- Quarterly Report (10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


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

	For the quarter ended June 30, 2009

	OR

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

For the transition period from __________ to __________

Commission File 0 - 32605

NEFFS BANCORP, INC.

(Exact name of registrant as specified in its charter)


Pennsylvania		23-2400383

(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

5629 PA Route 873, P.O. Box 10, Neffs, PA l8065-0010

(Address of principal executive offices)

(610) 767-3875

(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 o

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 o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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: o		Accelerated filer: o
	Non-Accelerated filer: o		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 o No x

As of July 31, 2009, there were 186,989 shares of common stock, par value of $1.00, outstanding.

NEFFS BANCORP, INC.

INDEX


PART 1.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	Consolidated Statements of Financial Condition (Unaudited) June 30, 2009 and December 31, 2008	4

	Consolidated Statements of Income (Unaudited) Three months ended June 30, 2009 and June 30, 2008 Six months ended June 30, 2009 and June 30, 2008	5

	Consolidated Statements of Stockholders’ Equity (Unaudited) Six months ended June 30, 2009 and June 30, 2008	6

	Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2009 and June 30, 2008	7

	Notes to the Interim Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25

Item 4T.	Controls and Procedures	25

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Submission of Matters to a Vote of Security Holders	26

Item 5.	Other Information	26

Item 6.	Exhibits	27

SIGNATURES		27

NEFFS BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)


Dollars in thousands, except share data	June 30, 2009			December 31, 2008

ASSETS

Cash and due from banks	$	1,733		$	2,489
Interest bearing deposits with banks		100			109
Federal funds sold		6,015			1,379
Securities available for sale		38,130			37,950
Securities held to maturity, fair value $93,953 in 2009; $89,111 in 2008		97,762			91,557

Loans		105,080			100,953
Less allowance for loan losses		(755	)		(761	)

Net loans		104,325			100,192


Premises and equipment, net		2,473			2,326
Restricted investments in bank stock		813			803
Other assets		1,993			1,977

Total assets	$	253,344		$	238,782


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Deposits
Non-interest bearing	$	17,511		$	16,740
Interest bearing		188,970			176,198

Total deposits		206,481			192,938
Other liabilities		1,373			1,315

Total liabilities		207,854			194,253


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		47,178			45,836
Accumulated other comprehensive income		590			442
Treasury stock, at cost 2009 12,971 shares; 2008 10,750 shares		(3,231	)		(2,702	)

Total stockholders’ equity		45,490			44,529


Total liabilities and stockholders’ equity	$	253,344		$	238,782

See Notes to Consolidated Financial Statements.

NEFFS BANCORP, INC AND SUBSIDIARY
C ONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


Dollars in thousands, except per share data

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008

Interest income:
Interest and fees on loans	$	1,684	$	1,615	$	3,293	$	3,171
Interest and dividends on investments:
Taxable		1,349		1,179		2,659		2,361
Exempt from federal income taxes		348		398		702		803
Interest on federal funds sold and other		2		9		4		10

Total interest income		3,383		3,201		6,658		6,345


Interest Expense
Deposits		1,397		1,536		2,801		3,124
Borrowings		—		1		—		10

Total interest expense		1,397		1,537		2,801		3,134


Net interest income		1,986		1,664		3,857		3,211

Provision for loan losses		1		15		1		30


Net interest income after Provision for loan losses		1,985		1,649		3,856		3,181


Other income:
Service charges on deposit accounts		27		32		54		62
Other service charges and fees		23		25		45		49
Other income		17		13		27		25

Total other income		67		70		126		136


Other expenses:
Salaries and employee benefits		359		351		722		704
Occupancy		62		49		104		93
Furniture and equipment		70		67		137		134
Pennsylvania shares tax		118		106		229		212
Other expenses		301		203		536		352

Total other expenses		910		776		1,728		1,495


Income before income taxes		1,142		943		2,254		1,822

Income tax expense		272		196		537		370


Net income	$	870	$	747	$	1,717	$	1,452


Per share data:
Earnings per share, basic	$	4.64	$	3.93	$	9.13	$	7.63


Weighted average common shares outstanding		187,501		190,152		188,031		190,233


Cash dividends declared per share	$	—	$	—	$	2.00	$	2.00

See Notes to Consolidated Financial Statements.

NEFFS BANCORP, INC AND SUBSIDIARY
C ONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2009 and 2008
(Unaudited)


Dollars in thousands, except per share data

	Common Stock		Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders’ Equity

Balance, December 31, 2007	$	200	$	753	$	43,558		$	(373	)	$	(2,308	)	$	41,830
Comprehensive Income:
Net income		—		—		1,452			—			—			1,452
Change in unrealized net losses on securities available for sale, net of tax		—		—		—			(187	)		—			(187	)

Total comprehensive income															1,265

Cash dividends declared on common stock, $2.00 per share		—		—		(381	)		—			—			(381	)
Purchase of treasury stock (1,058 shares)		—		—		—			—			(278	)		(278	)


Balance, June 30, 2008	$	200	$	753	$	44,629		$	(560	)	$	(2,586	)	$	42,436


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, 2008	$	200	$	753	$	45,836		$	442	$	(2,702	)	$	44,529
Comprehensive Income:
Net income		—		—		1,717			—		—			1,717
Change in unrealized net gains on securities available for sale, net of tax		—		—		—			148		—			148

Total comprehensive income														1,865

Cash dividends declared on common stock, $2.00 per share		—		—		(375	)		—		—			(375	)
Purchase of treasury stock (2,221 shares)		—		—		—			—		(529	)		(529	)


Balance, June 30, 2009	$	200	$	753	$	47,178		$	590	$	(3,231	)	$	45,490

See Notes to Consolidated Financial Statements.

NEFFS BANCORP, INC AND SUBSIDIARY
C ONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


Dollars in thousands

Six Months Ended June 30,	2009			2008

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,717		$	1,452
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		111			110
Provision for loan losses		1			30
Net accretion of securities premiums/discounts		(416	)		(201	)
Change in assets and liabilities:
Increase in:
Accrued interest receivable		(73	)		(105	)
Other assets		(19	)		(241	)
Increase (decrease) in:
Other liabilities		58			(67	)

Net cash provided by operating activities		1,379			978


CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in interest bearing deposits with banks		9			6
Increase in federal funds sold		(4,636	)		—
Purchase of securities available for sale		(4,839	)		(7,531	)
Proceeds from maturities/calls of securities available for sale		4,851			3,509
Purchase of securities held to maturity		(32,741	)		(28,858	)
Proceeds from maturities/calls of securities held to maturity		26,984			28,093
Net increase in restricted investment in bank stock		(10	)		(46	)
Net increase in loans		(4,134	)		(3,460	)
Purchases of premises and equipment		(258	)		(57	)

Net cash used in investing activities		(14,774	)		(8,344	)


CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		13,543			7,218
Net increase in federal funds purchased		—			601
Purchase of treasury stock		(529	)		(278	)
Dividends paid		(375	)		(381	)

Net cash provided by financing activities		12,639			7,160


Decrease in cash and cash equivalents		(756	)		(206	)
Cash and cash equivalents:
Beginning		2,489			3,888

Ending	$	1,733		$	3,682


Supplementary Cash Flows Information
Interest Paid	$	2,881		$	3,129

Income Taxes Paid	$	250		$	426

See Notes to Consolidated Financial Statements.

NEFFS BANCORP, INC.
N OTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
(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 six-month period ended June 30, 2009, are not necessarily indicative of the results that may be expected for the year ending December 3l, 2009. These statements should be read in conjunction with the financial statements and notes contained in the 2008 Annual Report to Stockholders.

In addition to historical information, this Form 10-Q Report contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Readers should carefully review the risk factors described in the Form 10-K filed with the SEC by the Corporation.

For further information, refer to the financial statements and footnotes thereto included in Neffs Bancorp, Inc.’s Annual Report to stockholders for the year ended December 31, 2008.

Note 2. COMMITMENTS AND CONTINGENCIES

The Corporation is subject to certain routine legal proceedings and claims arising in the ordinary course of business. It is management’s opinion that the ultimate resolution of these claims will not have a material adverse effect on the Corporation’s financial position and results of operations.

Note 3. COMPREHENSIVE INCOME

The components of other comprehensive income (loss) and related tax effects for the six months ended June 30, 2009 and 2008 are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
Dollars in thousands	2009			2008			2009			2008


Unrealized holding gains (losses) on available for sale securities	$	(273	)	$	(844	)	$	224		$	(283	)
Tax effect		93			287			(76	)		96


Other comprehensive income (loss), net of tax	$	(180	)	$	(557	)	$	148		$	(187	)

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 $690,000 of standby letters of credit as of June 30, 2009. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of June 30, 2009 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:

June 30, 2009

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

(In Thousands)

S ECURITIES A VAILABLE FOR S ALE :

U.S. Treasury note

100

—

103

Mortgage-backed securities

37,137

905

(15

)

38,027

37,237

908

(15

)

38,130

S ECURITIES H ELD TO M ATURITY :

Obligations of U.S. Government agencies

59,132

308

(2,567

)

56,873

Obligations of states and political subdivisions

32,482

1,033

(115

)

33,400

Corporate securities

5,210

(2,533

)

2,704

Mortgage-backed securities

938

—

976

97,762

1,406

(5,215

)

93,953


	December 31, 2008

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

	(In Thousands)
S ECURITIES A VAILABLE FOR S ALE :
U.S. Treasury note	$	100	$	7	$	—		$	107
Mortgage-backed securities		37,181		702		(40	)		37,843

	$	37,281	$	709	$	(40	)	$	37,950

S ECURITIES H ELD TO M ATURITY :
Obligations of U.S. Government agencies	$	52,871	$	568	$	(1,393	)	$	52,046
Obligations of states and political subdivisions		32,300		833		(66	)		33,067
Corporate securities		5,341		—		(2,413	)		2,928
Mortgage-backed securities		1,045		25		—			1,070

	$	91,557	$	1,426	$	(3,872	)	$	89,111

The amortized cost and fair values of securities at June 30, 2009, 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

—

785

790

Due after one year through five years

100

103

6,969

7,087

Due after five years through ten years

—

17,498

18,124

Due after ten years

—

71,572

66,976

100

103

96,824

92,977

Mortgage-backed securities

37,137

38,027

938

976

37,237

38,130

97,762

93,953

There were no sales of securities during 2009 and 2008.

Securities with an amortized cost and fair value of approximately $12,000,000 and $12,095,000 at June 30, 2009 and $7,698,000 and $7,721,000 at December 31, 2008 were pledged to secure public deposits and for other purposes required or permitted by law.

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 June 30, 2009 and December 31, 2008:


	Less than 12 Months				12 Months or More				Total

	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

	(In Thousands)
June 30, 2009:
Securities Available for Sale:
Mortgage-backed securities	$	2,069	$	12	$	279	$	3	$	2,348	$	15
Securities Held to Maturity:
Obligations of U.S. Government agencies		27,586		1,301		19,178		1,266		46,764		2,567
Obligations of states and political subdivisions		3,237		108		741		7		3,978		115
Corporate securities		—		—		2,027		2,533		2,027		2,533

Total Temporarily Impaired Securities	$	32,892	$	1,421	$	22,225	$	3,809	$	55,117	$	5,230


	Less than 12 Months				12 Months or More				Total

	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

	(In Thousands)
DECEMBER 31, 2008:
Securities Available for Sale:
Mortgage-backed securities	$	38	$	1	$	5,866	$	39	$	5,904	$	40
Securities Held to Maturity:
Obligations of U.S. Government agencies		26,576		1,206		2,572		187		29,148		1,393
Obligations of states and political subdivisions		3,818		44		627		22		4,445		66
Corporate securities		1,613		448		1,165		1,965		2,778		2,413

Total Temporarily Impaired Securities	$	32,045	$	1,699	$	10,230	$	2,213	$	42,275	$	3,912

The Corporation had 96 and 88 securities in an unrealized loss position at June 30, 2009 and December 31, 2008, respectively. The decline in fair value is due only to interest rate fluctuations. As the Corporation has the intent and ability to hold such investments until maturity or market price recovery, no securities are deemed to be other-than-temporarily impaired.

Note 7. FAIR VALUE MEASUREMENTS

Below are various estimated fair values at June 30, 2009 and December 31, 2008, as required by Statement of Financial Accounting Standards No. 107 (“FAS 107”). Such information, which pertains to the Corporation’s financial instruments, is based on the requirements set forth in FAS 107 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 quarter 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:

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.

Securities

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

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

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

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

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

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

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used 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)
Securities available for sale, June 30, 2009	$	38,130	$	38,130		—		—
Securities available for sale, December 31, 2008	$	37,950	$	37,950		—		—

The Corporation’s adoption of SFAS 157 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 FSP FAS 157-2.

On October 10, 2008, the FASB issued FSP 157-3, which clarifies the application of FAS 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The FSP states that an entity should not automatically conclude that a particular transaction price is determinative of fair value. In a dislocated market, judgment is required to evaluate whether individual transactions are forced liquidations or distressed sales. When relevant observable market information is not available, a valuation approach that incorporates management’s judgments about the assumptions that market participants would use in pricing the asset in a current sale transaction would be

acceptable. The FSP also indicates that quotes from brokers or pricing services may be relevant inputs when measuring fair value, but are not necessarily determinative in the absence of an active market for the asset. In weighing a broker quote as an input to a fair value measurement, an entity should place less reliance on quotes that do not reflect the result of market transactions. Further, the nature of the quote (for example, whether the quote is an indicative price or a binding offer) should be considered when weighing the available evidence. The FSP is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 30, 2008. Accordingly, the Corporation adopted the FSP prospectively, beginning July 1, 2008 and considered this guidance in determining fair value measurements at June 30, 2009.

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

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

The Corporation also considers the issuer’s financial condition, capital strength and near-term prospects. In addition, for debt securities and perpetual preferred securities that are treated as debt securities for the purpose of other-than-temporary analysis, the Corporation considers the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), current ability to make future payments in a timely manner and the issuer’s ability to service debt.

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

Certain of the corporate debt securities are accounted for under EITF 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests that Continue to Be Held by a Transferor in Securitized Financial Assets. For investments within the scope of EITF 99-20 at acquisition, the Corporation evaluates current available information in estimating the future cash flows of these securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Corporation considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various note classes. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, expected future default rates and other relevant market information. At June 30, 2009, the Corporation concluded that no adverse change in cash flows occurred during the quarter.

The Corporation analyzed the cash flow characteristics of these securities. Based on this analysis and because the Corporation has the intent and ability to hold these securities until recovery of fair value, which may be at maturity, and, for investments within the scope of EITF 99-20, determined that there was no adverse change in the cash flows as viewed by a market participant, the Corporation does not consider the investments in these assets to be other-than-temporarily impaired at June 30, 2009. However, there is a risk that this review could result in recognition of other-than-temporary impairment charges in the future.

We own 4 collateralized debt obligation securities totaling $3,992,000 par value and $1,416,000 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 June 30, 2009 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 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 June 30, 2009,

	§	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 will be 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.

Our TRUP CDO valuations were prepared by an independent third party. Their approach to determining fair value involved these steps:

	1.	Intex was used for cash flow modeling. 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 purchased and current book value (as of June 30, 2009) were used to produce the calculations.

	5.	The basic methodology of EITF 99-20 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.	EITF 99-20 prescribes using a discount rate “equal to the current yield used to accrete the beneficial interest”. The current book value and the projected cash flows for the previous quarter were used to calculate the discount rate.

	7.	The discount rate was then used to calculate the present value for the current quarter’s projected cash flows.

	8.	The result was then compared to the previous quarter to determine if the change is “favorable” or “adverse”.

	9.	Book value was used as the present value for the previous period.

	10.	The credit component of any impairment should be the difference between book value and the projected present value.

We recalculated the overall effective discount rates for these valuations. The overall discount rates range from 4.70% to 31.09% and are highly dependent upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the CDO and the prepayment assumptions.

The Corporation owns 3 Federal Home Loan Mortgage (FHLB) securities and 1 Ford Motor Credit security that have an unrealized loss greater than 20% of their book value. The unrealized loss on the FHLB securities is due to increases in overall rates. There is no increase in credit risk for these securities. The unrealized loss for the Ford Motor Credit security is mainly due to general decline in the automotive industry. Based on the analysis of the factors described above, management does not believe any unrealized loss in these securities represent an other-than-temporary impairment.

As of June 30, 2009, management does not believe any unrealized loss in its other debt securities represent an other-than-temporary impairment. The unrealized losses at June 30, 2009 were primarily interest rate-related.

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20” (FSP EITF 99-20-1). FSP EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets”, to achieve more consistent determination of whether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and other related guidance. FSP EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The implementation of this standard did not have a material effect on its results of operations or consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. FSP No. FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009. The implementation of this standard did not have a material effect on its results of operations or consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. FSP No. FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009. The Corporation has presented the necessary disclosures in Note 6 herein.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. FSP No. FAS 115-2 and FAS 124-2 are effective for interim and annual periods ending after June 15, 2009. The adoption of FSP No. FAS 115-2 and FAS 124-2 did not have a material impact on the Corporation’s financial position or results of operations.

Loans Receivable

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.

Accrued Interest Receivable

The carrying amount of accrued interest is considered a reasonable estimate of fair value.

Deposit Liabilities

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

The carrying amount of accrued interest approximates its fair value.

Off-Balance Sheet Instruments

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.

Restricted Investments in Bank Stocks

Restricted stocks include primarily Federal Home Loan Bank stock, which is carried at cost. Federal law requires a member institution of the Federal Home Loan Bank system to hold stock of its district Federal Home Loan Bank according to a predetermined formula.

In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock. Management evaluates the restricted stock for impairment in accordance with Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. Management’s determination of whether these investments are impaired is based on their assessment of

the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management believes no impairment charge is necessary related to the restricted stock as of June 30, 2009.

The estimated fair values of the Corporation’s financial instruments at December 31, 2008 and June 30, 2009 are as follows:


	June 30, 2009				December 31, 2008

	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value

	(In Thousands)
Financial assets:
Cash and short-term investments	$	1,833	$	1,833	$	2,598	$	2,598
Securities available for sale		38,130		38,130		37,950		37,950
Securities held to maturity		97,762		93,953		91,557		89,111
Loans, net		104,325		108,686		100,192		104,130
Accrued interest receivable		1,568		1,568		1,496		1,496
Federal funds sold		6,015		6,015		1,379		1,379

Financial liabilities:
Deposits		206,481		210,249		192,938		194,495
Accrued interest payable		1,139		1,139		1,219		1,219

Off-balance sheet financial instruments:
Commitments to extend credit and letters of credit		—		—		—		—

Note 8. NEW ACCOUNTING STANDARDS

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

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

FASB statement No. 141(R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determining what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement did not have a material impact on our consolidated financial position or results of operations because the Corporation did not acquire control of any business during the quarter ended June 30, 2009.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP requires companies acquiring contingent assets or assuming contingent liabilities in business combinations to either (a) if the assets’ or liabilities’ fair value can be determined, recognize them at fair value, at the acquisition date, or (b) if the assets’ or liabilities’ fair value cannot be determined, but (i) it is probable that an asset existed or that a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated, recognize them at their estimated amount, at the acquisition date. If the fair value of these contingencies cannot be determined and they are not probable or cannot be reasonably estimated, then companies should not recognize these contingencies as of the acquisition date and instead should account for them in subsequent periods by following other applicable GAAP. This FSP also eliminates the FAS 141R requirement of disclosing in the footnotes to the financial statements the range of expected outcomes for a recognized contingency. This FSP shall be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

FASB statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” was issued in December of 2007. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The implementation of this standard will not have a material impact on our consolidated financial position or results of operations.

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. This FSP amends SFAS 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009. The Corporation is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

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 will 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.

In May 2009, the FASB issued FAS No. 165, Subsequent Events, which requires companies to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. FAS No. 165 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial statement preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. FAS No. 165 also requires entities to disclose the date through which subsequent events have been evaluated. FAS No. 165 was effective for interim and annual reporting periods ending after June 15, 2009. The Corporation adopted the provisions of FAS No. 165 for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on Corporation’s results of operations or financial position. The Corporation has evaluated subsequent events through August 13, 2009, the date the financial statements were issued.

In June 2009, the FASB issued FAS No. 168, The ‘FASB Accounting Standards Codification’ and the Hierarchy of Generally Accepted Accounting Principles. FAS No. 168 establishes the FASB Accounting Standards Codification (Codification), which was officially launched on July 1, 2009, and became the primary source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under the authority of Federal securities laws are also sources of authoritative GAAP for SEC registrants. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification. FAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. As such, the Corporation plans to adopt FAS No.168 in connection with its third quarter 2009 reporting. As the Codification is neither expected nor intended to change GAAP, the adoption of FAS No.168 will not have a material impact on its results of operations or financial position.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Corporation’s balance sheets and statements of income. This section should be read in conjunction with the Corporation’s financial statements and accompanying notes.

Management of the Corporation has made forward-looking statements in this Form 10-Q. These forward-looking statements may be subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of the Corporation and its subsidiary. When words such as “believes,” “expects,” “anticipates” or similar expressions occur in this Form 10-Q, management is making forward-looking statements.

Readers should note that many factors, some of which are discussed elsewhere in this report and in the documents that management incorporates by reference, could affect the future financial results of the Corporation and its subsidiary, both individually and collectively, and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this Form 10-Q. These factors include the following:


	v	operating, legal and regulatory risks;

	v	economic, political, and competitive forces affecting banking, securities, asset management and credit services businesses; and

	v	the risk that management’s analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in other documents that the Corporation files periodically with the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES

Disclosure of the Corporation’s significant accounting policies is included in Note 1 to the financial statements of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2008. 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 second quarter of 2009 increased 16.5% to $870,000 as compared to $747,000 for the second quarter of 2008. Total revenues increased 5.5% from $3.3 million to $3.5 million for the quarter and total expenses increased 2.2% from $2.5 million to $2.6 million. Net income per common share increased 18.1% to $4.64 per share from $3.93 per share in the second quarter a year ago. At June 30, 2009, the Corporation had total assets of $253.3 million, total loans of $105.1 million, and total deposits of $206.5 million.

Net income for the first half of 2009 increased 18.3% to $1.7 million as compared to $1.5 million for the first half of 2008. Total revenues increased 4.7% from $6.5 million to $6.8 million for the first six months of 2009 and total expenses increased 0.8% from $5.0 million to $5.1 million. Net income per common share increased 19.7% to $9.13 per share from $7.63 per share from the first two quarters of 2009 to the same period of 2008.

RESULTS OF OPERATIONS

Average Balances and Average Interest Rates

Interest earning assets averaged $239.1 million for the second quarter of 2009 as compared to $222.8 million for the same period in 2008. The growth in interest earning assets was mainly the result of an increase of $7.7 million in average total loans and an increase of $8.6 million in investments. Average interest-bearing liabilities increased from $170.5 million during the second quarter of 2008 to $185.3 million during the second quarter of 2009. The increase in average interest bearing liabilities was the result of increases in time deposits, savings, and demand deposits, of $8.4 million, $5.4 million, and $1.3 million, respectively, offset by a decrease in Federal funds purchased of $292,000.

The average yield on earning assets was 5.7% for the second quarter of 2009 as compared to 5.8% for the same quarter in 2008. The average rate paid on interest-bearing liabilities was 3.0% for the second quarter of 2009 and 3.6% for the second quarter of 2008. This was the result of the decreasing interest rate environment that was experienced during the latter part 2008 and into 2009.

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 second quarter of 2009 increased by $182,000 or 5.7% over the second quarter of 2008 due mainly to an increase in loans and securities. Interest expense for the second quarter of 2009 decreased by $140,000 or 9.1%, as compared to the second quarter of 2008. The decrease was due mainly to decreases in deposit rates offset by increases in deposits.

Net interest income increased by $322,000 or 19.4% to $2.0 million for the second quarter of 2009 as compared to $1.7 million for the second quarter of 2008. This increase resulted from a net increase in interest bearing assets over net interest bearing liabilities and increasing net spread between yields on average assets and average rate paid.

For the six months ended June 30, 2009, interest income increased by $313,000 or 4.9% over the same period in 2008. The increase for the first six months was mostly related to the increase in loans and securities. Interest earning assets for the first six months of 2009 averaged $236.3 million versus $221.1 million for the comparable period in 2008. The yield on those assets was 5.6% for the first six months of 2009 and 5.7% for the same period of 2008.

Interest expense for the first six months of 2009 decreased $333,000 or 10.6% as compared to the first six months of 2008. The level of average interest-bearing liabilities increased from $169.0 million for the first half of 2008 to $182.3 million for the first six months of 2009. The average rate paid for the first half of 2009 and 2008 was 3.1% and 3.7%, respectively.

Net interest income for the first six months of 2009 increased by $646,000 or 20.1% over the same period in 2008. The company’s net interest margin increased to 3.3% for the six months ended June 30, 2009 from 2.9% for the same period last year.

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 second quarter of 2009 was 3.3% compared to 3.0% for the second quarter of 2008. During the second quarter of 2009, the yield on earning assets was 5.7%, a 10 basis point decrease over the 5.8% reported in the second quarter of 2008. The average rate paid on interest-bearing deposits decreased to 3.0% as compared to 3.6% for the second quarter of 2008.

Provision for Loan Losses

Provision for loan losses decreased from $15,000 for the second quarter of 2008 to $1,000 for the second period of 2009. The decrease is due in part to the minimal loan charge-offs in 2008 and 2009.

For the six months ending June 30, 2009, provision for loan losses decreased to $1,000 compared to $30,000 in the same period of 2008.

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 second quarter of 2009 decreased by $3,000 or 4.3% from the same period in 2008. The decrease was attributable to a decrease in service charges and fees offset by an increase in other income. Non-interest income for the first six months of 2009 decreased by $10,000 or 7.4% from the same period in 2008.

Non-interest Expense

For the second quarter of 2009, non-interest expenses increased by $134,000 or 17.3% to $910,000 compared to $776,000 over the same period in 2008. The increase was due to increases in other expenses, occupancy expenses, PA shares tax, employee expenses, and furniture and equipment expenses.

Salaries and employee benefits, which represent the largest component of non-interest expenses, increased by $8,000 or 2.3%, for the second quarter of 2009. This increase was due in part to an increase in employee salaries.

Occupancy expense for the second quarter of 2009 increased by $13,000 or 26.5% as compared to the second quarter of 2008. This increase was mainly due to an increase in rental property expenses.

Furniture and equipment expense increased $3,000 to $70,000 for the second quarter of 2009 over the same period of 2008.

Shares tax increased from $106,000 to $118,000 from the second quarter of 2008 to the second quarter of 2009.

Other expenses increased by $98,000, or 48.3%, to $301,000 in the second quarter of 2009 from the same period in 2008. This increase was mainly due to an increase in FDIC assessment expense.

Total non-interest expense was $1.7 million for the first six months of 2009 compared to $1.5 million for the same period of 2008.

Salary expenses and employee benefits, which represent the largest component, 41.8%, of non-interest expenses, increased by $18,000 or 2.6% over the first six months of 2008.

Occupancy expense for the first six months of 2009 increased by $11,000 or 11.8% as compared to the first six months of 2008 due mainly to increased rental property expenses.

Furniture and equipment expense increased by $3,000 to $137,000 for the first half of 2009 as compared to 2008.

Shares tax expense increased by $17,000 or 8.0% for the first six months of 2009 from the same period in 2008. This increase was mainly due to continued capital growth.

Net other expenses increased by $184,000 or 52.3% for the first six months ended June 30, 2009 over the first half of 2008 due mainly to the increase in the FDIC assessment expense.

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% and 1.2% for the three months ended June 30, 2009 and 2008, respectively. The overhead expense ratio equaled 1.3% for the first half of 2009 and 1.2% for the same period in 2008.

Another productivity measure is the operating efficiency ratio. This ratio expresses the relationship of non-interest expense (excluding foreclosed real estate expenses) to net interest income plus non-interest income (excluding non-recurring gains). For the quarter ended June 30, 2009, the operating efficiency ratio was 44.3% compared to 44.8% for the same period in 2008. For the six months ended June 30, 2009, this ratio was 43.4% compared to 44.7% for the six months ended June 30, 2008. This decrease is due mainly to the increase in net interest income.

Provision for Federal Income Taxes

The provision for federal income taxes was $272,000 for the second quarter of 2009 compared to $196,000 for this same period in 2008. For the first six months the provision was $537,000 and $370,000 for 2009 and 2008, respectively. The effective tax rate, which is the ratio of income tax expense to income before income taxes, was 23.8% for the second quarter of 2009 and 20.8% for the same period in 2008. The effective tax rate is below 34% due to the number of tax-exempt securities held by the Corporation. The effective tax rate and provision for Federal income taxes increased due to the increase in pre-tax income while tax-exempt income declined.

Return on Average Assets

Return on average assets (ROA) measures the Corporation’s net income in relation to its total average assets. The Corporation’s annualized ROA for the second quarter of 2009 was 1.4% compared to 1.3% for the second quarter of 2008 and 1.4% and 1.3% for the first half of 2009 and 2008, respectively. The increase in ROA was mainly due to the increase in net income period to period.

Return on Average Equity

Return on average equity (ROE) indicates how effectively the Corporation can generate net income on the capital invested by its stockholders. ROE is calculated by dividing net income by average stockholders’ equity. For purposes of calculating ROE, average stockholder’s equity included the effect of unrealized gains or losses, net of income taxes, on securities available for sale. The annualized ROE for the second quarter of 2009 and 2008 is 7.7% and 7.0%, respectively. The annualized ROE for the first half of 2009 increased to 7.6% from 6.9% in the same period of 2008. This increase is due mainly to the increase in net income in 2009 over 2008 for the respective periods.

FINANCIAL CONDITION

Securities

Securities available for sale increased $180,000 to $38.1 million as of June 30, 2009, from $38.0 million at December 31, 2008.

The securities available for sale portfolio had an unrealized gain of $590,000, net of taxes, at the end of the second quarter of 2009, compared to an unrealized gain of $442,000, net of taxes, at December 31, 2008. This increase was mainly due to current market conditions.

During the first six months of 2009, the securities held to maturity portfolio increased $6.2 million to $97.8 million from $91.6 million at December 31, 2008, primarily due to growth in deposits exceeding growth in loans.

There are 96 debt securities in unrealized loss positions; however, the Corporation does not intend to sell nor be required to sell these securities and therefore no securities are deemed to be other-than-temporarily impaired.

Net Loans Receivable

During the first six months of 2009, net loans receivable increased by $4.1 million from $100.2 million at December 31, 2008 to $104.3 million at June 30, 2009. Net loans receivable represented 50.5% of total deposits and 41.2% of total assets at June 30, 2009 as compared to 51.9% and 42.0%, respectively, at December 31, 2008.

Loan and Asset Quality and Allowance for Loan Losses

Total non-performing loans (comprised of non-accruing loans and loans past due 90 days or more and still accruing interest) were $232,000 at June 30, 2009 as compared to $173,000 at December 31, 2008. There were no repossessed assets held by the Corporation as of June 30, 2009 and December 31, 2008.

The following summary table presents information regarding non-performing loans and assets as of June 30, 2009 and December 31, 2008:

Nonperforming Loans and Assets
(Dollars in Thousands)


	June 30, 2009			December 31, 2008

Nonaccrual loans:	$	—		$	—
Commercial		—			—
Consumer		—			—
Real Estate:
Construction		—			—
Mortgage		—			—

Total nonaccrual		—			—
Loans past due 90 days or more		232			173
Restructured loans		—			—

Total nonperforming loans		232			173
Repossessed assets		—			—

Total nonperforming assets	$	232		$	173


Nonperforming loans to total loans		0.22	%		0.17	%
Nonperforming assets to total assets		0.09	%		0.07	%

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

Allowance for Loan Losses
(Dollars in Thousands)



	Six Months Ending 6/30/09			Six Months Ending 6/30/08

Balance at beginning of period	$	761		$	620
Provisions charged to operating expenses		1			30
Recoveries of loans previously charged-off
Commercial		—			—
Consumer		—			1
Real Estate		—			—

Total recoveries		—			1
Loans charged-off:
Commercial		—			—
Consumer		(7	)		(1	)
Real Estate		—			—

Total charged-off		(7	)		(1	)

Net charge-offs		(7	)		—

Balance at end of period	$	755		$	650

Net charge-offs as a percentage of average loans outstanding		0.01	%		0.00	%
Allowance for loan losses as a percentage of period-end loans		0.72	%		0.66	%

Deposits

Total deposits at June 30, 2009 were $206.5 million, an increase of $13.5 million, or 7.0%, over total deposits of $192.9 million at December 31, 2008. The outstanding balances by deposit classification at June 30, 2009 and 2008 are presented in the following table.


	At June 30, (Dollars in thousands)
	2009			2008
	Balance		Average Rate	Balance		Average Rate

Demand Deposits:
Noninterest-bearing	$	17,511		$	16,575
Interest-bearing		8,006	0.43		6,128	1.01
Savings		54,234	1.38		48,027	1.81
Time deposits:
<$100,000		80,961	3.96		77,767	4.50
>$100,000		45,769	3.82		39,112	4.85

Total Deposits	$	206,481		$	187,609

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 June 30, 2009, the Corporation’s simulation model indicated net interest income would increase 10.0% within the first year if rates increased as described above. The model projected that net interest income would decrease by 4.8% in the first year if rates decreased as described above.

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 June 30, 2009 totaled $8.2 million. This consisted of $2.3 million in commercial real estate, construction, and land development loans, $5.2 million in home equity lines of credit, $690,000 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 June 30, 2009, stockholders’ equity totaled $45.5 million, an increase of 2.2% over stockholders’ equity of $44.5 million at December 31, 2008. The increase in stockholders’ equity for the six months ended June 30, 2009 is net of a $529,000 increase in treasury stock and an unrealized gain, net of income taxes, of $148,000 on securities available for sale. Excluding this unrealized gain and treasury stock purchase, stockholders’ equity changed by an increase of $1.3 million in retained net income.

Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. The risk-based capital standards require all banks to have Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders’ equity together with related surpluses and retained earnings. Total capital may be comprised of total Tier 1 capital plus qualifying debt instruments and the allowance for loan losses.

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


	June 30, 2009	December 31, 2008	For Capital Adequacy Purposes	To be Well Capitalized Under Prompt Corrective Action Provision


Risk-based capital ratios:

Tier 1 Capital	31.4%	37.8%	4.0%	6.0	%

Total Capital	32.0%	38.5%	8.0%	10.0	%

Leveraged Capital	17.8%	18.6%	4.0%	5.0	%

The decrease in Risk-based capital ratios from December 31, 2008 to June 30, 2009 is due mainly to an increase in assets. At June 30, 2009, the capital levels of the Bank met the definition of a “well capitalized” institution.

I tem 3.

Quantitative and Qualitative Disclosures about Market Risk

The Corporation’s exposure to market risk has not changed significantly since March 31, 2009. The market risk principally includes interest rate risk, which is discussed in the Management’s Discussion and Analysis above.

I tem 4T.

Controls and Procedures

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

There have not been any changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

P art II.

OTHER INFORMATION


I tem 1. Legal Proceedings

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

I tem 1A.	Risk Factors

	During 2008 and 2009 the capital and credit markets experienced severe volatility and disruption. From the third quarter of 2008 through the second quarter of 2009, the volatility and disruption reached unprecedented levels. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases ceased to provide, funding to borrowers, including other financial institutions. Although to date we have not suffered liquidity problems, we are part of the financial system and a systemic lack of available credit, a lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition and results of operations.

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

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

	Please refer to Part 1, Item 1A, “Risk Factors”, of the Corporation’s Form 10-K for the year ended December 31, 2008 for additional disclosures regarding the risks and uncertainties related to the Corporation’s business.


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

	In April 2009 the Corporation offered its shareholders a “No-Fee, Odd-Lot Sales Program,” which shareholders can use to sell Neffs Bancorp, Inc. common shares held by persons who are the owners of less than 100 shares. The price per share will equal the average closing price during the previous ninety-day period in which the shareholder’s instructions to sell are received in the corporate office. Shareholders owning 100 or more shares are not included in the offer and are ineligible to participate in the program. The program will expire at 5:00 P. M., Eastern Standard Time, on December 31, 2009, unless extended or earlier terminated. The Corporation reserves the right to terminate or extend the program at any time in its sole discretion.

	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

April 1 through April 30, 2009	792		$	237	24		NA
May 1 through May 31, 2009	150			247	2		NA
June 1 through June 30, 2009	278			264	32		NA


Total	1,220		$	244	58		NA


Item 3.	Defaults Upon Senior Securities

	Not applicable

Item 4.	Submission of Matters to a Vote of Security Holders

	a)	An annual meeting of shareholders was held on May 13, 2009 at The NOVA Building, Coplay, PA.

	b)	Two matters were voted on at the May 13, 2009, meeting as follows:


Election of Directors	Term Expires		Votes Cast For		Votes against or Withheld

Duane A. Schleicher		May, 2012		150,220		3,201
John F. Simock		May, 2012		152,091		1,330
Mary Ann Wagner		May, 2012		152,321		1,100


Directors whose term continued after the meeting	Term Expires

Robert B. Heintzelman		May, 2010
Kevin A. Schmidt		May, 2010
John J. Remaley		May, 2011
John F. Sharkey, Jr.		May, 2011
Herman P. Snyder		May, 2011


	Ratification of the selection of Beard Miller Company LLP, Certified Public Accountants, as the Independent Auditors for the year ending December 31, 2009:


For	Against	Abstain
152,902	139	380


Item 5.	Other Information

	Not applicable


Item 6.	Exhibits

	3(i)	Amended and Restated Articles of Incorporation for Neffs Bancorp, Inc. (Incorporated by reference to Exhibit 3(i) to the Form 10 filed with the Commission on April 27, 2001, as amended on June 29, 2001 and July 20, 2001.)

	3(ii)	Amended and Restated By-laws of Neffs Bancorp, Inc. (Incorporated by reference to Exhibit 99.1 to the Form 8K filed with the Commission on February 27, 2002.)

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

	31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

	32.1	Certification of Chief Executive Officer pursuant to Section 1350 of the Sarbanes Oxley Act of 2002.

	32.2	Certification of Principal Financial Officer pursuant to Section 1350 of the Sarbanes Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf be the undersigned thereunto duly authorized.