption of this interpretation on the Company's
results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." The
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles ("GAAP"), and expands disclosures
about fair value measurements. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of this Statement is not
expected to have a material effect on the Company's results of operations or
financial condition.
Staff Accounting Bulletin No. 108 ("SAB 108") provides guidance on the
consideration of the effects of prior year financial statement misstatements in
quantifying current year misstatements for the purpose of assessing materiality.
Diversity in practice currently exists as to quantifying financial statement
misstatements. Therefore, the potential under current practice for the build up
of improper amounts on the balance sheet has been reviewed and addressed. The
Company is reviewing this accounting bulletin, but has not yet determined the
effect of adopting SAB 108, which is effective for years ending after November
15, 2006.
-10-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
5. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of the
Company's investment securities available-for-sale and held-to-maturity are as
follows (in thousands):
September 30, 2006
------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------------------------------------------
Available-for-sale
U.S. government obligations $ 1,999 $ - $ (82) $ 1,917
Mortgage-backed securities:
FHLMC 48,799 2 (1,192) 47,609
FNMA 21,715 5 (549) 21,171
Equity securities 2,000 - (57) 1,943
------- ------- ------- -------
Total $74,513 $ 7 $(1,880) $72,640
======= ======= ======= =======
September 30, 2005
------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------------------------------------------
Held-to-maturity
Mortgage-backed securities:
FHLMC $33,795 $ - $(1,025) $32,770
FNMA 45,314 1 (1,157) 44,158
GNMA 2,463 5 (47) 2,421
Other debt securities 10 - - 10
------- ------- ------- -------
Total $81,582 $ 6 $(2,229) $79,359
======= ======= ======= =======
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
======= ======= ======= =======
-11-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
December 31, 2005
------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------------------------------------------
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
======= ======= ======= =======
6. LOANS RECEIVABLE
Major groupings of loans are as follows (in thousands):
September 30, December 31,
2006 2005
-----------------------------
Mortgages:
Residential, 1-4 family $242,640 $243,188
Multi-family / non-residential 314,243 271,600
Construction 9,763 9,525
Automobile 153,509 185,812
Commercial 51,454 24,794
Other consumer 3,471 3,830
-------- --------
Loans receivable 775,080 738,749
Deferred loan fees and costs 87 197
Allowance for loan losses (6,032) (5,763)
-------- --------
Loans receivable, net $769,135 $733,183
======== ========
A summary of the activity in the allowance for loan losses is as follows (in
thousands):
For the Nine Months Ended
------------------------------
September 30, September 30,
2006 2005
------------------------------
Balance, beginning of period $5,763 $4,427
Provision for loan losses 868 1,314
Recoveries 345 240
Loans charged-off (944) (585)
------ ------
Balance, end of period $6,032 $5,396
====== ======
-12-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
7. DEPOSITS
Deposits are summarized as follows (in thousands):
September 30, December 31,
2006 2005
------------------------------
Non-interest-bearing checking accounts $ 58,953 $ 58,152
Interest-bearing checking accounts 1,535 3,320
Savings and club accounts 49,619 60,608
Money market accounts 126,956 117,930
Certificate of deposit accounts 398,266 366,461
-------- --------
$635,329 $606,471
======== ========
8. OTHER BORROWED FUNDS
1. Short-Term Borrowings
---------------------
Short-term borrowings, which consist primarily of Federal Home Loan Bank
("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
----------------------------
Nine Months Twelve Months
Ended Ended
September 30, December 31,
2006 2005
----------------------------
Average balance outstanding $70,403 $ 75,411
Maximum amount outstanding at any month end during the period 93,950 115,000
Balance outstanding at period end 93,950 86,650
Weighted average interest rate during the period 5.15% 3.59%
Weighted average interest rate at period end 5.54% 4.13%
2. Long-Term Borrowings
--------------------
At September 30, 2006, long-term borrowings, which consist of FHLB advances,
totaled $160.8 million. Advances consist of fixed-rate advances that will mature
within one to nine years. The advances are collateralized by FHLB stock and
certain first mortgage loans, first-lien home equity loans and mortgage-backed
securities. These advances had a weighted average interest rate of 3.99%.
As of September 30, 2006, long-term FHLB advances mature as follows (in
thousands):
2006 $ 8,000
2007 57,000
2008 45,100
2009 8,000
2010 10,000
Thereafter 32,700
--------
$160,800
========
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Management's discussion and analysis of financial condition and results
of operations is intended to provide assistance in understanding our
consolidated financial condition and results of operations. The information in
this section should be read with the consolidated interim financial statements
and the notes thereto included in this Form 10-Q.
Our results of operations are primarily dependent on our net interest
income. Net interest income is a function of the balances of interest-earning
assets outstanding in any one period, the yields earned on those assets and the
interest paid on deposits and borrowed funds that were outstanding in that same
period. To a lesser extent, the relative levels of our other income and other
expenses also affect our results of operations. Our other income consists
primarily of fees and service charges, commissions and gains and losses on the
sale of loans and investments. The other expenses consist primarily of employee
compensation and benefits, occupancy and equipment expenses, data processing
costs, marketing costs, professional fees, office supplies, telephone and
postage costs. Our results of operations are also significantly impacted by the
amount of provisions for loan losses which, in turn, are dependent upon, among
other things, the size and makeup of the loan portfolio, loan quality and loan
trends.
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21 E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995,
and is including this statement for the purpose of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and its subsidiaries include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission ("SEC").
The Company does not undertake - and specifically disclaims any
obligation - to release publicly the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
-14-
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with the
accounting principles generally accepted in the United States of America and
with general practices within the financial services industry. The preparation
of the financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
Allowance for Loan Losses. The Company recognizes that the determination
of the allowance for loan losses involves a higher degree of judgment and
complexity than its other significant accounting policies. The balance in the
allowance for loan losses is determined based on management's review and
evaluation of the loan portfolio in relation to past loss experience, the size
and composition of the portfolio, current economic events and conditions, and
other pertinent factors, including management's assumptions as to future
delinquencies, recoveries and losses. All of these factors may be susceptible to
significant change. To the extent actual outcomes differ from management's
estimates, additional provisions for loan losses may be required that would
adversely impact earnings in future periods.
Intangible Assets. Intangible assets, such as goodwill and the core
deposit intangible associated with the Company's January 2003 acquisition of
First Bank of Central Jersey, are subject to annual impairment tests and, in the
case of the core deposit intangible, amortization of the asset through a charge
to expense. To the extent the outcome of the impairment tests differ from the
carrying value, additional charges to expense could be required to reduce the
carrying value, which would adversely impact earnings in future periods.
Income Taxes. Under the liability method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities. Deferred tax assets are
subject to management's judgment based upon available evidence that future
realization is more likely than not. If management determines that the Company
may be unable to realize all or part of the net deferred tax assets in the
future, a direct charge to income tax expense may be required to reduce the
recorded value of the net deferred tax assets to the expected realizable amount,
thereby impacting earnings.
Comparison of Financial Condition at September 30, 2006 and December 31, 2005
Assets. Total assets reached $993.3 million on September 30, 2006, an
increase of 2.0%, or $19.4 million, from $973.9 million on December 31, 2005.
This growth was primarily attributable to an increase in net loans and in
bank-owned life insurance, partially offset by a decline in investment
securities.
Between December 31, 2005 and September 30, 2006, investment securities
decreased $26.7 million, or 14.8%, from $180.9 million to $154.2 million. This
decrease was due to maturities and principal repayments during the first nine
months of 2006. FHLB stock holdings decreased 3.2%, or $0.4 million, to $12.8
million at September 30, 2006, from $13.2 million at December 31, 2005.
Net loans increased 4.9%, or $35.9 million, to $769.1 million at
September 30, 2006, from $733.2 million at December 31, 2005. This growth
includes $45.8 million in originations and purchased loans, net of principal
repayments, offset by $9.1 million in participation loan sales, the amortization
of the premium on purchased loans and net deferred loan costs, along with a
provision of $868,000 recorded to the allowance for loan losses. During the
first quarter of 2006, the Bank sold approximately $9.1 million of participation
loans that were providing yields below current market levels. The most
significant changes during the nine months ended September 30, 2006 were in
multi-family/non-residential mortgage and commercial loans. Multi-family/
non-residential mortgages increased by $42.6 million, or 15.7%, to $314.2
million, while commercial loans increased by $26.7 million, or 107.5%, to $51.5
million. Automobile loans declined $32.3 million, or 17.4%, to
-15-
$153.5 million, as greater emphasis was placed on commercial and
multi-family/non-residential mortgage products.
On September 30, 2006, total loans of $775.1 million were comprised of
40.5% in multi-family/non-residential mortgage loans, 20.2% in consumer loans,
comprised mostly of direct automobile loans for both new and used vehicles,
16.6% in one-to-four family real estate loans, 14.6% in home equity loans, 6.8%
in commercial loans and 1.3% in construction loans.
The allowance for loan losses was $6.0 million at September 30, 2006,
compared to $5.8 million at December 31, 2005. This reflects a provision for
loan losses of $868,000 for the nine-month period ended September 30, 2006,
offset by net charge-offs of $599,000. The ratio of the allowance for loan
losses to total loans was 0.78% on both September 30, 2006 and December 31,
2005. Non-performing assets represented 0.13% of total assets on June 30, 2006,
compared to 0.04% on December 31, 2005. The increase was primarily due to the
placement of an $825,000 non-residential loan into non-performing status during
the third quarter of 2006.
Liabilities. Total liabilities increased $18.2 million, or 2.1%, to
$896.8 million at September 30, 2006, from $878.6 million at December 31, 2005.
The increase in total liabilities resulted primarily from an increase of $28.8
million, or 4.8%, in deposits, partially offset by a decline in FHLB advances of
$11.9 million, or 4.4%. The balance of the change was attributable to a increase
in total other liabilities of $1.2 million, or 20.4%.
Deposits reached $635.3 million at September 30, 2006, an increase of
$28.8 million, or 4.8%, from the $606.5 million reported at December 31, 2005.
This growth resulted from increases in certificates of deposit of $31.8 million,
or 8.7%, from the $366.5 million reported at year-end 2005, while core deposits,
which consist of checking, savings and money market accounts, decreased $3.0
million, or 1.2%. At September 30, 2006, brokered certificates of deposit
totaled $36.3 million, an increase of $12.7 million from December 31, 2005.
The $11.9 million decrease in FHLB advances between December 31, 2005 and
September 30, 2006 was primarily due to the growth in deposits.
Equity. Stockholders' equity totaled $96.5 million at September 30,
2006, an increase of $1.2 million, or 1.3%, from $95.3 million at December 31,
2005. The increase was attributable to net income for the period coupled with
the activity relating to the Company's stock based benefit plans, partially
offset by the repurchase of 201,893 shares of the Company's common stock in open
market transactions. Additionally, on September 27, 2006, the Company's Board of
Directors declared a quarterly cash dividend of $0.06 per common share, which
was payable on October 27, 2006 to stockholders of record on October 13, 2006.
The repurchase of shares associated with the Company's stock repurchase
programs resulted in a cumulative reduction in stockholders' equity of $2.7
million. The decrease in accumulated other comprehensive loss, net of tax
effect, totaled $142,000.
-16-
Average Balance Sheet. The following table sets forth certain information for
the three months ended September 30, 2006 and 2005. The average yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily average balances. The table does not include the allowance
for loan losses in the average balances of loans receivable. Management does not
believe that this causes any material differences in the information presented.
For the Three Months Ended September 30,
---------------------------------------------------------------------------
2006 2005
--------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable, net(1) $767,496 $12,199 6.36% $669,363 $ 9,868 5.90%
Securities(2) 156,697 1,577 4.03 206,863 1,934 3.74
Other interest-earning assets(3) 11,797 181 6.14 13,510 157 4.65
-------- ------- ------ -------- ------- ------
Total interest-earning assets 935,990 13,957 5.96 889,736 11,959 5.38
Non-interest-earning assets 46,928 40,013
-------- --------
Total assets $982,918 $929,749
======== ========
Interest-bearing liabilities:
Checking accounts(4) $ 60,217 $ 8 0.05% $ 57,298 $ 18 0.13%
Savings and club accounts 51,858 71 0.55 64,423 81 0.50
Money market accounts 126,417 1,039 3.29 141,421 771 2.18
Certificates of deposit 415,456 4,553 4.38 295,656 2,422 3.28
Other borrowed funds 231,569 2,627 4.54 270,193 2,517 3.73
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 885,517 8,298 3.75 828,991 5,809 2.80
Non-interest-bearing liabilities 2,027 ------- 2,409 -------
-------- --------
Total liabilities 887,544 831,400
Stockholders' equity 95,374 98,349
-------- --------
Total liabilities and stockholders' equity $982,918 $929,749
======== ========
Net interest income $ 5,659 $ 6,150
======= =======
Net interest rate spread(5) 2.21% 2.58%
Net interest margin(6) 2.42% 2.76%
Ratio of average interest-earning assets to
average interest-bearing liabilities 105.70% 107.33%
_______________________________
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes U.S. government obligations, mortgage-backed securities and
interest-bearing deposits in banks.
(3) Includes FHLB stock, at cost.
(4) Includes both interest-bearing and non-interest-bearing checking accounts.
(5) 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).
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
-17-
Average Balance Sheet. The following table sets forth certain information for
the nine months ended September 30, 2006 and 2005. The average yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily average balances. The table does not include the allowance
for loan losses in the average balances of loans receivable. Management does not
believe that this causes any material differences in the information presented.
For the Nine Months Ended September 30,
---------------------------------------------------------------------------
2006 2005
--------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable, net(1) $756,559 $35,456 6.25% $624,189 $27,210 5.81%
Securities(2) 166,645 4,998 4.00 228,497 6,448 3.76
Other interest-earning assets(3) 12,171 526 5.76 12,460 391 4.18
-------- ------- ------ -------- ------- ------
Total interest-earning assets 935,375 40,980 5.84 865,146 34,049 5.25
Non-interest-earning assets 47,457 40,444
-------- --------
Total assets $982,832 $905,590
======== ========
Interest-bearing liabilities:
Checking accounts(4) $ 61,903 $ 31 0.07% $ 56,074 $ 46 0.11%
Savings and club accounts 56,635 224 0.53 66,460 248 0.50
Money market accounts 117,208 2,444 2.78 151,932 2,374 2.08
Certificates of deposit 409,192 12,386 4.04 278,504 6,357 3.04
Other borrowed funds 240,701 7,598 4.21 247,794 6,347 3.42
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 885,639 22,683 3.41 800,764 15,372 2.56
Non-interest-bearing liabilities 2,530 ------- 3,187 -------
-------- --------
Total liabilities 888,169 803,951
Stockholders' equity 94,663 101,639
-------- --------
Total liabilities and stockholders' equity $982,832 $905,590
======== ========
Net interest income $18,297 $18,677
======= =======
Net interest rate spread(5) 2.43% 2.69%
Net interest margin(6) 2.61% 2.88%
Ratio of average interest-earning assets to
average interest-bearing liabilities 105.62% 108.04%
_______________________________
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Includes U.S. government obligations, mortgage-backed securities and
interest-bearing deposits in banks.
(3) Includes FHLB stock, at cost.
(4) Includes both interest-bearing and non-interest-bearing checking accounts.
(5) 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).
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
-18-
Comparison of Operating Results for the Three Months Ended September 30, 2006
and 2005
Net Income. Net income decreased by $127,000, to $981,000, for the
three months ended September 30, 2006, compared to $1.108 million for the same
period in 2005, an 11.5% decline. Diluted net income per common share was $0.09
for the third quarter of 2006, compared to $0.10 for the same period in 2005.
The decrease in net income was primarily attributable to a $491,000 decrease in
net interest income, partially offset by an increase in other income of $2,000,
a $192,000 decrease in the provision for loan losses, a $60,000 decrease in
other expenses and a $110,000 decrease in income tax expense. Results for the
third quarter of 2006 included $129,000, or $0.01 per diluted share, in
after-tax stock option expense associated with the adoption of SFAS No. 123(R),
"Share-Based Payment," which became effective January 1, 2006.
Net Interest Income. Net interest income declined $491,000, or 8.0%, to
$5.7 million for the three months ended September 30, 2006, compared to $6.2
million for the same period in 2005. Total interest income increased by $2.0
million, to $14.0 million, for the three months ended September 30, 2006, while
total interest expense increased by $2.5 million, to $8.3 million, when compared
to the same three-month period last year. This quarter's results included the
reversal of approximately $78,000 of accrued but unpaid interest on an $825,000
non-residential loan placed into non-performing status during the third quarter
of 2006. The net interest margin for the third quarter of 2006 declined 34 basis
points, to 2.42%, from 2.76% in the same period last year, and declined 24 basis
points, from 2.66% in the second quarter of 2006. The linked quarter and
year-over-year decline was the result of margin compression stemming from the
prolonged, flat yield curve and increased funding costs, coupled with a slowdown
in asset growth.
The 16.7% increase in total interest income was primarily due to a
$46.3 million, or 5.2%, increase in average interest-earning assets, combined
with a 58 basis point increase in the average yield earned on these assets when
compared to the same quarter of the prior year. The increase in interest-earning
assets was a result of the Company's growth strategy. The increase in the
average yield was primarily attributable to higher market interest rates on
originated loans, a higher yield on investment securities and an increased
dividend yield on FHLB stock.
The 42.8% increase in total interest expense primarily resulted from a
$56.5 million, or 6.8%, increase in average interest-bearing liabilities,
coupled with a 95 basis point increase in the average cost of funds when
compared to the same quarter of the prior year. The increase in the average cost
of interest-bearing liabilities was primarily attributable to higher market
interest rates, as well as an increase in higher cost certificates of deposits.
The majority of the increase in average interest-bearing liabilities for the
quarter ended September 30, 2006 was a result of a $119.8 million, or 40.5%,
increase in the average balance of certificate of deposit accounts.
Provision for Loan Losses. We maintain an allowance for loan losses
through provisions for loan losses that are charged to earnings. The provision
is made to adjust the total allowance for loan losses to an amount that
represents management's best estimate of incurred and probable losses in the
loan portfolio at the balance sheet date that are reasonable to estimate. In
estimating the losses in the loan portfolio that are both probable and
reasonable to estimate, management considers factors such as an internal
analysis of credit quality, general levels of loan delinquencies, collateral
values, the Bank's historical loan loss experience, changes in loan
concentrations by loan category, peer group information and economic and other
trends affecting our market area. The provision established for loan losses each
month reflects management's assessment of these factors in relation to the level
of the allowance at such time. Management allocates the allowance to various
categories based on its classified assets, historical loan loss experience and
its assessment of the risk characteristics of each loan category and the
relative balances at month end of each loan category. Management's assessment
did not change either in estimation method or assumptions during either period.
-19-
The provision for loan losses declined by $192,000, to $200,000, for
the three months ended September 30, 2006, from $392,000 for the same quarter in
2005. The decrease in the provision was primarily due to lower loan production
during the third quarter of 2006 as compared to the same period last year. Total
charge-offs amounted to $375,000 and recoveries amounted to $117,000, resulting
in a net charge-off amount of $258,000 for the three months ended September 30,
2006. This represents a $153,000 increase in net charge-offs when compared to
the same quarter in 2005.
Other Income. Other income increased $2,000, or 0.2%, to $956,000 for
the three months ended September 30, 2006, compared to $954,000 for the same
quarter in 2005. This was primarily the result of an increase in service charges
and fees on deposit accounts.
Other Expenses. Other expenses decreased $60,000, or 1.2%, to $5.0
million for the three months ended September 30, 2006. The decrease was
primarily attributable to a decline in advertising expenses and lower premises
and equipment expense. Salaries and benefits increased primarily as a result of
the $169,000 of pre-tax stock option compensation expense associated with the
adoption of SFAS No. 123(R).
Income Tax Expense. Income tax expense decreased by $110,000, or 19.4%,
during the three months ended September 30, 2006 when compared to the same
quarter in 2005, due in part to lower taxable income for the 2006 period.
Comparison of Operating Results for the Nine Months Ended September 30, 2006 and
2005
Net Income. Net income decreased by $243,000, to $3.1 million, for the
nine months ended September 30, 2006, compared to $3.3 million for the same
period in 2005, a 7.3% decline. Diluted net income per common share was $0.29
for both periods. The decrease in net income was primarily attributable to a
$380,000 decrease in net interest income coupled with a $566,000 increase in
other expenses, partially offset by a $52,000 increase in other income, a
$446,000 decrease in the provision for loan losses and a $205,000 decrease in
income tax expense. Results for the nine months ended September 30, 2006
included $376,000, or $0.03 per diluted share, in after-tax stock option expense
associated with the adoption of SFAS No. 123(R).
Net Interest Income. Net interest income declined by $380,000, or 2.0%,
to $18.3 million for the nine months ended September 30, 2006, compared to $18.7
million for the same period in 2005. Total interest income increased by $6.9
million, to $41.0 million, for the nine months ended September 30, 2006, while
total interest expense increased by $7.3 million, to $22.7 million, when
compared to the same nine-month period last year. Last year's results included
approximately $117,000 of loan prepayment fees, which related to two large
credits, while this year's results included the reversal of approximately
$78,000 of accrued but unpaid interest on an $825,000 loan placed into
non-performing status during the third quarter of 2006. The net interest margin
for the first nine months of 2006 declined 27 basis points, to 2.61%, from 2.88%
in the same period last year. This year-over-year decline was the result of
margin compression stemming from the prolonged, flat yield curve and increased
funding costs, coupled with a slowdown in asset growth.
The 20.4% increase in total interest income was primarily due to a
$70.2 million, or 8.1%, increase in average interest-earning assets, combined
with a 59 basis point increase in the average yield earned on these assets when
compared to the same period last year. The increase in interest-earning assets
was a result of the Company's growth strategy. The increase in the average yield
was primarily attributable to higher market interest rates on originated loans,
a higher yield on investment securities and an increased dividend yield on FHLB
stock.
The 47.6% increase in total interest expense primarily resulted from an
$84.9 million, or 10.6%, increase in average interest-bearing liabilities,
coupled with an 85 basis point increase in the average cost of funds when
compared to the same period last year. The increase in the average cost of
interest-bearing liabilities was primarily attributable to higher market
interest rates, as well as an increase in higher cost
-20-
certificates of deposits. The majority of the increase in average
interest-bearing liabilities for the first nine months of 2006 was a result of a
$130.7 million, or 46.9%, increase in the average balance of certificate of
deposit accounts over the same period last year.
Provision for Loan Losses. We maintain an allowance for loan losses
through provisions for loan losses that are charged to earnings. The provision
is made to adjust the total allowance for loan losses to an amount that
represents management's best estimate of incurred and probable losses in the
loan portfolio at the balance sheet date that are reasonable to estimate. In
estimating the losses in the loan portfolio that are both probable and
reasonable to estimate, management considers factors such as an internal
analysis of credit quality, general levels of loan delinquencies, collateral
values, the Bank's historical loan loss experience, changes in loan
concentrations by loan category, peer group information and economic and other
trends affecting our market area. The provision established for loan losses each
month reflects management's assessment of these factors in relation to the level
of the allowance at such time. Management allocates the allowance to various
categories based on its classified assets, historical loan loss experience and
its assessment of the risk characteristics of each loan category and the
relative balances at month end of each loan category. Management's assessment
did not change either in estimation method or assumptions during either period.
The provision for loan losses declined by $446,000, to $868,000, for
the nine months ended September 30, 2006, from $1.3 million for the same period
in 2005. The decrease in the provision was primarily due to lower loan
production during the nine months ended September 30, 2006 as compared to the
same period last year. Total charge-offs amounted to $944,000 and recoveries
amounted to $345,000, resulting in a net charge-off amount of $599,000 for the
nine months ended September 30, 2006. This represents a $254,000 increase in net
charge-offs when compared to the same period in 2005.
Other Income. Other income increased $52,000, or 2.0%, to $2.7 million
for the nine months ended September 30, 2006. This was primarily the result of
an increase of $53,000 in other income, primarily from bank-owned life
insurance.
Other Expenses. Other expenses increased $566,000, or 3.8%, to $15.3
million for the nine months ended September 30, 2006, compared to $14.8 million
for the same period in 2005. The increase was primarily attributable to salaries
and benefits resulting from the $497,000 of pre-tax stock option compensation
expense associated with the adoption of SFAS No. 123(R).
Income Tax Expense. Income tax expense decreased by $205,000, or 10.6%,
during the nine months ended September 30, 2006 when compared to the same period
in 2005, due primarily to lower taxable income for the 2006 period.
Liquidity
The Bank maintains liquid assets at levels it considers adequate to meet
liquidity needs. The liquidity of the Bank reflects its ability to provide funds
to meet loan requests, accommodate possible outflows in deposits, fund current
and planned expenditures and take advantage of interest rate opportunities in
connection with asset and liability management objectives. Funding loan
requests, providing for liability outflows and management of interest rate
fluctuations require continuous analysis in order to match the maturities of
earning assets with specific types of deposits and borrowings. Bank liquidity is
normally considered in terms of the nature and mix of the Bank's sources and
uses of funds.
The Bank's primary sources of liquidity are deposits, scheduled
amortization and prepayment of loans and mortgage-backed securities. In
addition, the Bank invests any excess funds in overnight federal funds
investments, which provide liquidity. Its cash and cash equivalents, defined as
cash and deposits in other financial institutions with original maturities of
three months or less, totaled $5.5 million at September 30, 2006. To a lesser
extent, the earnings and funds provided from operating activities are a source
of liquidity.
-21-
Liquidity management is both a daily and long-term function of business
management. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
and securities prepayments are greatly influenced by general interest rates,
economic conditions and competition. If the Bank requires funds beyond its
ability to generate them internally, it has the ability to obtain advances from
the FHLB, which provides an additional source of funds. At September 30, 2006,
the Bank's borrowing limit with the FHLB was $399.0 million, excluding
repurchase agreement advances, subject to collateral requirements. At September
30, 2006, the Bank had $167.2 million of FHLB advances outstanding and $87.5
million in repurchase agreement advances with the FHLB.
Management is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on the Company's
liquidity, capital or operations nor is it aware of any current recommendation
by regulatory authorities, which, if implemented, would have a material effect
on liquidity, capital or operations. The total amount of the Bank's commitments
to extend credit for mortgage and consumer loans as of September 30, 2006 was
$50.0 million, excluding commitments on unused lines of credit, which totaled
$30.7 million.
Management intends to expand the Bank's branch network either through
opening or acquiring branch offices. Three new offices and the relocation of one
branch are planned for late 2006 and 2007. The Company will also consider the
acquisition of local financial institutions as part of expanding its banking
operations. It does not, however, have any current understandings, agreements or
arrangements for the expansion of its business, other than opening new branch
office locations.
The following table discloses the Bank's contractual obligations as of
September 30, 2006 (in thousands):
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
---------------------------------------------------------------------
Certificates of deposit $398,266 $345,949 $ 45,488 $ 6,377 $ 452
FHLB advances (1) 254,750 150,950 61,100 10,000 32,700
Rental under operating leases 11,711 946 1,697 1,578 7,490
-------- -------- -------- ------- -------
Total $664,727 $497,845 $108,285 $17,955 $40,642
======== ======== ======== ======= =======
________________
(1) At September 30, 2006, other borrowed funds consisted of FHLB advances. The
Bank's borrowing limit with the FHLB was $399.0 million, excluding
repurchase agreement advances, subject to collateral requirements,
consisting of an overnight line of credit of $97.6 million, an adjustable
rate line of credit of $97.6 million and a regular advance limit of $203.8
million.
The following table discloses the Bank's commitments as of September
30, 2006 (in thousands):
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
---------------------------------------------------------------------
Lines of Credit (1) $30,744 $ 1,120 $612 $3,230 $25,782
Other commitments to extend credit 50,014 50,014 - - -
------- ------- ---- ------ -------
Total $80,758 $51,134 $612 $3,230 $25,782
======= ======= ==== ====== =======
________________
(1) Represents amounts committed to customers.
-22-
Regulatory Capital Requirements
The Bank is subject to federal regulations that impose certain minimum
capital requirements. Quantitative measures, established by regulation to ensure
capital adequacy, require the Bank to maintain amounts and ratios of tangible
and core capital to adjusted total assets and of total risk-based capital to
risk-weighted assets. On September 30, 2006, the Bank was in compliance with all
of its regulatory capital requirements. The following table sets forth the
Bank's capital position and relativity to regulatory requirements as of
September 30, 2006:
OTS Requirements
------------------------------------------
Minimum Classification for
Bank actual capital adequacy well-capitalized
----------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total risk-based capital
(to risk-weighted assets) $94,292 12.28% $61,431 8.00% $76,789 10.00%
Tier 1 capital (to risk-weighted assets) 88,260 11.49% N/A N/A 46,074 6.00%
Tier 1 capital (to adjusted total assets) 88,260 8.91% 39,626 4.00% 49,532 5.00%
Tangible capital (to adjusted total assets) 88,260 8.91% 14,860 1.50% N/A N/A
Impact of Inflation and Changes Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations, primarily those at the Bank. Unlike
most industrial companies, nearly all of the assets and liabilities of the Bank
are financial. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management of Interest Rate Risk and Market Risk
Quantitative Analysis. Management actively monitors its interest rate
risk exposure. The Bank's objective is to maintain a consistent level of
profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Bank uses the Office of Thrift
Supervision Net Portfolio Value (NPV) Model to monitor its exposure to interest
rate risk, which calculates changes in net portfolio value. Reports generated
from assumptions provided and modified by management are reviewed by the Asset/
Liability Management and Budget 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 200 basis point (1/100th of a percentage point)
upward and downward shift (shock) in the Treasury yield curve.
Management believes that there has not been a material adverse change
in market risk during the three-month period ended September 30, 2006.
-23-
Qualitative Analysis. Because the majority of the Bank's
interest-earning assets and interest-bearing liabilities are sensitive to
changes in interest rates, a significant form of market risk for the Bank is
interest rate risk, or changes in interest rates. The Bank is vulnerable to an
increase in interest rates to the extent that interest-bearing liabilities
mature or re-price more rapidly than interest-earning assets. Our assets include
long-term, fixed-rate loans and investments, while our primary sources of funds
are deposits and borrowings with substantially shorter maturities. Although
having interest-bearing liabilities that re-price more frequently than
interest-earning assets is generally beneficial to net interest income during a
period of declining interest rates, this type of asset/liability mismatch is
generally detrimental during periods of rising interest rates.
The Board of Directors has established an Asset/Liability Management
and Budget Committee. The Committee meets quarterly with management to review
current investments: average lives, durations and re-pricing frequencies of
loans and securities; loan and deposit pricing, production volumes and
alternative funding sources; interest rate risk analysis; liquidity and
borrowing needs; and a variety of other asset and liability management topics.
The management session of the Committee is held monthly with President Fiore
presiding and senior management in attendance. The results of the quarterly and
monthly meetings of the Committee are reported to the full Board at its regular
meetings. In addition, the Committee generally meets during October and November
each year with the goal of developing an annual business and operating plan for
presentation to the full Board.
To reduce the effect of interest rate changes on net interest income,
the Bank has adopted various strategies to enable it to improve the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
main elements of these strategies include seeking to:
o originate loans with adjustable-rate features or fixed-rate loans
with short maturities, such as home equity and consumer loans,
comprised mostly of direct automobile loans for both new and used
vehicles;
o expand commercial and industrial loans, which predominantly have
variable rates of interest;
o increase production in higher yielding commercial real estate
loans;
o lengthen the maturities of time deposits and borrowings when it
would be cost effective through the aggressive pricing and
promotion of certificates of deposits and utilization of FHLB
advances;
o increase core deposits (i.e., checking, savings and money market
accounts), which tend to be less interest rate sensitive; and
o purchase intermediate and adjustable-rate investment securities
that provide a stable cash flow, thereby providing investable
funds in varying interest rate cycles.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")),
the Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective.
Changes in internal controls. During the quarter under report, there
was no change in the Company's internal control over financial reporting that
has materially affected, or is reasonable likely to materially affect, the
Company's internal control over financial reporting.
-24-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company and its subsidiaries, from time to time, may be a party to
routine litigation, which arises in the normal course of business, such as
claims to enforce liens, condemnation proceedings on properties in which the
Bank, the wholly-owned subsidiary of the Company, holds security interests,
claims involving the making and servicing of real property loans and other
issues incident to its business. There were no lawsuits pending or known to be
contemplated at September 30, 2006 that would be expected to have a material
effect on the Company's operations or income.
Item 1A. Risk Factors.
------------
There has been no material change in the risk factors previously
disclosed in the Company's 2005 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
-----------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
The following table reports information regarding repurchases of the Company's
common stock during the third quarter of 2006 and the stock repurchase plans
approved by the Company's Board of Directors.
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
Total Number of Shares Maximum Number of Shares
Total Number Purchased as Part of that May Yet Be Purchased
of Shares Average Price Publicly Announced Under the Plans or
Purchased Paid per Share Plans or Programs (1) Programs (1)
Period
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
July 1-31, 2006 - - - 470,401
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
August 1-31, 2006 - - - 470,401
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
September 1-30, 2006 - - - 470,401
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
Total - - -
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
(1) On February 23, 2006, the Company announced that it intends to purchase up
to five percent of its common stock outstanding (approximately 572,294
shares) in open market transactions. This repurchase program incorporates
the 174,628 shares that remained available for repurchase under the
Company's August 2005 repurchase program. 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 470,401 shares yet to be purchased.
-25-
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
Item 6. Exhibits.
--------
a) Exhibits:
31 Certification pursuant to ss.302 of the Sarbanes-Oxley Act of
2002
32 Certification pursuant to ss.906 of the Sarbanes-Oxley Act of
2002
-26-
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNERGY FINANCIAL GROUP, INC.
Date: November 9, 2006 By: /s/John S. Fiore
-------------------------------------
John S. Fiore
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/John S. Fiore /s/A. Richard Abrahamian
- ------------------------------------- -------------------------------------------------
John S. Fiore A. Richard Abrahamian
President and Chief Executive Officer Senior Vice President and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: November 9, 2006 Date: November 9, 2006
-27-