10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ Annual Report pursuant to Section 13 or 15 (d) of the Securities and Exchange Act of 1934

for the fiscal year ended December 31, 2006.

o Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the transition period from                      to                     .

Commission File # 0-32605

NEFFS BANCORP, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2400383
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

5629 Route 873, P.O. Box 10, Neffs, PA 18065-0010
(Address of principal executive offices)

Registrant’s telephone number including area code: 610-767-3875

Securities registered under Section 12 (b) of the Exchange Act:
None

Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, $1.00 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 þ No o

Indicate by check mark if disclosure filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 o      Accelerated filer o      Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o      No þ

The aggregate market value of voting stock held by non-affiliates of the registrant is $50,079,073 as of June 30, 2006⁽¹⁾.

The number of shares of the Issuer’s common stock, par value is $1.00 per share, outstanding as of March 26, 2007 was 197,941.

DOCUMENTS INCORPORATED BY REFERENCE:

Part II incorporates certain information by reference from the registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2006 (the “Annual Report”). Part III incorporates certain information by reference from the registrant’s Proxy Statement for the Annual Meeting of Stockholders.

(1) The aggregate dollar amount of the voting stock set forth equals the number of shares of the registrant’s Common Stock outstanding, reduced by the amount of Common Stock held by executive officers, directors, and stockholders owning in excess of 10% of the registrant’s Common Stock, multiplied by the last sale price for the registrant’s Common Stock on June 30, 2006. The information provided shall in no way be construed as an admission that the officers, directors, or 10% stockholders in the registrant may be deemed an affiliate of the registrant or that such person is the beneficial owner of the shares reported as being held by him and any such inference is hereby disclaimed. The information provided herein is included solely for the record keeping purpose of the Securities and Exchange Commission.

NEFFS BANCORP, INC.
FORM 10-K TABLES OF CONTENTS

		Page
Part 1.
Item 1	Business		1
Item 1A	Risk Factors		6
Item 1B	Unresolved Staff Comments		9
Item 2	Properties		9
Item 3	Legal Proceedings		9
Item 4	Submission of Matters to a Vote of Security Holders		9
Part II.
Item 5	Market for Registrant’s Common Equity and Related Stockholder Matters		10
Item 6	Selected Financial Data		12
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 7A	Quantitative and Qualitative Disclosures about Market Risk		12
Item 8	Financial Statements and Supplementary Data		13
Item 9	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		13
Item 9A	Controls and Procedures		13
Item 9B	Other Information		13
Part III.
Item 10	Directors and Executive Officers and Corporate Governance		13
Item 11	Executive Compensation		14
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		14
Item 13	Certain Relationships and Related Transactions, and Director Independence		14
Item 14	Principal Accountant Fees and Services		14
Part IV.
Item 15	Exhibits and Financial Statement Schedules		14
Neffs Bancorp, Inc. Consolidated Financial Report
Certification of John J. Remaley
Certification of Kevin A. Schmidt
Certification of John J. Remaley Pursuant to 18 U.S.C. Section 1350
Certification of Kevin A. Schmidt Pursuant to 18 U.S.C. Section 1350

Part I

Item I. Business

Forward-Looking Statements

Neffs Bancorp, Inc. (the “corporation”) may from time to time make written or oral “forward-looking statements”, including statements contained in the corporation’s filings with the Securities and Exchange Commission (including the Annual Report and this Form 10-K and the exhibits hereto and thereto), in its reports to stockholders and in other communications by the corporation, which are made in good faith by the corporation pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the corporation’s beliefs, plans, objectives, goals, expectations, anticipations, estimates, and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (Some of which are beyond the corporation’s control). The words “may”, “could”, “should”, “would”, “believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan”, and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the corporation’s financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the corporation conducts operations; the effects of, and changes in, trade, monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve Bank (the “FRB”); inflation; interest rates; market and monetary fluctuations; the timely development of competitive new services; the willingness of customers to substitute competitors’ products and services for the corporation’s products and services and vice versa; the impact of the changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological acquisitions being less than expected; the growth and profitability of the corporation’s noninterest or fee income being less than expected; unanticipated regulatory or judicial proceedings; changes in consumer spending and saving habits; and the success of the corporation at managing the risks involved in the foregoing.

The corporation cautions that the foregoing list of important factors is not exclusive. The corporation does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the corporation.

General

Neffs Bancorp, Inc. (the “corporation”) is a Pennsylvania business corporation, which is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”). The corporation was incorporated on March 24, 1986 and became an active bank holding company on October 31, 1986.

As of December 31, 2006, the corporation has approximately $216 million in assets, $173 million in deposits, $87 million in net loans and $41 million in stockholders’ equity. The bank is a member of the Federal Reserve Bank (“FRB”) and the Bank’s deposits are insured up to the applicable limits by the Bank Insurance Fund (“BIF”) of the Federal Deposit Insurance Corporation (“FDIC”) to the fullest extent permitted by law.

The corporation’s principal executive office is located at 5629 Route 873, Neffs, Pennsylvania, 18065 and its telephone number is 610-767-3875.

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As of December 31, 2006 the corporation had 36 employees, of which 27 were full-time employees. Management believes the corporation’s relationship with its employees is good.

The bank is organized under the laws of the United States and headquartered in Neffs, Pennsylvania and has one (1) location. The bank was incorporated in 1923 pursuant to the United States National Bank Act under a charter granted by the Office of the Comptroller of Currency. The FDIC insures deposit accounts to the maximum extent provided by laws.

The Neffs National Bank (“Neffs” or the “bank”) provides a full range of retail and commercial banking services for consumers and small and mid-sized companies. The bank’s lending and investment activities are funded principally by retail deposits gathered through its retail banking facility.

The corporation’s website address is www.neffsnatl.com. The corporation makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after it electronically files such reports with the Securities and Exchange Commission. Copies of such reports are available at no charge by contacting The Neffs National Bank, 5629 Route 873, P.O. Box 10, Neffs, PA 18065-0010. (The information found on the corporation’s website does not constitute a part of this or any other report.)

Service Area

The bank offers its lending and depository services from its main office in Neffs, Pennsylvania.

Retail and Commercial Banking Activities

The bank provides a broad range of retail banking services and products including free personal checking accounts and business checking accounts, regular savings accounts, interest checking accounts, overdraft checking protection, fixed rate certificates of deposits, individual retirement accounts, club accounts, and safe deposit facilities. Its services also include a full range of lending activities including commercial construction and real estate loans, land development and business loans, business lines of credit, consumer loan programs (including installment loans for home improvement and the purchase of consumer goods and automobiles), and home equity loans. The bank also offers construction loans and permanent mortgages for homes.

The bank directs its commercial lending principally toward businesses that require funds within the bank’s legal limits, as determined from time to time, and that otherwise do business and/or are depositors with The Neffs National Bank. The bank also participates in inter-bank credit arrangements in order to take part in loans for amounts that are in excess of its lending limit. In consumer lending, the bank offers various types of loans, including revolving credit lines, automobile loans, and home improvement loans.

The corporation has focused its strategy for growth primarily on the further development of its community-based retail-banking facility. The objective of this corporate strategy is to maximize the total return to the corporation so as to adequately reward the stockholder and to continue as a sound and successful community oriented and independently operated financial institution.

The corporation is not dependent upon a single customer, or a few customers, the loss of which would have a material adverse effect on the corporation.

Competitive Business Conditions/Competitive Position

The corporation’s current primary service area, generally characterized as Northern Lehigh County, Pennsylvania, is characterized by intense competition for banking business. The bank competes with

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local commercial banks as well as numerous regionally based commercial banks, most of which have assets, capital, and lending limits larger than that of Neffs. The bank competes with respect to its lending activities as well as in attracting demand, savings, and time deposits with other commercial banks, savings banks, insurance companies, regulated small loan companies, credit unions and with issuers of commercial paper and other securities such as shares in money market funds. The business of the bank is not seasonal in nature.

Other institutions may have the ability to finance wide-ranging advertising campaigns, and to allocate investment assets to regions of highest yield and demand. Many institutions offer services such as trust services and international banking which Neffs does not directly offer (but which the bank may offer indirectly through other institutions).

In commercial transactions, the bank’s legal lending limit to a single borrower (approximately $6,300,000 as of December 31, 2006) enables it to compete effectively for the business of smaller companies.

In consumer transactions, the bank believes it is able to compete on a substantially equal basis with larger financial institutions because it offers longer hours of operation, personalized service and competitive interest rates on savings and time accounts with low or no minimum deposit requirements.

In order to compete with other financial institutions both within and beyond its primary service area, the bank uses, to the fullest extent possible, the flexibility which independent status permits. This includes an emphasis on specialized services for the small business person and professional contacts by the bank’s officers, directors, and employees, and the greatest possible efforts to understand fully the financial situation of relatively small borrowers. The size of such borrowers, in management’s opinion, often inhibits close attention to their needs by larger institutions.

The bank endeavors to be competitive with all competing financial institutions in this primary service area with respect to interest rates paid on time and savings deposits, its overdraft charges on deposit accounts, and interest rates charged on loans.

Supervision and Regulations

The following discussion sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to the corporation. The regulatory framework is intended primarily for the protection of depositors, other customers and the Federal Deposit Insurance Funds and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes or regulatory policy may have a material effect on the business of the company.

The Corporation

The corporation is subject to the jurisdiction of the Securities and Exchange Commission (“SEC”) and of state securities commissions for matters relating to the offering and sale of it securities and is subject to the SEC’s rules and regulations relating to periodic reporting, reporting to stockholders, proxy solicitation and insider trading.

The corporation is subject to the provisions of the Holding Company Act of 1956, as amended. The corporation is subject to supervision and examination by the FRB. Under the Holding Company Act, the corporation must secure the prior approval of the FRB before it may own or control, directly or

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indirectly, more than 5% of the voting shares or substantially all of the assets of any institution, including another bank (unless it already owns a majority of the voting stock of the bank).

Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory Community Reinvestment Act ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions. Neffs is currently rated “satisfactory” under the Community Reinvestment Act.

The corporation is required to file an annual report with the FRB and any additional information the FRB may require pursuant to the Holding Company Act. The FRB may also make examinations of the corporation and its subsidiaries. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or provision for any property or service. Thus, an affiliate of the corporation, such as the bank, may not condition the extension of credit, the lease or sale of property or furnishing of any services on (i) the customer’s obtaining or providing some additional credit, property or services from or to the corporation or its subsidiary or (ii) the customer’s refraining from doing business with a competitor of the corporation or of its subsidiary. The corporation or the bank may impose conditions to the extent necessary to reasonably assure the soundness of credit extended.

Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on (i) any extension of credit to the bank holding company or any of its subsidiaries, (ii) investments in the stock or other securities of the bank holding company, and (iii) taking the stock or securities of the bank holding company as collateral for loans to any borrower.

The Bank

As a nationally chartered commercial banking association, the bank is subject to regulation, supervision and regular examination by the Office of Comptroller of the Currency (“OCC”) and is required to furnish quarterly reports to the OCC. The bank is a member of the FRB. The bank’s deposits are insured by the FDIC up to applicable legal limits. Some of the aspects of the lending and deposit business of the bank that are regulated by these agencies include personal lending, mortgage lending and reserve requirements with respect to the extension of credit, credit practices, the disclosure of credit terms and discrimination in credit transactions.

The approval of the OCC is required for the establishment of additional branch offices.

Under the Change in Banking Control Act of 1978, subject to certain exceptions, no person may acquire control of the bank without giving at least sixty days prior written notice to the OCC. Under this Act and the regulations promulgated there under, control of the bank is generally presumed to be the power to vote ten percent (10%) or more of the common stock. The OCC is empowered to disapprove any such acquisition of control.

The amount of funds that Neffs may lend to a single borrower is limited generally under the National Bank Act to 15% of the aggregate of its capital, surplus and undivided profits and capital securities (all as defined by statute and regulation).

The OCC has authority under the Financial Institutions Supervisory Act to prohibit national banks from engaging in any activity that, in the OCC’s opinion, constitutes an unsafe or unsound practice in conducting their businesses. The FRB has similar authority with respect to the corporation.

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As a consequence of the extensive regulation of commercial banking activities in the United States, the bank’s business is particularly susceptible to being affected by federal and state legislation and regulations that may affect the cost of doing business.

Recent Legislation

USA Patriot Act.

In the wake of the tragic events, of September 11^th, on October 26, 2001, President Bush signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedure, and controls generally required financial institutions to take reasonable steps:

§	To conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transactions;
§	To ascertain the identity of the nominal and beneficial owners of and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;
§	To ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owners; and
§	To ascertain whether any foreign bank provides correspondent accounts to other foreign banks and it so, the identity of those foreign banks and related due diligence information.

Under the USA PATRIOT Act, financial institutions were required to establish anti-money laundering programs by April 25, 2002. The USA PATRIOT Act sets forth minimum standards for these programs, including:

§	The development of internal policies, procedures, and controls;
§	The designation of a compliance officer;
§	An ongoing employee training program; and
§	An independent audit function to test the programs.

In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institutions complying with these rules will not be deemed to have violated the privacy provisions of the Gramm-Leach Bliley Act. The bank does not have any significant international banking relationships, and does not anticipate that the USA PATRIOT Act will have a material effect on its business or operations.

Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered or that file reports under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence,

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expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure of reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws. Many of the provisions were effective immediately while other provisions become effective over a period of time and are subject to rulemaking by the SEC. Because the corporation’s common stock is registered with the SEC, it is currently subject to this Act.

National Monetary Policy

In addition to being affected by general economic conditions, the earnings and growth of the corporation are affected by the policies of regulatory authorities, including the OCC, the FRB and the FDIC. An important function of the FRB is to regulate the money supply and credit conditions. Among the instruments used to implement these objectives are open market operations in U. S. Government securities, setting the discount rate, and changes in reserve requirements against bank deposits.

The monetary policies and regulations of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings, and growth of the corporation cannot be predicted.

Effect of Inflation

Inflation has some impact on the bank’s operating costs. Unlike industrial companies, however, substantially all of the bank’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the bank’s performance than the general levels of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.

Environmental Laws

There are several federal and state statutes that regulate the obligations and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for attachment of liability resulting from its own actions, a bank may be held liable, under certain circumstances, for the actions of its borrowers, or third parties, when such actions result in environmental problems on properties that collateralize loans held by the bank. Further, the liability has the potential to far exceed the original amount of the loan issued by the bank. Currently, neither the corporation nor the bank is a party to any pending legal proceeding pursuant to any environmental statute, nor are the corporation and the bank aware of any circumstances that may give rise to liability under any such statue.

Item 1A. Risk Factors

The Corporation is Subject to Interest Rate Risk

Income and cash flows and the value of assets depend to a great extent on the difference between the interest rates earned on interest-earning assets, such as loans and investment securities, and the interest rates paid on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors which are beyond the bank’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest received on loans and investment securities and the amount of interest paid on deposits and borrowings but it will also affect the ability to originate loans and obtain deposits and the value of the investment portfolio. If the rate of interest paid on deposits and other borrowings increases more than the rate of interest earned on loans and other investments, net interest income and

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earnings could be adversely affected. Earnings also could be adversely affected if the rates on loans and other investments fall more quickly than those on deposits and other borrowings.

The Corporation’s Profitability Depends Significantly on Economic Conditions in the Commonwealth of Pennsylvania

The Corporation’s success depends primarily on the general economic conditions of the Commonwealth of Pennsylvania and the specific local markets in which the Corporation operates. Unlike larger national or other regional banks that are more geographically diversified, the Corporation provides banking and financial services to customers primarily in the Northern Lehigh Valley area. The local economic conditions in these areas have a significant impact on the demand for the Corporation’s products and services as well as the ability of the Corporation’s customers to repay loans, the value of the collateral securing loans and the stability of the Corporation’s deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Corporation’s financial condition and results of operations.

The Corporation’s Allowance for Possible Loan Losses May be Insufficient

Financial condition and results of operations could be adversely affected if the allowance for loan losses is not sufficient to absorb actual losses or if the bank is required to increase the allowance. Despite underwriting criteria, the bank may experience loan delinquencies and losses. In order to absorb losses associated with nonperforming loans, the allowance for loan losses is based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Determination of the allowance inherently involves a high degree of subjectivity and requires significant estimates of current credit risks and future trends, all of which may undergo material changes. At any time there are likely to be loans in the portfolio that will result in losses but that have not been identified as nonperforming or potential problem credits. The bank cannot be sure that all deteriorating credits are identified before they become nonperforming assets or that losses will be able to be limited on those loans that are identified. The bank may be required to increase the allowance for loan losses for any of several reasons. State and federal regulators, in reviewing the loan portfolio as part of a regulatory examination, may request that an increase be made to the allowance for loan losses. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the bank’s control, may require an increase in the allowance. In addition, if charge-offs in future periods exceed the allowance for loan losses, the bank will need additional increases in the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may materially affect the results of operations in the period in which the allowance is increased.

The Corporation Operates in a Highly Competitive Industry and Market Area

Neffs faces substantial competition in all phases of operation from a variety of different competitors, including commercial banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies, leasing companies, insurance companies and money market mutual funds. There is very strong competition among financial services providers in the principal service area. Competitors may have greater resources, higher lending limits or larger branch systems. Accordingly, they may be able to offer a broader range of products and services as well as better pricing for those products or services.

In addition, some of the competing financial services organizations are not subject to the same degree of regulations as are imposed on federally insured financial institutions. As a result, those non-bank

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competitors may be able to access funding and provide various services more easily or at less cost, adversely affecting the ability to compete effectively.

The Corporation is Subject to Extensive Government Regulation and Supervision

The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Changes in laws, regulations, and regulatory practices affecting the banking industry may increase costs of doing business or otherwise adversely affect banks and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and the bank cannot predict the ultimate effect of these changes, which could have a material adverse effect on profitability or financial condition.

The Corporation May Not be Able to Attract and Retain Skilled People

The Corporation’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Corporation can be intense and the Corporation may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Corporation’s key personnel could have a material adverse impact on the Corporation’s business because of their skills, knowledge of the Corporation’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The Corporation does not currently have employment agreements or non-competition agreements with any of its senior officers.

The Corporation is Subject to Environmental Liability Risk Associated with Lending Activities

Environmental liability associated with lending activities could result in losses. In the course of business, the bank may foreclose on and take title to properties securing loans. If hazardous substances were discovered on any of these properties, the bank could be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether the bank knew of, or was responsible for, the contamination. In addition, if the bank arranges for the disposal of hazardous or toxic substances at another site, costs may be incurred for cleaning up and removing those substances from the site even if the bank neither owned nor operated the disposal site. Environmental laws may require the bank to incur substantial expenses and may materially limit the use of properties acquired through foreclosure, reduce their value or limit the ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase exposure to environmental liability.

The Corporation Continually Encounters Technological Change

Failure to implement new technologies for operations may adversely affect growth or profits. The market for financial services, including banking services and consumer finance services is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking and telebanking. The ability to compete successfully in markets may depend on the ability to exploit such technological changes. However, no assurance can be given that management will be able to properly or timely anticipate or implement such technologies or properly train employees to use such technologies. Any failure to adapt to new technologies could adversely affect the financial condition or operating results of the Corporation.

The Corporation’s ability to pay dividends depends primarily on dividends from its banking subsidiary, which is subject to regulatory limits.

The Corporation is a bank holding company and its operations are conducted by its subsidiary. Its ability to pay dividends depends on its receipt of dividends from its subsidiary. Dividend payments from its banking subsidiary are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of its subsidiary to

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pay dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. There is no assurance that its subsidiary will be able to pay dividends in the future or that the Corporation will generate adequate cash flow to pay dividends in the future. The Corporation’s failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Main Office

The main office of Neffs is located at 5629 PA Route 873, North Whitehall Township, Neffs, PA 18065. The bank owns and occupies a 12,475 square feet building, containing a banking floor, lobby, administrative offices, lending offices, operations center, and executive offices. During 2001, the bank completed construction of two (2) additional lanes, for a total of five (5) lanes, to its drive thru facility located adjacent to the main building. The bank also owns a vacant lot behind the headquarters. Situated on the lot are a baseball field, basketball court and playground facility, all of which are available for use by the public.

The corporation also owns property at 5645 PA Route 873, Neffs, PA 18065, which is a one and one half (1 ¹/2) story single family dwelling with approximately 2,570 square feet of living space. This property is currently being leased.

Item 3. Legal Proceedings

The corporation is subject to certain legal proceedings and claims arising in the ordinary course of business. It is management’s opinion that the ultimate resolution of these claims will not have a material adverse effect on the corporation’s financial position and results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.

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Part II.

Item 5. Market For Registrant’s Common Equity and Related Stockholder Matters

The corporation’s common stock is currently quoted on the National Quotations Bureau’s Electronic Quotations Service (“Pink Sheet”) under the trading symbol NEFB. The corporation’s common stock is traded over-the-counter from time to time, primarily in the corporation’s geographic service area, through several local market makers.

The following table sets forth the prices at which common stock has traded during the last two (2) fiscal years. As of December 31, 2006, there were approximately 630 holders of record of the corporation’s common stock.

	Sales Prices
	High		Low
Quarter Ended:
March 31, 2006	$	245.00	$	245.00
June 30, 2006		253.00		253.00
September 30, 2006		253.00		253.00
December 31, 2006		256.00		256.00
March 31, 2005	$	230.00	$	230.00
June 30, 2005		235.00		230.00
September 30, 2005		236.00		235.00
December 31, 2005		243.00		240.00

The Corporation repurchased no shares during 2006 or 2005.

Dividends and Dividend History

The corporation has historically distributed to stockholders a dividend on May 15^th and November 15^th of each year. In 2006 a dividend of $2.00 per share was paid to stockholders on May 15 and a dividend of $2.00 per share was paid on November 15. In 2005 a dividend of $2.00 per share was paid to stockholders on May 15, and a dividend of $2.00 per share was paid on November 15.

The holders of common stock of the corporation are entitled to receive dividends as may be declared by the Board of Directors with respect to the common stock out of funds of the corporation. While the corporation is not subject to certain restrictions on dividends and stock redemptions applicable to a bank, the ability of the corporation to pay dividends to the holders of its common stock will depend to a large extent upon the amount of dividends paid by the bank to the corporation.

The ability of the corporation to pay dividends on its common stock in the future will depend on the earnings and the financial condition of the bank and the corporation. The corporation’s ability to pay dividends will be subject to the prior payment by the corporation of principal and interest on any debt obligations it may incur in the future as well as other factors that may exist at the time.

Regulatory authorities restrict the amount of cash dividends the bank can declare without prior regulatory approval.

The Corporation currently does not maintain any equity compensation plans.

10

Shareholder Return Performance Graph

The following graph compares the yearly dollar change in the cumulative total shareholder return on Neffs Bancorp, Inc.’s common stock against the cumulative total return of the NASDAQ Composite, and the Neffs Bancorp, Inc.’s Peer Groups for the period of five fiscal years commencing December 31, 2001, and ending December 31, 2006. The 2006 Peer Group has been revised to show a more comparable group as to size and location then the 2005 Peer Group. The graph shows the cumulative investment return to shareholders based on the assumption that a $100 investment was made on December 31, 2001, in each of Neffs Bancorp, Inc.’s common stock, the NASDAQ Composite and the Neffs Bancorp, Inc., Peer Group. We computed returns assuming the reinvestment of all dividends. The shareholder return shown on the following graph is not indicative of future performance.

Neffs Bancorp, Inc.

	Period Ending
Index	12/31/01		12/31/02		12/31/03		12/31/04		12/31/05		12/31/06
Neffs Bancrop, Inc.		100.00		106.13		121.87		129.29		137.82		143.75
NASDAQ Composite		100.00		68.76		103.67		113.16		115.57		127.58
Neffs Bancorp 2005 Per Group*		100.00		116.55		183.57		199.28		195.84		208.30
Neffs Bancorp 2006 Peer Group**		100.00		108.55		133.03		136.44		143.93		140.48

*	The Neffs Bancorp 2005 Peer Group Index conisists of Codorus Valley Bvancorp, Inc. Fidelity D&D Bancorp, Inc., First Chester County Corporation, Norwood Financial Corporation, Penseco Financial Services Corp., Peoples, First Inc., *acquired 6/14/04), and Premier Bancorp, Inc. (acquired 8/1/03).
**	The Neffs Bancorp 2006 Peer Group Index consists of American Bank Inc., First Star Bancorp Inc., East Penn Financial Corp., Mauch Chunk Financial Corp., MNB corp., New Tripoli Bancorp, Inc., JINB Bancorp, Inc.

Source: SNL Financial LC, Charlottesville, VA	(434) 977-1600
© 2007	www.snl.com

11

Item 6. Selected Financial Data

The information under the caption “Selected Financial Data” in the corporation’s Annual Report to Shareholders for the year ended December 31, 2006, which pages are included in Exhibit 13 hereto, are incorporated in their entirety by reference in response to this Item 6.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the corporation’s Annual Report to Shareholders for the year ended December 31, 2006, which pages are included in Exhibit 13 hereto, are incorporated in their entirety by reference in response to this Item 7.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

In an effort to assess market risk, the bank utilizes a simulation model to determine the effect of increases or decreases in market interest rates on net interest income and net income.

The simulation model assumes a hypothetical gradual shift in market interest rates over a twelve-month period. This is based on a review of historical changes in market interest rates and the level and curve of current interest rates. The simulated results represent the hypothetical effects to the bank’s net interest income and net income. Projections for loan and deposit growth were ignored in the simulation model. The simulation model includes all of the bank’s earning assets and interest-bearing liabilities and assumes a parallel and prorated shift in interest rates over a twelve-month period. The percentage declines in the table below are measured as percentage changes from the values of simulated net interest income in the current rate scenario and the impact of those changes on the prior year’s net income.

The aforementioned assumptions are revised based on defined scenarios of assumed speed and direction changes of market interest rates. These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions, as well as management strategies, among other factors. Because it is difficult to accurately quantify into assumptions the reaction of depositors and borrowers to market interest rate changes, the actual net interest income and net income results may differ from simulated results. While assumptions are developed based upon current economic and local market conditions, management cannot make any assurances as to the predictive nature of these assumptions.

The following table reflects the bank’s net interest income sensitivity analysis as of December 31, 2006 and 2005. The schedule indicates that as of December 31, 2006, a hypothetical 200 basis point decline in prevailing market interest rates would cause the bank’s net interest income to decline less then 1% from the current rate scenario. The computations do not contemplate any action management or the Asset/Liability Management Committee could undertake in response to changes in market conditions or market interest rates.

12

	2006						2005
	Change in						Change in
	Net Interest			Percentage			Net Interest			Percentage
(dollars in thousands)	Income			Change			Income			Change
Policy Limit					±5.0	%					±5.0	%
Down 200 basis points		($6	)		(0.1	%)		($114	)		(1.7	%)
Down 100 basis points		19			0.3	%		(36	)		(0.5	%)
Up 100 basis points		2			0.0	%		44			0.6	%
Up 200 basis points		(7	)		(0.1	%)		78			1.1	%

Item 8. Financial Statements and Supplementary Data

The financial statements in the corporation’s Annual Report to Shareholders for the year ended December 31, 2006, which pages are included in Exhibit 13 hereto, are incorporated in their entirety by reference in response to this Item 8.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

The Corporation maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Corporation files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon their evaluation of those controls and procedures as of December 31, 2006, the chief executive officer and principal financial officer of the Corporation concluded that the Corporation’s disclosure controls and procedures were adequate.

Internal Controls Over Financial Reporting

The Corporation made no significant changes in its internal controls or in other factors that could significantly affect these controls during the fourth quarter of the year ended December 31, 2006, including any corrective actions with regard to significant deficiencies and material weaknesses.

Item 9B. Other Information

None.

Part III.

Item 10. Directors and Executive Officers and Corporate Governance

The information under the captions “Governance of the Corporation”, “Information about Nominees and Continuing Directors”, “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” are incorporated here by reference to Neffs Bancorp, Inc.’s proxy statement for its 2007 Annual Meeting of Shareholders scheduled for May 9, 2007.

13

The corporation has adopted a Code of Ethics that applies to directors, officers and employees of the corporation and the bank, including the Chief Executive Officer and senior financial officers. A copy of the Code of Ethics was included as an exhibit to the corporation’s Form 10-K for the year ended December 31, 2003 and filed with the Securities and Exchange Commission. A request for the corporation’s Code of Ethics can be made in either writing to David C. Matulevich, Neffs Bancorp, Inc., 5629 Route 873, P.O. Box 10, Neffs, PA 18065-0010 or by telephone to 610-767-3875.

Item 11. Executive Compensation

The information under the caption “Executive Compensation” is incorporated here by reference to Neffs Bancorp, Inc.’s proxy statement for its 2007 Annual Meeting of Shareholders scheduled for May 9, 2007.

Item 12. Security Ownership of Certain Beneficial Owners and Management and related Stockholder Matters.

The information under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” is incorporated here by reference to Neffs Bancorp, Inc.’s proxy statement for its 2007 Annual Meeting of Shareholders scheduled for May 9, 2007.

The corporation currently does not maintain any equity compensation plans.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information under the caption “Transactions with Directors and Executive Officers” is incorporated here by reference to Neffs Bancorp, Inc.’s proxy statement for its 2007 Annual Meeting of Shareholders scheduled for May 9, 2007.

Item 14. Principal Accountant Fees and Services

The information under the caption “Report of the Audit Committee” is incorporated here by reference to Neffs Bancorp, Inc.’s proxy statement for its 2007 Annual Meeting of Shareholders scheduled for May 9, 2007.

Part IV

Item 15. Exhibits and Financial Statement Schedules

(a) (1)  Financial Statements are incorporated by reference from the 2006 Annual Report.

	Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Condition Consolidated Statements of Income
	Consolidated Statements of Stockholders’ Equity
	Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(2)	Financial Statements Schedules (This item is omitted since information required is either not applicable or is included in the footnotes to the Annual Financial Statements.)
(3)	The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibits Index.

14

No.	Description
3 (i)	Amended and Restated Articles of Incorporation of Neffs Bancorp, Inc. (Incorporated by reference to Exhibit 3(i) of the Registration Statement on Form 10 dated and as filed with Commission on April 27, 2001.)
3 (ii)	Amended and Restated Bylaws of Neffs Bancorp, Inc. (Incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K dated and as filed with the Commission on February 27, 2002.)
11	Statement re: computation of per share earnings. See Consolidated Statements of Income and Note 1 to the Consolidated Financial Statements included in the Annual Report set forth as Exhibit 13 hereto.
13	Excerpts from Neffs Bancorp, Inc. Annual Report to Stockholders.
14	Code of Ethics (incorporated by reference to Exhibit 14 to the Form 10-K of the registrant , filed on April 1, 2002.)
21	Subsidiary of the Registrant (incorporated by reference to Exhibit 21 to the Form 10-K of the registrant filed on April 1, 2002.)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
32.1	Certification of Chief Executive Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002.

(b)	Exhibits required by item 601 of Regulation SK.
	See Item 15(a) (3) above.

15

Signatures

Pursuant to the requirements of Section 13 or 15 (d) of the Securities and 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 dates indicated.

	Neffs Bancorp, Inc.
Date: March 26, 2007	By:	/s/ John J. Remaley
		John J. Remaley
		President and Chief Executive Officer

     Pursuant to the requirement of the Securities and 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 dates indicated.

Signatures	Title	Date
/s/ John J. Remaley John J. Remaley	President, Chief Executive Officer and Director	March 26, 2007
/s/Herman P. Snyder	Vice President and Director	March 26, 2007
Herman P. Snyder
/s/Robert B. Heintzelman	Director	March 26, 2007
Robert B. Heintzelman
/s/Mary Ann Wagner	Director	March 26, 2007
Mary Ann Wagner
/s/John F. Simock	Director	March 26, 2007
John F. Simock
/s/Kevin A. Schmidt	Treasurer and Director	March 26, 2007
Kevin A. Schmidt
/s/John F. Sharkey, Jr.	Director	March 26, 2007
John F. Sharkey, Jr.
/s/Duane A. Schleicher	Director	March 26, 2007
Duane A. Schleicher

16

EX-13

Exhibit 13

Neffs Bancorp, Inc.

Consolidated Financial Report

December 31, 2006

Directors of the Corporation
and Bank

Robert Heintzelman
Kevin A. Schmidt
Herman P. Snyder Duane A. Schleicher
John F. Simock John J. Remaley
John F. Sharkey, Jr.
Mary Ann Wagner

Officers of the Corporation

John J. Remaley	Herman P. Snyder
President	Vice President
Kevin A. Schmidt	Michael J. Bailey
Treasurer	Assistant Secretary

Officers of the Bank

Herman P. Snyder
Chairman of the Board

John J. Remaley	Kevin A. Schmidt
President	Executive Vice President and
	Chief Executive Officer
Michael J. Bailey	Carol L. Jones
Cashier and	Assistant Cashier and
Chief Operations Officer	Operations Officer

Dear Shareholder:

          As we close another year in the history of your corporation, and reflect on the accomplishments of the operations of 2006, we need to look forward and hope for a solid and prosperous year. In spite of the tight spread in local interest rates, a decreasing housing market in the national economy, and the uncertainty in world conditions, the staff, management and the board of directors maintained good control in an effort to achieve or exceed corporate goals. The task was not an easy one and required constant re-evaluation and adjustment.

          The continuing pressures exerted by other business ventures entering the financial markets had their impact on the established goals envisioned only a short time ago. New products and services have become the issues requiring management’s on-going scrutiny, with timely development and implementation necessary to maintain the competitive edge.

          Our customers continue to utilize the services of “Net Teller Online,” the Internet Banking Option, and “Bank Line,” your 24-Hour Telephone Banking Service with unprecedented frequency. With the ability to maintain almost instantaneous status of one’s accounts, the bank’s patrons continue to be better informed as these systems provide the ability to access the many details of each account. If you’ve not yet subscribed to these services, today would be a good day to start!

          As we move forward, we pause to express our sincere thanks to our shareholders and patrons for their confidence, and to the staff for their hard work and on-going efforts.

Cordially yours,

John J. Remaley
President

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Neffs Bancorp, Inc. and Subsidiary
Neffs, Pennsylvania

     We have audited the accompanying consolidated statements of financial condition of Neffs Bancorp, Inc. and subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neffs Bancorp, Inc. and subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

                                                            /S/Beard Miller Company LLP

Beard Miller Company LLP
Allentown, Pennsylvania
February 21, 2007

Neffs Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

	December 31,
	2006			2005
	(In Thousands, Except Share Data)
Assets
Cash and due from banks	$	2,201		$	2,958
Interest bearing deposits with banks		144			163
Federal funds sold		—			2,348
Securities available for sale		36,705			42,021
Securities held to maturity, fair value 2006 $84,561; 2005 $79,248		84,308			78,923
Loans receivable, net of allowance for loan losses 2006 $653; 2005 $657		87,418			82,385
Premises and equipment, net		2,505			2,549
Other assets		2,595			2,200
Total Assets	$	215,876		$	213,547
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	17,554		$	16,912
Interest bearing		155,547			156,364
Total Deposits		173,101			173,276
Federal funds purchased		357			—
Other liabilities		1,196			977
Total Liabilities		174,654			174,253
Stockholders’ equity:
Common stock, $1 par value; authorized 2,500,000 shares; issued 200,000 shares; outstanding 197,941 shares		200			200
Paid-in capital		753			753
Retained earnings		41,634			39,603
Accumulated other comprehensive loss		(947	)		(844	)
Treasury stock, at cost 2,059 shares		(418	)		(418	)
Total Stockholders’ Equity		41,222			39,294
Total Liabilities and Stockholders’ Equity	$	215,876		$	213,547

See notes to consolidated financial statements.

2

Neffs Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

	Years Ended December 31,
	2006			2005			2004
	(Dollars in Thousands, Except per Share Data)
Interest Income
Interest and fees on loans	$	5,419		$	5,001		$	4,747
Interest and dividends on investments:
Taxable		3,546			3,313			3,075
Exempt from federal income taxes		1,975			2,058			2,158
Interest on federal funds sold and other		51			82			67
Total Interest Income		10,991			10,454			10,047
Interest Expense
Deposits		5,115			4,469			4,082
Federal funds purchased		14			—			—
Total Interest Expense		5,129			4,469			4,082
Net Interest Income		5,862			5,985			5,965
Provision for Loan Losses		—			—			36
Net Interest Income after Provision for Loan Losses		5,862			5,985			5,929
Other Income
Service charges on deposit accounts		144			161			177
Other service charges and fees		66			78			44
Other income		48			37			47
Total Other Income		258			276			268
Other Expenses
Salaries and employee benefits		1,347			1,242			1,137
Occupancy		162			154			148
Furniture and equipment		243			210			151
Pennsylvania shares tax		381			312			288
Other expenses		676			694			661
Total Other Expenses		2,809			2,612			2,385
Income before Income Taxes		3,311			3,649			3,812
Income Tax (Benefit) Expense
Current		574			631			710
Deferred		(86	)		(54	)		(103	)
Total Income Tax Expense		488			577			607
Net Income	$	2,823		$	3,072		$	3,205
Earnings per Share, Basic	$	14.26		$	15.58		$	16.26
Weighted Average Common Shares Outstanding		197,941			197,117			197,091

See notes to consolidated financial statements.

3

Neffs Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2006, 2005 and 2004

								Accumulated
								Other						Total
	Common		Paid-in		Retained			Comprehensive			Treasury			Stockholders’
	Stock		Capital		Earnings			(Loss)			Stock			Equity
	(Dollars in Thousands, Except per Share Data)
Balance — December 31, 2003	$	200	$	690	$	34,853		$	(126	)	$	(562	)	$	35,055
Comprehensive income:
Net income		—		—		3,205			—			—			3,205
Change in unrealized net gains (losses) on securities available for sale, net of taxes		—		—		—			(205	)		—			(205	)
Total Comprehensive Income															3,000
Cash dividends declared on common stock, $3.75 per share		—		—		(739	)		—			—			(739	)
Balance — December 31, 2004		200		690		37,319			(331	)		(562	)		37,316
Comprehensive income:
Net income		—		—		3,072			—			—			3,072
Change in unrealized net gains (losses) on securities available for sale, net of taxes		—		—		—			(513	)		—			(513	)
Total Comprehensive Income															2,559
Cash dividends declared on common stock, $4.00 per share		—		—		(788	)		—			—			(788	)
Sale of treasury stock (850 shares)		—		63		—			—			144			207
Balance — December 31, 2005		200		753		39,603			(844	)		(418	)		39,294
Comprehensive income:
Net income		—		—		2,823			—			—			2,823
Change in unrealized net gains (losses) on securities available for sale, net of taxes		—		—		—			(103	)		—			(103	)
Total Comprehensive Income															2,720
Cash dividends declared on common stock, $4.00 per share		—		—		(792	)		—			—			(792	)
Balance — December 31, 2006	$	200	$	753	$	41,634		$	(947	)	$	(418	)	$	41,222

See notes to consolidated financial statements.

4

Neffs Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2006			2005			2004
	(In Thousands)
Cash Flows from Operating Activities
Net income	$	2,823		$	3,072		$	3,205
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		214			170			124
Provision for loan losses		—			—			36
Net amortization of securities		130			228			193
Deferred income tax benefit		(86	)		(54	)		(103	)
(Increase) decrease in assets:
Accrued interest receivable		(204	)		(28	)		(47	)
Other assets		(52	)		(17	)		46
Increase (decrease) in liabilities:
Accrued interest payable		201			131			(19	)
Other liabilities		18			11			33
Net Cash Provided by Operating Activities		3,044			3,513			3,468
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with banks		19			(140	)		23
Net (increase) decrease in federal funds sold		2,348			(570	)		7,612
Purchases of securities available for sale		(1,888	)		(8,438	)		(24,647	)
Purchases of securities held to maturity		(10,343	)		(4,116	)		(9,623	)
Proceeds from maturities/calls and principal repayments of securities available for sale		6,899			9,566			7,370
Proceeds from maturities/calls of securities held to maturity		4,977			4,505			13,017
Net increase in loans		(5,033	)		(6,070	)		(6,102	)
Proceeds from sale of foreclosed real estate		—			—			10
Purchases of premises and equipment		(170	)		(411	)		(77	)
Net Cash Used in Investing Activities		(3,191	)		(5,674	)		(12,417	)
Cash Flows from Financing Activities
Net increase (decrease) in deposits		(175	)		1,624			8,958
Net increase in federal funds purchased		357			—			—
Dividends paid		(792	)		(788	)		(739	)
Sales of treasury stock		—			207			—
Net Cash Provided by (Used in) Financing Activities		(610	)		1,043			8,219
Net Decrease in Cash and Cash Equivalents		(757	)		(1,118	)		(730	)
Cash and Cash Equivalents — Beginning		2,958			4,076			4,806
Cash and Cash Equivalents — Ending	$	2,201		$	2,958		$	4,076
Supplementary Cash Flows Information
Interest paid	$	4,928		$	4,337		$	4,101
Income taxes paid	$	531		$	655		$	645

5

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 1 — Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Neffs Bancorp, Inc. (the “Corporation”) and its wholly-owned subsidiary, The Neffs National Bank (the “Bank”). All material intercompany transactions have been eliminated.

Nature of Operations

The Bank operates from one location in Lehigh County, Pennsylvania. The Bank provides a full range of financial services to individuals, small businesses and corporate customers. The primary source of revenue is providing residential mortgages, consumer loans and commercial loans to customers located within the Lehigh Valley. The Bank’s primary deposits are checking accounts, savings accounts and certificates of deposit. As a national bank, the Bank is subject to regulation of the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation. The Corporation is subject to regulations of the Federal Reserve Bank.

Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets.

Significant Concentrations of Credit Risk

Most of the Corporation’s activities are with customers located within the Lehigh Valley of Pennsylvania. Note 3 discusses the types of securities that the Corporation invests in. Note 4 discusses the types of lending that the Corporation engages in. The Corporation does not have any significant concentrations to any one industry or customer. Although, the Corporation has a diversified loan portfolio, exposure to credit loss can be adversely impacted by downturns in local economic and employment conditions.

Securities

Securities classified as held to maturity are those debt securities the Corporation has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for the amortization of premium and accretion of discount, computed by the interest method over the terms of the securities.

Securities classified as available for sale are those debt securities that the Corporation intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in the maturity mix of the Corporation’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in other comprehensive income (loss), net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

6

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 1 — Significant Accounting Policies (Continued)

Securities (Continued)

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Equity securities include restricted investments, primarily Federal Home Loan Bank stock, which is carried at cost. Federal law requires a member institution of the Federal Home Loan Bank system to hold stock of its district Federal Home Loan Bank according to a predetermined formula.

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances. Interest income is accrued on the unpaid principal balance.

The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses and, subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

7

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 1 — Significant Accounting Policies (Continued)

Allowance for Loan Losses (Continued)

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the net realizable value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual residential and consumer loans for impairment disclosures, unless such loans are subject of a restructuring agreement.

Foreclosed Assets

Foreclosed assets are comprised of property acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure and loans classified as in-substance foreclosure. The Corporation includes such property in other assets. A loan is classified as in-substance foreclosure when the Corporation has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Foreclosed assets initially are recorded at fair value, net of estimated selling costs, at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other expenses. The Corporation had foreclosed assets totaling $71,000 as of December 31, 2006 and no foreclosed assets as of December 31, 2005.

Transfers of Financial Assets

Transfers of financial assets, including sales of loan participations, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

8

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 1 — Significant Accounting Policies (Continued)

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the premises and equipment. Charges for maintenance and repairs are expensed as incurred.

Advertising Costs

The Corporation follows the policy of charging the costs of advertising to expense as incurred. Total advertising expense for the years ended December 31, 2006, 2005 and 2004 was $46,000, $64,000 and $25,000, respectively.

Income Taxes

Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Corporation files a consolidated federal income tax return.

Earnings per Share

Earnings per share is based on the weighted average shares of common stock outstanding during each year. The Corporation currently maintains a simple capital structure, thus there are no dilutive effects on earnings per share.

Employee Benefit Plan

The Bank has a non-contributory defined contribution pension plan covering all employees having at least one year of service. Contribution amounts are determined annually by the Corporation and are charged to current operating expense. The expense amounted to $59,000, $64,000 and $57,000, for 2006, 2005 and 2004, respectively.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the statement of financial condition, such items, along with net income, are components of comprehensive income.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Corporation has defined cash and cash equivalents as cash on hand and amounts due from banks.

Treasury Stock

The acquisition of treasury stock is recorded under the cost method. At the date of subsequent reissue, the treasury stock is reduced by the cost of such stock on the first-in first-out basis with any excess proceeds being credited to paid-in-capital.

9

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

     Note 1 — Significant Accounting Policies (Continued)

Segment Reporting

The Corporation acts as an independent community financial services provider and offers traditional banking and related financial services to individual, business and government customers. The Corporation offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans and the providing of other financial services.

Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial and retail operations of the Corporation. As such, discrete information is not available and segment reporting would not be meaningful.

New Accounting Standards

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments”. Statement No. 155 amends FASB Statement No. 133 and FASB Statement No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for these instruments. Specifically, Statement 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 instrument on a fair value basis. Statement No. 155 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 Corporation is required to adopt the provisions of Statement No. 155, as applicable, beginning in fiscal year 2007. Management does not believe the adoption of Statement No. 155 will have any impact on the Corporation’s financial position and results of operations.

In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets – An Amendment of FASB Statement No. 140.” Statement No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Statement No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006, which for the Corporation will be as of the beginning of fiscal 2007. The Corporation does not believe that the adoption of Statement No. 156 will have any effect on its financial statements.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We do not expect that there will be any impact of adopting FIN 48 on our financial statements.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows.

10

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

On September 13, 2006, the Securities and Exchange Commission “SEC” issued Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of financial-statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Corporation has analyzed SAB 108 and determined that upon adoption it will have no impact on the reported 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-Including an amendment of FASB Statement No. 115. “SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Corporation January 1, 2008. The Corporation is evaluating the impact that the adoption of SFAS No. 159 will have on our consolidated financial statements.

Note 2 — Cash and Due from Banks

Regulations of the Board of Governors of the Federal Reserve System impose uniform reserve requirements on all depository institutions with transaction accounts (checking accounts, NOW accounts, etc.). Reserves are maintained in the form of vault cash or a non-interest bearing balance held with the Federal Reserve Bank. The Bank also, from time to time, maintains deposits with the Federal Reserve Bank and other banks for various services such as check clearing. The reserve requirement at December 31, 2006 and 2005 was $496,000 and $520,000, respectively.

11

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 3 — Securities

The amortized cost and fair values of securities are as follows:

	December 31, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Securities Available for Sale:
U.S. Treasury note	$	100	$	—	$	—		$	100
Mortgage-backed securities		37,389		2		(1,437	)		35,954
Equity securities		651		—		—			651
	$	38,140	$	2	$	(1,437	)	$	36,705
Securities Held to Maturity:
Obligations of U.S. Government agencies	$	38,537	$	23	$	(694	)	$	37,866
Obligations of states and political subdivisions		42,512		980		(52	)		43,440
Corporate securities		1,749		20		(35	)		1,734
Mortgage-backed securities		1,510		18		(7	)		1,521
	$	84,308	$	1,041	$	(788	)	$	84,561

12

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 3 — Securities (Continued)

	December 31, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Securities Available for Sale:
Mortgage-backed securities	$	42,731	$	14	$	(1,293	)	$	41,452
Equity securities		569		—		—			569
	$	43,300	$	14	$	(1,293	)	$	42,021
Securities Held to Maturity:
Obligations of U.S. Government agencies	$	29,683	$	—	$	(781	)	$	28,902
Obligations of states and political subdivisions		45,424		1,217		(63	)		46,578
Corporate securities		1,848		38		(124	)		1,762
Mortgage-backed securities		1,968		40		(2	)		2,006
	$	78,923	$	1,295	$	(970	)	$	79,248

The amortized cost and fair values of securities at December 31, 2006, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years		100		100		6,316		6,334
Due after five years through ten years		—		—		35,217		35,241
Due after ten years		—		—		41,265		41,465
		100		100		82,798		83,040
Mortgage-backed securities		37,389		35,954		1,510		1,521
Equity securities		651		651		—		—
	$	38,140	$	36,705	$	84,308	$	84,561

There were no sales of securities during 2006, 2005, and 2004.

13

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 3 — Securities (Continued)

The changes in net unrealized holding gains (losses) on securities available for sale that have been included in other comprehensive income (loss) for the years ended December 31, 2006, 2005 and 2004 are as follows:

	2006			2005			2004
	(In Thousands)
Gross change in unrealized gains (losses) on securities available for sale	$	(156	)	$	(778	)	$	(310	)
Reclassification adjustment for gains realized in income		—			—			—
Net Unrealized Losses		(156	)		(778	)		(310	)
Tax effect		53			265			105
Net of Tax Amount	$	(103	)	$	(513	)	$	(205	)

Securities with an amortized cost and fair value of approximately $3,764,000 and $3,705,000 at December 31, 2006 and $3,586,000 and $3,498,000 at December 31, 2005 were pledged to secure public deposits and for other purposes required or permitted by law.

The following tables show the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2006 and 2005:

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(In Thousands)
DECEMBER 31, 2006:
Securities Available for Sale:
Mortgage-backed securities	$	2,681	$	47	$	32,927	$	1,390	$	35,608	$	1,437
Securities Held to Maturity:
Obligations of U.S. Government agencies		7,507		96		28,091		598		35,598		694
Obligations of states and political subdivisions		—		—		3,988		52		3,988		52
Corporate securities		—		—		813		35		813		35
Mortgage-backed securities		328		2		290		5		618		7
Total Temporarily Impaired Securities	$	10,516	$	145	$	66,109	$	2,080	$	76,625	$	2,225

14

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 3 — Securities (Continued)

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(In Thousands)
DECEMBER 31, 2005:
Securities Available for Sale:
Mortgage-backed securities	$	10,181	$	196	$	29,332	$	1,097	$	39,513	$	1,293
Securities Held to Maturity:
Obligations of U.S. Government agencies		26,006		677		2,896		104		28,902		781
Obligations of states and political subdivisions		2,351		12		2,233		51		4,584		63
Corporate securities		789		59		185		65		974		124
Mortgage-backed securities		383		2		—		—		383		2
Total Temporarily Impaired Securities	$	39,710	$	946	$	34,646	$	1,317	$	74,356	$	2,263

Unrealized losses detailed above relate primarily to U.S. Government agency mortgage-backed securities, U.S. Government agency obligations, and municipal securities. The Corporation had 180 and 153 securities in an unrealized loss position at December 31, 2006 and 2005, respectively. The decline in fair value is due only to interest rate fluctuations. As the Corporation has the intent and ability to hold such investments until maturity or market price recovery, no securities are deemed to be other-than-temporarily impaired. None of the individual unrealized losses are significant.

Note 4 — Loans

The composition of the Corporation’s loan portfolio at December 31, 2006 and 2005 is as follows:

	2006			2005
	(In Thousands)
Commercial	$	4,664		$	4,832
Commercial real estate		18,820			16,440
Residential real estate		37,088			37,057
Real estate construction		1,053			384
Home equity		19,176			17,072
Other consumer		7,270			7,257
		88,071			83,042
Allowance for loan losses		(653	)		(657	)
	$	87,418		$	82,385

15

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 5 — Allowance for Loan Losses

Transactions in the allowance for loan losses are summarized as follows:

	2006			2005			2004
	(In Thousands)
Balance, beginning	$	657		$	663		$	637
Provision for loan losses		—			—			36
Recoveries on loans previously charged off		2			7			15
Loans charged off		(6	)		(13	)		(25	)
Balance, ending	$	653		$	657		$	663

Loans on which the accrual of interest has been discontinued amounted to $-0- at December 31, 2006 and 2005. Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full, amounted to $52,000 and $67,000 at December 31, 2006 and 2005, respectively.

There were no impaired loans as of December 31, 2006 and 2005. The average recorded investment in impaired loans during 2006, 2005 and 2004 was $-0-, $-0- and $-0-, respectively.

Note 6 — Premises and Equipment

The following summarizes premises and equipment at December 31, 2006 and 2005:

	2006			2005
	(In Thousands)
Premises	$	2,775		$	2,633
Furniture, fixtures and equipment		1,987			1,957
		4,762			4,590
Accumulated depreciation		(2,495	)		(2,279	)
		2,267			2,311
Land		238			238
	$	2,505		$	2,549

16

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 7 — Interest Bearing Deposits

Interest bearing deposits include certificates of deposit issued in denominations of $100,000 or greater which amounted to $32,363,000 and $30,852,000 at December 31, 2006 and 2005, respectively.

Interest bearing deposits at December 31, 2006 and 2005 are further detailed as follows:

	2006		2005
	(In Thousands)
Savings accounts	$	45,881	$	55,531
NOW accounts		7,781		9,106
Certificates and other time deposits		101,885		91,727
	$	155,547	$	156,364

Time deposits at December 31, 2006 had the following scheduled maturities (in thousands):

2007	$	56,519
2008		18,370
2009		6,494
2010		12,474
2011		8,028
	$	101,885

Note 8 — Borrowing Capacity

The Bank has a line of credit commitment available from Atlantic Central Bankers Bank for borrowings up to $4,000,000 in federal funds expiring May 31, 2007. Borrowings on this line are repaid on a daily basis. There was $357,000 of borrowings under this line of credit as of December 31, 2006. There were no borrowings under this line of credit as of December 31, 2005.

The Bank has maximum borrowing capacity with the Federal Home Loan Bank of $116,477,000. There were no borrowings outstanding at December 31, 2006 and 2005. Advances from the Federal Home Loan Bank are secured by qualifying assets of the Bank.

17

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 9 — Income Taxes

The components of the net deferred tax asset at December 31, 2006 and 2005 are as follows:

	2006		2005
	(In Thousands)
AMT credit carryforward	$	384	$	300
Unrealized losses on securities available for sale		488		436
Allowance for loan losses		171		172
Accrued benefits		14		12
Total Deferred Tax Assets		1,057		920
Securities accretion		8		21
Depreciation		29		17
Total Deferred Tax Liabilities		37		38
Net Deferred Tax Asset	$	1,020	$	882

The income tax provision for financial reporting purposes differs from the amount computed by applying the statutory income tax rate to income before income taxes. The differences for the years ended December 31, 2006, 2005 and 2004 are as follows:

	2006						2005						2004
				% of						% of						% of
				Pretax						Pretax						Pretax
	Amount			Income			Amount			Income			Amount			Income
	(Dollars in Thousands)
Tax at statutory rate	$	1,125			34	%	$	1,242			34	%	$	1,296			34	%
Increase (decrease) resulting from:
Tax-exempt interest income		(714	)		(21	)		(735	)		(20	)		(756	)		(20	)
TEFRA interest expense disallowance		77			2			70			2			67			2
	$	488			15	%	$	577			16	%	$	607			16	%

18

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 10 — Related Party Transactions

Some of the Corporation’s or the Bank’s directors, principal officers, principal shareholders and their related interests had transactions with the Bank in the ordinary course of business. All loans and loan commitments were made on substantially the same terms, including collateral and interest rates, as those prevailing at the time for comparable transactions. In the opinion of management, these transactions do not involve more than normal risk of collectibility or present other unfavorable features. It is anticipated that further such extensions of credit will be made in the future.

The following is an analysis of loans to these related parties during 2006 (in thousands):

Balances, January 1, 2006	$	1,975
Advances		665
Repayments		(297	)
Balances, December 31, 2006	$	2,343

Note 11 — Financial Instruments with Off-Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written is represented by the contract or notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table identifies the contract or notional amount of those instruments at December 31, 2006 and 2005:

	2006		2005
	(In Thousands)
Commitments to grant loans	$	1,334	$	1,934
Unfunded commitments under lines of credit		4,238		3,714
Letters of credit		665		361
	$	6,237	$	6,009

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory, and equipment.

19

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 11 — Financial Instruments with Off-Balance Sheet Risk (Continued)

Outstanding letters of credit written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Corporation requires collateral supporting these letters of credit as deemed necessary. The maximum undiscounted exposure related to these commitments at December 31, 2006 and 2005 was $665,000 and $361,000, respectively. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2006 and 2005 for guarantees under standby letters of credit issued is not material.

Note 12 — Dividend Restrictions

The amount of funds available to a parent from its subsidiary bank is limited for all national banks by restrictions imposed by the Comptroller of the Currency. A national bank is required to obtain the approval of the Comptroller of the Currency if the total of all dividends declared in any calendar year exceeds the Bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the Bank can declare dividends in 2007 of approximately $4,468,000 plus an additional amount equal to the Bank’s net profits for 2007, up to the date of any such dividend declaration.

Note 13 — Capital Requirements

The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weighting and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the tables below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2006, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2006, the most recent notification from the regulatory agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution’s category.

20

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 13 — Capital Requirements (Continued)

The Corporation and Bank’s actual capital ratios as of December 31, 2006 and 2005, and the maximum ratios required for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions are as follows:

To be Well Capitalized

under Prompt

For Capital Adequacy

Corrective Action

Actual

Purposes

Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in Thousands)

As of December 31, 2006:

Total capital (to risk-weighted assets):

Neffs Bancorp, Inc.

$

42,822

41.8

%

$

³8,192

³8.0

%

N/A

The Neffs National Bank

42,376

41.3

³8,214

³8.0

$

³10,268

³10.0

%

Tier 1 capital (to risk-weighted assets):

Neffs Bancorp, Inc.

42,169

41.2

³4,096

³4.0

N/A

The Neffs National Bank

41,723

40.6

³4,107

³4.0

³ 6,161

³ 6.0

Tier 1 capital (to average assets):

Neffs Bancorp, Inc.

42,169

19.6

³8,493

³4.0

N/A

The Neffs National Bank

41,723

19.4

³8,585

³4.0

³10,732

³ 5.0

As of December 31, 2005:

Total capital (to risk-weighted assets):

Neffs Bancorp, Inc.

$

40,795

41.6

%

$

³7,840

³8.0

%

N/A

The Neffs National Bank

40,278

41.2

³7,817

³8.0

$

³9,771

³10.0

%

Tier 1 capital (to risk-weighted assets):

Neffs Bancorp, Inc.

40,138

41.0

³3,920

³4.0

N/A

The Neffs National Bank

39,621

40.6

³3,908

³4.0

³ 5,862

³ 6.0

Tier 1 capital (to average assets):

Neffs Bancorp, Inc.

40,138

18.9

³8,493

³4.0

N/A

The Neffs National Bank

39,621

18.7

³8,493

³4.0

³10,616

³ 5.0

Note 14 — Fair Value of Financial Instruments

Below are various estimated fair values at December 31, 2006 and 2005, as required by Statement of Financial Accounting Standards No. 107 (“FAS 107”). Such information, which pertains to the Corporation’s financial instruments, is based on the requirements set forth in FAS 107 and does not purport to represent the aggregate net fair value of the Corporation. It is the Corporation’s general practice and intent to hold its financial instruments to maturity, except for certain securities designated as securities available for sale, and not to engage in trading activities. Many of the financial instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Therefore, the Corporation had to use significant estimations and present value calculations to prepare this disclosure.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Further, the fair value estimates are based on various assumptions, methodologies and subjective considerations, which vary widely among different financial institutions and which are subject to change.

21

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 14 — Fair Value of Financial Instruments (Continued)

The estimated fair value amounts have been measured as of their respective year ends, and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at year end.

The following methods and assumptions were used by the Corporation in estimating financial instrument fair values:

Cash and Due from Banks, Interest Bearing Deposits with Banks and Federal Funds Sold and Purchased

The statement of financial condition carrying amounts for cash and due from banks, interest bearing deposits with banks and federal funds sold and purchased approximate the estimated fair values of such assets.

Securities

Fair values for securities held to maturity and securities available for sale are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amount of restricted equity securities, such as Federal Reserve Bank stock, Atlantic Central Bankers Bank stock and Federal Home Loan Bank stock, is considered a reasonable estimate of fair value.

Loans Receivable

Fair values of variable rate loans subject to frequent repricing and which entail no significant credit risk are based on the carrying amounts. The estimated fair values of other loans are estimated by discounting the future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality.

Accrued Interest Receivable

The carrying amount of accrued interest is considered a reasonable estimate of fair value.

Deposit Liabilities

For deposits which are payable on demand, the carrying amount is a reasonable estimate of fair value. Fair values of fixed rate time deposits are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregate expected maturities.

Accrued Interest Payable

The carrying amount of accrued interest approximates its fair value.

Off-Balance Sheet Instruments

The fair value of commitments to extend credit and for outstanding letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present credit worthiness of the counterparties.

22

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 14 — Fair Value of Financial Instruments (Continued)

The estimated fair values of the Corporation’s financial instruments at December 31 are as follows:

	2006				2005
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In Thousands)
Financial assets:
Cash and short-term investments	$	2,345	$	2,345	$	5,469	$	5,469
Securities available for sale		36,705		36,705		42,021		42,021
Securities held to maturity		84,308		84,561		78,923		79,248
Loans, net		87,418		86,495		82,385		81,548
Accrued interest receivable		1,417		1,417		1,213		1,213
Financial liabilities:
Deposits		173,101		172,847		173,276		173,344
Accrued interest payable		1,103		1,103		902		902
Federal funds purchased		357		357		—		—
Off-balance sheet financial instruments:
Commitments to extend credit and letters of credit		—		—		—		—

23

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 15 — Condensed Financial Information of Neffs Bancorp, Inc. (Parent Only)

Balance Sheets

	December 31,
	2006		2005
	(In Thousands)
Assets
Cash	$	155	$	243
Investment in subsidiary		40,776		38,778
Premises and equipment		250		260
Other assets		62		34
Total Assets	$	41,243	$	39,315
Liability and Stockholders’ Equity
Liability, accounts payable	$	21	$	21
Stockholders’ equity		41,222		39,294
Total Liability and Stockholders’ Equity	$	41,243	$	39,315

Statements of Income

	Years Ended December 31,
	2006		2005		2004
	(In Thousands)
Dividends from subsidiary	$	792	$	788	$	739
Rental income		13		7		8
Expenses		111		122		140
Income before Income Taxes and Equity in Undistributed Earnings of Subsidiary		694		673		607
Income tax benefit		27		33		45
		721		706		652
Equity in undistributed earnings of subsidiary		2,102		2,366		2,553
Net Income	$	2,823	$	3,072	$	3,205

24

Neffs Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note 15 — Condensed Financial Information of Neffs Bancorp, Inc. (Parent Only) (Continued)

Statements of Cash Flows

	Years Ended December 31,
	2006			2005			2004
	(In Thousands)
Cash Flows from Operating Activities
Net income	$	2,823		$	3,072		$	3,205
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		10			9			7
Equity in undistributed earnings of subsidiary		(2,102	)		(2,366	)		(2,553	)
(Increase) decrease in other assets		(27	)		91			(44	)
Increase in other liabilities		—			1			19
Net Cash Provided by Operating Activities		704			807			634
Cash Flows Used in Investing Activities
Purchases of premises and equipment		—			(15	)		(2	)
Cash Flows Used in Financing Activities
Dividends paid		(792	)		(788	)		(739	)
Sale of treasury stock		—			207			—
Net Cash Used in Financing Activities		(792	)		(581	)		(739	)
Net Increase (Decrease) in Cash		(88	)		211			(107	)
Cash — Beginning		243			32			139
Cash — Ending	$	155		$	243		$	32

25

Neffs Bancorp, Inc. and Subsidiary

Selected Financial Data

The following financial information is not covered by the auditor’s report and must be read in conjunction with the consolidated financial statements and related notes along with Management’s Discussion and Analysis of Financial Condition and Results of Operations .

	At or For the Year Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in Thousands, Except Per Share Data)
Interest Income
Interest and fees on loans	$	5,419		$	5,001		$	4,747		$	5,044		$	5,470
Interest and dividends on securities		5,521			5,371			5,233			4,461			4,699
Interest on federal funds sold		51			82			67			128			133
Total interest income		10,991			10,454			10,047			9,633			10,302
Interest Expense
Deposits		5,115			4,469			4,082			4,434			4,977
Short-term borrowings		14			—			—			—			—
Total interest expense		5,129			4,469			4,082			4,434			4,977
Net interest income		5,862			5,985			5,965			5,199			5,325
Provision for loan losses		—			—			36			88			170
Net interest income after provision for loan losses		5,862			5,985			5,929			5,111			5,155
Other operating income		258			276			268			273			287
Other operating expense		2,809			2,612			2,385			2,269			1,986
Income before taxes		3,311			3,649			3,812			3,115			3,456
Applicable income taxes		488			577			607			341			641
Net income	$	2,823		$	3,072		$	3,205		$	2,774		$	2,815
Per Share Data
Basic earnings	$	14.26		$	15.58		$	16.26		$	14.11		$	14.33
Dividends declared	$	4.00		$	4.00		$	3.75		$	2.70		$	3.10
Average shares outstanding		197,941			197,117			197,091			196,529			196,431
At End of Period
Total assets	$	215,876		$	213,547		$	209,803		$	198,570		$	180,293
Securities		121,013			120,944			123,467			110,087			94,397
Loans, net of unearned income		87,418			83,042			76,978			70,886			69,598
Allowance for loan losses		653			657			663			637			564
Deposits		173,101			173,276			171,652			162,694			146,535
Stockholders’ equity		41,222			39,294			37,316			35,055			32,825
Key Ratios
Return on average assets		1.32	%		1.46	%		1.57	%		1.45	%		1.67	%
Return on average equity		7.11	%		8.08	%		8.89	%		8.16	%		8.85	%
Net loans to deposit ratio		50.50	%		47.55	%		44.46	%		43.18	%		47.11	%
Dividend payout ratio (dividends declared divided by net income)		28.05	%		25.66	%		23.06	%		19.14	%		21.63	%
Equity to asset ratio (average equity divided by average total assets)		18.61	%		17.95	%		17.56	%		17.73	%		18.93	%

26

Neffs Bancorp, Inc. and Subsidiary

Quarterly Summary of Financial Data (unaudited)

	2006
	Three Months Ended
	March 31		June 30		September 30		December 31
	(Dollars in Thousands, Except Per Share Data)
Interest income	$	2,682	$	2,707	$	2,787	$	2,815
Interest expense		1,212		1,233		1,308		1,376
Net interest income		1,470		1,474		1,479		1,439
Provision for loan losses		—		—		—		—
Other expenses, net of other income		639		684		667		561
Income before income taxes		831		790		812		878
Income tax expense		117		107		114		150
Net income	$	714	$	683	$	698	$	728
Earnings per share-Basic	$	3.61	$	3.45	$	3.52	$	3.68

	2005
	Three Months Ended
	March 31		June 30		September 30		December 31
	(Dollars in Thousands, Except Per Share Data)
Interest income	$	2,569	$	2,600	$	2,645	$	2,640
Interest expense		1,036		1,108		1,171		1,154
Net interest income		1,533		1,492		1,474		1,486
Provision for loan losses		—		—		—		—
Other expenses, net of other income		517		584		608		627
Income before income taxes		1,016		908		866		859
Income tax expense		178		139		127		133
Net income	$	838	$	769	$	739	$	726
Earnings per share-Basic	$	4.25	$	3.90	$	3.75	$	3.68

27

Neffs Bancorp, Inc. and Subsidiary

Common Stock Information

The Corporation’s common stock is currently quoted on the National Quotations Bureau’s Electronic Quotation Service (“Pink Sheets”) under the trading symbol NEFB. The Corporation’s common stock is traded over-the-counter from time to time, primarily in the Corporation’s geographic service area, through several local market makers.

The following table sets forth the high and low bid quotations for the Corporation’s common stock as reported for each quarterly period of the 2006 and 2005 fiscal years. This information is based on monthly reports from Boenning & Scattergood, Inc. There may have been other bids or transactions not known to the Corporation. The quotations reflect inter-dealer prices, do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.

Common Stock Information

					Cash Dividends
2006	HIGH		LOW		Per Share
First Quarter	$	245.00	$	245.00		—
Second Quarter	$	253.00	$	253.00	$	2.00
Third Quarter	$	253.00	$	253.00		—
Fourth Quarter	$	256.00	$	256.00	$	2.00

					Cash Dividends
2005	HIGH		LOW		Per Share
First Quarter	$	230.00	$	230.00		—
Second Quarter	$	235.00	$	230.00	$	2.00
Third Quarter	$	236.00	$	235.00		—
Fourth Quarter	$	243.00	$	240.00	$	2.00

As of December 31, 2006, Neffs Bancorp, Inc. had 197,941 outstanding shares and approximately 630 stockholders, including beneficial owners whose stock is held in nominee name.

28

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Years Ending December 31, 2006, 2005, and 2004

The following is management’s discussion and analysis of the significant changes in the financial condition and results of operations of Neffs Bancorp, Inc. (the “Corporation”) and it’s wholly owned subsidiary The Neffs National Bank (the “Bank”). The consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. This discussion should be read in conjunction with the financial tables, consolidated financial statements and notes to consolidated financial statements appearing elsewhere in this report. Current performance does not guarantee, assure or may not be indicative of similar performance in the future.

We have made forward-looking statements in this document and in documents that we incorporated by reference that are subject to risk and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of the Corporation and the Bank. When we use words such as “believes”, “expects”, “anticipates” or other similar expressions, we are making forward-looking statements.

Stockholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that we incorporate by reference, could affect the future financial results of the Bank and could cause those results to differ materially from those expressed in our forward-looking statements contained or incorporated by reference in this document. These factors include the following:

• operating, legal and regulatory risks,

• economic, political and competitive forces affecting our Banking business, and

• the risk that our analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in other documents that the Corporation files periodically with the Securities and Exchange Commission.

Critical Accounting Policies

Disclosure of the Corporation’s significant accounting policies is included in Note 1 of the consolidated financial statements. Certain of these policies are particularly sensitive requiring significant judgments, estimates and assumptions to be made by management. The allowance for loan losses is the critical accounting policy that requires significant management judgment.

Management, in determining the allowance for loan losses, makes significant estimates. Consideration is given to a variety of factors in establishing this estimate. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of the underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since the sufficiency of the allowance for loan losses is dependent to a great extent on conditions that may be beyond our control, it is possible that management’s estimates of the allowance for loan losses and actual results could differ in the near term. In addition, regulatory authorities, as an integral part of their examination, periodically review the allowance for loan losses. They may require additions to the allowance based upon their judgments about information available to them at the time of examination. Future increases to our allowance for loan losses,

29

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

whether due to unexpected changes in economic conditions or otherwise, would adversely affect our future results of operations.

OVERVIEW

The Corporation and its wholly owned subsidiary, The Neffs National Bank, continue to strive to provide quality products and services to the community with a personal touch. During 2006, the Corporation continued to experience strain on its net interest income due to increasing cost of funds and relatively flat yields on interest earning assets. Additionally, 2006 was the first full year of expense related to internet banking, imaging, and other system upgrades that were implemented in 2005.

The Corporation’s assets increased by 1.09% to $215,876,000 at December 31, 2006 from $213,547,000 at December 31, 2005. During the same period, net loans receivable increased $5,033,000 or 6.11% to $87,418,000 from $82,385,000, while deposits decreased $175,000 or .10% to $173,101,000 from $173,276,000. Securities increased $69,000 or 0.06% to $121,013,000 from $120,944,000. In 2006, the Corporation recorded net income of $2,823,000, a decrease of 8.11% as compared with $3,072,000 in 2005.

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

The single largest component of the Corporation’s primary operating income is net interest income. It is the amount by which interest earned on interest earning assets exceeds the interest paid on interest bearing liabilities. The change in interest income from year to year may be due to changes in interest rates, changes in volumes on interest earning assets and liabilities as well as changes in the mix of such assets and liabilities. The Corporation’s primary interest earning assets are loans to businesses and individuals and investment securities. Interest bearing liabilities consist primarily of time deposits, NOW deposits and savings deposits. Generally, changes in net interest income are measured by net interest rate spread and net interest margin. Net interest rate spread is equal to the difference between the average rate earned on interest earning assets and the average rate incurred on interest bearing liabilities. Net interest margin represents the difference between interest income (including net loan fees earned) and interest expense calculated as a percentage of average earning assets.

2006 Compared to 2005

Total interest income increased by $537,000 or 5.14% to $10,991,000 for the year ended December 31, 2006 from $10,454,000 at December 31, 2005. This increase is mainly the result of the average balance of the loan portfolio increasing by $6.3 million in 2006 over 2005 which generated additional interest and fees on loans throughout 2006. The yield on interest earning assets also increased from 5.10% in 2005 to 5.36% in 2006.

Total interest expense increased by $660,000 or 14.77% to $5,129,000 in 2006 from $4,469,000 in 2005. This increase in interest expense is due mainly to the increasing interest rate environment experienced throughout 2006. The yield on interest bearing liabilities increased from 2.85% in 2005 to 3.31% in 2006. The average balance of interest bearing liabilities decreased $2.0 million in 2006 from 2005.

Net interest income decreased by $123,000 or 2.06% to $5,862,000 in 2006 from $5,985,000 in 2005. The Corporation’s net interest rate spread for 2006 was 2.05% as compared to 2.25% for 2005. The net interest margin for 2006 was 2.86% as compared to 2.92% for 2005.

2005 Compared to 2004

Total interest income increased by $407,000 or 4.05% to $10,454,000 for the year ended December 31, 2005 from $10,047,000 at December 31, 2004. This increase was mostly the result of the average balance of loan portfolio increasing by $6.6 million in 2005 over 2004 which generated additional interest and fees on loans throughout 2005.

30

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

Total interest expense increased by $387,000 or 9.48% to $4,469,000 in 2005 from $4,082,000 in 2004. This increase in interest expense was due mainly to the increasing interest rate environment experienced throughout 2005.

Net interest income increased by $20,000 or .34% to $5,985,000 in 2005 from $5,965,000 in 2004. The Corporation’s net interest rate spread for 2005 was 2.25% as compared to 2.47% for 2004. The net interest margin for 2005 was 2.92% as compared to 3.03% for 2004.

Following is a summary of the Bank’s average balances, yields, interest income, and interest expense, the interest rate spread and the net interest margin for the years ended December 31, 2006, 2005, and 2004.

	Year Ended December 31,
	2006							2005							2004
	Average				Yield/			Average				Yield/			Average				Yield/
	Balance1		Interest		Rate			Balance1		Interest		Rate			Balance1		Interest		Rate
	(Dollars in Thousands)
Interest earning assets:
Loan receivable2	$	85,565	$	5,419		6.33	%	$	79,294	$	5,001		6.31	%	$	72,744	$	4,747		6.53	%
Investment securities:
Taxable		75,390		3,546		4.70	%		77,177		3,313		4.29	%		71,430		3,075		4.30	%
Non-taxable3		43,817		1,975		4.51	%		45,980		2,058		4.48	%		47,640		2,158		4.53	%
Other interest earning assets4		357		51		14.29	%		2,411		82		3.40	%		4,982		67		1.34	%
Total interest earning assets		205,129		10,991		5.36	%		204,862		10,454		5.10	%		196,796		10,047		5.11	%
Noninterest earning assets		8,155							7,067							8,517
Total assets	$	213,284						$	211,929						$	205,313
Interest bearing liabilities:
NOW	$	7,697		126		1.64	%	$	8,373		87		1.04	%	$	8,426		56		0.66	%
Savings		49,428		867		1.75	%		62,033		1,000		1.61	%		68,955		1,074		1.56	%
Certificates of deposit		97,273		4,122		4.24	%		86,372		3,382		3.92	%		77,508		2,952		3.81	%
Federal funds purchased		343		14		4.08	%		0		0		0	%		0		0		0	%
Total interest bearing liabilities		154,741		5,129		3.31	%		156,777		4,469		2.85	%		154,889		4,082		2.64	%
Noninterest bearing liabilities:
Demand deposits		17,571							16,133							13,565
Other liabilities		1,287							993							816
Stockholders’ equity		39,685							38,046							36,043
Total liabilities and stockholders’ equity	$	213,284						$	211,929						$	205,313
Net interest income/spread5			$	5,862		2.05	%			$	5,985		2.25	%			$	5,965		2.47	%
Net interest margin6						2.86	%						2.92	%						3.03	%

1	Averages are not computed on daily average. Average balances are computed based on an average of quarter-end balances.
2	Average balances include non-accrual loans.
3	There have been no tax equivalent adjustments made to yields.
4	This reflects average balance for Federal Funds Sold and is calculated by utilizing quarterly ending balance. The actual daily balance may differ greatly from this average balance due to the nature of these funds.
5	Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities.
6	Net interest margin represents net interest income as a percentage of average interest earning assets.

31

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

The following table attributes increases and decreases in components of net interest income either to changes in average volume or to changes in average rates for interest earning assets and interest bearing liabilities. Numerous and simultaneous balance and rate changes occur during the year. The amount of change that is not due solely to volume or rate is allocated proportionally to each.

	For Year Ended December 31,
	2006/2005 Increase/(Decrease)								2005/2004 Increase/(Decrease)
	Due to Change in								Due to Change in
	Volume			Rate		Net			Volume			Rate			Net
	(In Thousands)
Interest Income:
Loans receivable	$	397		$	21	$	418		$	417		$	(163	)	$	254
Securities		(183	)		333		150			178			(40	)		138
Other interest earning assets		(293	)		262		(31	)		(48	)		63			15
Total interest earning assets		(79	)		616		537			547			(140	)		407
Interest Expense:
NOW		(11	)		50		39			—			31			31
Savings		(221	)		88		(133	)		(111	)		37			(74	)
Certificates of Deposit		462			278		740			345			85			430
Federal funds purchased		14			—		14			—			—			—
Total interest bearing liabilities		244			416		660			234			153			387
Net change in net interest income	$	(323	)	$	200	$	(123	)	$	313		$	(293	)	$	20

Provision for Loan Losses

Although the Corporation maintains sound credit practices, loan deterioration may occur resulting in the eventual charge off of the loans as losses. The provision for loan losses and the allowance for loan losses are based upon management’s ongoing assessment of the Bank’s credit exposure and consideration of other relevant factors. The allowance for loan losses is a valuation that is available to absorb potential yet undetermined future charge offs. The provision for loan losses is the amount charged against the Bank’s earnings. Its appropriateness and adequacy are determined based upon several factors including:

• a continuing review of delinquent, classified and non-accrual loans, large loans and overall portfolio quality,

• analytical review of loan charge-off experience, delinquency rates and other relevant historical and peer statistical ratios,

• management’s judgment with respect to the nature of the portfolio, concentrations of credit and current and projected economic and business conditions and their impact on the existing portfolio, and

• regular examinations and review of the portfolio by regulatory authorities.

The allowance is allocated to specific loan categories based upon management’s classification of loans under the Corporation’s internal loan grading system and to pools of other loans that are not individually analyzed. Management makes allocations to specific loans based on the present value of expected future cash flows or the fair value of the underlying collateral for impaired loans and to other classified loans based on various credit risk factors. These factors include collateral values, the financial condition of the borrower and industry and current economic trends.

Allocations to commercial loan pools are developed by internal risk ratings and are based on management’s judgment concerning historical loss trends and other relevant factors. Installment and residential mortgage loan allocations are made at a portfolio level based on historical loss experience adjusted for portfolio activity and current conditions. Estimated credit losses are based on the average annual rate of net charge-offs experienced

32

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

over the previous two or three years on similar loans, adjusted for current condition and trends. While allocations are made to specific loans and pools of loans, the allowance is available for all loan losses.

There was no provision for loan losses made during 2006 or 2005 as compared to $36,000 for 2004. Management has concluded that the Allowance for Loan Losses had an adequate balance to justify no provision being made during 2006 and 2005, due to declining net charge offs and declining non-performing loans.

The Allowance for Loan Losses represented .74% of total loans receivable at December 31, 2006 as compared with .79% and .86% at December 31, 2005, and 2004, respectively. Management regularly assesses the appropriateness and adequacy of the allowance for loan losses in relation to credit exposure associated with individual borrowers, overall trends in the loan portfolio and other relevant factors, and believes the allowance is reasonable and adequate for each of the periods presented. The Corporation has no credit exposure to foreign countries or foreign borrowers.

The Bank’s loan loss experience for each of the five years ended December 31 is presented below.

	Year Ended December 31
	2006			2005			2004			2003			2002
	(Dollars in Thousands)
Average loans outstanding	$	85,565		$	79,294		$	72,744		$	69,730		$	71,337
Total gross loans at year end	$	88,071		$	83,042		$	76,978		$	70,886		$	69,598
Allowance for loan losses at January 1	$	657		$	663		$	637		$	564		$	445
Losses charge to allowance
Commercial		—			—			—			—			27
Real estate		—			—			—			28			—
Consumer		6			13			25			5			30
Total losses charged to allowance		6			13			25			33			57
Recoveries credited to allowance
Commercial		—			—			—			9			—
Real estate		—			—			—			—			—
Consumer		2			7			15			9			6
Total recoveries credit to allowance		2			7			15			18			6
Net charge-offs		4			6			10			15			51
Provision for loan losses		—			—			36			88			170
Allowance for loan losses at December 31	$	653		$	657		$	663		$	637		$	564
Ratio of net charge offs to average loans outstanding		0.00	%		0.01	%		0.01	%		0.02	%		0.07	%
Allowance as a percentage of total gross loans		0.74	%		0.79	%		0.86	%		0.90	%		0.81	%

33

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

The amount charged to operations and the related balance in the allowance for loan losses is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience and management’s estimates of potential losses.

Management maintains an allowance for loan losses that it considers adequate based on the evaluation process that is performed on a quarterly basis. As part of this process, management considers it appropriate to maintain a portion of the allowance that is based on credit quality trends, loan volume, current economic trends and other uncertainties. This portion of the allowance for loan losses is reflected as the unallocated portion in the table below that indicates the distribution of the allowance as of the end of each of the last five years.

	2006					2005					2004					2003					2002
			% of					% of					% of					% of					% of
	Amount		Loan			Amount		Loan			Amount		Loan			Amount		Loan			Amount		Loan
	(Dollars in Thousands)
Commercial	$	161		26.67	%	$	122		25.62	%	$	130		23.41	%	$	115		20.39	%	$	108		21.25	%
Real estate		281		43.31	%		271		45.08	%		256		48.71	%		246		50.20	%		235		69.25	%
Consumer		121		30.02	%		125		29.30	%		135		27.88	%		167		29.41	%		126		9.50	%
Unallocated		90					139					142					109					95
Total	$	653		100	%	$	657		100	%	$	663		100	%	$	637		100	%	$	564		100	%

Non-Interest Income

2006 Compared to 2005

Non-interest income consists primarily of service charges. Non interest income for 2006 had a decrease of $18,000 or 6.52% over 2005. This was mainly due to decrease in service charges on deposit accounts and fees derived from the sale of loan related insurance.

2005 Compared to 2004

Non-interest income consists primarily of service charges. Non interest income for 2005 had an increase of $8,000 or 2.99% over 2004. Service charges on deposit accounts declined slightly; however, this decrease was offset by an increase in fees derived from the sale of loan related insurance and ATM fees.

Non-Interest Expense

Salary expense and employee benefits represent the largest component, or 47.95%, of non-interest expenses. Non-interest expenses also include an array of other expenses such as:

• occupancy and equipment expenses,

• stationery, printing and Bank supplies,

• advertising,

• outside service providers, relating to data processing and ATM services,

• professional fees for legal, accounting, and consulting services,

• cost associated with the due diligence process of extending and maintaining loans and the collection process,

• Pennsylvania shares tax and FDIC assessment, and

• other types of expenses incurred as part of the normal course of operation of the Bank.

34

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

2006 Compared to 2005

Non-interest expenses for 2006 were $2,809,000, an increase of $197,000 or 7.54% as compared to non-interest expense of $2,612,000 for 2005.

Salary and employee benefits represent the largest portion of non-interest expense. For 2006, salary and employee benefits increased by $105,000, or 8.45%, due to the constant increasing costs associated with health care coverage and normal salary increases paid to employees. At both December 31, 2006 and 2005, the Bank employed 32 full-time equivalent employees.

Occupancy and equipment expenses increased by $41,000 or 11.26% to $405,000 as compared to $364,000 at December 31, 2005. The first full year of internet banking, bill pay and imaging resulted in additional maintenance, repair and depreciation expenses over those reported in 2005.

PA Shares Tax increased by $69,000 or 22.12% to $381,000 for 2006. This increase was due mainly to the unavailability of tax credits for 2006 for qualified contributions to an educational foundation. Such tax credits were available in 2005.

2005 Compared to 2004

Non-interest expenses for 2005 were $2,612,000, an increase of $227,000 or 9.52% as compared to non-interest expense of $2,385,000 for 2004.

Salary and employee benefits represent the largest portion of non-interest expense. For 2005, salary and employee benefits increased by 9.23% due to the constant increasing costs associated with health care coverage and normal salary increases paid to employees. At December 31, 2005, the Bank employed 32 full-time equivalent employees as compared to 31 at December 31, 2004.

Occupancy and equipment expenses increased by $65,000 or 21.74% to $364,000 as compared to $299,000 at December 31, 2004. The implementation of internet banking, bill pay and imaging resulted in additional maintenance, repair and depreciation expenses over those reported in 2004.

Income Taxes

Income tax expense was $488,000 for 2006 as compared to $577,000 for 2005 and $607,000 for 2004. The 15.42% decrease experienced during 2006 and 4.94% decrease in 2005 resulted from the decline in pre-tax income. The Corporation’s effective income tax rate for 2006, 2005 and 2004 was 15%, 16% and 16%, respectively.

Net Income

2006 Compared to 2005

Net income for 2006 was $2,823,000, which is a decline of $249,000 or 8.11% as compared to 2005. The Bank’s net interest income declined in 2006 due to a decrease in the Bank’s net interest spread and margin as the cost of interest-bearing deposits increased more than the yield on interest-bearing assets. During 2006, the Bank continued to offer online banking and imaging to all its customers. The costs associated with the first full year of these services had a negative impact on the net income. However, the bank anticipates continued growth from providing these new services.

Basic earnings per share for 2006 decreased to $14.26 from $15.58 in 2005, due to the decline in the net income for 2006.

35

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

2005 Compared to 2004

Net income for 2005 was $3,072,000, which is a decline of $133,000 or 4.15% as compared to 2004. During 2005 the Bank offered online banking and imaging to all its customers, in order to remain competitive amongst other financial institutions. The costs associated with implementing these new services and the advertising to promote the services, had a negative impact on the net income. However, the bank anticipates continued growth from providing these new services. The Bank’s net interest income growth was relatively flat for 2005 over 2004 due to a decrease in the Bank’s net interest spread and margin as the cost of interest-bearing deposits increased more than the yield on interest-bearing assets.

Basic Earning per share for 2005 decreased to $15.58 from $16.26 in 2004, due to the decline in the net income for 2005.

FINANCIAL CONDITION

Securities

The Corporation’s securities portfolio is composed of investments that not only provide interest income, including tax-exempt income, but also provide a source of liquidity. The portfolio allows management to better respond to the Bank’s interest sensitivity position, to diversify the earning asset portfolio and provide collateral for public fund deposits. Established policies are in place that address various aspects in managing the portfolio, including but not limited to, concentrations, liquidity, credit quality, interest rate sensitivity and regulatory guidelines.

Although the Bank generally intends to hold its securities portfolio until maturity, a portion of the portfolio is classified as available-for-sale. Securities in the held to maturity category are accounted for at amortized cost. Available for sale securities are accounted for at fair value with unrealized gains or losses, net of income taxes, reported as a separate component of stockholder’s equity. The Bank invests in securities for the yield they produce and not to profit from trading. The Bank holds no trading securities in its portfolio.

The securities portfolio at December 31, 2006 totaled $121,013,000 as compared to $120,944,000 at December 31, 2005, an increase of $69,000, or 0.06%. Securities available-for-sale decreased to $36,705,000 at December 31, 2006 compared to $42,021,000 at December 31, 2005. In addition, securities held to maturity increased to $84,308,000 at December 31, 2006 from $78,923,000 at December 31, 2005. Other than the U.S. Government and its agencies, the Bank holds no other securities of a single issuer whose aggregate carrying value exceeds 10% of stockholders’ equity.

The carrying value of the available-for-sale securities portfolio as of December 31, 2006, includes net unrealized losses of $1,435,000 (reflected as accumulated other comprehensive loss of $947,000 in stockholders’ equity, net of deferred income taxes of $488,000) compared to net unrealized losses of $1,279,000 (reflected as accumulated other comprehensive loss of $844,000 in stockholders’ equity, net of deferred income taxes of $435,000) as of December 31, 2005.

The Corporation has gross unrealized losses of $2,225,000 at December 31, 2006 on the securities portfolio with an aggregate fair value of $76,625,000. The unrealized losses are attributed to the current interest rate environment. The unrealized losses are temporary and management has the intent and ability to hold them until maturity or market price recovery. All securities are rated investment grade or better according to the Corporation’s policy.

36

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

The composition of the securities portfolio for the periods ending December 31, 2006, 2005 and 2004 is presented below.

	December 31
	2006		2005		2004
	(Dollars in Thousands)
Held to maturity securities:
U.S. Government agencies and corporations	$	38,537	$	29,683	$	27,162
State and political subdivisions		42,512		45,424		46,425
Mortgage-backed securities		1,510		1,968		3,135
Corporate securities		1,749		1,848		2,597
Available for sale securities:
Mortgage-backed securities		35,954		41,452		43,475
Equity securities		651		569		673
U.S. Treasury Note		100		—		—
Total securities	$	121,013	$	120,944	$	123,467

The following table presents the maturities and average weighted yields of the debt securities portfolio as of December 31, 2006.

					After one but					After five but
	Within one year				within five years					within ten years					After ten years
	Amount		Yield		Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in Thousands)
Available for sale:
Mortgage-backed securities	$	—		—	$	5,497		4.00	%	$	5,829		4.30	%	$	24,628		4.87	%
U.S. Treasury		—		—		100		4.92	%		—		—			—		—
						5,597					5,829					24,628
Held to maturity:
U.S. Government agencies		—		—		2,000		4.44	%		18,380		4.39	%		18,156		4.25	%
State and political subdivisions1		—		—		3,267		6.56	%		17,137		6.93	%		22,109		7.47	%
Mortgage-backed securities		—		—		—		—			1		11.91	%		1,509		6.29	%
Other securities		—		—		1,049		6.24	%		700		6.82	%		—		—
		—				6,316					36,218					41,774
Total	$	—			$	11,913				$	42,047				$	66,402

¹ Yields on tax-exempt debt securities have been computed on a fully tax-equivalent basis.

37

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

Loans

The loan portfolio comprises a major component of the Corporation’s earning assets. Net loans receivable increased $5,033,000 or 6.11% to $87,418,000 as of December 31, 2006 from $82,385,000 at December 31, 2005. Net loans receivable represent 40.49% of total assets and 50.50% of total deposits as of December 31, 2006 as compared to 38.58% and 47.55%, respectively, at December 31, 2005. All of the Corporation’s loans are to domestic borrowers.

Loan concentrations are considered to exist when the total amount of loans to any one or a multiple number of borrowers engaged in similar activities or having similar economic characteristics exceeds 10% of loans outstanding in any one category. At December 31, 2006, real estate loans amounted to $76,137,000 or 86.45% of total loans, and commercial and industrial loans amounted to $4,664,000 or 5.30% of total loans. Although such loans were not made to one specific borrower or industry, it is important to note that the quality of these loans is affected by the region’s economy and real estate market. Management does not believe such a concentration poses a problem to the Bank at this time.

Other than as described herein, management does not believe there are any trends, events, or uncertainties which are reasonably expected to have a material adverse impact on future results of operations, liquidity, or capital resources.

The composition of the total loan portfolio is shown in the table below for the periods presented.

	December 31,
	(Dollars in Thousands)
	2006					2005					2004					2003					2002
			% of					% of					% of					% of					% of
	Amount		Total			Amount		Total			Amount		Total			Amount		Total			Amount		Total
Commercial	$	4,664		5.30	%	$	4,832		5.82	%	$	4,095		5.32	%	$	2,832		4.00	%	$	3,490		5.01	%
Commercial real estate		18,820		21.37	%		16,440		19.80	%		13,925		18.09	%		11,615		16.39	%		11,300		16.24	%
Residential real estate		37,088		42.11	%		37,057		44.62	%		36,115		46.92	%		35,239		49.71	%		35,046		50.35	%
Real estate construction		1,053		1.20	%		384		0.46	%		1,376		1.79	%		350		0.49	%		657		0.94	%
Home equity		19,176		21.77	%		17,072		20.56	%		14,560		18.91	%		14,136		19.94	%		12,493		17.96	%
Other consumer		7,270		8.25	%		7,257		8.74	%		6,907		8.97	%		6,714		9.47	%		6,612		9.50	%
Total loans outstanding	$	88,071		100.00	%	$	83,042		100.00	%	$	76,978		100.00	%	$	70,886		100.00	%	$	69,598		100.00	%

38

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

The loan maturities and interest sensitivity for a segment of the loan portfolio are reflected in the table below.

	As of December 31, 2006
	Due Under		Due 1- 5		Due Over
	One Year		Years		Five Years		Total
	(In Thousands)
Maturity of loans receivable:
Commercial and commercial real estate	$	7,436	$	7,380	$	8,668	$	23,484
Real estate construction						1,053		1,053
Total	$	7,436	$	7,380	$	9,721	$	24,537

	Due 1-5		Due Over
	Years		Five Years
Fixed interest rates	$	1,940	$	3,252
Floating or adjustable interest rates		5,440		6,469
Total	$	7,380	$	9,721

Credit Risk and Loan Quality

The Corporation continues to strive to minimize credit risk. The Bank’s written lending policy requires underwriting, loan documentation and credit analysis standards to be met prior to the approval and funding of any loan. In accordance with that policy, internal loan review monitors the loan portfolio on an ongoing basis. The loan committee then prepares an analysis each quarter of the allowance for loan losses, which is then submitted to the Board of Directors for its assessment as to the adequacy of the allowance.

The lending policy is executed through the tiered assignment of loan limit authorities (secured and unsecured), to individual officers of the Bank, the Loan Committee and the Board of Directors. Although the Corporation maintains sound credit policies, certain loans may deteriorate for a variety of reasons. The Corporation’s policy is to place all loans on a non-accrual status upon becoming 90 days delinquent in their payments, unless there is a documented, reasonable expectation of the collection of the delinquent amount. Loans are reviewed monthly as to their delinquency status and on a quarterly basis through review and preparation of a troubled loans report, which is presented to the Board of Directors.

Total nonperforming loans (comprised of non-accruing loans and loans past due for more than 90 days) as of December 31, 2006 were $52,000 compared to $67,000 as of December 31, 2005. Total nonperforming loans as a percentage of total loans were .06% at December 31, 2006 as compared to ..08% at December 31, 2005. At December 31, 2006 foreclosed assets totaled $71,000. There were no foreclosed assets as of December 31, 2005. Lenders continue to work with customers to minimize losses associated with non-accrual and delinquent accounts. In addition, management is not aware of any material potential loan problems that have not been disclosed herein.

39

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

Detailed information about the Corporation’s nonperforming loans and nonperforming assets for the last five years is shown in the table below.

	December 31,
	2006			2005			2004			2003			2002
	(Dollars in Thousands)
Non-accruing loans	$	—		$	—		$	126		$	148		$	227
Accruing loans past due 90 days or more		52			67			63			327			203
Total nonperforming loans		52			67			189			475			430
Foreclosed real estate/repossessed assets		71			—			—			10			—
Total nonperforming assets	$	123		$	67		$	189		$	485		$	430
Non-accrual loans:
Interest income that would have been recorded on non-accrual loans	$	—		$	—		$	11		$	15		$	18
Interest income for above loans included in net income for the period	$	—		$	—		$	—		$	10		$	20
Ratios:
Nonperforming loans to total loans		0.06	%		0.08	%		0.25	%		0.67	%		0.62	%
Allowance for loan losses to nonperforming loans		1,255.77	%		980.60	%		350.79	%		134.11	%		131.16	%
Nonperforming assets to total assets		0.06	%		0.03	%		0.09	%		0.24	%		0.24	%
Commitments to lend additional funds to Nonperforming loan customers		—			—			—			—			—

Deposits

Deposits are the major source of the Corporation’s funds for lending and other investment purposes. Total deposits at December 31, 2006 were $173,101,000, a decrease of $175,000 or 0.10%, over total deposits of $173,276,000 as of December 31, 2005. The Corporation experienced the following increases/(decreases) for the year 2006 as compared to 2005.

Non-interest bearing demand deposits	3.80	%
Interest-bearing demand deposits	(14.55	%)
Savings deposits	(17.38	%)
Time deposits	11.07	%

40

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

The following table displays the maturities of time deposits issued in denominations of $100,000 or more at December 31, 2006.

	Time
(In Thousands)	Certificates
Three months or less	$	2,348
Over three months but within six months		4,803
Over six months but within twelve months		10,182
Over twelve months		15,030
Total	$	32,363

Liquidity

Liquidity represents the Corporation’s ability to efficiently manage cash flows at reasonable rates to support possible commitments to borrowers or the demands of depositors. Liquidity is essential to compensate for fluctuations in the balance sheet and provide funds for growth and normal operating expenditures. Liquidity needs may be met by converting assets into cash or obtaining sources of additional funding.

Sources of asset liquidity are provided through cash, amounts due from banks, interest-bearing deposits with banks and federal funds sold, which totaled $2,345,000 at December 31, 2006 as compared to $5,469,000 at December 31, 2005. Additional liquidity sources include principal payments on securities in the Bank’s securities portfolio and cash flow from its amortizing loan portfolio. Selling securities available-for-sale, selling loans or raising additional capital may be used to meet longer-term liquidity needs. At December 31, 2006, available-for-sale securities totaling $36,705,000 were available for liquidity purposes as compared with $42,021,000 at December 31. 2005.

Liability liquidity sources include attracting deposits at competitive rates. Core deposits at December 31, 2006 totaled $63,435,000 as compared to $72,443,000 at December 31, 2005. The Bank has a $4 million federal funds line of credit with its main correspondent bank, Atlantic Central Bankers Bank. The Bank had federal funds purchased under this line at December 31, 2006 and 2005 of $357,000 and $0, respectively. The Bank also has established a line of credit and other credit facilities with the Federal Home Loan Bank, which are reliable sources for short and long-term funds. Maximum borrowing capacity with the Federal Home Loan Bank is approximately $116,477,000.

Management is not aware of any demands, trends, commitments, or events that would result in the Bank’s inability to meet anticipated or unexpected needs.

Contractual Obligations

The following table represents the aggregate contractual obligations to make future payments as of December 31, 2006.

	Less than		1-3		3-5		Over 5
	1 Year		Years		Years		Years		Total
(In Thousands)
Time Deposits	$	56,519	$	24,864	$	20,502		—	$	101,885

41

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

Off-Balance Sheet Arrangements

The Corporation’s financial statements do not reflect off-balance sheet arrangements that are made in the normal course of business. Those off-balance sheet arrangements consist of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. These commitments at December 31, 2006 totaled $6,237,000. This consisted of $382,000 in tax-exempt loans, commercial real estate, construction, and land development loans, $4,238,000 in home equity lines of credit, $665,000 in standby letters of credit and the remainder in other unused commitments. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation.

Management believes that any amounts actually drawn upon can be funded in the normal course of operations. The Corporation has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.

Stockholders’ Equity and Capital Requirements/Ratios

The net effect of the activity in stockholders’ equity resulted in an increase of $1,928,000 in total stockholders’ equity to $41,222,000 at December 31, 2006 from $39,294,000 at December 31, 2005. Stockholders’ equity increased in 2006 as a result of an increase in retained earnings of $2,031,000, offset by an increase in accumulated other comprehensive loss of $103,000 at December 31, 2006. The Bank had $947,000 in net unrealized losses on available-for-sale securities, as compared to the $844,000 loss at December 31, 2005. FAS 115 requires banks to report securities classified as “available-for-sale” at fair value, with unrealized gains or losses, net of deferred income taxes, reported as a separate component of stockholders’ equity. The FAS 115 adjustment is not included in the Corporation’s calculations of regulatory capital ratios.

The Corporation places a significant emphasis on maintaining a strong capital base. The goals for capital planning are to build a strong capital base to allow for future growth, to support risks inherent in the banking industry, to retain earnings to meet regulatory requirements and to provide an adequate return to stockholders.

Current capital guidelines issued by federal regulatory authorities require the Corporation and the Bank to meet minimum risk-based capital ratios in an effort to make regulatory capital more responsive to the risk exposure related to on and off-balance sheet items.

Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. Risk-based capital guidelines redefine the components of capital, categorize assets into risk classes and include certain off-balance sheet items in the calculation of capital requirements. The components of risk-based capital are segregated as Tier I and Tier II capital. Tier I capital is composed of total stockholders’ equity reduced by goodwill and other intangible assets. Tier II capital is comprised of the allowance for loan losses and any qualifying debt obligations. Risk-based capital standards require the Corporation and the Bank to have Tier I capital of at least 4% and total capital (including Tier I capital) of at least 8% of risk-weighted assets.

The Corporation and the Bank are also subject to leverage capital requirements. This requirement compares capital (using the definition of Tier I capital) to average balance sheet assets and is intended to supplement the risk-based capital ratio in measuring capital adequacy. The guidelines set a minimum leverage ratio of 3% for institutions that are highly rated in terms of safety and soundness, and which are not experiencing or anticipating any significant growth. Other institutions are expected to maintain capital levels of at least 1% or 2% above the minimum. As of December 31, 2006, the Bank has a Tier I leverage ratio of 19.4%.

42

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

A comparison of the Bank’s risk-based capital ratios and leverage ratios is shown in the following table. The Corporation’s ratios are not significantly different.

	December 31,			December 31,
	2006			2005
	(Dollars in Thousands)
Tier I, common stockholders’ equity	$	41,723		$	39,621
Tier II, allowable portion of allowance for loan losses		653			657
Total capital	$	42,376		$	40,278
Tier I risk-based capital ratio		40.64	%		40.60	%
Tier II risk-based capital ratio		41.27	%		41.20	%

At December 31, 2006 and 2005, the Bank exceeded the minimum regulatory capital requirements to be considered a “well capitalized” financial institution under applicable federal regulations.

Banking laws and regulations limit the amount of dividends that may be paid by the Bank to the Corporation without prior approval of the Bank’s regulatory agency. These restrictions have not had, and are not expected to have, a significant impact on the Corporation’s ability to pay dividends.

Effect of Inflation

The majority of assets and liabilities of the Corporation are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The precise impact of inflation upon the Bank is difficult to measure. Inflation may affect the borrowing needs of consumers, thereby impacting the growth rate of the Corporation’s assets. Inflation may also affect the general level of interest rates, which can have a direct bearing on the Corporation.

Management believes the most significant impact on the financial results is the Corporation’s ability and timing to react to changes in interest rates. On an ongoing basis, management attempts to maintain an essentially balanced position between interest sensitive assets and liabilities, where such balancing is dependent on whether there is a rising or falling interest rate environment.

Interest Rate Sensitivity and Market Risk

In the normal course of conducting business activities, the Corporation is exposed to market risk, principally interest rate risk. Interest rate risk arises from market driven fluctuations in interest rates that may affect cash flows, income, expenses and the values of financial instruments. The Asset/Liability Committee manages interest rate risk.

The operations of the Corporation do not expose it to foreign currency exchange or commodity price risks. Also, the Corporation does not utilize interest rate swaps, caps or other hedging transactions. The Corporation does not own any trading assets.

The principal objective of the asset/liability management activities is to provide consistently higher levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Corporation. The Corporation utilizes an interest rate sensitivity model as the primary quantitative tool in measuring the amount of interest rate risk that is present. The traditional maturity “gap” analysis, which reflects the volume difference between interest rate sensitive assets and liabilities during a given time period, is

43

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

reviewed quarterly by management and the Asset Liability Committee (ALCO) of the Bank. A positive gap occurs when the amount of interest sensitive assets exceeds interest sensitive liabilities. This position would contribute positively to net income in a rising rate environment. Conversely, if the balance sheet is liability sensitive or negatively gapped, this position would contribute positively to net income in a falling rate environment. Management continues to monitor sensitivity in order to avoid overexposure to changing interest rates, while maintaining adequate capital and liquidity levels. Adjustments to the mix of assets and liabilities are made periodically in an effort to give the Bank dependable and steady growth in net interest income regardless of the behavior of interest rates in general.

Another method used by management to review its interest sensitive position is through “simulation”. In simulation, the Bank projects the future net interest streams in light of the current gap position. Various interest rate scenarios are used to measure levels of interest income associated with potential changes in our operating environment. Management cannot measure levels of interest income associated with potential changes in the Bank’s operating environment. Nor can it predict the direction of interest rates or how the mix of assets and liabilities will change. The use of this information will help formulate strategies to minimize the unfavorable effect on net interest income caused by interest rate changes.

A simple rate “gap” analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates. In the event of a change in interest rates, prepayments and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. Because of uncertainties, the Corporation utilizes more than one measurement tool in assessing interest rate sensitivity and market risk.

As of December 31, 2006 the Corporation was more negatively gapped than at December 31, 2005 in terms of its “One Year” gap position. A negative gap position reflects the volume of interest rate sensitive liabilities to be greater than the volume of interest rate sensitive assets. In consideration of interest rates decreasing, it is preferable to be in a negatively gapped position since there are more interest rate sensitive liabilities that are either maturing or whose interest rates will be repricing downward, quicker than the maturity/repricing of the interest rate sensitive assets. This will enhance the Corporation’s bottom line by improving the Corporation’s net interest rate spread since it is expected that interest expense will decrease faster than interest income.

The Corporation’s overall sensitivity to interest rate risk is low due to its non-complex balance sheet. The Corporation has the ability to expedite several strategies to manage interest rate risk, which include but are not limited to selling of residential mortgages, increasing/decreasing deposits via interest rate changes, borrowing from the Federal Home Loan Bank of Pittsburgh, and buying/selling investments.

44

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

The following table represents the gap position for the Bank at December 31, 2006. This schedule summarizes how many fixed rate assets and liabilities will pay down over the periods of time defined in the table.

	Maturity/Repricing Intervals
	1-3		3-12			1-3			3-5			Over 5
	Months		Months			Years			Years			Years		Total
	(In Thousands)
Federal funds sold	$	—	$	—		$	—		$	—		$	—	$	—
Interest bearing deposits with banks		—		144			—			—			—		144
Other securities		—		—			3,147			3,268			76,483		82,898
Mortgage-backed securities		2,118		6,425			5,594			4,987			18,340		37,464
Total securities		2,118		6,425			8,741			8,255			94,823		120,362
Total loans		29,814		17,768			15,969			8,546			15,974		88,071
Total interest earning assets		31,932		24,337			24,710			16,801			110,797		208,577
NOW Accounts		1,712		—			6,069			—			—		7,781
Savings		8,259		—			37,622			—			—		45,881
Total savings deposits		9,971		—			43,691			—			—		53,662
CDs<$100,000		7,823		31,363			19,274			11,063			—		69,523
CDs>$100,000		2,348		14,985			5,590			9,439			—		32,362
Total time deposits		10,171		46,348			24,864			20,502			—		101,885
Fed funds purchased		357		—			—			—			—		357
Total interest bearing liabilities		20,499		46,348			68,555			20,502			—		155,904
Rate sensitive gap	$	11,433	$	(22,011	)	$	(43,845	)	$	(3,701	)	$	110,797	$	52,673
Cumulative gap	$	11,433	$	(10,578	)	$	(54,423	)	$	(58,124	)	$	52,673		—

45

Neffs Bancorp, Inc. and Subsidiary

Management’s Discussion and Analysis

Regulatory Activity

From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Corporation. It cannot be predicted whether such legislation will be adopted or, if adopted, how such legislation would affect the business of the Corporation. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank’s business is particularly susceptible to being affected by federal regulation and regulations that may increase the cost of doing business. It is estimated that the costs associated with Sarbanes-Oxley Regulation 404 and SEC filings could exceed $125,000 for 2007. Except as specifically described above, management believes that the effect of the provisions of the aforementioned legislation on the liquidity, capital resources, and the results of operations of the Bank will be immaterial. Management is not aware of any other current specific recommendations or proposals by regulatory authorities that will impact the Corporation’s or the Bank’s, operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Corporation’s results of operations.

Further, the business of the Corporation is also affected by the state of the financial services industry in general. As a result of legal and industry changes, management predicts that the industry will continue to experience a certain amount of consolidations and mergers. Management believes that such consolidations and mergers may enhance it competitive position as a community bank.

Form 10-K

The Corporation will provide, without charge to any stockholder, a copy of its 2006 Annual Report on Form 10-K as required to be filed with the Securities and Exchange Commission. Requests should be made in writing to:

Neffs Bancorp, Inc.
P.O. Box 10
Neffs, PA 18065

46

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, John J. Remaley, President and Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Neffs Bancorp, Inc.;

2. Based on my knowledge, the annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

     (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

     (b) intentionally omitted;

     (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based upon 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; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial

reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to

47

adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 26, 2007	By:	/s/John J. Remaley
	President & CEO

48

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Kevin A. Schmidt, Principal Financial Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Neffs Bancorp, Inc.;

2. Based on my knowledge, the annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

     (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our

supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

     (b) intentionally omitted;

     (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our

conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based upon 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; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial

reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to

49

adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 26, 2007	By:	/s/ Kevin A. Schmidt
	Principal Financial Officer

50

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this annual report on Form 10K, that:

• the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities and Exchange Act of 1934, as amended, and

• the information contained in the report fairly presents, on all material respects, the Company’s financial condition and results of operations.

/s/ John J. Remaley
John J. Remaley, Chief Executive Officer

Dated: March 26, 2007

51

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this annual report on Form 10K, that:

• the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities and Exchange Act of 1934, as amended, and

• the information contained in the report fairly presents, on all material respects, the Company’s financial condition and results of operations.

/s/ Kevin A. Schmidt
Kevin A. Schmidt, Principal Financial Officer

Dated: March 26, 2007

52