UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarter ended September 30, 2009OR ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from __________ to __________
 
 Commission File:  0-32605
 
 NEFFS BANCORP, INC.
 ________________________________________
 (Exact name of registrant as specified in its charter)
 
 
 Pennsylvania

23-2400383(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)
 
 5629 PA Route 873, P.O. Box 10, Neffs, PA l8065-0010
 ________________________________________
 (Address of principal executive offices)
 
 
 (610) 767-3875
 ________________________________________
 (Issuer's telephone number)
 
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.  Yes   x    No    ̈
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes    ̈    No    ̈
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “small reporting company” in Rule 12-b-2 of the Exchange
Act.  (Check one):
 
 Large accelerated filer
 ̈
Accelerated filer
 ̈Non-accelerated filer
 ̈
Smaller reporting company
x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)   Yes    ̈    No   x
 
 As of October 31, 2009, there were 183,708 shares of common stock, par value of $1.00, outstanding.
  1
  NEFFS BANCORP, INC.
 
 INDEX
 
 PART 1. FINANCIAL INFORMATIONItem 1.

Consolidated Financial Statements
3Consolidated Statements of Financial Condition (Unaudited)
September 30, 2009 and December 31, 2008
3Consolidated Statements of Income (Unaudited)
Three months ended September 30, 2009 and September 30, 2008
Nine months ended September 30, 2009 and September 30, 2008
4Consolidated Statements of Stockholders’ Equity (Unaudited)
Nine months ended September 30, 2009 and September 30, 2008
5Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2009 and September 30, 2008
6Notes to the Interim Consolidated Financial Statements
7Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
17Item 3.

Quantitative and Qualitative Disclosures about Market Risk
24Item 4T.

Controls and Procedures
24PART II. OTHER INFORMATIONItem 1.

Legal Proceedings
24Item 1A.

Risk Factors
24Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds
25Item 3.

Defaults Upon Senior Securities
25Item 4.

Submission of Matters to a Vote of Security Holders
25Item 5.

Other Information
25Item 6.

Exhibits
25SIGNATURES


26
 
 
  2
 
 Index
  Part I FINIANCIAL INFORMATION
 
 Item 1.
 
 Consolidated Financial Statements
 
 NEFFS BANCORP, INC AND SUBSIDIARYCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(Unaudited)September 30,


December 31,Dollars in thousands, except share data

2009


2008ASSETSCash and due from banks

$
2,536


$
2,489Interest bearing deposits with banks


100



109Federal funds sold


-



1,379Securities available for sale


36,229



37,950Securities held to maturity, fair value$99,957 in 2009; $89,111 in 2008


102,444



91,557Loans


109,706



100,953Less allowance for loan losses


(808
)


(761
)Net loans


108,898



100,192Premises and equipment, net


2,435



2,326Restricted investments in bank stock


834



803Other assets


2,063



1,977Total assets

$
255,539


$
238,782LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities:DepositsNon-interest bearing

$
17,326


$
16,740Interest bearing


189,962



176,198Total deposits


207,288



192,938Other borrowings


1,725



-Other liabilities


1,528



1,315Total liabilities


210,541



194,253Stockholders' Equity:Common stock, $1 par value, authorized 2,500,000 shares;issued 200,000 shares;


200



200Paid-in capital


753



753Retained earnings


47,365



45,836Accumulated other comprehensive income


790



442Treasury stock, at cost 2009 16,292 shares; 2008 10,750 shares


(4,110
)


(2,702
)Total stockholders' equity


44,998



44,529Total liabilities and stockholders' equity

$
255,539


$
238,782See Notes to Consolidated Financial Statements.
   3
 
 Index
  NEFFS BANCORP, INC AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME(Unaudited)Dollars in thousands, except per share data

Three Months Ended
September 30,


Nine Months Ended
September 30,2009


2008


2009


2008Interest income:Interest and fees on loans

$
1,717


$
1,655


$
5,010


$
4,826Interest and dividends on investments:Taxable


1,326



1,222



3,985



3,595Exempt from federal income taxes


352



373



1,054



1,164Interest on federal funds sold and other


-



1



4



11Total interest income


3,395



3,251



10,053



9,596Interest ExpenseDeposits


1,373



1,492



4,174



4,616Borrowings


2



11



2



21Total interest expense


1,375



1,503



4,176



4,637Net interest income


2,020



1,748



5,877



4,959Provision for loan losses


60



38



61



68Net interest income after Provision for loan losses


1,960



1,710



5,816



4,891Other income:Service charges on deposit accounts


34



36



88



98Other service charges and fees


25



26



70



75Impairment charge on securities


(537
)


-



(537
)


-Security gains


10



-



10



-Other income


7



9



34



34Total other income (loss)


(461
)


71



(335
)


207Other expenses:Salaries and employee benefits


365



358



1,087



1,062Occupancy


63



83



167



171Furniture and equipment


68



68



205



200Pennsylvania shares tax


118



106



347



318Other expenses


220



164



756



523Total other expenses


834



779



2,562



2,274Income before income taxes


665



1,002



2,919



2,824Income tax expense


111



232



648



602Net income

$
554


$
770


$
2,271


$
2,222Per share data:Earnings per share, basic

$
2.98


$
4.06


$
12.12


$
11.69Weighted average common shares outstanding


185,983



189,676



187,341



190,046Cash dividends declared per share

$
2.00


$
2.00


$
4.00


$
4.00See Notes to Consolidated Financial Statements.
   4
 
 Index
  NEFFS BANCORP, INC AND SUBSIDIARYCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYNine Months Ended September 30, 2009 and 2008(Unaudited)  Dollars in thousands, except per share data

Common Stock


Paid-In Capital


Retained Earnings


Accumulated Other
Comprehensive Loss


Treasury Stock


Total Stockholders' EquityBalance, December 31, 2007

$
200


$
753


$
43,558


$
(373
)

$
(2,308
)

$
41,830Comprehensive Income:Net income


-



-



2,222



-



-



2,222Change in unrealized net losseson securities available for sale, net of tax


-



-



-



205



-



205Total comprehensive income






















2,427Cash dividends declared on commonstock, $4.00  per share


-



-



(760
)


-



-



(760
)Purchase of treasury stock (1,219 shares)


-



-



-



-



(320
)


(320
)Balance, September 30, 2008

$
200


$
753


$
45,020


$
(168
)

$
(2,628
)

$
43,177Dollars in thousands, except per share data

Common Stock


Paid-In Capital


Retained Earnings


Accumulated Other
Comprehensive Income


Treasury Stock


Total Stockholders' EquityBalance, December 31, 2008

$
200


$
753


$
45,836


$
442


$
(2,702
)

$
44,529Comprehensive Income:Net income


-



-



2,271



-



-



2,271Change in unrealized net gainson securities available for sale, net of tax


-



-



-



348



-



348Total comprehensive income






















2,619Cash dividends declared on commonstock, $4.00  per share


-



-



(742
)


-



-



(742
)Purchase of treasury stock (5,542 shares)


-



-



-



-



(1,408
)


(1,408
)Balance, September 30, 2009

$
200


$
753


$
47,365


$
790


$
(4,110
)

$
44,998See Notes to Consolidated Financial Statements.
  
  5
 
 Index
  NEFFS BANCORP, INC AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)Dollars in thousands

Nine Months Ended September 30,2009


2008CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
2,271


$
2,222Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation


166



165Provision for loan losses


61



68Net accretion of securities premiums/discounts


(530
)


(320
)Impairment charge on securities


537



-Security gains


(10
)


-Change in assets and liabilities:Increase (decrease) in:Accrued interest receivable


(302
)


(121
)Other assets


36



(131
)Decrease in:Other liabilities


(154
)


(106
)Net cash provided by operating activities


2,075



1,777CASH FLOWS FROM INVESTING ACTIVITIESDecrease in interest bearing deposits with banks


9



9Decrease in federal funds sold


1,379



-Purchase of securities available for sale


(5,352
)


(7,961
)Proceeds from maturities/calls of securities available for sale


7,547



5,268Purchase of securities held to maturity


(43,700
)


(30,617
)Proceeds from maturities/calls of securities held to maturity


32,870



29,733Net increase in restricted investment in bank stock


(31
)


(89
)Net increase in loans


(8,767
)


(5,112
)Purchases of premises and equipment


(275
)


(125
)Net cash used in investing activities


(16,320
)


(8,894
)CASH FLOWS FROM FINANCING ACTIVITIESNet increase in deposits


14,350



9,157Net increase (decrease) in short-term borrowings


1,725



(1,654
)Dividends paid


(375
)


(381
)Purchase of treasury stock


(1,408
)


(320
)Net cash provided by financing activities


14,292



6,802Increase (decrease) in cash and cash equivalents


47



(315
)Cash and cash equivalents:Beginning


2,489



3,888Ending

$
2,536


$
3,573Supplementary Cash Flows InformationInterest Paid

$
4,329


$
4,710Income Taxes Paid

$
500


$
676See Notes to Consolidated Financial Statements.
   6
 
 Index
  NEFFS BANCORP, INC.
 NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2009
 (Unaudited)
 
 
 Note 1.  BASIS OF PRESENTATION
 
 The consolidated financial statements include the accounts of Neffs Bancorp, Inc. (the “Corporation”) and its wholly owned subsidiary, The Neffs National Bank (the “Bank”).  All material intercompany accounts and transactions have been eliminated in consolidation.
 
 The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature.  Operating results for the nine-month period ended September 30, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  These statements
should be read in conjunction with the financial statements and notes contained in the 2008 Annual Report to Stockholders.
 
 In addition to historical information, this Form 10-Q Report contains forward-looking statements.  The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Important factors
that might cause such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.  Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof.  Readers should carefully review the risk factors described in the Form 10-K filed with the SEC by the Corporation for the
year ended December 31, 2008.
 
 In May 2009, the FASB issued ASC 855, Subsequent Events, which requires companies to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities.  ASC 855 requires entities to recognize
in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial statement preparation process.  Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date.  ASC 855 also requires entities to disclose the date through which subsequent events
have been evaluated.  ASC 855 was effective for interim and annual reporting periods ending after June 15, 2009.  The Corporation has evaluated subsequent events through November 16, 2009, the date the financial statements were issued.
 
 For further information, refer to the financial statements and footnotes thereto included in Neffs Bancorp, Inc.’s Annual Report to stockholders for the year ended December 31, 2008.
 
 Note 2.  COMMITMENTS AND CONTINGENCIES
 
 The Corporation is subject to certain routine legal proceedings and claims arising in the ordinary course of business.  It is management’s opinion that the ultimate resolution of these claims will not have a material adverse effect on the Corporation’s financial position and results of operations.
 
 Note 3.  COMPREHENSIVE INCOME
 
 The components of other comprehensive income and related tax effects for the nine months ended September 30, 2009 and 2008 are as follows:
   7
 
 Index
  
 Three Months
Ended
September 30,


Nine Months
Ended
September 30,Dollars in thousands

2009


2008


2009


2008Unrealized holding gains on available for sale securities

$
303


$
594


$
528


$
311Tax effect


(103
)


(202
)


(180
)


(106
)Other comprehensive income, net of tax

$
200


$
392


$
348


$
205
 
 Note 4.  EARNINGS PER SHARE
 
 Earnings per share is based on the weighted average shares of common stock outstanding during each period.  The Corporation currently maintains a simple capital structure and does not issue potentially dilutive securities; thus there are no dilutive effects on earnings per share.
 
 Note 5.  GUARANTEES
 
 The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party.  Generally,
all letters of credit when issued have expiration dates within one year.  The credit risks involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers.  The Corporation, generally, holds collateral and/or personal guarantees supporting these commitments.  The Corporation had $658,000 of standby letters of credit as of September 30, 2009.  Management believes that the proceeds obtained through a liquidation
of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of September 30, 2009 for guarantees under standby letters of credit issued is not material.
 
 Note 6.  SECURITIES
 
 The amortized cost and fair values of securities are as follows:
  September 30, 2009Amortized
Cost


Gross
Unrealized
Gains


Gross
Unrealized
Losses


Fair
ValueSecurities Available for Sale:

(In Thousands)U.S. Treasury note

$
100


$
5


$
-


$
105Mortgage-backed securities


34,932



1,197



(5
)


36,124$
35,032


$
1,202


$
(5
)

$
36,229Securities Held to Maturity:Obligations of U.S. Government agencies

$
63,636


$
338


$
(2,258
)

$
61,716Obligations of states and political subdivisions


33,250



1,576



(6
)


34,820Corporate securities


4,672



50



(2,230
)


2,492Mortgage-backed securities


886



43



-



929$
102,444


$
2,007


$
(4,494
)

$
99,957
 
  8
 
 Index
  
 December 31, 2008Amortized
Cost


Gross
Unrealized
Gains


Gross
Unrealized
Losses


Fair
ValueSecurities Available for Sale:

(In Thousands)U.S. Treasury note

$
100


$
7


$
-


$
107Mortgage-backed securities


37,181



702



(40
)


37,843$
37,281


$
709


$
(40
)

$
37,950Securities Held to Maturity:Obligations of U.S. Government agencies

$
52,871


$
568


$
(1,393
)

$
52,046Obligations of states and political subdivisions


32,300



833



(66
)


33,067Corporate securities


5,341



-



(2,413
)


2,928Mortgage-backed securities


1,045



25



-



1,070$
91,557


$
1,426


$
(3,872
)

$
89,111
 
 The amortized cost and fair values of securities at September 30, 2009, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 Available for Sale


Held to MaturityAmortized
Cost


Fair
Value


Amortized
Cost


Fair
Value(In Thousands)Due in one year or less

$
-


$
-


$
485


$
487Due after one year through five years


100



105



7,006



7,260Due after five years through ten years


-



-



17,535



18,332Due after ten years


-



-



76,532



72,949100



105



101,558



99,028Mortgage-backed securities


34,932



36,124



886



929$
35,032


$
36,229


$
102,444


$
99,957
 
 There were no sales of securities during 2009 and 2008.
 
 Securities with an amortized cost and fair value of approximately $12,000,000 and $12,385,000 at September 30, 2009 and $7,698,000 and $7,721,000 at December 31, 2008 were pledged to secure public deposits and for other purposes required or permitted by law.
 
  9
 
 Index
  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 September 30, 2009 and December 31, 2008:
 
 Less than 12 Months


12 Months or More


TotalFair
Value


Unrealized Losses


Fair
Value


Unrealized Losses


Fair
Value


Unrealized LossesSeptember 30, 2009:

(In Thousands)Securities Available for Sale:Mortgage-backed securities

$
467


$
2


$
133


$
3


$
600


$
5Securities Held to Maturity:Obligations of U.S. Government agencies


30,039



1,727



16,254



531



46,293



2,258Obligations of states and political subdivisions


427



6



-



-



427



6Corporate securities


-



-



1,292



2,230



1,292



2,230Total Temporarily Impaired Securities

$
30,933


$
1,735


$
17,679


$
2,764


$
48,612


$
4,499
 
 
 Less than 12 Months


12 Months or More


TotalFair
Value


Unrealized Losses


Fair
Value


Unrealized Losses


Fair
Value


Unrealized LossesDecember 31, 2008:

(In Thousands)Securities Available for Sale:Mortgage-backed securities

$
38


$
1


$
5,866


$
39


$
5,904


$
40Securities Held to Maturity:Obligations of U.S. Government agencies


26,576



1,206



2,572



187



29,148



1,393Obligations of states and political subdivisions


3,818



44



627



22



4,445



66Corporate securities


1,613



448



1,165



1,965



2,778



2,413Total Temporarily Impaired Securities

$
32,045


$
1,699


$
10,230


$
2,213


$
42,275


$
3,912
 
 The Corporation had 80 and 88 securities in an unrealized loss position at September 30, 2009 and December 31, 2008, respectively.  The decline in fair value is due mainly to interest rate fluctuations.  One security was deemed to be other-than-temporarily impaired as discussed in Note 7.  As
the Corporation does not intend to sell nor is it expected to be required to sell such investments until maturity or market price recovery no other securities were deemed to be other-than-temporarily impaired.
 
 Note 7.  FAIR VALUE MEASUREMENTS
 
 In April 2009, the FASB issued new guidance impacting ASC Topic 820, Fair Value Measurements and Disclosures.  This ASC provides additional guidance in determining fair values when there is no active market or where the price inputs being used represent distressed sales.  It reaffirms the need to use
judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.  The implementation of this standard did not have a material effect on the Corporation’s results of operations or consolidated financial statements.
 
 In April 2009, the FASB issued new guidance impacting ASC 320-10, Investments — Debt and Equity Securities, which provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.  This guidance is effective for interim and
annual periods ending after June 15, 2009.  The Corporation has presented the necessary disclosures in Note 6 herein.
   10
 
 Index
  
 In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124.2 changes the presentation
and amount of the other-than-temporary impairment recognized in the income statement.  The other-than-temporary impairment is separated into (a) the amount of other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.  The
amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
 
 In April 2009, the FASB issued new guidance impacting ASC 825-10-50, Financial Instruments, which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value.  This guidance
amended existing GAAP to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  This guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Corporation’s financial position or results of operations.
 
 Below are various estimated fair values at September 30, 2009 and December 31, 2008, as required by ASC Topic 820.  Such information, which pertains to the Corporation's financial instruments, is based on the requirements set forth in ASC Topic 820 and does not purport to represent the aggregate net fair
value of the Corporation.  It is the Corporation's general practice and intent to hold its financial instruments to maturity, except for certain securities designated as securities available for sale, and not to engage in trading activities.  Many of the financial instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction.  Therefore, the Corporation had to use significant estimations and present value calculations
to prepare this disclosure.
 
 Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts.  Further, the fair value estimates are based on various assumptions, methodologies and subjective considerations, which vary widely among different financial institutions and which are subject
to change.
 
 The estimated fair value amounts have been measured as of their respective quarter ends, and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at year end.
 
 The following methods and assumptions were used by the Corporation in estimating financial instrument fair values:
 
 Cash and Due from Banks, Interest Bearing Deposits with Banks and Federal Funds Sold and Purchased
 
 The statement of financial condition carrying amounts for cash and due from banks, interest bearing deposits with banks and federal funds sold and purchased approximate the estimated fair values of such assets.
 
 Securities
 
 In September 2006, the FASB issued an accounting standard related to fair value measurements, which was effective for the Corporation on January 1, 2008.  This standard defined fair value, established a framework for measuring fair value, and expanded disclosure requirements about fair value measurements. 
On January 1, 2008, the Corporation adopted this accounting standard related to fair value measurements for the Corporation’s financial assets and financial liabilities.  The Corporation deferred adoption of this accounting standard related to fair value measurements for the Corporation’s nonfinancial assets and nonfinancial liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009.  The adoption
of this accounting standard related to fair value measurements for the Corporation’s nonfinancial assets and nonfinancial liabilities had no impact on retained earnings and is not expected to have a material impact on the Corporation’s consolidated financial position or results of operations.  This accounting standard was subsequently codified into ASC Topic 820, Fair Value Measurements and Disclosures.
 
 ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC Topic 820 are as follows:
   11
 
 Index
  
 Level 1:  Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
 Level 2:  Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
 
 Level 3:  Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).
 
 An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
 For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used are as follows:
 
 Description

Total


(Level 1)
Quoted Prices
in ActiveMarkets
for Identical Assets


(Level 2)
Significant Other
Observable Inputs


(Level 3)
Significant
Unobservable Inputs(In Thousands)September 30, 2009U. S. Treasury note available for sale

$
105


$
105



-



-Mortgage-backed securities available for sale

$
36,124


$
36,124



-



-Impaired trust preferred security held to maturity

$
451



-



-


$
451December 31, 2008U. S. Treasury note available for sale

$
107


$
107



-



-Mortgage-backed securities available for sale

$
37,843


$
37,843



-



-
 
 The Corporation’s adoption of ASC Topic 820 applies only to its financial instruments required to be reported at fair value.  The Corporation does not have non-financial assets and non-financial liabilities for which adoption would apply in accordance with ASC Topic 820.
 
 On October 10, 2008, the FASB issued an accounting standard update related to fair value measurements, which clarifies the application of ASC Topic 820 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The update states that an entity
should not automatically conclude that a particular transaction price is determinative of fair value. In a dislocated market, judgment is required to evaluate whether individual transactions are forced liquidations or distressed sales. When relevant observable market information is not available, a valuation approach that incorporates management’s judgments about the assumptions that market participants would use in pricing the asset in a current sale transaction would be acceptable. The update also indicates
that quotes from brokers or pricing services may be relevant inputs when measuring fair value, but are not necessarily determinative in the absence of an active market for the asset. In weighing a broker quote as an input to a fair value measurement, an entity should place less reliance on quotes that do not reflect the result of market transactions. Further, the nature of the quote (for example, whether the quote is an indicative price or a binding offer) should be considered when weighing the available evidence.
The update was effective immediately and applied to prior periods for which financial statements had not been issued, including interim or annual periods ending on or before September 30, 2008. Accordingly, the Corporation adopted this guidance prospectively, beginning July 1, 2008 and considered this guidance in determining fair value measurements at September 30, 2009.
 
 The Corporation conducts other-than-temporary impairment analysis on a quarterly basis. The initial indication of other-than-temporary impairment for both debt and equity securities is a decline in the market value below the amount recorded for an investment. A decline in value that is considered to be other-than-temporary
is recorded as a loss within non-interest income in the consolidated statement of income.
   12
 
 Index
  
 In determining whether an impairment is other than temporary, the Corporation considers a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic
conditions of its industry, and the Corporation’s intent to sell or be required to sell the security before a sufficient period of time to allow for a recovery in market value or maturity. Among the factors that are considered in determining the Corporation’s intent and ability is a review of its capital adequacy, interest rate risk position and liquidity.
 
 The Corporation also considers the issuer’s financial condition, capital strength and near-term prospects. In addition, for debt securities and perpetual preferred securities that are treated as debt securities for the purpose of other-than-temporary analysis, the Corporation considers the cause of the price decline
(general level of interest rates and industry- and issuer-specific factors), current ability to make future payments in a timely manner and the issuer’s ability to service debt.
 
 The assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and the Corporation’s intent to sell or be required to sell the security before recovery in value require considerable judgment.
 
 Certain of the corporate debt securities are accounted for under ASC 325, Recognition of Interest Income and Impairment on Purchased Beneficial Interests that Continue to Be Held by a Transferor in Securitized Financial Assets. For investments within the scope of ASC 325 at acquisition, the Corporation evaluates current
available information in estimating the future cash flows of these securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Corporation considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments
to the various note classes. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, expected future default rates and other relevant market information related to the underlying securities and issuers.
 
 We own 4 collateralized debt obligation securities totaling $3,990,000 par value and $1,102,000 fair value that are backed by trust preferred securities issued by banks, thrifts, and insurance companies (TRUP CDOs). These securities are included in corporate held to maturity securities.  The market for these
securities at September 30, 2009 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which TRUP CDOs trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive as no new TRUP CDOs have been issued since 2007. There are currently very few market participants who are willing and or able to transact for these securities.  The
Corporation analyzed the cash flow characteristics of these securities.
 
 During the three and nine months ended September 30, 2009, the Corporation recognized in earnings impairment charges of $537,000 on one investment in a pooled trust preferred security resulting from several factors, including a downgrade on their credit ratings, failure to pass their principal coverage tests, indications
of a break in yield, and the decline in the net present value of their projected cash flows.  There were no impairment charges for the same period of 2008.  Management of the Corporation has deemed the impairment on this trust preferred security to be other-than-temporary based upon these factors and the duration and extent to which the market value has been less than cost, the inability to forecast a recovery in market value, and other factors concerning the issuers in the pooled security.
 
 Other-Than-Temporary Impairment
Credit Losses recorded in Earnings
(In Thousands)Beginning Balance July 1, 2009

$
-Additions for OTTI not previously recognized


537Total other-than-temporary losses recognized during the period, ending balance September 30, 2009

$
537
 
  13
 
 Index
  
 Based on cash flow forecasts for the remaining securities, management expects to recover the remaining amortized cost of these securities.  Based on this analysis and because the Corporation does not intend to sell and it is more likely than not that the Corporation will not be required to sell before its recovery
of amortized cost basis, which may be at maturity, and, for investments within the scope of ASC 325, the Corporation determined that there was no adverse change in the cash flows as viewed by a market participant.  Therefore, the Corporation does not consider the investments in the remaining three trust preferred assets to be other-than-temporarily impaired at September 30, 2009.  However, there is a risk that this review could result in recognition of additional other-than-temporary impairment
charges in the future.
 
 The market values for these securities (and any securities other than those issued or guaranteed by the US Treasury) are very depressed relative to historical levels. The yield spreads for the broad market of investment grade and high yield corporate bonds recently reached all time wide levels and remain near those levels
today. Thus in today’s market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general versus being an indicator of credit problems with a particular issuer.
 
 Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:
 
 §
The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at September 30, 2009,
 §
An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates and
 §
Our TRUP CDOs are classified within Level 3 of the fair value hierarchy because we determined that significant adjustments are required to determine fair value at the measurement date.
 
 Our TRUP CDO valuations were prepared by an independent third party. Their approach to determining fair value involved these steps:
 
 1.
There were a number of assumptions used and the results of the modeling were highly dependent upon the assumptions.
 2.
Credit and prepayment assumptions were used for each quarter.
 3.
Forward interest rates were used to project future principal and interest payments.  This allowed the analysts to model the impact of over- or under-collateralization for each transaction.  (Higher interest rates generally increase the credit stress on under-collateralized transactions by reducing excess interest, which is the difference between the interest received from the underlying collateral
and the interest paid on the rated bonds.)
 4.
Original face purchased, current book value (as of September 30, 2009), purchase date, and purchase price were used to produce the calculations.
 5.
The basic methodology of ASC 325 was to compare the present value of the cash flows from quarter to quarter.  A decline in the present value versus that for the previous quarter was considered to be an “adverse change”.
 6.
ASC 325 prescribes using a discount rate “equal to the current yield used to accrete the beneficial interest”.  Original discount margin calculated as of the purchase date passed on purchase price was used to calculate the discount rate.  The original discount margin is then added to the appropriate forward 3-month LIBOR rate to determine the discount rate.  For fixed/floating
securities, the original coupon is used as the discount rate for the remaining fixed-rate portion of the security’s estimated life.
 7.
The discount rate was then used to calculate the present value for the current quarter’s projected cash flows.
 8.
The result calculated for the current quarter was then compared to the previous quarter’s book value to determine if the change is “adverse”.
 9.
The credit component of any impairment should be the difference between book value and the projected present value for the current quarter.
 
 We recalculated the overall effective discount rates for these valuations.  The overall discount rates range from 9.08% to 57.15% and are highly dependent and reflected upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the CDO and the prepayment assumptions.
   14
 
 Index
  
 The Corporation owns 3 Federal National Mortgage Association (FNMA) securities and 1 Federal Home Loan Mortgage Corp (FHLMC) security that have an unrealized loss greater than 20% of their book value.  The unrealized loss on the FNMA and FHLMC securities is due to increases in overall rates.  There
is no increase in credit risk for these securities.  Based on the analysis of the factors described above, management does not believe any unrealized loss in these securities represents an other-than-temporary impairment.
 
 As of September 30, 2009, management does not believe any unrealized loss in its other debt securities represents an other-than-temporary impairment except as noted.  The unrealized losses at September 30, 2009 were primarily interest rate-related.
 
 Loans Receivable
 
 Fair values of variable rate loans subject to frequent repricing, and which entail no significant credit risk, are based on the carrying amounts.  The estimated fair values of other loans are estimated by discounting the future cash flows using interest rates currently offered for loans with similar terms to
borrowers of similar credit quality.
 
 Accrued Interest Receivable
 
 The carrying amount of accrued interest is considered a reasonable estimate of fair value.
 
 Deposit Liabilities
 
 For deposits which are payable on demand, the carrying amount is a reasonable estimate of fair value.  Fair values of fixed rate time deposits are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregate expected maturities.
 
 Accrued Interest Payable
 
 The carrying amount of accrued interest approximates its fair value.
 
 Off-Balance Sheet Instruments
 
 The fair value of commitments to extend credit and for outstanding letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present credit worthiness of the counterparties.
 
 Restricted Investments in Bank Stocks
 
 Restricted stocks include primarily Federal Home Loan Bank stock, which is carried at cost.  Federal law requires a member institution of the Federal Home Loan Bank system to hold stock of its district Federal Home Loan Bank according to a predetermined formula.
 
 In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock.  Management evaluates the restricted stock for impairment in accordance with Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade
Receivables) That Lend to or Finance the Activities of Others.  Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount
for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.  Management believes no impairment charge is necessary related to the restricted stock as of September 30, 2009.
 
 The estimated fair values of the Corporation’s financial instruments at September 30, 2009 and December 31, 2008 are as follows:
   15
 
 Index
  
 September 30, 2009


December 31, 2008Carrying
Amount


Estimated
Fair
Value


Carrying
Amount


Estimated
Fair
Value(In Thousands)Financial assets:Cash and short-term investments

$
2,636


$
2,636


$
2,598


$
2,598Securities available for sale


36,229



36,229



37,950



37,950Securities held to maturity


102,444



99,957



91,557



89,111Loans, net


108,898



113,480



100,192



104,130Accrued interest receivable


1,798



1,798



1,496



1,496Federal funds sold


-



-



1,379



1,379Financial liabilities:Deposits


207,288



210,889



192,938



194,495Accrued interest payable


1,066



1,066



1,219



1,219Off-balance sheet financial instruments:Commitments to extend credit and letters of credit


-



-



-



-
 
 Note 8.  NEW ACCOUNTING STANDARDS
 
 In December 2007, the FASB issued an accounting standard related to business combinations which is effective for fiscal years beginning on or after December 15, 2008.  This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination.  This accounting standard was subsequently codified into Accounting Standards Codification (ASC) Topic 805, Business Combinations. This new pronouncement did not have a material impact on our consolidated financial position or results of operations because the Corporation did not acquire control of any business during the
quarter ended September 30, 2009.
 
 In June 2009, the FASB issued an accounting standard related to the accounting for transfers of financial assets, which is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years.  This standard enhances reporting about transfers of financial assets,
including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. This standard eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. This standard also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period.  This accounting
standard was subsequently codified into ASC Topic 860.  The adoption of this standard is not expected to have a material effect on the Corporation’s results of operations or financial position.
 
 In December 2008, the FASB issued an update to ASC 715, “Employers’ Disclosures about Postretirement Benefit Plan Assets”.  This update amends SFAS 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, to provide guidance on an employer’s
disclosures about plan assets of a defined benefit pension or other postretirement plan.  The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009.  The Corporation is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.
 
 In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS).  IFRS is a comprehensive series of accounting standards published by the International Accounting Standards
Board (“IASB”).  Under the roadmap, the Corporation may be required to prepare financial statements in accordance with IFRS as early as 2014.  The SEC is expected to make a determination in 2011 regarding the mandatory adoption of IFRS.  The Corporation is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.
   16
 
 Index
  
 In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-01, Topic 105 - Generally Accepted Accounting Principles - FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles. The
Codification is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP).  The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place.  Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. The Corporation adopted this standard
for the interim reporting period ending September 30, 2009.  The adoption of this standard did not have a material impact on the Corporation’s results of operations or financial position.
 
 In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.  This ASU provides amendments for fair value measurements of liabilities.  It provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques.  ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  ASU 2009-05 is effective for the first reporting period (including interim periods) beginning
after issuance or December 15, 2009.  The Corporation is currently evaluating the impact of this standard on the Corporation’s financial condition, results of operations, and disclosures.
 
 
 Item 2.
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Corporation’s balance sheets and statements of income.  This section should be read in conjunction with the Corporation’s financial statements and accompanying notes.
 
 Management of the Corporation has made forward-looking statements in this Form 10-Q. These forward-looking statements may be subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of the Corporation and its subsidiary. When words
such as "believes," "expects," "anticipates" or similar expressions occur in this Form 10-Q, management is making forward-looking statements.
 
 Readers should note that many factors, some of which are discussed elsewhere in this report and in the documents that management incorporates by reference, could affect the future financial results of the Corporation and its subsidiary, both individually and collectively, and could cause those results to differ materially
from those expressed in the forward-looking statements contained or incorporated by reference in this Form 10-Q. These factors include the following:
 
 v
operating, legal and regulatory risks;
 
 v
economic, political, and competitive forces affecting banking, securities, asset management and credit services businesses; and
 
 v
the risk that management’s analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
 
 The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in other documents that the Corporation files periodically with the Securities and
Exchange Commission.
 
 CRITICAL ACCOUNTING POLICIES
 Disclosure of the Corporation’s significant accounting policies is included in Note 1 to the financial statements of the Corporation’s Annual Report to Stockholders for the year ended December 31, 2008.  Some of these policies are particularly sensitive, requiring significant judgments, estimates
and assumptions to be made by management, most particularly in connection with determining the provision for loan losses, the appropriate level of the allowance for loan losses, considerations of other-than-temporary impairment of investments, and deferred tax assets.  Additional information is contained in this Form 10-Q under the paragraphs titled “Provision for Loan Losses”, “Loan and Asset Quality and Allowance for Loan Losses”, and “Securities”.
   17
 
 Index
  
 OVERVIEW
 Net income for the third quarter of 2009 decreased 28.1% to $554,000 as compared to $770,000 for the third quarter of 2008, primarily because of a $537,000 impairment charge on a security.  Total revenues increased 4.2% from $3.3 million to $3.5 million for the quarter and total expenses increased 13.9% from
$2.6 million to $2.9 million.  Net income per common share decreased 26.6% to $2.98 per share from $4.06 per share in the third quarter a year ago.  At September 30, 2009, the Corporation had total assets of $255.5 million, total loans of $109.7 million, and total deposits of $207.3 million.
 
 Net income for the first three quarters of 2009 increased 2.2% to $2.3 million as compared to $2.2 million for the same period of 2008.  Total revenues increased 4.5% from $9.8 million to $10.2 million for the first nine months of 2009 and total expenses increased 5.2% from $7.6 million to $8.0 million.  Net
income per common share increased 3.7% to $12.12 per share from $11.69 per share from the first three quarters of 2009 to the same period of 2008.
 
 RESULTS OF OPERATIONS
 
 Average Balances and Average Interest Rates
 Interest earning assets averaged $247.3 million for the third quarter of 2009 as compared to $226.7 million for the same period in 2008.  The growth in interest earning assets was mainly the result of an increase of $12.0 million in average total investments and an increase of $8.6 million in average total loans.  Average
interest-bearing liabilities increased from $173.3 million during the third quarter of 2008 to $191.0 million during the third quarter of 2009.  The increase in average interest bearing liabilities was the result of increases in time deposits, savings, demand deposits, and other borrowings of $10.7 million, $7.6 million, $1.2 million, and $228,000, respectively, offset by a decrease in Federal funds purchased of $2.1 million.
 
 The average yield on earning assets was 5.5% for the third quarter of 2009 as compared to 5.7% for the same quarter in 2008.  The average rate paid on interest-bearing liabilities was 2.9% for the third quarter of 2009 and 3.5% for the third quarter of 2008. This was the result of the decreasing interest rate
environment that was experienced during the latter part of 2008 and into 2009.
 
 Net Interest Income and Net Interest Margin
 Net interest income is the difference between interest income earned on assets and interest expense incurred on liabilities used to fund those assets.  Interest earning assets primarily include loans, securities and Federal funds sold.  Liabilities used to fund such assets include deposits and borrowed
funds.  Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, related yields and associated funding costs.
 
 Interest income for the third quarter of 2009 increased by $144,000 or 4.4% over the third quarter of 2008 due mainly to an increase in loans and securities.  Interest expense for the third quarter of 2009 decreased by $128,000 or 8.5%, as compared to the third quarter of 2008.  The decrease was due
mainly to decreases in deposit rates offset by increases in deposits.
 
 Net interest income increased by $272,000 or 15.6% to $2.0 million for the third quarter of 2009 as compared to $1.7 million for the third quarter of 2008.  This increase resulted from a net increase in interest bearing assets over net interest bearing liabilities and increasing net spread between yields on
average assets and average rate paid.
 
 For the nine months ended September 30, 2009, interest income increased by $457,000 or 4.8% over the same period in 2008.  The increase for the first nine months was mostly related to the increase in loans and securities.  Interest earning assets for the first nine months of 2009 averaged $240.0 million
versus $223.0 million for the comparable period in 2008.  The yield on those assets was 5.6% for the first nine months of 2009 and 5.7% for the same period of 2008.
 
 Interest expense for the first nine months of 2009 decreased $461,000 or 9.9% as compared to the same period of 2008.  The level of average interest-bearing liabilities increased from $170.5 million for the first three quarters of 2008 to $185.2 million for the first three quarters of 2009.  The average
rate paid for the first nine months of 2009 and 2008 was 3.0% and 3.6%, respectively.
 
 Net interest income for the first nine months of 2009 increased by $918,000 or 18.5% over the same period in 2008.  The company’s net interest margin increased to 3.3% for the nine months ended September 30, 2009 from 3.0% for the same period last year.
   18
 
 Index
  
 Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average earning assets.
 
 Net interest margin for the third quarter of 2009 was 3.3% compared to 3.1% for the third quarter of 2008.  During the third quarter of 2009, the yield on earning assets was 5.5%, a 20 basis point decrease over the 5.7% reported in the third quarter of 2008.  The average rate paid on interest-bearing
deposits decreased to 2.9% as compared to 3.5% for the third quarter of 2008.
 
 Provision for Loan Losses
 Provision for loan losses increased from $38,000 for the third quarter of 2008 to $60,000 for the same period of 2009.  The increase is due mainly to the increase in loans.
 
 For the nine months ending September 30, 2009, provision for loan losses decreased to $61,000 compared to $68,000 in the same period of 2008.
 
 Management regularly assesses the appropriateness and adequacy of the allowance for loan losses in relation to credit exposure associated with individual borrowers, overall trends in the loan portfolio and other relevant factors, and believes the allowance is reasonable and adequate for each of the periods presented.  The
Corporation has no credit exposure to foreign countries or foreign borrowers.  The Corporation has no exposure to subprime mortgage loans.
 
 Non-interest Income
 Non-interest income for the third quarter of 2009 decreased by $532,000 from the same period in 2008.  The decrease was mainly due to a $537,000 other-than-temporary impairment on a security.  Non-interest income for the first nine months of 2009 decreased by $542,000 from the same period in 2008.
 
 Non-interest Expense
 For the third quarter of 2009, non-interest expenses increased by $55,000 or 7.1% to $834,000 compared to $779,000 for the same period in 2008.  The increase was due to increases in other expenses, PA shares tax, and employee expenses, offset by a decrease in occupancy expense.
 
 Salaries and employee benefits, which represent the largest component of non-interest expenses, increased by $7,000 or 2.0%, for the third quarter of 2009.  This increase was due in part to an increase in employee salaries.
 
 Occupancy expense for the third quarter of 2009 decreased by $20,000 or 24.1% as compared to the third quarter of 2008.  This decrease was mainly due to a decrease in rental property expenses.
 
 Furniture and equipment expense remained at $68,000 for the third quarters of 2009 and 2008.
 
 Shares tax increased from $106,000 to $118,000 from the third quarter of 2008 to the third quarter of 2009.
 
 Other expenses increased by $56,000, or 34.1%, to $220,000 in the third quarter of 2009 from the same period in 2008.  This increase was mainly due to increases in FDIC assessment expense and director training and education.
 
 Total non-interest expense was $2.6 million for the first nine months of 2009 compared to $2.3 million for the same period of 2008.
 
 Salary and employee benefits, which represent the largest component, 42.4%, of non-interest expenses, increased by $25,000 or 2.4% over the first nine months of 2008.
 
 Occupancy expense for the first nine months of 2009 decreased by $4,000 or 2.3% as compared to the first nine months of 2008 due mainly to decreased rental property expenses.
 
 Furniture and equipment expense increased by $5,000 or 2.5% to $205,000 for the first three quarters of 2009 as compared to 2008.
 
 Shares tax expense increased by $29,000 or 9.1% for the first nine months of 2009 from the same period in 2008.  This increase was mainly due to continued capital growth.
   19
 
 Index
  
 Net other expenses increased by $233,000 or 44.6% for the first nine months ended September 30, 2009 over the same period of 2008 due mainly to the increase in the FDIC assessment expense.
 
 One key measure used to monitor progress in controlling overhead expenses is the ratio of net non-interest expenses to average assets.  The ratio equals non-interest expenses (excluding foreclosed real estate expenses) less non-interest income (exclusive of non-recurring gains), divided by average assets.  This
ratio equaled 2.0% and 1.1% for the three months ended September 30, 2009 and 2008, respectively.  The overhead expense ratio equaled 1.5% for the first three quarters of 2009 and 1.2% for the same period in 2008.
 
 Another productivity measure is the operating efficiency ratio.  This ratio expresses the relationship of non-interest expense (excluding foreclosed real estate expenses) to net interest income plus non-interest income (excluding non-recurring gains).  For the quarter ended September 30, 2009, the
operating efficiency ratio was 65.2% compared to 39.8% for the same period in 2008.  For the nine months ended September 30, 2009, this ratio was 50.9% compared to 43.0% for the nine months ended September 30, 2008.  This increase is due mainly to the increase in non-interest expense.
 
 Provision for Federal Income Taxes
 The provision for federal income taxes was $111,000 for the third quarter of 2009 compared to $232,000 for this same period in 2008.  For the first nine months the provision was $648,000 and $602,000 for 2009 and 2008, respectively.  The effective tax rate, which is the ratio of income tax expense
to income before income taxes, was 16.7% for the third quarter of 2009 and 23.2% for the same period in 2008.  The effective tax rate is below 34% due to the number of tax-exempt securities held by the Corporation.  The effective tax rate and provision for Federal income taxes decreased due to the decrease in pre-tax income.
 
 Return on Average Assets
 Return on average assets (ROA) measures the Corporation’s net income in relation to its total average assets.  The Corporation’s annualized ROA for the third quarter of 2009 was 0.9% compared to 1.3% for the third quarter of 2008 and 1.2% and 1.3% for the first nine months of 2009 and 2008, respectively.  The
decrease in ROA was mainly due to the decrease in net income quarter to quarter.
 
 Return on Average Equity
 Return on average equity (ROE) indicates how effectively the Corporation can generate net income on the capital invested by its stockholders.  ROE is calculated by dividing net income by average stockholders’ equity.  For purposes of calculating ROE, average stockholder’s equity included
the effect of unrealized gains or losses, net of income taxes, on securities available for sale.  The annualized ROE for the third quarter of 2009 and 2008 is 4.9% and 7.2%, respectively.  The annualized ROE for the first nine months of 2009 decreased to 6.7% from 7.0% in the same period of 2008.  This decrease is due mainly to the decrease in net income in the third quarter of 2009 over the same period for 2008.
 
 FINANCIAL CONDITION
 
 Securities
 Securities available for sale decreased $1,721,000 to $36.2 million as of September 30, 2009, from $38.0 million at December 31, 2008.
 
 The securities available for sale portfolio had an unrealized gain of $790,000, net of taxes, at the end of the third quarter of 2009, compared to an unrealized gain of $442,000, net of taxes, at December 31, 2008.  This increase was mainly due to current market conditions.
 
 During the first nine months of 2009, the securities held to maturity portfolio increased $10.9 million to $102.4 million from $91.6 million at December 31, 2008, primarily due to growth in deposits exceeding growth in loans.
 
 There are 80 debt securities in unrealized loss positions; however, the Corporation does not intend to sell nor be required to sell these securities.  There is one security deemed to be other-than-temporarily impaired.  See Note 7 for details on this impairment.
   20
 
 Index
  Net Loans Receivable
 During the first nine months of 2009, net loans receivable increased by $8.7 million from $100.2 million at December 31, 2008 to $108.9 million at September 30, 2009.  Net loans receivable represented 52.5% of total deposits and 42.6% of total assets at September 30, 2009 as compared to 51.9% and 42.0%, respectively,
at December 31, 2008.
 
 Loan and Asset Quality and Allowance for Loan Losses
 Total non-performing loans (comprised of non-accruing loans and loans past due 90 days or more and still accruing interest) were $610,000 at September 30, 2009 as compared to $173,000 at December 31, 2008.  There were no repossessed assets held by the Corporation as of September 30, 2009 and December 31, 2008.
 
 The following summary table presents information regarding non-performing loans and assets as of September 30, 2009 and December 31, 2008:
  Nonperforming Loans and Assets
 (Dollars in Thousands)
 
 September
30, 2009


December
31, 2008Nonaccrual loans:

$
-


$
-Commercial


-



-Consumer


-



-Real Estate:Construction


-



-Mortgage


-



-Total nonaccrual


-



-Loans past due 90 days or more


610



173Restructured loans


-



-Total nonperforming loans


610



173Repossessed assets


-



-Total nonperforming assets

$
610


$
173Nonperforming loans to total loans


0.56
%


0.17
%Nonperforming assets to total assets


0.24
%


0.07
%
 
 The following table sets forth the Corporation’s provision and allowance for loan losses.
 
 Allowance for Loan Losses
 (Dollars in Thousands)
 
 Nine Months


Nine MonthsEnding 9/30/09


Ending 9/30/08Balance at beginning of period

$
761


$
620Provisions charged to operating expenses


61



68Recoveries of loans previously charged-offCommercial


-



-Consumer


-



1Real Estate


-



-Total recoveries


-



1Loans charged-off:Commercial


-



-Consumer


(14
)


(2
)Real Estate


-



-Total charged-off


(14
)


(2
)Net charge-offs


(14
)


-Balance at end of period

$
808


$
687Net charge-offs as a percentage of averageloans outstanding


0.01
%


0.00
%Allowance for loan losses as a percentage ofperiod-end loans


0.74
%


0.69
%
   21
 
 Index
  Deposits
 Total deposits at September 30, 2009 were $207.3 million, an increase of $14.4 million, or 7.4%, over total deposits of $192.9 million at December 31, 2008.  The outstanding balances by deposit classification at September 30, 2009 and 2008 are presented in the following table.
 
 At September 30,(Dollars in thousands)2009


2008Balance


Average
Rate


Balance


Average
RateDemand Deposits:Noninterest-bearing

$
17,326





$
15,915Interest-bearing


6,960



0.44



6,246



0.73Savings


56,608



1.33



47,921



1.69Time deposits:<$100,000


81,194



3.57



78,426



4.25>$100,000


45,200



3.96



41,040



4.64Total Deposits

$
207,288






$
189,548
 
 Interest Rate Sensitivity
 The management of interest rate sensitivity seeks to avoid fluctuating net interest margins and to provide consistent net interest income through periods of changing interest rates.
 
 The Corporation’s risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is composed primarily of interest rate risk.  The primary objective of the Corporation’s asset/liability management activities is to maximize net interest income while maintaining
acceptable levels of interest rate risk.  The Bank’s Asset/Liability Committee (ALCO) is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with those policies.  The Corporation’s Board of Directors approves the guidelines established by ALCO.
 
 An interest rate sensitive asset or liability is one that, within a defined period, either matures or experiences an interest rate change in line with general market interest rates.  Historically, the most common method of estimating interest rate risk was to measure the maturity and repricing relationships
between interest-earning assets and interest-bearing liabilities at specific points in time (GAP), typically one year.  Under this method, a company is considered liability sensitive when the amount of its interest-bearing liabilities exceeds the amount of its interest-bearing assets within the one-year horizon.  However, assets and liabilities with similar repricing characteristics may not reprice at the same time or to the same degree.  As a result, the Corporation’s GAP
does not necessarily predict the impact of changes in general levels of interest rates on net interest income.
 
 Management believes the simulation of net interest income in different interest rate environments provides a more meaningful measure of interest rate risk.  Income simulation analysis captures not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do
so.  Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time.  Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them.
 
 The Corporation’s income simulation model analyzes interest rate sensitivity by projecting net interest income over the next 12 months in a flat rate scenario versus net income in alternative interest rate scenarios.  Management continually reviews and refines its interest rate risk management process
in response to the changing economic climate.  Currently, the Corporation’s model projects a proportionate 200 basis point change during the next year.
 
 The Corporation’s ALCO policy has established that income sensitivity will be considered acceptable if overall net income volatility in a plus or minus 200 basis point scenario is within 5% of net interest income in a flat rate scenario.  At September 30, 2009, the Corporation’s simulation model
indicated net interest income would increase 9.3% within the first year if rates increased as described above.  The model projected that net interest income would decrease by 4.7% in the first year if rates decreased as described above.
   22
 
 Index
  Liquidity
 Liquidity management involves the ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth and reduce assets to meet deposit withdrawals, to maintain reserve requirements, and to otherwise operate the Corporation on an ongoing basis.  Liquidity needs are generally met by
converting assets into cash or obtaining sources of additional funds, mainly deposits.  Primarily cash and federal funds sold, and the cash flow from the amortizing securities and loan portfolios provide liquidity sources from asset categories.  The primary source of liquidity from liability categories is the generation of additional core deposit balances.
 
 Additionally, the Corporation has established secondary sources of liquidity consisting of federal funds lines of credit and borrowing capacity at the Federal Home Loan Bank, which can be drawn upon if needed.  In view of the primary and secondary sources as previously mentioned, management believes that the
Corporation is capable of meeting its anticipated liquidity needs.
 
 Off-Balance Sheet Arrangements
 The Corporation’s financial statements do not reflect off-balance sheet arrangements that are made in the normal course of business.  Those off-balance sheet arrangements consist of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments.  These commitments,
at September 30, 2009 totaled $7.6 million.  This consisted of $1.9 million in commercial real estate, construction, and land development loans, $5.0 million in home equity lines of credit, $658,000 in standby letters of credit and the remainder in other unused commitments.  Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation.
 
 Management believes that any amounts actually drawn upon can be funded in the normal course of operations.  The Corporation has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.
 
 Capital Adequacy
 At September 30, 2009, stockholders’ equity totaled $45.0 million, an increase of 1.1% over stockholders’ equity of $44.5 million at December 31, 2008.  The increase in stockholders’ equity for the nine months ended September 30, 2009 is net of a $1,408,000 increase in treasury stock and an
unrealized gain, net of income taxes, of $348,000 on securities available for sale.  Excluding this unrealized gain and treasury stock purchase, stockholders’ equity changed by an increase of $1.5 million in retained net income.
 
 Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy.  The risk-based capital standards require all banks to have Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at least 8% of risk-adjusted assets.  Tier 1 capital includes
common stockholders’ equity together with related surpluses and retained earnings.  Total capital may be comprised of total Tier 1 capital plus qualifying debt instruments and the allowance for loan losses.
 
 The following table provides a comparison of the Bank’s risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the period indicated.  The consolidated ratios are not materially different from those presented below.
  September 30,
2009


December 31,
2008


For Capital
Adequacy
Purposes


To be Well
Capitalized
Under Prompt
Corrective Action
ProvisionRisk-based capital ratios:Tier 1 Capital


30.7
%


37.8
%


4.0
%


6.0
%Total Capital


31.3
%


38.5
%


8.0
%


10.0
%Leveraged Capital


17.1
%


18.6
%


4.0
%


5.0
%
 
 The decrease in Risk-based capital ratios from December 31, 2008 to September 30, 2009 is due mainly to an increase in assets.  At September 30, 2009, the capital levels of the Bank met the definition of a “well capitalized” institution.
   23
 
 Index
  Item 3.
 
 Quantitative and Qualitative Disclosures about Market Risk
 The Corporation’s exposure to market risk has not changed significantly since June 30, 2009.  The market risk principally includes interest rate risk, which is discussed in the Management’s Discussion and Analysis above.
 
 Item 4T.
 
 Controls and Procedures
 Management of the Corporation, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)
as of the end of the period covered by this report.  Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this report.
 
 There have not been any changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Corporation’s
internal control over financial reporting.
 
 Part II. OTHER INFORMATION
 
 Item 1.            Legal Proceedings
 In the opinion of the management of the Corporation, there are no proceedings pending to which the Corporation or the Bank is a party or to which their property is subject, which, if determined adversely to the Corporation or the Bank, would be material in relation to the Corporation’s or the Bank’s financial
condition.  There are no proceedings pending other than ordinary routine litigation incident to the business of the Corporation or the Bank.  In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation or the Bank by government authorities.
 
 Item 1A.         Risk Factors
 During 2008 and 2009 the capital and credit markets experienced severe volatility and disruption. From the third quarter of 2008 through the third quarter of 2009, the volatility and disruption reached unprecedented levels.  Reflecting concern about the stability of the financial markets generally and the strength
of counterparties, many lenders and institutional investors have reduced, and in some cases ceased to provide, funding to borrowers, including other financial institutions.  Although to date we have not suffered liquidity problems, we are part of the financial system and a systemic lack of available credit, a lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition and results
of operations.
 
 In response to the turmoil in the banking system and financial markets, the U.S. government has taken unprecedented actions, including the U.S. Treasury's plan to inject capital into financial institutions for the purpose of stabilizing the financial markets generally or particular financial institutions. 
There is no assurance that government actions will achieve their purpose.
 
 The failure to help stabilize the financial markets and a continuation or worsening of the current financial market conditions could have a material adverse affect on our business, our financial condition, the financial condition of our customers, our common stock trading price, as well as our ability to access credit. 
It could also result in further declines in our investment portfolio which could become other-than-temporary impairments.
 
 Please refer to Part 1, Item 1A, “Risk Factors”, of the Corporation’s Form 10-K for the year ended December 31, 2008 for additional disclosures regarding the risks and uncertainties related to the Corporation’s business.
 
 
  24
 
 Index
  Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds
 In April 2009 the Corporation offered its shareholders a “No-Fee, Odd-Lot Sales Program,” which shareholders can use to sell Neffs Bancorp, Inc. common shares held by persons who are the owners of less than 100 shares.  The price per share will equal the average closing price during the previous
ninety-day period in which the shareholder’s instructions to sell are received in the corporate office.  Shareholders owning 100 or more shares are not included in the offer and are ineligible to participate in the program.  The program was extended and will expire at 5:00 P. M., Eastern Standard Time, on December 31, 2010, unless extended or earlier terminated.  The Corporation reserves the right to terminate or extend the program at any time in its sole discretion.
 
 The Corporation repurchased Bancorp stock during the quarter as presented in the table below.
 
 Total Number of
Shares Purchased


Average Price
Paid per Share


Total Number
of Shares Purchased as
Part of Publicly
Announced Plans
or Programs

Maximum Number of
Shares that may yet bePurchased Under the
Plans or ProgramsJuly 1 through July 31, 2009


40


$
261



40

NAAugust 1 through August 31, 2009


61



263



61

NASeptember 1 through September 30, 2009


3,220



265



-

NATotal


3,321


$
265



101

NA
 
 Item 3.            Defaults Upon Senior Securities
 Not applicable
 
 Item 4.            Submission of Matters to a Vote of Security Holders
 Not applicable
 
 Item 5.            Other Information
 Not applicable
 
 Item 6.            Exhibits
 
 3(i)
Amended and Restated Articles of Incorporation for Neffs Bancorp, Inc.
(Incorporated by reference to Exhibit 3(i) to the Form 10 filed with the Commission on April 27, 2001, as amended on June 29, 2001 and July 20, 2001.)
 
 3(ii)
Amended and Restated By-laws of Neffs Bancorp, Inc. (Incorporated by reference to Exhibit 99.1 to the Form 8K filed with the Commission on February 27, 2002.)
 
 31.1

31.2

32.1

32.2
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

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

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

Certification of Principal Financial Officer pursuant to Section 1350 of the Sarbanes Oxley Act of 2002.
    25
 
 Index
  
 SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf be the undersigned thereunto duly authorized.
 
 
 NEFFS BANCORP, INC.Date:  November 16, 2009

By:
/s/ John J. RemaleyName:
John J. RemaleyTitle:
President