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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 March 31, 2003
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 0 - 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 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 ( )
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15 of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ( ) 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)
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of 4/30/03, 196,431 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)
March 31, 2003 and December 31, 2002............................................ 3
Consolidated Statements of Income (Unaudited)
Three months ended March 31, 2003 and March 31, 2002............................ 4
Consolidated Statement of Stockholders' Equity (Unaudited)
Three months ended March 31, 2003, and March 31, 2002........................... 5
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 2003, and March 31, 2002........................... 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...................... 17
Item 4. Controls and Procedures......................................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 18
Item 2. Changes in Securities........................................................... 18
Item 3. Defaults Upon Senior Securities................................................. 18
Item 4. Results of Votes of Security Holders............................................ 18
Item 5. Other Information............................................................... 19
Item 6. Exhibits and Reports on Form 8-K................................................ 19
SIGNATURES ............................................................................... 20
2
NEFFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unadited)
March 31 December 31
Dollars in thousands 2003 2002
----------------------------
ASSETS
Cash and due from banks $ 3,277 $ 2,732
Interest bearing deposits with banks 23 18
Federal funds sold 10,279 10,475
Securities available for sale 13,065 10,044
Securities held to maturity, market value
$89,552 in 2003; $85,914 in 2002 88,006 84,353
Loans 69,038 69,598
Less allowance for loan losses (589) (564)
---------------------------
Net loans 68,449 69,034
---------------------------
Premises and equipment, net 2,374 2,396
Other assets 1,536 1,241
---------------------------
Total assets $ 187,009 $ 180,293
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 13,292 $ 11,934
Interest bearing 139,242 134,601
---------------------------
Total deposits 152,534 146,535
Other liabilities 813 933
---------------------------
Total liabilities 153,347 147,468
---------------------------
Stockholders' Equity
Common stock, $1 par value, authorized 2,500,000 shares; issued 200,000
shares as of 3/31/03; 196,431
outstanding as of 3/31/03 & 12/31/02 200 200
Paid-in capital 609 609
Retained earnings 33,380 32,610
Accumulated other comprehensive income 88 21
Less treasury stock at cost 3,569 shares in 2003; 3,569 shares in 2003 (615) (615)
---------------------------
Total stockholders' equity 33,662 32,825
---------------------------
Total liabilities and stockholders' equity $ 187,009 $ 180,293
===========================
See Notes to Consolidated Financial Statements.
3
NEFFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Dollars in thousands
Three months ended March 31, 2003 2002
------------ -------------
Interest income:
Interest and fees on loans 1,266 1,382
Interest and dividends on investments:
Taxable 677 738
Exempt from federal income taxes 542 383
Interest on federal funds sold and other 31 20
------------ -------------
Total interest income 2,516 2,523
------------ -------------
Interest Expense:
Interest on deposits 1,116 1,216
------------ -------------
Total interest expense 1,116 1,216
------------ -------------
Net interest income 1,400 1,307
------------ -------------
Provision for loan losses 15 20
------------ -------------
Net interest income after provision for loan losses 1,385 1,287
------------ -------------
Other income:
Service charges on deposit accounts 46 45
Other service charges and fees 14 17
Other income 10 6
Net security gains - 1
------------ -------------
Total other income 70 69
------------ -------------
Other expenses:
Salaries and employee benefits 267 245
Occupancy 28 23
Furniture and equipment 35 35
Pennsylvania shares tax 75 76
Other Expenses 144 99
------------ -------------
Total other expenses 549 478
------------ -------------
Income before income taxes 906 878
------------ -------------
Income tax expense 136 167
------------ -------------
Net income $ 770 $ 711
============ =============
Per share data:
Earnings per share, basic and diluted $ 3.92 $ 3.62
============ =============
Weighted average common shares outstanding 196,431 196,431
============ =============
See Notes to Consolidated Financial Statements.
4
NEFFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unadited)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Dollars in thousands Stock Capital Earnings Loss Stock Equity
-----------------------------------------------------------------------------
Balance, December 31, 2001 $ 200 $ 609 $ 30,404 $ (100) $ (615) $ 30,498
-------------
Comprehensive Income:
Net income - - 711 - - 711
Change in unrealized net losses on
securities available for sale, net of tax - - - (25) - (25)
-------------
Total comprehensive income 686
-----------------------------------------------------------------------------
Balance, March 31, 2002 $ 200 $ 609 $ 31,115 $ (125) $ (615) $ 31,184
=============================================================================
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Dollars in thousands Stock Capital Earnings Loss Stock Equity
-----------------------------------------------------------------------------
Balance, December 31, 2002 $ 200 $ 609 $ 32,610 $ 21 $ (615) $ 32,825
-------------
Comprehensive Income:
Net income - - 770 - - 770
Change in unrealized net gains on
securities available for sale, net of tax - - - 67 - 67
-------------
Total comprehensive income 837
-----------------------------------------------------------------------------
Balance, March 31, 2003 $ 200 $ 609 $ 33,380 $ 88 $ (615) $ 33,662
=============================================================================
See Notes to Consolidated Financial Statements.
5
NEFFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Dollars in thousands
Three months ended March 31, 2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 770 $ 711
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 27 23
Provision for loan losses 15 20
Net accretion of securities (45) (127)
Net security gains - (1)
Change in assets and liabilities:
Increase in:
Accrued interest receivable (210) (10)
Income taxes receivable (98) (40)
Other assets (21) (18)
Decrease in:
Accrued interest payable (80) (82)
Other liabilities (40) (55)
----------- -----------
Net cash provided by operating activities 318 421
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits
with banks (5) (7)
Net (increase)decrease in federal funds sold 196 (2,084)
Purchase of securities available for sale (3,264) (3,021)
Proceeds from maturities/calls of securities available
for sale 346 722
Purchase of securities held to maturity (10,777) (7,960)
Proceeds from maturities/calls of securities held to
maturity 7,167 4,661
Net decrease in loans 570 1,041
Purchases of premises and equipment (5) (30)
----------- -----------
Net cash used in investing activities (5,772) (6,678)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,999 5,599
----------- -----------
Net cash provided by financing activities 5,999 5,599
----------- -----------
Increase (decrease) in cash and cash equivalents 545 (658)
Cash and cash equivalents:
Beginning 2,732 2,909
----------- -----------
Ending $ 3,277 $ 2,251
=========== ===========
Supplementary Cash Flows Information
Interest Paid $ 1,196 $ 1,297
=========== ===========
Income Taxes Paid $ 309 $ 284
=========== ===========
See Notes to Consolidated Financial Statements.
6
NEFFS BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(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 three-month period
ending March 3l, 2003, are not necessarily indicative of the results that may be
expected for the year ending December 3l, 2003. These statements should be read
in conjunction with notes to the financial statements contained in the 2002
Annual Report to Stockholders.
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 Corporation
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, 2002.
NOTE 2. COMMITMENTS AND CONTIGENCIES
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 and results of operations.
7
NOTE 3. COMPREHENSIVE INCOME
Comprehensive income was $837,000 and $686,000 for the three months ended March
31, 2003 and 2002. The difference between comprehensive income and net income
presented in the Consolidated Statements of Stockholders' Equity is attributed
solely to unrealized gains and losses on available-for-sale securities during
the periods presented.
NOTE 4. NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation expands the disclosures to be made by a guarantor
in its financial statements about its obligations under certain guarantees and
requires the guarantor to recognize a liability for the fair value of an
obligation assumed under certain specified guarantees. FIN 45 clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies." In
general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability or
equity security of the guaranteed party, which would include standby letters of
credit. Certain guarantee contracts are excluded from both the disclosure and
recognition requirements of this Interpretation, including, among others,
guarantees related to commercial letters of credit and loan commitments. The
disclosure requirements of FIN 45 require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
accounting recognition requirements of FIN 45 are to be applied prospectively to
guarantees issued or modified after December 31, 2002. Adoption of FIN 45 did
not have a significant impact on the Corporation's financial condition or
results of operations.
Outstanding letters of credit written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. The
Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for standby letters of credit is
represented by the contractual amount of those instruments. The corporation had
$698,000 of standby letters of credit as of March 31, 2003. The Bank uses the
same credit policies in making conditional obligations as it does for on-balance
sheet instruments.
The majority of these standby letters of credit expire within the next twelve
months. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending other loan commitments. The Corporation
requires collateral supporting these letters of credit as deemed necessary.
Management believes that the proceeds obtained through a liquidation of such
collateral would be sufficient to cover the maximum potential amount of future
payments required under the corresponding guarantees. The current amount of the
liability as of March 31, 2003 for guarantees under standby letters of credit
issued after December 31, 2002 is not material.
8
In April 2003, the Financial Accounting Standards Board issued Statement No.
149, "Amendment of Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities". This statement clarifies the definition of a derivative and
incorporates certain decisions made by the Board as part of the Derivatives
Implementation Group process. This statement is effective for contracts entered
into or modified, and for hedging relationships designated after June 30, 2003
and should be applied prospectively. The provisions of the Statement that relate
to implementation issues addressed by the Derivatives Implementation Group that
have been effective should continue to be applied in accordance with their
respective effective dates. Adoption of this standard is not expected to have a
significant impact on the Corporation'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 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
9
should carefully review the risk factors described in other documents that the
Corporation files periodically with the Securities and Exchange Commission.
OVERVIEW
Net income for the quarter increased 8.3% to $770,000 as compared to $711,000
for the first quarter of 2002 and total revenues remained the same at $2.6
million for the quarter. Diluted net income per common share increased 8.3% to
$3.92 per share from $3.62 per share in the first quarter a year ago. At March
31, 2003, the Corporation had total assets of $187 million, total loans of $69
million, and total deposits of $152.5 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $176.2 million for the first quarter of 2003 as
compared to $153.2 million for the same period in 2002. The yield on earning
assets for the first quarter of 2003 was 5.7%, a decrease of 88 basis points
over the comparable period in 2002.
The growth in interest earning assets was funded primarily by an increase of $21
million in the average balance of deposits. Interest-bearing liabilities
increased from $115.5 million during the first quarter of 2002 to $136.6 million
during the first quarter of 2003. Growth in average interest bearing liabilities
was the result of increases in interest bearing demand deposits, savings, and
time deposits of $512,000, $17.5 million, and $3 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 3.3% for the first
quarter of 2003 and 4.2% for the first quarter of 2002, a decrease of 90 basis
points. This was the result of the declining interest rate environment that was
experienced during much of year 2002.
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 decreased by $7,000, or .3% over the first quarter of 2002.
Interest expense for the first quarter of 2003 decreased by $100,000, or 8.2%,
compared to the first quarter of 2002. The decrease was due to the general
decline in rates being paid on interest bearing deposits, mainly certificates of
deposit.
10
Net interest income increased by $93,000, to $1.4 million, or 7.1% over the
first quarter of 2002. The increase was due to the decrease in rates being paid
on interest bearing deposit accounts during the first quarter of 2002. As rates
continued to decrease during the second and third quarters of 2002, the
Corporation reduced rates being offered on interest bearing deposit accounts,
mainly certificates of deposit. Net income for the first quarter of 2003
continued to be affected by those downward rate adjustments.
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 first quarter of 2003 was 3.8%
compared to 3.4% for the first quarter of 2002. During the first quarter of
2003, yields on earning assets decreased to 5.7%, yields on interest bearing
deposits decreased to 3.3%, as compared to 6.6% and 4.2%, respectively, for the
first quarter of 2002.
Provision for Loan Losses
The provision for loan losses decreased by $5,000 or 25.0% during the first
quarter of 2003. This decrease was made to keep pace with the decrease in the
loan portfolio.
Non-interest Income
Non-interest income for the first quarter of 2003 increased by $1,000, or 1.5%
from the same period in 2002. The increase was attributable to growth in deposit
accounts, related service charges, and fee income derived from the sale of loan
related insurance.
Non-interest Expense
For the first quarter of 2003, non-interest expenses increased by $71,000, or
14.9%, to $549,000, compared to $478,000 over the same period in 2002. Increases
in employee costs and a nominal increase in operational expenses attributed to
the rise in non-interest expense while being offset by decreases in other
miscellaneous expenses.
Salary expenses and employee benefits, which represent the largest component of
non-interest expenses, increased by $22,000, or 9.0%, for the first quarter of
2003. This increase is consistent with general wage and benefit increases as
well as increases in staff levels necessary to handle the Corporation's growth
from the first quarter of 2002 to the first quarter of 2003.
The total of other non-interest expenses increased by $37,000, or 15.1%, for the
three-month period ending March 3l, 2003, as compared to the same period in
2002. There was a general increase in expenses for the first quarter, such as
stationary and supplies, travel and convention, advertising and loan and
collection expenses.
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net non-interest expenses to average assets. Net non-interest expenses
equal non-interest
11
expenses (excluding foreclosed real estate expenses) less non-interest income
(exclusive of non-recurring gains), divided by average assets. This ratio
equaled .3% for the three months ended March 3l, 2003, unchanged from March 3l,
2002. 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 non-interest income (excluding
non-recurring gains). For the quarter ended March 31, 2003, the operating
efficiency ratio was 37.4% compared to 34.7% for the similar period in 2002.
Provision for Federal Income Taxes
The provision for federal income taxes was $136,000 for the first quarter of
2003 compared to $167,000 for the same period in 2002. The effective tax rate,
which is the ratio of income tax expense to income before income taxes was 15.0%
for the first three months of 2003 and 19.0% for the same period in 2002, due to
increases in tax-exempt securities.
Net Income
Net income for the first quarter of 2003 was $770,000, an increase of $59,000,
or 8.3%, over the $711,000 recorded in the first quarter of 2002. The increase
was a result of an increase in net interest income, a reduction in income tax
expense and provision for loan losses, and was offset by an increase in
non-interest expense.
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 first
quarter of 2003 was 1.7% a decrease of 1 basis point from the first quarter of
2002. For purposes of calculating ROA, average assets have been adjusted to
exclude gross unrealized appreciation or depreciation on securities available
for sale.
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 appreciation or depreciation, net of income taxes, on securities
available for sale. The annualized ROE for the first quarter of 2003 remained
unchanged at 9.3% from the first quarter of 2002.
FINANCIAL CONDITION
12
Securities
Securities available for sale increased $3 million to $13.1 million as of March
3l, 2003, from $10 million on December 3l, 2002. The increase was due to the
purchase of mortgage back securities.
The securities available-for-sale portfolio had an unrealized net gain of
$88,000, at the end of the first quarter of 2003, due to declining interest
rates during the first quarter of 2003.
During the first three months of 2003, the securities held to maturity portfolio
increased $3.7 million to $88 million. The increase was the result of purchases
of mortgage-backed securities, U. S. Government agency securities and
state/municipal securities.
Federal funds sold on an over-night basis as of March 31, 2003 totaled $10.3
million, a decrease of $196,000, or 1.9% from December 3l, 2002.
The weighted average life of the combined securities portfolio was approximately
12 years at March 3l, 2003 with a weighted yield of 6.88%.
NET LOANS RECEIVABLE
During the first three months of 2003, net loans receivable decreased by
$585,000 from $69 million at December 31, 2002, to $68.4 million on March 31,
2003. Net loans receivable represented 44.9% of total deposits and 36.6% of
total assets at March 31, 2003, as compared to 47.1% and 38.3%, respectively, at
December 31, 2002.
LOAN AND ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
As of March 3l, 2002, total loans receivable reached $69 million, a decrease of
$560,000, or 0.8%, as compared to December 3l, 2002.
Total non-performing assets (non-performing loans and foreclosed real estate,
excluding loans past due 90 days or more and still accruing interest) at March
3l, 2003, were $224,000, or .12%, of total assets as compared to $227,000, or
..13%, of total assets at December 3l, 2002. There was no foreclosed real estate
held by the Corporation as of March 3l, 2003 or as of December 3l, 2002.
The following summary table presents information regarding non-performing loans
and assets as of March 3l, 2003 and 2002, and December 3l, 2002.
13
NONPERFORMING LOANS AND ASSETS
(in Thousands)
March 31, December 31, March 31,
2003 2002 2002
Nonaccrual Loans:
Commercial $ - $ - $ 2
Consumer - - -
Real Estate:
Construction - - -
Mortgage 224 227 291
----------- ---------------- ------------
Total nonaccrual 224 227 293
Restructured loans - - -
----------- ---------------- ------------
Total nonperforming loans 224 227 293
Foreclosed real estate - - -
----------- ---------------- ------------
Total nonperforming assets 224 227 293
Loans past due 90 days or more 268 203 9
----------- ---------------- ------------
Total nonperforming assets and
loans past due 90 days or more $ 492 $ 430 $ 302
Nonperforming loans to total loans 0.33% 0.32% 0.41%
Nonperforming assets to total assets 0.12% 0.13% 0.18%
The following table sets forth the corporation's provision and allowance for
loan losses.
ALLOWANCE FOR LOAN LOSSES
3 months 3 months
Ending Ending
March 31, March 31,
2003 2002
Balance at beginning of period $ 564 $ 446
Provisions charged to operating expenses 15 20
Recoveries of loans previously charged-off
Commercial 9 -
Consumer 1 -
Real Estate - -
----------- ----------------
Total Recoveries 10 -
Loans Charged Off:
Commercial - -
Consumer - 6
Real Estate - -
----------- ----------------
Total Charged-off - 6
Net Charge-offs (recoveries) (10) 6
Balance at end of period $ 589 $ 460
Net charge-offs as a percentage of 0.00% 0.01%
average loans outstanding
Allowance for loan losses as a percentage of 0.85% 0.64%
period-end loans
14
DEPOSITS
Total deposits at March 3l, 2003, were $152.5 million, up $6 million, or 4.1%,
over total deposits of $146.5 million at December 3l, 2002. The average balances
for the first three months of 2003 and 2002 are presented in the following
table:
Three Months Ended March 31,
2003 2002
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
Demand Deposits:
Noninterest-bearing $ 11,900 $ 11,232
Interest-bearing 8,004 1.95% 7,492 1.44%
Savings 54,608 1.93% 37,132 2.89%
Time deposits 73,942 4.51% 70,901 5.20%
----------- ---------
Total Deposits $ 148,454 $ 126,757
=========== =========
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
15
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 March 3l, 2003, the Corporation's simulation model indicates net
interest income would increase 3.0% within the first year if rates increased as
described above. The model projects that net income would decrease by 3.5% 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.
16
CAPITAL ADEQUACY
At March 31, 2003, stockholders' equity totaled $33.7 million, up 2.7% over
stockholders' equity of $32.8 million at December 31, 2002. Stockholders' equity
at March 31, 2003 included $67,000 unrealized gain, net of income taxes, on
securities available for sale. Excluding this unrealized gain, gross
stockholders' equity changed by an increase of $770,000 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.
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:
To Be Well
Capitalized
For Capital Under Prompt
March 31, December 31, Adequacy Corrective Action
2003 2002 Purposes Provisions
---- ---- -------- ----------
Risk-Based Capital Ratios:
Tier 1 Capital 40.31% 40.20% 4.00% 6.00%
Total Capital 41.00 40.90 8.00 10.00
Leveraged Capital 18.40 18.50 4.00 5.00
At March 3l, 2002, the consolidated capital levels of the Corporation and 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 3l, 2002. The market risk principally includes interest rate risk,
which is discussed in the Management's Discussion and Analysis above.
17
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 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
Corporation concluded that the Corporation's disclosure controls and procedures
were adequate.
The Corporation 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 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
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
18
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.
19
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: 05/12/03 /s/ John J. Remaley
--------------------------
John J. Remaley, President
Date: 05/12/03 /s/ Duane J. Costenbader
-------------------------------------
Duane J. Costenbader, Asst. Secretary
20
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
21
(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: May 12, 2003 By: /s/ John J. Remaley
John J. Remaley
Chief Executive Officer
22
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADDED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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.
23
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: May 12, 2003 By: /s/ Duane J. Costenbader
Duane J. Costenbader
Principal Financial Officer
24