-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OYLA6he57CQcwmAcE945xK3vKRMR3jsJnM+DZWZN3/fHHQztUwMdrMPptcAI7MUb ssXlWRoUD3S7c3vf+9v0Cw== 0000893220-04-001679.txt : 20040811 0000893220-04-001679.hdr.sgml : 20040811 20040811125028 ACCESSION NUMBER: 0000893220-04-001679 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEFFS BANCORP INC CENTRAL INDEX KEY: 0000797838 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232400383 STATE OF INCORPORATION: PA FISCAL YEAR END: 1201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-32605 FILM NUMBER: 04966413 BUSINESS ADDRESS: STREET 1: 5629 ROUTE 873 STREET 2: P.O. BOX 10 CITY: NEFFS STATE: PA ZIP: 18065 BUSINESS PHONE: 6107673875 10-Q 1 w00153e10vq.txt FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File 000-32605 NEFFS BANCORP, INC. --------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2400383 - ----------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification incorporation or organization) No.) 5629 PA Route 873, P.O. Box 10, Neffs, PA 18065-0010 -------------------------------------------------------------- (Address of principal executive offices) (610) 767-3875 ---------------------------------------------- (Issuer's telephone number) 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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes ( ) No (X) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of 6/30/04, 197,091 shares of common stock, par value of $1.00, were outstanding. 1 NEFFS BANCORP, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Statements of Financial Condition (Unaudited) June 30, 2004 and December 31, 2003................................................................. 3 Consolidated Statements of Income (Unaudited) Three months ended June 30, 2004 and June 30, 2003 Six months ended June 30, 2004 and June 30, 2003.................................................... 4 Consolidated Statements of Stockholders' Equity (Unaudited) Six months ended June 30, 2004 and June 30, 2003.................................................... 5 Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2004 and June 30, 2003.................................................... 6 Notes to the Interim Consolidated Financial Statements (Unaudited).................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................... 20 Item 4. Controls and Procedures............................................................................. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................................................... 21 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.................... 21 Item 3. Defaults Upon Senior Securities..................................................................... 21 Item 4. Submission of Matters to a Vote of Security Holders................................................. 21 Item 5. Other Information................................................................................... 22 Item 6. Exhibits and Reports on Form 8-K.................................................................... 22 SIGNATURES ................................................................................................... 23
2 NEFFS BANCORP, INC AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
June 30, December 31, Dollars in thousands, except share data 2004 2003 -------- ------------ ASSETS Cash and due from banks $ 4,959 $ 4,806 Interest bearing deposits with banks 26 46 Federal funds sold 3,178 9,390 Securities available for sale 39,023 27,382 Securities held to maturity, fair value $85,105 in 2004;$84,880 in 2003 82,136 82,705 Loans 73,018 70,886 Less allowance for loan losses (663) (637) -------- --------- Net loans 72,355 70,249 -------- --------- Premises and equipment, net 2,298 2,355 Other assets 2,099 1,637 -------- --------- Total assets $206,074 $ 198,570 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits Non-interest bearing $ 13,509 $ 13,107 Interest bearing 156,151 149,587 -------- --------- Total Deposits 169,660 162,694 Other liabilities 736 821 -------- --------- Total liabilities 170,396 163,515 -------- --------- Stockholders' Equity Common stock, $1 par value, authorized 2,500,000 shares; issued 200,000 shares; outstanding 197,091 shares 200 200 Paid-in capital 690 690 Retained earnings 36,048 34,853 Accumulated other comprehensive loss (698) (126) Treasury stock, at cost 2,909 shares (562) (562) -------- --------- Total stockholders' equity 35,678 35,055 -------- --------- Total liabilities and stockholders' equity $206,074 $ 198,570 ======== =========
See Notes to Consolidated Financial Statements. 3 NEFFS BANCORP, INC AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended Dollars in thousands,except per share data June 30, June 30, 2004 2003 2004 2003 ------------------- ------------------- Interest income: Interest and fees on loans $ 1,194 $ 1,253 $ 2,359 $ 2,519 Interest and dividends on investments: Taxable 766 627 1,468 1,304 Exempt from federal income taxes 541 568 1,107 1,110 Interest on federal funds sold and other 10 40 33 71 -------- -------- -------- -------- Total interest income 2,511 2,488 4,967 5,004 -------- -------- -------- -------- Interest Expense: Interest on deposits 996 1,115 2,049 2,231 -------- -------- -------- -------- Total interest expense 996 1,115 2,049 2,231 -------- -------- -------- -------- Net interest income 1,515 1,373 2,918 2,773 -------- -------- -------- -------- Provision for loan losses 15 15 30 30 -------- -------- -------- -------- Net interest income after provision for loan losses 1,500 1,358 2,888 2,743 Other income: Service charges on deposit accounts 40 44 81 90 Other service charges and fees 18 31 30 45 Other income 7 2 12 12 -------- -------- -------- -------- Total other income 65 77 123 147 -------- -------- -------- -------- Other expenses: Salaries and employee benefits 272 275 551 542 Occupancy 37 47 69 75 Furniture and equipment 39 35 78 70 Pennsylvania shares tax 81 78 162 153 Other expenses 218 131 346 275 -------- -------- -------- -------- Total other expenses 647 566 1,206 1,115 -------- -------- -------- -------- Income before income taxes 918 869 1,805 1,775 Income tax expense 142 114 265 250 -------- -------- -------- -------- Net income $ 776 $ 755 $ 1,540 $ 1,525 ======== ======== ======== ======== Per share data: Earnings per share, basic $ 3.94 $ 3.84 $ 7.81 $ 7.76 ======== ======== ======== ======== Weighted average common shares outstanding 197,091 196,431 197,091 196,431 ======== ======== ======== ======== Cash dividends declared per share $ 1.75 $ 1.20 $ 1.75 $ 1.20 ======== ======== ======== ========
See Notes to Consolidated Financial Statements. 4 NEFFS BANCORP, INC AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Accumulated Additional Other Total Common Paid-In Retained Comprehensive Treasury Stockholders' Dollars in thousands, except per share data Stock Capital Earnings Income Stock Equity ----- ------- -------- ------ ----- ------ Balance, December 31, 2002 $ 200 $ 609 $32,610 $ 21 $ (615) $ 32,825 -------- Comprehensive Income: Net income - - 1,525 - - 1,525 Change in unrealized net gains on securities available for sale, net of tax 39 39 -------- Total comprehensive income 1,564 ======== Cash dividends declared on common stock, $1.20 per share - - (236) - - (236) ----- ----- ------- ---- ------ -------- Balance, June 30, 2003 $ 200 $ 609 $33,899 $ 60 $ (615) $ 34,153 ===== ===== ======= ==== ====== ========
Accumulated Additional Other Total Common Paid-In Retained Comprehensive Treasury Stockholders' Dollars in thousands, except per share data Stock Capital Earnings Income Stock Equity ----- ------- -------- ------ ----- ------ Balance, December 31, 2003 $ 200 $ 690 $34,853 $ (126) $ (562) $ 35,055 -------- Comprehensive Income: Net income - - 1,540 - - 1,540 Change in unrealized net gains(losses) on securities available for sale, net of tax (572) (572) -------- Total comprehensive income 968 -------- Cash dividends declared on common stock, $1.75 per share - - (345) - - (345) ----- ----- ------- ------ ------ -------- Balance, June 30, 2004 $ 200 $ 690 $36,048 $ (698) $ (562) $ 35,678 ===== ===== ======= ====== ====== ========
See Notes to Consolidated Financial Statements. 5 NEFFS BANCORP, INC AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Dollars in thousands Six Months Ended June 30, 2004 2003 -------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,540 $ 1,525 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 63 53 Provision for loan losses 30 30 Net amortization (accretion) of securities 84 (9) Change in assets and liabilities: (Increase) decrease in: Accrued interest receivable (46) (78) Income taxes receivable 12 (228) Other assets (143) (13) Decrease in: Accrued interest payable (78) (77) Other liabilities (7) (19) -------- ---------- Net cash provided by operating activities 1,455 1,184 -------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest bearing deposits with banks 20 (25) Net (increase) decrease in federal funds sold 6,212 (2,772) Purchase of securities available for sale (16,220) (11,468) Proceeds from maturities/calls of securities available for sale 3,609 2,274 Purchase of securities held to maturity (6,165) (22,890) Proceeds from maturities/calls of securities held to maturity 6,753 25,702 Net (increase) decrease in loans (2,136) 750 Purchases of premises and equipment (6) (45) Proceeds from sale of foreclosed real estate 10 - -------- ---------- Net cash used in investing activities (7,923) (8,474) -------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 6,966 10,268 Dividends paid (345) (236) -------- ---------- Net cash provided by financing activities 6,621 10,032 -------- ---------- Increase in cash and cash equivalents 153 2,742 Cash and cash equivalents: Beginning 4,806 2,732 -------- ---------- Ending $ 4,959 $ 5,474 ======== ========== Supplementary Cash Flows Information Interest Paid $ 2,127 $ 2,308 ======== ========== Income Taxes Paid $ 585 $ 621 ======== ==========
See Notes to Consolidated Financial Statements. 6 NEFFS BANCORP, INC. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The 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 accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for the six-month period ended June 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These statements should be read in conjunction with notes to the financial statements contained in the 2003 Annual Report to Stockholders. For further information, refer to the financial statements and footnotes thereto included in the Neffs Bancorp, Inc. Annual Report for the year ended December 31, 2003. NOTE 2. COMMITMENTS AND CONTINGENCIES The Corporation is subject to certain routine 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 or results of operations. 7 NOTE 3. COMPREHENSIVE INCOME The components of other comprehensive income and related tax effects for the six months and three months ended June 30, 2004 and 2003 are as follows:
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- (In Thousands) Unrealized holding gains (losses) on $(1,128) $ (42) $ (867) $ 59 available for sale securities Tax effect 418 14 295 (20) ------- ------- ------- ------- Other comprehensive income (loss), net of tax $ (810) $ (28) $ (572) $ 39 ======= ======= ======= =======
NOTE 4. 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. NOTE 5. GUARANTEES The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation, generally, holds collateral and/or personal guarantees supporting these commitments. The Corporation has $318,000 of standby letters of credit as of June 30, 2004. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of June 30, 2004 for guarantees under standby letters of credit issued is not material. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Corporation's balance sheets and statements of income. This section should be read in conjunction with the Corporation's financial statements and accompanying notes. Management of the Corporation has made forward-looking statements in this Form 10-Q. These forward-looking statements may be subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of the Corporation and its subsidiary. When words such as "believes," "expects," "anticipates" or similar expressions occur in this Form 10-Q, management is making forward-looking statements. Readers should note that many factors, some of which are discussed elsewhere in this report and in the documents that management incorporates by reference, could affect the future financial results of the Corporation and its subsidiary, both individually and collectively, and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this Form 10-Q. These factors include the following: * operating, legal and regulatory risks; * economic, political and competitive forces affecting banking, securities, asset management and credit services businesses; and * the risk that management's analyses 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 to the financial statements of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses. Additional information is contained in this Form 10-Q on page 11 9 under the paragraph titled "Provision for Loan Losses" and on page 14 under the paragraphs titled "Loan and Asset Quality and Allowance for Loan Losses". OVERVIEW Net income for the second quarter of 2004 increased 2.8% to $776,000 as compared to $755,000 for the second quarter of 2003 and total revenues increased .4% from $2.565 million to $2.576 million for the quarter. Net income per common share increased 2.6% to $3.94 per share from $3.84 per share in the second quarter a year ago. At June 30, 2004, the Corporation had total assets of $206 million, total loans of $72.4 million, and total deposits of $169.7 million. RESULTS OF OPERATIONS Average Balances and Average Interest Rates Interest earning assets averaged $197.1 million for the second quarter of 2004 as compared to $178.9 million for the same period in 2003. The yield on earning assets for the second quarter of 2004 was 5.1%, a decrease of 46 basis points over the comparable period in 2003. The growth in interest earning assets was funded primarily by an increase of $14 million in the average balance of deposits. Average interest-bearing liabilities increased from $141.9 million during the second quarter of 2003 to $155.9 million during the second quarter of 2004. Growth in average interest bearing liabilities was the result of increases in interest bearing demand deposits, savings, and time deposits of $467,000, $12.2 million, and $1.4 million, respectively. Deposit account growth was attributed to the banks favorable interest rate structure combined with the general decline in confidence in the stock market. The average rate paid on interest-bearing liabilities was 2.6% for the second quarter of 2004 and 3.1% for the second quarter of 2003, a decrease of 50 basis points. This was the result of the declining interest rate environment that was experienced during much of year 2003. Net Interest Income and Net Interest Margin Net interest income is the difference between interest income earned on assets and interest expense incurred on liabilities used to fund those assets. Interest earning assets primarily include loans and securities and Federal Funds Sold. Liabilities used to fund such assets include deposits and borrowed funds. Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, related yields and associated funding costs. Interest income increased by $23,000, or .9% over the second quarter of 2003. The increase in interest income is attributed to the slight rise in interest rates on the Bank's loan and securities portfolios and the increase in average earning assets. Interest expense for the second quarter of 2004 decreased by $119,000, or 10.7%, compared to the second quarter of 2003. The decrease was due to the general decline in rates being offered and paid on interest bearing deposits, mainly certificates of deposit and savings accounts. 10 Net interest income increased by $142,000 or 10.3% over the second quarter of 2003. As marketplace rates continued to decrease on loans and securities, the Corporation reduced rates being offered on interest bearing deposit accounts. Net income for the second quarter of 2004 continued to be positively affected by those downward rate adjustments. For the six months ended June 30, 2004, interest income decreased by $37,000 or ..7%, over the same period in 2003. The decrease for the first six months was mostly related to the declining interest rates and the level of average securities outstanding. Interest earning assets for the first six months of 2004 averaged $194.9 million versus $177.5 million for the comparable period in 2003. The yield on those assets decreased to 5.1% during the first half of 2004, from 5.6% for the first half of 2003. Interest expense for the first six months of 2004 declined $182,000 or 8.2% for the first six months of 2004. The level of average interest-bearing liabilities increased from $139.2 million for the first half of 2003 to $154.2 million for the first six months of 2004. The average rate paid for the first half of 2004 was 2.7%, down 50 basis points from 3.2% for the comparable period in the prior year. Net interest income for the first six months of 2004 increased by $145,000 or 5.2% over the same period in 2003. The company's net interest margin decreased to 3.0% for the first six months of 2004, from 3.1% from the first half of 2003. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average earning assets. Net interest margin for the second quarter of 2004 was 3.1%, which remained unchanged from the same period of 2003. During the second quarter of 2004, yields on earning assets declined to 5.1% from 5.6% in 2003, yields on interest bearing deposits decreased to 2.6%, as compared to 3.1%, for the second quarter of 2003. Provision for Loan Losses The provision for loan losses remained unchanged at $15,000 during the second quarter of 2004 as compared to the second quarter of 2003. There were minimal changes in the loan portfolio both in size and quality as compared to the second quarter of 2003, therefore the provision for loan losses remained consistent. Non-interest Income Non-interest income for the second quarter of 2004 decreased by $12,000, or 15.6% from the same period in 2003. The decrease was attributable to decreases in fee income derived from the sale of loan related insurance and the reduction of deposit account service charges. Recurring core noninterest income for the first six months of 2004 was $111,000 as compared to $135,000 for the first half of 2003, a decrease of 17.8%. The decrease is mainly 11 attributable to a decrease in deposit account service charge income and fee income derived from the sale of loan related insurance. Non-interest Expense For the second quarter of 2004, non-interest expenses increased by $81,000, or 14.3%, to $647,000, compared to $566,000 over the same period in 2003. This increase is primarily the result of an increase in miscellaneous expenses. Salary expenses and employee benefits, which represent the largest component, 42%, of non-interest expenses, decreased by $3,000, or 1%, for the second quarter of 2004. This slight decrease is due to the retirement of an executive officer. Occupancy expense for the second quarter of 2004 decreased by $10,000 or 21.3% as compared to the second quarter of 2003. This decrease in occupancy expenses is mostly related to roof repairs of the main office that were completed in the second quarter of 2003. Furniture and equipment expenses for the second quarter of 2004 increased by $4,000 or 11.4% as compared to the second quarter of 2003. This increase is due to increased depreciation expense on equipment additions. Other expenses increased by $87,000 or 66.4% throughout the second quarter of 2004 as compared to the second quarter of 2003. This increase is mostly related to a $50,000 donation made to Northern Lehigh School District Educational Foundation. The Bank will receive a 90% or $45,000 state tax credit to offset this donation For the first six months of 2004, non-interest expense increased by $91,000 or 8.2% over the same period in 2003. Salary expenses and employee benefits, which represents the largest component, 45.7%, of non-interest expenses, increased by $9,000 or 1.7%, over the first six months of 2003. The increase was due to normal salary adjustments and hiring of additional staff, partially offset by the retirement of an executive officer as mentioned above. Occupancy and furniture and equipment expenses for the first six months of 2004 remained relatively unchanged as compared to the first half of 2003. Net other expenses increased by $71,000 or 25.8% for the first six months ended June 30, 2004 over the first half of 2003. This increase is mostly related to a $50,000 donation made to Northern Lehigh School District Educational Foundation. The Bank will receive a 90% or $45,000 state tax credit to offset this donation. One key measure used to monitor progress in controlling overhead expenses is the ratio of net non-interest expense to average assets. Net non-interest expenses equal noninterest expenses (excluding foreclosed real estate expenses) less non-interest income (exclusive of nonrecurring gains), divided by average assets. This annualized ratio was 1.13% for the 12 three months ended June 30, 2004, slightly higher than 1.03% for the three months ended June 30, 2003. It was 1.06% for the first six months of 2004 compared to 1.04% for the comparable period in 2003. Another productivity measure is the operating efficiency ratio. This ratio expresses the relationship of non-interest expenses (excluding foreclosed real estate expenses) to net interest income plus noninterest income (excluding nonrecurring gains). For the quarter ended June 30, 2004, the operating efficiency ratio was 41.0% compared to 39.0% for the similar period in 2003. For the six months ended June 30, 2004, this ratio was 39.7% compared to 38.2% for the six months ended June 30, 2003. Provision for Federal Income Taxes The provision for federal income taxes was $142,000 for the second quarter of 2004, as compared to $114,000 for the same period in 2003. For six months ended June 30, the provision was $265,000 and $250,000 for 2004 and 2003, respectively. The effective tax rate, which is the ratio of income tax expense to income before income taxes, was 15.5% for the second quarter of 2004 and 13.1% for the second quarter of 2003, due to lower tax exempt interest. The effective tax rate for the first six months of 2004 and 2003 were 14.7% and 14.1%, respectively. Net Income Net income for the second quarter of 2004 was $776,000, an increase of $21,000 or 2.8% over the $755,000 recorded in the second quarter of 2003. This increase was mainly due to the favorable interest rate climate as deposit account growth funded higher yielding securities. Net income for the first six months of 2004 remained relatively constant at $1.5 million as compared to the same period of 2003. This was mainly due to a favorable interest rate climate, enhanced by growth in short term; low rate deposits accounts and subsequent growth in higher yielding securities. Return on Average Assets Return on average assets (ROA) measures the Corporation's net income in relation to its total average assets. The Corporation's annualized ROA for the second quarter of 2004 was 1.5% compared to 1.6% for the second quarter of 2003. The ROA for the first six months of 2004 was 1.5% as compared to 1.6% for the same period in 2003. Return on Average Equity Return on average equity (ROE) indicates how effectively the Corporation can generate net income on the capital invested by its stockholders. ROE is calculated by dividing net income by average stockholders' equity. For purposes of calculating ROE, average stockholders' equity includes the effect of unrealized gains or losses, net of income taxes, on securities 13 available for sale. The annualized ROE for the second quarter of 2004 was 8.7% as compared to 8.9% for the second quarter of 2003. The ROE for the first six months of 2004 was 8.6% as compared to 9.1% for the same period of 2003. FINANCIAL CONDITION Securities During the first six months of 2004 securities available for sale increased by $11.6 million from $27.4 million at December 31, 2003 to $39 million at June 30, 2004. This increase is a result of increased purchases of mortgage-backed securities. The securities available for sale portfolio is comprised of mortgage-backed securities and equity securities. Federal funds sold decreased by $6.2 million from $9.4 million to $3.2 million during the first six months of 2004 from December 31, 2003. This decrease was due mainly to purchases of securities available for sale and held to maturity, which were offset by calls of bonds and continued growth in deposit accounts. Total securities and federal funds sold aggregated $124.3 million at June 30, 2004, and represented 60% of total assets. The average yield on the combined securities portfolio for the first six months of 2004 was 4.4% as compared to 5.0% for the similar period of 2003. For the second quarter of 2004, the average yield on the combined securities portfolio was 4.3% as compared to 4.9% for the same period in 2003. The weighted average life of the combined securities portfolio was approximately 12 years at June 30, 2004 with a weighted yield of 4.30% as compared to 4.5% for the same period in 2003. Net Loans Receivable During the first six months of 2004 net loans receivable increased by $2.2 million from $70.2 million at December 31, 2003, to $72.4 million on June 30, 2004. Loans receivable represented 42.7% of total deposits and 35.1% of total assets at June 30, 2004, as compared to 43.2% and 35.4%, respectively, at December 31, 2003. Loan and Asset Quality and Allowance for Loan Losses As of June 30, 2004, total loans receivable increased $2.2 million as compared to December 31, 2003. Total non-performing assets (non-performing loans and foreclosed real estate, excluding loans past due 90 days or more and still accruing interest) at June 30, 2004, were $173,000, or .08%, of total assets as compared to $148,000, or ..08%, of total assets at December 31, 2003. There was no foreclosed real estate held by the Corporation as of June 30, 2004 as compared to $10,000 held at December 31, 2003. 14 The following summary table presents information regarding non-performing loans and assets as of June 30, 2004 and December 31, 2003. 15 NONPERFOMING LOANS AND ASSETS (Dollars in Thousands)
June 30 December 31, 2004 2003 Nonaccrual Loans: Commercial $ - $ - Consumer 6 - Real Estate: Construction - - Mortgage 167 148 -------- ------- Total nonaccrual 173 148 Restructured loans - - -------- ------- Total nonperforming loans 173 148 Foreclosed real estate - 10 -------- ------- Total nonperforming assets 173 158 Loans past due 90 days or more 34 327 -------- ------- Total nonperforming assets and loans past due 90 days or more $ 207 $ 485 ======== ======= Nonperforming loans to total loans 0.24% 0.67% Nonperforming assets to total assets 0.08% 0.08%
The following table sets forth the company's provision and allowance for loan losses. ALLOWANCE FOR LOAN LOSSES (Dollars in Thousands)
6 months 6 months Ending Ending June 30 June 30 2004 2003 Balance at beginning of period $ 637 $ 564 Provisions charged to operating expenses 30 30 Recoveries of loans previously charged-off - Commercial - 9 Consumer - 10 Real Estate - - -------- ------- Total Recoveries - 19 Loans Charged Off: Commercial - - Consumer - (2) Real Estate (4) - -------- ------- Total Charged-off (4) (2) -------- ------- Net (Charge-offs) recoveries (4) 17 -------- ------- Balance at end of period $ 663 $ 611 ======== ======= Net charge-offs as a percentage of average loans outstanding 0.00% (0.01%) Allowance for loan losses as a percentage of period-end loans 0.91% 0.86%
16 Deposits Total deposits at June 30, 2004, were $169.7 million, up $7 million, or 4.3%, over total deposits of $162.7 million at December 31, 2003. The average balances for the first six months of 2004 and 2003 are presented in the following table: Six Months Ended June 30, (Dollars in thousands)
2004 2003 Average Average Average Average Balance Rate Balance Rate ------- ---- ------- ---- Demand Deposits: Noninterest-bearing $ 13,269 $ 13,462 Interest-bearing 8,788 .60% 8,304 .96% Savings 68,280 1.64% 57,026 1.94% Time deposits: <$100,000 54,168 3.56% 54,542 4.25% >$100,000 22,358 4.42% 21,341 4.82% -------- -------- Total Deposits $166,863 $154,675 ======== ========
Interest Rate Sensitivity The management of interest rate sensitivity seeks to avoid fluctuating net interest margins and to provide consistent net interest income through periods of changing interest rates. The Corporation's risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is composed primarily of interest rate risk. The primary objective of the Corporation's asset/liability management activities is to maximize net interest income while maintaining acceptable levels of interest rate risk. The Bank's Asset/Liability Committee (ALCO) is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with those policies. The Corporation's Board of Directors approves the guidelines established by ALCO. An interest rate sensitive asset or liability is one that, within a defined period, either matures or experiences an interest rate change in line with general market interest rates. Historically, the most common method of estimating interest rate risk was to measure the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (GAP), typically one year. Under this method, a company is considered liability sensitive when the amount of its interest-bearing liabilities exceeds the amount of its interest-earning assets within the one-year horizon. However, assets and liabilities with similar repricing characteristics may not reprice at the same time or to the 17 same degree. As a result, the Corporation's GAP does not necessarily predict the impact of changes in general levels of interest rates on net interest income. Management believes the simulation of net interest income in different interest rate environments provides a more meaningful measure of interest rate risk. Income simulation analysis captures not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them. The Corporation's income simulation model analyzes interest rate sensitivity by projecting net interest income over the next 12 months in a flat rate scenario versus net income in alternative interest rate scenarios. Management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, the Corporation's model projects a proportionate 200 basis point change during the next year. The Corporation's ALCO policy has established that income sensitivity will be considered acceptable if overall net income volatility in a plus or minus 200 basis point scenario is within 5% of net interest income in a flat rate scenario. At June 30, 2004, the Corporation's simulation model indicates net interest income would increase 3.4% within the first year if rates increased as described above. The model projects that net interest income would decrease by 3.7% in the first year if rates decreased as described above. All of these forecasts are within an acceptable level of interest rate risk per the policies established by ALCO. Liquidity Liquidity management involves the ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth and reduce assets to meet deposit withdrawals, to maintain reserve requirements, and to otherwise operate the Corporation on an ongoing basis. Liquidity needs are generally met by converting assets into cash or obtaining sources of additional funds, mainly deposits. Primarily cash and federal funds sold, and the cash flow from the amortizing securities and loan portfolios provide liquidity sources from asset categories. The primary source of liquidity from liability categories is the generation of additional core deposit balances. Additionally, the Corporation has established secondary sources of liquidity consisting of federal funds lines of credit and borrowing capacity at the Federal Home Loan Bank, which can be drawn upon if needed. In view of the primary and secondary sources as previously mentioned, management believes that the Corporation is capable of meeting its anticipated liquidity needs. 18 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 June 30, 2004 totaled $9.082 million. This consisted of $3.585 million in tax-exempt loans, commercial real estate, construction, and land development loans, $3.035 million in home equity lines of credit, $2.462 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. Capital Adequacy At June 30, 2004, stockholders' equity totaled $35.7 million, up 1.8% over stockholders' equity of $35.1 million at December 31, 2003. The increase in stockholders' equity for the six months ended June 30, 2004 included a $572,000 unrealized loss, net of income taxes, on securities available for sale. Excluding this unrealized loss, gross stockholders' equity changed by an increase of $1,195,000 in retained net income. Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. The risk-based capital standards require all banks to have Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders' equity together with related surpluses and retained earnings. Total capital may be comprised of total Tier 1 capital plus qualifying debt instruments, and the allowance for loan losses. 19 The following table provides a comparison of the Corporation's risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the periods indicated:
For Capital June 30, December 31, Adequacy 2004 2003 Purposes ---- ---- -------- Risk-Based Capital Ratios: Tier 1 Capital 40.55% 40.40% 4.00% Total Capital 41.29 41.10 8.00 Leveraged Capital 17.68 18.00 4.00
The Bank's Capital Ratio's are not materially different from that of the Corporation. At June 30 2004, the capital levels of the Bank met the definition of a "well capitalized" institution. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation's exposure to market risk has not changed significantly since December 31, 2003. The market risk principally includes interest rate risk, which is discussed in the Management's Discussion and Analysis above. ITEM 4. 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 June 30, 2004, the chief executive officer and principal financial officer of the Corporation concluded that the Corporation's disclosure controls and procedures were adequate. The Corporation made no changes in its internal controls or in other factors that has materially affected, or is reasonably likely to materially affect these controls during the quarter ended June 30, 2004, including any corrective actions with regard to significant deficiencies and material weaknesses. 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the opinion of the management of the Corporation, there are no proceedings pending to which the Corporation or its subsidiary are a party or to which their property is subject, which, if determined adversely to the Corporation or its subsidiary, would be material in relation to the Corporation's or its subsidiary's financial condition. There are no proceedings pending other than ordinary routine litigation incident to the business of the Corporation or its subsidiary. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation or its subsidiary by government authorities. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) An annual meeting of shareholders was held on May 12, 2004, at The NOVA Building, Coplay, PA. b) One matter was voted on at the May 12, 2004, meeting as follows:
Term Votes cast Votes against Director's Re-elected Expires for or withheld* --------------------- ------- --- ------------ Robert B. Heintzelman April, 2007 160,174 25 Kevin A. Schmidt April, 2007 158,384 1,815
*Includes broker nonvotes.
Directors whose term continued after the meeting: Term Expires - ------------------------------------------------- ------------ John J. Remaley April, 2005 Herman P. Snyder April, 2005 John F. Simock April, 2006 Mary Ann Wagner April, 2006
21 ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 3(i) Amended and Restated Articles of Incorporation for Neffs Bancorp, Inc. (Incorporated by reference to Exhibit 3 (i) to the Form 10 filed with the Commission on April 27, 2001, as amended on June 29, 2001 and July 20, 2001.) 3(ii) Amended and Restated By-laws of Neffs Bancorp, Inc. (Incorporated by reference to Exhibit 99.1 to the Form 8K filed with the Commission on February 27, 2002.) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 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) Reports on Form 8-K None. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEFFS BANCORP, INC. Date: 08/11/04 /s/ John J. Remaley John J. Remaley, President 23 EX-31.1 2 w00153exv31w1.txt CEO CERTIFICATION PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION I, John J. Remaley, Chief Executive Officer, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Neffs Bancorp, Inc. 2) Based on my knowledge, this quarterly 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 quarterly report. 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report. 4) The registrant's other certifying officer(s) 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 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) 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: (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are 24 reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date August 11, 2004 /s/John J. Remaley John J. Remaley Chief Executive Officer 25 EX-31.2 3 w00153exv31w2.txt CFO CERTIFICATION PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION I, Kevin A. Schmidt, Principal Financial Officer, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Neffs Bancorp, Inc. 2) Based on my knowledge, this quarterly 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 quarterly report. 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report. 4) The registrant's other certifying officer(s) 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 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) 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: (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are 26 reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date August 11, 2004 By: /s/ Kevin A. Schmidt Kevin A. Schmidt Principal Financial Officer 27 EX-32.1 4 w00153exv32w1.txt CEO CERTIFICATION PURSUANT TO SECTION 1350 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 Quarterly Report on Form 10-Q, 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: August 11, 2004 28 EX-32.2 5 w00153exv32w2.txt CFO CERTIFICATION PURSUANT TO SECTION 1350 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 Quarterly Report on Form 10-Q, 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: August 11, 2004 29 -----END PRIVACY-ENHANCED MESSAGE-----