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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, 2005
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 4/30/05, 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, 2005 and December 31, 2004..................................... 3
Consolidated Statements of Income (Unaudited)
Three months ended March 31, 2005 and March 31, 2004..................... 4
Consolidated Statements of Stockholders' Equity (Unaudited)
Three months ended March 31, 2005, and March 31, 2004.................... 5
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 2005, and March 31, 2004.................... 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. Unregistered Sales of Equity Securities and Use of Proceeds.............. 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................................................................. 19
SIGNATURES.......................................................................... 21
2
NEFFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31 December 31
Dollars in thousands, except per share data 2005 2004
--------- -----------
ASSETS
Cash and due from banks $ 3,466 $ 4,076
Interest bearing deposits with banks 10 23
Federal funds sold 1,874 1,778
Securities available for sale 43,938 44,148
Securities held to maturity, fair value
$79,854 in 2005; $81,416 in 2004 79,227 79,319
Loans 77,672 76,978
Less allowance for loan losses (663) (663)
--------- -----------
Net loans 77,009 76,315
--------- -----------
Premises and equipment, net 2,400 2,308
Other assets 2,415 1,836
--------- -----------
Total assets $ 210,339 $ 209,803
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 14,523 $ 14,182
Interest bearing 157,203 157,470
--------- -----------
Total deposits 171,726 171,652
Other liabilities 1,176 835
--------- -----------
Total liabilities 172,902 172,487
--------- -----------
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 37,763 37,319
Accumulated other comprehensive loss (654) (331)
Treasury stock, at cost 2,909 shares (562) (562)
--------- -----------
Total stockholders' equity 37,437 37,316
--------- -----------
Total liabilities and stockholders' equity $ 210,339 $ 209,803
========= ===========
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, 2005 2004
-------- --------
Interest income:
Interest and fees on loans 1,210 1,165
Interest and dividends on investments:
Taxable 824 702
Exempt from federal income taxes 519 566
Interest on federal funds sold and other 16 23
-------- --------
Total interest income 2,569 2,456
-------- --------
Interest Expense - deposits 1,036 1,053
-------- --------
Net interest income 1,533 1,403
Provision for loan losses - 15
-------- --------
Net interest income after provision for loan losses 1,533 1,388
-------- --------
Other income:
Service charges on deposit accounts 42 41
Other service charges and fees 14 12
Other income 9 5
-------- --------
Total other income 65 58
-------- --------
Other expenses:
Salaries and employee benefits 313 279
Occupancy 30 32
Furniture and equipment 49 39
Pennsylvania shares tax 42 81
Other expenses 148 128
-------- --------
Total other expenses 582 559
-------- --------
Income before income taxes 1,016 887
Income tax expense 178 123
-------- --------
Net income $ 838 $ 764
======== ========
Per share data:
Earnings per share, basic $ 4.25 $ 3.88
======== ========
Weighted average common shares outstanding 197,091 197,091
======== ========
Cash dividends declared per share $ 2.00 $ -
======== ========
See Notes to Consolidated Financial Statements.
4
NEFFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2005 and 2004
(Unaudited)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Dollars in thousands Stock Capital Earnings Income (Loss) Stock Equity
---------- ---------- -------- ------------- -------- -------------
Balance, December 31, 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
========== ========== ======== ============= ======== =============
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Dollars in thousands Stock Capital Earnings Loss Stock Equity
---------- ---------- -------- ------------- -------- -------------
Balance, December 31, 2004 $ 200 $ 690 $ 37,319 $ (331) $ (562) $ 37,316
Comprehensive Income:
Net income - - 838 - - 838
Change in unrealized net losses on
securities available for sale, net of tax - - - (323) - (323)
-------------
Total comprehensive income 515
-------------
Cash dividends declared on common
stock, $2.00 per share - - (394) - - (394)
---------- ---------- -------- ------------- -------- -------------
Balance, March 31, 2005 $ 200 $ 690 $ 37,763 $ (654) $ (562) $ 37,437
========== ========== ======== ============= ======== =============
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, 2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 838 $ 764
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 35 32
Provision for loan losses - 15
Net amortization of securities 56 23
Change in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (143) (147)
Income taxes receivable (6) 74
Other assets (263) (255)
Increase (decrease) in:
Other liabilities (53) (39)
---------- ----------
Net cash provided by operating activities 464 467
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits
with banks 13 (10)
Net (increase) decrease in federal funds sold (96) 4,073
Purchase of securities available for sale (2,501) (10,354)
Proceeds from maturities/calls of securities available
for sale 2,168 1,229
Purchase of securities held to maturity (1,143) (4,669)
Proceeds from maturities/calls of securities held to
maturity 1,232 4,006
Net (increase) decrease in loans (694) 154
Purchases of premises and equipment (127) (4)
Proceeds from sale of foreclosed real estate - 1
---------- ----------
Net cash used in investing activities (1,148) (5,574)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 74 5,177
---------- ----------
Net cash provided by financing activities 74 5,177
---------- ----------
Increase (decrease) in cash and cash equivalents (610) 70
Cash and cash equivalents:
Beginning 4,076 4,806
---------- ----------
Ending $ 3,466 $ 4,876
========== ==========
Supplementary Cash Flows Information
Interest Paid $ 1,051 $ 1,108
========== ==========
Income Taxes Paid $ 176 $ 334
========== ==========
See Notes to Consolidated Financial Statements.
6
NEFFS BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(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 31, 2005, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. These statements should be read
in conjunction with notes to the financial statements contained in the 2004
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 2004 Annual Report to Stockholders.
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 (loss) and related tax effects
for the three months ended March 31, 2005 and 2004 are as follows:
Three Months Ended
March 31,
2005 2004
-------- --------
(In Thousands)
Unrealized holding gains (losses) on
available for sale securities $ (489) $ 361
Tax effect 166 (123)
-------- --------
Other comprehensive income (loss),
net of tax $ (323) $ 238
======== ========
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 $464,000 of standby letters of credit as of
March 31, 2005. 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, 2005 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 are included in
Note 1 to the financial statements of the Corporation's Annual Report on Form
10-K for the year ended December 31, 2004. 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 2005 increased 9.7% to $838,000 as compared
to $764,000 for the first quarter of 2004 and total revenues increased by
$120,000 from $2.514 million to $2.634 million for the quarter. Net income per
common share increased 9.5% to $4.25 per share from $3.88 per share in the first
quarter a year ago. At March 31, 2005, the Corporation had total assets of $210
million, total loans of $77 million, and total deposits of $172 million.
RESULTS OF OPERATIONS
Average Balances and Average Interest Rates
Interest earning assets averaged $202.7 million for the first quarter of 2005 as
compared to $192.7 million for the same period in 2004. The yield on earning
assets for the first quarter of 2005 was 5.1%, this yield remained constant over
the comparable period in 2004. Interest-bearing liabilities increased from
$152.5 million during the first quarter of 2004 to $157 million during the first
quarter of 2005. Growth in average interest bearing liabilities was the result
of an increase in time deposits of $6.1 million, offset by a decrease in
interest bearing demand deposits and savings deposits of $348,000 and $1.3
million, respectively. Certificate of Deposit account growth was attributed to
the Banks favorable interest rate structure in their market place.
The average rate paid on interest-bearing liabilities was 2.6% for the first
quarter of 2005 and 2.8% for the first quarter of 2004, a decrease of 20 basis
points. This was the result of different maturity mixes in 2005 over 2004. The
decline in the average interest rate on Certificates of Deposit greater than
$100,000 has impacted the Bank's cost of funds for the first quarter of 2005.
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. The
Corporation had no borrowed funds in the periods presented. 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 $113,000, or 4.6% over the first quarter of 2004.
This slight increase in interest income is attributed to the growth of the
Bank's loan and securities portfolios. Interest expense for the first quarter of
2005 decreased by $17,000, or 1.6%, compared to the first quarter of 2004. 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 increased by $130,000 or 9.3% to $1.533 million as compared
to $1.403 million for the first quarter of 2004, due to a higher growth of
interest-earning assets than 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. Net interest margin for the first quarter of 2005 was 3.0%
compared to 2.9% for the first quarter of 2004. During the first quarter of
2005, yields on earning assets remained constant at 5.1%, interest bearing
deposits decreased to 2.6%, as compared to 2.8%, for the first quarter of 2004.
Provision for Loan Losses
Based on historical and projected loss trends, no provision for loan losses was
made for the first quarter of 2005. During the first quarter of 2004, the
provision for loan losses was $15,000. For the first quarter of 2005, management
concluded that the allowance for loan losses had an adequate balance to justify
no provision for this quarter.
Non-interest Income
Non-interest income for the first quarter of 2005 increased by $7,000, or 12.1%
from the same period in 2004. The increase was attributable to an increase in
fee income derived from the sale of loan related insurance, ATM fees, and
Visa/MasterCard fees.
Non-interest Expense
For the first quarter of 2005, non-interest expenses increased by $23,000, or
4.1%, to $582,000, compared to $559,000 over the same period in 2004. Increases
in employee costs, operational expenses and other miscellaneous expenses
attributed to the rise in non-interest expense.
Salary expenses and employee benefits, which represent the largest component of
non-interest expenses, increased by $34,000, or 12.1%, for the first quarter of
2005. 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 2004 to the first quarter of 2005.
Occupancy and furniture and equipment expenses increased by $8,000 or 11.3% over
the first quarter of 2004. This increase was the result of purchasing additional
office equipment during the first quarter of 2005.
Pennsylvania Shares Tax for the first quarter of 2005 decreased by $39,000 or
48.1% as compared to the first quarter of 2004. The majority of this decrease
is related to a tax credit issued as the result of a $50,000 donation expense
made to Northern Lehigh School District Educational Foundation in the first
quarter of 2005. This donation is included in other expenses on the income
statement.
11
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 1.0% for the three months ended March 31, 2005,
unchanged from March 31, 2004. Another productivity measure is the operating
efficiency ratio. This ratio expresses the relationship of non-interest expenses
(excluding foreclosed real estate expenses) to net interest income plus
non-interest income (excluding non-recurring gains). For the quarter ended March
31, 2005, the operating efficiency ratio was 36.4% compared to 38.3% for the
similar period in 2004.
Provision for Federal Income Taxes
The provision for federal income taxes was $178,000 for the first quarter of
2005 compared to $123,000 for the same period in 2004. The effective tax rate,
which is the ratio of income tax expense to income before income taxes was 17.5%
for the first three months of 2005 and 13.9% for the same period in 2004. The
increase in the effective tax rate is due to higher pre-tax income with lower
tax-exempt 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 first
quarter of 2005 was 1.60% an increase of 7 basis points from the first quarter
of 2004.
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 2005 increased to 9.0% from
8.6% in 2004, an increase of 40 basis points, due to the increase in net income
for the first quarter of 2005 over the first quarter of 2004.
FINANCIAL CONDITION
Securities
Securities available for sale decreased $210,000 to $43.9 million as of March
31, 2005, from $44.1 million on December 31, 2004.
12
The securities available-for-sale portfolio had an unrealized loss of $654,000,
net of taxes at the end of the first quarter of 2005, due to increasing interest
rates during the first quarter of 2005. As the Corporation has the intent and
ability to hold these securities until maturity or market price recovery, no
securities are deemed to be other than temporarily impaired.
The weighted average life of the combined securities portfolio was approximately
11 years at March 31, 2005 with a weighted yield of 5.24% as compared to 4.45%
for the same period in 2004.
NET LOANS RECEIVABLE
During the first three months of 2005, net loans receivable increased by
$694,000 from $76.3 million at December 31, 2004, to $77 million on March 31,
2005. Net loans receivable represented 44.8% of total deposits and 36.6% of
total assets at March 31, 2005, as compared to 44.5% and 36.4%, respectively, at
December 31, 2004.
LOAN AND ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
There were no non-performing assets (non-performing loans and foreclosed real
estate, excluding loans past due 90 days or more and still accruing interest) at
March 31, 2005. There was no foreclosed real estate held by the Corporation as
of March 31, 2005 and December 31, 2004.
The following summary table presents information regarding non-performing loans
and assets as of March 31, 2005 and December 31, 2004.
13
NONPERFORMING LOANS AND ASSETS
(Dollars in Thousands)
March 31, December 31,
2005 2004
Nonaccrual Loans:
Commercial $ - $ -
Consumer - -
Real Estate:
Construction - -
Mortgage - 126
--------- --------
Total nonaccrual - 126
Restructured loans - -
--------- --------
Total nonperforming loans - 126
Foreclosed real estate - -
--------- --------
Total nonperforming assets - 126
Loans past due 90 days or more 47 63
--------- --------
Total nonperforming assets and
loans past due 90 days or more $ 47 $ 189
========= ========
Nonperforming loans to total loans 0.00% 0.25%
Nonperforming assets to total assets 0.00% 0.09%
The following table sets forth the corporation's provision and allowance
for loan losses.
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
Three Months Three Months
Ending Ending
March 31, March 31,
2005 2004
Balance at beginning of period $ 663 $ 637
Provisions charged to operating expenses - 15
Recoveries of loans previously charged-off
Commercial - -
Consumer 5 -
Real Estate - -
---------- ----------
Total Recoveries 5 -
Loans Charged Off:
Commercial - -
Consumer (5) (12)
Real Estate - -
---------- ----------
Total Charged-off (5) (12)
Net Charge-offs - (12)
---------- ----------
Balance at end of period $ 663 $ 640
========== ==========
Net charge-offs as a percentage of
average loans outstanding 0.00% 0.02%
Allowance for loan losses as a percentage of
period-end loans 0.85% 0.91%
14
DEPOSITS
Total deposits at March 31, 2005, were $171.7 million, up $74,000, or .04%, over
total deposits of $171.7 million at December 31, 2004. The average balances for
the first three months of 2005 and 2004 are presented in the following table:
Three Months Ended March 31,
2005 2004
Average Average Average Average
Balance Rate Balance Rate
--------- ------- --------- -------
Demand Deposits:
Noninterest-bearing $ 14,929 $ 12,579
Interest-bearing 8,538 .80% 8,799 .59%
Savings 65,148 1.49% 67,713 1.80%
Time deposits:
<$100,000 56,171 3.72% 54,097 3.62%
>$100,000 27,346 3.85% 21,933 4.49%
--------- ---------
Total Deposits $ 172,132 $ 165,121
========= =========
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
15
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 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 31, 2005, the Corporation's simulation model indicates net
interest income would increase 2.7% within the first year if rates increased as
described above. The model projects that net interest income would decrease by
3.3% 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 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 March
31, 2005 totaled $7.8 million. This consisted of $2.5 million in tax-exempt
loans, commercial real estate, construction, and land development loans, $3.7
million in home equity lines of credit, $464,000 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, 2005, stockholders' equity totaled $37.4 million, up 0.3% over
stockholders' equity of $37.3 million at December 31, 2004. The increase in
stockholders' equity for the three months ended March 31, 2005 included a
$323,000 unrealized loss, net of income taxes, on securities available for sale.
Excluding this unrealized loss, stockholders' equity changed by an increase of
$444,000 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
2005 2004 Purposes Provision
-------- ------------ ----------- -----------------
Risk-Based Capital Ratios:
Tier 1 Capital 40.6% 40.4% 4.0% 6.0%
Total Capital 41.4% 41.2% 8.0% 10.0%
Leveraged Capital 18.2% 18.0% 4.0% 5.0%
At March 31, 2005,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, 2004. 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, 2005, 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, 2005, 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. 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
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Section 302 of the Sarbanes Oxley Act of 2002
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.
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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: 05/12/05 /s/ John J. Remaley
--------------------------------
John J. Remaley, President
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