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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, 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 000-32605
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 [ ]
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]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of 9/30/04, 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)
September 30, 2004 and December 31, 2003........................................................... 3
Consolidated Statements of Income (Unaudited)
Three months ended September 30, 2004 and September 30, 2003
Nine months ended September 30, 2004 and September 30, 2003........................................ 4
Consolidated Statements of Stockholders' Equity (Unaudited)
Nine months ended September 30, 2004 and September 30, 2003........................................ 5
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2004 and September 30, 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......................................... 20
Item 4. Controls and Procedures............................................................................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................................ 21
Item 3. Defaults Upon Senior Securities.................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................................................ 21
Item 5. Other Information.................................................................................. 21
Item 6. Exhibits .......................................................................................... 21
SIGNATURES ...................................................................................................... 23
2
NEFFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
Dollars in thousands, except per share data 2004 2003
------------------------------
ASSETS
Cash and due from banks $ 4,346 $ 4,806
Interest bearing deposits with banks 28 46
Federal funds sold 3,249 9,390
Securities available for sale 39,644 27,382
Securities held to maturity, fair value
2004 $82,759; 2003 $85,460 80,321 82,705
Loans 74,618 70,886
Less allowance for loan losses (664) (637)
---------------------------
Net loans 73,954 70,249
---------------------------
Premises and equipment, net 2,277 2,355
Other assets 1,967 1,637
---------------------------
Total assets $ 205,786 $ 198,570
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 13,868 $ 13,107
Interest bearing 154,198 149,587
---------------------------
Total deposits 168,066 162,694
Other liabilities 735 821
---------------------------
Total liabilities 168,801 163,515
---------------------------
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 36,880 34,853
Accumulated other comprehensive loss (223) (126)
Treasury stock, at cost 2,909 shares (562) (562)
---------------------------
Total stockholders' equity 36,985 35,055
---------------------------
Total liabilities and stockholders' equity $ 205,786 $ 198,570
===========================
See Notes to Consolidated Financial Statements.
3
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
Dollars in thousands,except per share data 2004 2003 2004 2003
---------------------- ----------------------
Interest income:
Interest and fees on loans $ 1,172 $ 1,297 $ 3,531 $ 3,816
Interest and dividends on investments:
Taxable 805 467 2,273 1,771
Exempt from federal income taxes 530 578 1,637 1,688
Interest on federal funds sold 11 31 44 102
---------------------- ----------------------
Total interest income 2,518 2,373 7,485 7,377
---------------------- ----------------------
Interest Expense:
Interest on deposits 1,006 1,112 3,055 3,343
---------------------- ----------------------
Total interest expense 1,006 1,112 3,055 3,343
---------------------- ----------------------
Net interest income 1,512 1,261 4,430 4,034
Provision for loan losses 6 15 36 45
---------------------- ----------------------
Net interest income after provision
for loan losses 1,506 1,246 4,394 3,989
---------------------- ----------------------
Other income:
Service charges on deposit accounts 49 46 130 136
Other service charges and fees 21 18 51 63
Other income - 6 12 18
---------------------- ----------------------
Total other income 70 70 193 217
---------------------- ----------------------
Other expenses:
Salaries and employee benefits 283 293 834 835
Occupancy 52 46 121 121
Furniture and equipment 39 35 117 105
Pennsylvania shares tax 63 78 225 231
Other expenses 129 118 475 393
---------------------- ----------------------
Total other expenses 566 570 1,772 1,685
---------------------- ----------------------
Income before income taxes 1,010 746 2,815 2,521
Income tax expense 178 79 443 329
---------------------- ----------------------
Net income $ 832 $ 667 $ 2,372 $ 2,192
====================== ======================
Per share data:
Earnings per share, basic $ 4.22 $ 3.40 $ 12.03 $ 11.16
====================== ======================
Weighted average common shares outstanding 197,091 196,431 197,091 196,431
====================== ======================
Cash dividends declared per share $ - $ - $ 1.75 $ 1.20
====================== ======================
See Notes to Consolidated Financial Statements.
4
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Dollars in thousands, except per share data 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 gains
(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
=================================================================================
Accumulated
Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Dollars in thousands, except per share data Stock Capital Earnings Loss Stock Equity
--------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 200 $ 690 $ 34,853 $ (126) $ (562) $ 35,055
--------
Comprehensive Income:
Net income - - 2,372 - - 2,372
Change in unrealized net losses
on securities available for
sale,net of tax (97) (97)
--------
Total comprehensive income 2,275
--------
Cash dividends declared on common
stock, $1.75 per share - - (345) - - (345)
-----------------------------------------------------------------------------------
Balance, September 30, 2004 $ 200 $ 690 $ 36,880 $ (223) $ (562) $ 36,985
===================================================================================
See Notes to Consolidated Financial Statements.
5
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Dollars in thousands
Nine Months Ended September 30, 2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,372 $ 2,192
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 95 80
Provision for loan losses 36 45
Net amortization of securities 136 167
Change in assets and liabilities:
Increase in:
Accrued interest receivable (134) (229)
Income taxes receivable (59) (158)
Other assets (97) (79)
Decrease in:
Accrued interest payable (73) (111)
Other liabilities (13) (23)
-------- --------
Net cash provided by operating activities 2,263 1,884
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing
deposits with banks 18 (5)
Net decrease in federal funds sold 6,141 2,568
Purchase of securities available for sale (17,942) (17,065)
Proceeds from maturities/calls of securities available
for sale 5,384 4,979
Purchase of securities held to maturity (7,624) (30,529)
Proceeds from maturities/calls of securities held to
maturity 10,021 31,488
Net increase in loans (3,741) (521)
Purchases of premises and equipment (17) (62)
Proceeds from sale of foreclosed real estate 10 -
-------- --------
Net cash used in investing activities (7,750) (9,147)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,372 9,161
Dividends paid (345) (236)
-------- --------
Net cash provided by financing activities 5,027 8,925
-------- --------
Increase (decrease) in cash and cash equivalents (460) 1,662
Cash and cash equivalents:
Beginning 4,806 2,732
-------- --------
Ending $ 4,346 $ 4,394
======== ========
Supplementary Cash Flows Information
Interest Paid $ 3,128 $ 3,454
======== ========
Income Taxes Paid $ 836 $ 798
======== ========
See Notes to Consolidated Financial Statements.
6
NEFFS BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine-month period
ended September 30, 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.
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 or results of operations.
7
NOTE 3. COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects for the
nine months and three months ended September 30, 2004 and 2003 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----- ----- ---- ----
(In Thousands)
Unrealized holding gains (losses) on
available for sale securities $ 720 $(230) $(147) $(171)
Tax effect (244) 78 50 58
----- ----- ----- -----
Other comprehensive income (loss), net of tax $ 476 $(152) $ (97) $(113)
===== ===== ===== =====
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 $326,000 of standby letters of credit as of
September 30, 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 September 30, 2004 for
guarantees under standby letters of credit issued is not material.
NOTE 6. NEW ACCOUNTING STANDARDS
In March 2004, the SEC released Staff Accounting Bulleting (SAB) No. 105,
"Application of Accounting Principles to Loan Commitments." SAB 105 provides
guidance about the measurements of loan commitments recognized at fair value
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SAB 105 also requires companies to disclose their accounting policy
for those loan commitments including methods and assumptions used to estimate
fair value and associated hedging strategies. SAB 105 is
8
effective for all loan commitments accounted for as derivatives that are entered
into after March 31, 2004. The adoption of SAB 105 is not expected to have an
effect on our consolidated financial statements.
In March 2004, the FASB's Emerging Issues Task Force (EITF) reached a consensus
on EITF Issue No., 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" (EIFT 03-1). EIFT 03-1 provides guidance
regarding the meaning of other-than-temporary impairment and its application to
investments classified as either available-for-sale or held-to-maturity under
FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and to equity securities accounted for under the cost method.
Included in EIFT 03-1 is guidance on how to account for impairments that are
solely due to interest rate changes, including changes resulting from increases
in sector credit spreads. This guidance was to become effective for reporting
periods beginning after June 15, 2004. However, on September 30, 2004, the FASB
issued a Staff Position that delays the effective date for the recognition and
measurement guidance of EITF 03-1 until additional clarifying guidance is
issued. This additional guidance is expected to be issued during and be
effective for the fourth quarter of 2004. We are not able to assess the impact
of the adoption of EIFT 03-1 until final guidance is issued.
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;
9
- - 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 under the paragraph titled "Provision for Loan Losses" and on page 14
under the paragraphs titled "Loan and Asset Quality and Allowance for Loan
Losses".
OVERVIEW
Net income for the third quarter of 2004 increased 25% to $832,000 as compared
to $667,000 for the third quarter of 2003 and total revenues increased 6% from
$2.443 million to $2.588 million for the quarter. Net income per common share
increased 24% to $4.22 per share from $3.40 per share in the third quarter a
year ago. At September 30, 2004, the Corporation had total assets of $206
million, total loans of $74.6 million, and total deposits of $168.1 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $198.5 million for the third quarter of 2004 as
compared to $185.7 million for the same period in 2003. The yield on earning
assets for the third quarter of 2004 was 5.1%, which remained unchanged as
compared to the same period in 2003.
The growth in interest earning assets was funded primarily by an increase of $12
million in the average balance of deposits. Average interest-bearing liabilities
increased from $144.4 million during the third quarter of 2003 to $155.7 million
during the third quarter of 2004. Growth in average interest bearing liabilities
was the result of increases in interest bearing demand deposits, savings, and
time deposits of $130,000, $10.5 million, and $596,000, respectively. Deposit
account growth was attributed to the banks favorable interest rate structure
combined with the general decline in confidence in the stock market.
10
The average rate paid on interest-bearing liabilities was 2.58% for the third
quarter of 2004 and 3.08% for the third 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 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. 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 increased by $145,000, or 6% over the third quarter of 2003. The
increase in interest income is attributed to the slight rise in interest rates
on the Bank's loan and securities portfolios and the increase in average earning
assets. Interest expense for the third quarter of 2004 decreased by $106,000, or
9.5%, compared to the third 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 and savings accounts.
Net interest income increased by $251,000 or 19.9% over the third 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 third quarter of 2004 continued to be positively affected by
those downward rate adjustments.
For the nine months ended September 30, 2004, interest income increased by
$108,000 or 1.5%, over the same period in 2003. Interest earning assets for the
first nine months of 2004 averaged $196.1 million versus $180.3 million for the
comparable period in 2003. The yield on those assets for 2004 was 5.1% as
compared to 5.5% the first nine months of 2003.
Interest expense for the first nine months of 2004 declined by $288,000 or 8.6%
for the first nine months of 2004. Average interest-bearing liabilities
increased from $141 million for the first nine months of 2003 to $154.7 million
for the first nine months of 2004. The average rate paid for these nine months
was 2.6%, down 60 basis points from 3.2% for the comparable period in the prior
year.
Net interest income for the first nine months of 2004 increased by $396,000 or
9.8% over the same period in 2003. The company's net interest margin decreased
to 3.0% for the first nine months of 2004, from 3.2% over the same period in
2003.
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 third quarter of 2004 was 3.1%,
which is a slight increase from 2.7% for the third quarter of 2003. During the
third quarter of 2004, yields on earning assets remained constant at 5.1% from
the third quarter of 2003, yields on interest bearing deposits decreased to
2.6%, as compared to 3.1%, for the third quarter of 2003.
11
Provision for Loan Losses
The provision for loan losses was $6,000 during the third quarter of 2004 as
compared to $15,000 for the third quarter of 2003. The provision for loan losses
was $36,000 for the nine months ended September 30, 2004 compared to $45,000 for
the nine months ended September 30, 2003. The decrease in the provision is due
to decreased risk in the portfolio along with minimal growth in the loan
portfolio.
Non-interest Income
Non-interest income for the third quarter of 2004 was $70,000 for the three
months ending September 30,2004, remaining unchanged from the same period in
2003.
Recurring core noninterest income for the first nine months of 2004 was $181,000
as compared to $199,000 for the nine months of 2003, a decrease of 9.1%. The
decrease is mainly attributable to a decrease in deposit account service charge
income and fee income derived from the sale of loan related insurance.
Non-interest Expense
For the third quarter of 2004, non-interest expenses decreased by $4,000, or
..7%, to $566,000, compared to $570,000 over the same period in 2003. This
decrease is primarily the result of a decrease in Pennsylvania Shares Tax of
$15,000 due to the recognition of the Education Improvement tax credit. The tax
credit relates to the $50,000 Education improvement donation made to the
Northern Lehigh School District Foundation which was expensed in the second
quarter.
Salary expenses and employee benefits, which represent the largest component,
50%, of non-interest expenses, decreased by $10,000, or 3.4%, for the third
quarter of 2004. This slight decrease is due to the retirement of an executive
officer.
Occupancy expense for the third quarter of 2004 increased by $6,000 or 13% as
compared to the third quarter of 2003. This increase is the result of normal
building maintenance performed throughout the third quarter of 2004.
Furniture and equipment expenses for the third quarter of 2004 increased by
$4,000 or 11.4% as compared to the third quarter of 2003. This increase is due
to increased depreciation expense on equipment additions.
Other expenses increased by $11,000 or 9.3% throughout the third quarter of 2004
as compared to the third quarter of 2003. This increase is mostly related to
increases in travel expenses, supplies expenses, and other miscellaneous
expenses.
For the first nine months of 2004, non-interest expense increased by $87,000 or
5.2% over the same period in 2003.
12
Salary expenses and employee benefits, which represents the largest component,
47.1% of non-interest expenses, decreased by $1,000, over the first nine months
of 2003. The decrease was due to normal salary adjustments and hiring of
additional staff, partially offset by the retirement of an executive officer as
mentioned above.
Occupancy and furniture and equipment expenses for the first nine months of 2004
increased by $12,000 or 5.3% as compared to the same period of 2003. This
increase is related to normal building maintenance performed throughout the
first nine months of 2004.
Net other expenses increased by $82,000 or 20.9% for the first nine months ended
September 30, 2004 over the first nine months of 2003. This increase is mostly
related to a $50,000 donation made to Northern Lehigh School District
Educational Foundation. The Bank will receive a 90% or $45,000 state tax credit
to offset this donation.
One key measure used to monitor progress in controlling overhead expenses is the
ratio of net non-interest expense to average assets. Net non-interest expenses
equal noninterest expenses (excluding foreclosed real estate expenses) less
non-interest income (exclusive of nonrecurring gains), divided by average
assets. This annualized ratio was .96% for the three months ended September 30,
2004, slightly lower than 1.04% for the three months ended September 30, 2003.
It was 1.03% for the first nine months of 2004 compared to 1.02% for the
comparable period in 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 noninterest income (excluding
nonrecurring gains). For the quarter ended September 30, 2004, the operating
efficiency ratio was 35.8% compared to 42.8% for the similar period in 2003. For
the nine months ended September 30, 2004, this ratio was 38.3% compared to 39.6%
for the nine months ended September 30, 2003.
Provision for Federal Income Taxes
The provision for federal income taxes was $178,000 for the third quarter of
2004, as compared to $79,000 for the same period in 2003. For nine months ended
September 30, the provision was $443,000 and $329,000 for 2004 and 2003,
respectively. The effective tax rate, which is the ratio of income tax expense
to income before income taxes, was 17.6% for the third quarter of 2004 and 10.6%
for the third quarter of 2003. The effective tax rate for the first nine months
of 2004 and 2003 were 15.7% and 13.1%, respectively. The increase in the
effective tax rate is due to increased income before income taxes combined with
lower tax-exempt income.
Net Income
Net income for the third quarter of 2004 was $832,000, an increase of $165,000
or 24.7% over the $667,000 recorded in the third quarter of 2003. This increase
was mainly due to the
13
favorable interest rate climate as deposit account growth funded higher yielding
securities, resulting in a $251,000 increase in net interest income.
Net income for the first nine months of 2004 was $2.4 million, an increase of
$180,000 or 8.2% as compared to the same period of 2003. This was mainly due to
a favorable interest rate climate, enhanced by growth in short term; low rate
deposits accounts and subsequent growth in higher yielding securities, resulting
in a $396,000 increase in net interest income.
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 third
quarter of 2004 was 1.6% compared to 1.4% for the third quarter of 2003. The ROA
for the first nine months of 2004 remained constant from 2003 at 1.6%.
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 third quarter of 2004 was 9.2% as compared to
7.8% for the third quarter of 2003. The ROE for the first nine months of 2004
was 8.8% as compared to 8.7% for the same period of 2003.
FINANCIAL CONDITION
Securities
Federal funds sold decreased by $6.2 million from $9.4 million to $3.2 million
during the first nine months of 2004 from December 31, 2003. This decrease was
due mainly to purchases of securities available for sale and held to maturity,
which were offset by calls of bonds and continued growth in deposit accounts.
Total securities and federal funds sold aggregated $123.2 million at September
30, 2004, and represented 59.9% of total assets.
Held to maturity securities decreased by $2.4 million from $82.7 million to
$80.3 million during the first nine months of 2004 from December 31, 2003. This
decrease was mainly due to calls and maturity of bonds. These proceeds received
helped to fund the increase in available for sale securities.
During the first nine months of 2004 securities available for sale increased by
$12.2 million from $27.4 million at December 31, 2003 to $39.6 million at
September 30, 2004. 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.
14
The average yield on the combined securities portfolio for the first nine months
of 2004 was 4.4% as compared to 4.5% for the similar period of 2003. For the
third quarter of 2004, the average yield on the combined securities portfolio
was 4.4% as compared to 4.0% for the same period in 2003.
The weighted average life of the combined securities portfolio was approximately
12 years at September 30, 2004 with a weighted yield of 4.4% as compared to 4.0%
for the same period in 2003.
Net Loans Receivable
During the first nine months of 2004 net loans receivable increased by $3.7
million from $70.2 million at December 31, 2003, to $73.9 million on September
30, 2004. The increase in net loans receivable is the result of a $2.7 million
increase in commercial and commercial real estate loans, $500,000 increase in
consumer real estate and related loans and $500,000 increase in personal and
retail installment loans. Loans receivable represented 44.0% of total deposits
and 36.3% of total assets at September 30, 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 September 30, 2004, total loans receivable increased $3.7 million as
compared to December 31, 2003.
Total non-accrual loans at September 30, 2004, were $166,000, or .22%, of total
loans as compared to $148,000, or .21%, of total loans at December 3l, 2003.
There was no foreclosed real estate held by the Corporation as of September 30,
2004 as compared to $10,000 held at December 31, 2003.
15
The following summary table presents information regarding non-performing loans
and assets as of September 30, 2004 and December 31, 2003.
Nonperforming Loans and Assets
(Dollars in Thousands)
September 30, December 31,
2004 2003
Nonaccrual Loans:
Commercial $ -- $ --
Real Estate: -- --
Construction -- --
Mortgage 166 148
---- ----
Total nonaccrual 166 148
Restructured loans -- --
Loans past due 90 days or more 51 327
---- ----
Total nonperforming loans 217 475
Foreclosed real estate -- 10
---- ----
Total nonperforming assets 217 485
==== ====
Nonperforming loans to total loans 0.29% 0.67%
Nonperforming assets to total assets 0.11% 0.24%
The following table sets forth the Corporation's provision and allowance for
loan losses.
Allowance for Loan Losses
(Dollars in Thousands)
9 Months 9 Months
Ending Ending
September 30, September 30,
2004 2003
Balance at beginning of period $ 637 $ 564
Provisions charged to operating expenses 36 45
Recoveries of loans previously charged-off:
Commercial - 9
Consumer 13 10
Real estate - -
----- -----
Total Recoveries 13 19
Loans Charged-off:
Commercial - -
Consumer (22) (5)
Real Estate - -
----- -----
Total Charged-off (22) (5)
----- -----
Net (Charge-off) recoveries (9) 14
----- -----
Balance at end of period $ 664 $ 623
===== =====
Net Charge-offs as a percentage of
average loans outstanding 0.01% -
Allowance for loan losses as a percentage of
period end loans 0.89% 0.89%
16
Deposits
Total deposits at September 30, 2004, were $168.1 million, up $5.4 million, or
3.3%, over total deposits of $162.7 million at December 3l, 2003. The average
balances for the first nine months of 2004 and 2003 are presented in the
following table:
Nine Months Ended September 30,
(Dollars in thousands)
2004 2003
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
Demand Deposits:
Noninterest-bearing $ 13,434 $ 13,285
Interest-bearing 8,606 .61% 8,254 1.29%
Savings 68,288 1.59% 57,380 2.64%
Time deposits:
<$100,000 54,225 3.55% 54,534 4.34%
>$100,000 22,626 4.41% 21,563 3.21%
-------- --------
Total Deposits $167,179 $155,016
======== ========
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
17
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 September 30, 2004, the Corporation's simulation model indicates
net interest income would increase 2.9% within the first year if rates increased
as described above. The model projects that net interest income would decrease
by 3.4% 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.
18
Off-Balance Sheet Arrangements
The Corporation's financial statements do not 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
September 30, 2004 totaled $8.398 million. This consisted of $3.457 million in
tax-exempt loans, commercial real estate, construction, and land development
loans, $3.268 million in home equity lines of credit, $326.0 thousand 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 September 30, 2004, stockholders' equity totaled $37 million, up 5.5% over
stockholders' equity of $35 million at December 31, 2003. The increase in
stockholders' equity for the nine months ended September 30, 2004 included a
$97,000 unrealized loss, net of income taxes, on securities available for sale.
Excluding this unrealized loss, gross stockholders' equity changed by an
increase of $2,027,000 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.
19
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:
For Capital
September 30, December 31, Adequacy
2004 2003 Purposes
---- ---- --------
Risk-Based Capital Ratios:
Tier 1 Capital 40.85% 40.40% 4.00%
Total Capital 41.57 41.10 8.00
Leveraged Capital 18.08 18.00 4.00
The Bank's capital ratios are not materially different from that of the
Corporation. At September 30 2004, the capital levels 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 31, 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
September 30, 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 changes in its internal controls or in other factors
that has materially affected, or is reasonably likely to materially affect these
controls during the quarter ended September 30, 2004, including any corrective
actions with regard to significant deficiencies and material weaknesses.
20
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. UNREGISTERED SALES OF EQUITY 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
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.)
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes Oxley Act of 2002
21
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes Oxley Act of 2002
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.
22
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 by the
undersigned thereunto duly authorized.
NEFFS BANCORP, INC.
Date: 11/12/04 /s/ John J. Remaley
------------------------------------
John J. Remaley, President
23