NEFB Neffs Bancorp Inc (PK)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2008

OR

o		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 No.)
incorporation or organization)

5629 PA Route 873, P.O. Box 10, Neffs, PA l8065-0010
(Address of principal executive offices)

(610) 767-3875

     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 þ       No  o

           Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

           Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes o       No  þ

As of October 31, 2008, there were 189,352 shares of common stock, par value of $1.00, outstanding.

 

 

NEFFS BANCORP, INC.

INDEX

PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition (Unaudited) September 30, 2008 and December 31, 2007			3
Consolidated Statements of Income (Unaudited) Three months ended September 30, 2008 and September 30, 2007 Nine months ended September 30, 2008 and September 30, 2007			4
Consolidated Statements of Stockholders’ Equity (Unaudited) Nine months ended September 30, 2008 and September  30, 2007			5
Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2008 and September 30, 2007			6
Notes to the Interim Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures about Market Risk			20
Item 4T. Controls and Procedures			20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			21
Item 1A. Risk Factors			21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 3. Defaults Upon Senior Securities			22
Item 4. Submission of Matters to a Vote of Security Holders			22
Item 5. Other Information			22
Item 6. Exhibits			22
SIGNATURES			24

NEFFS BANCORP, INC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

		September 30,				December 31,
Dollars in thousands, except share data		2008				2007
ASSETS
Cash and due from banks		$	3,573			$	3,888
Interest bearing deposits with banks			109				118
Securities available for sale			39,428				36,394
Securities held to maturity, fair value $87,942 in 2008; $87,896 in 2007			88,074				86,811
Loans			99,721				94,610
Less allowance for loan losses			(687	)			(620	)
Net loans			99,034				93,990
Premises and equipment, net			2,307				2,347
Other assets			2,395				2,249
Total assets		$	234,920			$	225,797
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits
Non-interest bearing		$	15,915			$	17,205
Interest bearing			173,633				163,186
Total deposits			189,548				180,391
Federal funds purchased			595				2,249
Other liabilities			1,600				1,327
Total liabilities			191,743				183,967
Stockholders’ Equity:
Common stock, $1 par value, authorized 2,500,000 shares; issued 200,000 shares			200				200
Paid-in capital			753				753
Retained earnings			45,020				43,558
Accumulated other comprehensive loss			(168	)			(373	)
Treasury stock, at cost 2008 10,464 shares; 2007 9,245 shares			(2,628	)			(2,308	)
Total stockholders’ equity			43,177				41,830
Total liabilities and stockholders’ equity		$	234,920			$	225,797

See Notes to Consolidated Financial Statements.

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		2008				2007				2008				2007
Interest income:
Interest and fees on loans		$	1,655			$	1,536			$	4,826			$	4,441
Interest and dividends on investments:
Taxable			1,222				1,049				3,595				3,009
Exempt from federal income taxes			373				437				1,164				1,366
Interest on federal funds sold and other			1				17				11				52
Total interest income			3,251				3,039				9,596				8,868
Interest Expense
Deposits			1,492				1,534				4,616				4,508
Borrowings			11				—				21				1
Total interest expense			1,503				1,534				4,637				4,509
Net interest income			1,748				1,505				4,959				4,359
Provision for loan losses			38				—				68				—
Net interest income after provision for loan losses			1,710				1,505				4,891				4,359
Other income:
Service charges on deposit accounts			36				36				98				100
Other service charges and fees			26				24				75				68
Other income			9				11				34				33
Total other income			71				71				207				201
Other expenses:
Salaries and employee benefits			358				341				1,062				1,029
Occupancy			83				64				171				134
Furniture and equipment			68				69				200				201
Pennsylvania shares tax			106				100				318				302
Other expenses			164				150				523				507
Total other expenses			779				724				2,274				2,173
Income before income taxes			1,002				852				2,824				2,387
Income tax expense			232				148				602				370
Net income		$	770			$	704			$	2,222			$	2,017
Per share data:
Earnings per share, basic		$	4.06			$	3.57			$	11.69			$	10.21
Weighted average common shares outstanding			189,676				197,004				190,046				197,625
Cash dividends declared per share		$	2.00			$	2.00			$	4.00			$	4.00

See Notes to Consolidated Financial Statements.

NEFFS BANCORP, INC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2008 and 2007

(Unaudited)

														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, 2006		$	200			$	753			$	41,634			$	(947	)		$	(418	)		$	41,222
Comprehensive Income:
Net income			—				—				2,017				—				—				2,017
Change in unrealized net losses on securities available for sale, net of tax			—				—				—				200				—				200
Total comprehensive income																							2,217
Cash dividends declared on common stock, $4.00 per share			—				—				(777	)			—				—				(777	)
Purchase of treasury stock (7,186 shares)			—				—				—				—				(1,890	)			(1,890	)
Balance, September 30, 2007		$	200			$	753			$	42,874			$	(747	)		$	(2,308	)		$	40,772

														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, 2007		$	200			$	753			$	43,558			$	(373	)		$	(2,308	)		$	41,830
Comprehensive Income:
Net income			—				—				2,222				—				—				2,222
Change in unrealized net losses on securities available for sale, net of tax			—				—				—				205				—				205
Total comprehensive income																							2,427
Cash dividends declared on common stock, $4.00 per share			—				—				(760	)			—				—				(760	)
Purchase of treasury stock (1,219 shares)			—				—				—				—				(320	)			(320	)
Balance, September 30, 2008		$	200			$	753			$	45,020			$	(168	)		$	(2,628	)		$	43,177

See Notes to Consolidated Financial Statements.

NEFFS BANCORP, INC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Dollars in thousands
Nine Months Ended September 30,		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	2,222			$	2,017
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			165				151
Provision for loan losses			68				—
Net accretion of securities premiums/discounts			(320	)			(47	)
Change in assets and liabilities:
Increase in:
Accrued interest receivable			(121	)			(186	)
Other assets			(131	)			(40	)
Decrease in:
Other liabilities			(106	)			62
Net cash provided by operating activities			1,777				1,957
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in interest bearing deposits with banks			9				(61	)
Increase in federal funds sold			—				(3,700	)
Purchase of securities available for sale			(8,050	)			(1,925	)
Proceeds from maturities/calls of securities available for sale			5,268				5,019
Purchase of securities held to maturity			(30,617	)			(9,417	)
Proceeds from maturities/calls of securities held to maturity			29,733				6,546
Net increase in loans			(5,112	)			(5,731	)
Purchases of premises and equipment			(125	)			(39	)
Net cash used in investing activities			(8,894	)			(9,308	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits			9,157				10,625
Net decrease in federal funds purchased			(1,654	)			(357	)
Dividends paid			(381	)			(396	)
Purchase of treasury stock			(320	)			(1,890	)
Net cash provided by financing activities			6,802				7,982
Increase (decrease) in cash and cash equivalents			(315	)			631
Cash and cash equivalents:
Beginning			3,888				2,201
Ending		$	3,573			$	2,832
Supplementary Cash Flows Information
Interest Paid		$	4,710			$	4,390
Income Taxes Paid		$	676			$	410

See Notes to Consolidated Financial Statements.

NEFFS BANCORP, INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(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 and the rules and regulations of the Securities and Exchange Commission (“SEC”) 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, 2008, are not necessarily indicative of the results that may be expected for the year ending December 3l, 2008. These statements should be read in conjunction with the financial statements and notes contained in the 2007 Annual Report to Stockholders.

For further information, refer to the financial statements and footnotes thereto included in Neffs Bancorp, Inc.’s Annual Report to stockholders for the year ended December 31, 2007.

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.

Note 3. COMPREHENSIVE INCOME

The components of other comprehensive income (loss) and related tax effects for the three and nine months ended September 30, 2008 and 2007 are as follows:

		Three Months								Nine Months
		Ended								Ended
		September 30,								September 30,
Dollars in thousands		2008				2007				2008				2007
Unrealized holding gains on available for sale securities		$	594			$	550			$	311			$	303
Tax effect			(202	)			(187	)			(106	)			(103	)
Other comprehensive income, net of tax		$	392			$	363			$	205			$	200

Note 4. EARNINGS PER SHARE

Earnings per share is based on the weighted average shares of common stock outstanding during each period. The Corporation currently maintains a simple capital structure and does not issue potentially dilutive securities; 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 risks involved in issuing letters of credit are 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 had $612,000 of standby letters of credit as of September 30, 2008. 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 payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2008 for guarantees under standby letters of credit issued is not material.

Note 6. ADOPTION OF NEW ACCOUNTING STANDARDS

The Corporation adopted FASB Statement No. 157 “Fair Value Measurements” (SFAS 157) effective January 1, 2008 for financial assets and liabilities that are measured and reported at fair value. There was no impact from the adoption of SFAS 157 on the amounts reported in the consolidated financial statements. The primary effect of SFAS 157 on the Corporation was to expand the required disclosures pertaining to the methods used to determine fair values.

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2008 are as follows:

(Level 1)

(Level 2)

Quoted Prices

Significant

(Level 3)

in Active

Other

Significant

September 30,

Markets for

Observable

Unobservable

Description

2008

Identical Assets

Inputs

Inputs

(In Thousands)

Securities Available for sale

$

39,428

$

39,428

The Corporation’s adoption of SFAS 157 applies only to its financial instruments required to be reported at fair value. The adoption did not apply to those non-financial assets and non-financial liabilities for which adoption was delayed until January 1, 2009 in accordance with FSP FAS 157-2.

On October 10, 2008, the FASB issued FSP 157-3, which clarifies the application of FAS 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The FSP states that an entity should not automatically conclude that a particular transaction price is determinative of fair value. In a dislocated market, judgment is required to evaluate whether individual transactions are forced liquidations or distressed sales. When relevant observable market information is not available, a valuation approach that incorporates management’s judgments about the assumptions that market participants would use in pricing the asset in a current sale transaction would be acceptable. The FSP also indicates that quotes from brokers or pricing services may be relevant inputs when measuring fair value, but are not necessarily determinative in the absence of an active market for the asset. In weighing a broker quote as an input to a fair value measurement, an entity should place less reliance on quotes that do not reflect the result of market transactions. Further, the nature of the quote (for example, whether the quote is an indicative price or a binding offer) should be considered when weighing the available evidence. The FSP is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 30, 2008. Accordingly, the Corporation adopted the FSP prospectively, beginning July 1, 2008 and considered this guidance in determining fair value measurements on September 30, 2008.

The Corporation conducts other-than-temporary impairment analysis on a quarterly basis. The initial indication of other-than-temporary impairment for both debt and equity securities is a decline in the market value below the amount recorded for an investment. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the consolidated statement of income.

In determining whether an impairment is other than temporary, the Corporation considers a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and the Corporation’s intent and ability to retain the security for a period of time sufficient to allow for a recovery in market value or maturity. Among the factors that are considered in determining the Corporation’s intent and ability is a review of its capital adequacy, interest rate risk position and liquidity.

The Corporation also considers the issuer’s financial condition, capital strength and near-term prospects. In addition, for debt securities and perpetual preferred securities that are treated as debt securities for the

purpose of other-than-temporary analysis, the Corporation considers the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), current ability to make future payments in a timely manner and the issuer’s ability to service debt.

The assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and the Corporation’s intent and ability to retain the security require considerable judgment.

Certain of the corporate debt securities are accounted for under EITF 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests that Continue to Be Held by a Tranferor in Securitized Financial Assets. For investments within the scope of EITF 99-20 at acquisition, the Corporation evaluates current available information in estimating the future cash flows of these securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Corporation considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various note classes. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, expected future default rates and other relevant market information. At September 30, 2008, the Corporation concluded that no adverse change in cash flows occurred during the third quarter.

The Corporation analyzed the cash flow characteristics of these securities. Based on this analysis and because the Corporation has the intent and ability to hold these securities until recovery of fair value, which may be at maturity; and, for investments within the scope of EITF 99-20, determined that there was no adverse change in the cash flows as viewed by a market participant, the Corporation does not consider the investments in these assets to be other-than-temporarily impaired at September 30, 2008. However, there is a risk that this review could result in recognition of other-than-temporary impairment charges in the future.

As of September 30, 2008, management does not believe any unrealized loss represents an other-than-temporary impairment. The unrealized losses at September 30, 2008 were primarily interest rate-related.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Corporation January 1, 2008. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.

Note 7. NEW ACCOUNTING STANDARDS

In September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF 08-5). EITF 08-5 provides guidance for measuring liabilities issued with an attached third-party credit enhancement (such as a guarantee). It clarifies that the issuer of a liability with a third-party credit enhancement should not include the effect of the credit enhancement in the fair value measurement of the liability. EITF 08-5 is effective for the first reporting period beginning after December 15, 2008. The Company is currently assessing the impact of EITF 08-5 on its consolidated financial position and results of operations.

In May 2008, the FASB issued FAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. FAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). FAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect the adoption of FAS No. 162 to have a material effect on its results of operations and financial position.

In February 2008, the FASB issued a FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one “linked” transaction. The FSP includes a “rebuttable presumption” that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. The FSP will be effective for fiscal years beginning after November 15, 2008 and will apply only to original transfers made after that date; early adoption will not be allowed. The Corporation is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

FASB statement No. 141(R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determining what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Corporation’s accounting for business combinations beginning January 1, 2009.

FASB statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” was issued in December of 2007. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Corporation is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

Staff Accounting Bulletin No. 109 (SAB 109), “Written Loan Commitments Recorded at Fair Value Through Earnings” expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff’s views consistent with current authoritative accounting guidance, the SAB revises and rescinds portions of SAB No. 105, “Application of Accounting Principles to Loan Commitments.”  Specifically, the SAB revises the SEC staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the staff’s views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Corporation does not expect SAB 109 to have a material impact on its financial statements.

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:

	v		operating, legal and regulatory risks;
	v		economic, political, and competitive forces affecting banking, securities, asset management and credit services businesses; and
	v		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 to Stockholders for the year ended December 31, 2007. 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, the appropriate level of the allowance for loan losses, and considerations of other-than-temporary impairment of investments. Additional information is contained in this Form 10-Q under the paragraphs titled “Provision for Loan Losses”, “Loan and Asset Quality and Allowance for Loan Losses”, and “Securities”.

OVERVIEW

Net income for the third quarter of 2008 increased 9.4% to $770,000 as compared to $704,000 for the third quarter of 2007. Total revenues increased 6.8% from $3.1 million to $3.3 million for the quarter and total expenses increased 6.1% from $2.4 million to $2.6 million. Net income per common share

increased 13.7% to $4.06 per share from $3.57 per share in the third quarter a year ago. At September 30, 2008, the Corporation had total assets of $234.9 million, total loans of $99.7 million, and total deposits of $189.5 million.

Net income for the first nine months of 2008 increased 10.2% to $2.2 million as compared to $2.0 million for the first nine months of 2007. Total revenues increased 8.1% from $9.1 million to $9.8 million for the first nine months of 2008 and total expenses increased 7.5% from $7.1 million to $7.6 million. Net income per common share increased 14.5% to $11.69 per share from $10.21 per share from the first three quarters of 2008 to the same period of 2007.

RESULTS OF OPERATIONS

Average Balances and Average Interest Rates

Interest earning assets averaged $226.7 million for the third quarter of 2008 as compared to $217.0 million for the same period in 2007. The growth in interest earning assets was mainly the result of an increase of $5.9 million in average total loans and an increase of $5.3 million in average total investments. Average interest-bearing liabilities increased from $162.4 million during the third quarter of 2007 to $173.3 million during the third quarter of 2008. The increase in average interest bearing liabilities was the result of increases in time deposits, Federal funds purchased, and savings deposit accounts of $8.7 million, $2.2 million, and $638,000, respectively, offset by a decrease in demand deposits of $549,000.

The average yield on earning assets was 5.7% for the third quarter of 2008 as compared to 5.6% for the same quarter in 2007. The average rate paid on interest-bearing liabilities was 3.5% for the third quarter of 2008 and 3.8% for the third quarter of 2007. This was the result of the decreased deposit rates and increased loan yields experienced from September 2007 to September 2008.

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, securities and Federal Funds Sold. Liabilities used to fund such assets include deposits and borrowed funds. Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, related yields and associated funding costs.

Interest income for the third quarter of 2008 increased by $212,000 or 7.0% over the third quarter of 2007 due mainly to an increase in loans and securities. Interest expense for the third quarter of 2008 decreased by $31,000 or 2.0%, as compared to the third quarter of 2007. The decrease was due mainly to a decrease in deposit interest rates.

Net interest income increased by $243,000 or 16.1% to $1.7 million for the third quarter of 2008 as compared to $1.5 million for the third quarter of 2007. This increase resulted from an increase in interest-bearing assets and decrease in deposit interest rates.

For the nine months ended September 30, 2008, interest income increased by $728,000 or 8.2% over the same period in 2007. The increase for the first nine months was mostly related to the increase in loans and securities. Interest earning assets for the first nine months of 2008 averaged $223.0 million versus $214.5 million for the comparable period in 2007. The yield on those assets increased from 5.5% for the first nine month of 2007 to 5.7% for the same period in 2008.

Interest expense for the first nine months of 2008 increased $128,000 or 2.8% as compared to the first nine months of 2007. The level of average interest-bearing liabilities increased from $160.8 million for the first three quarters of 2007 to $170.5 million for the same period of 2008. The average rate paid for the first three quarters of 2008 and 2007 was 3.6% and 3.7%, respectively.

Net interest income for the first three quarters of 2008 increased by $600,000 or 13.8% over the same period in 2007. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average earning assets. The company’s net interest margin increased to 3.0% for the nine months ended September 30, 2008 from 2.7% for the same period last year.

Provision for Loan Losses

Provision for loan losses increased $38,000 for the third quarter of 2008 from no provision in the third quarter of 2007. The increase is due in part to an increase in loans.

For the nine months ending September 30, 2008, provision for loan losses increased $68,000 compared to no provision for loan losses in the same period of 2007.

Management regularly assesses the appropriateness and adequacy of the allowance for loan losses in relation to credit exposure associated with individual borrowers, overall trends in the loan portfolio and other relevant factors, and believes the allowance is reasonable and adequate for each of the periods presented. The Corporation has no credit exposure to foreign countries or foreign borrowers. The Corporation also has no exposure to subprime mortgage loans.

Non-interest Income

Non-interest income for the third quarter of 2008 and 2007 remained the same at $71,000. Non-interest income for the first nine months of 2008 increased by $6,000 or 3.0% from the same period in 2007.

Non-interest Expense

For the third quarter of 2008, non-interest expenses increased by $55,000 or 7.6% to $779,000 compared to $724,000 over the same period in 2007. The increase was due to increases in employee expenses, occupancy expenses, PA shares tax, and other expenses.

Salary expenses and employee benefits, which represent the largest component of non-interest expenses, increased by $17,000 or 5.0%, for the third quarter of 2008. This increase was due in part to an increase in employee benefits.

Occupancy expense for the third quarter of 2008 increased by $19,000 or 29.7% as compared to the third quarter of 2007. Increased use of internet banking, bill pay and imaging resulted in additional maintenance, repair and depreciation expenses over the third quarter of 2007.

Furniture and equipment expense decreased $1,000 to $68,000 for the third quarter of 2008 over the same period of 2007.

Shares tax increased from $100,000 to $106,000 from the third quarter of 2007 to the third quarter of 2008.

Other expenses increased by $14,000, or 9.3%, to $164,000 in the third quarter of 2008 from the same period in 2007. This increase was mainly due to increases in bank account maintenance, postage, and bookkeeping expenses.

Total non-interest expense was $2.3 million for the first nine months of 2008 compared to $2.2 million for the same period of 2007.

Salary expenses and employee benefits, which represent the largest component, 46.7%, of non-interest expenses, increased by $33,000 or 3.2% over the first nine months of 2007.

Occupancy expense for the first nine months of 2008 increased by $37,000 or 27.6% as compared to the first nine months of 2007 due mainly to increased use of internet banking, bill pay, and imaging.

Furniture and equipment expense decreased by $1,000 to $200,000 for the first nine months of 2008 as compared to 2007.

Shares tax expense increased by $16,000 or 5.3% for the first nine months of 2008 from the same period in 2007. This increase was mainly due to continued capital growth.

Net other expenses increased by $16,000 or 3.2% for the first nine months ended September 30, 2008 over the same period of 2007.

One key measure used to monitor progress in controlling overhead expenses is the ratio of net non-interest expenses to average assets. The ratio equals non-interest expenses (excluding foreclosed real estate expenses) less non-interest income (exclusive of non-recurring gains), divided by average assets. This ratio equaled 1.1% for the third quarter of 2008 and 1.2% for the same period of 2007. The overhead expense ratio was 1.2% for the first three quarters of 2008 and 2007.

Another productivity measure is the operating efficiency ratio. This ratio expresses the relationship of non-interest expense (excluding foreclosed real estate expenses) to net interest income plus non-interest income (excluding non-recurring gains). For the quarter ended September 30, 2008, the operating efficiency ratio was 39.8% compared to 45.9% for the same period in 2007. For the nine months ended September 30, 2008, this ratio was 43.0% compared to 47.7% for the same period of 2007. This decrease is due mainly to the increase in net interest income.

Provision for Federal Income Taxes

The provision for federal income taxes was $232,000 for the third quarter of 2008 compared to $148,000 for this same period in 2007. For the first nine months the provision was $602,000 and $370,000 for 2008 and 2007, respectively. The effective tax rate, which is the ratio of income tax expense to income before income taxes, was 23.2% for the third quarter of 2008 and 17.4% for the same period in 2007. The effective tax rate is below 34% due to the number of tax-exempt securities held by the Corporation. The effective tax rate and provision for Federal income taxes increased due to the increase in pre-tax income while tax-exempt income declined.

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 2008 and 2007 was 1.3%. ROA for

the first nine months of 2008 and 2007 was 1.3% and 1.2%, respectively. The increase in ROA was mainly due to the increase in net income period to period.

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 stockholder’s equity included the effect of unrealized gains or losses, net of income taxes, on securities available for sale. The annualized ROE for the third quarter of 2008 and 2007 is 7.2% and 6.8%, respectively. The annualized ROE for the first three quarters of 2008 increased to 7.0% from 6.5% in the same period of 2007. This increase is due mainly to the increase in net income in 2008 over 2007 for the respective periods.

FINANCIAL CONDITION

Securities

Securities available for sale increased $3.0 million to $39.4 million as of September 30, 2008, from $36.4 million at December 31, 2007. This increase was due mainly to the purchase of additional securities as the continued growth in deposits and equity surpassed loan demand.

The securities available for sale portfolio had an unrealized loss of $168,000, net of taxes, at the end of the third quarter of 2008, compared to an unrealized loss of $373,000, net of taxes, at December 31, 2007. This decrease was mainly due to increase in market value as market rates continued to decline.

During the first nine months of 2008, the securities held to maturity portfolio increased $1.3 million to $88.1 million from $86.8 million at December 31, 2007. This increase was due mainly to the purchase of additional securities as the continued growth in deposits and equity surpassed loan demand.

There are 145 debt securities in unrealized loss positions. In reviewing their rating, underlying price, anticipated cash flow, and the intent and ability to hold the securities until maturity or market price recovery, the Corporation deemed that no securities are deemed to be other than temporarily impaired.

Net Loans Receivable

During the first nine months of 2008, net loans receivable increased by $5.0 million from $94.0 million at December 31, 2007 to $99.0 million at September 30, 2008. Net loans receivable represented 52.2% of total deposits and 42.2% of total assets at September 30, 2008 as compared to 52.1% and 41.6%, respectively, at December 31, 2007.

Loan and Asset Quality and Allowance for Loan Losses

Total non-performing loans (comprised of non-accruing loans and loans past due 90 days or more and still accruing interest) were $194,000 at September 30, 2008 as compared to $36,000 at December 31, 2007. No loss is anticipated in these loans. There were no repossessed assets held by the Corporation as of September 30, 2008 and December 31, 2007.

The following summary table presents information regarding non-performing loans and assets as of September 30, 2008 and December 31, 2007:

Nonperforming Loans and Assets
(Dollars in Thousands)

		September				December
		30, 2008				31, 2007
Nonaccrual loans:		$	—			$	—
Commercial			—				—
Consumer			—				—
Real Estate:
Construction			—				—
Mortgage			—				—
Total nonaccrual			—				—
Loans past due 90 days or more			194				36
Restructured loans			—				—
Total nonperforming loans			194				36
Repossessed assets			—				—
Total nonperforming assets		$	194			$	36
Nonperforming loans to total loans			0.19	%			0.04	%
Nonperforming assets to total assets			0.08	%			0.02	%

The following table sets forth the Corporation’s provision and allowance for loan losses.

Allowance for Loan Losses
(Dollars in Thousands)

		Nine Months				Nine Months
		Ending 9/30/08				Ending 9/30/07
Balance at beginning of period		$	620			$	653
Provisions charged to operating expenses			68				—
Recoveries of loans previously charged-off
Commercial			—				—
Consumer			1				4
Real Estate			—				—
Total recoveries			1				4
Loans charged-off:
Commercial			—				—
Consumer			(2	)			(14	)
Real Estate			—				—
Total charged-off			(2	)			(14	)
Net charge-offs			(1	)			(10	)
Balance at end of period		$	687			$	643
Net charge-offs as a percentage of average loans outstanding			0.00	%			0.01	%
Allowance for loan losses as a percentage of period-end loans			0.69	%			0.69	%

Deposits

Total deposits at September 30, 2008 were $189.5 million, an increase of $9.2 million, or 5.1%, over total deposits of $180.4 million at December 31, 2007. The outstanding balances by deposit classification at September 30, 2008 and 2007 are presented in the following table.

						At September 30,
						(Dollars in thousands)
		2008								2007
						Average								Average
		Balance				Rate				Balance				Rate
Demand Deposits:
Noninterest-bearing		$	15,915							$	18,052
Interest-bearing			6,246				0.73				6,302				1.70
Savings			47,921				1.69				49,368				1.92
Time deposits:
<$100,000			78,426				4.25				73,470				4.62
>$100,000			41,040				4.64				36,533				4.99
Total Deposits		$	189,548							$	183,726

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-bearing 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 September 30, 2008, the Corporation’s simulation model indicated net interest income would increase 1.17% within the first year if rates increased as described above. The model projected that net interest income would decrease by 0.64% 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.

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, 2008 totaled $6.0 million. This consisted of $1.1 million in commercial real estate, construction, and land development loans, $4.2 million in home equity lines of credit, $612,000 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 September 30, 2008, stockholders’ equity totaled $43.2 million, an increase of 3.2% over stockholders’ equity of $41.8 million at December 31, 2007. The increase in stockholders’ equity for

the nine months ended September 30, 2008 is net of a $320,000 increase in treasury stock and an unrealized gain, net of income taxes, of $205,000 on securities available for sale. Excluding this unrealized gain and treasury stock purchase, stockholders’ equity changed by an increase of $1.5 million 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.

The following table provides a comparison of the Bank’s risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the period indicated. The consolidated ratios are not materially different from those presented below.

														To be Well
														Capitalized
										For Capital				Under Prompt
		September 30,				December 31,				Adequacy				Corrective Action
		2008				2007				Purposes				Provision
Risk-based capital ratios:
Tier 1 Capital			37.4	%			37.9	%			4.0	%			6.0	%
Total Capital			38.0	%			38.5	%			8.0	%			10.0	%
Leveraged Capital			18.4	%			18.7	%			4.0	%			5.0	%

At September 30, 2008, 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 June 30, 2008. The market risk principally includes interest rate risk, which is discussed in the Management’s Discussion and Analysis above.

Item 4T.

Controls and Procedures

Management of the Corporation, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this report.

There have not been any changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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 the Bank is a party or to which their property is subject, which, if determined adversely to the Corporation or the Bank, would be material in relation to the Corporation’s or the Bank’s financial condition. There are no proceedings pending other than ordinary routine litigation incident to the business of the Corporation or the Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation or the Bank by government authorities.

Item 1A. Risk Factors

During 2008 the capital and credit markets experienced severe volatility and disruption. In the third quarter of 2008, the volatility and disruption reached unprecedented levels.  Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases ceased to provide, funding to borrowers, including other financial institutions.  Although to date we have not suffered liquidity problems, we are part of the financial system and a systemic lack of available credit, a lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition and results of operations.

In response to the turmoil in the banking system and financial markets, the U.S. government has taken unprecedented actions, including the U.S. Treasury’s plan to inject capital into financial institutions for the purpose of stabilizing the financial markets generally or particular financial institutions.  There is no assurance that government actions will achieve their purpose.

The failure to help stabilize the financial markets and a continuation or worsening of the current financial market conditions could have a material adverse affect on our business, our financial condition, the financial condition of our customers, our common stock trading price, as well as our ability to access credit.  It could also result in further declines in our investment portfolio which could become other-than-temporary impairments.

Please refer to Part 1, Item 1A, “Risk Factors”, of the Corporation’s Form 10-K for the year ended December 31, 2007 for additional disclosures regarding the risks and uncertainties related to the Corporation’s business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Although there is no formal stock repurchase plan, the Corporation repurchased Bancorp stock during the third quarter of 2008 as presented in the table below.

Total

Maximum

Number

Number of

of Shares

Shares that

Total

Purchased as

may yet be

Number

Average

Part of

Purchased

of

Price

Publicly

Under the

Shares

Paid per

Announced Plans

Plans or

Purchased

Share

or Programs

Programs

July 1 through July 31, 2008

—

$

—

NA

NA

August 1 through August 31, 2008

41

263

NA

NA

September 1 through September 31, 2008

120

263

NA

NA

Total

161

$

263

NA

NA

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.
	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.

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: November 14, 2008		/s/ John J. Remaley
		John J. Remaley, President

Neffs Bancorp (PK) (USOTC:NEFB)
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Neffs Bancorp (PK) (USOTC:NEFB)
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