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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File _0__-___32605__
NEFFS BANCORP, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2400383
- ----------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
5629 PA Route 873, P.O. Box 10, Neffs, PA 18065-0010
--------------------------------------------------------------
(Address of principal executive offices)
(610) 767-3875
----------------------------------------------
(Issuer's telephone number)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15 of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ( ) No ( )
Indicate by a check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.
Yes ( ) No (X)
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of 4/30/04, 197,091 shares of common stock, par value of $1.00, were
outstanding.
1
NEFFS BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition (Unaudited)
March 31, 2004 and December 31, 2003.......................................................... 3
Consolidated Statements of Income (Unaudited)
Three months ended March 31, 2004 and March 31, 2003.......................................... 4
Consolidated Statements of Stockholders' Equity (Unaudited)
Three months ended March 31, 2004, and March 31, 2003......................................... 5
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 2004, and March 31, 2003......................................... 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.................................... 18
Item 4. Controls and Procedures....................................................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 19
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.............. 19
Item 3. Defaults Upon Senior Securities............................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders........................................... 19
Item 5. Other Information............................................................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................................................. 19
SIGNATURES............................................................................................. 21
2
NEFFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31 December 31
Dollars in thousands, except share data 2004 2003
--------- ---------
ASSETS
Cash and due from banks $ 4,876 $ 4,806
Interest bearing deposits with banks 56 46
Federal funds sold 5,317 9,390
Securities available for sale 36,831 27,382
Securities held to maturity, market value
$86,147 in 2004;$84,880 in 2003 83,382 82,705
Loans 70,720 70,886
Less allowance for loan losses (640) (637)
--------- ---------
Net loans 70,080 70,249
--------- ---------
Premises and equipment, net 2,327 2,355
Other assets 1,841 1,637
--------- ---------
Total assets $ 204,710 $ 198,570
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 12,858 $ 13,107
Interest bearing 155,013 149,587
--------- ---------
Total deposits 167,871 162,694
Other liabilities 782 821
--------- ---------
Total liabilities 168,653 163,515
--------- ---------
Stockholders' Equity
Common stock, $1 par value, authorized 2,500,000 shares;
issued 200,000 shares; outstanding 197,091 shares 200 200
Paid-in capital 690 690
Retained earnings 35,617 34,853
Accumulated other comprehensive income (loss) 112 (126)
Treasury stock, at cost 2,909 shares (562) (562)
--------- ---------
Total stockholders' equity 36,057 35,055
--------- ---------
Total liabilities and stockholders' equity $ 204,710 $ 198,570
========= =========
See Notes to Consolidated Financial Statements.
3
NEFFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Dollars in thousands,except per share data
Three months ended March 31, 2004 2003
-------- --------
Interest income:
Interest and fees on loans 1,165 1,266
Interest and dividends on investments:
Taxable 702 677
Exempt from federal income taxes 566 542
Interest on federal funds sold and other 23 31
-------- --------
Total interest income 2,456 2,516
-------- --------
Interest Expense:
Interest on deposits 1,053 1,116
-------- --------
Total interest expense 1,053 1,116
-------- --------
Net interest income 1,403 1,400
-------- --------
Provision for loan losses 15 15
-------- --------
Net interest income after provision for loan losses 1,388 1,385
-------- --------
Other income:
Service charges on deposit accounts 41 46
Other service charges and fees 12 14
Other income 5 10
-------- --------
Total other income 58 70
-------- --------
Other expenses:
Salaries and employee benefits 279 267
Occupancy 32 28
Furniture and equipment 39 35
Pennsylvania shares tax 81 75
Other expenses 128 144
-------- --------
Total other expenses 559 549
-------- --------
Income before income taxes 887 906
-------- --------
Income tax expense 123 136
-------- --------
Net income $ 764 $ 770
======== ========
Per share data:
Earnings per share, basic $ 3.88 $ 3.92
======== ========
Weighted average common shares outstanding 197,091 196,431
======== ========
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 Stock Equity
------- ---------- -------- ------------- -------- -------------
Balance, December 31, 2002 $ 200 $ 609 $32,610 $ 21 $ (615) $32,825
-------
Comprehensive Income:
Net income - - 770 - - 770
Change in unrealized net gains on
securities available for sale, net of tax - - - 67 - 67
-------
Total comprehensive income 837
------- ------- ------- ------- ------- -------
Balance, March 31, 2003 $ 200 $ 609 $33,380 $ 88 $ (615) $33,662
======= ======= ======= ======= ======= =======
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Dollars in thousands Stock Capital Earnings Income Stock Equity
------- ---------- -------- ------------- -------- -------------
Balance, December 31, 2003 $ 200 $ 690 $34,853 $ (126) $ (562) $35,055
-------
Comprehensive Income:
Net income - - 764 - - 764
Change in unrealized net gains on
securities available for sale, net of tax - - - 238 - 238
-------
Total comprehensive income 1,002
------- ------- ------- ------- ------- -------
Balance, March 31, 2004 $ 200 $ 690 $35,617 $ 112 $ (562) $36,057
======= ======= ======= ======= ======= =======
See Notes to Consolidated Financial Statements.
5
NEFFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Dollars in thousands
Three months ended March 31, 2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 764 $ 770
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 32 27
Provision for loan losses 15 15
Net amortization (accretion) of securities 23 (45)
Change in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (147) (210)
Income taxes receivable 74 (98)
Other assets (255) (21)
Increase (decrease) in:
Accrued interest payable (55) (80)
Income tax payable 48 -
Other liabilities (32) (40)
-------- --------
Net cash provided by operating activities 467 318
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest bearing deposits
with banks (10) (5)
Net decrease in federal funds sold 4,073 196
Purchase of securities available for sale (10,354) (3,264)
Proceeds from maturities/calls of securities available
for sale 1,229 346
Purchase of securities held to maturity (4,669) (10,777)
Proceeds from maturities/calls of securities held to
maturity 4,006 7,167
Net decrease in loans 154 570
Purchases of premises and equipment (4) (5)
Proceeds from sale of OREO 1 -
-------- --------
Net cash used in investing activities (5,574) (5,772)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,177 5,999
-------- --------
Net cash provided by financing activities 5,177 5,999
-------- --------
Increase in cash and cash equivalents 70 545
Cash and cash equivalents:
Beginning 4,806 2,732
-------- --------
Ending $ 4,876 $ 3,277
======== ========
Supplementary Cash Flows Information
Interest Paid $ 1,108 $ 1,196
======== ========
Income Taxes Paid $ 334 $ 309
======== ========
See Notes to Consolidated Financial Statements.
6
NEFFS BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Neffs Bancorp,
Inc. (the "Corporation") and its wholly owned subsidiary, The Neffs National
Bank (the "Bank"). All material intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles in the United States
of America for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included and
are of a normal, recurring nature. Operating results for the three-month period
ended March 3l, 2004, are not necessarily indicative of the results that may be
expected for the year ending December 3l, 2004. These statements should be read
in conjunction with notes to the financial statements contained in the 2003
Annual Report to Stockholders.
In addition to historical information, this Form 10-Q Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Important factors that might cause such differences include, but are not limited
to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. Readers should
carefully review the risk factors described in other documents the Corporation
files from time to time with the Securities and Exchange Commission.
For further information, refer to the financial statements and footnotes thereto
included in The Neffs Bancorp, Inc. Annual Report for the year ended December
31, 2003.
NOTE 2. COMMITMENTS AND CONTINGENCIES
The Corporation is subject to certain routine legal proceedings and claims
arising in the ordinary course of business. It is management's opinion that the
ultimate resolution of these claims will not have a material adverse effect on
the Corporation's financial position and results of operations.
7
NOTE 3. COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects for the
three months ended March 31, 2004 and 2003 are as follows:
Three Months Ended
March 31,
2004 2003
----- -----
(In Thousands)
Unrealized holding gains on
available for sale securities $ 361 $ 101
Tax effect (123) (34)
----- -----
Other comprehensive income, net of tax $ 238 $ 67
===== =====
NOTE 4. EARNINGS PER SHARE
Earnings per share is based on the weighted average shares of common stock
outstanding during each year. The Corporation currently maintains a simple
capital structure, thus there are no dilutive effects on earnings per share.
NOTE 5. GUARANTEES
The Corporation does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Generally, all
letters of credit, when issued have expiration dates within one year. The credit
risk involved in issuing letters of credit is essentially the same as those that
are involved in extending loan facilities to customers. The Corporation,
generally, holds collateral and/or personal guarantees supporting these
commitments. The Corporation has $734,000 of standby letters of credit as of
March 31, 2004. Management believes that the proceeds obtained through a
liquidation of collateral and the enforcement of guarantees would be sufficient
to cover the potential amount of future payment required under the corresponding
guarantees. The current amount of the liability as of March 31, 2004 for
guarantees under standby letters of credit issued is not material.
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Corporation's balance sheets and
statements of income. This section should be read in conjunction with the
Corporation's financial statements and accompanying notes.
Management of the Corporation has made forward-looking statements in this Form
10-Q. These forward-looking statements may be subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Corporation and its
subsidiary. When words such as "believes," "expects," "anticipates" or similar
expressions occur in this Form 10-Q, management is making forward-looking
statements.
Readers should note that many factors, some of which are discussed elsewhere in
this report and in the documents that management incorporates by reference,
could affect the future financial results of the Corporation and its subsidiary,
both individually and collectively, and could cause those results to differ
materially from those expressed in the forward-looking statements contained or
incorporated by reference in this Form 10-Q. These factors include the
following:
* operating, legal and regulatory risks;
* economic, political and competitive forces affecting banking,
securities, asset management and credit services businesses; and
* the risk that management's analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
The Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in other documents that the Corporation files periodically with the
Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
Disclosure of the Corporation's significant accounting policies is included in
Note 1 to the financial statements of the Corporation's Annual Report on Form
10-K for the year ended December 31, 2003. Some of these policies are
particularly sensitive, requiring significant judgments, estimates and
assumptions to be made by management, most particularly in connection with
determining the provision for loan losses and the appropriate level of the
allowance for loan losses. Additional information is contained in this Form 10-Q
on page 11
9
under the paragraph titled "Provision for Loan Losses" and on page 13 under the
paragraphs titled "Loan and Asset Quality and Allowance for Loan Losses".
OVERVIEW
Net income for the first quarter of 2004 decreased .8% to $764,000 as compared
to $770,000 for the first quarter of 2003 and total revenues declined $72,000
from $2.586 million to $2.514 million for the quarter. Net income per common
share decreased 1.00% to $3.88 per share from $3.92 per share in the first
quarter a year ago. At March 31, 2004, the Corporation had total assets of $205
million, total loans of $70 million, and total deposits of $168 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $192.7 million for the first quarter of 2004 as
compared to $176.2 million for the same period in 2003. The yield on earning
assets for the first quarter of 2004 was 5.1%, a decrease of 61 basis points
over the comparable period in 2003. The growth in interest earning assets was
funded primarily by an increase of $16.0 million in the average balance of
deposits. Interest-bearing liabilities increased from $136.6 million during the
first quarter of 2003 to $152.5 million during the first quarter of 2004. Growth
in average interest bearing liabilities was the result of increases in interest
bearing demand deposits, savings, and time deposits of $795,000, $13.1 million,
and $2.1 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 2.8% for the first
quarter of 2004 and 3.3% for the first quarter of 2003, a decrease of 50 basis
points. This was the result of the declining interest rate environment that was
experienced during much of year 2003.
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income earned on assets
and interest expense incurred on liabilities used to fund those assets. Interest
earning assets primarily include loans and securities and Federal Funds Sold.
Liabilities used to fund such assets include deposits and borrowed funds.
Changes in net interest income and margin result from the interaction between
the volume and composition of earning assets, related yields and associated
funding costs.
Interest income decreased by $60,000, or 2.4% over the first quarter of 2003.
The decrease in interest income is attributed to the declining interest rates on
the Bank's loan and securities portfolios. Interest expense for the first
quarter of 2004 decreased by $63,000, or 5.7%, compared to the first quarter of
2003. The decrease was due to the general decline in rates being offered and
paid on interest bearing deposits, mainly certificates of deposit.
10
Net interest income remained relatively constant at $1.4 million over the first
quarter of 2003. As marketplace rates continued to decrease on loans and
securities, the Corporation reduced rates being offered on interest bearing
deposit accounts. Net income for the first quarter of 2004 continued to be
affected by those downward rate adjustments.
Net interest margin represents the difference between interest income, including
net loan fees earned, and interest expense, reflected as a percentage of average
earning assets. Net interest margin for the first quarter of 2004 was 2.9%
compared to 3.2% for the first quarter of 2003. During the first quarter of
2004, yields on earning assets decreased to 5.1%, yields on interest bearing
deposits decreased to 2.8%, as compared to 5.7% and 3.3%, respectively, for the
first quarter of 2003.
Provision for Loan Losses
The provision for loan losses remained unchanged at $15,000 during the first
quarter of 2004 as compared to the first quarter of 2003. Due to the loan
portfolio remaining constant both in size and quality as compared to the first
quarter of 2003, no changes were made to the provision.
Non-interest Income
Non-interest income for the first quarter of 2004 decreased by $12,000, or 17.1%
from the same period in 2003. The decrease was attributable to a decrease in fee
income derived from the sale of loan related insurance and the reduction of
deposit account service charges.
Non-interest Expense
For the first quarter of 2004, non-interest expenses increased by $10,000, or
1.8%, to $559,000, compared to $549,000 over the same period in 2003. Increases
in employee costs and a nominal increase in operational expenses attributed to
the rise in non-interest expense while being offset by decreases in other
miscellaneous expenses.
Salary expenses and employee benefits, which represent the largest component of
non-interest expenses, increased by $12,000, or 4.5%, for the first quarter of
2004. This increase is consistent with general wage and benefit increases as
well as increases in staff levels necessary to handle the Corporation's growth
from the first quarter of 2003 to the first quarter of 2004.
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net non-interest expenses to average assets. Net non-interest expenses
equal non-interest expenses (excluding foreclosed real estate expenses) less
non-interest income (exclusive of non-recurring gains), divided by average
assets. This ratio equaled .3% for the three months ended March 3l, 2004,
unchanged from March 3l, 2003. Another productivity measure is the operating
efficiency ratio. This ratio expresses the relationship of non-interest expenses
(excluding foreclosed real estate expenses) to net interest income plus
non-interest income
11
(excluding non-recurring gains). For the quarter ended March 31, 2004, the
operating efficiency ratio was 38.3% compared to 37.4% for the similar period in
2003.
Provision for Federal Income Taxes
The provision for federal income taxes was $123,000 for the first quarter of
2004 compared to $136,000 for the same period in 2003. The effective tax rate,
which is the ratio of income tax expense to income before income taxes was 13.9%
for the first three months of 2004 and 15.0% for the same period in 2003.
Net Income
Net income for the first quarter of 2004 was $764,000, a decrease of $6,000, or
..8%, over the $770,000 recorded in the first quarter of 2003. The decrease was a
result of a decrease in other income and increase in other expenses, offset by a
slight increase in net interest income and a decrease in federal income tax
expense.
Return on Average Assets
Return on average assets (ROA) measures the Corporation's net income in relation
to its total average assets. The Corporation's annualized ROA for the first
quarter of 2004 was 1.53% a decrease of 16 basis points from the first quarter
of 2003.
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 gains or losses, net of income taxes, on securities available for
sale. The annualized ROE for the first quarter of 2004 decreased to 8.6% from
9.3% in 2003, a decrease of 70 basis points.
FINANCIAL CONDITION
Securities
Securities available for sale increased $9.5 million to $36.8 million as of
March 3l, 2004, from $27.3 million on December 3l, 2003. The increase was due to
the purchase of mortgage-backed securities.
The securities available-for-sale portfolio had an unrealized gain of $112,000,
net of taxes at the end of the first quarter of 2004, due to declining interest
rates during the first quarter of 2004.
12
During the first three months of 2004, the securities held to maturity portfolio
increased $677,000 to $83 million. The increase was the result of purchases of
mortgage-backed securities, U. S. Government agency securities and
state/municipal securities, net of maturities.
Federal funds sold on an over-night basis as of March 31, 2004 totaled $5.3
million, a decrease of $4.1 million or 43.4% from December 31, 2003.
The weighted average life of the combined securities portfolio was approximately
12 years at March 3l, 2003 with a weighted yield of 4.45% as compared to 5.05%
for the same period in 2003.
NET LOANS RECEIVABLE
During the first three months of 2004, net loans receivable decreased by
$169,000 from $70.2 million at December 31, 2003, to $70.1 million on March 31,
2004. Net loans receivable represented 41.8% of total deposits and 34.2% of
total assets at March 31, 2004, as compared to 43.2% and 35.4%, respectively, at
December 31, 2003.
LOAN AND ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
As of March 3l, 2003, total loans receivable remained relatively unchanged at
$70 million as compared to December 31, 2003.
Total non-performing assets (non-performing loans and foreclosed real estate,
excluding loans past due 90 days or more and still accruing interest) at March
3l, 2004, were $297,000, or .15%, of total assets as compared to $475,000, or
..24%, of total assets at December 3l, 2003. There was foreclosed real estate
held by the Corporation as of March 3l, 2004, valued at $9,000 as compared to
$10,000 held at December 31, 2003.
The following summary table presents information regarding non-performing loans
and assets as of March 3l, 2004 and 2003, and December 3l, 2003.
13
NONPERFOMING LOANS AND ASSETS
(Dollars in Thousands)
March 31 December 31,
2004 2003
Nonaccrual Loans:
Commercial $ - $ -
Consumer 6 -
Real Estate:
Construction - -
Mortgage 291 148
----- -----
Total nonaccrual 297 148
Restructured loans - -
----- -----
Total nonperforming loans 297 148
Foreclosed real estate - 10
----- -----
Total nonperforming assets 297 158
Loans past due 90 days or more 30 327
----- -----
Total nonperforming assets and
loans past due 90 days or more $ 327 $ 485
===== =====
Nonperforming loans to total loans 0.42% 0.67%
Nonperforming assets to total assets 0.15% 0.24%
The following table sets forth the company's provision and allowance for loan
losses.
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
3 months 3 months
Ending Ending
March 31 March 31
2004 2003
Balance at beginning of period $ 637 $ 564
Provisions charged to operating expenses 15 15
Recoveries of loans previously charged-off -
Commercial - 9
Consumer - 1
Real Estate - -
----- ------
Total Recoveries - 10
Loans Charged Off:
Commercial - -
Consumer - -
Real Estate 12 -
----- ------
Total Charged-off 12 -
----- ------
Net (Charge-offs) recoveries (12) 10
----- ------
Balance at end of period $ 640 $ 589
===== ======
Net charge-offs as a percentage of
average loans outstanding 0.02% (0.01%)
Allowance for loan losses as a percentage of
period-end loans 0.91% 0.86%
14
DEPOSITS
Total deposits at March 3l, 2004, were $167.9 million, up $5.2 million, or 3.2%,
over total deposits of $162.7 million at December 3l, 2003. The average balances
for the first three months of 2004 and 2003 are presented in the following
table:
Three Months Ended March 31,
2004 2003
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
Demand Deposits:
Noninterest-bearing $ 12,579 $ 11,900
Interest-bearing 8,799 .59% 8,004 1.95%
Savings 67,713 1.80% 54,608 1.93%
Time deposits:
<$100,000 54,097 3.62% 53,946 4.37%
>$100,000 21,933 4.49% 19,996 4.88%
-------- --------
Total Deposits $165,121 $148,454
======== ========
Interest Rate Sensitivity
The management of interest rate sensitivity seeks to avoid fluctuating net
interest margins and to provide consistent net interest income through periods
of changing interest rates.
The Corporation's risk of loss arising from adverse changes in the fair value of
financial instruments, or market risk, is composed primarily of interest rate
risk. The primary objective of the Corporation's asset/liability management
activities is to maximize net interest income while maintaining acceptable
levels of interest rate risk. The Bank's Asset/Liability Committee (ALCO) is
responsible for establishing policies to limit exposure to interest rate risk,
and to ensure procedures are established to monitor compliance with those
policies. The Corporation's Board of Directors approves the guidelines
established by ALCO.
An interest rate sensitive asset or liability is one that, within a defined
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific points in time (GAP), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the one-year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the
15
same degree. As a result, the Corporation's GAP does not necessarily predict the
impact of changes in general levels of interest rates on net interest income.
Management believes the simulation of net interest income in different interest
rate environments provides a more meaningful measure of interest rate risk.
Income simulation analysis captures not only the potential of all assets and
liabilities to mature or reprice, but also the probability that they will do so.
Income simulation also attends to the relative interest rate sensitivities of
these items, and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
The Corporation's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 12 months in a flat rate scenario
versus net income in alternative interest rate scenarios. Management continually
reviews and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Corporation's model projects a
proportionate 200 basis point change during the next year.
The Corporation's ALCO policy has established that income sensitivity will be
considered acceptable if overall net income volatility in a plus or minus 200
basis point scenario is within 5% of net interest income in a flat rate
scenario. At March 3l, 2004, the Corporation's simulation model indicates net
interest income would increase 2.6% within the first year if rates increased as
described above. The model projects that net interest income would decrease by
4.1% in the first year if rates decreased as described above. All of these
forecasts are within an acceptable level of interest rate risk per the policies
established by ALCO.
LIQUIDITY
Liquidity management involves the ability to generate cash or otherwise obtain
funds at reasonable rates to support asset growth and reduce assets to meet
deposit withdrawals, to maintain reserve requirements, and to otherwise operate
the Corporation on an ongoing basis. Liquidity needs are generally met by
converting assets into cash or obtaining sources of additional funds, mainly
deposits. Primarily cash and federal funds sold, and the cash flow from the
amortizing securities and loan portfolios provide liquidity sources from asset
categories. The primary source of liquidity from liability categories is the
generation of additional core deposit balances.
Additionally, the Corporation has established secondary sources of liquidity
consisting of federal funds lines of credit and borrowing capacity at the
Federal Home Loan Bank, which can be drawn upon if needed. In view of the
primary and secondary sources as previously mentioned, management believes that
the Corporation is capable of meeting its anticipated liquidity needs.
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OFF-BALANCE SHEET ARRANGEMENTS
The Corporation's financial statements do reflect off-balance sheet arrangements
that are made in the normal course of business. Those off-balance sheet
arrangements consist of unfunded loans and letters of credit made under the same
standards as on-balance sheet instruments. These commitments, at March 31, 2004
totaled $10.724 million. This consisted of $4.785 million in tax-exempt loans,
commercial real estate, construction, and land development loans, $2.647 million
in home equity lines of credit, $734,000 in standby letters of credit and the
remainder in other unused commitments. Because these instruments have fixed
maturity dates, and because many of them will expire without being drawn upon,
they do not generally present any significant liquidity risk to the Corporation.
Management believes that any amounts actually drawn upon can be funded in the
normal course of operations. The Corporation has no investment in or financial
relationship with any unconsolidated entities that are reasonably likely to have
a material effect on liquidity or the availability of capital resources.
CAPITAL ADEQUACY
At March 31, 2004, stockholders' equity totaled $36.1 million, up 2.9% over
stockholders' equity of $35.1 million at December 31, 2003. The increase in
stockholders' equity for the three months ended March 31, 2004 included a
$238,000 unrealized gain, net of income taxes, on securities available for sale.
Excluding this unrealized gain, gross stockholders' equity changed by an
increase of $764,000 in retained net income.
Risk-based capital provides the basis for which all banks are evaluated in terms
of capital adequacy. The risk-based capital standards require all banks to have
Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at
least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders'
equity together with related surpluses and retained earnings. Total capital may
be comprised of total Tier 1 capital plus qualifying debt instruments, and the
allowance for loan losses.
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The following table provides a comparison of the Corporation's risk-based
capital ratios and leverage ratios to the minimum regulatory requirements for
the periods indicated:
To Be Well
Capitalized
For Capital Under Prompt
March 31 December 31, Adequacy Corrective Action
2004 2003 Purposes Provision
-------- ------------ ----------- -----------------
Risk-Based Capital Ratios:
Tier 1 Capital 41.10% 40.40% 4.00% 6.00%
Total Capital 41.83 41.10 8.00 10.00
Leveraged Capital 17.88 18.00 4.00 5.00
At March 3l, 2004, the consolidated capital levels of the Corporation and of the
bank met the definition of a "well capitalized" institution.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's exposure to market risk has not changed significantly since
December 3l, 2003. 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 SEC. Based upon their evaluation of those controls and procedures as of
March 31, 2004, the chief executive officer and principal financial officer of
the Corporation concluded that the Corporation's disclosure controls and
procedures were adequate.
The Corporation made no significant changes in its internal controls or in other
factors that could significantly affect these controls during the quarter ended
March 31, 2004, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of the management of the Corporation, there are no proceedings
pending to which the Corporation or its subsidiary are a party or to which their
property is subject, which, if determined adversely to the Corporation or its
subsidiary, would be material in relation to the Corporation's or its
subsidiary's financial condition. There are no proceedings pending other than
ordinary routine litigation incident to the business of the Corporation or its
subsidiary. In addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation or its subsidiary by
government authorities.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
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 the Form 10 filed with the
Commission on April 27, 2001, as amended on June 29,
2001 and July 20, 2001.)
3(ii) Amended and Restated By-laws of Neffs Bancorp, Inc.
(Incorporated by reference to Exhibit 99.1 to the
Form 8K filed with the Commission on February 27,
2002.)
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4 Instruments Defining the Right of Security Holders
(See Exhibit 3(i) and 3 (ii), above).
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf be the
undersigned thereunto duly authorized.
NEFFS BANCORP, INC.
Date: 05/12/04 /s/ John J. Remaley
John J. Remaley, President
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