UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-50529
CHEVIOT FINANCIAL CORP.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Federal 56-2423720
---------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3723 Glenmore Avenue, Cincinnati, Ohio 45211
--------------------------------------------------------------------------------
(Address of principal executive office)
Registrant's telephone number, including area code: (513) 661-0457
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one.)
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Small business issuer [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 November 12, 2009, the latest practicable date, 8,868,706 shares of the
registrant's common stock, $.01 par value, were issued and outstanding.
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 during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes [ ] No [ ]
Page 1 of 30
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 21
Quantitative and Qualitative Disclosures about
Market Risk 29
Controls and Procedures 29
PART II - OTHER INFORMATION 30
SIGNATURES 31
2
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 2009 2008
(Unaudited)
Cash and due from banks $ 2,583 $ 4,192
Federal funds sold 5,558 4,063
Interest-earning deposits in other financial institutions 4,753 1,758
--------- ---------
Cash and cash equivalents 12,894 10,013
Investment securities available for sale - at fair value 49,525 23,909
Investment securities held to maturity - at cost, approximate
market value of $- and $7,074 at September 30, 2009
and December 31, 2008, respectively - 7,000
Mortgage-backed securities available for sale - at fair value 5,217 648
Mortgage-backed securities held to maturity - at cost, approximate
market value of $6,103 and $6,830 at September 30, 2009 and
December 31, 2008, respectively 6,005 6,915
Loans receivable - net 251,661 267,754
Loans held for sale - at lower of cost or market 429 729
Real estate acquired through foreclosure - net 2,391 1,064
Office premises and equipment - at depreciated cost 4,945 4,969
Federal Home Loan Bank stock - at cost 3,369 3,369
Accrued interest receivable on loans 1,111 1,159
Accrued interest receivable on mortgage-backed securities 38 32
Accrued interest receivable on investments and interest-earning deposits 395 466
Prepaid expenses and other assets 796 297
Bank-owned life insurance 3,618 3,516
Prepaid federal income taxes 90 160
--------- ---------
Total assets $ 342,484 $ 332,000
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $232,325 $216,048
Advances from the Federal Home Loan Bank 37,973 44,604
Advances by borrowers for taxes and insurance 992 1,464
Accrued interest payable 147 172
Accounts payable and other liabilities 1,822 1,069
Deferred federal income taxes 528 412
--------- ---------
Total liabilities 273,787 263,769
Shareholders' equity
Preferred stock - authorized 5,000,000 shares, $.01 par value; none issued
Common stock - authorized 30,000,000 shares, $.01 par value;
9,918,751 shares issued at September 30, 2009 and December 31, 2008, respectively 99 99
Additional paid-in capital 43,771 43,625
Shares acquired by stock benefit plans (2,426) (2,829)
Treasury stock - at cost, 1,050,045 and 1,046,247 shares at September 30, 2009
and December 31, 2008, respectively (12,828) (12,799)
Retained earnings - restricted 40,015 40,276
Accumulated comprehensive gain (loss), unrealized gains (losses) on securities
available for sale, net of related tax effects (benefits) 66 (141)
--------- ---------
Total shareholders' equity 68,697 68,231
--------- ---------
Total liabilities and shareholders' equity $ 342,484 $ 332,000
========= =========
See accompanying notes to consolidated financial statements.
3
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
2009 2008 2009 2008
(Unaudited)
Interest income
Loans $11,103 $11,489 $ 3,577 $ 3,922
Mortgage-backed securities 342 369 110 107
Investment securities 1,038 1,582 384 531
Interest-earning deposits and other 35 80 10 10
------- ------- ------- -------
Total interest income 12,518 13,520 4,081 4,570
Interest expense
Deposits 3,805 5,261 1,169 1,513
Borrowings 1,350 1,226 422 480
------- ------- ------- -------
Total interest expense 5,155 6,487 1,591 1,993
------- ------- ------- -------
Net interest income 7,363 7,033 2,490 2,577
Provision for losses on loans 803 413 351 125
------- ------- ------- -------
Net interest income after provision for losses on loans 6,560 6,620 2,139 2,452
Other income (expense)
Rental 38 39 13 13
Gain on sale of loans 319 26 47 17
Loss on sale of real estate acquired through foreclosure (54) (48) (5) (5)
Earnings on bank-owned life insurance 103 99 34 34
Other operating 247 246 90 87
------- ------- ------- -------
Total other income 653 362 179 146
General, administrative and other expense
Employee compensation and benefits 3,384 3,247 1,100 1,150
Occupancy and equipment 429 418 147 140
Property, payroll and other taxes 745 719 235 229
Data processing 257 236 73 77
Legal and professional 316 285 97 93
Advertising 150 150 50 50
FDIC expense 194 22 38 9
Other operating 570 453 143 142
------- ------- ------- -------
Total general, administrative and other expense 6,045 5,530 1,883 1,890
------- ------- ------- -------
Earnings before income taxes 1,168 1,452 435 708
Federal income taxes (benefit)
Current 401 452 219 345
Deferred 9 6 (25) (88)
------- ------- ------- -------
Total federal income taxes 410 458 194 257
------- ------- ------- -------
NET EARNINGS $ 758 $ 994 $ 241 $ 451
======= ======= ======= =======
EARNINGS PER SHARE
Basic $ .09 $ .11 $ .03 $ .05
======= ======= ======= =======
Diluted $ .09 $ .11 $ .03 $ .05
======= ======= ======= =======
Dividends per common share $ .30 $ .27 $ .10 $ .09
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
4
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the nine and three months ended September 30, 2009 and 2008
(In thousands)
For the nine months For the three months
ended September 30, ended September 30,
2009 2008 2009 2008
Net earnings for the period $758 $ 994 $241 $ 451
Other comprehensive income (loss), net of tax (benefits):
Unrealized holding gains (losses) on securities during the period, net of tax
(benefits) of $107and $(262) for the nine months ended September 30, 2009
and 2008, respectively, and $97and $(151) for the three months ended
September 30, 2009 and 2008, respectively 207 (508) 188 (294)
---- ----- ---- ----
Comprehensive income $965 $ 486 $429 $ 157
==== ===== ==== =====
Accumulated comprehensive income (loss) $ 66 $(462) $ 66 $(462)
==== ===== ==== =====
See accompanying notes to consolidated financial statements.
5
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2009 and 2008
(In thousands)
2009 2008
(Unaudited)
Cash flows from operating activities:
Net earnings for the period $ 758 $ 994
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums and discounts on investment
and mortgage-backed securities, net 15 (15)
Depreciation 234 214
Amortization of deferred loan origination fees - net (20) -
Proceeds from sale of loans in the secondary market 19,405 2,833
Loans originated for sale in the secondary market (19,086) (2,787)
Gain on sale of loans (319) (26)
Loss on sale of real estate acquired through foreclosure 54 48
Federal Home Loan Bank stock dividends - (131)
Provision for losses on loans 803 413
Net increase in cash surrender value of bank-owned life insurance (102) (99)
Amortization of expense related to stock benefit plans 363 376
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 48 (62)
Accrued interest receivable on mortgage-backed securities (6) 16
Accrued interest receivable on investments and interest-
earning deposits 71 (98)
Prepaid expenses and other assets (499) (215)
Accounts payable and other liabilities 753 103
Accrued interest payable (25) 60
Federal income taxes
Current 70 199
Deferred 9 6
------ ------
Net cash provided by operating activities 2,526 1,829
------ ------
Cash flows used in investing activities:
Principal repayments on loans 58,684 39,471
Loan disbursements (42,787) (56,758)
Loans purchased (1,700) (455)
Purchase of investment securities - available for sale (55,940) (18,973)
Proceeds from maturity of investment securities - available for sale 30,565 21,000
Proceeds from maturity of investment securities - held to maturity 7,000 -
Purchase of mortgage-backed securities - available for sale (5,267) -
Principal repayments on mortgage-backed securities - available for sale 755 143
Principal repayments on mortgage-backed securities - held to maturity 911 2,243
Proceeds from sale of real estate acquired through foreclosure 268 661
Additions to real estate acquired through foreclosure (236) (9)
Proceeds from sale of office premises and equipment 1 -
Purchase of office premises and equipment (211) (69)
------ ------
Net cash used in investing activities (7,957) (12,746)
------ ------
Cash flows provided by financing activities:
Net increase (decrease) in deposits 16,277 (6,810)
Proceeds from Federal Home Loan Bank advances - 25,500
Repayments on Federal Home Loan Bank advances (6,631) (8,105)
Advances by borrowers for taxes and insurance (472) (287)
Treasury stock repurchases (29) (649)
Stock option expense, net 186 183
Dividends paid on common stock (1,019) (925)
------ ------
Net cash provided by financing activities 8,312 8,907
------ ------
Net increase (decrease) in cash and cash equivalents 2,881 (2,010)
Cash and cash equivalents at beginning of period 10,013 9,450
------ ------
Cash and cash equivalents at end of period $12,894 $7,440
====== ======
See accompanying notes to consolidated financial statements.
6
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30, 2009 and 2008
(In thousands)
2009 2008
(Unaudited)
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 327 $ 261
====== ======
Interest on deposits and borrowings $5,180 $6,427
====== ======
Supplemental disclosure of noncash investing activities:
Transfer of loans to real estate acquired through foreclosure $1,413 $ 541
====== ======
Loans originated upon sales of real estate acquired through foreclosure $ - $ 138
====== ======
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 153 $ 15
====== ======
See accompanying notes to consolidated financial statements.
7
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2009 and 2008
1. Basis of Presentation
---------------------
Cheviot Financial Corp. ("Cheviot Financial" or the "Corporation") is a
financial holding company, the principal asset of which consists of its
ownership of Cheviot Savings Bank (the "Savings Bank"). The Savings Bank
conducts a general banking business in southwestern Ohio which consists of
attracting deposits and applying those funds primarily to the origination of
real estate loans. The Corporation is 62% owned by Cheviot Mutual Holding
Company. Cheviot Savings' profitability is significantly dependent on net
interest income, which is the difference between interest income from
interest-earning assets and the interest expense paid on interest-bearing
liabilities. Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances.
The accompanying unaudited financial statements were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. Accordingly, these consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto of Cheviot Financial included in the
Annual Report on Form 10-K for the year ended December 31, 2008. However, in the
opinion of management, all adjustments (consisting of only normal recurring
accruals) which are necessary for a fair presentation of the consolidated
financial statements have been included. The results of operations for the three
and nine month periods ended September 30, 2009, are not necessarily indicative
of the results which may be expected for the entire year.
2. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements as of and for the three and
nine months ended September 30, 2009, include the accounts of the Corporation
and its wholly-owned subsidiary, the Savings Bank. All significant intercompany
items have been eliminated.
3. Liquidity and Capital Resources
-------------------------------
Liquidity describes our ability to meet the financial obligations that arise in
the ordinary course of business. Liquidity is primarily needed to meet the
borrowing and deposit withdrawal requirements of our customers and to fund
current and planned expenditures. Our primary sources of funds are deposits,
scheduled amortization and prepayments of loan principal and mortgage-backed
securities, maturities and calls of securities and funds provided by our
operations. In addition, we may borrow from the Federal Home Loan Bank of
Cincinnati. At September 30, 2009 and December 31, 2008, we had $38.0 million
and $44.6 million, respectively, in outstanding borrowings from the Federal Home
Loan Bank of Cincinnati and had the capacity to increase such borrowings at
those dates by approximately $105.2 million and $99.3 million, respectively.
Loan repayments and maturing securities are a relatively predictable source of
funds. However, deposit flows, calls of securities and prepayments of loans and
mortgage-backed securities are strongly influenced by interest rates, general
and local economic conditions and competition in the marketplace. These factors
reduce the predictability of these sources of funds.
8
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2009 and 2008
3. Liquidity and Capital Resources (continued)
-------------------------------
Our primary investing activities are the origination of one- to four-family real
estate loans, commercial real estate, construction and consumer loans, and, to a
lesser extent, the purchase of securities. For the nine months ended September
30, 2009, loan originations totaled $61.9 million, compared to $59.5 million for
the nine months ended September 30, 2008.
Total deposits increased $16.3 million during the nine months ended September
30, 2009, compared to a decrease of $6.8 million during the nine months ended
September 30, 2008. Deposit flows are affected by the level of interest rates,
the interest rates and products offered by competitors and other factors.
The following table sets forth information regarding the Corporation's
obligations and commitments to make future payments under contract as of
September 30, 2009.
Payments due by period
Less More than More than More
than 1-3 4-5 than
1 year years years 5 years Total
(In thousands)
Contractual obligations:
Advances from the Federal Home Loan Bank $ 12,000 $ 2,236 $ 3,178 $20,559 $ 37,973
Certificates of deposit 107,755 25,200 11,041 - 143,996
Amount of loan commitments and expiration per period:
Commitments to originate one- to four-family
loans 589 - - - 589
Home equity lines of credit 12,197 - - - 12,197
Undisbursed loans in process 3,987 - - - 3,987
-------- ------- ------- ------- --------
Total contractual obligations $136,528 $27,436 $14,219 $20,559 $198,742
======== ======= ======= ======= ========
We are committed to maintaining a strong liquidity position. We monitor our
liquidity position on a daily basis. We anticipate that we will have sufficient
funds to meet our current funding commitments. Based on our deposit retention
experience and current pricing strategy, we anticipate that a significant
portion of maturing time deposits will be retained.
9
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2009 and 2008
3. Liquidity and Capital Resources (continued)
-------------------------------
At September 30, 2009 and 2008, we exceeded all of the applicable regulatory
capital requirements. Our core (Tier 1) capital was $57.2 million and $55.0
million, or 17.1 % and 16.7% of total assets at September 30, 2009 and 2008. In
order to be classified as "well-capitalized" under federal banking regulations,
we were required to have core capital of at least $20.1 million, or 6.0% of
assets as of September 30, 2009. To be classified as a well-capitalized bank, we
must also have a ratio of total risk-based capital to risk-weighted assets of at
least 10.0%. At September 30, 2009 and 2008, we had a total risk-based capital
ratio of 34.5% and 32.2%, respectively.
4. Earnings Per Share
-----------------
Basic earnings per share is computed based upon the weighted-average common
shares outstanding during the period, less shares in the ESOP that are
unallocated and not committed to be released plus shares in the ESOP that have
been allocated. The weighted-average common shares outstanding includes
5,455,313 shares held by our mutual holding company. Weighted-average common
shares deemed outstanding gives effect to 178,540 and 214,247 unallocated shares
held by the ESOP for the three and nine months ended September 30, 2009 and
2008, respectively.
For the nine months ended For the three months ended
September 30, September 30,
2009 2008 2009 2008
Weighted-average common shares
outstanding (basic) 8,691,891 8,692,243 8,690,166 8,668,352
Dilutive effect of assumed exercise
of stock options 25,997 50,176 24,658 54,816
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 8,717,888 8,742,419 8,714,824 8,723,168
========= ========= ========= =========
5. Stock Option Plan
-----------------
On April 26, 2005, the Corporation approved a Stock Incentive Plan that provides
for grants of up to 486,018 stock options. During 2009, 2008, and 2007
approximately 8,060, 8,060, and 6,460 option shares were granted subject to five
year vesting.
The Corporation follows FASB Accounting Standard Codification Topic 718 (ASC
718), "Compensation - Stock Compensation", for its stock option plans, and
accordingly, the Corporation recognizes the expense of these grants as required.
Stock-based employee compensation costs pertaining to stock options is reflected
as a net increase in equity, for both any new grants, as well as for all
unvested options outstanding at December 31, 2005, in both cases using the fair
values established by usage of the Black-Scholes option pricing model, expensed
over the vesting period of the underlying option.
10
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2009 and 2008
5. Stock Option Plan (continued)
-----------------
The Corporation elected the modified prospective transition method in applying
ASC 718. Under this method, the provisions of ASC 718 apply to all awards
granted or modified after the date of adoption, as well as for all unvested
options outstanding at December 31, 2005. The compensation cost recorded for
unvested equity-based awards is based on their grant-date fair value. For the
nine months ended September 30, 2009, the Corporation recorded $186,000 in
after-tax compensation cost for equity-based awards that vested during the nine
months ended September 30, 2009. The Corporation has $201,000 unrecognized
pre-tax compensation cost related to non-vested equity-based awards granted
under its stock incentive plan as of September 30, 2009, which is expected to be
recognized over a weighted-average vesting period of approximately 0.8 years.
A summary of the status of the Corporation's stock option plan as of September
30, 2009, and changes during the period then ended is presented below:
Nine months ended Year ended
September 30, 2009 December 31, 2008
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
Outstanding at beginning of period 404,280 $11.16 396,220 $11.21
Granted 8,060 8.48 8,060 9.03
Exercised - - - -
Forfeited - - - -
------- ------- ------- ------
Outstanding at end of period 412,340 $ 11.11 404,280 $11.16
======= ======= ======= ======
Options exercisable at period-end 314,792 $ 11.17 233,936 $11.17
======= ======= ======= ======
Fair value of options granted $ 3.31 $ 1.93
======= ======
The following information applies to options outstanding at September 30, 2009:
Number outstanding 412,340
Exercise price $8.48 - $13.63
Weighted-average exercise price $11.17
Weighted-average remaining contractual life 5.8 years
The expected term of options is based on evaluations of historical and expected
future employee exercise behavior. The risk free interest rate is based upon the
U.S. Treasury rates at the date of grant with maturity dates approximately equal
to the expected life at grant date. Volatility is based upon the historical
volatility of the Corporation's stock.
11
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2009 and 2008
5. Stock Option Plan (continued)
-----------------
The fair value of each option was estimated on the date of grant using the
modified Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 2009: dividend yield of 4.48%, expected
volatility of 56.38%, risk-free interest rate of 3.25% and an expected life of
10 years for each grant.
The effects of expensing stock options are reported in "cash provided by
financing activities" in the Consolidated Statements of Cash Flows.
6. Investment and Mortgage-backed Securities
----------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of investment securities at September 30, 2009 and
December 31, 2008 are shown below.
September 30, 2009
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for Sale:
U.S. Government agency securities $47,927 $182 $ 61 $48,048
Municipal obligations 1,545 19 87 1,477
------- ---- ---- -------
$49,472 $201 $148 $49,525
======= ==== ==== =======
December 31, 2008
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for Sale:
U.S. Government agency securities $21,995 $62 $ 45 $22,012
Municipal obligations 2,110 2 215 1,897
------- --- ---- -------
$24,105 $64 $260 $23,909
======= === ==== =======
Held to Maturity:
U.S. Government agency securities $ 7,000 $74 $ - $ 7,074
======= === ==== =======
12
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2009 and 2008
6. Investment and Mortgage-backed Securities (continued)
-----------------------------------------
The amortized cost of investment securities at September 30, 2009 by contractual
term to maturity, are shown below.
September 30,
2009
(In thousands)
Less than one year $ 3,021
One to five years 31,906
Five to ten years 6,000
More than ten years 8,545
-------
$49,472
=======
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at September 30, 2009 and
December 31, 2008 are shown below.
September 30, 2009
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for sale:
Federal Home Loan Mortgage
Corporation adjustable-rate
participation certificates $ 883 $ 5 $ - $ 888
Federal National Mortgage
Association adjustable-rate
participation certificates 708 1 - 709
Government National Mortgage
Association adjustable-rate
participation certificates 3,579 41 - 3,620
------ ---- - ------
$5,170 $ 47 $ - $5,217
====== ==== ==== ======
Held to maturity:
Federal Home Loan Mortgage
Corporation adjustable-rate
participation certificates $ 625 $ 1 $ 2 $ 624
Federal National Mortgage
Association adjustable-rate
participation certificates 668 2 1 669
Government National Mortgage
Association adjustable-rate
participation certificates 4,712 98 - 4,810
------ ---- - ------
$6,005 $101 $ 3 $6,103
====== ==== ==== ======
13
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2009 and 2008
6. Investment and Mortgage-backed Securities (continued)
-----------------------------------------
December 31, 2008
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for sale:
Government National Mortgage
Association adjustable-rate
participation certificates $ 666 $ - $18 $ 648
====== === === ======
Held to maturity:
Federal Home Loan Mortgage
Corporation adjustable-rate
participation certificates $ 683 $ 1 $ 1 $ 683
Federal National Mortgage 757 - 5 752
Association adjustable-rate
participation certificates
Government National Mortgage
Association adjustable-rate
participation certificates 5,475 - 80 5,395
------ - --- ------
$6,915 $ 1 $86 $6,830
====== === === ======
The amortized cost of mortgage-backed securities, including those designated as
available for sale, at September 30, 2009, by contractual terms to maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may generally prepay obligations without prepayment penalties.
September 30,
2009
(In thousands)
Due in one year or less $ 437
Due in one year through five years 1,923
Due in five years through ten years 2,847
Due in more than ten years 5,968
--------
$ 11,175
========
14
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2009 and 2008
6. Investment and Mortgage-backed Securities (continued)
-----------------------------------------
The table below indicates the length of time individual securities have been in
a continuous unrealized loss position at September 30, 2009:
Less than 12 months 12 months or longer Total
Description of Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized
securities investments value losses investments value losses investments value losses
(Dollars in thousands)
U.S. Government
agency securities 4 $7,941 $58 1 $1,998 $ 3 5 $ 9,939 $ 61
Municipal obligations - - - 2 1,147 87 2 1,147 87
Mortgage-backed
securities 6 356 1 4 36 2 10 392 3
-- ------ -- - ------ ---- -- ------- ----
Total temporarily
impaired securities 10 $8,297 $59 7 $3,181 $ 92 17 $11,478 $151
== ====== == = ====== ==== == ======= ====
Management has the intent and ability to hold these securities for the
foreseeable future. The decline in the fair value is primarily due to an
increase in market interest rates. The fair values are expected to recover as
securities approach maturity dates. The Company has evaluated these securities
and has determined that the decline in their values is temporary.
7. Income Taxes
------------
The Corporation uses an asset and liability approach to accounting for income
taxes. The asset and liability approach requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities. Deferred tax assets are recognized if it is more likely than not
that a future benefit will be realized. The Corporation accounts for income
taxes in accordance with Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 740, Income Taxes, which prescribes
the recognition and measurement criteria related to tax positions taken or
expected to be taken in a tax return.
The Corporation recognizes the financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. At
adoption date, the Corporation applied the standard to all tax positions for
which the statute of limitations remained open. The Corporation was not required
to record any liability for unrecognized tax benefits as of January 1, 2007.
There have been no material changes in unrecognized tax benefits since January
1, 2007. As stated in the Annual Report, the only known tax attribute which can
influence the Corporation's effective tax rate is the utilization of charitable
contribution carryforwards.
15
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2009 and 2008
7. Income Taxes (continued)
------------
The Corporation is subject to income taxes in the U.S. federal jurisdiction, as
well as various state jurisdictions. Tax regulations within each jurisdiction
are subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the Corporation is
no longer subject to U.S. federal, state and local, or non U.S. income tax
examinations by tax authorities for the years before 2005.
The Corporation will recognize, if applicable, interest accrued related to
unrecognized tax benefits in interest expense and penalties in operating
expenses.
8. Disclosures about Fair Value of Assets and Liabilities
------------------------------------------------------
Pursuant to GAAP, fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. A three-level hierarchy exists in
GAAP for fair value measurements based upon the inputs to the valuation of an
asset or liability.
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities.
Fair value methods and assumptions are set forth below for each type of
financial instrument.
Securities available for sale: Fair value on available for sale securities were
based upon a market approach. Securities which are fixed income instruments that
are not quoted on an exchange, but are traded in active markets, are valued
using prices obtained from our custodian, which used third party data service
providers. Available for sale securities includes U.S. agency securities,
municipal bonds and mortgage-backed agency securities
16
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2009 and 2008
8. Disclosures About Fair Value of Assets and Liabilities (continued)
Fair Value Measurements at
September 30, 2009
-------------------------------------------------
Quoted prices
in active Significant Significant
markets for other other
identical observable unobservable
assets inputs inputs
September 30, 2009 (Level 1) (Level 2) (Level 3)
------------------ --------- --------- ---------
Securities available for sale $ 54,742 $54,742
The Corporation is predominately an asset based lender with real estate serving
as collateral on a substantial majority of loans. Loans which are deemed to be
impaired are primarily valued on a nonrecurring basis at the fair values of the
underlying real estate collateral. Such fair values are obtained using
independent appraisals, which the Corporation considers to be Level 2 inputs.
The aggregate carrying amount of impaired loans at September 30, 2009 was
approximately $2.0 million.
9. Effects of Recent Accounting Pronouncements
-------------------------------------------
On July 1, 2009, the FASB's GAAP Codification became effective as the sole
authoritative source of US GAAP. This codification reorganizes current GAAP for
non-governmental entities into a topical index to facilitate accounting research
and to provide users additional assurance that they have referenced all related
literature pertaining to a given topic. Existing GAAP prior to the Codification
was not altered in compilation of the GAAP Codification. The GAAP Codification
encompasses all FASB Statements of Financial Accounting Standards (SFAS),
Emerging Issues Task Force (EITF) statements, FASB Staff Positions (FSP), FASB
Interpretations (FIN), FASB Derivative Implementation Guides (DIG), American
Institute of Certified Public Accountants (AICPA) Statement of Positions (SOPS),
Accounting Principles Board (APB) Opinions and Accounting Research Bulletins
(ARBs) along with the remaining body of GAAP effective as of June 30, 2009.
Financial Statements issued for all interim and annual periods ending after
September 15, 2009 will need to reference accounting guidance embodied in the
Codification as opposed to referencing the previously authoritative
pronouncements. Accounting literature included in the codification is referenced
by Topic, Subtopic, Section and paragraph.
In June 2008, the Financial Accounting Standards Board ("FASB") issued FASB ASC
260-10, Determining whether Instruments Granted in Share-Based Payment
Transactions are Participating Securities. Under this topic, unvested
share-based payment awards that contain nonforfeitable rights to dividends are
considered to be a separate class of common stock and are included in the basic
earnings per share calculation using the two-class method that is described in
FASB ASC 260-10, Earnings per Share (EPS). This pronouncement was effective for
the Company as of January 1, 2009 and did not have a material effect on the EPS
calculation.
17
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2009 and 2008
9. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
In April 2009, the FASB issued three amendments to the fair value measurement,
disclosure and other-than- temporary impairment standards:
o FASB ASC 820-10-65, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly
o FASB ASC 320-10-65, Recognition and Presentation of
Other-Than-Temporary Impairments
o FASB ASC 825-10-65, Interim Disclosures about Fair Value of Financial
Instruments
FASB ASC 820-10-65, Fair Value Measurements, defines fair value as the price
that would be received to sell the asset or transfer the liability in an orderly
transaction between market participants at the measurement date under current
market conditions. FASB ASC 820-10-65 provides additional guidance on
determining when the volume and level of activity for the asset or liability has
significantly decreased as well as guidance on identifying circumstances when a
transaction may not be considered orderly. When the reporting entity concludes
there has been a significant decrease in the volume and level of activity for
the asset or liability, further analysis of the information from that market is
needed and significant adjustments to the related prices may be necessary to
estimate fair value in accordance with FASB ASC 820-10.
FASB ASC 320-10-65 clarifies the interaction of the factors that should be
considered when determining whether a debt security is other-than-temporarily
impaired. For debt securities, management must assess whether, (a) it has the
intent to sell the security or (b) it is more likely than not that it will be
required to sell the security prior to its anticipated recovery. These steps are
done before assessing whether the entity will recover the cost basis of the
investment. Previously, this assessment required management to assert it has
both the intent and the ability to hold a security for a period of time
sufficient to allow for an anticipated recovery in fair value to avoid
recognizing an other-than-temporary impairment. This change does not affect the
need to forecast recovery of the value of the security through either cash flows
or market price.
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, FASB ASC 320-10-65 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 the total 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.
FASB ASC 825-10-65 requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements.
All three pronouncements discussed herein include substantial additional
disclosure requirements. The three pronouncements were effective for the Company
as of June 30, 2009 did not have a significant impact to the Company's financial
statements.
18
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended September 30, 2009 and 2008
10. Fair Value of Financial Instruments
-----------------------------------
Fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practical to estimate the value, is based
upon the characteristics of the instruments and relevant market information.
Financial instruments include cash, evidence of ownership in an entity or
contracts that convey or impose on an entity the contractual right or obligation
to either receive or deliver cash for another financial instrument. These fair
value estimates are based on relevant market information and information about
the financial instruments. Fair value estimates are intended to represent the
price for which an asset could be sold or liability could be settled. However,
given there is no active market or observable market transactions for many of
the Corporation's financial instruments, it has made estimates of many of these
fair values which are subjective in nature, involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimated values.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments at September 30, 2009:
Cash and cash equivalents: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted market
price.
Loans receivable: The loan portfolio was segregated into categories with
similar characteristics, such as one-to four-family residential,
multi-family residential and commercial real estate. These loan categories
were further delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant loan categories were computed via discounted cash
flow analysis, using current interest rates offered for loans with similar
terms to borrowers of similar credit quality. For loans on deposit
accounts, fair values were deemed to equal the historic carrying values.
The historical carrying amount of accrued interest on loans is deemed to
approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate
fair value.
Deposits: The fair value of NOW accounts, passbook accounts, and money
market demand deposits is deemed to approximate the amount payable on
demand at September 30, 2009. Fair values for fixed-rate certificates of
deposit have been estimated using a discounted cash flow calculation using
the interest rates currently offered for deposits of similar remaining
maturities.
Advances from the Federal Home Loan Bank: The fair value of these advances
is estimated using the rates currently offered for similar advances of
similar remaining maturities or, when available, quoted market prices.
Advances by Borrowers for Taxes and Insurance: The carrying amount of
advances by borrowers for taxes and insurance is deemed to approximate fair
value.
19
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended September 30, 2009 and 2008
10. Fair Value of Financial Instruments (continued)
-----------------------------------
Commitments to extend credit: For fixed-rate loan commitments, the fair value
estimate considers the difference between current levels of interest rates and
committed rates. At September 30, 2009, the fair value of the derivative loan
commitments was not material.
September 30, 2009
Carrying Fair
Value Value
(In thousands)
Financial assets
Cash and cash equivalents $ 12,894 $ 12,894
Investment securities 49,525 49,525
Mortgage-backed securities 11,222 11,320
Loans receivable - net 252,090 265,952
Federal Home Loan Bank stock 3,369 3,369
-------- --------
$329,100 $343,060
======== ========
Financial liabilities
Deposits $232,325 $232,185
Advances from the Federal Home
Loan Bank 37,973 42,111
Advances by borrowers for taxes
and insurance 992 992
-------- --------
$271,290 $275,288
======== ========
11. Subsequent Events
-----------------
The Company evaluates events and transactions occurring subsequent to the date
of the financial statements for matters requiring recognition or disclosure in
the financial statements. The accompanying financial statements consider events
through November 12, 2009.
20
Cheviot Financial Corp.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
--------------------------
This report on Form 10-Q contains forward-looking statements, which can be
identified by the use of such words as estimate, project, believe, intend,
anticipate, plan, seek, expect and similar expressions. These forward-looking
statements are subject to significant risks, assumptions and uncertainties that
could affect the actual outcome of future events. Because of these
uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements.
Recent Developments
-------------------
The U.S. Treasury Department recently suggested legislation that would
significantly change the current bank regulatory system. The proposal would
create a new federal banking regulator, the National Bank Supervisor, and merge
our current primary federal regulator, the Office of Thrift Supervision, as well
as the Office of the Comptroller of the Currency (the primary federal regulator
for national banks) into the new federal bank regulator. The proposal would also
eliminate federal savings banks and require all federal savings banks to elect,
within six months of the effective date of the legislation, to convert to
either, a national bank, state bank or state savings association. A federal
savings bank that does not make the election would, by operation of law, be
converted to a national bank within one year of the effective date of the
legislation. Cheviot Savings Bank is an Ohio-chartered savings and loan
association, and would continue to have its Ohio charter.
Cheviot Financial Corp. would become a bank holding company subject to
regulation and supervision by the Board of Governors of the Federal Reserve
System instead of the Office of Thrift Supervision. As a bank holding company,
Cheviot Financial Corp. may become subject to regulatory capital requirements it
is not currently be subject to as a savings and loan holding company and certain
additional restrictions on its activities. In addition, compliance with new
regulations and being supervised by one or more new regulatory agencies could
increase our expenses.
On September 29, 2009, the Federal Deposit Insurance Corporation issued a notice
of proposed rulemaking pursuant to which all insured depository institutions
would be required to prepay their estimated assessments for the fourth quarter
of 2009, and for all of 2010, 2011 and 2012. Under the proposed rule, this
pre-payment would be due on December 31, 2009. Under the proposed rule, the
assessment rate for the fourth quarter of 2009 and for 2010 would be based on
each institution's total base assessment rate for the third quarter of 2009,
modified to assume that the assessment rate in effect on September 30, 2009 had
been in effect for the entire third quarter, and the assessment rate for 2011
and 2012 would be equal to the modified third quarter assessment rate plus an
additional 3 basis points. In addition, each institution's base assessment rate
for each period would be calculated using its third quarter assessment base,
adjusted quarterly for an estimated 5% annual growth rate in the assessment base
through the end of 2012.
Critical Accounting Policies
----------------------------
We consider accounting policies involving significant judgments and assumptions
by management that have, or could have, a material impact on the carrying value
of certain assets or on income to be critical accounting policies. We consider
the accounting method used for the allowance for loan losses to be a critical
accounting policy.
21
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Critical Accounting Policies (continued)
----------------------------------------
The allowance for loan losses is the estimated amount considered necessary to
cover inherent, but unconfirmed credit losses in the loan portfolio at the
balance sheet date. The allowance is established through the provision for
losses on loans which is charged against income. In determining the allowance
for loan losses, management makes significant estimates and has identified this
policy as one of the most critical for Cheviot Financial.
Management performs a quarterly evaluation of the allowance for loan losses.
Consideration is given to a variety of factors in establishing this estimate
including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlining collateral, the financial strength of the borrower, results of
internal loan reviews and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change.
The analysis has two components, specific and general allocations. Specific
percentage allocations can be made for unconfirmed losses related to loans that
are determined to be impaired. Impairment is measured by determining the present
value of expected future cash flows or, for collateral-dependent loans, the fair
value of the collateral adjusted for market conditions and selling expenses. If
the fair value of the loan is less than the loan's carrying value, a charge-off
is recorded for the difference. The general allocation is determined by
segregating the remaining loans by type of loan, risk weighting (if applicable)
and payment history. We also analyze historical loss experience, delinquency
trends, general economic conditions and geographic and industry concentrations.
This analysis establishes factors that are applied to the loan groups to
determine the amount of the general reserve. Actual loan losses may be
significantly more than the allowances we have established which could result in
a material negative effect on our financial results.
Discussion of Financial Condition Changes at December 31, 2008 and at September
30, 2009
--------------------------------------------------------------------------------
Total assets increased $10.5 million, or 3.2%, to $342.5 million at September
30, 2009, from $332.0 million at December 31, 2008. The increase in total assets
reflects an increase in cash and cash equivalents, investment securities and
mortgage-backed securities, which were partially offset by a decrease in loans
receivable.
Cash, federal funds sold and interest-earning deposits increased $2.9 million,
or 28.8%, to $12.9 million at September 30, 2009, from $10.0 million at December
31, 2008. The increase in cash and cash equivalents at September 30, 2009, was
due to a $1.5 million increase in federal funds sold and a $3.0 million increase
in interest-earning deposits, which was partially offset by a $1.6 million
decrease in cash and due from banks. Investment securities increased $18.6
million to $49.5 million at September 30, 2009. At September 30, 2009, $49.5
million of investment securities were classified as available for sale.
Mortgage-backed securities increased $3.7 million, or 48.4%, to $11.2 million at
September 30, 2009, from $7.6 million at December 31, 2008. The increase in
mortgage-backed securities was due primarily purchases of $5.3 million, which
was partially offset by principal prepayments and repayments totaling $1.7
million. At September 30, 2009, $6.0 million of mortgage-backed securities were
classified as held to maturity, while $5.2 million were classified as available
for sale. As of September 30, 2009, none of the mortgage-backed securities are
considered impaired.
22
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes at December 31, 2008 and at September
30, 2009 (continued)
--------------------------------------------------------------------------------
Loans receivable, including loans held for sale, decreased $16.4 million, or
6.1%, to $252.1 million at September 30, 2009, from $268.5 million at December
31, 2008. The decrease reflects loan originations totaling $61.9 million,
partially offset by loan principal repayments of $58.7 million and sales to the
Federal Home Loan Bank of $19.4 million. The change in the composition of the
Corporation's assets reflects management's decision to take advantage of
opportunities to obtain a higher rate of return by selling certain mortgage
loans and recording gains.
The allowance for loan losses totaled $1.3 million and $709,000 at September 30,
2009 and December 31, 2008, respectively. In determining the adequacy of the
allowance for loan losses at any point in time, management and the board of
directors apply a systematic process focusing on the risk of loss in the
portfolio. First, the loan portfolio is segregated by loan types to be evaluated
collectively and individually. Delinquent multi-family and commercial loans are
evaluated individually for potential impairments in their carrying value.
Second, the allowance for loan losses entails utilizing our historic loss
experience by applying such loss percentage to the loan types to be collectively
evaluated in the portfolio. The $390,000 increase in the provision for losses on
loans during the nine months ended September 30, 2009 is a reflection of the
following factors, weaker economic conditions in the greater Cincinnati area,
loan charge-offs of $187,000 and the need to allocate approximately $50,000 in
specific reserves for three residential properties with principal balances
totaling $404,000 which were acquired through foreclosure. The analysis of the
allowance for loan losses requires an element of judgment and is subject to the
possibility that the allowance may need to be increased, with a corresponding
reduction in earning. To the best of management's knowledge, all known and
inherent losses that are probable and that can be reasonably estimated have been
recorded at September 30, 2009.
Non-performing and impaired loans totaled $2.0 million and $1.8 million at
September 30, 2009 and December 31, 2008, respectively. At September 30, 2009,
non-performing and impaired loans were comprised of twenty-four loans secured by
one-to-four family residential real estate and one loan secured by commercial
real estate. At September 30, 2009 and December 31, 2008, real estate acquired
through foreclosure totaled $2.4 million and $1.1 million, respectively. The
Corporation has an allowance for loan losses intended to absorb losses inherent
in our loan portfolio. The allowance for loan losses represented 61.8% and 38.4%
of non-performing and impaired loans at September 30, 2009 and December 31,
2008, respectively. Although management believes that the Corporation's
allowance for loan losses is adequate to absorb known and inherent losses in our
portfolio, based upon the available facts and circumstances, there can be no
assurance that additions to the allowance will not be necessary in future
periods, which would adversely affect our results of operations.
Deposits increased $16.3 million, or 7.5%, to $232.3 million at September 30,
2009, from $216.0 million at December 31, 2008. Advances from the Federal Home
Loan Bank of Cincinnati decreased by $6.6 million, or 14.9%, to $38.0 million at
September 30, 2009, from $44.6 million at December 31, 2008.
Shareholders' equity increased $466,000, or 0.7%, to $68.7 million at September
30, 2009, from $68.2 million at December 31, 2008. The increase primarily
resulted from net earnings of $758,000, an increase of $207,000 in unrealized
gains on securities available for sale and an increase in shares acquired by
stock benefit plans of $403,000 which were partially offset by dividends paid of
$1.0 million. At September 30, 2009, Cheviot Financial had the ability to
purchase an additional 364,616 shares under its announced stock repurchase plan.
23
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes at December 31, 2008 and at September
30, 2009 (continued)
--------------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
We monitor our liquidity position on a daily basis using reports that recap all
deposit activity and loan commitments. A significant portion of our deposit base
is made up of time deposits. At September 30, 2009, $107.8 million of time
deposits are due to mature within twelve months. The daily deposit activity
report allows us to price our time deposits competitively. Because of this and
our deposit retention experience, we anticipate that a significant portion of
maturing time deposits will be retained. At September 30, 2009, we had loan
commitments of $589,000. Our loan commitments are funded or expire within 45
days from the date of the commitment.
Borrowings from the Federal Home Loan Bank of Cincinnati decreased $6.6 million
during the nine months ended September 30, 2009. We have the ability to increase
such borrowings by approximately $105.2 million. At September 30, 2009, we had
no borrowings other than Federal Home Loan Bank of Cincinnati borrowings. The
additional borrowings can be used to offset any decrease in customer deposits or
to fund loan commitments.
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2009 and 2008
--------------------------------------------------------------------------------
General
-------
Net earnings for the nine months ended September 30, 2009 totaled $758,000, a
$236,000 decrease from the $994,000 in net earnings reported for the same period
in 2008. The decrease in net earnings reflects an increase in general,
administrative and other expenses, including FDIC insurance premiums, of
$515,000 and an increase in the provision for losses on loans of $390,000, which
were partially offset by an increase in net interest income of $330,000, an
increase in other income of $291,000 and a decrease of $48,000 in federal income
taxes for the 2009 period.
Net Interest Income
-------------------
Total interest income decreased $1.0 million, or 7.4%, to $12.5 million for the
nine-months ended September 30, 2009, from $13.5 million for the comparable
period in 2008. Interest income on loans decreased $386,000, or 3.4%, to $11.1
million during the 2009 period from $11.5 million for the 2008 period. This
decrease was due primarily to a $3.0 million, or 1.2%, decrease in the average
balance of loans outstanding and a 13 basis point decrease in the average yield
on loans to 5.81 % for the 2009 period from 5.94% for the nine months ended
September 30, 2008.
Interest income on mortgage-backed securities decreased $27,000, or 7.3%, to
$342,000 for the nine months ended September 30, 2009, from $369,000 for the
same period in 2008, due primarily to a 151 basis point decrease in the average
yield, which was partially offset by an increase in the average balance of
securities outstanding of $2.4 million for the nine months ended September 30,
2008 from the comparable period in 2008. Interest income on investment
securities decreased $544,000, or 34.4%, to $1.0 million for the nine months
ended September 30, 2009, compared to $1.6 million for the same period in 2008,
due primarily to a 260 basis point decrease in the average yield to 3.15% in the
2009 period, which was partially offset by an increase of $2.3 million, or 6.3%
in the average balance of investment securities outstanding. Interest income on
other interest-earning deposits decreased $45,000, or 56.3% to $35,000 for the
nine months ended September 30, 2009, as compared to the same period in 2008.
24
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2009 and 2008 (continued)
--------------------------------------------------------------------------------
Interest expense decreased $1.3 million, or 20.5% to $5.2 million for the nine
months ended September 30, 2009, from $6.5 million for the same period in 2008.
Interest expense on deposits decreased by $1.5 million, or 27.7%, to $3.8
million for the nine months ended September 30, 2009, from $5.3 million for the
same period in 2008 due primarily to a 101 basis point decrease in the average
costs of deposits to 2.28% during the 2009 period, which was partially offset by
a $9.3 million, or 4.4%, increase in the average balance outstanding. Interest
expense on borrowings increased by $124,000 or 10.1%, due primarily to a $4.0
million, or 10.8%, increase in the average balance outstanding, which was
partially offset by a 2 basis point decrease in the average cost of borrowings.
The decrease in the average cost of deposits and borrowings reflects lower
shorter term interest rates in 2009 as compared to 2008, as actions by the
Federal Reserve to reduce shorter term interest rates resulted in a steepening
of the yield curve and a reduction of short term and medium term interest rates.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $330,000, or 4.7%, to $7.4 million for the nine
months ended September 30, 2009. The average interest rate spread increased to
2.63% for the nine months ended September 30, 2009 from 2.41% for the nine
months ended September 30, 2008. The net interest margin increased to 3.08% for
the nine months ended September 30, 2009 from 3.05% for the nine months ended
September 30, 2008.
Provision for Losses on Loans
-----------------------------
As a result of an analysis of historical experience, the volume and type of
lending conducted by the Savings Bank, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to the Savings Bank's market area, and other factors related to the
collectability of the Savings Bank's loan portfolio, management recorded a
$803,000 provision for losses on loans for the nine months ended September 30,
2009, compared to a $413,000 provision for losses on loans for the nine months
ended September 30, 2008. The decision to make a larger provision for loan
losses during the nine months ended September 30, 2009, as compared to recent
periods, reflects management's assessment of the amount necessary to maintain an
adequate allowance based on our historical loss experience, changes in the local
economy, and other external factors. These other external factors, economic
conditions and collateral value changes, have had a negative impact on all types
of loans in the portfolio. There can be no assurance that the loan loss
allowance will be sufficient to cover losses on non-performing loans in the
future, however management believes they have identified all known and inherent
losses that are probable and that can be reasonably estimated within the loan
portfolio, and that the allowance for loan losses is adequate to absorb such
losses.
Other Income
------------
Other income increased $291,000, or 80.4%, to $653,000 for the nine months ended
September 30, 2009, compared to the same period in 2008, due primarily to an
increase in the gain on sale of loans of $293,000, which was partially offset by
an increase of $6,000 in loss on sale of real estate acquired through
foreclosure.
25
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2009 and 2008 (continued)
--------------------------------------------------------------------------------
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense increased $515,000, or 9.3%, to $6.0
million for the nine months ended September 30, 2009, from $5.5 million for the
comparable period in 2008. This increase is a result of an increase of $137,000
in employee compensation and benefits, a $21,000 increase in data processing
expense, an increase of $172,000 in FDIC expense and an increase of $117,000 in
other operating expense. The increase in employee compensation and benefits is a
result of the increase in compensation expense as we increased our number of
full time equivalent employees to accommodate the Corporation's growth. The
increase in data processing expense is a result of the conversion of the core
computer operating system in May 2009. The increase in FDIC expense is a result
of the special assessment from the FDIC of approximately $140,000. The increase
in other operating expense is a result of real estate taxes, maintenance and
insurance expense on properties acquired through foreclosure.
FDIC Premiums
-------------
The FDIC imposed an assessment against institutions for deposit insurance. This
assessment is based on the risk category of the institution and currently ranges
from 5 to 43 basis points of the institution's deposits. Federal law requires
that the designated reserve ratio for the deposit insurance fund be established
by the FDIC at 1.15% to 1.50% of estimated insured deposits. If this reserve
ratio drops below 1.15% or the FDIC expects it to do so within six months, the
FDIC must, within 90 days, establish and implement a plan to restore the
designated reserve ratio to 1.15% of estimated insured deposits within five
years (absent extraordinary circumstances). On December 22, 2008, the FDIC
issued final rules increasing the current assessment rates for all institutions
by 7 basis points and up to 50 basis points for certain financial institutions
for the first quarter of 2009. It is expected that the FDIC will adopt a new
risk based assessment system.
In addition, the Emergency Economic Stabilization Act of 2008 (EESA) temporarily
increased the limit on FDIC insurance coverage for deposits to $250,000 through
December 31, 2009, and the FDIC took action to provide coverage for newly-issued
senior unsecured debt and non-interest bearing transaction accounts in excess of
the $250,000 limit, for which institutions will be assessed additional premiums.
On February 27, 2009, the FDIC announced an amendment to its restoration plan
for the Deposit Insurance Fund by imposing an emergency special assessment on
all insured financial institutions. This special assessment of $140,000 occurred
on June 30, 2009, and was payable by us on September 30, 2009. In September
2009, the FDIC issued a Notice of Proposed Rulemaking that would require insured
institutions to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted
a uniform three-basis point increase in assessment rates effective on January 1,
2011. The Corporation's estimated prepayment of FDIC assessments is
approximately $876,000 which would be amortized to expense over three years.
26
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2009 and 2008 (continued)
--------------------------------------------------------------------------------
Federal Income Taxes
--------------------
The provision for federal income taxes decreased $48,000, or 10.5%, to $410,000
for the nine months ended September 30, 2009, from $458,000 for the same period
in 2008, due primarily to a $284,000, or 19.6%, decrease in pre-tax earnings.
The effective tax rate was 35.1% and 31.6% for the nine month periods ended
September 30, 2009 and 2008. The difference between the Corporation's effective
tax rate in the 2009 and 2008 periods and the 34% statutory corporate rate is
due primarily to the tax-exempt earnings on bank-owned life insurance,
tax-exempt interest on municipal obligations and tax benefits for the
contribution to the Cheviot Savings Bank Foundation offset by the difference in
the stock compensation deduction for tax purposes.
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2009 and 2008
--------------------------------------------------------------------------------
General
-------
Net earnings for the three months ended September 30, 2009 totaled $241,000, a
$210,000 decrease from the $451,000 net earnings reported in the September 2008
period. The decrease in net earnings reflects a decrease in net interest income
after the provision for losses on loans of $313,000, which was partially offset
by an increase of $33,000 in other income, a decrease of $7,000, in general,
administrative and other expenses and a decrease of $63,000 in federal income
taxes for the 2009 quarter.
Net Interest Income
-------------------
Total interest income decreased $489,000, or 10.7%, to $4.1 million for the
three-months ended September 30, 2009, from the comparable quarter in 2008.
Interest income on loans decreased $345,000, or 8.8%, to $3.6 million during the
2009 quarter from $3.9 million for the 2008 quarter. This decrease was due
primarily to a $13.0 million, or 4.9%, decrease in the average balance of loans
outstanding and by a 25 basis point decrease in the average yield on loans to
5.67% for the 2009 quarter from 5.92% for the three months ended September 30,
2008.
Interest income on mortgage-backed securities increased $3,000, or 2.8%, to
$110,000 for the three months ended September 30, 2009, from $107,000 for the
comparable 2008 quarter, due primarily to a $3.4 million increase in the average
balance of securities outstanding, which was partially offset by a 147 basis
point decrease in the average yield period to period. Interest income on
investment securities decreased $147,000, or 27.7%, to $384,000 for the three
months ended September 30, 2009, compared to $531,000 for the same quarter in
2008, due primarily to a 327 basis point decrease in the average yield to 2.85%
in the 2009 quarter, which was partially offset by an increase of $13.4 million,
or 38.5% in the average balance of investment securities outstanding. Interest
income on other interest-earning deposits was $10,000 for the three months ended
September 30, 2009 and 2008, respectively.
Interest expense decreased $402,000, or 20.2%, to $1.6 million for the three
months ended September 30, 2009, from $2.0 million for the same quarter in 2008.
Interest expense on deposits decreased by $344,000, or 22.7%, to $1.2 million,
from $1.5 million due primarily to a 83 basis point decrease in the average cost
of deposits to 2.06% during the 2009 quarter, which was partially offset by a
$17.0 million, or 8.1%, increase in the average balance outstanding. Interest
expense on borrowings decreased by $58,000, or 12.1%, due primarily to a $6.0
million, or 13.4%, decrease in the average balance outstanding, which was
partially offset by a 6 basis point increase in the average cost of borrowings.
27
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2009 and 2008 (continued)
--------------------------------------------------------------------------------
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $87,000, or 3.4%, to $2.5 million for the three
months ended September 30, 2009, as compared to the same quarter in 2008. The
average interest rate spread decreased to 2.72% for the three months ended
September 30, 2009 from 2.76% for the three months ended September 30, 2008. The
net interest margin decreased to 3.12% for the three months ended September 30,
2009 from 3.33% for the three months ended September 30, 2008.
Provision for Losses on Loans
-----------------------------
Management recorded a $351,000 provision for losses on loans for the three
months ended September 30, 2009, compared to a $125,000 provision for losses on
loans for the three months ended September 30, 2008. The decision to make a
provision for loan losses during the three months ended September 30, 2009
reflects the amount necessary to maintain an adequate allowance based on our
historical loss experience and other external factors. These external factors,
economic conditions and collateral value changes, have had a negative impact on
non-owner occupied loans in the portfolio. There can be no assurance that the
loan loss allowance will be sufficient to cover losses on non-performing loans
in the future, however management believes they have identified all known and
inherent losses that are probable and that can be reasonably estimated within
the loan portfolio, and that the allowance for loan losses is adequate to absorb
such losses.
Other Income
------------
Other income increased $33,000, or 22.6%, to $179,000 for the three months ended
September 30, 2009, compared to the same quarter in 2008, due primarily to an
increase in the gain on sale of loans of $30,000.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense decreased $7,000, or 0.4%, for the
three months ended September 30, 2009, from the comparable quarter in 2008, and
was $1.9 million for both periods. This decrease is a result of a decrease of
$50,000 in employee compensation and benefits, which was partially offset by an
increase in FDIC expense of $29,000. The decrease in employee compensation and
benefits is due primarily to a decrease in the health insurance costs of the
Corporation. The increase in FDIC expense in a result of an increase in the
quarterly assessments.
Federal Income Taxes
--------------------
The provision for federal income taxes decreased $63,000, or 24.5%, to $194,000
for the three months ended September 30, 2009, from $257,000 for the same
quarter in 2008, due primarily to a $273,000, or 38.6%, decrease in pre-tax
earnings. The effective tax rate was 44.6% and 36.3% for the three month periods
ended September 30, 2009 and 2008, respectively. The difference between the
Corporation's effective tax rate in the 2009 and 2008 periods and the 34%
statutory corporate rate is due primarily to the tax-exempt earnings on
bank-owned life insurance, tax- exempt interest on municipal obligations and tax
benefits for the contribution to the Cheviot Savings Bank Foundation, offset by
the difference in the stock compensation deduction for tax and book purposes.
28
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Corporation's market risk since the
Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2008.
ITEM 4 CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer evaluated
the disclosure controls and procedures (as defined under Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of
the period covered by this quarterly report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective.
There were no changes in the Corporation's internal controls or in other factors
that could materially affect, or could reasonably be likely to materially
affect, these controls subsequent to the date of their evaluation by the
Corporation's Chief Executive Officer and Chief Financial Officer.
29
Cheviot Financial Corp.
PART II
ITEM 1. Legal Proceedings
----------------
None.
ITEM 1A. Risk Factors
------------
There have been no changes to the Corporation's risk factors since the filing of
the Corporation's Annual Report on Form 10-K for the year ended December 31,
2008.
ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
-----------------------------------------------------------------------
The Corporation announced a repurchase plan on January 16, 2008 which provides
for the repurchase of 5% or 447,584 shares of our common stock. As of September
30, 2009, the Corporation had purchased 82,968 shares pursuant to the program.
During the past three months, the Corporation did not repurchase any shares of
its common stock.
Total # of
shares purchased
Total Average as part of publicly
# of shares price paid announced plans
Period purchased per share or programs
------ --------- --------- ------------
July 1-31, 2009 - $- 82,968
August 1-31, 2009 - $- 82,968
September 1 - 30, 2009 - $- 82,968
ITEM 3. Defaults Upon Senior Securities
------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits
--------
31.1 Certification of Principal Executive Officer Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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.
30
Cheviot Financial Corp.
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 by the
undersigned thereunto duly authorized.
Date: November 12, 2009 By: /s/ Thomas J. Linneman
---------------------- ------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
Date: November 12, 2009 By: /s/ Scott T. Smith
---------------------- ------------------------------------
Scott T. Smith
Chief Financial Officer
31