Back to GetFilings.com
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, 2002
--------------
NEFFS BANCORP, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2400383
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5629 PA Route 873, P.O. Box 10, Neffs, PA l8065-0010
--------------------------------------------------------------
(Address of principal executive offices)
(610) 767-3875
----------------------------------------------
(Registrant'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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of 7/31/02, 196,431
shares of common stock, par value of $1.00, were outstanding.
NEFFS BANCORP, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition (Unaudited)............3
June 30, 2002, and December 31, 2001
Consolidated Statements of Income (Unaudited).........................4
Three months ended June 30, 2002 and 2001
Six months ended June 30, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity(Unaudited).5
Six months ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows (Unaudited).....................6
Six months ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements (Unaudited)................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........17
PART II. OTHER INFORMATION................................................... 18
Signatures...........................................................19
2
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
Dollars in thousands 2002 2001
---------------------------
ASSETS (Unaudited) (Audited)
Cash and due from banks $ 2,522 $ 2,909
Interest bearing deposits with banks 18 45
Federal funds sold 6,752 2,076
Securities available for sale 8,970 5,433
Securities held to maturity, market value
2002 $75,526; 2001 $69,593 75,045 70,221
Loans 71,723 72,616
Less allowance for loan losses (505) (446)
---------------------------
Net loans 71,218 72,170
---------------------------
Premises and equipment, net 2,334 2,319
Other assets 1,491 1,276
---------------------------
Total assets $ 168,350 $ 156,449
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 12,326 $ 11,593
Interest bearing 123,281 113,339
---------------------------
Total Deposits 135,607 124,932
Other liabilities 976 1,019
---------------------------
Total liabilities 136,583 125,951
---------------------------
Stockholder's Equity
Common stock, $1 par value, authorized 2,500,000 shares; issued 200,000
shares; outstanding 196,431 shares
in 2002 and 2001 200 200
Additional paid-in capital 609 609
Retained earnings 31,598 30,404
Accumulated other comprehensive loss, net of deferred
taxes $(13) and $(52) in 2002 and 2001, respectively (25) (100)
Less treasury stock, at cost, 3,569 shares in 2002 and 2001 (615) (615)
---------------------------
Total stockholders' equity 31,767 30,498
---------------------------
Total liabilities and stockholders' equity $ 168,350 $ 156,449
===========================
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,
2002 2001 2002 2001
--------------------------- --------------------------
Interest income:
Interest and fees on loans $ 1,383 $ 1,483 $ 2,765 $ 2,898
Interest and dividends on investments:
Taxable 757 778 1,495 1,573
Exempt from federal income taxes 432 266 815 532
Interest on federal funds sold and other 30 21 50 35
--------------------------- --------------------------
Total interest income 2,602 2,548 5,125 5,038
--------------------------- --------------------------
Interest Expense:
Interest on deposits 1,244 1,278 2,460 2,543
Interest on short-term borrowings -- -- -- 3
--------------------------- --------------------------
Total interest expense 1,244 1,278 2,460 2,546
--------------------------- --------------------------
Net interest income 1,358 1,270 2,665 2,492
--------------------------- --------------------------
Provision for loan losses 45 -- 65 --
--------------------------- --------------------------
Net interest income after provision
for loan losses 1,313 1,270 2,600 2,492
Other income:
Service charges on deposit accounts 41 40 86 78
Other service charges and fees 26 23 43 35
Gain on sale of foreclosed real estate -- -- -- 7
Other income (1) 5 5 10
Net security gains -- 2 1 3
--------------------------- --------------------------
Total other income 66 70 135 133
--------------------------- --------------------------
Other expenses:
Salaries and employee benefits 252 231 497 458
Occupancy 30 25 53 48
Furniture and equipment 35 32 70 64
Pennsylvania shares tax 69 67 145 129
Other expenses 141 149 240 262
--------------------------- --------------------------
Total other expenses 527 504 1,005 961
--------------------------- --------------------------
Income before income taxes 852 836 1,730 1,664
--------------------------- --------------------------
Income tax expense 153 189 320 378
--------------------------- --------------------------
--------------------------- --------------------------
Net income $ 699 $ 647 $ 1,410 $ 1,286
=========================== ==========================
Per share data:
Earnings per share, basic and diluted $ 3.56 $ 3.29 $ 7.18 $ 6.54
=========================== ==========================
Weighted average common shares outstanding 196,431 196,431 196,431 196,518
=========================== ==========================
Cash dividends declared per share $ 1.10 $ 1.10 $ 1.10 $ 1.10
=========================== ==========================
See Notes to Consolidated Financial Statements.
4
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Retained Other Total
Common Paid-In Earnings Comprehensive Treasury Stockholders'
Dollars in thousands Stock Capital (Deficit) Income (Loss) Stock Equity
---------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 200 $ 609 $ 28,322 $ 17 $ (488) $ 28,660
--------
Comprehensive Income:
Net income and total
comprehensive income -- -- 1,286 -- -- 1,286
Cash dividends declared on common
stock, $1.10 per share -- -- (216) -- -- (216)
Purchase of treasury stock -- -- -- -- (127) (127)
-------------------------------------------------------------------------------------
Balance, June 30, 2001 $ 200 $ 609 $ 29,392 $ 17 $ (615) $ 29,603
=====================================================================================
Accumulated
Additional Retained Other Total
Common Paid-In Earnings Comprehensive Treasury Stockholders'
Dollars in thousands Stock Capital (Deficit) Income (Loss) Stock Equity
---------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 200 $ 609 $ 30,404 $ (100) $ (615) $ 30,498
--------------------------------------------------------------------------------------
Comprehensive Income:
Net income -- -- 1,410 -- -- 1,410
Change in unrealized net gains on
securities available for
sale, net of tax 75 75
--------
Total comprehensive income 1,485
--------
Cash dividends declared on common
stock, $1.10 per share -- -- (216) -- -- (216)
--------------------------------------------------------------------------------------
Balance, June 30, 2002 $ 200 $ 609 $ 31,598 $ (25) $ (615) $ 31,767
======================================================================================
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, 2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,410 $ 1,286
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 50 49
Gain on sale of foreclosed real estate -- (7)
Provision for loan losses 65 --
Net accretion of securities (252) (207)
Net security gains (1) (3)
Change in assets and liabilities:
Decrease(Increase) in:
Accrued interest receivable (87) 31
Income taxes receivable (160) 11
Other assets (7) (104)
Increase (decrease) in:
Accrued interest payable (33) 34
Income taxes -- 20
Other liabilities (10) (50)
-------- --------
Net cash provided by operating activities 975 1,060
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest bearing deposits
with banks 27 22
Net increase in federal funds sold (4,676) (3,349)
Purchase of securities available for sale (4,415) (5)
Proceeds from maturities/calls of available
for sale 992 554
Purchase of securities held to maturity (13,014) (8,717)
Proceeds from maturities/calls of securities held to
maturity 8,443 7,651
Net decrease(increase) in loans 887 (2,331)
Proceeds from sale of foreclosed real estate -- 104
Purchases of premises and equipment (65) (95)
-------- --------
Net cash used in investing activities (11,821) (6,166)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 10,675 5,887
Dividends paid (216) (216)
Purchases of treasury stock -- (127)
-------- --------
Net cash provided by financing activities 10,459 5,544
-------- --------
Increase (decrease) in cash and cash equivalents (387) 438
Cash and cash equivalents:
Beginning 2,909 2,163
-------- --------
Ending $ 2,522 $ 2,601
======== ========
Supplementary Cash Flows Information
Interest Paid $ 2,520 $ 2,520
======== ========
Income Taxes Paid $ 625 $ 626
======== ========
See Notes to Consolidated Financial Statements.
6
THE NEFFS BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
Note 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The Neffs Bancorp,
Inc. ("the company") and its wholly owned subsidiary The Neffs National Bank.
All material intercompany accounts and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with U.S.generally accepted accounting principles ("GAAP") for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by GAAP 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 three and six-month periods ended June 30, 2002, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002.
In addition to historical information, this Form 10-Q Report contains
forward-looking statements. The forward-looking statements made in this report
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements.
Important factors that might cause such differences include, but are not limited
to; those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The company undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the company files
from time to time with the Securities and Exchange Commission.
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, 2001.
7
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Common Stock Dividend and Per Share Data
On April 30, 2002, the Board of Directors declared a $ 216,074 cash dividend on
common stock outstanding, paid on May 15, 2002, to shareholders of record on
April 30, 2002. This resulted in a $1.10 dividend per share of common stock.
Note 3. COMMITMENTS AND CONTIGENCIES
The company 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
company's financial position and results of operations.
Note 4. COMPREHENSIVE INCOME
Comprehensive income was $1.49 million and $1.29 million for the six months
ended June 30, 2002 and 2001. For the three months ending June 30, 2002 and
2001, comprehensive income was $799,000 and $637,000, respectively. The
difference between comprehensive income and net income presented in the
Consolidate Statements of Changes in Stockholders' Equity is attributed solely
to unrealized gains and losses on available-for-sale securities during the
periods presented
Note 5. NEW ACCOUNTING STANDARDS
In July of 2001, the Financial Accounting Standards Board issued Statement No.
143, "Accounting for Asset Retirement Obligations," which addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
This Statement will become effective for the company on January 1, 2003.
Adoption of this statement is not expected to have a material impact on the
Corporation's financial condition or results of operations.
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 company's balance sheets and
statements of income. This section should be read in conjunction with the
company's financial statements and accompanying notes.
8
FORWARD-LOOKING STATEMENTS:
Management of the company has made forward-looking statements in this Form 10-Q.
These forward-looking statements are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations of the company and its subsidiary. When words
such as "believes," "expects," "anticipates" or similar expressions occur in the
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 company 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:
- 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 analysis of these risks and forces could be
incorrect and/or that the strategies developed to address them could
be unsuccessful.
The company 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 Neffs Bancorp, Inc. files periodically with
the Securities and Exchange Commission.
OVERVIEW
Net Income for the quarter increased 8.0% to $699,000 as compared to $647,000
for the second quarter of 2001, and total revenues increased by 1.9% to $2.7
million for the quarter. Net income per common share increased 8.2% to $3.56
from $3.29 per common share in the second quarter a year ago. At June 30, 2002,
the company had total assets of $168.4 million, total loans of $71.7 million,
and total deposits of $135.6 million.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
The largest source of the company's income is net interest income. 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. The principal source of funding
for such assets is deposits.
9
Interest income increased by $54,000, or 2.1%, over the second quarter of 2001.
Average interest earning assets grew to $160.4 million for the second quarter of
2002 as compared to $140.1 million for the same period in 2001. This increase
was attributed to the $11.7 million growth in the securities portfolio and the
$6.7 million in Federal Funds sold. The yield on earning assets for the second
quarter of 2002 was 6.48% a decrease of 80 basis points over the comparable
period in 2001.
Interest expense for the second quarter of 2002 increased by $34,000, or 2.7%
compared to the second quarter of 2001. This increase was primarily attributable
to an increase in the level of average interest-bearing liabilities from $103.4
million during the second quarter of 2001 to $122.1 million during the second
quarter of 2002. The average rate paid on these liabilities for the second
quarter of 2002 was 4.07% - a decrease of 84 basis points.
Net interest income for the second quarter of 2002 increased by $88,000, or 6.9%
over the same period in 2001. Changes in net interest income are frequently
measured by two statistics: net interest rate spread and net interest margin.
Net interest rate spread is the difference between the average rate earned on
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, reflected as a percentage of average
earning assets. The company's net interest rate spread was 2.41% during the
second quarter of 2002 compared to 2.37% during the same period of the previous
year. The net interest margin decreased by 4 basis points from 4.02% for the
second quarter 2001 to 3.98% during the second quarter of 2002.
For the six months ended June 30, 2002, interest income increased by $87,000 or
1.7%, over the same period in 2001. As with the second quarter, the increase for
the first six months was mostly related to the volume increases in the level of
average securities outstanding. Interest earning assets for the first six months
of 2002 averaged $156.8 million versus $139.1 million for the comparable period
in 2001. The yield on those assets decreased to 6.54% during the first half of
2002, from 7.30% for the first half of 2001.
Interest expense for the first six months of 2002 declined $86,000 to
$2,460,000, from $2,546,000 for the first six months of 2001. The level of
average interest-bearing liabilities increased from $103.4 million for the first
half of 2001 to $118.8 million for the first six months of 2002. The average
rate paid for the first half of 2002 was 4.14%, down 82 basis points from 4.96%
for the comparable period in the prior year.
Net interest income for the first six months of 2002 increased by $173,000 or
6.9% over the same period in 2001. The company's net interest margin decreased
to 3.99% for the first six months of 2002, from 4.01% from the first half of
2001.
Noninterest Income
Noninterest income for the second quarter of 2002 decreased by $4,000, or 5.7%
from the same period in 2001. The decrease is attributable to service charges
and fees associated with
10
servicing a higher volume of deposit accounts and transactions and to net
security gains during 2001.
Recurring core noninterest income for the first six months of 2002 was $131,000
as compared to $113,000 for the first half of 2001, an increase of 15.9%. The
increase is mainly attributable to an increase in deposit account service charge
income.
Noninterest Expense
For the second quarter of 2002, noninterest expense increased by $23,000 or
4.6%, over the same period in 2001.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $21,000, or 9.1% for the second quarter of
2002 over the second quarter of 2001. This increase is consistent with increases
in staff levels necessary to handle company growth.
Furniture and equipment expenses of $35,000 were $3,000 or 9.4% higher for the
second quarter of 2002, than for the three months ended June 30, 2001 due to
purchase of additional equipment relative to the expansion of the bank's drive
in facility.
Net other expenses decreased by $8,000 or 5.4%. This decrease was primarily due
to lower professional fees related to our Securities and Exchange Commission
filing.
Salary expenses and employee benefits increased by $39,000 or 8.5%, over the
first six months of 2001. The increase was due to normal salary adjustments and
hiring of additional staff.
Occupancy and furniture and equipment expenses for the first six months of 2002
were $11,000, or 9.8% higher compared to the first half of 2001. This increase
consists of $6,000 in furniture and fixture repairs and $5,000 in building
maintenance expenses. This is relative to the expansion of the bank's Drive-In
Facility.
Pennsylvania shares tax expense totaled $145,000 for the first six months ended
June 30, 2002, an increase of $16,000, or 12.4%, over the first half of 2001.
Net other expenses decreased by $22,000 or 8.4% for the first six months ended
June 30, 2002 over the first half of 2001. This decrease was primarily due to
decreased aggregate professional fees related to our Securities and Exchange
Commission filing.
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net noninterest expense to average assets. Net noninterest expenses
equal noninterest expenses (excluding foreclosed real estate expenses) less
noninterest income (exclusive of nonrecurring gains), divided by average assets.
This ratio was .28% for the three months ended June 30, 2002, slightly lower
than .30% for the three months ended June 30, 2001. It
11
was .54% for the first six months of 2002 compared to .58% for the comparable
period in 2001.
Another productivity measure is the operating efficiency ratio. This ratio
expresses the relationship of noninterest expenses (excluding foreclosed real
estate expenses) to net interest income plus noninterest income (excluding
nonrecurring gains). For the quarter ended June 30, 2002, the operating
efficiency ratio was 37.0% compared to 37.6% for the similar period in 2001. For
the six months ended June 30, 2002, this ratio was 35.9% compared to 36.6% for
the six months ended June 30, 2001.
Provision for Federal Income Tax
The provision for federal income taxes was $153,000 for the second quarter of
2002, as compared to $189,000 for the same period in 2001. For six months ended
June 30, the provision was $320,000 and $378,000 for 2002 and 2001,
respectively. The effective tax rate, which is the ratio of income tax expense
to income before income taxes, was 18% for the second quarter of 2002 and 22.6%
for the second quarter of 2001. The effective tax rate for the first six months
of 2002 and 2001 were 18.5% and 22.7%, respectively. The reason for this
decrease is due to the bank's increased investments into tax-free securities.
Net Income
Net income for the second quarter of 2002 was $699,000, an increase of $52,000
or 8.0% over the $647,000 recorded in the second quarter of 2001. 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 2002 was $1.4 million as compared to $1.3
million recorded in the first six months of 2001. 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 and Average Equity
Return on average assets ("ROA") measures the company's net income in relation
to its total average assets. The company's annualized ROA for the second quarter
of 2002 was 1.73% as compared to 1.86% for the second quarter of 2001. The ROA
for the first six months of 2002 and 2001 was 1.77% and 1.83% respectively. For
purposes of calculating ROA, average assets were adjusted to exclude gross
unrealized appreciation or deprecation on securities available for sale.
Return on average equity ("ROE") indicates how effectively the company can
generate net income on the capital invested by its shareholders. ROE is
calculated by dividing net income by average shareholders' equity. For purposes
of calculating ROE, average shareholders' equity includes the effect of
unrealized appreciation or depreciation, net of income taxes, on securities
available for sale. The annualized ROE for the second quarter of 2002 was 8.96%,
12
as compared to 9.27% for the second quarter of 2001. The annualized ROE for the
first six months of 2002 remained unchanged from the first six months of 2001 at
9.14%.
FINANCIAL CONDITION
Securities
During the first six months of 2002, securities available for sale increased by
$4.7 million (excluding effects of unrealized gains/losses) from $2.1 million at
December 31, 2001 to $6.8 million at June 30, 2002. This increase is a result of
increased purchases of mortgage-backed securities. The securities available for
sale portfolio is comprised of U.S. Treasury Notes, U.S. Government agency
securities, mortgage-backed securities, and equity securities.
During the first six months of 2002, securities held to maturity increased from
$70.2 million to $75.0 million, primarily as a result of the net purchases of
tax-exempt securities. Securities held to maturity include U.S. Government
agency securities, tax-exempt securities, mortgage-backed securities, and equity
securities.
Federal funds sold increased by $4.7 million during the first six months of 2002
from $2.1 million at December 31, 2001. This increase was due mainly to calls of
bonds and continued strong growth in deposits, mainly savings account deposits.
Total securities and federal funds sold aggregated $90.8 million at June 30,
2002, and represented 53.9% of total assets.
The average yield on the combined securities portfolio for the first six months
of 2002 was 5.80% as compared to 6.29% for the similar period of 2001. For the
second quarter of 2002, the average yield on the combined securities portfolio
was 5.76% as compared to 7.06% for the same period in 2001.
Loans Receivable
During the first six months of 2002, net loans receivable decreased by $952,000
from $72.2 million at December 31, 2001, to $71.2 million on June 30, 2002.
Loans receivable represented 52.5% of total deposits and 42.3% of total assets
at June 30, 2002, as compared to 57.7% and 46.1%, respectively, at December 31,
2001.
Loan and Asset Quality and Allowance for Loan Losses
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, 2002, were $291,000, or .17%, of total assets as compared to $298,000, or
..19%, of total assets at December 3l, 2001.
There was no foreclosed real estate owned at June 30, 2002, or at December 31,
2001.
The following summary table presents information regarding non-performing loans
and assets as of June 30, 2002 and 2001, and December 3l, 2001.
13
NONPERFORMING LOANS AND ASSETS
(Dollars in thousands)
June 30, December 31, June 30,
2002 2001 2001
Nonaccrual Loans:
Commercial $ 2 $ 2 $ 13
Consumer -- -- --
Real Estate:
Construction -- -- --
Mortgage 289 296 --
---- ---- ----
Total nonaccrual 291 298 13
Restructured loans -- -- --
---- ---- ----
Total nonperforming loans 291 298 13
Foreclosed real estate -- -- --
---- ---- ----
Total nonperforming assets 291 298 13
Loans past due 90 days or more 235 71 78
---- ---- ----
Total nonperforming assets and
loans past due 90 days or more $526 $369 $ 91
Nonperforming loans to total loans 0.73% 0.51% 0.13%
Nonperforming assets to total assets 0.31% 2.40% 0.06%
The following table sets forth the corporation's provision and allowance for
loan losses.
ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
6 months Year
Ending Ending
June 30, December 31,
2002 2001
Balance at beginning of period $445 $440
Provisions charged to operating expenses 65 37
Recoveries of loans previously charged-off
Commercial -- --
Consumer -- 5
Real Estate -- --
---- ----
Total Recoveries -- 5
Loans Charged Off:
Commercial -- --
Consumer 5 37
Real Estate -- --
---- ----
Total Charged-off 5 37
Net Charge-offs 5 32
Balance at end of period $505 $445
Net charge-offs as a percentage of
average loans outstanding 0.01% 0.04%
Allowance for loan losses as a percentage of
period-end loans 0.70% 0.61%
14
Deposits
Total deposits at June 30, 2002 were $135.6 million, up $10.7 million, or 8.5%,
over total deposits of $124.9 million at December 3l, 2001. The average balances
for six months ended June 30, 2002 and 2001 are presented in the following
table.
Six Months Ended June 30,
2002 2001
Average Average Average Average
Dollars in thousands Balance Rate Balance Rate
------- ------- ------- -------
Demand Deposits:
Noninterest-bearing 11,536 $ 11,231
Interest-bearing 7,722 1.45% 7,137 2.41%
Savings 39,676 2.90 28,257 3.17
Time Deposits 71,393 5.12 68,007 5.84
-------- --------
TOTAL DEPOSITS 130,327 114,632
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 company'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 company's asset/liability management
activities is to maximize net interest income while maintaining acceptable
levels of interest rate risk. The company'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 company'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
as 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
15
same degree. As a result, the company'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 company'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 company's model projects a
proportionate 200 basis point change during the next year.
The company'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, 2002, the company's simulation model indicates net
interest income would increase 2.7% within the first year if rates increased as
described above. The model projects that net income would decrease by 3.2% in
the first year if rates decreased as described above. All of these forecasts are
within an acceptable level of interest rate risk under 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 company 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 company 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 company is capable of meeting its anticipated liquidity needs.
16
Capital Adequacy
At June 30, 2002, shareholders' equity totaled $31.8 million, up 4.16% over
shareholders' equity of $30.5 million at December 31, 2001. Shareholders' equity
at June 30, 2002 included a $25,000 unrealized loss, net of income taxes, on
securities available for sale. Excluding this unrealized loss, gross
shareholders' equity changed by an increase of $1.2 million 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 shareholders'
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.
The following table provides a comparison of the company's risk-based capital
ratios and leverage ratios to the minimum regulatory requirements for the
periods indicated:
To Be Well
Capitalized
For Capital Under Prompt
June 30, December 31, Adequacy Corrective Action
2002 2001 Purposes Provisions
-------- ------------ ----------- -----------------
Risked Based
Capital Ratios:
Tier 1 37.6% 37.0% 4.0% 6.0%
Total 38.2 37.6 8.0 10.0
Leveraged Total 19.0 20.1 4.0 5.0
At June 30, 2002, the consolidated capital levels of the company and of the
subsidiary bank met the definition of a "well capitalized" institution.
Quantitative and Qualitative Disclosure About Market Risk
The company's exposure to market risk has not changed significantly since
December 3l, 2001. The market risk principally includes interest rate risk,
which is discussed in the Management's Discussion and Analysis above.
17
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of the management of the company, there are no proceedings
pending to which the company or its subsidiary are a party or to which their
property is subject, which, if determined adversely to the company or its
subsidiary, would be material in relation to the company's or its subsidiary's
financial condition. There are no proceedings pending other than ordinary
routine litigation incident to the business of the company or its subsidiary. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against the company or its subsidiary by government authorities.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
a) An annual meeting of shareholders was held on April 10, 2002,
at The NOVA Building, Coplay, PA.
b) One matter was voted on at the April 10, 2002, meeting as
follows:
1) Two directors were re-elected:
Term Votes cast Votes against
Re-elected Expires for or withheld*
---------- ------- ---------- -------------
John J. Remaley April, 2005 128,073 1,380
Herman P. Snyder April, 2005 127,973 1,480
*Includes broker nonvotes.
Directors whose term continued after the meeting: Term Expires
- ------------------------------------------------- ------------
Robert L. Wagner April, 2003
John F. Simock April, 2003
Robert B. Heintzelman April, 2004
ITEM 5. OTHER INFORMATION
Not applicable
18
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.)
4 Instruments Defining the Right of Security Holders
(See Exhibit 3(i) and 3 (ii), above).
11 Statement Re: Computation of Per Share Earnings (See
Management Discussion and Analysis, above).
99 Certification of Chief Executive Officer and
Principal Financial Officer of Neffs Bancorp, Inc.
b) Reports on Form 8-K
None.
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 be the
undersigned thereunto duly authorized.
NEFFS BANCORP, INC.
Date: /s/ John J. Remaley
John J. Remaley, President
Date: /s/ Duane J. Costenbader
Duane J. Costenbader, Asst. Secretary
19