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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 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 9/30/03, 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
September 30, 2003 (Unaudited) and December 31, 2002.......................................... 3
Consolidated Statements of Income (Unaudited)
Three months ended September 30, 2003 and September 30, 2002
Nine months ended September 30, 2003 and September 30, 2002................................... 4
Consolidated Statements of Shareholders' Equity (Unaudited)
Nine months ended September 30, 2003, and September 30, 2002.................................. 5
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2003, and September 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 and Use of Proceeds..................................................... 20
Item 3. Defaults Upon Senior Securities............................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders........................................... 20
Item 5. Other Information............................................................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................................................. 20
SIGNATURES............................................................................................. 22
2
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
Dollars in thousands 2003 2002
------------- ------------
(Unaudited) (Audited)
ASSETS
Cash and due from banks $ 4,394 $ 2,732
Interest bearing deposits with banks 23 18
Federal funds sold 7,907 10,475
Securities available for sale 21,825 10,044
Securities held to maturity, market value
2003 $85,460; 2002 $85,914 83,361 84,353
Loans 70,133 69,598
Less allowance for loan losses (623) (564)
--------- --------
Net loans 69,510 69,034
--------- --------
Premises and equipment, net 2,378 2,396
Other assets 1,765 1,241
--------- --------
Total assets $ 191,163 $180,293
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 12,931 $ 11,934
Interest bearing 142,765 134,601
--------- --------
Total Deposits 155,696 146,535
Other liabilities 799 933
--------- --------
Total liabilities 156,495 147,468
--------- --------
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 34,566 32,610
Accumulated other comprehensive income (92) 21
Less treasury stock at cost 2003: 3,569 shares; 2002: 3,569 shares (615) (615)
--------- --------
Total shareholders' equity 34,668 32,825
--------- --------
Total liabilities and shareholders' equity $ 191,163 $180,293
========= ========
See Notes to Consolidated Financial Statements.
3
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Interest income:
Interest and fees on loans $ 1,297 $ 1,367 $ 3,816 $ 4,132
Interest and dividends on investments:
Taxable 467 755 1,771 2,250
Exempt from federal income taxes 578 441 1,688 1,256
Interest on federal funds sold and others 31 42 102 92
-------- -------- -------- --------
Total interest income 2,373 2,605 7,377 7,730
-------- -------- -------- --------
Interest Expense:
Interest on deposits 1,112 1,277 3,343 3,737
-------- -------- -------- --------
Total interest expense 1,112 1,277 3,343 3,737
-------- -------- -------- --------
Net interest income 1,261 1,328 4,034 3,993
-------- -------- -------- --------
Provision for loan losses 15 45 45 110
-------- -------- -------- --------
Net interest income after provision
for loan losses 1,246 1,283 3,989 3,883
-------- -------- -------- --------
Other operating income:
Service charges on deposit accounts 46 45 136 131
Other service charges and fees 18 18 63 61
Net security gains - - - 1
Other income 6 8 18 13
-------- -------- -------- --------
Total other income 70 71 217 206
-------- -------- -------- --------
Other operating expenses:
Salaries and employee benefits 293 249 835 746
Occupancy 46 39 121 92
Furniture and equipment 35 35 105 105
Pennsylvania shares tax 78 69 231 214
Other expenses 118 97 393 337
-------- -------- -------- --------
Total other expenses 570 489 1,685 1,494
-------- -------- -------- --------
Income before income taxes 746 865 2,521 2,595
Income tax expense 79 167 329 487
-------- -------- -------- --------
Net income $ 667 $ 698 $ 2,192 $ 2,108
======== ======== ======== ========
Per share data:
Earnings per share, basic and diluted $ 3.40 $ 3.55 $ 11.16 $ 10.73
======== ======== ======== ========
Weighted average common shares outstanding 196,431 196,431 196,431 196,431
======== ======== ======== ========
Cash dividends declared per share $ - $ - $ 1.20 $ 1.10
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
4
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other Total
Common Paid-In Retained Comprehensive Treasury Shareholders'
(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 - - 2,108 - - 2,108
Change in unrealized net gains
on securities available for sale,net of tax 149 149
------------
Total comprehensive income 2,257
------------
Cash dividends declared on common
stock, $1.10 per share - - (216) - - (216)
------ ------- -------- ------------ ------- ------------
Balance, September 30, 2002 $ 200 $ 609 $ 32,296 $ 49 $ (615) $ 32,539
====== ======= ======== ============ ======= ============
Accumulated
Other Total
Common Paid-In Retained Comprehensive Treasury Shareholders'
(Dollars in thousands) Stock Capital Earnings Income (Loss) Stock Equity
------ ------- -------- ------------- -------- -------------
Balance, December 31, 2002 $ 200 $ 609 $ 32,610 $ 21 $ (615) $ 32,825
------------
Comprehensive Income:
Net income - - 2,192 - - 2,192
Change in unrealized net losses
on securities available for sale,net of tax (113) (113)
------------
Total comprehensive income 2,079
------------
Cash dividends declared on common
stock, $1.20 per share - - (236) - - (236)
------ ------- -------- ------------ ------- ------------
Balance, September 30, 2003 $ 200 $ 609 $ 34,566 $ (92) $ (615) $ 34,668
====== ======= ======== ============ ======= ============
See Notes to Consolidated Financial Statements.
5
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(Dollars in thousands) 2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,192 $ 2,108
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 80 76
Provision for loan losses 45 110
Net amortization (accretion) of securities 167 (367)
Net security gains - (1)
Change in assets and liabilities:
Increase in:
Accrued interest receivable (229) (40)
Other assets (237) (86)
Increase (decrease) in:
Accrued interest payable (111) (58)
Other liabilities (23) 5
---------- ----------
Net cash provided by operating activities 1,884 1,747
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing
deposits with banks (5) 22
Net (increase) decrease in federal funds sold 2,568 (10,277)
Purchase of securities available for sale (17,065) (8,021)
Proceeds from maturities/calls of securities available
for sale 4,979 2,039
Purchase of securities held to maturity (30,529) (20,956)
Proceeds from maturities/calls of securities held to
maturity 31,488 17,982
Net decrease (increase) in loans (521) 1,669
Purchases of premises and equipment (62) (168)
---------- ----------
Net cash used in investing activities (9,147) (17,710)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 9,161 16,370
Dividends paid (236) (216)
---------- ----------
Net cash provided by financing activities 8,925 16,154
---------- ----------
Increase in cash and cash equivalents 1,662 191
Cash and cash equivalents:
Beginning 2,732 2,909
---------- ----------
Ending $ 4,394 $ 3,100
========== ==========
Supplementary Cash Flows Information
Interest Paid $ 3,463 $ 3,808
========== ==========
Income Taxes Paid $ 798 $ 787
========== ==========
See Notes to Consolidated Financial Statements.
6
NEFFS BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
nine month periods ended September 30, 2003, are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003. These
statements should be read in conjunction with notes to the financial statements
contained in the 2002 Annual Report to Shareholders.
In addition to historical information, this Form 10-Q Report contains
forward-looking statements. The forward-looking statements made in this report
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements.
Important factors that might cause such differences include, but are not limited
to; those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The company undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the company files
from time to time with the Securities and Exchange Commission.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report for the year ended December 31, 2002.
7
NOTE 2. COMMITMENTS AND CONTINGENCIES
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 $2.08 million and $2.26 million for the nine months
ended September 30, 2003 and 2002. For the three months ending September 30,
2003 and 2002, comprehensive income was $515,000 and $772,000, respectively. The
difference between comprehensive income and net income presented in the
Consolidated Statements of Shareholders' 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 Company's financial condition or results of
operations.
Outstanding letters of credit written are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
Company'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 Company had $716,000 of
standby letters of credit as of September 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 Company 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 September 30, 2003 for guarantees under standby letters of credit issued
after December 31, 2002 is not material, in management's opinion.
In January 2003, the FASB 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 December 31, 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 April 2003, the Financial Accounting Standards Board (FASB) 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. The 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 dates. Adoption of this standard did not have a significant impact on
the Company's financial condition or results of operations.
In May 2003, the FASB 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 Company's balance sheets and
statements of income.
9
This section should be read in conjunction with the Company's financial
statements and accompanying notes.
Management of the Company 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 Company 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.
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 Company files periodically with the
Securities and Exchange Commission.
OVERVIEW
Net income for the quarter decreased 4.44% to $667,000, as compared to $698,000
for the third quarter of 2002. Net income per common share decreased 4.23% to
$3.40 from $3.55 per common share in the third quarter a year ago. At September
30, 2003, the Company had total assets of $191.2 million, net loans of $69.5
million, and total deposits of $155.7 million.
RESULTS OF OPERATIONS
AVERAGE BALANCES AND AVERAGE INTEREST RATES
Interest earning assets averaged $185.7 million for the third quarter of 2003 as
compared to $165.1 million for the same period in 2002. The yield on earning
assets for the third quarter of 2003 was 5.11%, a decrease of 121 basis points
over the comparable period in 2002.
10
The growth in interest earning assets was funded primarily by an increase of
$17.5 million in the average balance of deposits. Average interest-bearing
liabilities increased from $126.9 million during the third quarter of 2002 to
$144.4 million during the third quarter of 2003. Growth in average interest
bearing liabilities was the result of increases in interest bearing demand
deposits, savings, and time deposits of $500,000, $13 million, and $4 million,
respectively. Deposit account growth was attributed to the banks favorable
interest rate structure combined with the general decline in confidence in the
stock market.
The average rate paid on interest-bearing liabilities was 3.08% for the third
quarter of 2003 and 4.03% for the third quarter of 2002, a decrease of 95 basis
points. This was the result 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 for the third quarter of 2003 decreased by $232,000, or 8.91%,
over the third quarter of 2002. Average interest earning assets grew to $185.7
million for the third quarter of 2003 as compared to $165.1 million for the same
period in 2002. The decrease in interest income is attributed to the declining
interest rates on loans and securities. The yield on earning assets for the
third quarter of 2003 was 5.11% a decrease of 121 basis points over the
comparable period in 2002.
Interest expense for the third quarter of 2003 decreased by $165,000, or 12.92%
compared to the third 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 third quarter of 2003 was 3.08% a
decrease of 95 basis points.
Net interest income for the third quarter of 2003 decreased by $67,000 or 5.05%
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
2.03% during the third quarter of 2003 compared to 2.29% for the same period of
the previous year. The net interest margin decreased by 50 basis points from
3.22% for the third quarter 2002 to 2.72% during the third quarter of 2003.
For the nine months ended September 30, 2003, interest income decreased by
$353,000 or 4.57%, over the same period in 2002. As with the third quarter, the
decrease for the first nine months was mostly related to the declining interest
rates and the level of average securities outstanding. Interest earning assets
for the first nine months of 2003 averaged $180.3 million
11
versus $159.6 million for the comparable period in 2002. The yield on those
assets decreased to 5.46% during the nine months of 2003, from 6.46% for the
first nine months of 2002.
Interest expense for the first nine months of 2003 totaled approximately $3.3
million, a decrease of $394,000 or 10.54%, over the first nine months of 2002.
The average interest-bearing liabilities increased from $121.5 million for the
first nine months of 2002 to $141.0 million for the first nine months of 2003.
The average rate paid for the first nine months of 2003 was 3.16%, down 94 basis
points from 4.10% for the comparable period in the prior year.
Net interest income for the first nine months of 2003 increased by $41,000 or
1.03% over the same period in 2002. The company's net interest margin decreased
to 2.98% for the first nine months of 2003, from 3.34% from the first nine
months of 2002.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $30,000 during the third quarter of
2003. This was due to decreased growth in the loan portfolio and a decrease in
net charge offs.
NONINTEREST INCOME
Noninterest income for the third quarter of 2003 decreased by $1,000 or 1.41%
from the same period in 2002.
Recurring core noninterest income for the first nine months of 2003 was $199,000
as compared to $192,000 for the first nine months of 2002, an increase of 3.65%.
The increase is mainly attributable to an increase in deposit account service
charge income.
NONINTEREST EXPENSE
For the third quarter of 2003, noninterest expense increased by $81,000 or
16.56%, over the same period in 2002. A comparison of noninterest expense for
certain categories for these two periods is discussed below.
Salary expenses and employee benefits, which represent the largest component of
noninterest expenses, increased by $44,000, or 17.67% for the third quarter of
2003 over the third quarter of 2002. This increase is consistent with increases
in staff levels necessary to handle company growth.
Occupancy and furniture and equipment expense increased $7,000 or 9.46% during
the third quarter of 2003 as compared to 2002. This increase is attributed to
building maintenance performed during the third quarter of 2003.
Pennsylvania shares tax expense totaled $78,000 for the third quarter ended
September 30, 2003, an increase of $9,000, or 13.04%, over the third quarter of
2002.
12
Net other expenses for the third quarter increased $21,000 or 21.65% as compared
to the third quarter of 2002. This increase is mainly the result of attendance
at conventions, purchase of stationary and supplies, increased advertising and
an increase in professional fees.
For the first nine months of 2003, non-interest expense increased by $191,000 or
12.78% over the same period in 2002. A comparison of noninterest expense for
certain categories for these two periods is discussed below.
Salary expenses and employee benefits increased by $89,000 or 11.93%, over the
first nine months of 2002. The increase was due to normal salary adjustments and
hiring of additional staff.
Occupancy and furniture and equipment expenses for the first nine months of 2003
were $226,000, or 14.72% higher compared to the first nine months of 2002. This
increase consists of building maintenance expenses performed during the first
nine months of 2003.
Pennsylvania shares tax expense totaled $231,000 for the first nine months of
2003, an increase of $17,000, or 7.94%, over the nine months of 2002.
Net other expenses increased by $56,000 or 16.62% for the nine months ended
September 30, 2003 over the same nine months of 2002. This increase is mainly
the result of attendance at conventions, purchase of stationary and supplies,
increased advertising and an increase in professional fees.
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net noninterest expense to average assets. Net noninterest expenses
equal noninterest expenses (excluding foreclosed real estate expenses) less
noninterest income (exclusive of nonrecurring gains), divided by average assets.
This annualized ratio was 1.04% for the three months ended September 30, 2003,
slightly higher than .92% for the three months ended September 30, 2002. It was
1.02% for the first nine months of 2003 compared to 1.04% 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 September 30, 2003, the operating
efficiency ratio was 42.82% compared to 34.95% for the similar period in 2002.
For the nine months ended September 30, 2003, this ratio was 39.64% compared to
35.58% for the nine months ended September 30, 2002.
PROVISION FOR FEDERAL INCOME TAX
The provision for federal income taxes was $79,000 for the third quarter of
2003, as compared to $167,000 for the same period in 2002. For nine months ended
September 30,
13
the provision was $329,000 and $487,000 for 2003 and 2002, respectively. The
effective tax rate, which is the ratio of income tax expense to income before
income taxes, was 10.59% for the third quarter of 2003 and 19.31% for the third
quarter of 2002. The effective tax rate for the first nine months of 2003 and
2002 were 13.05% and 18.77%, respectively. The reason for this decrease is due
to the Bank's increased investments into tax-free securities.
NET INCOME
Net income for the third quarter of 2003 was $667,000, a decrease of $31,000 or
4.44% over the $698,000 recorded in the third quarter of 2002. This decrease is
mainly due to the unfavorable interest rate climate and an increase in operating
expenses for the quarter. Net income for the first nine months of 2003 was $2.2
million as compared to $2.1 million recorded in the first nine months of 2002.
This increase is mainly due to a decrease in income taxes as a result of the
purchase of tax-free securities.
RETURN ON AVERAGE ASSETS
Return on average assets (ROA) measures the Company's net income in relation to
its total average assets. The Company's annualized ROA for the third quarter of
2003 was 1.38% compared to 1.63% for the third quarter of 2002. The ROA for the
first nine months of 2003 and 2002 was 1.55% and 1.72%, respectively.
RETURN ON AVERAGE EQUITY
Return on average equity (ROE) indicates how effectively the Company can
generate net income on the capital invested by its shareholders. ROE is
calculated by dividing net income by average shareholders' equity. For purposes
of calculating ROE, average shareholders' equity includes the effect of
unrealized appreciation or depreciation, net of income taxes, on securities
available for sale. The annualized ROE for the third quarter of 2003 was 7.75%
and 8.58% for 2002. The annualized ROE for the first nine months of 2003 was
8.66% and 8.83% for 2002.
FINANCIAL CONDITION
SECURITIES
During the first nine months of 2003, securities available for sale increased by
$11.8 million (excluding effects of unrealized gains/losses) from $10 million at
December 31, 2002 to $21.8 million at September 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 nine months of 2003, securities held to maturity decreased from
$84.4 million to $83.4 million, primarily as a result of the redemption of U.S.
Government agency securities and corporate securities. Proceeds from redemptions
were reinvested in tax-exempt securities which increased to $51.4 million at
September 30, 2003 from $43.3 million
14
at December 31, 2002. Securities held to maturity include U.S. Government agency
securities, tax-exempt securities, mortgage-backed securities, corporate
securities and equity securities.
The average yield on the combined securities portfolio for the first nine months
of 2003 was 4.46% as compared to 5.75% for the similar period of 2002. For the
third quarter of 2003, the average yield on the combined securities portfolio
was 4.00% as compared to 5.64% for the same period in 2002.
NET LOANS RECEIVABLE
During the first nine months of 2003, net loans receivable increased by $500,000
from $69 million at December 31, 2002, to $69.5 million on September 30, 2003.
Loans receivable represented 44.64% of total deposits and 36.36% of total assets
at September 30, 2003, as compared to 47.11% and 38.29%, 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
September 30, 2003, were $149,000, or .08%, 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 September 30, 2003 or December 31,
2002.
The following summary table presents information regarding non-performing loans
and assets as of September 30, 2003 and 2002, and December 3l, 2002.
15
NONPERFORMING LOANS AND ASSETS
(Dollars in Thousands)
September 30 December 31, September 30
2003 2002 2002
Nonaccrual Loans:
Commercial $ - $ - $ 2
Consumer - - -
Real Estate:
Construction - - -
Mortgage 149 227 287
-------- ------ ------
Total nonaccrual 149 227 289
Restructured loans - - -
-------- ------ ------
Total nonperforming loans 149 227 289
Foreclosed real estate - - -
-------- ------ ------
Total nonperforming assets 149 227 289
Loans past due 90 days or more 331 203 53
-------- ------ ------
Total nonperforming assets and
loans past due 90 days or more $ 480 $ 430 $ 342
Nonperforming loans to total loans 0.21% 0.32% 0.48%
Nonperforming assets to total assets 0.08% 0.13% 0.20%
The following table sets forth the company's provision and allowance for loan
losses.
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
9 months Year
Ending Ending
September 30 December 31,
2003 2002
Balance at beginning of period $ 564 $ 445
Provisions charged to operating expenses 45 170
Recoveries of loans previously charged-off
Commercial 9 -
Consumer 10 6
Real Estate - -
------- ------
Total Recoveries 19 6
Loans Charged Off:
Commercial - (27)
Consumer (5) (30)
Real Estate - -
------- ------
Total Charged-off (5) (57)
------- ------
Net (Charge-offs) recoveries 14 (51)
------- ------
Balance at end of period $ 623 $ 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% 0.81%
16
DEPOSITS
Total deposits at September 30, 2003 were $155.7 million, up $9.2 million, or
6.28%, over total deposits of $146.5 million at December 3l, 2002. The average
balances for the nine months ended September 30, 2003 and 2002 are presented in
the following table.
Nine Months Ended September 30
---------------------------------------
2003 2002
Average Average Average Average
Balance Rate Balance Rate
-------- ------- --------- -------
Demand Deposits:
Noninterest bearing $ 12,826 $ 12,136
Interest bearing 8,320 0.90% 7,755 1.38%
Savings 57,080 1.94% 41,846 2.91%
Time Deposits greater than $100,000 21,093 4.18% 19,043 5.43%
Time Deposits less than $100,000 54,467 4.72% 52,863 4.96%
-------- ---------
Total Deposits $153,786 $ 133,643
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 September 30, 2003, the Company's simulation model indicates net
interest income would increase 2.51% within the first year if rates increased as
described above. The model projects that net income would decrease by 3.43% 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 September 30, 2003, shareholders' equity totaled $34.7 million, up 5.79% over
shareholders' equity of $32.8 million at December 31, 2002. Shareholders' equity
at September 30, 2003 included a $92,000 unrealized loss, net of income taxes,
on securities available for sale. Excluding this unrealized loss, gross
shareholders' equity changed by an increase of $1,956,000 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
Sept. 30, December 31, Adequacy Corrective Action
2003 2002 Purposes Provisions
--------- ------------ ----------- -----------------
Risked Based
Capital Ratios:
Tier 1 40.4% 40.2% 4.0% 6.0%
Total 41.1 40.9 8.0 10.0
Leveraged Total 17.8 18.5 4.0 5.0
At September 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 beginning on page
17, above.
ITEM 4.
CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities and Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures as of September 30, 2003, the chief
19
executive officer and principal financial officer of the Company concluded that
the Company's disclosure controls and procedures were adequate.
The Company made no significant changes in its internal controls or in other
factors that could significantly affect these controls during the quarter ended
September 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3(i) Amended and Restated Articles of Incorporation for
Neffs Bancorp, Inc. (Incorporated by reference to
Exhibit 3(i) to Form 10 filed with the Commission on
April 27, 2001, as amended on June 29, 2001 and July
20, 2001.)
20
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: 11/10/2003 /s/ John J. Remaley
John J. Remaley, President
Date: 11/10/2003 /s/ Duane J. Costenbader
Duane J. Costenbader, Asst. Secretary
22