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: March 31, 2007
--------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
SEC File Number: 000-50467
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SYNERGY FINANCIAL GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
New Jersey 52-2413926
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 North Avenue East, Cranford, New Jersey 07016
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(908) 272-3838
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant: (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is 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 April 27, 2007:
$0.10 Par Value Common Stock 11,382,143
- ---------------------------- ------------------
Class Shares Outstanding
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2007 and
December 31, 2006......................................................1
Consolidated Statements of Income for the three months ended
March 31, 2007 and 2006................................................2
Consolidated Statement of Changes in Stockholders' Equity for the
three months ended March 31, 2007......................................3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2007 and 2006................................................4
Notes to Consolidated Financial Statements.................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk................20
Item 4. Controls and Procedures...................................................21
PART II OTHER INFORMATION
Item 1. Legal Proceedings.........................................................22
Item 1A. Risk Factors..............................................................22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...............22
Item 3. Defaults Upon Senior Securities...........................................23
Item 4. Submission of Matters to a Vote of Security Holders.......................23
Item 5. Other Information.........................................................23
Item 6. Exhibits..................................................................23
Signatures..............................................................................24
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
March 31, December 31,
2007 2006
----------- -----------
Assets:
Cash and amounts due from banks $ 5,676 $ 5,673
Interest-bearing deposits with banks 5,348 4,458
----------- -----------
Cash and cash equivalents 11,024 10,131
Investment securities available-for-sale, at fair value 63,615 68,417
Investment securities held-to-maturity (fair
value of $73,310 and $76,263, respectively) 74,737 77,917
Federal Home Loan Bank of New York stock, at cost 9,629 11,981
Loans receivable, net 754,467 765,001
Accrued interest receivable 3,882 3,848
Property and equipment, net 20,602 20,106
Cash surrender value of bank-owned life insurance 22,043 21,816
Other assets 6,541 7,109
----------- -----------
Total assets $ 966,540 $ 986,326
=========== ===========
Liabilities:
Deposits $ 677,687 $ 645,816
Other borrowed funds 183,400 235,675
Advance payments by borrowers for taxes and insurance 2,694 2,701
Accrued interest payable on advances 608 651
Other liabilities 2,542 2,983
----------- -----------
Total liabilities 866,931 887,826
----------- -----------
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 2007 and 2006
Outstanding - 11,382,143 in 2007 and 2006 1,251 1,251
Additional paid-in-capital 85,938 85,381
Retained earnings 34,784 34,582
Unearned ESOP shares (4,430) (4,600)
Treasury stock acquired for the RSP, at cost;
266,223 in 2007 and 271,613 in 2006 (3,024) (3,086)
Treasury stock, at cost; 1,127,493 in 2007 and 2006 (14,125) (14,125)
Accumulated other comprehensive loss, net of taxes (785) (903)
----------- -----------
Total stockholders' equity 99,609 98,500
----------- -----------
Total liabilities and stockholders' equity $ 966,540 $ 986,326
=========== ===========
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
Ended March 31,
----------------------
2007 2006
--------- --------
Interest income:
Loans, including fees $ 12,455 $ 11,340
Investment securities 1,452 1,763
Other 223 173
--------- --------
Total interest income 14,130 13,276
--------- --------
Interest expense:
Deposits 6,215 4,357
Borrowed funds 2,474 2,542
--------- --------
Total interest expense 8,689 6,899
--------- --------
Net interest income before provision for loan losses 5,441 6,377
Provision for loan losses 56 416
--------- --------
Net interest income after provision for loan losses 5,385 5,961
--------- --------
Other income:
Service charges and other fees on deposit accounts 507 494
Commissions 226 230
Other 286 152
--------- --------
Total other income 1,019 876
--------- --------
Other expenses:
Salaries and employee benefits 3,176 3,077
Premises and equipment 630 662
Occupancy 616 562
Professional services 204 197
Advertising 45 114
Other operating 412 554
--------- --------
Total other expenses 5,083 5,166
--------- --------
Income before income tax expense 1,321 1,671
Income tax expense 480 622
--------- --------
Net income $ 841 $ 1,049
========= ========
Per share of common stock:
Basic earnings per share $ 0.08 $ 0.10
========= ========
Diluted earnings per share $ 0.08 $ 0.10
========= ========
Basic weighted average shares outstanding 10,481 10,358
========= ========
Diluted weighted average shares outstanding 10,910 10,671
========= ========
The accompanying notes are an integral part of these statements.
-2-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2007
(In thousands, except share amounts)
(unaudited)
Treasury
Common stock stock Accumulated
------------------ Additional Unearned acquired comprehensive
Shares Par paid-in- Retained ESOP for the Treasury income (loss),
issued value capital earnings shares RSP Stock net TOTAL
---------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2007 12,509,636 $1,251 $85,381 $34,582 $(4,600) $(3,086) $(14,125) $(903) $98,500
Net income - - - 841 - - - - 841
Other comprehensive income,
net of reclassification
adjustment and taxes - - - - - - - 118 118
-------
Total comprehensive income 959
Dividends declared ($0.06 per share) - - - (639) - - - - (639)
Common stock held by ESOP committed
to be released (24,906 shares) - - 232 - 170 - - - 402
Other stock compensation plan
activity, including tax benefits - - 6 - - - - - 6
Compensation recognized under
stock plans - - 381 - - - - - 381
Common stock issued by RSP (5,390) - - (62) - - 62 - - -
----------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2007 12,509,636 $1,251 $85,938 $34,784 $(4,430) $(3,024) $(14,125) $(785) $99,609
==============================================================================================
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 Three Months
Ended March 31,
---------------------
2007 2006
-------- ---------
Operating activities:
Net income $ 841 $ 1,049
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 328 380
Provision for loan losses 56 416
Deferred income tax expense (benefit) 324 (68)
Amortization of deferred loan fees and costs (36) (39)
Amortization of premiums on investment securities 104 131
Release of ESOP shares 402 327
Compensation recognized under stock plans 381 359
Increase in accrued interest receivable (34) (45)
Decrease in other assets 250 631
Decrease in other liabilities (397) (1,485)
Increase in cash surrender value of bank-owned life insurance (227) (130)
Decrease in accrued interest payable on advances (43) (5)
-------- --------
Net cash provided by operating activities 1,949 1,521
-------- --------
Investing activities:
Maturity and principal repayments of investment
securities held-to-maturity 3,154 4,551
Maturity and principal repayments of investment
securities available-for-sale 4,842 5,237
Purchase of property and equipment (824) (359)
Redemption of FHLB stock 2,352 2,569
Purchase of bank owned life insurance - (1,820)
Decrease (increase) in loans 10,514 (21,081)
Proceeds from sale of loans - 7,117
-------- --------
Net cash provided by (used in) investing activities 20,038 (3,786)
-------- --------
Financing activities:
Net increase in deposits 31,871 64,699
Decrease in short-term FHLB advances (45,275) (57,100)
Proceeds from long-term FHLB advances 15,000 7,000
Repayments of long-term FHLB advances (22,000) (7,000)
(Decrease) increase in advance payments by borrowers
for taxes and insurance (7) 455
Dividends paid (683) (567)
Purchase of treasury stock - (2,457)
-------- --------
Net cash (used in) provided by financing activities (21,094) 5,030
-------- --------
Net increase in cash and cash equivalents 893 2,765
Cash and cash equivalents at beginning of year 10,131 6,583
-------- --------
Cash and cash equivalents at end of period $ 11,024 $ 9,348
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ - $ -
======== ========
Interest paid on deposits and borrowed funds $ 8,647 $ 6,838
======== ========
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, 2006. The results for the three months ended
March 31, 2007 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2007 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.
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.
-5-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
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 March 31, 2007
------------------------------------------------------
Weighted
Income average shares Per
(numerator) (denominator) share amount
----------- ------------- ------------
Basic earnings per share:
Income available to common stockholders $ 841 10,481 $ 0.08
Effect of dilutive common stock equivalents 0 429 0.00
--------- ------ ---------
Diluted earnings per share:
Income available to common stockholders $ 841 10,910 $ 0.08
========= ====== =========
For the Three Months Ended March 31, 2006
------------------------------------------------------
Weighted
Income average shares Per
(numerator) (denominator) share amount
----------- ------------- ------------
Basic earnings per share:
Income available to common stockholders $ 1,049 10,358 $ 0.10
Effect of dilutive common stock equivalents 0 313 0.00
--------- ------ ---------
Diluted earnings per share:
Income available to common stockholders $ 1,049 10,671 $ 0.10
========= ====== =========
3. STOCK-BASED COMPENSATION
Stock Option and Restricted Stock 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 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.
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 of common stock
-6-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
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.
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 March 31, 2007 and 2006, the
Company recognized approximately $170,000 and $159,000, respectively, of
compensation expense relating to its stock option plans and approximately
$41,000 of income tax benefit resulting from this expense for each of these
periods.
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
$3.60: dividend yield of 1.50%; expected volatility of 25.45%; 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 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 March 31, 2007 and 2006, the Company recognized approximately
$211,000 and $200,000, respectively, of compensation expense relating to the
restricted stock plans, and approximately $85,000 and $80,000, respectively, of
income tax benefit resulting from this expense for these periods.
As of March 31, 2007, there were approximately $1.5 million and $1.9 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 2.1 years for both the stock
option plans and restricted stock plans.
The following is a summary of the Company's stock option plans for the three
months ended March 31, 2007:
Weighted Aggregate
Average Intrinsic
Shares Exercise Price Value
------ -------------- -----
Outstanding at beginning of period 1,257,646 $ 8.68
Granted.......................... - -
Exercised........................ - -
Forfeited........................ - -
Expired.......................... - -
---------
Outstanding at end of period 1,257,646 $ 8.68 $8,728,063
---------
Exercisable at end of period..... 557,532 $ 8.00 $4,248,394
=========
Weighted average remaining
contractual life.............. 7.0 years
-7-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
The following is a summary of the Company's restricted stock plans for the three
months ended March 31, 2007:
Weighted
Average Grant
Shares Date Fair Value
------ ---------------
Outstanding at beginning of period 270,336 $ 9.44
Granted.......................... - -
Vested........................... (5,390) 13.50
Forfeited........................ - -
Expired.......................... - -
------- -------
Outstanding at end of period 264,946 $ 9.36
======= =======
Employee Stock Ownership Plan
- -----------------------------
The Company has established an ESOP covering eligible employees with one year of
service, as defined by the ESOP. Compensation expense for the ESOP is recorded
at an amount equal to the shares allocated by the ESOP multiplied by the average
fair market value of the shares during the year. The Company recognizes
compensation expense ratably over the year for the ESOP shares to be allocated
based upon the Company's current estimate of the number of shares expected to be
allocated by the ESOP during each calendar year. The difference between the
average fair market value and the cost of the shares allocated by the ESOP is
recorded as an adjustment to additional paid-in-capital.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In 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 accounted for 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 adoption of this
Statement did not 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 adoption of this Statement did not have a material effect on the Company's
results of operations or financial condition.
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
-8-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
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 has
assessed the impact of FIN 48 and has determined that there are no significant
positions taken in the preparation of its tax return that create any
uncertainties and therefore, the adoption of FIN 48 did not have a material
impact on its results of operations or financial condition.
In September 2006, the FASB Emerging Issues Task Force ("EITF") finalized Issue
No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements." This issue
requires that a liability be recorded during the service period when a
split-dollar life insurance agreement continues after participants' employment
or retirement. The required accrued liability will be based on either the
post-employment benefit cost for the continuing life insurance or based on the
future death benefit depending on the contractual terms of the underlying
agreement. This issue is effective for fiscal years beginning after December 15,
2007. The Company has not completed its evaluation of the impact of adoption of
EITF 06-4.
In September 2006, the FASB EITF finalized Issue No. 06-5, "Accounting for
Purchases of Life Insurance - Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of
Life Insurance)." This issue requires that a policyholder consider contractual
terms of a life insurance policy in determining the amount that could be
realized under the insurance contract. It also requires that if the contract
provides for a greater surrender value if all individual policies in a group are
surrendered at the same time, that the surrender value be determined based on
the assumption that policies will be surrendered on an individual basis. Lastly,
the issue discusses whether the cash surrender value should be discounted when
the policyholder is contractually limited in its ability to surrender a policy.
This issue is effective for fiscal years beginning after December 15, 2006. The
adoption of this Statement did not have a material effect on the Company's
results of operations or 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.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." Statement 159 provides companies
with an option to report selected financial assets and liabilities at fair
value. Statement 159's objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. Statement 159 is effective as of the
beginning of an entity's first fiscal year beginning after November 15, 2007.
Early adoption is permitted as of the beginning of the previous fiscal year
provided that the entity makes that choice in the first 120 days of that fiscal
year and also elects to apply the provisions of Statement 157. The Company is
still evaluating the impact the adoption of Statement No. 159 will have on its
future consolidated financial statements.
-9-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
5. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of the
Company's investment securities available-for-sale and held-to-maturity are as
follows (in thousands):
March 31, 2007
-------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
Available-for-sale
------------------
U.S. government obligations $ 1,999 $ - $ (62) $ 1,937
Mortgage-backed securities:
FHLMC 42,566 35 (790) 41,811
FNMA 18,266 14 (358) 17,922
Equity securities 2,000 - (55) 1,945
----------- --------- --------- -----------
Total $ 64,831 $ 49 $ (1,265) $ 63,615
=========== ========= ========= ===========
March 31, 2007
-------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
Held-to-maturity
----------------
Mortgage-backed securities:
FHLMC $ 31,120 $ 5 $ (715) $ 30,410
FNMA 41,361 1 (687) 40,675
GNMA 2,246 5 (36) 2,215
Other debt securities 10 - - 10
----------- --------- --------- -----------
Total $ 74,737 $ 11 $ (1,438) $ 73,310
=========== ========= ========= ===========
December 31, 2006
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
Available-for-sale
------------------
U.S. government obligations $ 2,000 $ - $ (72) $ 1,928
Mortgage-backed securities:
FHLMC 45,723 34 (908) 44,849
FNMA 20,092 17 (410) 19,699
Equity securities 2,000 - (59) 1,941
----------- --------- -------- -----------
Total $ 69,815 $ 51 $ (1,449) $ 68,417
=========== ========= ======== ===========
-10-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
December 31, 2006
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
Held-to-maturity
----------------
Mortgage-backed securities:
FHLMC $ 32,397 $ 1 $ (804) $ 31,594
FNMA 43,150 1 (816) 42,335
GNMA 2,360 4 (40) 2,324
Other debt securities 10 - - 10
----------- --------- -------- -----------
Total $ 77,917 $ 6 $ (1,660) $ 76,263
=========== ========= ======== ===========
6. LOANS RECEIVABLE
Major groupings of loans are as follows (in thousands):
March 31, December 31,
2007 2006
----------- -----------
Mortgages:
Residential, 1-4 family $ 230,236 $ 237,857
Multi-family / non-residential 335,244 326,225
Construction 8,005 6,487
Automobile 126,201 142,033
Commercial 57,361 54,854
Other consumer 3,332 3,467
----------- -----------
Loans receivable 760,379 770,923
Deferred loan fees and costs 23 68
Allowance for loan losses (5,935) (5,990)
----------- -----------
Loans receivable, net $ 754,467 $ 765,001
=========== ===========
A summary of the activity in the allowance for loan losses is as follows (in
thousands):
For the Three Months Ended
-------------------------------------
March 31, March 31,
2007 2006
----------- -----------
Balance, beginning of period $ 5,990 $ 5,763
Provision for loan losses 56 416
Recoveries 107 103
Loans charged-off (218) (383)
----------- -----------
Balance, end of period $ 5,935 $ 5,899
=========== ===========
-11-
SYNERGY FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
7. DEPOSITS
Deposits are summarized as follows (in thousands):
March 31, December 31,
2007 2006
---------- ----------
Non-interest-bearing checking accounts $ 73,521 $ 59,587
Interest-bearing checking accounts 2,828 1,080
Savings and club accounts 51,721 46,306
Money market accounts 143,134 123,433
Certificate of deposit accounts 406,483 415,410
---------- ----------
$ 677,687 $ 645,816
========== ==========
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
-------------------------------------
Three Months Twelve Months
Ended Ended
March 31, December 31,
2007 2006
------------ ------------
Average balance outstanding $ 60,358 $ 72,669
Maximum amount outstanding at any month end during the period 77,700 93,950
Balance outstanding at period end 31,600 76,875
Weighted average interest rate during the period 5.40% 5.23%
Weighted average interest rate at period end 5.50% 5.38%
2. Long-Term Borrowings
--------------------
At March 31, 2007, long-term borrowings, which consist of FHLB advances, totaled
$151.8 million. Advances consist of fixed-rate advances that will mature within
one to eight 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 4.30%.
As of March 31, 2007, long-term FHLB advances mature as follows (in thousands):
2007 $ 40,000
2008 61,100
2009 8,000
2010 5,000
2011 10,000
Thereafter 27,700
---------
$ 151,800
=========
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Management's discussion and analysis of financial condition and results
of operations is intended to provide assistance in understanding our
consolidated financial condition and results of operations. The information in
this section should be read with the consolidated interim financial statements
and the notes thereto included in this Form 10-Q.
Our results of operations are primarily dependent on our net interest
income. Net interest income is a function of the balances of interest-earning
assets outstanding in any one period, the yields earned on those assets and the
interest paid on deposits and borrowed funds that were outstanding in that same
period. To a lesser extent, the relative levels of our other income and other
expenses also affect our results of operations. Our other income consists
primarily of fees and service charges, commissions and gains and losses on the
sale of loans and investments. The other expenses consist primarily of employee
compensation and benefits, occupancy and equipment expenses, data processing
costs, marketing costs, professional fees, office supplies, telephone and
postage costs. Our results of operations are also significantly impacted by the
amount of provisions for loan losses which, in turn, are dependent upon, among
other things, the size and makeup of the loan portfolio, loan quality and loan
trends.
Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21 E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities 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 SEC.
The Company does not undertake - and specifically disclaims any
obligation - to release publicly the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
-13-
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with the
accounting principles generally accepted in the United States of America and
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 March 31, 2007 and December 31, 2006
Assets. Total assets were $966.5 million on March 31, 2007, a decrease of
2.0%, or $19.8 million, from $986.3 million on December 31, 2006. This decrease
was primarily attributable to a decrease of $10.5 million in net loans and an
$8.0 million decline in investment securities.
Between December 31, 2006 and March 31, 2007, investment securities
decreased $8.0 million, or 5.5%, from $146.3 million to $138.4 million. This
decrease was due to maturities and principal repayments during the first three
months of 2007. FHLB stock holdings decreased 19.6%, or $2.4 million, to $9.6
million at March 31, 2007, from $12.0 million at December 31, 2006 due to the
decreased level of borrowings from the FHLB.
Net loans decreased 1.4%, or $10.5 million, to $754.5 million at March
31, 2007, from $765.0 million at December 31, 2006. During the first quarter of
2007, there were $34.5 million in loan originations and purchases, which were
more than offset by principal repayments of $45.1 million. Automobile loans
declined $15.8 million from December 31, 2006 to $126.2 million at March 31,
2007, while multi-family/non-residential loans and commercial loans increased
$9.0 million and $2.5 million, respectively. At March 31, 2007,
multi-family/non-residential loans totaled $335.2 million while commercial loans
totaled $57.4 million. Over the past year, the Company has reduced the
origination of automobile loans and deployed its cash into higher-yielding,
commercial-based products.
-14-
At March 31, 2007, total loans of $760.4 million were comprised of 44.1%
in multi-family/non-residential mortgage loans, 17.0% in consumer loans,
comprised mostly of direct automobile loans for both new and used vehicles,
16.2% in one-to-four family real estate loans, 14.1% in home equity loans, 7.5%
in commercial loans and 1.1% in construction loans.
The allowance for loan losses was $5.9 million at March 31, 2007,
compared to $6.0 million at December 31, 2006. This reflects a provision for
loan losses of $56,000 for the three-month period ended March 31, 2007, offset
by net charge-offs of $111,000. The ratio of the allowance for loan losses to
total loans was 0.78% on both March 31, 2007 and December 31, 2006.
Non-performing assets represented 0.04% of total assets on both March 31, 2007
and December 31, 2006.
Liabilities. Total liabilities decreased $20.9 million, or 2.4%, to
$866.9 million at March 31, 2007, from $887.8 million at December 31, 2006. The
decrease resulted primarily from a decline in FHLB advances of $52.3 million, or
22.2%, which was partially offset by an increase in deposits of $31.9 million,
or 4.9%. The $52.3 million decrease in FHLB advances between December 31, 2006
and March 31, 2007 was primarily due to the growth in deposits coupled with the
decline in both loans and investment securities.
Deposits reached $677.7 million at March 31, 2007, an increase of $31.9
million, or 4.9%, from the $645.8 million reported at December 31, 2006. Core
deposits, which consist of checking, savings and money market accounts,
increased $40.8 million, or 17.7%, while certificates of deposit decreased by
$8.9 million, or 2.1%, from the $415.4 million reported at year-end 2006. At
March 31, 2007, brokered certificates of deposit totaled $38.3 million, a
decrease of $5.0 million from the $43.3 million at December 31, 2006.
Equity. Stockholders' equity totaled $99.6 million at March 31, 2007, an
increase of $1.1 million, or 1.1%, from $98.5 million at December 31, 2006. The
increase was primarily attributable to net income for the quarter and stock
benefit plan activity, partially offset by the March 28, 2007 declaration of a
quarterly cash dividend of $0.06 per common share, which was payable on April
27, 2007 to stockholders of record on April 13, 2007. Additionally, accumulated
other comprehensive loss, net of taxes, declined by $118,000.
-15-
Average Balance Sheet. The following table sets forth certain information for
the three months ended March 31, 2007 and 2006. The average yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily average balances. The table does not include the allowance
for loan losses in the average balances of loans receivable. Management does not
believe that this causes any material differences in the information presented.
For the Three Months Ended March 31,
---------------------------------------------------------------
2007 2006
------------------------------- ------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable, net(1) $760,881 $12,455 6.55% $742,164 $11,340 6.11%
Securities(2) 146,566 1,452 3.96 180,166 1,763 3.91
Other interest-earning assets(3) 11,370 223 7.85 12,839 173 5.39
-------- ------- ---- -------- ------- ----
Total interest-earning assets 918,817 14,130 6.15 935,169 13,276 5.68
Non-interest-earning assets 55,066 43,713
-------- --------
Total assets $973,883 $978,882
======== ========
Interest-bearing liabilities:
Checking accounts(4) $60,318 $6 0.04% $60,778 $14 0.09%
Savings and club accounts 45,747 61 0.53 60,750 87 0.57
Money market accounts 129,894 1,138 3.50 106,167 555 2.09
Certificates of deposit 413,858 5,010 4.84 396,581 3,701 3.73
Other borrowed funds 222,083 2,474 4.46 257,473 2,542 3.95
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 871,900 8,689 3.99 881,749 6,899 3.13
Non-interest-bearing liabilities 3,055 2,652
-------- --------
Total liabilities 874,955 884,401
Stockholders' equity 98,928 94,481
-------- --------
Total liabilities and stockholders' equity $973,883 $978,882
======== ========
Net interest income $5,441 $6,377
====== ======
Net interest rate spread(5) 2.16% 2.55%
Net interest margin(6) 2.37% 2.73%
Ratio of average interest-earning assets to
average interest-bearing liabilities 105.38% 106.06%
- ---------------------
(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.
-16-
Comparison of Operating Results for the Three Months Ended March 31, 2007 and
2006
Net Income. Net income decreased by $208,000, to $841,000, for the
three months ended March 31, 2007, compared to $1.049 million for the same
period in 2006, a 19.8% decline. Diluted net income per common share was $0.08
for the first quarter of 2007, compared to $0.10 for the same period in 2006.
The decrease in net income was primarily attributable to a $936,000 decrease in
net interest income, partially offset by an increase in other income of
$143,000, a $360,000 decrease in the provision for loan losses, an $83,000
decrease in other expenses and a $142,000 decrease in income tax expense.
Net Interest Income. Net interest income declined $936,000, or 14.7%,
to $5.4 million for the three months ended March 31, 2007, compared to $6.4
million for the same period in 2006. Total interest income increased by
$854,000, to $14.1 million, for the three months ended March 31, 2007, while
total interest expense increased by $1.8 million, to $8.7 million, when compared
to the same three-month period last year. The year-over-year decline was the
result of margin compression stemming from the flat to inverted yield curve,
increased funding costs and a slowdown in asset growth. Compared to the fourth
quarter of 2006, net interest income increased $3,000. The net interest margin
for the first quarter of 2007 increased to 2.37%, from 2.34% for the fourth
quarter of 2006, but was down 36 basis points from the 2.73% for the first
quarter of 2006.
The 6.4% increase in total interest income for the first quarter 2007,
as compared to the same quarter last year, was primarily due to a 47 basis point
increase in the yield earned on average interest-earning assets. This was
primarily the result of the rebalancing of our loan portfolio, which has
resulted in the replacement of amortizing lower yield automobile loans with
higher-yielding multi-family/non-residential and commercial loans, as well as
generally higher yields on loans as a result of increases in market interest
rates. Additionally, the investment portfolio, which yielded 3.96% in the first
quarter of 2007, continued to decline, as the cash flow has been utilized to pay
down higher cost borrowings and/or fund loan activity. The increase in the
dividend yield on FHLB stock also contributed to the increase in our asset
yield.
The 25.9% increase in total interest expense for the first quarter
2007, as compared to the same quarter last year, was primarily due to an 86
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.
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 $360,000, to $56,000, for the
three months ended March 31, 2007, from $416,000 for the same quarter in 2006.
The decrease in the provision was primarily due to lower loan production and
lower net charge-offs during the first quarter of 2007 as compared to the same
period last year. Total charge-offs amounted to $218,000 and recoveries amounted
to $107,000, resulting in a net charge-off amount of $111,000 for the three
months ended March 31, 2007. This represents a $169,000 decrease in net
charge-offs when compared to the same quarter in 2006.
-17-
Other Income. Other income increased $143,000, or 16.3%, to $1.0
million for the three months ended March 31, 2007, compared to $876,000 for the
same quarter in 2006. The change was primarily due to an increase in income from
bank-owned life insurance.
Other Expenses. Other expenses decreased $83,000, or 1.6%, to $5.1
million for the three months ended March 31, 2007. This was primarily
attributable to a decline in advertising expenses, lower premises and equipment
expense and other operating expenses, as the Company remains focused on
controlling costs.
Income Tax Expense. Income tax expense decreased by $142,000, or 22.8%,
during the three months ended March 31, 2007 when compared to the same quarter
in 2006, reflecting lower taxable income for the 2007 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 $11.0 million at March 31, 2007. To a lesser
extent, the earnings and funds provided from operating activities are a source
of liquidity.
Liquidity management is both a daily and long-term function of business
management. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
and securities prepayments are greatly influenced by general interest rates,
economic conditions and competition. If the Bank requires funds beyond its
ability to generate them internally, it has the ability to obtain advances from
the FHLB, which provides an additional source of funds. At March 31, 2007, the
Bank's borrowing limit with the FHLB was $290.5 million, subject to collateral
requirements. At March 31, 2007, the Bank had $183.4 million of FHLB advances
outstanding, including $108.5 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 March 31, 2007 was $25.0
million, excluding commitments on unused lines of credit, which totaled $29.6
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 2007 and 2008.
-18-
The following table discloses the Bank's contractual obligations as of March 31,
2007 (in thousands):
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
------- --------- --------- --------- -------
Certificates of deposit $406,483 $374,609 $30,519 $ 825 $ 530
FHLB advances (1) 183,400 75,600 65,100 30,000 12,700
Rental under operating leases 11,683 922 1,732 1,525 7,504
-------- -------- ------- ------- -------
Total $601,566 $451,131 $97,351 $32,350 $20,734
======== ======== ======= ======= =======
- -----------------
(1) At March 31, 2007, other borrowed funds consisted of FHLB advances. At
March 31, 2007, our borrowing limit with FHLB was $290.5 million, subject
to collateral requirements.
The following table discloses the Bank's commitments as of March 31,
2007 (in thousands):
Total Less Than 1-3 Years 4-5 Years After
1 Year 5 Years
------- --------- --------- --------- -------
Lines of credit (1) $29,626 $ 2,386 $643 $216 $26,381
Other commitments to extend credit 25,009 25,009 - - -
------- ------- ---- ---- -------
Total $54,635 $27,395 $643 $216 $26,381
======= ======= ==== ==== =======
- ---------------
(1) Represents amounts committed to customers.
Regulatory Capital Requirements
The Bank is subject to federal regulations that impose certain minimum
capital requirements. Quantitative measures, established by regulation to ensure
capital adequacy, require the Bank to maintain amounts and ratios of tangible
and core capital to adjusted total assets and of total risk-based capital to
risk-weighted assets. On March 31, 2007, the Bank was in compliance with all of
its regulatory capital requirements. The following table sets forth the Bank's
capital position and relativity to regulatory requirements as of March 31, 2007:
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) $95,852 12.72% $60,289 8.00% $75,361 10.00%
Tier 1 capital (to risk-weighted assets) 89,917 11.93% N/A N/A 45,217 6.00%
Tier 1 capital (to adjusted total assets) 89,917 9.34% 38,510 4.00% 48,137 5.00%
Tangible capital (to adjusted total assets) 89,917 9.34% 14,441 1.50% N/A N/A
-19-
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 any material adverse change
in market risk during the three-month period ended March 31, 2007.
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 a Budget and Asset/Liability
Management 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 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:
-20-
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 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.
-21-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company and its subsidiaries, from time to time, may be a party to
routine litigation, which arises in the normal course of business, such as
claims to enforce liens, condemnation proceedings on properties in which the
Bank, the wholly-owned subsidiary of the Company, holds security interests,
claims involving the making and servicing of real property loans and other
issues incident to its business. There were no lawsuits pending or known to be
contemplated at March 31, 2007 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 2006 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 first quarter of 2007 and the stock repurchase plans
approved by the Company's Board of Directors.
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
Total Number of Shares Maximum Number of Shares
Total Number Purchased as Part of that May Yet Be Purchased
of Shares Average Price Publicly Announced Under the Plans or
Period Purchased Paid per Share Plans or Programs (1) Programs (1)
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
January 1-31, 2007 - - - 470,401
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
February 1-28, 2007 - - - 470,401
- ----------------------------- --------------- ---------------- ------------------------- ----------------------------
March 1-31, 2007 - - - 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 as of March 31, 2007.
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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
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNERGY FINANCIAL GROUP, INC.
Date: May 10, 2007 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: May 10, 2007 Date: May 10, 2007
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