-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ADLez1lZqcgvFzMorMVUYBLgRbAUlmY6cUrxmpnPEga7SmFEAi3UiT1/Y3L9YafN tUgOxHuHifLhpsstZeH5og== 0000946275-06-000795.txt : 20061109 0000946275-06-000795.hdr.sgml : 20061109 20061109153105 ACCESSION NUMBER: 0000946275-06-000795 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061109 DATE AS OF CHANGE: 20061109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNERGY FINANCIAL GROUP INC /NJ/ CENTRAL INDEX KEY: 0001263766 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 522413926 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-50467 FILM NUMBER: 061201841 BUSINESS ADDRESS: STREET 1: 310 NORTH AVE EAST CITY: CRANFORD STATE: NJ ZIP: 07016 BUSINESS PHONE: 8006933838 10-Q 1 f10q_093006-0207.txt FORM SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: September 30, 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 --------- 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 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 - ------- ----------------- 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- EX-31 2 ex-31.txt CERTIFICATIONS SECTION 302 CERTIFICATION I, John S. Fiore, President and Chief Executive Officer of Synergy Financial Group, Inc., certify that: 1. I have reviewed this report on Form 10-Q of Synergy Financial Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 9, 2006 /s/John S. Fiore ------------------------------------- John S. Fiore President and Chief Executive Officer (Principal Executive Officer) SECTION 302 CERTIFICATION I, A. Richard Abrahamian, Senior Vice President and Chief Financial Officer of Synergy Financial Group, Inc., certify that: 1. I have reviewed this report on Form 10-Q of Synergy Financial Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 9, 2006 /s/A. Richard Abrahamian ------------------------------------------------- A. Richard Abrahamian Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EX-32 3 ex-32.txt CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. ss.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Synergy Financial Group, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, John S. Fiore, President and Chief Executive Officer, and A. Richard Abrahamian, Senior Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/John S. Fiore /s/A. Richard Abrahamian - ------------------------------------- ------------------------------------------------- John S. Fiore A. Richard Abrahamian President and 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
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