Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 2003
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
----------------------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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 6/30/03,
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)
June 30, 2003 and December 31, 2002................................................................ 3
Consolidated Statements of Income (Unaudited) Three months ended
June 30, 2003 and June 30, 2002
Six months ended June 30, 2003 and June 30, 2002................................................... 4
Consolidated Statements of Stockholders' Equity (Unaudited)
Six months ended June 30, 2003, and June 30, 2002.................................................. 5
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2003, and June 30, 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......................................... 19
Item 4. Controls and Procedures............................................................................ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 20
Item 2. Changes in Securities.............................................................................. 20
Item 3. Defaults Upon Senior Securities.................................................................... 20
Item 4. Results of Votes of Security Holders............................................................... 20
Item 5. Other Information.................................................................................. 21
Item 6. Exhibits and Reports on Form 8-K................................................................... 21
SIGNATURES....................................................................................................... 22
2
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
Dollars in thousands 2003 2002
---------------------------
ASSETS (Unaudited)
Cash and due from banks $ 5,474 $ 2,732
Interest bearing deposits with banks 43 18
Federal funds sold 13,247 10,475
Securities available for sale 19,268 10,044
Securities held to maturity, market value
2003 $84,867; 2002 $85,914 81,579 84,353
Loans 68,865 69,598
Less allowance for loan losses (611) (564)
---------------------------
Net loans 68,254 69,034
---------------------------
Premises and equipment, net 2,388 2,396
Other assets 1,540 1,241
---------------------------
Total assets $ 191,793 $ 180,293
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 13,619 $ 11,934
Interest bearing 143,184 134,601
---------------------------
Total Deposits 156,803 146,535
Other liabilities 837 933
---------------------------
Total liabilities 157,640 147,468
---------------------------
Stockholders' Equity
Common stock, $1 par value, authorized 2,500,000 shares;
issued 200,000 shares; outstanding 2003 196,431 shares;
2002 196,431 shares 200 200
Paid-in capital 609 609
Retained earnings 33,899 32,610
Accumulated other comprehensive income 60 21
Less treasury stock at cost 2003: 3,569 shares; 2002: 3,569 shares (615) (615)
---------------------------
Total stockholders' equity 34,153 32,825
---------------------------
Total liabilities and stockholders' equity $ 191,793 $ 180,293
===========================
See Notes to Consolidated Financial Statements.
3
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands, except per share data) 2003 2002 2003 2002
--------------------------- ---------------------------
Interest income:
Interest and fees on loans $ 1,253 $ 1,383 $ 2,519 $ 2,765
Interest and dividends on investments:
Taxable 627 757 1,304 1,495
Exempt from federal income taxes 568 432 1,110 815
Interest on federal funds sold and other 40 30 71 50
--------------------------- ---------------------------
Total interest income 2,488 2,602 5,004 5,125
--------------------------- ---------------------------
Interest Expense:
Interest on deposits 1,115 1,244 2,231 2,460
--------------------------- ---------------------------
Total interest expense 1,115 1,244 2,231 2,460
--------------------------- ---------------------------
Net interest income 1,373 1,358 2,773 2,665
--------------------------- ---------------------------
Provision for loan losses 15 45 30 65
--------------------------- ---------------------------
Net interest income after provision
for loan losses 1,358 1,313 2,743 2,600
Other income:
Service charges on deposit accounts 44 41 90 86
Other service charges and fees 31 26 45 43
Other income 2 (1) 12 5
Net security gains - - - 1
--------------------------- ---------------------------
Total other income 77 66 147 135
--------------------------- ---------------------------
Other expenses:
Salaries and employee benefits 275 252 542 497
Occupancy 47 30 75 53
Furniture and equipment 35 35 70 70
Pennsylvania shares tax 78 69 153 145
Other expenses 131 141 275 240
--------------------------- ---------------------------
Total other expenses 566 527 1,115 1,005
--------------------------- ---------------------------
Income before income taxes 869 852 1,775 1,730
Income tax expense 114 153 250 320
--------------------------- ---------------------------
Net income $ 755 $ 699 $ 1,525 $ 1,410
=========================== ===========================
Per share data:
Earnings per share, basic and diluted $ 3.84 $ 3.56 $ 7.76 $ 7.18
=========================== ===========================
Weighted average common shares outstanding 196,431 196,431 196,431 196,431
=========================== ===========================
Cash dividends declared per share $ 1.20 $ 1.10 $ 1.20 $ 1.10
=========================== ===========================
See Notes to Consolidated Financial Statements.
4
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Dollars in thousands Stock Capital Earnings Income (Loss) Stock Equity
-----------------------------------------------------------------------------
Balance, December 31, 2001 $ 200 $ 609 $ 30,404 $ (100) $ (615) $ 30,498
----------
Comprehensive Income:
Net income - - 1,410 - - 1,410
Change in unrealized net gains on
securities available for sale, net of tax 75 75
----------
Total comprehensive income 1,485
----------
Cash dividends declared on common
stock, $1.10 per share - - (216) - - (216)
---------------------------------------------------------------------------
Balance, June 30, 2002 $ 200 $ 609 $ 31,598 $ (25) $ (615) $ 31,767
===========================================================================
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Dollars in thousands Stock Capital Earnings Income Stock Equity
-----------------------------------------------------------------------------
Balance, December 31, 2002 $ 200 $ 609 $ 32,610 $ 21 $ (615) $ 32,825
----------
Comprehensive Income:
Net income - - 1,525 - - 1,525
Change in unrealized net gains on
securities available for sale, net of tax 39 39
----------
Total comprehensive income 1,564
----------
Cash dividends declared on common
stock, $1.20 per share - - (236) - - (236)
---------------------------------------------------------------------------
Balance, June 30, 2003 $ 200 $ 609 $ 33,899 $ 60 $ (615) $ 34,153
===========================================================================
See Notes to Consolidated Financial Statements.
5
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Dollars in thousands
Six Months Ended June 30, 2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,525 $ 1,410
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 53 50
Provision for loan losses 30 65
Net accretion of securities (9) (252)
Net security gains - (1)
Change in assets and liabilities:
Decrease in:
Accrued interest receivable (78) (87)
Income taxes receivable (228) (160)
Other assets (13) (7)
Decrease in:
Accrued interest payable (77) (33)
Other liabilities (19) (10)
-------- --------
Net cash provided by operating activities 1,184 975
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase(decrease) in interest bearing deposits
with banks (25) 27
Net increase in federal funds sold (2,772) (4,676)
Purchase of securities available for sale (11,468) (4,415)
Proceeds from maturities/calls of securities available
for sale 2,274 992
Purchase of securities held to maturity (22,890) (13,014)
Proceeds from maturities/calls of securities held to
maturity 25,702 8,443
Net decrease in loans 750 887
Purchases of premises and equipment (45) (65)
-------- --------
Net cash used in investing activities (8,474) (11,821)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 10,268 10,675
Dividends paid (236) (216)
-------- --------
Net cash provided by financing activities 10,032 10,459
-------- --------
Increase (decrease) in cash and cash equivalents 2,742 (387)
Cash and cash equivalents:
Beginning 2,732 2,909
-------- --------
Ending $ 5,474 $ 2,522
======== ========
Supplementary Cash Flows Information
Interest Paid $ 2,308 $ 2,520
======== ========
Income Taxes Paid $ 621 $ 625
======== ========
See Notes to Consolidated Financial Statements.
6
NEFFS BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(Unaudited)
Note 1. BASIS OF PRESENTATION
The consolidated financial statements include the 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 accounting principles generally accepted 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 and six
month periods ended June 30, 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 made in this report
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements.
Important factors that might cause such differences include, but are not limited
to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The company undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the company files
from time to time with the Securities and Exchange Commission.
For further information, refer to the financial statements and footnotes thereto
included in Neffs Bancorp, Inc. Annual Report for the year ended December 31,
2002.
7
NOTE 2. COMMITMENTS AND CONTIGENCIES
The Company is subject to certain routine legal proceedings and claims arising
in the ordinary course of business. It is management's opinion that the ultimate
resolution of these claims will not have a material adverse effect on the
Company's financial position and results of operations.
NOTE 3. COMPREHENSIVE INCOME
Comprehensive income was $1.56 million and $1.49 million for the six months
ended June 30, 2003 and 2002. For the three months ending June 30, 2003 and
2002, comprehensive income was $727,000 and $799,000, respectively. 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, net of tax.
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
$672,000 of standby letters of credit as of June 30, 2003. The Bank uses the
same credit policies in making conditional obligations as it does for on-balance
sheet instruments.
8
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 June 30, 2003 for guarantees under standby letters of credit
issued after December 31, 2002 is not material.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." This interpretation provides new guidance for the
consolidation of variable interest entities (VIEs) and requires such entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risk among parties involved. The interpretation also adds
disclosure requirements for investors that are involved with unconsolidated
VIEs. The disclosure requirements apply to all financial statements issued after
January 31, 2003. The consolidation requirements apply immediately to VIEs
created after January 31, 2003 and are effective for the first fiscal year or
interim period beginning after June 12, 2003 for VIEs acquired before February
1, 2003. The adoption of this interpretation did not have any impact on the
Company's financial condition or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." This statement requires that an issuer classify a
financial instrument that is within its scope as a liability. Many of these
instruments were previously classified as equity. This Statement was effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise was effective beginning July 1, 2003. The adoption of this standard
did not have any 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 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 the
Bank. When words such as "believes," "expects," "anticipates" or similar
expressions occur in this Form 10-Q, management is making forward-looking
statements.
9
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 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 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 the Compnay files periodically with the
Securities and Exchange Commission.
OVERVIEW
Net income for the quarter increased 8.0% to $755,000 as compared to $699,000
for the second quarter of 2002. Net income per common share increased 7.9% to
$3.84 from $3.56 per common share in the second quarter a year ago. At June 30,
2003, the Company had total assets of $191.8 million, total loans of $68.9
million, and total deposits of $156.8 million.
RESULTS OF OPERATIONS
AVERAGE BALANCES AND AVERAGE INTEREST RATES
Interest earning assets averaged $178.9 million for the second quarter of 2003
as compared to $160.4 million for the same period in 2002. The yield on earning
assets for the second quarter of 2003 was 5.6%, a decrease of 90 basis points
over the comparable period in 2002.
The growth in interest earning assets was funded primarily by an increase of $20
million in the average balance of deposits. Average interest-bearing liabilities
increased from $122.1 million during the second quarter of 2002 to $141.9
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 $1.0 million, $15.2 million, and $3.8 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 3.1% for the second
quarter of 2003 and 4.1% for the second quarter of 2002, a decrease of 100 basis
points. This was the result
10
of the declining interest rate environment that was experienced during much of
2002 and 2003.
NET INTEREST INCOME AND NET INTEREST MARGIN
The largest source of the Company's income is net interest income. Net interest
income is the difference between interest income earned on assets and interest
expense incurred on liabilities used to fund those assets. Interest earning
assets primarily include loans and securities. The principal source of funding
for such assets is deposits.
Interest income decreased by $114,000, or 4.4%, over the second quarter of 2002.
Average interest earning assets grew to $178.9 million for the second quarter of
2003 as compared to $160.4 million for the same period in 2002. This decrease is
attributed to the declining interest rates on loans. The yield on earning assets
for the second quarter of 2003 was 5.6% a decrease of 90 basis points over the
comparable period in 2002.
Interest expense for the second quarter of 2003 decreased by $129,000, or 10.4%
compared to the second quarter of 2002. This decrease was primarily attributable
to a decrease in the average rates paid on interest-bearing liabilities. The
average rate paid on these liabilities for the second quarter of 2003 was 3.1% a
decrease of 100 basis points.
Net interest income for the second quarter of 2003 increased by $15,000, or 1.1%
over the same period in 2002. 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
interest-earning assets and the average rate incurred on interest-bearing
liabilities. Net interest margin represents the difference between interest
income, including net loan fees earned, and interest expense, reflected as a
percentage of average earning assets. The company's net interest rate spread was
2.5% during the second quarter of 2003 compared to 2.4% for the same period of
the previous year. The net interest margin decreased by 40 basis points from 3.4
for the second quarter 2002 to 3.0% during the second quarter of 2003.
For the six months ended June 30, 2003, interest income decreased by $121,000 or
2.4%, over the same period in 2002. As with the second quarter, the decrease for
the first six months was mostly related to the declining interest rates and the
level of average securities outstanding. Interest earning assets for the first
six months of 2003 averaged $177.5 million versus $156.8 million for the
comparable period in 2002. The yield on those assets decreased to 5.6% during
the first half of 2003, from 6.5% for the first half of 2002.
Interest expense for the first six months of 2003 declined $229,000 or 9.3% for
the first six months of 2002. The level of average interest-bearing liabilities
increased from $118.8 million for the first half of 2002 to $139.2 million for
the first six months of 2003. The average rate paid for the first half of 2003
was 3.2%, down 90 basis points from 4.1% for the comparable period in the prior
year.
11
Net interest income for the first six months of 2003 increased by $108,000 or
4.1% over the same period in 2002. The company's net interest margin decreased
to 3.1% for the first six months of 2003, from 3.4% from the first half of 2002.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased by $15,000 during the second quarter of
2003; $30,000 less than the increase for the second quarter of 2002. This change
was made to keep pace with the decrease in the loan portfolio.
NONINTEREST INCOME
Noninterest income for the second quarter of 2003 decreased by $11,000, or 16.7%
from the same period in 2002. The increase is attributable to service charges
and fees associated with servicing a higher volume of deposit accounts and
transactions.
Recurring core noninterest income for the first six months of 2003 was $135,000
as compared to $131,000 for the first half of 2002, an increase of 3.0%. The
increase is mainly attributable to an increase in deposit account service charge
income.
NONINTEREST EXPENSE
For the second quarter of 2003, noninterest expense increased by $39,000 or
7.4%, over the same period in 2002.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $23,000, or 9.1% for the second quarter of
2003 over the second quarter of 2002. This increase is consistent with increases
in staff levels necessary to handle company growth.
Occupancy expense increased $17,000 for the second quarter of 2003 as compared
to 2003. This increase is attributed to building maintenance performed during
the second quarter of 2003.
Other expenses for the second quarter of 2003 remained relatively unchanged as
compared to the second quarter of 2002.
For the first six months of 2003, non-interest expense increased by $110,000 or
11% over the same period in 2002.
Salary expenses and employee benefits increased by $45,000 or 9.1%, over the
first six months of 2002. The increase was due to normal salary adjustments and
hiring of additional staff.
12
Occupancy and furniture and equipment expenses for the first six months of 2003
were $22,000, or 41.5% higher compared to the first half of 2002. This increase
consists of building maintenance expenses performed during the first six months
of 2003.
Pennsylvania shares tax expense totaled $153,000 for the first six months ended
June 30, 2003, an increase of $8,000, or 5.5%, over the first half of 2002.
Net other expenses increased by $35,000 or 11.3% for the first six months ended
June 30, 2003 over the first half of 2002. This increase is the result of
attendance at conventions, purchase of stationary and supplies, and increased
advertising.
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 annualized ratio was 1.04% for the three months ended June 30, 2003,
slightly lower than 1.12% for the three months ended June 30, 2002. It was 1.04%
for the first six months of 2003 compared to 1.08% for the comparable period in
2002.
Another productivity measure is the operating efficiency ratio. This ratio
expresses the relationship of noninterest expenses (excluding foreclosed real
estate expenses) to net interest income plus noninterest income (excluding
nonrecurring gains). For the quarter ended June 30, 2003, the operating
efficiency ratio was 39.0% compared to 37.0% for the similar period in 2002. For
the six months ended June 30, 2003, this ratio was 38.2% compared to 35.9% for
the six months ended June 30, 2002.
PROVISION FOR FEDERAL INCOME TAX
The provision for federal income taxes was $114,000 for the second quarter of
2003, as compared to $153,000 for the same period in 2002. For six months ended
June 30, the provision was $250,000 and $320,000 for 2003 and 2002,
respectively. The effective tax rate, which is the ratio of income tax expense
to income before income taxes, was 13.1% for the second quarter of 2003 and 18%
for the second quarter of 2002. The effective tax rate for the first six months
of 2003 and 2002 were 14.1% and 18.5%, respectively. The reason for this
decrease is due to the bank's increased investments into tax-free securities.
NET INCOME
Net income for the second quarter of 2003 was $755,000, an increase of $56,000
or 8.0% over the $699,000 recorded in the second quarter of 2002. This increase
was mainly due to the favorable interest rate climate as deposit account growth
funded higher yielding securities.
Net income for the first six months of 2003 was $1.5 million as compared to $1.4
million recorded in the first six months of 2002. This was mainly due to a
favorable interest rate
13
climate, enhanced by growth in short term, low rate deposits accounts and
subsequent growth in higher yielding securities.
RETURN ON AVERAGE ASSETS
Return on average assets (ROA) measures the Corporation's net income in relation
to its total average assets. The Corporation's annualized ROA for the second
quarter of 2003 was 1.6% compared to 1.7% for the second quarter of 2002. The
ROA for the first six months of 2003 and 2002 was 1.6% and 1.8%, respectively.
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 second quarter of 2003 and 2002
was 9.0%. The annualized ROE for the first six months of 2003 remained unchanged
from the first six months of 2002 at 9.1%.
FINANCIAL CONDITION
SECURITIES
During the first six months of 2002, securities available for sale increased by
$9.3 million (excluding effects of unrealized gains/losses) from $10 million at
December 31, 2002 to $19.3 million at June 30, 2003. This increase is a result
of increased purchases of mortgage-backed securities. The securities available
for sale portfolio is comprised of mortgage-backed securities and equity
securities.
During the first six months of 2003, securities held to maturity decreased from
$84.4 million to $81.6 million, primarily as a result of the redemption of U.S.
Government agency securities and Corporate securities. Securities held to
maturity include U.S. Government agency securities, tax-exempt securities,
mortgage-backed securities, corporate securities and equity securities.
Federal funds sold increased by $2.8 million during the first six months of 2003
from $10.5 million at December 31, 2002. This increase was due mainly to calls
of bonds and continued strong growth in deposits, mainly savings account
deposits. Total securities and federal funds sold aggregated $114.1 million at
June 30, 2003, and represented 59.5% of total assets.
The average yield on the combined securities portfolio for the first six months
of 2003 was 5.0% as compared to 5.8% for the similar period of 2002. For the
second quarter of 2003,
14
the average yield on the combined securities portfolio was 4.9% as compared to
5.8% for the same period in 2002.
NET LOANS RECEIVABLE
During the first six months of 2003, net loans receivable decreased by $780,000
from $69.0 million at December 31, 2002, to $68.3 million on June 30, 2003.
Loans receivable represented 43.9% of total deposits and 35.9% of total assets
at June 30, 2003, as compared to 47.5% and 38.6%, respectively, at December 31,
2002.
LOAN AND ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
Total non-performing assets (non-performing loans and foreclosed real estate,
excluding loans past due 90 days or more and still accruing interest) at June
30, 2003, were $223,000, 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 owned at June 30, 2003, or at December 31,
2002.
The following summary table presents information regarding non-performing loans
and assets as of June 30, 2003 and 2002, and December 3l, 2002.
15
NONPERFORMING LOANS AND ASSETS
(in Thousands)
June 30, December 31, June 30,
2003 2002 2002
---------- ---------- ----------
Nonaccrual Loans:
Commercial $ - $ - $ 2
Consumer - - -
Real Estate:
Construction - - -
Mortgage 223 227 289
---------- ---------- ----------
Total nonaccrual 223 227 291
Restructured loans - - -
---------- ---------- ----------
Total nonperforming loans 223 227 291
Foreclosed real estate - - -
---------- ---------- ----------
Total nonperforming assets 223 227 291
Loans past due 90 days or more 160 203 235
---------- ---------- ----------
Total nonperforming assets and
loans past due 90 days or more $ 383 $ 430 $ 526
Nonperforming loans to total loans 0.73% 0.32% 0.73%
Nonperforming assets to total assets 0.13% 0.13% 0.31%
The following table sets forth the corporation's provision and allowance for
loan losses.
ALLOWANCE FOR LOAN LOSSES
6 months Year
Ending Ending
June 30, December 31,
2003 2002
------------ ------------
Balance at beginning of period $ 564 $ 445
Provisions charged to operating expenses 30 170
Recoveries of loans previously charged-off
Commercial 9 -
Consumer 10 6
Real Estate - -
------------ ------------
Total Recoveries 19 6
Loans Charged Off:
Commercial - (27)
Consumer (2) (30)
Real Estate - -
------------ ------------
Total Charged-off (2) (57)
------------ ------------
Net Charge-offs (recoveries) 17 (51)
------------ ------------
Balance at end of period $ 611 $ 564
Net charge-offs as a percentage of
average loans outstanding - 0.04%
Allowance for loan losses as a percentage of
period-end loans 0.89% 0.61%
16
DEPOSITS
Total deposits at June 30, 2003 were $156.8 million, up $10.3 million, or 7.0%,
over total deposits of $146.5 million at December 3l, 2002. The average balances
for the six months ended June 30, 2003 and 2002 are presented in the following
table.
Six Months Ended June 30
2003 2002
Average Average Average Average
Dollars in thousands Balance Rate Balance Rate
------- ------- --------- -------
Demand Deposits:
Noninterest-bearing 13,462 $ 11,536
Interest-bearing 8,331 .96% 7,722 1.45%
Savings 56,037 1.94 39,676 2.90
Time Deposits 74,851 4.41 71,393 5.12
------- ---------
TOTAL DEPOSITS 152,681 130,327
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 Company's Board of Directors approves the guidelines established
by ALCO.
An interest rate sensitive asset or liability is one that, within a defined
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
as specific points in time ("GAP"), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the one-year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the same
degree. As a result, the Company's GAP does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
Management believes the simulation of net interest income in different interest
rate environments provides a more meaningful measure of interest rate risk.
Income simulation
17
analysis captures not only the potential of all assets and liabilities to mature
or reprice, but also the probability that they will do so. Income simulation
also attends to the relative interest rate sensitivities of these items, and
projects their behavior over an extended period of time. Finally, income
simulation permits management to assess the probable effects on the balance
sheet not only of changes in interest rates, but also of proposed strategies for
responding to them.
The company's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 12 months in a flat rate scenario
versus net income in alternative interest rate scenarios. Management continually
reviews and refines its interest rate risk management process in response to the
changing economic climate. Currently, the company's model projects a
proportionate 200 basis point change during the next year.
The company's ALCO policy has established that income sensitivity will be
considered acceptable if overall net income volatility in a plus or minus 200
basis point scenario is within 5% of net interest income in a flat rate
scenario. At June 30, 2003, the company's simulation model indicates net
interest income would increase 3.2% within the first year if rates increased as
described above. The model projects that net income would decrease by 3.9% 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
At June 30, 2003, shareholders' equity totaled $34.2 million, up 4.2% over
shareholders' equity of $32.8 million at December 31, 2002. Shareholders' equity
at June 30, 2003 included a $60,000 unrealized gain, net of income taxes, on
securities available for sale. Excluding this unrealized gain, gross
shareholders' equity changed by an increase of $1.3 million in retained net
income.
18
Risk-based capital provides the basis for which all banks are evaluated in terms
of capital adequacy. The risk-based capital standards require all banks to have
Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at
least 8% of risk-adjusted assets. Tier 1 capital includes common shareholders'
equity together with related surpluses and retained earnings. Total capital may
be comprised of total Tier 1 capital plus qualifying debt instruments, and the
allowance for loan losses.
The following table provides a comparison of the company's risk-based capital
ratios and leverage ratios to the minimum regulatory requirements for the
periods indicated:
To Be Well
Capitalized
For Capital Under Prompt
June 30, December 31, Adequacy Corrective Action
2003 2002 Purposes Provisions
-------- ------------ ----------- -----------------
Risked Based
Capital Ratios:
Tier 1 40.1% 40.2% 4.0% 6.0%
Total 40.8 40.9 8.0 10.0
Leveraged Total 17.8 18.5 4.0 5.0
At June 30, 2003, 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
The company'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.
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 as of June 30, 2003, the chief
19
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 during the quarter ended
June 30, 2003, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of the management of the company, there are no proceedings
pending to which the company or its subsidiary are a party or to which their
property is subject, which, if determined adversely to the company or its
subsidiary, would be material in relation to the company's or its subsidiary's
financial condition. There are no proceedings pending other than ordinary
routine litigation incident to the business of the company or its subsidiary. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against the company or its subsidiary by government authorities.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
a) An annual meeting of shareholders was held on April 9, 2003,
at The NOVA Building, Coplay, PA.
b) One matter was voted on at the April 9, 2003, meeting as
follows:
Term Votes cast Votes against
Re-elected Expires for or withheld*
---------- -----------------------------------------------
John F. Simock April, 2006 114,357 0
Robert L. Wagner April, 2006 114,357 0
*Includes broker nonvotes.
Directors whose term continued after the meeting: Term Expires
- ------------------------------------------------- ------------
Robert L. Heintzelman April, 2004
John J. Remaley April, 2004
Herman P. Snyder April, 2005
20
ITEM 5. OTHER INFORMATION
On May 30, 2003, the corporation noted the passing of long-standing director,
Robert L. Wagner. Mr. Wagner served as director since 1988 and as
Secretary/Treasurer since 2002. On June 17, 2003, Mary Ann Wagner, was appointed
to serve as a Class C director to complete the remaining term of Mr. Wagner
which expires in 2006.
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 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 3(ii) to Form
8-K 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
required by this exhibit is contained in the
statements of income filed as part of Item 1 of this
report.
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15d- 14(a)
31.2 Certification of Principal Financial Officer pursuant
to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer pursuant to
Section 1350 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant
to Section 1350 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
None.
21
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: 08/11/03 /s/ John J. Remaley
John J. Remaley, President
Date: 08/11/03 /s/ Duane J. Costenbader
Duane J. Costenbader, Asst. Secretary
22