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EX-32.1 - CERTIFICATION - NEFFS BANCORP INCex-32_1.htm
EX-31.1 - CERTIFICATION - NEFFS BANCORP INCex-31_1.htm
EX-32.2 - CERTIFICATION - NEFFS BANCORP INCex-32_2.htm
EX-31.2 - CERTIFICATION - NEFFS BANCORP INCex-31_2.htm


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 quarterly period ended March 31, 2011

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 incorporation or organization)
 
(IRS Employer Identification No.)

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

(610) 767-3875
 (Issuer's telephone number)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  ¨    No  ¨

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 definition of “accelerated filer,” “large accelerated filer” and “small reporting company” in Rule 12-b-2 of the Exchange Act.  (Check one):

 
Large Accelerated filer  
¨
Accelerated filer
¨
 
 
Non-Accelerated filer
¨
Smaller reporting company  
x
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes  ¨    No  x

As of April 30, 2011, there were 178,430 shares of common stock, par value of $1.00, outstanding.

 
 

 

NEFFS BANCORP, INC.

INDEX

 
     
  3
     
 
     
 
     
 
     
 
     
 
     
     
28
     
     
 
     
     
     
     
     
     
     
     
 


 
2


PART 1.
FINANCIAL INFORMATION

Item 1.
Consolidated Financial Statements
NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

Dollars in thousands, except share data
 
March 31,
   
December 31,
 
   
2011
   
2010
 
ASSETS
 
 
   
 
 
             
Cash and due from banks
  $ 6,960     $ 7,448  
Interest bearing deposits with banks
    180       141  
Securities available for sale
    41,639       41,828  
Securities held to maturity, fair value $100,850 in 2011;$98,617 in 2010
    103,433       101,932  
                 
Loans
    122,882       121,886  
Less allowance for loan losses
    (1,202 )     (1,114 )
Net loans
    121,680       120,772  
                 
Premises and equipment, net
    2,311       2,341  
Restricted investments in bank stock
    770       809  
Other assets
    3,189       3,192  
Total assets
  $ 280,162     $ 278,463  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Liabilities:
               
Deposits
               
Non-interest bearing
  $ 18,992     $ 18,480  
Interest bearing
    212,990       212,207  
Total deposits
    231,982       230,687  
Other liabilities
    1,332       1,079  
Total liabilities
    233,314       231,766  
                 
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
    51,285       50,818  
Accumulated other comprehensive income
    83       138  
Treasury stock, at cost 2011 21,570 shares; 2010 20,540 shares
    (5,473 )     (5,212 )
Total stockholders' equity
    46,848       46,697  
                 
Total liabilities and stockholders' equity
  $ 280,162     $ 278,463  
                 
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,
 
   
2011
   
2010
 
Interest income:
           
Interest and fees on loans
  $ 1,774     $ 1,682  
Interest and dividends on investments:
               
Taxable
    1,037       1,233  
Exempt from federal income taxes
    436       348  
Interest on federal funds sold and other
    2       -  
Total interest income
    3,249       3,263  
Interest Expense
               
 Deposits
    1,125       1,244  
Total interest expense
    1,125       1,244  
Net interest income
    2,124       2,019  
Provision for loan losses
    87       30  
Net interest income after provision for loan losses
    2,037       1,989  
Other income:
               
Impairment loss on securities
    (38 )     (633 )
Portion of impairment loss recognized in other comprehensive income (before tax)
    7       519  
Net impairment loss
    (31 )     (114 )
Service charges on deposit accounts
    24       26  
Other service charges and fees
    25       25  
Gain on called securities
    3       -  
Other income
    6       11  
Total other income (expense)
    27       (52 )
Other expenses:
               
Salaries and employee benefits
    420       400  
Occupancy
    57       48  
Furniture and equipment
    69       66  
Pennsylvania shares tax
    124       118  
FDIC expense
    75       49  
Other expenses
    187       180  
Total other expenses
    932       861  
Income before income taxes
    1,132       1,076  
Income tax expense
    246       253  
Net income
  $ 886     $ 823  
                 
Per share data:
               
Earnings per share, basic
  $ 4.96     $ 4.49  
Weighted average common shares outstanding
    178,745       183,116  
Cash dividends declared per share
  $ 2.35     $ 2.00  
                 
See Notes to Consolidated Financial Statements.
               

 
4


NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2011 and 2010
(Unaudited)

Dollars in thousands, except per share data

Dollars in thousands, except per share data
 
Common Stock
   
Paid-In Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income
   
Treasury Stock
   
Total Stockholders' Equity
 
Balance, December 31, 2009
  $ 200     $ 753     $ 48,255     $ 556     $ (4,136 )   $ 45,628  
Comprehensive Income:
                                               
Net income
    -       -       823       -       -       823  
Change in unrealized net gain on securities available for sale,net of tax
    -       -       -       148       -       148  
Unrealized losses on OTTI of securities held to maturity, net of tax
    -       -       -       (342 )     -       (342 )
Total comprehensive income
                                            629  
                                                 
Cash dividends declared on common stock, $2.00  per share
    -       -       (366 )     -       -       (366 )
Purchase of treasury stock  (617 shares)
    -       -       -       -       (158 )     (158 )
                                                 
Balance, March 31, 2010
  $ 200     $ 753     $ 48,712     $ 362     $ (4,294 )   $ 45,733  
 
Dollars in thousands, except per share data
 
Common Stock
   
Paid-In Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income
   
Treasury Stock
   
Total Stockholders' Equity
 
Balance, December 31, 2010
  $ 200     $ 753     $ 50,818     $ 138     $ (5,212 )   $ 46,697  
Comprehensive Income:
                                               
Net income
    -       -       886       -       -       886  
Change in unrealized net gain on securities available for sale, net of tax
    -       -       -       (51 )     -       (51 )
Unrealized losses on OTTI of securities held to maturity, net of tax
    -       -       -       (4 )     -       (4 )
Total comprehensive income
                                            831  
                                                 
Cash dividends declared on common stock, $2.35  per share
    -       -       (419 )     -       -       (419 )
Purchase of treasury stock  (1,030 shares)
    -       -       -       -       (261 )     (261 )
                                                 
Balance, March 31, 2011
  $ 200     $ 753     $ 51,285     $ 83     $ (5,473 )   $ 46,848  

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,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 886     $ 823  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    87       30  
Depreciation
    61       55  
Net amortization (accretion) of securities premiums/discounts
    176       (35 )
Impairment loss on securities
    31       114  
Gain on called securities
    (3 )     -  
Change in assets and liabilities:
               
(Increase) decrease  in:
               
Accrued interest receivable
    87       (183 )
PA shares tax
    (372 )     (353 )
Other assets
    316       111  
Increase (decrease) in:
               
Accrued interest payable
    (70 )     (72 )
Other liabilities
    (96 )     125  
Net cash provided by operating activities
    1,103       615  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net increase in interest bearing deposits with banks
    (39 )     -  
Net decrease in federal funds sold
    -       2,933  
Purchase of securities available for sale
    (3,051 )     (488 )
Proceeds from maturities/calls of securities available  for sale
    3,101       2,926  
Purchase of securities held to maturity
    (10,220 )     (14,832 )
Proceeds from maturities/calls of securities held to maturity
    8,571       10,824  
Net decrease in restricted investments in bank stock
    39       -  
Net increase in loans
    (995 )     (1,239 )
Purchases of premises and equipment
    (31 )     (9 )
Net cash provided (used) by investing activities
    (2,625 )     115  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in deposits
    1,295       4,909  
Purchase of treasury stock
    (261 )     (158 )
Net cash provided by financing activities
    1,034       4,751  
Increase (decrease) in cash and cash equivalents
    (488 )     5,481  
Cash and cash equivalents:
               
Beginning
    7,448       2,187  
Ending
  $ 6,960     $ 7,668  
                 
Supplementary Cash Flows Information
               
Interest Paid
  $ 1,195     $ 1,316  
Income Taxes Paid
  $ -     $ -  
                 
See Notes to Consolidated Financial Statements.
               

 
6


NEFFS BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(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 three-month period ended March 3l, 2011, are not necessarily indicative of the results that may be expected for the year ending December 3l, 2011.  These statements should be read in conjunction with the financial statements and notes contained in the 2010 Annual Report to Shareholders.

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 SEC.

For further information, refer to the financial statements and footnotes thereto included in Neffs Bancorp, Inc.’s Annual Report to Shareholders for the year ended December 31, 2010.
 
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 and related tax effects for the three months ended March 31, 2011 and 2010 are as follows:
 
   
 Three Months Ended
March 31,
 
     2011      2010  
   
(In Thousands)
 
             
Change in unrealized net gains on securities available for sale
  $ (77 )   $ 224  
Change in unrealized losses on OTTI securities held to maturity
    (7 )     (519 )
Tax effect
    29       101  
Other comprehensive income, net of tax
  $ (55 )   $ (194 )

 
7

 
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 $644,000 of standby letters of credit as of March 31, 2011.  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, 2011 for guarantees under standby letters of credit issued is not material.

Note 6.  SECURITIES

The amortized cost and fair values of securities are as follows:
 
   
March 31, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Securities Available for Sale:
 
(In Thousands)
 
U.S. Treasury note
  $ 100     $ 5     $ -     $ 105  
Mortgage-backed securities (Government agencies-residential)
    40,767       1,165       (398 )     41,534  
    $ 40,867     $ 1,170     $ (398 )   $ 41,639  
Securities Held to Maturity:
                               
Obligations of U.S. Government agencies
  $ 38,762     $ 253     $ (580 )   $ 38,435  
Obligations of states and political subdivisions
    59,675       734       (1,199 )     59,210  
Corporate securities
    1,200       58       -       1,258  
Collateralized debt obligations
    2,120       -       (1,916 )     204  
Mortgage-backed securities (Government agencies-residential)
    1,676       71       (4 )     1,743  
    $ 103,433     $ 1,116     $ (3,699 )   $ 100,850  

 
8

 
   
December 31, 2010
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Securities Available for Sale:
 
(In Thousands)
 
U.S. Treasury note
  $ 100     $ 6     $ -     $ 106  
Mortgage-backed securities (Government agencies-residential)
    40,879       1,229       (386 )     41,722  
    $ 40,979     $ 1,235     $ (386 )   $ 41,828  
Securities Held to Maturity:
                               
Obligations of U.S. Government agencies
  $ 36,738     $ 189     $ (590 )   $ 36,337  
Obligations of states and political subdivisions
    61,040       672       (1,803 )     59,909  
Corporate securities
    1,350       41       -       1,391  
Collateralized debt obligations
    2,138       -       (1,896 )     242  
Mortgage-backed securities (Government agencies-residential)
    666       72       -       738  
    $ 101,932     $ 974     $ (4,289 )   $ 98,617  

The amortized cost and fair values of securities at March 31, 2011, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
Available for Sale
   
Held to Maturity
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
   
(In Thousands)
 
Due in one year or less
  $ -     $ -     $ 1,255     $ 1,273  
Due after one year through five years
    100       105       6,420       6,663  
Due after five years through ten years
    -       -       12,130       12,409  
Due after ten years
    -       -       81,952       78,763  
      100       105       101,757       99,108  
Mortgage-backed securities
    40,767       41,534       1,676       1,742  
    $ 40,867     $ 41,639     $ 103,433     $ 100,850  

There were no sales of securities during 2011 and 2010.

Securities with an amortized cost and fair value of approximately $12,000,000 and $12,383,000 at March 31, 2011 and $12,000,000 and $12,780,000 at December 31, 2010 were pledged to secure public deposits and for other purposes required or permitted by law.

 
9


The following tables show the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010:
 
    Less than 12 Months    
12 Months or More
   
Total
 
    Fair
Value
   
Unrealized
Losses
    Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
March 31, 2011:
                                               
Securities Available for Sale:
                                               
Mortgage-backed securities
  $ 18,411     $ 398     $ -     $ -     $ 18,411     $ 398  
Securities Held to Maturity:
                                               
Obligations of U.S. Government agencies
    18,474       567       2,541       13       21,015       580  
Obligations of states and political subdivisions
    20,658       931       5,524       268       26,182       1,199  
Mortgage-backed securities
    1,030       4       -       -       1,030       4  
Collateralized debt obligations
    -       -       204       1,916       204       1,916  
Total Temporarily Impaired Securities
  $ 58,573     $ 1,900     $ 8,269     $ 2,197     $ 66,842     $ 4,097  
 
     Less than 12 Months    
12 Months or More
   
Total
 
     Fair
Value
     Unrealized
Losses
     Fair
Value
    Unrealized
Losses
     Fair
Value
    Unrealized
Losses
 
December 31, 2010:
                                               
Securities Available for Sale:
                                               
Mortgage-backed securities
  $ 16,990     $ 386     $ -     $ -     $ 16,990     $ 386  
Securities Held to Maturity:
                                               
Obligations of U.S. Government agencies
    17,864       482       7,668       108       25,532       590  
Obligations of states and political subdivisions
    28,900       1,665       3,857       138       32,757       1,803  
Collateralized debt obligations
    -       -       242       1,896       242       1,896  
Total Temporarily Impaired Securities
  $ 63,754     $ 2,533     $ 11,767     $ 2,142     $ 75,521     $ 4,675  

The Corporation had 158 and 188 securities in an unrealized loss position at March 31, 2011 and December 31, 2010, respectively.  The decline in fair value is due primarily to interest rate fluctuations.  Two securities were deemed to be other-than-temporarily impaired as discussed in Note 9.  As the Corporation does not intend to sell nor is it expected to be required to sell its investments until maturity or market price recovery no other securities were deemed to be other-than-temporarily impaired.

 
10


Note 7.  LOANS

The composition of the Corporation's loan portfolio at March 31, 2011 and December 31, 2010 is as follows:
 
   
March 31, 2011
   
December 31, 2010
 
   
(In Thousands)
 
             
Commercial real estate
  $ 39,284     $ 39,311  
Commercial non-real estate
    5,338       5,192  
Residential real estate
    56,025       54,869  
Real estate construction
    341       401  
Home equity
    14,981       14,982  
Other consumer
    6,913       7,131  
                 
      122,882       121,886  
Allowance for loan losses
    (1,202 )     (1,114 )
                 
    $ 121,680     $ 120,772  

The following summarizes the allowance for loan losses and recorded investment in classes of loans for quarter ended March 31, 2011:

   
Commercial
Real Estate
   
Commercial
Non-Real
Estate
   
Residential
Real Estate
   
Real Estate Construction
   
Home Equity
   
Other
Consumer
   
Total
 
   
(In Thousands)
 
Allowance for loan loss at December 31, 2010
  $ 381     $ 46     $ 507     $ 4     $ 122     $ 54     $ 1,114  
Losses charged to allowance
    -       -       -       -       -       -       -  
Recoveries credited to allowance
    -       -       -       -       1       -       1  
Provision
    43       2       39       (1 )     (1 )     5       87  
Allowance ending balance
  $ 424     $ 48     $ 546     $ 3     $ 122     $ 59     $ 1,202  
Ending balance: individually evaluated for impairment
  $ 68       -       -       -       -       -     $ 68  
Ending balance: collectively evaluated for impairment
  $ 356     $ 48     $ 546     $ 3     $ 122     $ 59     $ 1,134  
                                                         
Loans
                                                       
Ending balance
  $ 39,284     $ 5,338     $ 56,025     $ 341     $ 14,981     $ 6,913     $ 122,882  
Ending balance: individually evaluated for impairment
  $ 7,050     $ 151       -       -       -       -     $ 7,201  
Ending balance: collectively evaluated for impairment
  $ 32,234     $ 5,187     $ 56,025     $ 341     $ 14,981     $ 6,913     $ 115,681  

 
11


The following summarizes the allowance for loan losses and recorded investment in classes of loans at December 31, 2010:

   
Commercial
Real Estate
   
Commercial
Non-Real
Estate
   
Residential
Real Estate
   
Real Estate Construction
   
Home Equity
   
Other
Consumer
   
Total
 
   
(In Thousands)
 
                                           
Allowance ending balance
  $ 381     $ 46     $ 507     $ 4     $ 122     $ 54     $ 1,114  
Ending balance: individually evaluated for impairment
  $ 24       -       -       -       -       -     $ 24  
Ending balance: collectively evaluated for impairment
  $ 357     $ 46     $ 507     $ 4     $ 122     $ 54     $ 1,090  
                                                         
Loans
                                                       
Ending balance
  $ 39,311     $ 5,192     $ 54,869     $ 401     $ 14,982     $ 7,131     $ 121,886  
Ending balance: individually evaluated for impairment
  $ 5,556     $ 163       -       -       -       -     $ 5,719  
Ending balance: collectively evaluated for impairment
  $ 33,755     $ 5,029     $ 54,869     $ 401     $ 14,982     $ 7,131     $ 116,167  

The allowance for loan loss increased from $1,114,000 at December 31, 2010 to $1,202,000 at March 31, 2011 due to the increase in the provision for loan losses.  The increase is due mainly to increases in loan volume and qualitative factors affecting the allowance as a result of the quarterly review.

The following summarizes the commercial credit risk profile by internally assigned grade at March 31, 2011:

   
Commercial
Real Estate
   
Commercial
Non-Real
Estate
 
   
(In Thousands)
 
             
Pass/Unclassified
  $ 23,279     $ 4,153  
Pass/Watch
    5,582       633  
OAEM/Special Mention
    3,232       401  
Substandard
    4,772       151  
Non-Accrual
    2,419       -  
Total
  $ 39,284     $ 5,338  

The following summarizes the commercial credit risk profile by internally assigned grade at December 31, 2010:

   
Commercial
Real Estate
   
Commercial
Non-Real
Estate
 
   
(In Thousands)
 
             
Pass/Unclassified
  $ 21,897     $ 4,358  
Pass/Watch
    6,650       653  
OAEM/Special Mention
    3,557       18  
Substandard
    4,779       163  
Non-Accrual
    2,428       -  
Total
  $ 39,311     $ 5,192  
 
 
12


The following summarizes the consumer credit risk profile based on payment activity at March 31, 2011:

   
Residential
Real Estate
   
Real Estate Construction
   
Home Equity
   
Other
Consumer
 
   
(In Thousands)
 
                         
Performing
  $ 56,002     $ 341     $ 14,981     $ 6,908  
Nonperforming*
    23       -       -       5  
Total
  $ 56,025     $ 341     $ 14,981     $ 6,913  
                                 
The following summarizes the consumer credit risk profile based on payment activity at December 31, 2010:

   
Residential
Real Estate
   
Real Estate Construction
   
Home Equity
   
Other
Consumer
 
   
(In Thousands)
 
                         
Performing
  $ 54,846     $ 401     $ 14,899     $ 7,128  
Nonperforming*
    23       -       83       3  
Total
  $ 54,869     $ 401     $ 14,982     $ 7,131  
                                 
*Non performing loans include non-accruing loans and loans past due 90 days or more and still accruing interest

The composition of impaired loans at March 31, 2011 is as follows:

   
Recorded
Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
   
(In Thousands)
 
                               
With no related allowance recorded
                             
Commercial real estate
  $ 1,788     $ 1,788     $ -     $ 1,792     $ 31  
With related allowance recorded
                                       
Commercial real estate
    563       631       68       563       9  
Total
                                       
Commercial real estate
  $ 2,351     $ 2,419     $ 68     $ 2,355     $ 40  
                                         
The composition of impaired loans at December 31, 2010 is as follows:

   
Recorded
Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
   
(In Thousands)
 
                               
With no related allowance recorded
                             
Commercial real estate
  $ 2,186     $ 2,186     $ -     $ 2,194     $ 108  
With related allowance recorded
                                       
Commercial real estate
    218       242       24       264       -  
Total
                                       
Commercial real estate
  $ 2,404     $ 2,428     $ 24     $ 2,458     $ 108  

 
13


Age analysis of past due loans and non accrual loans by class of the loan portfolio as of March 31, 2011 is as follows:

   
30-59 Days Past Due
   
60-89 Days Past Due
   
90 Days or Over Past Due
   
Total Past Due
   
Current
   
Total Loans Receivable
   
90 Days or Over and Accruing
   
Non-Accrual
 
   
(In Thousands)
 
                                                 
Commercial real estate
  $ 1,393     $ 2,054     $ 375     $ 3,822     $ 35,462     $ 39,284     $ -     $ 2,419  
Commercial non-real estate
    89       151       -       240       5,098       5,338       -       -  
Residential real estate
    1,428       107       23       1,558       54,467       56,025       -       23  
Real estate construction
    -       -       -       -       341       341       -       -  
Home equity
    476       67       -       543       14,438       14,981       -       -  
Other consumer
    271       33       5       309       6,604       6,913       5       -  
Total
  $ 3,657     $ 2,412     $ 403     $ 6,472     $ 116,410     $ 122,882     $ 5     $ 2,442  

Age analysis of past due loans and non accrual loans by class of the loan portfolio as of December 31, 2010 is as follows:

   
30-59 Days Past Due
   
60-89 Days Past Due
   
90 Days or Over Past Due
   
Total Past Due
   
Current
   
Total Loans Receivable
   
90 Days or Over and Accruing
   
Non-Accrual
 
   
(In Thousands)
 
                                                 
Commercial real estate
  $ 2,158     $ 637     $ 1,645     $ 4,440     $ 34,871     $ 39,311     $ -     $ 2,428  
Commercial non-real estate
    179       43       -       222       4,970       5,192       -       -  
Residential real estate
    1,295       417       23       1,735       53,134       54,869       -       23  
Real estate construction
    -       -       -       -       401       401       -       -  
Home equity
    186       170       83       439       14,543       14,982       83       -  
Other consumer
    146       58       3       207       6,924       7,131       3       -  
Total
  $ 3,964     $ 1,325     $ 1,754     $ 7,043     $ 114,843     $ 121,886     $ 86     $ 2,451  

Note 8.  FAIR VALUE MEASUREMENTS

Below are various estimated fair values at March 31, 2011 and December 31, 2010, as required by ASC Topic 820.  Such information, which pertains to the Corporation's financial instruments, is based on the requirements set forth in ASC Topic 820 and does not purport to represent the aggregate net fair value of the Corporation.  It is the Corporation's general practice and intent to hold its financial instruments to maturity, except for certain securities designated as securities available for sale, and not to engage in trading activities.  Many of the financial instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction.  Therefore, the Corporation had to use significant estimations and present value calculations to prepare this disclosure.

Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts.  Further, the fair value estimates are based on various assumptions, methodologies and subjective considerations, which vary widely among different financial institutions and which are subject to change.

The estimated fair value amounts have been measured as of their respective year ends, and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at year end.

The following methods and assumptions were used by the Corporation in estimating financial instrument fair values:

ASC Topic 820 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 ASC Topic 820 are as follows:
 
 
14


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 are as follows:

Description
 
Total
   
(Level 1)
Quoted Prices in Active Markets for Identical Assets
   
(Level 2)
Significant Other Observable Inputs
   
(Level 3)
Significant Unobservable Inputs
 
      (In Thousands)  
March 31, 2011
                       
U. S. Treasury note available for sale
  $ 105     $ 105       -       -  
Mortgage-backed securities available for sale
  $ 41,534       -     $ 41,534       -  
December 31, 2010
                               
U. S. Treasury note available for sale
  $ 106     $ 106       -       -  
Mortgage-backed securities available for sale
  $ 41,722       -     $ 41,722       -  

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

Description
 
Total
   
(Level 1)
Quoted Prices in Active Markets for Identical Assets
   
(Level 2)
Significant Other Observable Inputs
   
(Level 3)
Significant Unobservable Inputs
 
      (In Thousands)  
March 31, 2011
                       
Impaired trust preferred security held to maturity
  $ 124       -       -     $ 124  
Impaired loans
  $ 563       -       -     $ 563  
December 31, 2010
                               
Impaired trust preferred security held to maturity
  $ 162       -       -     $ 162  
Impaired loans
  $ 218       -       -     $ 218  

The Corporation’s adoption of ASC Topic 820 applies only to its financial instruments required to be reported at fair value.  The Corporation does not have non-financial assets and non-financial liabilities for which adoption would apply in accordance with ASC Topic 820.

 
15


The following methods and assumptions were used by the Corporation in estimating financial instrument fair values:
 
Securities
Fair values of unimpaired securities held to maturity (carried at cost) and securities available for sale are generally determined by quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.  Mortgage-backed securities were valued using level 2 inputs where quoted fair values are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis.

At March 31, 2011 we own four collateralized debt obligation securities totaling $2,120,000 book value and $204,000 fair value that are backed by trust preferred securities issued by banks, thrifts, and insurance companies (TRUP CDOs). These securities are included in corporate held to maturity securities.  The market for these securities at March 31, 2011 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which TRUP CDOs trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive as no new TRUP CDOs have been issued since 2007. There are currently very few market participants who are willing and or able to transact for these securities.  The Corporation analyzed the cash flow characteristics of these securities and determined that one security is other-than-temporarily impaired as described in Note 9.

For the impaired held to maturity trust preferred security the change in book value is as follows:

   
Impaired trust preferred security held to maturity
 
   
(In Thousands)
 
Book/fair value of impaired held to maturity security at December 31, 2010
  $ 162  
Credit related impairment
    (31 )
Non-credit related impairment
    (7 )
Book/fair value of impaired security at March 31, 2011
  $ 124  

Loans Receivable (Carried at Cost)
Fair values of variable rate loans subject to frequent repricing and which entail no significant credit risk are based on the carrying amounts.  The estimated fair values of other loans are estimated by discounting the future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality.

Impaired loans are considered impaired under the guidance of the loan impairment subsection of the Receivables Topic, ASC Section 310-10-35, under which the Corporation has measured impairment generally based on the fair value of the loan’s collateral.  Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

Cash and Due from Banks, Interest Bearing Deposits with Banks and Federal Funds Sold and Purchased
The statement of financial condition carrying amounts for cash and due from banks, interest bearing deposits with banks and federal funds sold and purchased approximate the estimated fair values of such assets.

Accrued Interest Receivable (Carried at Cost)
The carrying amount of accrued interest is considered a reasonable estimate of fair value.

Deposit Liabilities (Carried at Cost)
For deposits which are payable on demand, the carrying amount is a reasonable estimate of fair value.  Fair values of fixed rate time deposits are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregate expected maturities.

Accrued Interest Payable (Carried at Cost)
The carrying amount of accrued interest approximates its fair value.

 
16


Off-Balance Sheet Instruments (Disclosed at Cost)
The fair value of commitments to extend credit and for outstanding letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present credit worthiness of the counterparties.
 
The estimated fair values of the Corporation’s financial instruments at March 31, 2011 and December 31, 2010 are as follows:
 
   
2011
   
2010
 
   
Carrying
Amount
   
Estimated
Fair
Value
   
Carrying
Amount
   
Estimated
Fair
Value
 
   
(In Thousands)
 
Financial assets:
                       
Cash and short-term investments
  $ 7,140     $ 7,140     $ 7,589     $ 7,589  
Securities available for sale
    41,639       41,639       41,828       41,828  
Securities held to maturity
    103,433       100,850       101,932       98,617  
Loans, net
    121,680       126,379       120,772       125,965  
Accrued interest receivable
    1,745       1,745       1,832       1,832  
                                 
Financial liabilities:
                               
Deposits
    231,982       236,161       230,687       235,117  
Accrued interest payable
    905       905       975       975  
 
                               
Off-balance sheet financial instruments:
                               
Commitments to extend credit
and letters of credit
    -       -       -       -  

Note 9.  IMPAIRMENT

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into (a) the amount of other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.  The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

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 to sell or the likelihood it will be required to sell the security before a sufficient period of time 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
 
 
17

 
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 to sell or the likelihood it will be required to sell the security before recovery in value require considerable judgment.

Certain of the corporate debt securities are accounted for under ASC 325, Recognition of Interest Income and Impairment on Purchased Beneficial Interests that Continue to Be Held by a Transferor in Securitized Financial Assets. For investments within the scope of ASC 325 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 related to the underlying securities and issuers.

During the first quarter of 2011 the Corporation recognized in earnings an impairment charge of $31,000 on an other-than-temporarily impaired trust preferred security.  The Corporation recognized in earnings an impairment charge of $114,000 on one investment in a pooled trust preferred security in the first quarter of 2010.  Based on several factors including credit ratings, principal coverage tests, break in yield analysis, and cash flow forecasts, management expects to recover the remaining amortized cost of these securities.  A break in yield for a given tranche of a collateralized debt obligation (investment) means that deferrals/defaults have reached such a level that the tranche would not receive all of its contractual cash flows (principal and interest) by maturity (so not just a temporary interest shortfall, but an actual loss in yield on the investment).  In other words, the magnitude of the defaults/deferrals has depleted all of the credit enhancement (excess interest and over-collateralization) beneath the given tranche.  Based on this analysis and because the Corporation does not intend to sell and it is more likely than not that the Corporation will not be required to sell before its recovery of amortized cost basis, which may be at maturity, and, for investments within the scope of ASC 325, the Corporation determined that there was no adverse change in the cash flows as viewed by a market participant except as noted.  However, there is a risk that such reviews could result in recognition of additional other-than-temporary impairment charges in the future.

   
Other-Than-Temporary Impairment Credit Losses Recorded in Earnings
 
   
(In Thousands)
 
Beginning Balance January 1, 2011
  $ 1,191  
Additions for OTTI not previously recognized
    31  
Total other-than-temporary losses recognized ending balance March 31, 2011
  $ 1,222  
 
The market values for these securities (and any securities other than those issued or guaranteed by the US Treasury) are very depressed relative to historical levels. The yield spreads for the broad market of investment grade and high yield corporate bonds recently reached all time wide levels and remain near those levels today. Thus in today’s market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general versus being an indicator of credit problems with a particular issuer.

Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:
 
§
the few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at March 31, 2011,
 
§
an income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates and
 
§
our TRUP CDOs are classified within Level 3 of the fair value hierarchy because we determined that significant adjustments are required to determine fair value at the measurement date.
 
 
18


Our TRUP CDO valuations were prepared with the assistance of a third party. Their approach to determining fair value involved these steps:
 
1.
There were a number of assumptions used and the results of the modeling were highly dependent upon the assumptions.
 
2.
Credit and prepayment assumptions were used for each quarter.
 
3.
Forward interest rates were used to project future principal and interest payments.  This allowed the analysts to model the impact of over- or under-collateralization for each transaction.  (Higher interest rates generally increase the credit stress on under-collateralized transactions by reducing excess interest, which is the difference between the interest received from the underlying collateral and the interest paid on the rated bonds.)
 
4.
Original face value, purchased value, current book value (as of March 31, 2011), purchase date, and purchase price were used to produce the calculations.
 
5.
The basic methodology of ASC 325 was to compare the present value of the cash flows from quarter to quarter.  A decline in the present value versus that for the previous quarter was considered to be an “adverse change.”
 
6.
ASC 325 prescribes using a discount rate “equal to the current yield used to accrete the beneficial interest.”  Original discount margin calculated as of the purchase date based on purchase price was used to calculate the discount rate.  The original discount margin is then added to the appropriate forward 3-month LIBOR rate to determine the discount rate.  For fixed/floating securities, the original coupon is used as the discount rate for the remaining fixed-rate portion of the security’s estimated life.
 
7.
The discount rate was then used to calculate the present value for the current quarter’s projected cash flows.
 
8.
The result calculated for the current quarter was then compared to the previous quarter’s book value to determine if the change is “adverse.”
 
9.
The credit component of any impairment should be the difference between book value and the projected present value for the current quarter.

We recalculated the overall effective discount rates for these valuations.  The overall discount rates range from 7.30% to 42.20% and are highly dependent and reflected upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the CDO and the prepayment assumptions.

As of March 31, 2011, management does not believe any unrealized loss in its other debt securities represents an other-than-temporary impairment except as noted.  The unrealized losses at March 31, 2011 were primarily interest rate-related.

Note 10.  NEW ACCOUNTING STANDARDS

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”).  IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”).  Under the roadmap, the Corporation may be required to prepare financial statements in accordance with IFRS as early as 2014.  The SEC is expected to make a determination in 2011 regarding the mandatory adoption of IFRS.  The Corporation is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

The FASB has issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:
 
§
A reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and
 
§
In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:
 
§
For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and
 
§
A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.
 
 
19


ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310):  Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.  The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20, enabling public-entity creditors to provide those disclosures after the FASB clarifies the guidance for determining what constitutes a troubled debt restructuring.  The deferral in this Update will result in more consistent disclosures about troubled debt restructurings.  This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20.  In the proposed Update for determining what constitutes a troubled debt restructuring, the FASB proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011.  For the new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to the beginning of the fiscal year in which the proposal is adopted.  The adoption of this guidance is not expected to have a material impact on the Corporation’s financial statements.

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310):  A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring.  The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption.  As a result of applying these amendments, an entity may identify receivables that are newly considered impaired.  For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011.  This ASU is not expected to have a material impact on the Corporation’s 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.
 
 
20

 
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, 2010.  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 first quarter of 2011 increased 7.7% to $886,000 as compared to $823,000 for the first quarter of 2010. The increase in net income was mainly due to the increase in net interest income.  Net income per common share increased to $4.96 for the first quarter of 2011 compared to $4.49 for 2010.  At March 31, 2011, the Corporation had total assets of $280.2 million and total deposits of $232.0 million.

RESULTS OF OPERATIONS

Average Balances and Average Interest Rates
Interest earning assets averaged $266.2 million for the first quarter of 2011 as compared to $247.9 million for the same period in 2010.  The yield on earning assets for the first quarter of 2011 was 4.9%; this yield decreased from 5.3% in the comparable period in 2010.

Interest-bearing liabilities were $212.2 million during the first quarter of 2011, a 7.9% increase from the $196.6 million reported in the first quarter of 2010.  The change in average interest bearing liabilities was the result of increases in time deposits and savings of $10.1 million and $6.4 million, respectively.  This was offset by a decrease in interest bearing checking accounts of $917,000.  The average rate paid on interest bearing liabilities was 2.1% for the first quarter of 2011 and 2.5% for the first quarter of 2010.

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 first quarter of 2011 decreased by $14,000 or 0.4% over the first quarter of 2010 due to a decrease in yield on interest earning assets.  Interest expense for the first quarter of 2011 decreased by $119,000 or 9.6%, as compared to the first quarter of 2010.  The decrease was due to lower interest rates being offered and paid on interest bearing deposits.

Net interest income increased by $105,000 or 5.2% to $2.1 million for the first quarter of 2011 as compared to $2.0 million for the first quarter of 2010.  This increase resulted from an increase in interest earning assets and interest bearing deposits offset by a decrease in interest rates.

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 2011 was 3.2% compared to 3.3% for the first quarter of 2010.  During the first quarter of 2011, the yield on earning assets was 4.9%, a 40 basis point decrease over the 5.3% reported in the first quarter of 2010.  The cost on interest bearing deposits decreased to 2.1% as compared to 2.5% for the first quarter of 2010.

Provision for Loan Losses
Although we strive to originate loans to qualified customers, loan deterioration may occur resulting in the eventual charge off of the loans as losses.  The provision for loan losses and the allowance for loan losses are based upon management’s ongoing assessment of the Bank’s credit exposure and consideration of other relevant factors.  The allowance for loan losses is a valuation that is available to absorb potential yet undetermined future charge offs.  The provision for loan losses is the amount charged against the Bank’s earnings.  Its appropriateness and adequacy are determined based upon several factors including:
 
·
a continuing review of delinquent, classified and non-accrual loans, large loans and overall portfolio quality,
 
 
21

 
 
·
analytical review of loan charge-off experience, delinquency rates and other relevant historical and peer statistical ratios,
 
·
management’s judgment with respect to the nature of the portfolio, concentrations of credit and current and projected economic and business conditions and their impact on the existing portfolio, and
 
·
regular examinations and review of the portfolio by regulatory authorities.

The allowance is allocated to specific loan categories based upon management’s classification of loans under the Corporation’s internal loan grading system and to pools of other loans that are not individually analyzed.  Management makes allocations to specific loans based on the present value of expected future cash flows or the fair value of the underlying collateral for impaired loans and to other classified loans based on various credit risk factors.  These factors include collateral values, the financial condition of the borrower and industry and current economic trends.

Allocations to commercial loan pools are developed by internal risk ratings and are based on management’s judgment concerning historical loss trends and other relevant factors.  Installment and residential mortgage loan allocations are made at a portfolio level based on historical loss experience adjusted for portfolio activity and current conditions.  Estimated credit losses are based on the average annual rate of net charge-offs experienced over the previous two or three years on similar loans, adjusted for current condition and trends.  While allocations are made to specific loans and pools of loans, the allowance is available for all loan losses.

Provision for loan losses increased to $87,000 for 2011 from $30,000 for the first quarter in 2010.  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 has no exposure to subprime mortgage loans.

Non-interest Income
Non-interest income for the first quarter of 2011 increased to $27,000 from a loss of $52,000 for the same period in 2010.  The increase was attributable to the decrease in impairment loss on securities held to maturity.

Non-interest Expense
For the first quarter of 2011, non-interest expenses increased by $71,000 or 8.2% to $932,000 compared to $861,000 over the same period in 2010.  This increase is due mainly to increases in FDIC expense and employee expenses.

Salary expenses and employee benefits, which represent the largest component of non-interest expenses, increased by $20,000 or 5.0%, for the first quarter of 2011.  This increase was due mainly to increases in employee benefits and salaries.

Occupancy expense increased 18.8% to $57,000 in the first quarter of 2011 from $48,000 for the same period in 2010.  This increase is due mainly to an increase in utilities expense.

Furniture and equipment expense decreased $3,000 or 4.5% to $69,000 for the first quarter of 2011 over the same period of 2010.

Pennsylvania shares tax increased from $118,000 to $124,000 from the first quarter of 2010 to the first quarter of 2011.  This increase was mainly due to continued capital growth.

FDIC expense increased $26,000 or 53.1% to $75,000 for the first quarter of 2011 over $49,000 for the same period of 2010.  This increase is due to an increase in the deposits and factors used to determine the FDIC expense.

Other expenses increased by $7,000, or 3.9%, to $187,000 in 2011 from the same period in 2010.

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 1.3% for the three months ended March 31, 2011 compared to 1.2% for the same period in 2010.  Another productivity measure is the operating efficiency ratio.  This ratio expresses the relationship of non-interest expense to net interest income plus non-interest income.  For the quarter ended March 31, 2011, the operating efficiency ratio was 43.3% compared to 43.8% for the same period in 2010.  This decrease is due mainly to the increase in net interest income and non-interest income.
 
 
22


Provision for Federal Income Taxes
The provision for federal income taxes was $246,000 for the first quarter of 2011 compared to $253,000 for this same period in 2010.  The effective tax rate, which is the ratio of income tax expense to income before income taxes, was 21.7% for the first three months of 2011 and 23.5% for the same period in 2010.  The effective tax rate is below 34% due to the number of tax-exempt securities held by the Corporation.

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 2011 and 2010 was 1.3%.

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 equity included the effect of unrealized gains or losses, net of income taxes, on securities available for sale.  The annualized ROE for the first quarter of 2011 increased to 7.6% from 7.2% in 2010, an increase of 40 basis points, due mainly to the increase in net income for the first quarter of 2011 over the first quarter of 2010.

FINANCIAL CONDITION

Securities
Securities available for sale decreased $189,000 to $41.6 million as of March 31, 2011, from $41.8 million at December 31, 2010.

The securities available for sale portfolio had an unrealized gain of $510,000, net of taxes at the end of the first quarter of 2011, compared to an unrealized gain of $560,000, net of taxes, at December 31, 2010.  This decrease was mainly due to lower yields on securities purchased throughout 2010.

During the first three months of 2011, the securities held to maturity portfolio increased $1.5 million to $103.4 million from $101.9 million at December 31, 2010, primarily due to the deployment of funds from increased deposits.

There are 158 debt securities in unrealized loss positions; however, the Corporation does not intend to sell nor be required to sell these securities.  There are two securities deemed to be other-than-temporarily impaired.  See Note 9 to the Interim Consolidated Financial Statements for details on these impairments.

Net Loans Receivable
During the first three months of 2011, net loans receivable increased by $908,000 from $120.8 million at December 31, 2010 to $121.7 million at March 31, 2011.  Net loans receivable represented 52.5% of total deposits and 43.4% of total assets at March 31, 2011 as compared to 52.4% and 43.4%, respectively, at December 31, 2010.

The Bank provides a wide range of commercial and consumer loan products.  Loans are generally classified as commercial real estate, commercial non-real estate, residential real estate, real estate construction, home equity, and other consumer.

Commercial real estate loans include fixed rate loans and variable rate lines of credit for retail businesses, farming, investment properties, and churches secured by commercial real estate.  Rates are higher than residential real estate loans and terms are generally shorter.  Adjustable rates are generally priced in relation to the Wall Street Journal prime rate.  The pricing of commercial real estate loans is based primarily on the credit risk of the borrower, with due consideration given to borrowers with appropriate deposit relationships and competition.  The loans normally amortize over 10 to 20 years except for lines of credit loans.  These loans are well collateralized with no more than 80% loan to value and many have personal guarantors.  Commercial real estate loans, however, entail significant additional credit risks compared to residential real estate loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers.  In addition, the repayment of loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.

Commercial non-real estate loans include loans and lines of credit for equipment, business expansion, working capital, tax free municipal loans, and other general business purpose loans.  Rates may be variable or fixed and terms are up to seven years.  Adjustable rates are generally priced in relation to the Wall Street Journal prime rate.  Generally, commercial loans are secured by various types of collateral, with loan-to-value no more than 80%, but also include unsecured loans.  Many of the
 
 
23

 
loans are personally guaranteed.  Commercial business loans generally have higher interest rates than consumer loans of like duration because they have a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of any collateral.  The pricing of commercial business loans is based primarily on the credit risk of the borrower, with due consideration given to borrowers with appropriate deposit relationships and competition.  Commercial lending is also subject to economic downturns could adversely affect the ability of borrowers to repay loans and affect the value of the collateral securing the loan.

Residential real estate loans include first mortgages on one to four family residential homes.  Rates are normally fixed for seven years with a call option at that time.  Residential real estate loans normally amortize from 15 to 30 years.  These loans are secured by residential real estate with a loan-to-value normally no more than 80%.  Mortgage loans have historically had a longer average life than commercial and consumer loans.  Accordingly, payment and interest rate risks are greater in some respects with mortgage loans than with commercial or consumer lending.  Mortgage lending is also subject to economic downturns, in that increases in unemployment could adversely affect the ability of borrowers to repay mortgage loans and decreases in property values could affect the value of the real estate serving as collateral for the loan.

Real estate construction loans provide financing for the construction of residential homes and commercial building.  These loans are normally fixed rate, interest only until completion of construction, normally within nine months.  Upon completion of construction, the loans reclassify as residential real estate or commercial real estate loans.  Construction loans expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs in addition to the risks associated with residential and commercial real estate loans.  Site inspections throughout the construction process and upon completion help manage the risk.

Home equity loans include fixed rate home equity loans and variable rate home equity lines of credit secured by the borrower’s primary residence.  The borrower is permitted to draw on a home equity line of credit at any time after it is originated and may repay the outstanding balance at any time.  Home equity loans are generally originated as mortgages with fixed terms of five to ten years.  Home equity loans and lines of credit are generally underwritten with the same criteria that is used to underwrite fixed-rate, residential real estate loans.  These rates are fixed and loan-to-value ratios are normally up to no more than 80%.  Home equity lending risk is similar to residential real estate risk.

Other consumer loans include fixed rate secured and unsecured installment loans and variable rate unsecured lines of credit.  Rates on these loans are higher than loans secured by real estate.  Other consumer loans may be amortized up to five years or interest only with the principal due at maturity.  Collateral normally held includes automobiles, equipment, and deposit accounts.  Consumer loans expose us to risk that collateral value may deteriorate and balance on unsecured loans may not be collected.  Other consumer lending is also subject to economic downturns, in that increases in unemployment could adversely affect the ability of borrowers to repay loans.  There is minimal exposure to unsecured consumer loans due to the low volume and limitations on these loans.

Income is verified through review of tax returns and/or pay stubs. Credit reports are obtained for individuals including personal guarantors for all loan types.  Appraisals are normally obtained for all commercial and consumer loans where total indebtedness exceeds the bank’s policy limits.  Generally the minimum debt coverage ratio is 2.2x for consumer and 1.2x for commercial and a maximum global debt to income of  70% for all commercial loans.

The lending policy is executed through the tiered assignment of loan limit authorities (secured and unsecured), to individual officers of the Bank, the Loan Committee and the Board of Directors.  Despite maintaining credit policies, certain loans may deteriorate for a variety of reasons.  The Corporation’s policy is to place all loans on a non-accrual status upon becoming 90 days delinquent in their payments, unless there is a documented, reasonable expectation of the collection of the delinquent amount.  Loans are reviewed monthly as to their delinquency status and on a quarterly basis through review and preparation of a troubled loans report, which is presented to the Board of Directors.

Loan concentrations are considered to exist when the total amount of loans to any one or a multiple number of borrowers engaged in similar activities or having similar economic characteristics exceeds 10% of loans outstanding in any one category.  At March 31, 2011, real estate loans amounted to $110,631,000 or 90% of total loans, and commercial and industrial loans amounted to $5,338,000 or 4.3% of total loans.  Although such loans were not made to one specific borrower or industry, it is important to note that the quality of these loans is affected by the region’s economy and real estate market.  Management does not believe such a concentration poses a problem to the Bank at this time.

Other than as described herein, management does not believe there are any trends, events, or uncertainties which are reasonably expected to have a material adverse impact on future results of operations, liquidity, or capital resources.
 
 
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Loan and Asset Quality and Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged against income.  Loans deemed to be uncollectible are charged against the allowance for loan losses and, subsequent recoveries, if any, are credited to the allowance.
 
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated.  The allowance for loan losses is reviewed at least quarterly and includes a portfolio analysis and a review of various qualitative/quantitative factors.
 
Qualitative/quantitative factors include the following:
 
·
historical loan loss experience,
 
·
recent trends in losses,
 
·
changes in lending policies and procedures including underwriting standards and collection, charge-off, and recovery practices,
 
·
changes in national and local economic and business conditions including condition of various market segments,
 
·
changes in nature and volume of the portfolio,
 
·
experience, ability, and depth of lending management and staff,
 
·
trends in the volume and severity of past due and classified loans and volume of non-accrual loans, troubled debt restructuring, and other loan modifications,
 
·
changes in the quality of the Bank’s loan review system,
 
·
the existence and effect of any large credits and concentrations of credit and changes in the level of such concentrations,
 
·
the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the portfolio, and
 
·
trends in values of collateral and lending standards relating to various types of collateral.

This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.
 
Total non-performing loans (comprised of non-accruing loans and loans past due 90 days or more and still accruing interest) were $2,447,000 at March 31, 2011 as compared to $2,537,000 at December 31, 2010.  Generally these loans are well collateralized; therefore management does not expect to incur material losses due to the increase in nonperforming loans or overall increase in the loan portfolio.  In addition, management believes the allowance for loan loss is sufficient to cover any such losses.  The Corporation held no repossessed assets at March 31, 2011 and $7,000 in repossessed assets at December 31, 2010.  There were no foreclosed real estate and no restructured loans at March 31, 2011 and December 31, 2010.  The majority of non-performing loans consist of six loan customers.  Loans on non-accrual status are well collateralized therefore management does not expect any material losses from these loans.  Total non-performing loans may increase in the future.

The following summary table presents information regarding non-performing loans and assets as of March 31, 2011 and December 31, 2010:
 
Nonperforming Loans and Assets
(Dollars in Thousands)

   
March 31,
2011
   
December 31,
2010
 
Non-accruing loans
  $ 2,442     $ 2,451  
Accruing loans past 90 days or more
    5       86  
Total nonperforming loans
    2,447       2,537  
Foreclosed real estate/repossessed assets
    -       7  
Total nonperforming assets
  $ 2,447     $ 2,544  
                 
Nonperforming loans to total loans
    1.99 %     2.08 %
Nonperforming assets to total assets
    0.87 %     0.91 %

 
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Deposits
Total deposits at March 31, 2011 were $232.0 million, an increase of $1.3 million, or 0.6%, over total deposits of $230.7 million at December 31, 2010.  The outstanding balances by deposit classification at March 31, 2011 and 2010 are presented in the following table.

   
At March 31,
 
   
(Dollars in thousands)
 
   
2011
   
2010
 
   
Balance
   
Average
Yield
   
Balance
   
Average
Yield
 
Demand deposits:
                       
   Noninterest-bearing
  $ 18,992           $ 16,034        
   Interest-bearing
    6,498       0.19 %     8,005       0.38 %
Savings
    69,191       0.76 %     64,196       1.18 %
Time deposits:
                               
   <$100,000
    86,704       2.60 %     81,341       3.14 %
   >$100,000
    50,597       3.41 %     46,724       3.64 %
Total deposits
  $ 231,982             $ 216,300          
                                 
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 March 31, 2011, the Corporation’s simulation model indicated net interest income would increase 9.79% within the first year if rates increased as described above.  The model projected that net interest income would decrease by 4.50% in the first year if rates decreased as described above.

 
26


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 March 31, 2011 totaled $8.5 million.  This consisted of $785,000 in tax-exempt loans, commercial real estate, construction, and land development loans, $4.9 million in home equity lines of credit, $644,000 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, 2011, stockholders’ equity totaled $46.8 million, an increase of 0.3% over stockholders’ equity of $46.7 million at December 31, 2010.  The increase in stockholders’ equity for the three months ended March 31, 2011 included an increase of $467,000 in retained earnings offset by $55,000 decrease in accumulated other comprehensive income and a $261,000 increase in treasury stock.

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.
 
   
March 31,
2011
   
December 31,
2010
   
For Capital
Adequacy
Purposes
   
To be Well
Capitalized
Under Prompt
Corrective Action
Provision
 
Risk-based capital ratios:
                       
Tier 1 Capital
    31.0 %     30.8 %     4.0 %     6.0 %
Total Capital
    31.8 %     31.6 %     8.0 %     10.0 %
Leveraged Capital
    16.7 %     16.6 %     4.0 %     5.0 %

At March 31, 2011, the capital levels of the Bank met the definition of a “well capitalized” institution.

 
27


Item 3.

Quantitative and Qualitative Disclosures about Market Risk
The Corporation’s exposure to market risk has not changed materially since December 31, 2010.  The market risk principally includes interest rate risk, which is discussed in the Management’s Discussion and Analysis above.

Item 4.

Controls and Procedures
Management of the Corporation, including the Chief Executive Officer and the Principal 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 Principal 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 March 31, 2011 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 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 1A.                Risk Factors
The Corporation is operating in a very uncertain environment for financial institutions.  In 2009 through 2011, there has been a series of events in financial and credit markets that have led to liquidity and credit crises throughout the world.  There has also been considerable concern about the deepening economic downturn, both in the United States and internationally, and its ultimate impact on financial institutions.  U.S. and foreign governmental agencies have taken unprecedented steps in an attempt to stabilize the markets, but there is no assurance these steps will be effective.  Future developments in the financial and credit markets that the Corporation cannot currently predict could have a material impact on the Corporation's financial condition and results of operations.
 
Please refer to Part 1, Item 1A, “Risk Factors”, of the Corporation’s Form 10-K for the year ended December 31, 2010 for additional disclosures regarding the risks and uncertainties related to the Corporation’s business.  There have been no material changes to the risks disclosed therein.

 
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Item 2.                   Unregistered Sales of Equity Securities and Use of Proceeds
The Corporation repurchased Bancorp stock during the quarter as presented in the table below.

   
Total Number of
Shares Purchased
   
Average Price
Paid per Share
    Total Number of Shares Purchased as
Part of Publicly
Announced Plans or Programs
    Maximum Number
of  Shares that may
yet be Purchased
Under the
Plans or Programs
 
January 1 through January 31, 2011
    955     $ 253    
NA
   
NA
 
February 1 through February 28, 2011
    75       260    
NA
   
NA
 
March 1 through March 31, 2011
    -       -    
NA
   
NA
 
Total
    1,030     $ 254    
NA
   
NA
 
Item 3.
Defaults Upon Senior Securities
Not applicable
Item 4.
[Removed and Reserved]
Item 5.
Other Information
None
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)
Amendment to By-Laws of Neffs Bancorp, Inc. (Incorporated by Reference to Exhibit 3 to the Form 8-K Filed with the Commission on March 17, 2011).
     
 
3(iii)
Amendment to By-laws of Neffs Bancorp, Inc. (Incorporated by Reference to Exhibit 99.1 to the Form 8K filed with the Commission on February 27, 2002.)
     
 
     
 
     
 
     
 

 
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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:  May 16, 2011 
 /s/ John J. Remaley  
   John J. Remaley, President  
   
     
 
       
Date:  May 16, 2011 
 /s/ Kevin A. Schmidt  
   Kevin A. Schmidt, Principal Financial Officer  
   
     
 
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