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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 September 30, 2002
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 l8065-0010
--------------------------------------------------------------
(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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of 10/31/02, 196,431
shares of common stock, par value of $1.00, were outstanding.
1
NEFFS BANCORP, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition(Unaudited) .................. 3
September 30, 2002, and December 31, 2001
Consolidated Statements of Income (Unaudited) .............................. 4
Three months ended September 30, 2002 and September 30, 2001
Nine months ended September 30, 2002 and September 30, 2001
Consolidated Statement of Stockholders' Equity (Unaudited) ................. 5
Nine months ended September 30, 2002 and September 30, 2001
Consolidated Statements of Cash Flows (Unaudited) .......................... 6
Nine months ended September 30, 2002, and September 30, 2001
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 ................. 18
Item 4. Controls and Procedures .................................................... 19
PART II. OTHER INFORMATION .......................................................... 19
Item 1 Legal Proceedings .......................................................... 19
Item 2 Changes in Securities ...................................................... 19
Item 3 Defaults Upon Senior Securities ............................................ 19
Item 4 Results of Votes of Security Holders ....................................... 19
Item 5 Other Information .......................................................... 20
Item 6 Exhibits and Reports on Form 8-K ........................................... 20
SIGNATURES .......................................................................... 21
2
ITEM 1. FINANCIAL STATEMENTS
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
Dollars in thousands 2002 2001
--------- ---------
ASSETS (Unaudited)
Cash and due from banks $ 3,100 $ 2,909
Interest bearing deposits with banks 23 45
Federal funds sold 12,353 2,076
Securities available for sale 11,641 5,433
Securities held to maturity, market value
2002 $75,341; 2001 $69,593 73,564 70,221
Loans 70,914 72,616
Less allowance for loan losses (523) (446)
--------- ---------
Net loans 70,391 72,170
--------- ---------
Premises and equipment, net 2,411 2,319
Other assets 1,324 1,276
--------- ---------
Total assets $ 174,807 $ 156,449
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 12,479 $ 11,593
Interest bearing 128,823 113,339
--------- ---------
Total Deposits 141,302 124,932
Other liabilities 966 1,019
--------- ---------
Total liabilities 142,268 125,951
--------- ---------
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 32,296 30,404
Accumulated other comprehensive income(loss), net of deferred
taxes $26 and $(52) in 2002 and 2001, respectively 49 (100)
Less treasury stock, at cost, 3,569 shares in 2002 and 2001 (615) (615)
--------- ---------
Total stockholders' equity 32,539 30,498
--------- ---------
Total liabilities and stockholders' equity $ 174,807 $ 156,449
========= =========
See Notes to Consolidated Financial Statements.
3
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Interest income:
Interest and fees on loans $ 1,367 $ 1,459 $ 4,132 $ 4,357
Interest and dividends on investments:
Taxable 755 768 2,250 2,341
Exempt from federal income taxes 441 282 1,256 814
Interest on federal funds sold and others 42 32 92 67
-------- -------- -------- --------
Total interest income 2,605 2,541 7,730 7,579
-------- -------- -------- --------
Interest Expense:
Interest on deposits 1,277 1,290 3,737 3,833
Interest on short-term borrowings -- -- 3
-------- -------- -------- --------
Total interest expense 1,277 1,290 3,737 3,836
-------- -------- -------- --------
Net interest income 1,328 1,251 3,993 3,743
-------- -------- -------- --------
Provision for loan losses 45 -- 110 --
-------- -------- -------- --------
Net interest income after provision
for loan losses 1,283 1,251 3,883 3,743
-------- -------- -------- --------
Other operating income:
Service charges on deposit accounts 45 40 131 118
Other service charges and fees 18 20 61 55
Net security gains -- 2 1 5
Gain on sale of foreclosed real estate -- -- -- 7
Other income 8 3 13 13
-------- -------- -------- --------
Total other income 71 65 206 198
-------- -------- -------- --------
Other operating expenses:
Salaries and employee benefits 249 236 746 694
Occupancy 39 38 92 86
Furniture and equipment 35 32 105 96
Pennsylvania shares tax 69 66 214 195
Other expenses 97 146 337 408
-------- -------- -------- --------
Total other expenses 489 518 1,494 1,479
-------- -------- -------- --------
Income before income taxes 865 798 2,595 2,462
-------- -------- -------- --------
Income tax expense 167 176 487 554
-------- -------- -------- --------
-------- -------- -------- --------
Net income $ 698 $ 622 $ 2,108 $ 1,908
======== ======== ======== ========
Per share data:
Earnings per share, basic and diluted $ 3.55 $ 3.17 $ 10.73 $ 9.71
======== ======== ======== ========
Weighted average common shares outstanding 196,431 196,431 196,431 196,518
======== ======== ======== ========
Cash dividends declared per share $ -- $ -- $ 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 - - 1,908 - - 1,908
Change in unrealized net gains
on securities available for sale,net of tax 2 2
--------
Total comprehensive income 1,910
--------
Cash dividends declared on common
stock, $1.10 per share - - (216) - - (216)
Purchase of treasury stock - - - - (127) (127)
----- ----- -------- ---- ------ --------
Balance, September 30, 2001 $ 200 $ 609 $ 30,014 $ 19 $ (615) $ 30,227
===== ===== ======== ==== ====== ========
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 - - 2,108 - - 2,108
Change in unrealized net gains
on securities available for sale,net of tax 149 149
--------
Total comprehensive income 2,257
--------
Cash dividends declared on common
stock, $1.10 per share - - (216) - - (216)
----- ----- -------- ------ ------ --------
Balance, September 30, 2002 $ 200 $ 609 $ 32,296 $ 49 $ (615) $ 32,539
===== ===== ======== ====== ====== ========
See Notes to Consolidated Financial Statements.
5
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Dollars in thousands
Nine Months Ended September 30, 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,108 $ 1,908
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 76 75
Gain on sale of foreclosed real estate -- (7)
Provision for loan losses 110 --
Net accretion of securities (367) (321)
Net security gains (1) (5)
Change in assets and liabilities:
Decrease (Increase) in:
Accrued interest receivable (40) 192
Income taxes receivable (85) (33)
Other assets (1) (13)
Increase (decrease) in:
Accrued interest payable (58) (37)
Other liabilities 5 --
-------- --------
Net cash provided by operating activities 1,747 1,759
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest bearing deposits with banks 22 13
Net increase in federal funds sold (10,277) (3,019)
Purchase of securities available for sale (8,021) (1,022)
Proceeds from maturities/calls of available
for sale 2,039 581
Purchase of securities held to maturity (20,956) (16,022)
Proceeds from maturities/calls of securities held to
maturity 17,982 17,732
Net decrease (increase) in loans 1,669 (3,662)
Proceeds from sale of foreclosed real estate -- 104
Purchases of premises and equipment (168) (190)
-------- --------
Net cash used in investing activities (17,710) (5,485)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 16,370 4,389
Dividends paid (216) (216)
Purchases of treasury stock -- (127)
-------- --------
Net cash provided by financing activities 16,154 4,046
-------- --------
Increase in cash and cash equivalents 191 320
Cash and cash equivalents:
Beginning 2,909 2,163
-------- --------
Ending $ 3,100 $ 2,483
======== ========
Supplementary Cash Flows Information
Interest Paid $ 3,808 $ 3,883
======== ========
Income Taxes Paid $ 787 $ 814
======== ========
See Notes to Consolidated Financial Statements.
6
THE NEFFS BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include accounts of Neffs Bancorp, Inc.
(the Company) and its wholly owned subsidiary The Neffs National Bank (the
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 nine-month period ended September 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 contained herein 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. 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 footnotes thereto
included in The Neffs Bancorp, Inc. Annual Report for the year ended December
31, 2001.
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 stockholders of record on
April 30, 2002. This resulted in a $1.10 dividend per share of common stock.
7
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain legal proceedings and claims arising in the
ordinary course of business. It is management's opinion, at this time, that the
ultimate resolution of these claims will not have a material adverse effect on
the Company's financial position and results of operation.
NOTE 4. COMPREHENSIVE INCOME
Comprehensive income was $2.26 million and $1.91 million for the nine months
ended September 30, 2002 and 2001. For the three months ending September 30,
2002 and 2001, comprehensive income was $770,000 and $620,000, 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 Standard 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
Company's financial condition or results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement No.
145, "Rescission of Statements No. 4, 44 and 64, Amendment of Statement No. 13".
This statement requires that debt extinguishment no longer be classified as an
extraordinary item since debt extinguishment has become a risk management
strategy for many companies. It also eliminates the inconsistent accounting
treatment for sale-leaseback transactions and certain lease modifications that
have economic effects similar to sale-leaseback transactions. This statement
became effective May 15, 2002 and did not have a significant impact on the
Company's financial condition or results of operations.
In June 2002, the Financial Accounting Standards Board issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", which
nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and other Costs to Exit and Activity (including certain
costs incurred in a restructuring)." This statement delays recognition of these
costs until liabilities are incurred and requires fair value measurement. It
does not impact the recognition of liabilities incurred in connection with a
business combination or the disposal of long-lived assets. The provisions of
this statement are effective for exit or disposal activities initiated after
8
December 31, 2002 and are not expected to have a significant impact on the
Company's financial condition or results of operations.
In October 2002, the Financial Accounting Standards Board issued Statement No.
147, "Acquisitions of Certain Financial Institutions." This statement provides
guidance on accounting for the acquisition of a financial institution, including
the acquisition of part of a financial institution. The statement defines
criteria for determining whether the acquired financial institution meets the
conditions for a "business combination". If the acquisition meets the conditions
of a "business combination", the specialized accounting guidance under Statement
No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions"
will not apply after September 30, 2002 and the amount of the unidentifiable
intangible asset will be reclassified to goodwill upon adoption of Statement No.
147. The transition provisions were effective on October 1, 2002 and did not
have a significant impact on the Company's financial condition or results of
operations.
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 Company's statements of financial
condition and statements of income. This section should be read in conjunction
with the Company's financial statements and accompanying notes.
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 the Bank. 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 the bank, 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
9
- 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 12.22% to $698,000 as compared to $622,000
for the third quarter of 2001 and total revenues increased by 2.69% to $2.7
million for the quarter as compared to $2.6 million for previous quarter ended
September 30, 2001. At September 30, 2002, the Company had total assets of
$174.8 million, net loans of $70.4 million, and total deposits of $141.3
million.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
The largest source of the Company's income is 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.
Interest income increased by $64,000 or 2.52% over the third quarter of 2001.
Interest earning assets averaged $165.1 million for the third quarter of 2002,
as compared to $144.3 million for the same period in 2001. The yield on earning
assets for the third quarter of 2002 was 6.32%, a decrease of 72 basis points
over the comparable period in 2001.
Interest expense for the third quarter of 2002 decreased by $13,000, or 1.01%
compared to the third quarter of 2001. This decrease was primarily attributable
to the declining rates being paid on deposit accounts. The average rate paid on
these liabilities for the third quarter of 2002 was 4.03%, a decrease of 80
basis points.
Net interest income for the third quarter of 2002 increased by $77,000, or
6.16%, 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
2.29% during the third quarter of 2002 compared to 2.21% during the same period
of the previous year. The net interest margin decreased by 18 basis points from
3.93% for the third quarter of 2001 to 3.75% during the third quarter of 2002.
10
For the nine months ended September 30, 2002, interest income increased by
$151,000, or 1.99%, over the same period in 2001. The increase for the first
nine months of 2002 was mostly related to the strong growth in the investment
portfolio. Interest earning assets for the first nine months of 2002 averaged
$159.3 million versus $140.8 million for the comparable period in 2001. The
yield on those assets decreased to 6.46% during the first nine months of 2002,
from 7.18% for the first nine months of 2001.
Interest expense for the first nine months of 2002 totaled approximately $3.7
million, a decrease of $99,000, or 2.58%, over the first nine months of 2001.
The average interest-bearing liabilities increased from $104.6 million for the
first nine months of 2001 to $121.5 million for the first nine months of 2002.
The average rate paid for the first nine months of 2002 was 4.10%, down 79 basis
points from 4.89% for the comparable period in the prior year.
Net interest income for the first nine months of 2002 increased by $250,000, or
6.68%, over the same period in 2001. The Company's net interest margin decreased
to 3.91% for the first nine months of 2002, from 4.00% for the first nine months
of 2001.
Noninterest Income
Noninterest income for the third quarter of 2002 increased by $6,000, or 9.23%
from the same period in 2001. The increase is attributable to service charges
and fees associated with servicing a higher volume of deposit accounts, rental
income, and increased income generated through safe deposit box rentals and
mastercard/visa commissions.
Recurring core noninterest income for the first nine months of 2002 was $192,000
as compared to $173,000 for the first nine months of 2001, an increase of
10.98%. The increase is mainly attributable to service charges and fees
associated with servicing a higher volume of deposit accounts.
Noninterest Expense
For the third quarter of 2002, noninterest expense decreased by $29,000 or
5.60%, over the same period in 2001. The decrease for the third quarter is
mostly due to a reduction in aggregate director fees, advertising expenses, and
lower ATM transaction fees.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $13,000, or 5.51% for the third quarter of
2002 over the third quarter of 2001. This increase is consistent with increases
in staff levels necessary to handle Company growth.
Other operating expenses, excluding salary expense, decreased by $42,000 or
14.89% for the three months ended September 30, 2002, as compared to the same
period of 2001.
11
This decrease was primarily due to a reduction in total director fees,
advertising expenses, and lower ATM transaction fees.
For the first nine months of 2002, total noninterest expenses increased by
$15,000, or 1.01% over the comparable period in 2001. A comparison of
noninterest expense for certain categories for these two periods is discussed
below.
Salary expenses and employee benefits increased by $52,000 or 7.49%, over the
first nine 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 nine months of 2002
increased $15,000 or 8.24% primarily due to an increase in repairs and
maintenance associated with computer technology and an increase in real estate
taxes.
Pennsylvania shares tax expense totaled $214,000 for the first nine months ended
September 30, 2002, an increase of $19,000, or 9.74%, over the first nine months
of 2001. This increase was due to increased retained earnings for the Bank.
Other operating expenses decreased by $71,000 or 17.40% for the first nine
months ended September 30, 2002 over the first nine months of 2001. This
decrease consists of a $50,000 reduction in legal fees associated with
Securities and Exchange Commission filings. Due to the loss of two directors,
expenses for directors fees have declined. ATM transaction fees where offset by
increasing fees charged to non-bank customers, which lowered the ATM transaction
fees.
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 .23% for the three months ended September 30, 2002, slightly
lower than .31% for the three months ended September 30, 2001. It was .79% for
the first nine months of 2002, compared to .88% for the respective 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 September 30, 2002, the operating
efficiency ratio was 34.95% compared to 39.36% for the similar period in 2001.
For the nine months ended September 30, 2002, this ratio was 35.58% compared to
37.53% for the nine months ended September 30, 2001.
12
Provision For Federal Income Tax
The provision for federal income taxes was $167,000 for the third quarter of
2002, as compared to $176,000 for the same period in 2001. For nine months ended
September 30, the provision was $487,000 and $554,000 for 2002 and 2001,
respectively. The effective tax rate, which is the ratio of income tax expense
to income before income taxes, was 18.77% for the first nine months of 2002 and
22.50% for the first nine months of 2001. The reason for this decrease is due to
the bank's increased investments into tax-free securities.
Net Income
Net income for the third quarter of 2002 was $698,000, an increase of $76,000 or
12.22% over the $622,000 recorded in the third quarter of 2001. The increase was
due mainly to increased income generated in securities and declining rates being
paid on deposit accounts, in addition to a reduction in legal fees related to
the Company's SEC filings.
Net income for the first nine months of 2002 was $2.1 million as compared to
$1.9 million recorded in the first nine months of 2001. The increase was due
mainly to increased income generated in securities and declining rates being
paid on deposit accounts, in addition to a reduction in legal fees for SEC
filings.
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 third quarter of
2002 was 1.63% as compared to 1.73% for the third quarter of 2001. The ROA for
the first nine months of 2002 and 2001 was 1.72% and 1.80% respectively. For
purposes of calculating ROA, average assets were adjusted to exclude gross
unrealized appreciation or depreciation 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 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 appreciation or depreciation, net of income taxes, on securities
available for sale. The annualized ROE for the third quarter of 2002 was 8.58%,
as compared to 8.40% for the third quarter of 2001. The annualized ROE for the
first nine months of 2002 was 8.83%, as compared to 8.65% for the first nine
months of 2001.
13
FINANCIAL CONDITION
Securities
During the first nine months of 2002, securities available for sale increased by
$6.2 million (net of unrealized appreciation) from $5.4 million at December 31,
2001 to $11.6 million at September 30, 2002. This net increase was due mainly to
increase of approximately $7.2 million in government agency securities and a
reduction of $1.0 million in U.S. Treasury notes. The securities available for
sale portfolio is comprised of U.S. Treasury Notes, U.S. Government agency
securities, equity securities and stock in correspondent banks.
During the first nine months of 2002, securities held to maturity increased from
$70.2 million to $73.6 million. This $3.3 million increase is due to net
increases of $6.4 million in tax-exempt securities and net decreases of $3.1
million in U.S. Government agency securities, U.S. Treasury securities,
mortgage-backed securities, and corporate securities.
Federal funds sold increased by $10.3 million during the first nine months of
2002 from $2.1 million at December 31, 2001. This increase was due mainly to
calls of bonds, an increase in deposit accounts and represents a temporary
investment until higher yielding assets become available. Total securities and
federal funds sold aggregated $97.6 million at September 30, 2002, and
represented 55.81% of total assets.
The average yield on the combined securities portfolio for the first nine months
of 2002 was 5.75% as compared to 6.91% for the similar period of 2001.
NET LOANS RECEIVABLE
During the first nine months of 2002, net loans receivable decreased by $1.8
million from $72.2 million at December 31, 2001, to $70.4 million on September
30, 2002. Net loans receivable represented 49.82% of total deposits and 40.27%
of total assets at September 30, 2002, as compared to 62% and 49%, 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
September 30, 2002, were $342,000, or .20%, of total assets as compared to
$369,000, or .24%, of total assets at December 3l, 2001.
There was no foreclosed real estate owned at September 30, 2002.
The following summary table presents information regarding non-performing loans
and assets as of September 30, 2002 and 2001, and December 3l, 2001.
14
NONPERFORMING LOANS AND ASSETS
(Dollars in thousands)
September 30, December 31, September 30,
2002 2001 2001
---- ---- ----
Nonaccrual Loans:
Commercial $ 2 $ 2 $ 4
Consumer -- -- --
Real Estate:
Construction -- --
Mortgage 287 296 300
---- ---- ----
Total nonaccrual 289 298 304
Restructured loans -- --
---- ---- ----
Total nonperforming loans 289 298 304
Foreclosed real estate 71 --
---- ---- ----
Total nonperforming assets 289 369 304
Loans past due 90 days or more 53 -- 121
---- ---- ----
Total nonperforming assets and
loans past due 90 days or more $342 $369 $425
Nonperforming loans to total loans 0.48% 0.51% 0.58%
Nonperforming assets to total assets 0.20% 0.24% 0.29%
The following table sets forth the corporation's provision and allowance for
loan losses.
ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
9 months Year
Ending Ending
September 30, December 31,
2002 2001
Balance at beginning of period $ 446 $ 440
Provisions charged to operating expenses 110 37
Recoveries of loans previously charged-off
Commercial -- --
Consumer -- 6
Real Estate -- --
------ ------
Total Recoveries -- 6
Loans Charged Off:
Commercial 27 --
Consumer 6 37
Real Estate -- --
------ ------
Total Charged-off 33 37
Net Charge-offs 33 31
Balance at end of period $ 523 $ 446
Net charge-offs as a percentage of
average loans outstanding 0.04% 0.03%
Allowance for loan losses as a percentage of
period-end loans 0.74% 0.62%
15
DEPOSITS
Total deposits at September 30, 2002 were $141.3 million, up $16.4 million, or
13.10%, over total deposits of $124.9 million at December 3l, 2001. The average
balances for nine months ended September 30, 2002 and 2001 are presented in the
following table.
Nine Months Ended September 30
------------------------------
2002 2001
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
Demand Deposits:
Noninterest bearing $ 12,136 $ 11,394
Interest bearing 7,755 1.38% 7,049 2.15%
Savings 41,846 2.91% 28,675 3.10%
Time Deposits greater than $100,000 19,043 5.43% 16,316 6.05%
Time Deposits less than $100,000 52,863 4.96% 52,491 5.94%
--------- ---------
Total Deposits $ 133,643 $ 115,925
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 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 Bank'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 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.
16
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 Bank'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 Bank's model projects a
proportionate 200 basis point change during the next year.
The Bank'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 September 30, 2002, the Company's simulation model indicates net
interest income would increase 2.1% within the first year if rates increased as
described above. The model projects that net income would decrease by 3.3% 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.
CAPITAL ADEQUACY
17
At September 30, 2002, stockholder's equity totaled $32.5 million, up 6.69% over
stockholders' equity of $30.5 million at December 31, 2001. Stockholder's equity
at September 30, 2002 included a $49,000 unrealized gain, net of income taxes,
on securities available for sale. Excluding this unrealized gain, gross
stockholder's equity changed by an increase of $1.9 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 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.
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
Sept. 30, Dec. 31, For Capital Under Prompt Corrective
Risk-Based 2002 2001 Adequacy Purposes Action Provisions
-----------------------------------------------------------------------------
Captial Ratios:
Tier 1 39.23% 34.30% 4.00% 6.00%
Total 39.86% 34.80% 8.00% 10.00%
Leveraged Total 18.96% 19.97% 4.00% 5.00%
At September 30, 2002, the consolidated capital levels of the Company and of the
Bank met the definition of a "well capitalized" institution.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Due to the extent that rates have declined this year, the Bank has become more
sensitive to future rate declines and expects added compression of the net
interest margin. Currently, the Bank has 30.7% of its deposits in NOW and
savings accounts, which it considers core deposits, and which normally carry
lower rates relative to other types of deposits. Because of this, these accounts
have historically contributed significantly to the net interest margin. However,
there is an ultimate floor to which the rates on these accounts can fall. Under
current conditions, the inability to further decrease these deposit rates while
loan and other earning asset rates continue to drop and reprice at lower rates
will result in further compression of the net interest margin. The added risk in
this market is that as the rates on the core deposits bottom-out, investors
could migrate to other types of accounts paying higher rates. The net interest
income at risk position of the Bank remains within the guidelines established by
the Bank's asset/liability policy. The Bank continues to monitor and manage its
rate sensitivity during these unusual times.
18
No material change has been noted related to the market risk for the bank's
securities.
ITEM 4.
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company
maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company
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 Securities and Exchange
Commission. Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this
report, the chief executive officer and principal financial officer
of the Company concluded that the Company's disclosure controls and
procedures were adequate.
(b) Changes in internal controls. The Company made no significant
changes in its internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation of the controls by the chief executive officer and the
principal financial officer.
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
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
19
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
Not applicable.
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.)
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).
99.1 Certification of Chief Executive Officer of Neffs Bancorp,
Inc., Pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Principal Financial Officer of Neffs Bancorp,
Inc., Pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
b) Reports on Form 8-K
None.
20
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: 11/14/2002 /s/ John J. Remaley
John J. Remaley, President
Date: 11/14/2002 /s/ Duane J. Costenbader
Duane J. Costenbader, Asst. Secretary
21
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADDED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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, the 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 and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date.
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation
of the internal controls which could adversely affect
the registrant's ability to record, process, summarize
and report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
22
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls.
5) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ John J. Remaley
John J. Remaley
Chief Executive Officer
23
CERTIFICATION
I, Duane J. Costenbader, 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, the 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 and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date.
5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation
of the internal controls which could adversely affect
the registrant's ability to record, process, summarize
and report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls.
24
6) The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Duane J. Costenbader
Duane J. Costenbader
Principal Financial Officer
25