Item 1A. Risk Factors
The Corporation is Subject to Interest Rate Risk
Income and cash flows and the value of assets depend to a great extent on the difference between the interest rates earned on interest-earning assets, such as loans and investment securities, and the interest rates paid on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors which are beyond the bank’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest received on loans and investment securities and the amount of interest paid on deposits and borrowings but it will also affect the ability to originate loans and obtain deposits and the value of the investment portfolio. If the rate of interest paid on deposits and other borrowings increases more than the rate of interest earned on loans and other investments, net interest income and earnings could be adversely affected. Earnings also could be adversely affected if the rates on loans and other investments fall more quickly than those on deposits and other borrowings.
The Corporation’s Profitability Depends Significantly on Economic Conditions in the Commonwealth of Pennsylvania
The Corporation’s success depends primarily on the general economic conditions of the Commonwealth of Pennsylvania and the specific local markets in which the Corporation operates. Unlike larger national or other regional banks that are more geographically diversified, the Corporation provides banking and financial services to customers primarily in the Northern Lehigh Valley area. The local economic conditions in these areas have a significant impact on the demand for the Corporation’s products and services as well as the ability of the Corporation’s customers to repay loans, the value of the collateral securing loans and the stability of the Corporation’s deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, subprime loan deterioration, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Corporation’s financial condition and results of operations. The Corporation is not directly involved in any type of subprime lending.
The Corporation’s Allowance for Loan Losses May be Insufficient
Financial condition and results of operations could be adversely affected if the allowance for loan losses is not sufficient to absorb actual losses or if the bank is required to increase the allowance. Despite underwriting criteria, the bank may experience loan delinquencies and losses. In order to absorb losses associated with nonperforming loans, the allowance for loan losses is based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Determination of the allowance inherently involves a high degree of subjectivity and requires significant estimates of current credit risks and future trends, all of which may undergo material changes. At any time there are likely to be loans in the portfolio that will result in losses but that have not been identified as nonperforming or potential problem credits. The bank cannot be sure that all deteriorating credits are identified before they become nonperforming assets or that losses will be able to be limited on those loans that are identified. The bank may be required to increase the allowance for loan losses for any of several reasons. State and federal regulators, in reviewing the loan portfolio as part of a regulatory examination, may request that an increase be made to the allowance for loan losses. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the bank’s control, may require an increase in the allowance. In addition, if charge-offs in future periods exceed the allowance for loan losses, the bank will need additional increases in the allowance for loan losses.
Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may materially affect the results of operations in the period in which the allowance is increased.
The Corporation Operates in a Highly Competitive Industry and Market Area
Neffs faces substantial competition in all phases of operation from a variety of different competitors, including commercial banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies, leasing companies, insurance companies and money market mutual funds. There is very strong competition among financial services providers in the principal service area. Competitors may have greater resources, higher lending limits or larger branch systems. Accordingly, they may be able to offer a broader range of products and services as well as better pricing for those products or services.
In addition, some of the competing financial services organizations are not subject to the same degree of regulations as are imposed on federally insured financial institutions. As a result, those non-bank competitors may be able to access funding and provide various services more easily or at less cost, adversely affecting the ability to compete effectively.
The Corporation is Subject to Extensive Government Regulation and Supervision
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Changes in laws, regulations, and regulatory practices affecting the banking industry may increase costs of doing business or otherwise adversely affect banks and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and the bank cannot predict the ultimate effect of these changes, which could have a material adverse effect on profitability or financial condition.
The Corporation May Not be Able to Attract and Retain Skilled People
The Corporation’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Corporation can be intense and the Corporation may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Corporation’s key personnel could have a material adverse impact on the Corporation’s business because of their skills, knowledge of the Corporation’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The Corporation does not currently have employment agreements or non-competition agreements with any of its senior officers.
The Corporation is Subject to Environmental Liability Risk Associated with Lending Activities
Environmental liability associated with lending activities could result in losses. In the course of business, the bank may foreclose on and take title to properties securing loans. If hazardous substances were discovered on any of these properties, the bank could be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether the bank knew of, or was responsible for, the contamination. In addition, if the bank arranges for the disposal of hazardous or toxic substances at another site, costs may be incurred for cleaning up and removing those substances from the site even if the bank neither owned nor operated the disposal site. Environmental laws may require the bank to incur substantial expenses and may materially limit the use of properties acquired through foreclosure, reduce their value or limit the ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase exposure to environmental liability.
The Corporation Continually Encounters Technological Change
Failure to implement new technologies for operations may adversely affect growth or profits. The market for financial services, including banking services and consumer finance services is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking and telebanking. The ability to compete successfully in markets may depend on the ability to exploit such technological changes. However, no assurance can be given that management will be able to properly or timely anticipate or implement such technologies or properly train employees to use such technologies. Any failure to adapt to new technologies could adversely affect the financial condition or operating results of the Corporation.
The Corporation’s ability to pay dividends depends primarily on dividends from its banking subsidiary, which is subject to regulatory limits.
The Corporation is a bank holding company and its operations are conducted by its subsidiary. Its ability to pay dividends depends on its receipt of dividends from its subsidiary. Dividend payments from its banking subsidiary are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of its subsidiary to pay dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. There is no assurance that its subsidiary will be able to pay dividends in the future or that the Corporation will generate adequate cash flow to pay dividends in the future. The Corporation’s failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Main Office
The main office of Neffs is located at 5629 PA Route 873, North Whitehall Township, Neffs, PA 18065. The bank owns and occupies a 12,475 square feet building, containing a banking floor, lobby, administrative offices, lending offices, operations center, and executive offices. During 2001, the bank completed construction of two (2) additional lanes, for a total of five (5) lanes, to its drive thru facility located adjacent to the main building. The bank also owns a vacant lot behind the headquarters. Situated on the lot are a baseball field, basketball court and playground facility, all of which are available for use by the public.
The Corporation also owns property at 5645 PA Route 873, Neffs, PA 18065, which is a one and one half (1 1/2) story single family dwelling with approximately 2,570 square feet of living space. This property is currently being leased.
Item 3.
Item 3. Legal Proceedings
The Corporation is subject to certain 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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.
Part II.
Item 5.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Corporation’s common stock is currently quoted on the National Quotations Bureau’s Electronic Quotations Service (“Pink Sheet”) under the trading symbol NEFB. The Corporation’s common stock is traded over-the-counter from time to time, primarily in the Corporation’s geographic service area, through several local market makers.
The following table sets forth the prices at which common stock has traded during the last two (2) fiscal years. As of December 31, 2007, there were approximately 630 holders of record of the Corporation’s common stock.
The Corporation purchased 7,186 shares at $263 per share during 2007 and no shares during 2006.
Dividends and Dividend History
The Corporation has historically distributed to stockholders a dividend on May 15th and November 15th of each year. In 2007 a dividend of $2.00 per share was paid to stockholders on May 15 and a dividend of $2.00 per share was paid on November 15. In 2006 a dividend of $2.00 per share was paid to stockholders on May 15, and a dividend of $2.00 per share was paid on November 15.
The holders of common stock of the Corporation are entitled to receive dividends as may be declared by the Board of Directors with respect to the common stock out of funds of the Corporation. While the Corporation is not subject to certain restrictions on dividends and stock redemptions applicable to a bank, the ability of the Corporation to pay dividends to the holders of its common stock will depend to a large extent upon the amount of dividends paid by the bank to the Corporation.
The ability of the Corporation to pay dividends on its common stock in the future will depend on the earnings and the financial condition of the bank and the Corporation. The Corporation’s ability to pay
dividends will be subject to the prior payment by the Corporation of principal and interest on any debt obligations it may incur in the future as well as other factors that may exist at the time.
Regulatory authorities restrict the amount of cash dividends the bank can declare without prior regulatory approval.
The Corporation currently does not maintain any equity compensation plans.
Shareholder Return Performance Graph
The following graph compares the yearly dollar change in the cumulative total shareholder return on Neffs Bancorp, Inc.’s common stock against the cumulative total return of the NASDAQ Composite, and the Neffs Bancorp, Inc.’s Peer Groups for the period of five fiscal years commencing December 31, 2002, and ending December 31, 2007. The graph shows the cumulative investment return to shareholders based on the assumption that a $100 investment was made on December 31, 2002, in each of Neffs Bancorp, Inc.’s common stock, the NASDAQ Composite and the Neffs Bancorp, Inc., Peer Groups. We computed returns assuming the reinvestment of all dividends. The shareholder return shown on the following graph is not indicative of future performance.
“The Neffs Bancorp 2006 Peer Group Index consists of American Bank Inc., East Penn Financial Corp (acquired 11/19/07)., Mauch Chunk Financial Corp., New Tripoli Bancorp. Inc.,
“The Neffs Bancorp 2007 Peer Group Index consists of American Bank Inc., First Star Bancorp Inc., Mauch Chunk Financial Corp., MNB Corp., New Tripoli Bancorp Inc., JTNB Bancorp Inc.,
Source: SNL Financial LC Charlottesville. VA
@2008
(434)977-1600
WWW.snl.com
Item 6.
Item 6. Selected Financial Data
The information under the caption “Selected Financial Data” in the Corporation’s Annual Report to Shareholders for the year ended December 31, 2007, which pages are included in Exhibit 13 hereto, are incorporated in their entirety by reference in response to this Item 6.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Corporation’s Annual Report to Shareholders for the year ended December 31, 2007, which pages are included in Exhibit 13 hereto, are incorporated in their entirety by reference in response to this Item 7.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In an effort to assess market risk, the bank utilizes a simulation model to determine the effect of increases or decreases in market interest rates on net interest income and net income.
The simulation model assumes a hypothetical gradual shift in market interest rates over a twelve-month period. This is based on a review of historical changes in market interest rates and the level and curve of current interest rates. The simulated results represent the hypothetical effects to the bank’s net interest income and net income. Projections for loan and deposit growth were ignored in the simulation model. The simulation model includes all of the bank’s earning assets and interest-bearing liabilities and assumes a parallel and prorated shift in interest rates over a twelve-month period. The percentage declines in the table below are measured as percentage changes from the values of simulated net interest income in the current rate scenario and the impact of those changes on the prior year’s net income.
The aforementioned assumptions are revised based on defined scenarios of assumed speed and direction changes of market interest rates. These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions, as well as management strategies, among other factors. Because it is difficult to accurately quantify into assumptions the reaction of depositors and borrowers to market interest rate changes, the actual net interest income and net income results may differ from simulated results. While assumptions are developed based upon current economic and local market conditions, management cannot make any assurances as to the predictive nature of these assumptions.
The following table reflects the bank’s net interest income sensitivity analysis as of December 31, 2007 and 2006. The schedule indicates that as of December 31, 2007, a hypothetical 200 basis point decline in prevailing market interest rates would cause the bank’s net interest income to decline less then 1% from the current rate scenario. The computations do not contemplate any action management or the Asset/Liability Management Committee could undertake in response to changes in market conditions or market interest rates.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements in the Corporation’s Annual Report to Shareholders for the year ended December 31, 2007, which pages are included in Exhibit 13 hereto, are incorporated in their entirety by reference in response to this Item 8.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Disclosure 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 December 31, 2007, the chief executive officer and principal financial officer of the Corporation concluded that the Corporation’s disclosure controls and procedures were effective.
Internal Controls Over Financial Reporting
The Corporation made no significant changes in its internal controls or in other factors that could significantly affect these controls during the fourth quarter of the year ended December 31, 2007, including any corrective actions with regard to significant deficiencies and material weaknesses.
Item 9A(T). Controls and Procedures
Report of Management’s Assessment of Internal Control over Financial Reporting
Management is responsible for designing, implementing, documenting, and maintaining an adequate system of internal control over financial reporting. An adequate system of internal control over financial reporting encompasses the processes and procedures that have been established by management to:
§
maintain records that accurately reflect the company’s transactions;
§
prepare financial statement and footnote disclosures in accordance with GAAP that can be relied upon by external users;
§
prevent and detect unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Management conducted an evaluation of the effectiveness of the Corporation’s internal control over financial reporting based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation under the criteria in Internal Control- Integrated Framework, management concluded that internal control over financial reporting was effective as of December 31, 2007. Furthermore, during the conduct of its assessment, management identified no material weakness in its financial reporting control system.
The Board of Directors of Neffs Bancorp, Inc., through its Audit Committee, provides oversight to managements’ conduct of the financial reporting process. The Audit Committee, which is composed entirely of independent directors, is also responsible to recommend the appointment of independent public accountants. The Audit Committee also meets with management, the internal audit staff, and the independent public accountants throughout the year to provide assurance as to the adequacy of the financial reporting process and to monitor the overall scope of the work performed by the internal audit staff and the independent public accountants.
Because of its inherent limitations, our disclosure controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Corporation to provide only management’s report in this annual report.
/s/ John J. Remaley
President & CEO
/s/ Kevin A. Schmidt
Principle Financial Officer
Item 9B.
Item 9B. Other Information
None.
Part III.
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The information under the captions “Governance of the Corporation”, “Information about Nominees and Continuing Directors”, “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance” are incorporated here by reference to Neffs Bancorp, Inc.’s proxy statement for its 2008 Annual Meeting of Shareholders scheduled for May 14, 2008.
The Corporation has adopted a Code of Ethics that applies to directors, officers and employees of the Corporation and the bank, including the Chief Executive Officer and senior financial officers. A copy of the Code of Ethics was included as an exhibit to the Corporation’s Form 10-K for the year ended December 31, 2003 and filed with the Securities and Exchange Commission. A request for the
Corporation’s Code of Ethics can be made in either writing to David C. Matulevich, Neffs Bancorp, Inc., 5629 Route 873, P.O. Box 10, Neffs, PA 18065-0010 or by telephone to 610-767-3875.
Item 11.
Item 11. Executive Compensation
The information under the caption “Executive Compensation” is incorporated here by reference to Neffs Bancorp, Inc.’s proxy statement for its 2008 Annual Meeting of Shareholders scheduled for May 14, 2008.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” is incorporated here by reference to Neffs Bancorp, Inc.’s proxy statement for its 2008 Annual Meeting of Shareholders scheduled for May 14, 2008.
The Corporation currently does not maintain any equity compensation plans.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information under the caption “Transactions with Directors and Executive Officers” is incorporated here by reference to Neffs Bancorp, Inc.’s proxy statement for its 2008 Annual Meeting of Shareholders scheduled for May 14, 2008.
Item 14.
Item 14. Principal Accountant Fees and Services
The information under the caption “Report of the Audit Committee” is incorporated here by reference to Neffs Bancorp, Inc.’s proxy statement for its 2008 Annual Meeting of Shareholders scheduled for May 14, 2008.
Part IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
No.
Description
(a)
(1 )
Financial Statements are incorporated by reference from the 2007 Annual Report.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2 )
Financial Statements Schedules (This item is omitted since information required is either not applicable or is included in the footnotes to the Annual Financial Statements.)
(3 )
The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibits Index.
(i)
Amended and Restated Articles of Incorporation of Neffs Bancorp, Inc. (Incorporated by reference to Exhibit 3(i) of the Registration Statement on Form 10 dated and as filed with Commission on April 27, 2001.)
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Pursuant to the requirement of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.