NEFFS BANCORP INC
THE CORPORATION IS SUBJECT TO INTEREST RATE RISK  Income and cash flows and the value of assets depend to a great extent on the difference between the interest rates earned on interest-earning assets, such as loans and investment securities, and the interest rates paid on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors which are beyond the bank's control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest received on loans and investment securities and the amount of interest paid on deposits and borrowings but it will also affect the ability to originate loans and obtain deposits and the value of the investment portfolio. If the rate of interest paid on deposits and other borrowings increases more than the rate of interest earned on loans and other investments, net interest income and                                          6    earnings could be adversely affected. Earnings also could be adversely affected if the rates on loans and other investments fall more quickly than those on deposits and other borrowings.  THE CORPORATION'S PROFITABILITY DEPENDS SIGNIFICANTLY ON ECONOMIC CONDITIONS IN THE COMMONWEALTH OF PENNSYLVANIA  The Corporation's success depends primarily on the general economic conditions of the Commonwealth of Pennsylvania and the specific local markets in which the Corporation operates. Unlike larger national or other regional banks that are more geographically diversified, the Corporation provides banking and financial services to customers primarily in the Northern Lehigh Valley area. The local economic conditions in these areas have a significant impact on the demand for the Corporation's products and services as well as the ability of the Corporation's customers to repay loans, the value of the collateral securing loans and the stability of the Corporation's deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Corporation's financial condition and results of operations.  THE CORPORATION'S ALLOWANCE FOR POSSIBLE LOAN LOSSES MAY BE INSUFFICIENT  Financial condition and results of operations could be adversely affected if the allowance for loan losses is not sufficient to absorb actual losses or if the bank is required to increase the allowance. Despite underwriting criteria, the bank may experience loan delinquencies and losses. In order to absorb losses associated with nonperforming loans, the allowance for loan losses is based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Determination of the allowance inherently involves a high degree of subjectivity and requires significant estimates of current credit risks and future trends; all of which may undergo material changes. At any time there are likely to be loans in the portfolio that will result in losses but that have not been identified as nonperforming or potential problem credits. The bank cannot be sure that all deteriorating credits are identified before they become nonperforming assets or that losses will be able to be limited on those loans that are identified. The bank may be required to increase the allowance for loan losses for any of several reasons. State and federal regulators, in reviewing the loan portfolio as part of a regulatory examination, may request that an increase be made to the allowance for loan losses. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the bank's control, may require an increase in the allowance. In addition, if charge-offs in future periods exceed the allowance for loan losses; the bank will need additional increases in the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and possibly, capital, and may materially affect the results of operations in the period in which the allowance is increased.  THE CORPORATION OPERATES IN A HIGHLY COMPETITIVE INDUSTRY AND MARKET AREA  Neffs faces substantial competition in all phases of operation from a variety of different competitors, including commercial banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies, leasing companies, insurance companies and money market mutual funds. There is very strong competition among financial services providers in the principal service area. Competitors may have greater resources, higher lending limits or larger branch systems. Accordingly, they may be able to offer a broader range of products and services as well as better pricing for those products or services.  In addition, some of the competing financial services organizations are not subject to the same degree of regulations as are imposed on federally insured financial institutions. As a result, those non-bank                                          7    competitors may be able to access funding and provide various services more easily or at less cost, adversely affecting the ability to compete effectively.  THE CORPORATION IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND SUPERVISION  The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Changes in laws, regulations, and regulatory practices affecting the banking industry may increase costs of doing business or otherwise adversely affect and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and the bank cannot predict the ultimate effect of these changes, which could have a material adverse effect on profitability or financial condition.  THE CORPORATION MAY NOT BE ABLE TO ATTRACT AND RETAIN SKILLED PEOPLE  The Corporation's success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Corporation can be intense and the Corporation may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Corporation's key personnel could have a material adverse impact on the Corporation's business because of their skills, knowledge of the Corporation's market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The Corporation does not currently have employment agreements or non-competition agreements with any of its senior officers.  THE CORPORATION IS SUBJECT TO ENVIRONMENTAL LIABILITY RISK ASSOCIATED WITH LENDING ACTIVITIES  Environmental liability associated with lending activities could result in losses. In the course of business, the bank may foreclose on and take title to properties securing loans. If hazardous substances were discovered on any of these properties, the bank could be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether the bank knew of, or were responsible for, the contamination. In addition, if the bank arranges for the disposal of hazardous or toxic substances at another site, costs may be incurred for cleaning up and removing those substances from the site even if the bank neither owned nor operated the disposal site. Environmental laws may require the bank to incur substantial expenses and may materially limit the use of properties acquired through foreclosure, reduce their value or limit the ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase exposure to environmental liability.  THE CORPORATION CONTINUALLY ENCOUNTERS TECHNOLOGICAL CHANGE  Failure to implement new technologies for operations may adversely affect growth or profits. The market for financial services, including banking services and consumer finance services is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking and telebanking. The ability to compete successfully in markets may depend on the ability to exploit such technological changes. However, no assurance can be given that management will be able to properly or timely anticipate or implement such technologies or properly train employees to use such technologies. Any failure to adapt to new technologies could adversely affect the financial condition or operating results.  THE CORPORATION'S ABILITY TO PAY DIVIDENDS DEPENDS PRIMARILY ON DIVIDENDS FROM ITS BANKING SUBSIDIARY, WHICH IS SUBJECT TO REGULATORY LIMITS.  The Corporation is a bank holding company and its operations are conducted by its subsidiary. Its ability to pay dividends depends on its receipt of dividends from its subsidiary. Dividend payments from its banking subsidiary are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of its subsidiary to                                          8    pay dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. There is no assurance that its subsidiary will be able to pay dividends in the future or that the Corporation will generate adequate cash flow to pay dividends in the future. The Corporation's failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock.
None.
MAIN OFFICE  The main office of Neffs is located at 5629 PA Route 873, North Whitehall Township, Neffs, PA 18065. The bank owns and occupies a 12,475 square feet building, containing a banking floor, lobby, administrative offices, lending offices, operations center, and executive offices. During 2001, the bank completed construction of two (2) additional lanes, for a total of five (5) lanes, to its drive thru facility located adjacent to the main building. The bank also owns a vacant lot behind the headquarters. Situated on the lot are a baseball field, basketball court and playground facility, all of which are available for use by the public.  The corporation also owns property at 5645 PA Route 873, Neffs, PA 18065; which is a one and one half (1 1/2) story single family dwelling with approximately 2,570 square feet of living space. This property is currently being leased.
The corporation is subject to certain legal proceedings and claims arising in the ordinary course of business. It is management's opinion that the ultimate resolution of these claims will not have a material adverse effect on the corporation's financial position and results of operations.
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.                                          9   Part II.
The corporation's common stock is currently quoted on the National Quotations Bureau's Electronic Quotations Service ("Pink Sheet") under the trading symbol NEFB. The corporation's common stock is traded over-the-counter from time to time, primarily in the corporation's geographic service area, through several local market makers.  The following table sets forth the prices for which common stock has traded during the last two (2) fiscal years. As of December 31, 2005, there were approximately 615 holders of record of the corporation's common stock.                               Sales Prices                         -----------------                           High      Low                         -------   -------    Quarter Ended:    March 31, 2005       $230.00   $230.00    June 30, 2005         235.00    230.00    September 30, 2005    236.00    235.00    December 31, 2005     243.00    240.00     March 31, 2004       $240.00   $225.00    June 30, 2004         230.00    225.00    September 30, 2004    225.00    225.00    December 31, 2004     230.00    228.00   DIVIDENDS AND DIVIDEND HISTORY  The corporation has historically distributed to stockholders a dividend on May 15th and November 15th of each year. In 2005 a dividend of $2.00 per share was paid to stockholders on May 15 and a dividend of $2.00 per share was paid on November 15. In 2004 a dividend of $1.75 per share was paid to stockholders on May 15, and a dividend of $2.00 per share was paid on November 15.  The holders of common stock of the corporation are entitled to receive dividends as may be declared by the Board of Directors with respect to the common stock out of funds of the corporation. While the corporation is not subject to certain restrictions on dividends and stock redemptions applicable to a bank, the ability of the corporation to pay dividends to the holders of its common stock will depend to a large extent upon the amount of dividends paid by the bank to the corporation.  The ability of the corporation to pay dividends on its common stock in the future will depend on the earnings and the financial condition of the bank and the corporation. The corporation's ability to pay dividends will be subject to the prior payment by the corporation of principal and interest on any debt obligations it may incur in the future as well as other factors that may exist at the time.  Regulatory authorities restrict the amount of cash dividends the bank can declare without prior regulatory approval.
The information under the caption "Selected Financial Data" in the corporation's Annual Report to Shareholders for the year ended December 31, 2005, which pages are included in Exhibit 13 hereto, are incorporated in their entirety by reference in response to this Item 6.                                          10
The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the corporation's Annual Report to Shareholders for the year ended December 31, 2005, which pages are included in Exhibit 13 hereto, are incorporated in their entirety by reference in response to this Item 7.
In an effort to assess market risk, the bank utilizes a simulation model to determine the effect of increases or decreases in market interest rates on net interest income and net income.  The simulation model assumes a hypothetical gradual shift in market interest rates over a twelve-month period. This is based on a review of historical changes in market interest rates and the level and curve of current interest rates. The simulated results represent the hypothetical effects to the bank's net interest income and net income. Projections for loan and deposit growth were ignored in the simulation model. The simulation model includes all of the bank's earning assets and interest-bearing liabilities and assumes a parallel and prorated shift in interest rates over a twelve-month period. The percentage declines in the table below are measured as percentage changes from the values of simulated net interest income in the current rate scenario and the impact of those changes on the prior year's net income.  The aforementioned assumptions are revised based on defined scenarios of assumed speed and direction changes of market interest rates. These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions, as well as management strategies, among other factors. Because it is difficult to accurately quantify into assumptions the reaction of depositors and borrowers to market interest rate changes, the actual net interest income and net income results may differ from simulated results. While assumptions are developed based upon current economic and local market conditions, management cannot make any assurances as to the predictive nature of these assumptions.  The following table reflects the bank's net interest income sensitivity analysis as of December 31, 2005 and 2004. The schedule indicates that as of December 31, 2005, a hypothetical 200 basis point decline in prevailing market interest rates would cause the bank's net interest income to decline less then 4% from the current rate scenario. The computations do not contemplate any action management or the Asset/Liability Management Committee could undertake in response to changes in market conditions or market interest rates.                                        2005                        2004                          -------------------------   -------------------------                            CHANGE IN                   CHANGE IN                          NET INTEREST   PERCENTAGE   NET INTEREST   PERCENTAGE (dollars in thousands)      INCOME        CHANGE        INCOME        CHANGE                          ------------   ----------   ------------   ----------      Policy Limit                              +/-5.0%                     +/-5.0%  Down 200 basis points       ($114)          (1.7%)      ($224)          (3.1%) Down 100 basis points         (36)          (0.5%)        (93)          (1.3%)  Up 100 basis points            44            0.6%          66            0.9% Up 200 basis points            78            1.1%          81            1.1%                                           11
The financial statements in the corporation's Annual Report to Shareholders for the year ended December 31, 2005, which pages are included in Exhibit 13 hereto, are incorporated in their entirety by reference in response to this Item 7.
None.
DISCLOSURE CONTROLS AND PROCEDURES  The Corporation maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Corporation files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon their evaluation of those controls and procedures as of December 31, 2005, the chief executive officer and principal financial officer of the Corporation concluded that the Corporation's disclosure controls and procedures were adequate.  INTERNAL CONTROLS OVER FINANCIAL REPORTING  The Corporation made no significant changes in its internal controls or in other factors that could significantly affect these controls during the fourth quarter of the year ended December 31, 2005, including any corrective actions with regard to significant deficiencies and material weaknesses.
None.  PART III.
The information under the captions "Information about Nominees and Continuing Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance are incorporated here by reference to Neffs Bancorp, Inc.'s proxy statement for its 2006 Annual Meeting of Shareholders scheduled for May 10, 2006.  The corporation has adopted a Code of Ethics that applies to directors, officers and employees of the corporation and the bank. A copy of the Code of Ethics was included as an exhibit to the corporation's Form 10-K for the year ended December 31, 2003 and filed with the Securities and Exchange Commission. A request for the corporation's Code of Ethics can be made in either writing to Dawn E. Hamm, Neffs Bancorp, Inc., 5629 Route 873, P.O. Box 10, Neffs, PA 18065-0010 or by telephone to 610-767-3875.
The information under the caption "Executive Compensation" is incorporated here by reference of Neffs Bancorp, Inc.'s proxy statement for its 2006 Annual Meeting of Shareholders scheduled for May 10, 2006.                                          12
The information under the caption "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" is incorporated here by reference of Neffs Bancorp, Inc.'s proxy statement for its 2006 Annual Meeting of Shareholders scheduled for May 10, 2006.  The corporation currently does not maintain any equity compensation plans.
The information under the caption "Transactions with Directors and Executive Officers" is incorporated here by reference to Neffs Bancorp, Inc.'s proxy statement for its 2006 Annual Meeting of Shareholders scheduled for May 10, 2006.
The information under the caption "Report of the Audit Committee" is incorporated here by reference to Neffs Bancorp, Inc.'s proxy statement for its 2006 Annual Meeting of Shareholders scheduled for May 10, 2006.  PART IV
(a)  (1) Financial Statements are incorporated by reference from the 2005               Annual Report                 Report of Independent Registered Public Accounting Firm                Consolidated Statements of Financial Condition                Consolidated Statements of Income                Consolidated Statements of Stockholders' Equity                Consolidated Statements of Cash Flows                Notes to Consolidated Financial Statements            (2)  Financial Statements Schedules (This item is omitted since                information required is either not applicable or is included in                the footnotes to the Annual Financial Statements.)            (3)  The following exhibits are filed as part of this Form 10-K, and                this list includes the Exhibits Index.    NO.      DESCRIPTION - ---      -----------   3 (i)    Amended and Restated Articles of Incorporation of Neffs Bancorp, Inc.          (Incorporated by reference to Exhibit 3(i) of the Registration          Statement on Form 10 dated and as filed with Commission on April 27,          2001.)  3 (ii)   Amended and Restated Bylaws of Neffs Bancorp, Inc. (Incorporated by          reference to Exhibit 99.1 of the Current Report on Form 8-K dated and          as filed with the Commission on February 27, 2002.)      11   Statement re: computation of per share earnings. See Consolidated          Statements of Income and Note 1 to the Consolidated Financial          Statements included in the Annual Report se forth as Exhibit 13 hereto.                                           13          13   Excerpts from Neffs Bancorp, Inc. Annual Report to Stockholders.      14   Code of Ethics (incorporated by reference to Exhibit 14 to the Form          10-K of the registrant, filed on April 1, 2002.)      21   Subsidiary of the Registrant (incorporated by reference to Exhibit 21          to the Form 10-K of the registrant filed on April 1, 2002.)    31.1   Certification of Chief Executive Officer pursuant to Rule          13a-14(a)/15d-14(a)    31.2   Certification of Principal Financial Officer pursuant to Rule          13a-14(a)/15d-14(a)    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.        (b)  Exhibits required by item 601 of Regulation SK.            See Item 15(a)(3) above.                                          14                                       SIGNATURES  Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.                                          Neffs Bancorp, Inc.   Date: March 24, 2006                    By: /s/ John J. Remaley                                             ------------------------------------                                             John J. Remaley                                             President and                                             Chief Executive Officer  Pursuant to the requirement of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.    Signatures                    Title                                             Date - ----------                    -----                                             ----      /s/ John J. Remaley - --------------------------- John J. Remaley               President, Chief Executive Officer and Director   March 24, 2006   /s/ Herman P. Snyder - --------------------------- Herman P. Snyder              Vice President and Director                       March 24, 2006   /s/ Robert B. Heintzelman - --------------------------- Robert B. Heintzelman         Director                                          March 24, 2006   /s/ Mary Ann Wagner - --------------------------- Mary Ann Wagner               Director                                          March 24, 2006   /s/ John F. Simock - --------------------------- John F. Simock                Director                                          March 24, 2006   /s/ Kevin A. Schmidt - --------------------------- Kevin A. Schmidt              Director                                          March 24, 2006   /s/ John F. Sharkey, Jr. - --------------------------- John F. Sharkey, Jr.          Director                                          March 24, 2006   /s/ Duane A. Schleicher - --------------------------- Duane A. Schleicher           Director                                          March 24, 2006                                           15    EX-13 2 w19059exv13.txt EXCERPTS FROM NEFFS BANCORP, INC. ANNUAL REPORT TO STOCKHOLDERS    EXHIBIT 13                                 NEFFS BANCORP, INC.                            CONSOLIDATED FINANCIAL REPORT                                  DECEMBER 31, 2005                                          1                              DIRECTORS OF THE CORPORATION                                     AND BANK  Robert Heintzelman                                             John J. Remaley                                Duane A. Schleicher  Kevin A. Schmidt                                           John F. Sharkey, Jr.                                  John F. Simock  Herman P. Snyder                                              Mary Ann Wagner                             OFFICERS OF THE CORPORATION   John J. Remaley                                                Herman P. Snyder     President                                                    Vice President  Kevin A. Schmidt                                                  Dawn E. Hamm     Treasurer                                                       Secretary                                OFFICERS OF THE BANK                                  Herman P. Snyder                               Chairman of the Board       John J. Remaley                                      Kevin A. Schmidt         President                                   Executive Vice President and                                                        Chief Executive Officer      Michael J. Bailey                                      Carol L. Jones        Cashier and                                      Assistant Cashier and Chief Operations Officer                                 Operations Officer                                           2    Dear Shareholder:       The day-to-day challenges that management experienced during the year 2005, and the uncertainties imposed by local, national and international conditions, made the task of overseeing the operations of the subsidiary something that administrators in other professions might have difficulty pursuing. The decisions made during one week were, at times, out-dated procedures for the next week. By the time those short-term initiatives were in place, other considerations were necessary to counteract the negativity.       In spite of the events that neither the board of directors nor management could control, Neffs Bancorp, Inc. and its subsidiary, The Neffs National Bank experienced a prosperous and growth-oriented year of operation. Monitoring interest rates was an on-going task, with the environment becoming more competitive, as other businesses became involved in the "business of banking."       Total Assets of the bank reached a new high, as did Retained Earnings. This growth directly increases the value of the shareholders' investment, and compliments your decision to trust the placement of your financial matters with your locally-owned, growth and profit-oriented company.       With the introduction of "Net Teller Online," the Internet Banking Option, and "Bank Line," your 24-Hour Telephone Banking Service, we continue to offer the most current technology available to our growing customer base. Both systems are convenient, simple to use, and completely confidential.       As we begin the new year, we express our sincere thanks to our shareholders and patrons, and recognize the dedication and professionalism of our staff.  Cordially yours,   - ------------------------------------- John J. Remaley President                                          3    (BEARD MILLER COMPANY LOGO)               REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Stockholders Neffs Bancorp, Inc. and Subsidiary Neffs, Pennsylvania       We have audited the accompanying consolidated statements of financial condition of Neffs Bancorp, Inc. and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.       We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.       In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neffs Bancorp, Inc. and subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.                                          (BEARD MILLER COMPANY LLP)  Beard Miller Company LLP Allentown, Pennsylvania January 11, 2006                                          4   NEFFS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION                                                                                  DECEMBER 31,                                                                           -------------------                                                                             2005       2004                                                                           --------   --------                                                                              (IN THOUSANDS,                                                                            EXCEPT SHARE DATA)                                                ASSETS  Cash and due from banks                                                   $  2,958   $  4,076 Interest bearing deposits with banks                                           163         23 Federal funds sold                                                           2,348      1,778 Securities available for sale                                               42,021     44,148 Securities held to maturity, fair value 2005 $79,248; 2004 $81,416          78,923     79,319 Loans receivable, net of allowance for loan losses 2005 $657; 2004 $663     82,385     76,315 Premises and equipment, net                                                  2,549      2,308 Other assets                                                                 2,200      1,836                                                                           --------   --------    TOTAL ASSETS                                                           $213,547   $209,803                                                                           ========   ========                               LIABILITIES AND STOCKHOLDERS' EQUITY  Liabilities:    Deposits:       Non-interest bearing                                                $ 16,912   $ 14,182       Interest bearing                                                     156,364    157,470                                                                           --------   --------    Total Deposits                                                          173,276    171,652 Other liabilities                                                              977        835                                                                           --------   --------    TOTAL LIABILITIES                                                       174,253    172,487                                                                           --------   --------  Stockholders' equity:    Common stock, $1 par value; authorized 2,500,000 shares;       issued 200,000 shares; outstanding 2005 197,941 shares;       2004 197,091 shares                                                      200        200    Paid-in capital                                                             753        690    Retained earnings                                                        39,603     37,319    Accumulated other comprehensive loss                                       (844)      (331)    Treasury stock, at cost 2005 2,059 shares; 2004 2,909 shares               (418)      (562)                                                                           --------   --------    TOTAL STOCKHOLDERS' EQUITY                                               39,294     37,316                                                                           --------   --------    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $213,547   $209,803                                                                           ========   ========   See notes to consolidated financial statements.                                           2    NEFFS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME                                                                   YEARS ENDED DECEMBER 31,                                                             ------------------------------                                                               2005       2004       2003                                                             --------   --------   --------                                                              (DOLLARS IN THOUSANDS, EXCEPT                                                                     PER SHARE DATA)     INTEREST INCOME    Interest and fees on loans                               $  5,001   $  4,747   $  5,044    Interest and dividends on investments:       Taxable                                                  3,313      3,075      2,193       Exempt from federal income taxes                         2,058      2,158      2,268    Interest on federal funds sold                                 82         67        128                                                             --------   --------   --------       TOTAL INTEREST INCOME                                   10,454     10,047      9,633 INTEREST EXPENSE, DEPOSITS                                     4,469      4,082      4,434                                                             --------   --------   --------       NET INTEREST INCOME                                      5,985      5,965      5,199 PROVISION FOR LOAN LOSSES                                         --         36         88                                                             --------   --------   --------       NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES      5,985      5,929      5,111                                                             --------   --------   --------  OTHER INCOME    Service charges on deposit accounts                           161        177        178    Other service charges and fees                                 78         44         54    Other income                                                   37         47         41                                                             --------   --------   --------       TOTAL OTHER INCOME                                         276        268        273                                                             --------   --------   --------  OTHER EXPENSES    Salaries and employee benefits                              1,242      1,137      1,121    Occupancy                                                     154        148        165    Furniture and equipment                                       210        151        151    Pennsylvania shares tax                                       312        288        309    Other expenses                                                694        661        523                                                             --------   --------   --------       TOTAL OTHER EXPENSES                                     2,612      2,385      2,269                                                             --------   --------   --------       INCOME BEFORE INCOME TAXES                               3,649      3,812      3,115                                                             --------   --------   --------  INCOME TAX (BENEFIT) EXPENSE    Current                                                       631        710        508    Deferred                                                      (54)      (103)      (167)                                                             --------   --------   --------       TOTAL INCOME TAX EXPENSE                                   577        607        341                                                             --------   --------   --------       NET INCOME                                            $  3,072   $  3,205   $  2,774                                                             ========   ========   ======== EARNINGS PER SHARE, BASIC                                   $  15.58   $  16.26   $  14.11                                                             ========   ========   ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                   197,117    197,091    196,529                                                             ========   ========   ========   See notes to consolidated financial statements.                                           3    NEFFS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2005, 2004 and 2003                                                                                       ACCUMULATED                                                                                       OTHER                      TOTAL                                                     COMMON   PAID-IN   RETAINED   COMPREHENSIVE   TREASURY   STOCKHOLDERS'                                                      STOCK   CAPITAL   EARNINGS   INCOME (LOSS)     STOCK        EQUITY                                                     ------   -------   --------   -------------   --------   -------------                                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)        BALANCE - DECEMBER 31, 2002                         $  200     $609    $32,610        $  21         ($615)      $32,825                                                                                                                 ------- Comprehensive income:    Net income                                           --       --      2,774           --            --         2,774    Change in unrealized net gains (losses) on       securities available for sale, net of taxes       --       --         --         (147)           --          (147)                                                                                                                 -------    TOTAL COMPREHENSIVE INCOME                                                                                     2,627                                                                                                                 -------    Cash dividends declared on common stock, $2.70       per share                                         --       --       (531)          --            --          (531)    Sale of treasury stock (660 shares)                  --       81         --           --            53           134                                                     ------     ----    -------        -----        ------       -------  BALANCE - DECEMBER 31, 2003                            200      690     34,853         (126)         (562)       35,055                                                                                                                 ------- Comprehensive income:    Net income                                           --       --      3,205           --            --         3,205    Change in unrealized net gains (losses) on       securities available for sale, net of taxes       --       --         --         (205)           --          (205)                                                                                                                 -------    TOTAL COMPREHENSIVE INCOME                                                                                     3,000                                                                                                                 -------    Cash dividends declared on common stock, $3.75       per share                                         --       --       (739)          --            --          (739)                                                     ------     ----    -------        -----        ------       -------  BALANCE - DECEMBER 31, 2004                            200      690     37,319         (331)         (562)       37,316                                                                                                                 ------- Comprehensive income:    Net income                                           --       --      3,072           --            --         3,072    Change in unrealized net gains (losses) on       securities available for sale, net of taxes       --       --         --         (513)           --          (513)                                                                                                                 -------    TOTAL COMPREHENSIVE INCOME                                                                                     2,559                                                                                                                 -------    Cash dividends declared on common stock, $4.00       per share                                         --       --       (788)          --            --          (788)    Sale of treasury stock (850 shares)                  --       63         --           --           144           207                                                     ------     ----    -------        -----        ------       ------- BALANCE - DECEMBER 31, 2005                         $  200     $753    $39,603        $(844)       $ (418)      $39,294                                                     ======     ====    =======        =====        ======       =======   See notes to consolidated financial statements.                                           4   NEFFS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                 YEARS ENDED DECEMBER 31,                                                           -----------------------------                                                             2005      2004       2003                                                           -------   --------   --------                                                                   (IN THOUSANDS)     CASH FLOWS FROM OPERATING ACTIVITIES    Net income                                             $ 3,072   $  3,205   $  2,774    Adjustments to reconcile net income to net cash       provided by operating activities:          Depreciation                                         170        124        116          Provision for loan losses                             --         36         88          Net amortization of securities                       228        193        389          Deferred income tax benefit                          (54)      (103)      (167)          (Increase) decrease in assets:             Accrued interest receivable                       (28)       (47)       (76)             Other assets                                      (17)        46        (77)          Increase (decrease) in liabilities:             Accrued interest payable                          131        (19)      (104)             Other liabilities                                  11         33         (8)                                                           -------   --------   --------          NET CASH PROVIDED BY OPERATING ACTIVITIES          3,513      3,468      2,935                                                           -------   --------   -------- CASH FLOWS FROM INVESTING ACTIVITIES    Net (increase) decrease in interest bearing               (140)        23        (28)        deposits with banks    Net (increase) decrease in federal funds sold             (570)     7,612      1,085    Purchases of securities available for sale              (8,438)   (24,647)   (25,100)    Purchases of securities held to maturity                (4,116)    (9,623)   (33,881)    Proceeds from maturities/calls and principal       repayments of securities available for sale           9,566      7,370      7,295    Proceeds from maturities/calls of securities held to       maturity                                              4,505     13,017     35,384    Net increase in loans                                   (6,070)    (6,102)    (1,303)    Proceeds from sale of foreclosed real estate                --         10         --    Purchases of premises and equipment                       (411)       (77)       (75)                                                           -------   --------   --------          NET CASH USED IN INVESTING ACTIVITIES             (5,674)   (12,417)   (16,623)                                                           -------   --------   -------- CASH FLOWS FROM FINANCING ACTIVITIES    Net increase in deposits                                 1,624      8,958     16,159    Dividends paid                                            (788)      (739)      (531)    Sales of treasury stock                                    207         --        134                                                           -------   --------   --------          NET CASH PROVIDED BY FINANCING ACTIVITIES          1,043      8,219     15,762                                                           -------   --------   --------          NET INCREASE (DECREASE) IN CASH AND CASH          (1,118)      (730)     2,074             EQUIVALENTS CASH AND CASH EQUIVALENTS - BEGINNING                       4,076      4,806      2,732                                                           -------   --------   -------- CASH AND CASH EQUIVALENTS - ENDING                        $ 2,958   $  4,076   $  4,806                                                           =======   ========   ======== SUPPLEMENTARY CASH FLOWS INFORMATION    Interest paid                                          $ 4,337   $  4,101   $  4,538                                                           =======   ========   ========    Income taxes paid                                      $   655   $    645   $    567                                                           =======   ========   ========   See notes to consolidated financial statements.                                           5    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES  BASIS OF PRESENTATION       The accompanying 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      transactions have been eliminated.  NATURE OF OPERATIONS       The Bank operates from one location in Lehigh County, Pennsylvania. The      Bank provides a full range of financial services to individuals, small      businesses and corporate customers. The primary source of revenue is      providing residential mortgages, consumer loans and commercial loans to      customers located within the Lehigh Valley. The Bank's primary deposits are      checking accounts, savings accounts and certificates of deposit. As a      national bank, the Bank is subject to regulation of the Office of the      Comptroller of Currency and the Federal Deposit Insurance Corporation. The      Corporation is subject to regulations of the Federal Reserve Bank.  ESTIMATES       In preparing financial statements in conformity with accounting principles      generally accepted in the United States of America, management is required      to make estimates and assumptions that affect the reported amounts of      assets and liabilities and the disclosure of contingent assets and      liabilities at the date of the financial statements and income and expenses      during the reporting period. Actual results could differ from those      estimates. Material estimates that are particularly susceptible to      significant changes in the near term relate to the determination of the      allowance for loan losses.  SIGNIFICANT CONCENTRATIONS OF CREDIT RISK       Most of the Corporation's activities are with customers located within the      Lehigh Valley of Pennsylvania. Note 3 discusses the types of securities      that the Corporation invests in. Note 4 discusses the types of lending that      the Corporation engages in. The Corporation does not have any significant      concentrations to any one industry or customer. Although, the Corporation      has a diversified loan portfolio, exposure to credit loss can be adversely      impacted by downturns in local economic and employment conditions.  SECURITIES       Securities classified as held to maturity are those debt securities the      Corporation has both the intent and ability to hold to maturity regardless      of changes in market conditions, liquidity needs or changes in general      economic conditions. These securities are carried at cost adjusted for the      amortization of premium and accretion of discount, computed by the interest      method over the terms of the securities.       Securities classified as available for sale are those debt securities that      the Corporation intends to hold for an indefinite period of time but not      necessarily to maturity. Any decision to sell a security classified as      available for sale would be based on various factors, including significant      movement in interest rates, changes in the maturity mix of the      Corporation's assets and liabilities, liquidity needs, regulatory capital      considerations and other similar factors. Securities available for sale are      carried at fair value. Unrealized gains or losses are reported as increases      or decreases in other comprehensive income (loss), net of the related      deferred tax effect. Realized gains or losses, determined on the basis of      the cost of the specific securities sold, are included in earnings.      Premiums and discounts are recognized in interest income using the interest      method over the terms of the securities.                                           6    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  SECURITIES (CONTINUED)       Management determines the appropriate classification of debt securities at      the time of purchase and re-evaluates such designation as of each balance      sheet date.       Declines in the fair value of held to maturity and available for sale      securities below their cost that are deemed to be other than temporary are      reflected in earnings as realized losses. In estimating      other-than-temporary impairment losses, management considers (1) the length      of time and the extent to which the fair value has been less than cost, (2)      the financial condition and near-term prospects of the issuer, and (3) the      intent and ability of the Corporation to retain its investment in the      issuer for a period of time sufficient to allow for any anticipated      recovery in fair value.       Equity securities include restricted investments, 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.  LOANS       Loans receivable that management has the intent and ability to hold for the      foreseeable future or until maturity or payoff are stated at their      outstanding unpaid principal balances. Interest income is accrued on the      unpaid principal balance.       The accrual of interest is generally discontinued when the contractual      payment of principal or interest has become 90 days past due or management      has serious doubts about further collectibility of principal or interest,      even though the loan is currently performing. A loan may remain on accrual      status if it is in the process of collection and is either guaranteed or      well secured. When a loan is placed on nonaccrual status, unpaid interest      credited to income in the current year is reversed and unpaid interest      accrued in prior years is charged against the allowance for loan losses.      Interest received on nonaccrual loans generally is either applied against      principal or reported as interest income, according to management's      judgment as to the collectibility of principal. Generally, loans are      restored to accrual status when the obligation is brought current, has      performed in accordance with the contractual terms for a reasonable period      of time and the ultimate collectibility of the total contractual principal      and interest is no longer in doubt.  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. Management's      periodic evaluation of the adequacy of the allowance is based on the      Corporation's past loan loss experience, known and inherent risks in the      portfolio, adverse situations that may affect the borrower's ability to      repay, the estimated value of any underlying collateral, composition of the      loan portfolio, current economic conditions and other relevant factors.      This evaluation is inherently subjective as it requires material estimates      that may be susceptible to significant revision as more information becomes      available.                                           7    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  ALLOWANCE FOR LOAN LOSSES (CONTINUED)       The allowance consists of specific, general and unallocated components. The      specific component relates to loans that are classified as either doubtful,      substandard or special mention. For such loans that are also classified as      impaired, an allowance is established when the discounted cash flows (or      collateral value or observable market price) of the impaired loan is lower      than the carrying value of that loan. The general component covers      non-classified loans and is based on historical loss experience adjusted      for qualitative factors. An unallocated component is maintained to cover      uncertainties that could affect management's estimate of probable losses.      The unallocated component of the allowance reflects the margin of      imprecision inherent in the underlying assumptions used in the      methodologies for estimating specific and general losses in the portfolio.       A loan is considered impaired when, based on current information and      events, it is probable that the Corporation will be unable to collect the      scheduled payments of principal or interest when due according to the      contractual terms of the loan agreement. Factors considered by management      in determining impairment include payment status, collateral value and the      probability of collecting scheduled principal and interest payments when      due. Loans that experience insignificant payment delays and payment      shortfalls generally are not classified as impaired. Management determines      the significance of payment delays and payment shortfalls on a case-by-case      basis, taking into consideration all of the circumstances surrounding the      loan and the borrower, including the length of the delay, the reasons for      the delay, the borrower's prior payment record and the amount of the      shortfall in relation to the principal and interest owed. Impairment is      measured on a loan by loan basis for commercial and construction loans by      either the present value of expected future cash flows discounted at the      loan's effective interest rate, the loan's obtainable market price or the      fair value of the collateral if the loan is collateral dependent.       Large groups of smaller balance homogeneous loans are collectively      evaluated for impairment. Accordingly, the Corporation does not separately      identify individual residential and consumer loans for impairment      disclosures, unless such loans are subject of a restructuring agreement.  FORECLOSED ASSETS       Foreclosed assets are comprised of property acquired through a foreclosure      proceeding or acceptance of a deed in lieu of foreclosure and loans      classified as in-substance foreclosure. The Corporation includes such      property in other assets. A loan is classified as in-substance foreclosure      when the Corporation has taken possession of the collateral regardless of      whether formal foreclosure proceedings take place. Foreclosed assets      initially are recorded at fair value, net of estimated selling costs, at      the date of foreclosure establishing a new cost basis. After foreclosure,      valuations are periodically performed by management and the assets are      carried at the lower of cost or fair value minus estimated costs to sell.      Revenues and expenses from operations and changes in the valuation      allowance are included in other expenses. The Corporation had no foreclosed      assets at December 31, 2005 and 2004.  TRANSFERS OF FINANCIAL ASSETS       Transfers of financial assets, including sales of loan participations, are      accounted for as sales, when control over the assets has been surrendered.      Control over transferred assets is deemed to be surrendered when (1) the      assets have been isolated from the Corporation, (2) the transferee obtains      the right (free of conditions that constrain it from taking advantage of      that right) to pledge or exchange the transferred assets and (3) the      Corporation does not maintain effective control over the transferred assets      through an agreement to repurchase them before their maturity.                                           8    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  PREMISES AND EQUIPMENT       Premises and equipment are carried at cost less accumulated depreciation      and amortization. Depreciation is computed on the straight-line method over      the estimated useful lives of the premises and equipment. Charges for      maintenance and repairs are expensed as incurred.  ADVERTISING COSTS       The Corporation follows the policy of charging the costs of advertising to      expense as incurred. Total advertising expense for the years ended December      31, 2005, 2004, and 2003 was $64,000, $25,000 and $26,000, respectively.  INCOME TAXES       Deferred taxes are provided on the liability method whereby deferred tax      assets are recognized for deductible temporary differences and deferred tax      liabilities are recognized for taxable temporary differences. Temporary      differences are the differences between the reported amounts of assets and      liabilities and their tax basis. Deferred tax assets are reduced by a      valuation allowance when, in the opinion of management, it is more likely      than not that some portion of the deferred tax assets will not be realized.      Deferred tax assets and liabilities are adjusted for the effects of changes      in tax laws and rates on the date of enactment. The Corporation files a      consolidated federal income tax return.  EARNINGS PER SHARE       Earnings per share is based on the weighted average shares of common stock      outstanding during each year. The Corporation currently maintains a simple      capital structure, thus there are no dilutive effects on earnings per      share.  EMPLOYEE BENEFIT PLAN       The Bank has a non-contributory defined contribution pension plan covering      all employees having at least one year of service. Contribution amounts are      determined annually by the Corporation and are charged to current operating      expense. The expense amounted to $64,000, $57,000, and $60,000, for 2005,      2004 and 2003, respectively.  COMPREHENSIVE INCOME       Accounting principles generally require that recognized revenue, expenses,      gains and losses be included in net income. Although certain changes in      assets and liabilities, such as unrealized gains and losses on available      for sale securities, are reported as a separate component of the equity      section of the statement of financial condition, such items, along with net      income, are components of comprehensive income.  CASH AND CASH EQUIVALENTS       For purposes of reporting cash flows, the Corporation has defined cash and      cash equivalents as cash on hand and amounts due from banks.                                           9    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  SEGMENT REPORTING       The Corporation acts as an independent community financial services      provider and offers traditional banking and related financial services to      individual, business and government customers. The Corporation offers a      full array of commercial and retail financial services, including the      taking of time, savings and demand deposits; the making of commercial,      consumer and mortgage loans and the providing of other financial services.       Management does not separately allocate expenses, including the cost of      funding loan demand, between the commercial and retail operations of the      Corporation. As such, discrete information is not available and segment      reporting would not be meaningful.  NEW ACCOUNTING STANDARDS       In March 2004, the FASB's Emerging Issues Task Force (EITF) reached a      consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary      Impairment and Its Application to Certain Investments." EITF 03-1 provides      guidance on other-than-temporary impairment models for marketable debt and      equity securities accounted for under SFAS 115 and non-marketable equity      securities accounted for under the cost method. The EITF developed a basic      three-step model to evaluate whether an investment is      other-than-temporarily impaired. In November 2005, the FASB approved the      issuance of FASB Staff Position FAS No. 115-1 and FAS 124-1, "The Meaning      of Other-Than-Temporary Impairment and Its Application to Certain      Investments." The FSP addresses when an investment is considered impaired,      whether the impairment is other-than-temporary and the measurement of an      impairment loss. The FSP also includes accounting considerations subsequent      to the recognition of an other-than-temporary impairment and requires      certain disclosures about unrealized losses that have not been recognized      as other-than-temporary. The FSP is effective for reporting periods      beginning after December 15, 2005 with earlier application permitted. For      the Corporation, the effective date will be the first quarter of fiscal      2006. The adoption of this accounting principle is not expected to have a      significant impact on our financial position or results of operations.       In July 2005, the FASB issued a proposed interpretation of FAS 109,      "Accounting for Income Taxes," to clarify certain aspects of accounting for      uncertain tax positions, including issues related to the recognition and      measurement of those tax positions. If adopted as proposed, any adjustments      required to be recorded as a result of adopting the interpretation would be      reflected as a cumulative effect from a change in accounting principle. We      are currently in the process of determining the impact of adoption of the      interpretation as proposed on our financial position or results of      operations.                                          10   NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 2 - CASH AND DUE FROM BANKS  Regulations of the Board of Governors of the Federal Reserve System impose uniform reserve requirements on all depository institutions with transaction accounts (checking accounts, NOW accounts, etc.). Reserves are maintained in the form of vault cash or a non-interest bearing balance held with the Federal Reserve Bank. The Bank also, from time to time, maintains deposits with the Federal Reserve Bank and other banks for various services such as check clearing. The reserve requirement at December 31, 2005 and 2004 was $520,000 and $454,000, respectively.  NOTE 3 - SECURITIES  The amortized cost and fair values of securities are as follows:                                                           DECEMBER 31, 2005                                          ---------------------------------------------                                                         GROSS        GROSS                                          AMORTIZED   UNREALIZED   UNREALIZED    FAIR                                             COST        GAINS       LOSSES     VALUE                                          ---------   ----------   ----------   -------                                                          (IN THOUSANDS)      SECURITIES AVAILABLE FOR SALE:    Mortgage-backed securities             $42,731      $   14      $(1,293)    $41,452    Equity securities                          569          --           --         569                                           -------      ------      -------     -------                                           $43,300      $   14      $(1,293)    $42,021                                           =======      ======      =======     =======  SECURITIES HELD TO MATURITY:    Obligations of U.S. Government       agencies                            $29,683      $   --      $  (781)    $28,902    Obligations of states and political       subdivisions                         45,424       1,217          (63)     46,578    Corporate securities                     1,848          38         (124)      1,762    Mortgage-backed securities               1,968          40           (2)      2,006                                           -------      ------      -------     -------                                           $78,923      $1,295      $  (970)    $79,248                                           =======      ======      =======     =======                                           11    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 3 - SECURITIES (CONTINUED)                                                           DECEMBER 31, 2004                                          ---------------------------------------------                                                         GROSS        GROSS                                          AMORTIZED   UNREALIZED   UNREALIZED    FAIR                                             COST        GAINS       LOSSES     VALUE                                          ---------   ----------   ----------   -------                                                          (IN THOUSANDS)      SECURITIES AVAILABLE FOR SALE:    Mortgage-backed securities             $43,976      $   92       $(593)     $43,475    Equity securities                          673          --          --          673                                           -------      ------       -----      -------                                           $44,649      $   92       $(593)     $44,148                                           =======      ======       =====      =======  SECURITIES HELD TO MATURITY:    Obligations of U.S. Government       agencies                            $27,162      $   53       $(124)     $27,091    Obligations of states and political       subdivisions                         46,425       2,039         (42)      48,422    Corporate securities                     2,597          84          (9)       2,672    Mortgage-backed securities               3,135          96          --        3,231                                           -------      ------       -----      -------                                           $79,319      $2,272       $(175)     $81,416                                           =======      ======       =====      =======   The amortized cost and fair values of securities at December 31, 2005, 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     FAIR    AMORTIZED     FAIR                                             COST      VALUE       COST      VALUE                                          ---------   -------   ---------   -------                                                        (IN THOUSANDS)      Due in one year or less                   $    --    $    --    $   200    $   201 Due after one year through five years          --         --      5,255      5,213 Due after five years through ten years         --         --     31,391     31,393 Due after ten years                            --         --     40,109     40,435                                           -------    -------    -------    -------                                                --         --     76,955     77,242 Mortgage-backed securities                 42,731     41,452      1,968      2,006 Equity securities                             569        569         --         --                                           -------    -------    -------    -------                                           $43,300    $42,021    $78,923    $79,248                                           =======    =======    =======    =======   There were no sales of securities during 2005, 2004, and 2003.                                          12    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 3 - SECURITIES (CONTINUED)  The changes in net unrealized holding gains (losses) on securities available for sale that have been included in other comprehensive income (loss) for the years ended December 31, 2005, 2004, and 2003 are as follows:                                                 2005    2004    2003                                             -----   -----   -----                                                 (IN THOUSANDS)     Gross change in unrealized gains (losses)    on securities available for sale         $(778)  $(310)  $(223) Reclassification adjustment for gains    realized in income                          --      --      --                                             -----   -----   -----    Net Unrealized Losses                     (778)   (310)   (223) Tax effect                                    265     105      76                                             -----   -----   -----    Net of Tax Amount                        $(513)  $(205)  $(147)                                             =====   =====   =====   Securities with an amortized cost and fair value of approximately $3,586,000 and $3,498,000 at December 31, 2005 and $3,450,000 and $3,442,000 at December 31, 2004 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 December 31, 2005 and 2004:                                                LESS THAN 12 MONTHS     12 MONTHS OR MORE            TOTAL                                            --------------------   --------------------   --------------------                                              FAIR    UNREALIZED     FAIR    UNREALIZED     FAIR    UNREALIZED                                             VALUE      LOSSES      VALUE      LOSSES      VALUE      LOSSES                                            -------   ----------   -------   ----------   -------   ----------                                                                      (IN THOUSANDS)        DECEMBER 31, 2005:    SECURITIES AVAILABLE FOR SALE:       Mortgage-backed securities           $10,181      $196      $29,332     $1,097     $39,513     $1,293    SECURITIES HELD TO MATURITY:       Obligations of U.S. Government          agencies                           26,006       677        2,896        104      28,902        781       Obligations of states and          political subdivisions              2,351        12        2,233         51       4,584         63       Corporate securities                     789        59          185         65         974        124       Mortgage-backed securities               383         2           --         --         383          2                                            -------      ----      -------     ------     -------     ------    TOTAL TEMPORARILY IMPAIRED SECURITIES   $39,710      $946      $34,646     $1,317     $74,356     $2,263                                            =======      ====      =======     ======     =======     ======                                           13   NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 3 - SECURITIES (CONTINUED)                                                    LESS THAN 12 MONTHS      12 MONTHS OR MORE            TOTAL                                                 --------------------   --------------------   --------------------                                                   FAIR    UNREALIZED     FAIR    UNREALIZED     FAIR    UNREALIZED                                                  VALUE      LOSSES      VALUE      LOSSES      VALUE      LOSSES                                                 -------   ----------   -------   ----------   -------   ----------                                                                           (IN THOUSANDS)        DECEMBER 31, 2004:    SECURITIES AVAILABLE FOR SALE:       Mortgage-backed securities                $21,001      $302      $15,654      $291      $36,655      $593    SECURITIES HELD TO MATURITY:       Obligations of U.S. Government agencies     4,484        16        6,392       108       10,876       124       Obligations of states and          political subdivisions                     255         5        2,520        37        2,775        42       Corporate securities                          493         7          248         2          741         9                                                 -------      ----      -------      ----      -------      ----       TOTAL TEMPORARILY IMPAIRED SECURITIES     $26,233      $330      $24,814      $438      $51,047      $768                                                 =======      ====      =======      ====      =======      ====   Unrealized losses detailed above relate primarily to U.S. Government agency mortgage-backed securities, U.S. Government agency obligations, and municipal securities. The Corporation had 153 and 90 securities in an unrealized loss position at December 31, 2005 and 2004, 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. None of the individual unrealized losses are significant.  NOTE 4 - LOANS  The composition of the Corporation's loan portfolio at December 31, 2005 and 2004 is as follows:                                  2005       2004                             --------   --------                                (IN THOUSANDS)    Commercial                   $ 4,832    $ 4,095 Commercial real estate        16,440     13,925 Residential real estate       37,057     36,115 Real estate construction         384      1,376 Home equity                   17,072     14,560 Other consumer                 7,257      6,907                              -------    -------                               83,042     76,978 Allowance for loan losses       (657)      (663)                              -------    -------                              $82,385    $76,315                              =======    =======                                           14    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 5 - ALLOWANCE FOR LOAN LOSSES  Transactions in the allowance for loan losses are summarized as follows:                                                    2005   2004   2003                                                 ----   ----   ----                                                   (IN THOUSANDS)     Balance, beginning                              $663   $637   $564    Provisions for loan losses                     --     36     88    Recoveries on loans previously charged off      7     15     18    Loans charged off                             (13)   (25)   (33)                                                 ----   ----   ---- Balance, ending                                 $657   $663   $637                                                 ====   ====   ====   Loans on which the accrual of interest has been discontinued amounted to $-0- and $126,000 at December 31, 2005 and 2004, respectively. Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full, amounted to $67,000 and $63,000 at December 31, 2005 and 2004, respectively.  There were no impaired loans as of December 31, 2005 and 2004. The average recorded investment in impaired loans during 2005, 2004 and 2003 was $-0-, $-0-, and $-0-, respectively.  NOTE 6 - PREMISES AND EQUIPMENT  The following summarizes premises and equipment at December 31, 2005 and 2004:                                          2005      2004                                     -------   -------                                       (IN THOUSANDS)    Premises                            $ 2,633   $ 2,607 Furniture, fixtures and equipment     1,957     1,574                                     -------   -------                                       4,590     4,181 Accumulated depreciation             (2,279)   (2,111)                                     -------   -------                                       2,311     2,070 Land                                    238       238                                     -------   -------                                     $ 2,549   $ 2,308                                     =======   =======                                           15    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 7 - INTEREST BEARING DEPOSITS  Interest bearing deposits include certificates of deposit issued in denominations of $100,000 or greater which amounted to $30,852,000 and $25,191,000 at December 31, 2005 and 2004, respectively.  Interest bearing deposits at December 31, 2005 and 2004 are further detailed as follows:                                             2005       2004                                        --------   --------                                           (IN THOUSANDS)    Savings accounts                       $ 55,531   $ 67,703 NOW accounts                              9,106      9,174 Certificates and other time deposits     91,727     80,593                                        --------   --------                                        $156,364   $157,470                                        ========   ========   Time deposits at December 31, 2005 had the following scheduled maturities (in thousands):     2006      $35,894 2007       21,461 2008        8,583 2009        8,113 2010       17,676           -------           $91,727           =======   NOTE 8 - BORROWING CAPACITY  The Bank has a line of credit commitment available from Atlantic Central Bankers Bank for borrowings up to $4,000,000 in federal funds. Borrowings on this line are repaid on a daily basis. There were no borrowings under this line of credit as of December 31, 2005 and 2004.  The Bank's maximum borrowing capacity with the Federal Home Loan Bank was $100,709,000. There were no borrowings outstanding at December 31, 2005 and 2004. Advances from the Federal Home Loan Bank are secured by qualifying assets of the Bank.                                          16   NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 9 - INCOME TAXES  The components of the net deferred tax asset at December 31, 2005 and 2004 are as follows:                                                           2005   2004                                                        ----   ----                                                      (IN THOUSANDS)    AMT credit carryforward                                $300   $247 Unrealized losses on securities available for sale      436    171 Allowance for loan losses                               172    174 Accrued benefits                                         12     10                                                        ----   ----    TOTAL DEFERRED TAX ASSETS                            920    602                                                        ----   ---- Securities accretion                                     21     16 Depreciation                                             17     23                                                        ----   ----    TOTAL DEFERRED TAX LIABILITIES                        38     39                                                        ----   ----    NET DEFERRED TAX ASSET                              $882   $563                                                        ====   ====   The income tax provision for financial reporting purposes differs from the amount computed by applying the statutory income tax rate to income before income taxes. The differences for the years ended December 31, 2005, 2004, and 2003 are as follows:                                          2005              2004              2003                                 ---------------   ---------------   ---------------                                           % OF              % OF              % OF                                          PRETAX            PRETAX            PRETAX                                 AMOUNT   INCOME   AMOUNT   INCOME   AMOUNT   INCOME                                 ------   ------   ------   ------   ------   ------                                                (DOLLARS IN THOUSANDS)        Tax at statutory rate           $1,242     34%    $1,296     34%    $1,059     34% Increase (decrease) resulting    from:    Tax-exempt interest income     (735)   (20)      (756)   (20)      (799)   (26)    TEFRA interest expense       disallowance                  70      2         67      2         81      3                                 ------    ---     ------    ---     ------    ---                                 $  577     16%    $  607     16%    $  341     11%                                 ======    ===     ======    ===     ======    ===                                           17    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 10 - RELATED PARTY TRANSACTIONS  Some of the Corporation's or the Bank's directors, principal officers, principal shareholders and their related interests had transactions with the Bank in the ordinary course of business. All loans and loan commitments were made on substantially the same terms, including collateral and interest rates, as those prevailing at the time for comparable transactions. In the opinion of management, these transactions do not involve more than normal risk of collectibility or present other unfavorable features. It is anticipated that further such extensions of credit will be made in the future.  The following is an analysis of loans to these related parties during 2005 (in thousands):     Balances, January 1, 2005     $  978    Advances                    1,295    Repayments                    298                               ------ Balances, December 31, 2005   $1,975                               ======   NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK  The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.  The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written is represented by the contract or notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table identifies the contract or notional amount of those instruments at December 31, 2005 and 2004:                                                  2005     2004                                              ------   ------                                               (IN THOUSANDS)    Commitments to grant loans                   $1,934   $3,099 Unfunded commitments under lines of credit    3,714    3,350 Letters of credit                               361      704                                              ------   ------                                              $6,009   $7,153                                              ======   ======   Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.                                          18    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)  Outstanding letters of credit written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Corporation requires collateral supporting these letters of credit as deemed necessary. The maximum undiscounted exposure related to these commitments at December 31, 2005 and 2004 was $361,000 and $704,000, respectively. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2005 and 2004 for guarantees under standby letters of credit issued is not material.  NOTE 12 - DIVIDEND RESTRICTIONS  The amount of funds available to a parent from its subsidiary bank is limited for all national banks by restrictions imposed by the Comptroller of the Currency. A national bank is required to obtain the approval of the Comptroller of the Currency if the total of all dividends declared in any calendar year exceeds the Bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the Bank can declare dividends in 2006 of approximately $4,919,000 plus an additional amount equal to the Bank's net profits for 2006, up to the date of any such dividend declaration.  NOTE 13 - CAPITAL REQUIREMENTS  The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weighting and other factors.  Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the tables below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2005, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.  As of December 31, 2005, the most recent notification from the regulatory agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category.                                          19   NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 13 - CAPITAL REQUIREMENTS (CONTINUED)  The Corporation and Bank's actual capital ratios as of December 31, 2005 and 2004, and the maximum ratios required for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions are as follows:                                                                                                           TO BE WELL                                                                                                     CAPITALIZED UNDER                                                                     FOR CAPITAL ADEQUACY            PROMPT CORRECTIVE                                                     ACTUAL                PURPOSES                  ACTION PROVISIONS                                                ---------------   --------------------------   ----------------------------                                                 AMOUNT   RATIO       AMOUNT         RATIO         AMOUNT          RATIO                                                -------   -----   -------------   ----------   --------------   -----------                                                                           (DOLLARS IN THOUSANDS)        AS OF DECEMBER 31, 2005:    Total capital (to risk-weighted       assets):       Neffs Bancorp, Inc.                      $40,795   41.6%   $> or = 7,840   > or = 8.0%               N/A       The Neffs National Bank                   40,278   41.2     > or = 7,817   > or = 8.0   $> or =  9,771   > or = 10.0%    Tier 1 capital (to risk-weighted assets):       Neffs Bancorp, Inc.                       40,138   41.0     > or = 3,920   > or = 4.0                N/A       The Neffs National Bank                   39,621   40.6     > or = 3,908   > or = 4.0    > or =  5,862   > or =  6.0    Tier 1 capital (to average assets):       Neffs Bancorp, Inc.                       40,138   18.9     > or = 8,493   > or = 4.0                N/A       The Neffs National Bank                   39,621   18.7     > or = 8,493   > or = 4.0    > or = 10,616   > or =  5.0  AS OF DECEMBER 31, 2004:    Total capital (to risk-weighted       assets):       Neffs Bancorp, Inc.                      $38,310   41.2%   $> or = 7,440   > or = 8.0%               N/A       The Neffs National Bank                   37,918   40.9     > or = 7,419   > or = 8.0   $> or =  9,273   > or = 10.0%    Tier 1 capital (to risk-weighted assets):       Neffs Bancorp, Inc.                       37,647   40.4     > or = 3,720   > or = 4.0                N/A       The Neffs National Bank                   37,255   40.2     > or = 3,709   > or = 4.0    > or =  5,564   > or =  6.0    Tier 1 capital (to average assets):       Neffs Bancorp, Inc.                       37,647   18.0     > or = 8,346   > or = 4.0                N/A       The Neffs National Bank                   37,255   17.9     > or = 8,346   > or = 4.0    > or = 10,433   > or =  5.0   NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS  Below are various estimated fair values at December 31, 2005 and 2004, 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.                                          20    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)  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:  CASH AND DUE FROM BANKS, INTEREST BEARING DEPOSITS WITH BANKS AND FEDERAL FUNDS SOLD       The statement of financial condition carrying amounts for cash and due from      banks, interest bearing deposits with banks and federal funds sold      approximate the estimated fair values of such assets.  SECURITIES       Fair values for securities held to maturity and securities available for      sale are based on quoted market prices, if available. If quoted market      prices are not available, fair values are based on quoted market prices of      comparable instruments. The carrying amount of restricted equity      securities, such as Federal Reserve Bank stock, Atlantic Central Bankers      Bank stock and Federal Home Loan Bank stock, is considered a reasonable      estimate of fair value.  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.                                          21    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)  The estimated fair value of the Corporation's financial instruments at December 31 are as follows:                                               2005                   2004                                    --------------------   --------------------                                               ESTIMATED              ESTIMATED                                    CARRYING      FAIR     CARRYING      FAIR                                     AMOUNT      VALUE      AMOUNT      VALUE                                    --------   ---------   --------   ---------                                                   (IN THOUSANDS)      Financial assets:    Cash and short-term       investments                  $  5,469    $  5,469   $  5,877    $  5,877    Securities available for sale     42,021      42,021     44,148      44,148    Securities held to maturity       78,923      79,248     79,319      81,416    Loans, net                        82,385      81,548     76,315      77,766    Accrued interest receivable        1,213       1,213      1,185       1,185  Financial liabilities:    Deposits                         173,276     173,344    171,652     172,669    Accrued interest payable             902         902        770         770  Off-balance sheet financial    instruments:    Commitments to extend credit       and letters of credit              --          --         --          --                                           22    NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 15 - CONDENSED FINANCIAL INFORMATION OF NEFFS BANCORP, INC. (PARENT ONLY)  BALANCE SHEETS                                                     DECEMBER 31,                                               -----------------                                                 2005      2004                                               -------   -------                                                 (IN THOUSANDS)                       ASSETS  Cash                                          $   243   $    32 Investment in subsidiary                       38,778    36,925 Premises and equipment                            260       254 Other assets                                       34       125                                               -------   -------    TOTAL ASSETS                               $39,315   $37,336                                               =======   =======       LIABILITY AND STOCKHOLDERS' EQUITY  Liability, accounts payable                   $    21   $    20 Stockholders' equity                           39,294    37,316                                               -------   -------    TOTAL LIABILITY AND STOCKHOLDERS' EQUITY   $39,315   $37,336                                               =======   =======   STATEMENTS OF INCOME                                                     YEARS ENDED DECEMBER 31,                                                  ------------------------                                                   2005     2004     2003                                                  ------   ------   ------                                                       (IN THOUSANDS)     Dividends from subsidiary                        $  788   $  739   $  587 Rental income                                         7        8       10 Expenses                                            122      140       68                                                  ------   ------   ------    INCOME BEFORE INCOME TAXES AND EQUITY IN       UNDISTRIBUTED EARNINGS OF SUBSIDIARY          673      607      529 Income tax benefit                                   33       45       20                                                  ------   ------   ------                                                     706      652      549 Equity in undistributed earnings of subsidiary    2,366    2,553    2,225                                                  ------   ------   ------    NET INCOME                                    $3,072   $3,205   $2,774                                                  ======   ======   ======                                           23   NEFFS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 15 - CONDENSED FINANCIAL INFORMATION OF NEFFS BANCORP, INC. (PARENT ONLY) (CONTINUED)  STATEMENTS OF CASH FLOWS                                                             YEARS ENDED DECEMBER 31,                                                        ---------------------------                                                          2005      2004      2003                                                        -------   -------   -------                                                               (IN THOUSANDS)     CASH  FLOWS FROM OPERATING ACTIVITIES    Net income                                          $ 3,072   $ 3,205   $ 2,774    Adjustments to reconcile net income to       net cash provided by operating activities:       Depreciation                                           9         7         6       Equity in undistributed earnings of subsidiary    (2,366)   (2,553)   (2,225)       (Increase) decrease in other assets                   91       (44)      (20)       Increase in other liabilities                          1        19        --                                                        -------   -------   -------       NET CASH PROVIDED BY OPERATING ACTIVITIES            807       634       535                                                        -------   -------   ------- CASH FLOWS USED IN INVESTING ACTIVITIES    Purchases of premises and equipment                     (15)       (2)       --                                                        -------   -------   ------- CASH FLOWS USED IN FINANCING ACTIVITIES    Dividends paid                                         (788)     (739)     (531)    Sale of treasury stock                                  207        --       134                                                        -------   -------   -------       NET CASH USED IN FINANCIAL ACTIVITIES               (581)     (739)     (397)                                                        -------   -------   -------       NET INCREASE (DECREASE) IN CASH                      211      (107)      138 CASH - BEGINNING                                            32       139         1                                                        -------   -------   ------- CASH - ENDING                                          $   243   $    32   $   139                                                        =======   =======   =======                                           24    NEFFS BANCORP, INC. AND SUBSIDIARY SELECTED FINANCIAL DATA  The following financial information is not covered by the auditor's report and must be read in conjunction with the consolidated financial statements and related notes along with Management's Discussion and Analysis of Financial Condition and Results of Operations.                                                       AT OR FOR THE YEAR ENDED DECEMBER 31,                                            ----------------------------------------------------                                              2005       2004       2003       2002       2001                                            --------   --------   --------   --------   --------                                                (Dollars in Thousands, Except Per Share Data)       Interest Income    Interest and fees on loans              $  5,001   $  4,747   $  5,044   $  5,470   $  5,813    Interest an dividends on securities        5,371      5,233      4,461      4,699      4,165    Interest on federal funds sold                82         67        128        133         98                                            --------   --------   --------   --------   -------- Total interest income                        10,454     10,047      9,633     10,302     10,076 Interest Expense    Deposits                                   4,469      4,082      4,434      4,977      5,095    Short-term borrowings                         --         --         --         --          3                                            --------   --------   --------   --------   -------- Total interest expense                        4,469      4,082      4,434      4,977      5,098                                            --------   --------   --------   --------   -------- Net interest income                           5,985      5,965      5,199      5,325      4,978 Provision for loan losses                        --         36         88        170         37                                            --------   --------   --------   --------   -------- Net interest income after provision    for loan losses                            5,985      5,929      5,111      5,155      4,941 Other operating income                          276        268        273        287        269 Other operating expense                       2,612      2,385      2,269      1,986      1,990                                            --------   --------   --------   --------   -------- Income before taxes                           3,649      3,812      3,115      3,456      3,220 Applicable income taxes                         577        607        341        641        706                                            --------   --------   --------   --------   -------- Net income                                 $  3,072   $  3,205   $  2,774   $  2,815   $  2,514                                            ========   ========   ========   ========   ======== PER SHARE DATA    Basic earnings                          $  15.58   $  16.26   $  14.11   $  14.33   $  12.80    Dividends declared                      $   4.00   $   3.75   $   2.70   $   3.10   $   2.20    Average shares outstanding               197,117    197,091    196,529    196,431    196,474 AT END OF PERIOD    Total assets                            $213,547   $209,803   $198,570   $180,293   $156,449    Securities                               120,944    123,467    110,087     94,397     75,654    Loans, net of unearned income             83,042     76,978     70,886     69,598     72,616    Allowance for loan losses                    657        663        637        564        445    Deposits                                 173,276    171,652    162,694    146,535    124,932    Stockholders' equity                      39,294     37,316     35,055     32,825     30,498 KEY RATIOS    Return on average assets                    1.46%      1.57%      1.45%      1.67%      1.70%    Return on average equity                    8.08%      8.89%      8.16%      8.85%      8.49%    Net loans to deposit ratio                 47.55%     44.46%     43.18%     47.11%     57.77%    Dividend payout ratio (dividends       declared divided by net income)         25.66%     23.06%     19.14%     21.63%     17.19%    Equity to asset ratio (average equity       divided by average total assets)        17.95%     17.56%     17.73%     18.93%     20.06%                                           25    NEFFS BANCORP, INC. AND SUBSIDIARY QUARTERLY SUMMARY OF FINANCIAL DATA (UNAUDITED)                                                      2005 Three Months Ended                                       -----------------------------------------------                                       March 31   June 30   September 30   December 31                                       --------   -------   ------------   -----------                                        (Dollars in Thousands, Except Per Share Data)      Interest income                        $2,569     $2,600      $2,645         $2,640 Interest expense                        1,036      1,108       1,171          1,154                                        ------     ------      ------         ------   Net interest income                   1,533      1,492       1,474          1,486 Provision for loan losses                  --         --          --             -- Other expenses, net of other income       517        584         608            627                                        ------     ------      ------         ------   Income before income taxes            1,016        908         866            859 Income tax expense                        178        139         127            133                                        ------     ------      ------         ------   Net income                           $  838     $  769      $  739         $  726                                        ======     ======      ======         ====== Earnings per share-Basic               $ 4.25     $ 3.90      $ 3.75         $ 3.68                                                      2004 Three Months Ended                                       -----------------------------------------------                                       March 31   June 30   September 30   December 31                                       --------   -------   ------------   -----------                                        (Dollars in Thousands, Except Per Share Data)      Interest income                        $2,456     $2,511      $2,518         $2,562 Interest expense                        1,053        996       1,006          1,027                                        ------     ------      ------         ------   Net interest income                   1,403      1,515       1,512          1,535 Provision for loan losses                  15         15           6             -- Other expenses, net of other income       501        582         496            538                                        ------     ------      ------         ------   Income before income taxes              887        918       1,010            997 Income tax expense                        123        142         178            164                                        ------     ------      ------         ------   Net income                           $  764     $  776      $  832         $  833                                        ======     ======      ======         ====== Earnings per share-Basic               $ 3.88     $ 3.94      $ 4.22         $ 4.22                                           26   NEFFS BANCORP, INC. AND SUBSIDIARY COMMON STOCK INFORMATION  The Corporation's common stock is currently quoted on the National Quotations Bureau's Electronic Quotation Service "(Pink Sheets") under the trading symbol NEFB. The Corporation's common stock is traded over-the-counter from time to time, primarily in the Corporation's geographic service area, through several local market makers.  The following table sets forth the high and low bid quotations for the Corporation's common stock as reported for each quarterly period of the 2005 and 2004 fiscal years. This information is based on monthly reports from Boenning & Scattergood, Inc. There may have been other bids or transactions not known to the Corporation. The quotations reflect inter-dealer prices, do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.                              Common Stock Information                                         Cash Dividends      2005          HIGH      LOW       Per Share      ----        -------   -------   -------------     First Quarter    $230.00   $230.00          -- Second Quarter   $235.00   $230.00       $2.00 Third Quarter    $236.00   $235.00          -- Fourth Quarter   $243.00   $240.00       $2.00                                         Cash Dividends      2005          HIGH      LOW       Per Share      ----        -------   -------   -------------     First Quarter    $240.00   $225.00          -- Second Quarter   $230.00   $225.00       $1.75 Third Quarter    $225.00   $225.00          -- Fourth Quarter   $230.00   $228.00       $2.00   As of December 31, 2005, Neffs Bancorp, Inc. had 197,941 outstanding shares and approximately 615 stockholders, including beneficial owners whose stock is held in nominee name.                                          27    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS                  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                        CONDITION AND RESULTS OF OPERATIONS                  Years Ending December 31, 2005, 2004, and 2003  The following is management's discussion and analysis of the significant changes in the financial condition and results of operations of Neffs Bancorp, Inc. (the "Corporation") and it's wholly owned subsidiary The Neffs National Bank (the "Bank"). The consolidated financial condition and results of operations consist almost entirely of the Bank's financial condition and results of operations. This discussion should be read in conjunction with the financial tables, consolidated financial statements and notes to consolidated financial statements appearing elsewhere in this report. Current performance does not guarantee, assure or may not be indicative of similar performance in the future.  We have made forward-looking statements in this document and in documents that we incorporated by reference that are subject to risk and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of the Corporation and the Bank. When we use words such as "believes", "expects", "anticipates" or other similar expressions, we are making forward-looking statements.  Stockholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that we incorporate by reference, could affect the future financial results of the Bank and could cause those results to differ materially from those expressed in our forward-looking statements contained or incorporated by reference in this document. These factors include the following:       -    operating, legal and regulatory risks,       -    economic, political and competitive forces affecting our Banking           business, and       -    the risk that our analysis 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 of the consolidated financial statements. Certain of these policies are particularly sensitive requiring significant judgments, estimates and assumptions to be made by management. The allowance for loan losses is the critical accounting policy that requires significant management judgment.  Management, in determining the allowance for loan losses, makes significant estimates. Consideration is given to a variety of factors in establishing this estimate. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers' perceived financial and managerial strengths, the adequacy of the underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since the sufficiency of the allowance for loan losses is dependent, to a great extent on conditions that may be beyond our control, it is possible that management's estimates of the allowance for loan losses and actual results could differ in the near term. In addition, regulatory authorities, as an integral part of their examination, periodically review the allowance for loan losses. They may require additions to the allowance based upon their judgments about                                          28    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  information available to them at the time of examination. Future increases to our allowance for loan losses, whether due to unexpected changes in economic conditions or otherwise, would adversely affect our future results of operations.  OVERVIEW  2005 brought about exciting new products at The Neffs National Bank. The Bank added internet banking, which included numerous features such as automatic bill payment service, online statements that are compatible with personal and commercial financial software, online check images, capabilities to research all transactions and standard features such as transfers and stop payments, etc. In addition to internet banking, the Bank implemented check imaging in place of mailing the original checks and upgraded the existing telephone banking service. These services were promoted through an advertising campaign, "I Bank. We Bank", that also emphasized the Bank's commitment to customer service and competitiveness as a community bank. Other promotional incentives included drawings for a free computer and Certificate of Deposit and loan specials.  The Corporation's assets increased by 1.78% to $213,547,000 at December 31, 2005 from $209,803,000 at December 31, 2004. During the same period, net loans receivable increased $6,070,000 or 7.95% to $82,385,000 from $76,315,000, while deposits increased $1,624,000 or .95% to $173,276,000 from $171,652,000. Securities decreased $2,523,000 or 2.04% to $120,944,000 from $123,467,000. In 2005, the Corporation recorded net income of $3,072,000, a decrease of 4.15% as compared with $3,205,000 in 2004.  RESULTS OF OPERATIONS  NET INTEREST INCOME AND NET INTEREST MARGIN  The single largest component of the Corporation's primary operating income is net interest income. It is the amount by which interest earned on interest earning assets exceeds the interest paid on interest bearing liabilities. The change in interest income from year to year may be due to changes in interest rates, changes in volumes on interest earning assets and liabilities as well as changes in the mix of such assets and liabilities. The Corporation's primary interest earning assets are loans to businesses and individuals and investment securities. Interest bearing liabilities consist primarily of time deposits, NOW deposits and savings deposits. Generally, changes in net interest income are measured by net interest rate spread and net interest margin. Net interest rate spread is equal to the difference between the average rate earned on interest earning assets and the average rate incurred on interest bearing liabilities. Net interest margin represents the difference between interest income (including net loan fees earned) and interest expense calculated as a percentage of average earning assets.  2005 COMPARED TO 2004  Total interest income increased by $407,000 or 4.05% to $10,454,000 for the year ended December 31, 2005 from $10,047,000 at December 31, 2004. This increase is mostly the result of the loan portfolio increasing by $6.1 million which generated additional interest and fees on loans throughout 2005.  Total interest expense increased by $387,000 or 9.48% to $4,469,000 in 2005 from $4,082,000 in 2004. This increase in interest expense is due mainly in part to the increasing interest rate environment experienced throughout 2005.  Net interest income increased by $20,000 or .34% to $5,985,000 in 2005 from $5,965,000 in 2004. The Corporation's net interest rate spread for 2005 was 2.25% as compared to 2.47% for 2004. The net interest margin for 2005 was 2.92% as compared to 3.03% for 2004.                                          29    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  2004 COMPARED TO 2003  Total interest income increased by $414,000 or 4.29% to $10,047,000 for the year ended December 31, 2004 from $9,633,000 for the year ended December 31, 2003. This increase is the result of an increase in interest earning assets during 2004 which offset a decline in the yield on interest earning assets.  Total interest expense decreased by $352,000 or 7.93% to $4,082,000 in 2004 from $4,434,000 in 2003. This decrease was the result of a decrease in the yield on interest bearing liabilities which offset the growth in interest bearing liabilities.  Net interest income increased by $766,000 or 14.73% to $5,965,000 in 2004 from $5,199,000 in 2003. The Corporation's net interest rate spread increased to 2.47% in 2004 from 2.15% in 2003. The net interest margin increased from 2.83% in 2003 to 3.03% in 2004.  Following is a summary of the Bank's average balances, rates, interest income, and expenses, the interest rate spread and the net interest margin for the years ended December 31, 2005, 2004, and 2003                                                                            Year Ended December 31,                                        ----------------------------------------------------------------------------------------                                                    2005                          2004                          2003                                        ----------------------------  ----------------------------  ----------------------------                                          Average             Yield/    Average             Yield/    Average             Yield/                                        Balance(1)  Interest   Rate   Balance(1)  Interest   Rate   Balance(1)  Interest  Rate                                        ----------  --------  ------  ----------  --------  ------  ----------  --------  ------                                                                         (Dollars in Thousands)           Interest Earning Assets:    Loan receivable(2)                   $ 79,294    $ 5,001   6.31%   $ 72,744    $ 4,747   6.53%   $ 69,730    $5,044    7.26%    Investment Securities:       Taxable                             77,177      3,313   4.29%     71,430      3,075   4.30%     53,471     2,193    4.10%       Non-taxable(3)                      45,980      2,058   4.48%     47,640      2,158   4.53%     50,269     2,268    4.51%    Other interest earning assets           2,411         82   3.40%      4,982         67   1.34%     10,234       128    1.25%                                         --------    -------   ----    --------    -------   ----    --------    ------    ----    Total interest earning assets         204,862     10,454   5.10%    196,796     10,047   5.11%    183,704     9,633    5.24%                                                     -------                       -------                       ------ Noninterest earning assets                 7,067                         8,517                         8,084                                         --------                      --------                      --------    Total assets                         $211,929                      $205,313                      $191,788                                         ========                      ========                      ========  Interest Bearing Liabilities:    NOW                                  $  8,373         87   1.04%   $  8,426         56   0.66%   $  8,495        72    0.85%    Savings                                62,033      1,000   1.61%     68,955      1,074   1.56%     59,144     1,140    1.93%    Certificates of Deposit                86,372      3,382   3.92%     77,508      2,952   3.81%     76,063     3,222    4.24%                                         --------    -------   ----    --------    -------   ----    --------    ------    ----    Total interest bearing liabilities    156,777      4,469   2.85%    154,889      4,082   2.64%    143,702     4,434    3.09%                                                     -------                       -------                       ------ Noninterest bearing liabilities:    Demand deposits                        16,133                        13,565                        13,276    Other liabilities                         993                           816                           801 Stockholders' Equity                      38,046                        36,043                        34,009                                         --------                      --------                      --------    Total liabilities and       Stockholders' Equity              $211,929                      $205,313                      $191,788                                         ========                      ========                      ========  Net interest income/spread(4)                       $ 5,985   2.25%               $ 5,965   2.47%               $5,199    2.15%                                                     =======                       =======                       ====== Net interest margin(5)                                        2.92%                         3.03%                         2.83%   - ---------- (1)  Averages are not computed on daily average. Average balances are computed      based on an average of quarter-end balances.  (2)  Average balances include non-accrual loans.  (3)  There have been no tax equivalent adjustments made to yields.  (4)  Interest rate spread represents the difference between the average yield on      interest earning assets and the average cost of interest bearing      liabilities.  (5)  Net interest margin represents net interest income as a percentage of      average interest earning assets.                                          30   NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  The following table attributes increases and decreases in components of net interest income either to changes in average volume or to changes in average rates for interest earning assets and interest bearing liabilities. Numerous and simultaneous balance and rate changes occur during the year. The amount of change that is not due solely to volume or rate is allocated proportionally to each.                                                         FOR YEAR ENDED DECEMBER 31,                                            -----------------------------------------------                                                   2005/2004                2004/2003                                              INCREASE/(DECREASE)      INCREASE/(DECREASE)                                            ----------------------   ----------------------                                               DUE TO CHANGE IN         DUE TO CHANGE IN                                            VOLUME    RATE    NET    VOLUME    RATE    NET                                            ------   -----   -----   ------   -----   -----                                                           (In Thousands)        Interest Income:    Loans receivable                        $ 417    $(163)   $254    $211    $(508)  $(297)    Securities                                178      (40)    138     672      100     772    Other interest earning assets             (48)      63      15     (70)       9     (61)                                            -----    -----    ----    ----    -----   -----    Total interest earning assets             547     (140)    407     813     (399)    414 Interest Expense:    NOW                                        --       31      31      (1)     (15)    (16)    Savings                                  (111)      37     (74)    172     (238)    (66)    Certificates of Deposit                   345       85     430      60     (330)   (270)                                            -----    -----    ----    ----    -----   -----       Total interest bearing liabilities     234      153     387     231     (583)   (352)                                            -----    -----    ----    ----    -----   ----- Net change in net interest income          $ 313    $(293)   $ 20    $582    $ 184   $ 766                                            =====    =====    ====    ====    =====   =====   PROVISION FOR LOAN LOSSES  Although the Corporation maintains sound credit practices, 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,       -    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.  Allocation 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                                          31    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  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.  There was no provision for loan losses made during 2005 as compared to $36,000 for 2004 and $88,000 for 2003. Management has concluded that the Allowance for Loan Losses had an adequate balance to justify no provision being made during 2005.  The Allowance for Loan Losses represented .79% of total loans receivable at December 31, 2005 as compared with .86% and .90% at December 31, 2004, and 2003, respectively. 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 Bank's loan loss experience for each of the five years ended December 31 is presented below.                                                             YEAR ENDED DECEMBER 31                                             -----------------------------------------------                                               2005      2004      2003      2002      2001                                             -------   -------   -------   -------   -------                                                          (Dollars in Thousands)       Average loans outstanding                   $79,294   $72,744   $69,730   $71,337   $71,928                                             =======   =======   =======   =======   ======= Total gross loans at year end               $83,042   $76,978   $70,886   $69,598   $72,615                                             =======   =======   =======   =======   =======  Allowance for loan losses at January 1      $   663   $   637   $   564   $   445   $   440 Losses charge to allowance    Commercial                                    --        --        --        27         7    Real estate                                   --        --        28        --         6    Consumer                                      13        25         5        30        24                                             -------   -------   -------   -------   -------    Total losses charged to allowance             13        25        33        57        37 Recoveries credited to allowance    Commercial                                    --        --         9        --        --    Real estate                                   --        --        --        --        --    Consumer                                       7        15         9         6         5                                             -------   -------   -------   -------   -------    Total recoveries credit to allowance           7        15        18         6         5                                             -------   -------   -------   -------   ------- Net charge-offs                                   6        10        15        51        32 Provision for loan losses                        --        36        88       170        37                                             -------   -------   -------   -------   ------- Allowance for loan losses at December 31    $   657   $   663   $   637   $   564   $   445                                             =======   =======   =======   =======   =======  Ratio of net charge offs to average loans    outstanding                                 0.01%     0.01%     0.02%     0.07%     0.04% Allowance as a percentage of total    gross loans                                 0.79%     0.86%     0.90%     0.81%     0.61%                                           32    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  The amount charged to operations and the related balance in the allowance for loan losses is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience and management's estimates of potential losses.  Management maintains an allowance for loan losses that it considers adequate based on the evaluation process that is performed on a quarterly basis. As part of this process, management considers it appropriate to maintain a portion of the allowance that is based on credit quality trends, loan volume, current economic trends and other uncertainties. This portion of the allowance for loan losses is reflected as the unallocated portion in the table below that indicates the distribution of the allowance as of the end of each of the last five years.                       2005             2004             2003             2002             2001               --------------   --------------   --------------   --------------   --------------                         % of             % of             % of             % of             % of               Amount    Loan   Amount    Loan   Amount    Loan   Amount    Loan   Amount    Loan               ------   -----   ------   -----   ------   -----   ------   -----   ------   -----                                             (Dollars in Thousands)            Commercial     $122    25.62%   $130    23.41%   $115    20.39%   $108    21.25%   $ 92    20.47% Real estate     271    45.08%    256    48.71%    246    50.20%    235    69.25%    262    70.87% Consumer        125    29.30%    135    27.88%    167    29.41%    126     9.50%     83     8.66% Unallocated     139              142              109               95                8                ----    -----    ----    -----    ----    -----    ----    -----    ----    ----- Total          $657      100%   $663      100%   $637      100%   $564      100%   $445      100%                ====    =====    ====    =====    ====    =====    ====    =====    ====    =====   NON-INTEREST INCOME  2005 COMPARED TO 2004  Non-interest income consists primarily of service charges. Non interest income for 2005 had an increase of $8,000 or 2.99% over 2004. Service charges on deposit accounts declined slightly; however, this decrease was offset by an increase in fees derived from the sale of loan related insurance and ATM fees.  2004 COMPARED TO 2003  Non-interest income consists primarily of service charges. Non-interest income for 2004 decreased $5,000 or 1.83% to $268,000 from $273,000 in 2003. The decrease was mainly the result of a slight reduction in other service charges and fees.  NON-INTEREST EXPENSE  Salary expense and employee benefits represent the largest component, or 47.55% of non-interest expenses. Non-interest expenses also include an array of other expenses such as:       -    occupancy and equipment expenses,       -    stationery, printing and Bank supplies,       -    advertising,       -    outside service providers, relating to data processing and ATM           services,       -    professional fees for legal, accounting, and consulting services,       -    cost associated with the due diligence process of extending and           maintaining loans and the collection process,       -    Pennsylvania shares tax and FDIC assessment, and       -    other types of expenses incurred as part of the normal course of           operation of the Bank.                                          33   NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  2005 COMPARED TO 2004  Non-interest expenses for 2005 were $2,612,000, an increase of $227,000 or 9.52% as compared to non-interest expense of $2,385,000 for 2004.  Salary and employee benefits represent the largest portion of non-interest expense. For 2005, salary and employee benefits increased by 9.23%; due to the constant increasing costs associated with health care coverage and normal salary increases paid to employees. At December 31, 2005, the Bank employed 32 full-time equivalent employees as compared to 31 at December 31, 2004.  Occupancy and equipment expenses increased by $65,000 or 21.74% to $364,000 as compared to $299,000 at December 31, 2004. The implementation of internet banking, bill pay and imaging resulted in additional maintenance, repair and depreciation expenses over those reported in 2004.  2004 COMPARED TO 2003  Non-interest expenses for 2004 were $2,385,000, representing an increase of $116,000 or 5.11%, compared to $2,269,000 for 2003.  Salary expenses and related employee benefits increased by $16,000 or 1.42%, to $1,137,000 for 2004 from $1,121,000 for 2003. The slight increase was mainly the result of an officer retiring at December 31, 2004; offset by the hiring of additional personnel; normal salary increases paid to employees and increased premium costs associated with group medical insurance. At December 31, 2004, there were 31 full-time equivalent employees as compared to 29 at December 31, 2003.  Occupancy and equipment expenses decreased by $17,000 or 5.37% to $299,000 from 2004 from $316,000 for 2003. The $17,000 decrease was the result of reduced occupancy expenses for 2004.  Other expenses increased $138,000 or 26.38% to $661,000 in 2004 from $523,000 in 2003. This increase mainly resulted from a $50,000 donation made to Northern Lehigh School District Education Foundation and legal and audit fees incurred for Securities and Exchange Commission filings.  INCOME TAXES  Income tax expense was $577,000 for 2005 as compared to $607,000 for 2004 and $341,000 for 2003. The 4.94% decrease experienced during 2005 resulted from the decline in pre-tax income. The 78.00% increase during 2004 was caused by a decline in tax-free interest income and an increase in pre-tax income. The Corporation's effective income tax rate for 2005, 2004 and 2003 was 16%, 16% and 11%, respectively.  NET INCOME  2005 COMPARED TO 2004  Net income for 2005 was $3,072,000, which is a decline of $133,000 or 4.15% as compared to 2004. During 2005 the Bank offered online banking and imaging to all its customers, in order to remain competitive amongst other financial institutions. The costs associated with implementing these new services and the advertising to promote the services, had a negative impact on the net income. However, the bank anticipates continued growth from providing these new services. The Bank's net interest income growth was relatively flat for 2005 over 2004 due to a decrease in the Bank's net interest spread and margin as the cost of interest-bearing deposits increased more than the yield on interest-bearing assets.  Basic Earning per share for 2005 decreased to $15.58 from $16.26 in 2004, due to the decline in the net income for 2005.                                          34    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  2004 COMPARED TO 2003  Net income for 2004 was $3,205,000, an increase of $431,000 or 15.53% from $2,774,000 for 2003. This increase is primarily the result of increased net interest income due to growth of the Bank and an improved net interest margin.  Basic Earnings per share for 2004 increased to $16.26 from $14.11 in 2003, due to the increase in net income for 2004.  FINANCIAL CONDITION  SECURITIES  The Corporation's securities portfolio is composed of investments that not only provide interest income, including tax-exempt income, but also provide a source of liquidity. The portfolio allows management to better respond to the Bank's interest sensitivity position, to diversify the earning asset portfolio and provide collateral for public fund deposits. Established policies are in place that address various aspects in managing the portfolio, including but not limited to, concentrations, liquidity, credit quality, interest rate sensitivity and regulatory guidelines.  Although the Bank generally intends to hold its securities portfolio until maturity, a portion of the portfolio is classified as available-for-sale. Securities in the held to maturity category are accounted for at amortized cost. Available for sale securities are accounted for at fair value with unrealized gains or losses, net of income taxes, reported as a separate component of stockholder's equity. The Bank invests in securities for the yield they produce and not to profit from trading. The Bank holds no trading securities in its portfolio.  The securities portfolio at December 31, 2005 totaled $120,944,000 as compared to $123,467,000 at December 31, 2004, a decrease of $2,523,000, or 2.04%. Securities available-for-sale decreased to $42,021,000 at December 31, 2005 compared to $44,148,000 at December 31, 2004. In addition, securities held to maturity decreased to $78,923,000 at December 31, 2005 from $79,319,000 at December 31, 2004. Other than the U.S. Government and its agencies, the Bank holds no other securities of a single issuer whose aggregate carrying value exceeds 10% of stockholders equity.  The carrying value of the available-for-sale securities portfolio as of December 31, 2005, includes net unrealized losses of $1,279,000 (reflected as accumulated other comprehensive loss of $844,000 in stockholders' equity, net of deferred income taxes of $435,000) compared to net unrealized losses of $502,000 (reflected as accumulated other comprehensive loss of $331,000 in stockholders' equity, net of deferred income taxes of $171,000) as of December 31, 2004.  The Corporation has total unrealized losses of $2,263,000 at December 31, 2005 on the securities portfolio with an aggregate fair value of $74,356,000. The unrealized losses are attributed to the current interest rate environment. The unrealized losses are temporary and management has the intent and ability to hold them until maturity or market price recovery. All securities are rated investment grade or better according to the Corporation's policy.                                          35    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  The composition of the securities portfolio for the periods ending December 31, 2005, 2004 and 2003 are presently below.                                                             December 31                                                ------------------------------                                                  2005       2004       2003                                                --------   --------   --------                                                    (Dollars in Thousands)     Held to maturity securities:    U.S. Government agencies and corporations   $ 29,683   $ 27,162   $ 21,992    State and political subdivisions              45,424     46,425     50,571    Mortgage-backed securities                     1,968      3,135      5,845    Corporate securities                           1,848      2,597      4,297 Available for sale securities:    Mortgage-backed securities                    41,452     43,475     26,800    Equity securities                                569        673        582                                                --------   --------   --------       Total securities                         $120,944   $123,467   $110,087                                                ========   ========   ========   The following table presents the maturities and average weighted yields of the debt securities portfolio as of December 31, 2005.                                                        After one but      After five but                                 Within one year   within five years   within ten years   After ten years                                 ---------------   -----------------   ----------------   ---------------                                 Amount    Yield    Amount     Yield    Amount    Yield    Amount   Yield                                 ------   ------   --------   ------   -------   ------   -------   -----                                                          (Dollars in Thousands)          Available for sale:    Mortgage-backed securities    $ --       --      $2,662    3.70%   $11,383    4.25%   $27,407   4.84% Held to maturity:    U.S. Government agencies        --       --       2,500    3.80%    14,148    4.39%    13,035   4.47%    State and political       subdivisions(1)             200     7.33%      2,357    6.64%    16,143    6.93%    26,724   7.40%    Mortgage-backed securities      --       --          --      --          2   11.91%     1,966   6.30%    Other securities                --       --         398    6.24%     1,100    6.44%       350   7.19%                                  ----               ------            -------                                   200                5,255             31,393             42,075                                  ----               ------            -------            -------       Total                      $200               $7,917            $42,776            $69,482                                  ====               ======            =======            =======   - ---------- (1)  Yields on tax-exempt debt securities have been computed on a fully      tax-equivalent basis.                                          36    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  LOANS  The loan portfolio comprises a major component of the Corporation's earning assets. Net loans receivable increased $6,070,000 or 7.95% to $82,385,000 as of December 31, 2005 from $76,315,000 at December 31, 2004. Net loans receivable represent 38.58% of total assets and 47.55% of total deposits as of December 31, 2005 as compared to 36.37% and 44.45%, respectively, at December 31, 2004. All of the Corporation's loans are to domestic borrowers.  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 have similar economic characteristics exceeds 10% of loans outstanding in any one category. At December 31, 2005, real estate loans amounted to $70,953,000 or 85.44% of total loans, and commercial and industrial loans amounted to $4,832,000 or 5.82% 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.  The composition of the total loan portfolio is shown in the table below for the periods presented.                                                               December 31,                                                         (Dollars in Thousand)                     --------------------------------------------------------------------------------------------                           2005               2004               2003               2002               2001                     ----------------   ----------------   ----------------   ----------------   ----------------                                % of               % of               % of               % of               % of                      Amount    Total    Amount    Total    Amount    Total    Amount    Total    Amount    Total                     -------   ------   -------   ------   -------   ------   -------   ------   -------   ------            Commercial          $ 4,832     5.82%  $ 4,095     5.32%  $ 2,832     4.00%  $ 3,490     5.01%  $ 4,579     6.31% Commercial    real estate       16,440    19.80%   13,925    18.09%   11,615    16.39%   11,300    16.24%   10,281    14.16% Residential    real estate       37,057    44.62%   36,115    46.92%   35,239    49.71%   35,046    50.35%   39,490    54.37% Real estate    construction         384     0.46%    1,376     1.79%      350     0.49%      657     0.94%    1,095     1.51% Home equity          17,072    20.56%   14,560    18.91%   14,136    19.94%   12,493    17.96%   10,882    14.99% Other    consumer           7,257     8.74%    6,907     8.97%    6,714     9.47%    6,612     9.50%    6,288     8.66%                     -------   ------   -------   ------   -------   ------   -------   ------   -------   ------    Total loans       outstanding   $83,042   100.00%  $76,978   100.00%  $70,886   100.00%  $69,598   100.00%  $72,615   100.00%                     =======   ======   =======   ======   =======   ======   =======   ======   =======   ======                                           37   NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  The loan maturities and interest sensitivity for a segment of the loan portfolio is reflected in the table below.                                                         As of December 31, 2005                                            -------------------------------------------                                            Due Under   Due 1- 5    Due Over                                             One Year     Years    Five Years    Total                                            ---------   --------   ----------   -------                                                           (In Thousands)      Maturity of loans receivable:    Commercial and commercial real estate     $6,850     $5,837      $8,585     $21,272    Real estate construction                                            384         384                                              ------     ------      ------     -------       Total                                  $6,850     $5,837      $8,969     $21,656                                              ======     ======      ======     =======                                            Due 1-5    Due Over                                          Years    Five Years                                         -------   ----------    Fixed interest rates                     $1,715     $3,324 Floating or adjustable interest rates     4,122      5,645                                          ------     ------    Total                                 $5,837     $8,969                                          ======     ======   CREDIT RISK AND LOAN QUALITY  The Corporation continues to strive to minimize credit risk. The Bank's written lending policy requires underwriting, loan documentation and credit analysis standards to be met prior to the approval and funding of any loan. In accordance with that policy, internal loan review monitors the loan portfolio on an ongoing basis. The loan committee then prepares an analysis each quarter of the allowance for loan losses, which is then submitted to the Board of Directors for its assessment as to the adequacy of the allowance.  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. Although the Corporation maintains sound 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.  Total nonperforming loans (comprised of non-accruing loans and loans past due for more than 90 days) as of December 31, 2005 were $67,000 compared to $189,000 as of December 31, 2004. Total nonperforming loans as a percentage of total loans were .08% at December 31, 2005 as compared to .25% at December 31, 2004. At December 31, 2005 and 2004 there was no foreclosed real estate. Lenders continue to work with customers to minimize losses associated with non-accrual and delinquent accounts. In addition, management is not aware of any material potential loan problems that have not been disclosed herein.                                          38    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  Detailed information about the Corporation's nonperforming loans and nonperforming assets for the last five years is shown in the table below.                                                                    December 31,                                               -----------------------------------------------                                                 2005      2004      2003      2002      2001                                               -------   -------   -------   -------   -------                                                          (Dollars in Thousands)       Non-accruing loans                            $    --   $   126   $   148   $   227   $   298 Accruing loans past due 90 days or more            67        63       327       203        71                                               -------   -------   -------   -------   -------    Total nonperforming loans                       67       189       475       430       369 Foreclosed real estate                             --        --        10        --        --                                               -------   -------   -------   -------   -------    Total nonperforming assets                 $    67   $   189   $   485   $   430      $369                                               =======   =======   =======   =======   ======= Non-accrual loans:    Interest income that would have been       recorded on non-accrual loans           $    --   $    11   $    15   $    18   $    17 Interest income for above loans included in       net income for the period               $    --   $    --   $    10   $    20   $     7  Ratios:    Nonperforming loans to total loans            0.08%     0.25%     0.67%     0.62%     0.51%    Allowance for loan losses to       nonperforming loans                      980.60%   350.79%   134.11%   131.16%   120.60%    Nonperforming assets to total assets          0.03%     0.09%     0.24%     0.24%     0.24%    Commitments to lend additional funds to       Nonperforming loan customers                 --        --        --        --        --   DEPOSITS  Deposits are the major source of the Corporation's funds for lending and other investment purposes. Total deposits at December 31, 2005 were $173,276,000, and increase of $1,624,000 or 0.95%, over total deposits of $171,652,000 as of December 31, 2004. The Corporation experienced the following increases/(decreases) for the year 2005 as compared to 2004.     Non-interest bearing demand deposits    19.25% Interest-bearing demand deposits         (.74%) Savings deposits                       (17.98%) Time deposits                           13.82%                                           39   NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  The following table displays the maturities of time deposits issued in denominations of $100,000 or more at December 31, 2005.                                                   Time                                            Certificates                                            ------------ (In Thousands)   Three months or less                          $ 1,370 Over three months but within six months       $ 1,923 Over six months but within twelve months      $ 6,705 Over twelve months                            $20,854                                               -------    Total                                      $30,852                                               =======   LIQUIDITY  Liquidity represents the Corporation's ability to efficiently manage cash flows at reasonable rates to support possible commitments to borrowers or the demands of depositors. Liquidity is essential to compensate for fluctuations in the balance sheet and provide funds for growth and normal operating expenditures. Liquidity needs may be met by converting assets into cash or obtaining sources of additional funding.  Sources of asset liquidity are provided through cash, amounts due from banks, interest-bearing deposits with banks and federal funds sold, which totaled $5,469,000 at December 31, 2005 as compared to $5,877,000 at December 31, 2004. Additional liquidity sources include principal payments on securities in the Bank's securities portfolio and cash flow from its amortizing loan portfolio. Selling securities available-for-sale, selling loans or raising additional capital may be used to meet longer-term liquidity needs. At December 31, 2005, available-for-sale securities totaling $42,021,000 were available for liquidity purposes as compared with $44,148,000 at December 31. 2004.  Liability liquidity sources include attracting deposits at competitive rates. Core deposits at December 31, 2005 totaled $131,690,000 as compared to $130,456,000 at December 31, 2004. The Bank has a $4 million federal fund line of credit with its main correspondent bank, Atlantic Central Bankers Bank. The Bank had no federal funds purchased under this line at December 31, 2005 and 2004. The Bank also has established a line of credit and other credit facilities with the Federal Home Loan Bank, which are reliable sources for short and long-term funds. Maximum borrowing capacity with the Federal Home Loan Bank is approximately $100,709,000.  Management is not aware of any demands, trends, commitments, or events that would result in the Bank's inability to meet anticipated or unexpected needs.  CONTRACTUAL OBLIGATIONS  The following table represents the aggregate contractual obligations to make future payments as of December 31, 2005.                     Less than     1-3       3-5     Over 5                    1 Year     Years     Years     Years    Total                  ---------   -------   -------   ------   ------- (In Thousands)       Time Deposits     $35,894    $30,044   $25,789      --    $91,727                   =======    =======   =======     ===    =======                                           40   NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  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 December 31, 2005 totaled $6,009,000. This consisted of $1,350,000 in tax-exempt loans, commercial real estate, construction, and land development loans, $3,714,000 in home equity lines of credit, $361,000 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.  STOCKHOLDERS' EQUITY AND CAPITAL REQUIREMENTS/RATIOS  The net effect of the activity in stockholders' equity resulted in an increase of $1,978,000 in total stockholders' equity to $39,294,000 at December 31, 2005 from $37,316,000 at December 31, 2004. Stockholders' equity increased in 2005 as a result of retained earnings of $2,284,000, plus a treasury stock sale of $207,000, less a decrease in accumulated other comprehensive income of $513,000 at December 31, 2005, the Bank had $844,000 in net unrealized losses on available-for-sale securities, as compared to the $331,000 loss at December 31, 2004. FAS 115 requires banks to report securities classified as "available-for-sale" at fair value, with unrealized gains or losses, net of deferred income taxes, reported as a separate component of stockholder's equity. The FAS 115 adjustment is not included in the Corporation's calculations of regulatory capital ratios.  The Corporation places a significant emphasis on maintaining a strong capital base. The goals for capital planning are to build a strong capital base to allow for future growth, to support risks inherent in the banking industry, to retain earnings to meet regulatory requirements and to provide an adequate return to stockholders.  Current capital guidelines issued by federal regulatory authorities require the Corporation and the Bank to meet minimum risk-based capital ratios in an effort to make regulatory capital more responsive to the risk exposure related to on and off-balance sheet items.  Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. Risk-based capital guidelines redefine the components of capital, categorize assets into risk classes and include certain off-balance sheet items in the calculation of capital requirements. The components of risk-based capital are segregated as Tier I and Tier II capital. Tier I capital is composed of total stockholders' equity reduced by goodwill and other intangible assets. Tier II capital is comprised of the allowance for loan losses and any qualifying debt obligations. Risk-based capital standards require the Corporation and the Bank to have Tier I capital of at least 4% and total capital (including Tier I capital) of at least 8% of risk-weighted assets.  The Corporation and the Bank are also subject to leverage capital requirements. This requirement compares capital (using the definition of Tier I capital) to average balance sheet assets and is intended to supplement the risk-based capital ratio in measuring capital adequacy. The guidelines set a minimum leverage ratio of 3% for institutions that are highly rated in terms of safety and soundness, and which are not experiencing or anticipating any significant growth. Other institutions are expected to maintain capital levels of at least 1% or 2% above the minimum. As of December 31, 2005, the Bank has a Tier I leverage ratio of 18.7%.                                          41    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  A comparison of the Bank's risk-based capital ratios and leverage ratios is shown in the following table. The Corporation's ratios are not significantly different.                                                              December 31,   December 31,                                                               2005           2004                                                           ------------   ------------                                                              (Dollars in Thousands)    Tier I, common stockholder's equity                          $39,621        $37,255 Tier II, allowable portion of allowance for loan losses          657            663                                                              -------        -------    Total capital                                             $40,278        $37,918                                                              =======        ======= Tier I risk-based capital ratio                                40.60%         40.17% Tier II risk-based capital ratio                               41.20%         40.89%   At December 31, 2005 and 2004, the Bank exceeded the minimum regulatory capital requirements to be considered a "well capitalized" financial institution under applicable federal regulations.  Banking laws and regulations limit the amount of dividends that may be paid by the Bank to the Corporation without prior approval of the Bank's regulatory agency. These restrictions have not had, and are not expected to have, a significant impact on the Corporation's ability to pay dividends.  EFFECT OF INFLATION  The majority of assets and liabilities of the Corporation are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The precise impact of inflation upon the Bank is difficult to measure. Inflation may affect the borrowing needs of consumers, thereby impacting the growth rate of the Corporation's assets. Inflation may also affect the general level of interest rates, which can have a direct bearing on the Corporation.  Management believes the most significant impact on the financial results is the Corporation's ability and timing to react to changes in interest rates. On an ongoing basis, management attempts to maintain an essentially balanced position between interest sensitive assets and liabilities, where such balancing is dependent on whether there is a rising or falling interest rate environment.  INTEREST RATE SENSITIVITY AND MARKET RISK  In the normal course of conducting business activities, the Corporation is exposed to market risk, principally interest rate risk. Interest rate risk arises from market driven fluctuations in interest rates that may affect cash flows, income, expenses and the values of financial instruments. The Asset/Liability Committee manages interest rate risk.  The operations of the Corporation do not expose it to foreign currency exchange or commodity price risks. Also, the Corporation does not utilize interest rate swaps, caps or other hedging transactions. The Corporation does not own any trading assets.  The principal objective of the asset/liability management activities is to provide consistently higher levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Corporation. The Corporation utilizes an interest rate sensitivity model as the primary quantitative tool in measuring the amount of interest rate risk that is present. The traditional maturity "gap" analysis, which reflects the volume difference between interest rate sensitive assets and liabilities during a given time period, is                                          42    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  reviewed quarterly by management and the Asset Liability Committee (ALCO) of the Bank. A positive gap occurs when the amount of interest sensitive assets exceeds interest sensitive liabilities. This position would contribute positively to net income in a rising rate environment. Conversely, if the balance sheet is liability sensitive or negatively gapped. This position would contribute positively to net income in a falling rate environment. Management continues to monitor sensitivity in order to avoid overexposure to changing interest rates, while maintaining adequate capital and liquidity levels. Adjustments to the mix of assets and liabilities are made periodically in an effort to give the Bank dependable and steady growth in net interest income regardless of the behavior of interest rates in general.  Another method used by management to review its interest sensitive position is through "simulation". In simulation, the Bank projects the future net interest streams in light of the current gap position. Various interest rate scenarios are used to measure levels of interest income associated with potential changes in our operating environment. Management cannot measure levels of interest income associated with potential changes in the Bank's operating environment. Nor can it predict the direction of interest rates or how the mix of assets and liabilities will change. The use of this information will help formulate strategies to minimize the unfavorable effect on net interest income caused by interest rate changes.  A simple rate "gap" analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates. In the event of a change in interest rates, prepayments and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. Because of uncertainties, the Corporation utilizes more than one measurement tool in assessing interest rate sensitivity and market risk.  As of December 31, 2005 the Corporation was more positively gapped than December 31, 2004 in terms of its "One Year" gap position. A positive gap position reflects the volume of interest rate sensitive assets to be greater than the volume of interest rate sensitive liabilities. In consideration of interest rates increasing, it is preferable to be in a positively gapped position since there are more interest rate sensitive assets that are either maturing or whose interest rates will be repricing upward, quicker than the maturity/repricing of the interest rate sensitive liabilities. This will enhance the Corporation's bottom line by improving the Corporation's net interest rate spread since it is expected that interest income will increase faster than interest expense.  The Corporation's overall sensitivity to interest rate risk is low due to its non-complex balance sheet. The Corporation has the ability to expedite several strategies to manage interest rate risk, which include but are not limited to selling of residential mortgages, increasing/decreasing deposits via interest rate changes, borrowing from the Federal Home Loan Bank of Pittsburgh, and buying/selling investments.                                          43    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  The following table represents the gap position for the Bank at December 31, 2005. This schedule summarizes how many fixed rate assets and liabilities will pay down over the periods of time defined in the table.                                                           Maturity/Repricing Intervals                                        ------------------------------------------------------------                                          1-3       3-12       1-3        3-5      Over 5                                         Months    Months     Years      Years      Years     Total                                        -------   -------   --------   --------   --------   -------                                                               (In Thousands)        Federal funds sold                     $ 2,348        --         --         --         --   $  2,348 Interest bearing deposits with banks        --       163         --         --         --        163 Other securities                            --       200      1,700      3,555     71,499     76,954 Mortgage-backed securities               2,456     7,437      5,491      5,546     22,490     43,420                                        -------   -------   --------   --------   --------   -------- Total securities                         2,456     7,637      7,191      9,101     93,989    120,374 Total loans                             29,375    18,411     13,457      6,780     15,019     83,042                                        -------   -------   --------   --------   --------   -------- Total interest earning assets           34,179    26,211     20,648     15,881    109,008    205,927 NOW Accounts                             1,912        --      7,194         --         --      9,106 Savings                                 10,551        --     44,980         --         --     55,531                                        -------   -------   --------   --------   --------   -------- Total savings deposits                  12,463        --     52,174         --         --     64,637 CDs<$100,000                             7,262    18,642     23,549     11,423         --     60,876 CDs>$100,000                             1,370     8,628      6,496     14,358         --     30,852                                        -------   -------   --------   --------   --------   -------- Total time deposits                      8,632    27,270     30,045     25,781         --     91,728                                        -------   -------   --------   --------   --------   -------- Total interest bearing liabilities      21,095    27,270     82,219     25,781         --    156,365                                        -------   -------   --------   --------   --------   -------- Rate sensitive gap                     $13,084   $(1,059)  $(61,571)  $ (9,900)  $109,008   $ 49,562 Cumulative gap                         $13,084   $12,025   $(49,546)  $(59,446)  $ 49,562         --                                           44    NEFFS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS  REGULATORY ACTIVITY  From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Corporation. It cannot be predicted whether such legislation will be adopted or, if adopted, how such legislation would affect the business of the Corporation. As a consequence of the extensive regulation of commercial Banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal regulation and regulations that may increase the cost of doing business. Except as specifically described above, management believes that the effect of the provisions of the aforementioned legislation on the liquidity, capital resources, and the results of operations of the Bank will be immaterial. Management is not aware of any other current specific recommendations by regulatory authorities or proposed of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have a negative impact on the Corporation's results of operations.  Further, the business of the Corporation is also affected by the state of the financial services industry in general. As a result of legal and industry changes, management predicts that the industry will continue to experience a certain amount of consolidations and mergers. Management believes that such consolidations and mergers may enhance it competitive position as a community bank.  FORM 10-K  The Corporation will provide, without charge to any stockholder, a copy of its 2005 Annual Report on Form 10-K as required to be filed with the Securities and Exchange Commission. Requests should be made in writing to:                                          Neffs Bancorp, Inc.                                         P.O. Box 10                                         Neffs, PA 18065                                          45    EX-31.1 3 w19059exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER    EXHIBIT 31.1                                    CERTIFICATION  I, John J. Remaley, President and Chief Executive Officer, certify that:       1. I have reviewed this annual report on Form 10-K of Neffs Bancorp, Inc.;       2. Based on my knowledge, the annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;       3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;       4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:            (a) designed such disclosure controls and procedures, or caused such      disclosure controls and procedures to be designed under our supervision, to      ensure that material information relating to the registrant, including its      consolidated subsidiaries, is made known to us by others within those      entities, particularly during the period in which this annual report is      being prepared;            (b) intentionally omitted;            (c) evaluated the effectiveness of the registrant's disclosure      controls and procedures and presented in this annual report our conclusions      about the effectiveness of the disclosure controls and procedures, as of      the end of the period covered by this annual report based upon such      evaluation; and            (d) disclosed in this report any change in the registrant's internal      control over financial reporting that occurred during the registrant's most      recent fiscal quarter that has materially affected, or is reasonably likely      to materially affect, the registrant's internal control over financial      reporting; and       5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):            (a) all significant deficiencies and material weaknesses in the design      or operation of internal control over financial reporting which are      reasonably likely to                                          46         adversely affect the registrant's ability to record, process, summarize and      report financial information; and            (b) any fraud, whether or not material, that involves management or      other employees who have a significant role in the registrant's internal      control over financial reporting.   Date: March 24, 2006                    By: /s/ John J. Remaley                                             ------------------------------------                                             President & CEO                                          47    EX-31.2 4 w19059exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER    EXHIBIT 31.2                                    CERTIFICATION  I, Kevin A. Schmidt, Principal Financial Officer, certify that:       1. I have reviewed this annual report on Form 10-K of Neffs Bancorp, Inc.;       2. Based on my knowledge, the annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;       3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;       4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:            (a) designed such disclosure controls and procedures, or caused such      disclosure controls and procedures to be designed under our supervision, to      ensure that material information relating to the registrant, including its      consolidated subsidiaries, is made known to us by others within those      entities, particularly during the period in which this annual report is      being prepared;            (b) intentionally omitted;            (c) evaluated the effectiveness of the registrant's disclosure      controls and procedures and presented in this annual report our conclusions      about the effectiveness of the disclosure controls and procedures, as of      the end of the period covered by this annual report based upon such      evaluation; and            (d) disclosed in this report any change in the registrant's internal      control over financial reporting that occurred during the registrant's most      recent fiscal quarter that has materially affected, or is reasonably likely      to materially affect, the registrant's internal control over financial      reporting; and       5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):            (a) all significant deficiencies and material weaknesses in the design      or operation of internal control over financial reporting which are      reasonably likely to                                          48         adversely affect the registrant's ability to record, process, summarize and      report financial information; and            (b) any fraud, whether or not material, that involves management or      other employees who have a significant role in the registrant's internal      control over financial reporting.   Date: March 24, 2006                    By: /s/ Kevin A. Schmidt                                             ------------------------------------                                             Principal Financial Officer                                          49    EX-32.1 5 w19059exv32w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 1350    EXHIBIT 32.1                      CERTIFICATION OF CHIEF EXECUTIVE OFFICER       PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906                         OF THE SARBANES-OXLEY ACT OF 2002  The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this annual report on Form 10K, that:       -    the report fully complies with the requirements of Sections 13(a) and           15(d) of the Securities and Exchange Act of 1934, as amended, and       -    the information contained in the report fairly presents, on all           material respects, the Company's financial condition and results of           operations.   /s/ John J. Remaley - ------------------------------------- John J. Remaley, Chief Executive Officer  Dated: March 24, 2006                                          50    EX-32.2 6 w19059exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 1350    EXHIBIT 32.2                    CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER       PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906                         OF THE SARBANES-OXLEY ACT OF 2002  The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this annual report on Form 10K, that:       -    the report fully complies with the requirements of Sections 13(a) and           15(d) of the Securities and Exchange Act of 1934, as amended, and       -    the information contained in the report fairly presents, on all           material respects, the Company's financial condition and results of           operations.   /s/ Kevin A. Schmidt - ------------------------------------- Kevin A. Schmidt, Principal Financial Officer  Dated: March 24, 2006                                          51    -----END PRIVACY-ENHANCED MESSAGE-----