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 March 31, 2010
------------------------------------------------
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 May 14, 2010, the latest practicable date, 8,864,908 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 24
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 22
Quantitative and Qualitative Disclosures about
Market Risk 28
Controls and Procedures 28
PART II - OTHER INFORMATION 29
SIGNATURES 30
2
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, December 31,
ASSETS 2010 2009
(Unaudited)
Cash and due from banks $ 1,145 $ 3,217
Federal funds sold 2,117 4,582
Interest-earning deposits in other financial institutions 2,882 3,484
---------- ---------
Cash and cash equivalents 6,144 11,283
Investment securities available for sale - at fair value 73,368 55,851
Mortgage-backed securities available for sale - at fair value 4,789 4,920
Mortgage-backed securities held to maturity - at cost, approximate
market value of $5,565 and $5,816 at March 31, 2010 and
December 31, 2009, respectively 5,483 5,744
Loans receivable - net 242,527 245,905
Loans held for sale - at lower of cost or market - 1,097
Real estate acquired through foreclosure - net 1,990 2,048
Office premises and equipment - at depreciated cost 4,809 4,889
Federal Home Loan Bank stock - at cost 3,375 3,369
Accrued interest receivable on loans 1,075 1,074
Accrued interest receivable on mortgage-backed securities 33 36
Accrued interest receivable on investments and interest-earning deposits 417 322
Prepaid expenses and other assets 1,859 1,591
Bank-owned life insurance 3,687 3,653
Prepaid federal income taxes - 78
----------- ----------
Total assets $ 349,556 $ 341,860
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $238,950 $235,904
Advances from the Federal Home Loan Bank 38,221 33,672
Advances by borrowers for taxes and insurance 1,008 1,501
Accrued interest payable 139 136
Accounts payable and other liabilities 1,690 1,625
Accrued federal income taxes 129 -
Deferred federal income taxes 322 272
---------- ---------
Total liabilities 280,459 273,110
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 March 31, 2010 and December 31, 2009 99 99
Additional paid-in capital 43,870 43,819
Shares acquired by stock benefit plans (2,069) (2,069)
Treasury stock - at cost, 1,050,045 shares at March 31, 2010
and December 31, 2009 (12,828) (12,828)
Retained earnings - restricted 40,238 40,109
Accumulated comprehensive loss, unrealized losses on securities
available for sale, net of related tax benefits (213) (380)
---------- ---------
Total shareholders' equity 69,097 68,750
---------- ---------
Total liabilities and shareholders' equity $ 349,556 $ 341,860
========== =========
See accompanying notes to consolidated financial statements.
3
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
For the three months ended March 31, 2010 and 2009
(In thousands, except per share data)
2010 2009
Interest income
Loans $3,508 $3,848
Mortgage-backed securities 86 105
Investment securities 373 369
Interest-earning deposits and other 40 10
------ ------
Total interest income 4,007 4,332
Interest expense
Deposits 915 1,374
Borrowings 366 471
------ ------
Total interest expense 1,281 1,845
------ ------
Net interest income 2,726 2,487
Provision for losses on loans 40 337
------ ------
Net interest income after provision for
losses on loans 2,686 2,150
Other income
Rental 16 13
Loss on sale of real estate acquired through foreclosure - (20)
Gain on sale of loans 36 131
Earnings on bank-owned life insurance 35 34
Other operating 95 73
------ ------
Total other income 182 231
General, administrative and other expense
Employee compensation and benefits 1,160 1,118
Occupancy and equipment 164 143
Property, payroll and other taxes 245 251
Data processing 61 85
Legal and professional 129 131
Advertising 50 50
FDIC expense 71 9
Other operating 218 193
------ ------
Total general, administrative and other expense 2,098 1,980
------ ------
Earnings before federal income taxes 770 401
Federal income taxes
Current 302 166
Deferred (35) (58)
------ ------
Total federal income taxes 267 108
------ ------
NET EARNINGS $ 503 $ 293
====== ======
EARNINGS PER SHARE
Basic $ .06 $ .03
====== ======
Diluted $ .06 $ .03
====== ======
Dividends declared per share $ .11 $ .10
====== ======
See accompanying notes to consolidated financial statements.
4
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the three months ended March 31, 2010 and 2009
(In thousands)
2010 2009
Net earnings for the period $ 503 $ 293
Other comprehensive income (loss), net of related tax expense (benefit):
Unrealized holding gains (losses) on securities during the period,
net of tax expense (benefit) of $86 and $(29) for the periods
ended March 31, 2010 and 2009, respectively 167 (57)
----- -----
Comprehensive income $ 670 $ 236
===== =====
Accumulated comprehensive loss $(213) $(380)
===== =====
See accompanying notes to consolidated financial statements.
5
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 31, 2010 and 2009
(In thousands)
2010 2009
Cash flows from operating activities:
Net earnings for the period $ 503 $ 293
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Amortization of premiums and discounts on investment
and mortgage-backed securities, net 10 (3)
Depreciation 80 75
Amortization of deferred loan origination fees - net (3) (5)
Proceeds from sale of loans in the secondary market 2,756 9,132
Loans originated for sale in the secondary market (2,720) (9,001)
Gain on sale of loans (36) (131)
Amortization of expense related to stock benefit plans (11) (19)
Provision for losses on loans 40 337
Federal Home Loan Bank stock dividends (6) -
Loss on real estate acquired through foreclosure - 20
Impairment on real estate acquired through foreclosure 81 -
Net increase in cash surrender value of bank-owned life insurance (34) (34)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (1) 34
Accrued interest receivable on mortgage-backed securities 3 (11)
Accrued interest receivable on investments and interest-earning deposits (95) 83
Prepaid expenses and other assets (268) (334)
Accrued interest payable 3 (7)
Accounts payable and other liabilities 65 (124)
Federal income taxes
Current 207 86
Deferred (35) (58)
-------- --------
Net cash flows provided by operating activities 539 333
Cash flows used in investing activities:
Principal repayments on loans 10,112 21,071
Loan disbursements (5,697) (12,746)
Purchase of investment securities - available for sale (32,196) -
Proceeds from maturity of investment securities - available for sale 14,901 -
Proceeds from maturity of investment securities - held to maturity - 2,000
Purchase of mortgage-backed securities - available for sale - (4,055)
Principal repayments on mortgage-backed securities - available for sale 151 288
Principal repayments on mortgage-backed securities - held to maturity 261 253
Proceeds from the sale of real estate acquired through foreclosure - 104
Additions to real estate acquired through foreclosure - (17)
Purchase of office premises and equipment - (68)
-------- --------
Net cash flows provided by (used in) investing activities (12,468) 6,830
Cash flows provided by financing activities:
Net increase in deposits 3,046 11,444
Proceeds from Federal Home Loan Bank advances 10,000 -
Repayments on Federal Home Loan Bank advances (5,451) (1,604)
Advances by borrowers for taxes and insurance (493) (502)
Stock option expense, net 62 61
Dividends paid on common stock (374) (340)
-------- --------
Net cash flows provided by financing activities 6,790 9,059
-------- --------
Net increase (decrease) in cash and cash equivalents (5,139) 16,222
Cash and cash equivalents at beginning of period 11,283 10,013
-------- --------
Cash and cash equivalents at end of period $ 6,144 $ 26,235
======== ========
See accompanying notes to consolidated financial statements.
6
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED)
For the three months ended March 31, 2010 and 2009
(In thousands)
2010 2009
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 95 $ 75
======= =======
Interest on deposits and borrowings $ 1,284 $ 1,838
======= =======
Supplemental disclosure of non-cash investing activities:
Transfer from loans to real estate acquired through foreclosure $ 23 $ 1,140
======= =======
Recognition of mortgage servicing rights $ 22 $ 72
======= =======
See accompanying notes to consolidated financial statements.
7
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2010 and 2009
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. Earnings per share is reported including all shares held by Cheviot
Mutual Holding Company. Cheviot Mutual Holding Company has to date waived the
receipt of dividends declared by the Corporation. 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, 2009. 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
month period ended March 31, 2010 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
months ended March 31, 2010 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 March 31, 2010 and December 31, 2009, we had $38.2 million and
$33.7 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 $104.9 million and $109.3 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 months ended March 31, 2010 and 2009
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 the
purchase of securities. For the three months ended March 31, 2010, loan
originations totaled $8.4 million, compared to $21.7 million for the three
months ended March 31, 2009.
Total deposits increased $3.0 million and $11.4 million during the three months
ended March 31, 2010 and 2009, respectively. 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 contracts as of March
31, 2010.
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 $ 5,000 $ 1,808 $ 3,192 $ 28,221 $ 38,221
Certificates of deposit 99,390 29,842 11,386 - 140,618
Amount of loan commitments and expiration per period:
Commitments to originate one- to four-family
loans 1,349 - - - 1,349
Home equity lines of credit 12,633 - - - 12,633
Undisbursed loans in process 3,310 - - - 3,310
-------- -------- -------- -------- --------
Total contractual obligations $121,682 $ 31,650 $ 14,578 $ 28,221 $196,131
======== ======== ======== ======== ========
-------------------------
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 months ended March 31, 2010 and 2009
3. Liquidity and Capital Resources (continued)
------------------------------
At March 31, 2010 and 2009, we exceeded all of the applicable regulatory capital
requirements. Our core (Tier 1) capital was $55.2 million and $56.3 million, or
16.0% and 16.5% of total assets at March 31, 2010 and 2009, respectively. In
order to be classified as "well-capitalized" under federal banking regulations,
we were required to have core capital of at least $20.7 million, or 6.0% of
assets as of March 31, 2010. 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 March 31, 2010 and 2009, we had a total risk-based capital ratio
of 33.2% and 33.0%, 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. Weighted-average common shares deemed outstanding gives effect
to 142,833 and 178,540 unallocated shares held by the ESOP for the three months
ended March 31, 2010 and 2009, respectively.
For the three months ended
March 31,
2010 2009
Weighted-average common shares
outstanding (basic) 8,725,873 8,693,964
Dilutive effect of assumed exercise
of stock options 7,919 46,216
--------- ---------
Weighted-average common shares
outstanding (diluted) 8,733,792 8,740,180
========= =========
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 options shares were granted subject to a
five year vesting period.
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.
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
three months ended March 31, 2010, the Corporation recorded $62,000 in after-tax
compensation cost for equity-based awards that vested during the three months
ended March 31, 2010. The Corporation has $64,000 unrecognized pre-tax
compensation cost related to non-vested equity-based awards granted under its
stock incentive plan as of March 31, 2010, which is expected to be recognized
over a weighted-average vesting period of approximately 0.3 years.
10
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2010 and 2009
5. Stock Option Plan (continued)
-----------------
A summary of the status of the Corporation's stock option plan as of March 31,
2010, and changes during the period then ended is presented below:
Three months ended Year ended
March 31, 2010 December 31, 2009
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
Outstanding at beginning of period 412,340 $11.11 404,280 $11.16
Granted - - 8,060 8.48
Exercised - - - -
Forfeited - - - -
------- ------ ------- -----
Outstanding at end of period 412,340 $11.11 412,340 $11.11
======= ===== ======= =====
Options exercisable at period-end 314,792 $11.17 314,792 $11.17
======= ===== ======= =====
Options expected to be exercisable at year-end
Fair value of options granted NA $3.31
== ====
The following information applies to options outstanding at March 31, 2010:
Number outstanding 412,340
Exercise price$8.48 - $13.63
Weighted-average exercise price $11.11
Weighted-average remaining contractual life 5.3 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 the 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 months ended March 31, 2010 and 2009
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 March 31, 2010 and December
31, 2009 are shown below.
March 31, 2010
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for Sale:
U.S. Government agency securities $72,203 $123 $365 $71,961
Municipal obligations 1,545 5 143 1,407
------- ----- ---- -------
$73,748 $128 $508 $73,368
====== === === ======
December 31, 2009
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Available for Sale:
U.S. Government agency securities $54,915 $67 $ 527 $ 54,455
Municipal obligations 1,545 4 153 1,396
------- --- --- -------
$56,460 $71 $ 680 $ 55,851
====== == === ======
12
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2010 and 2009
6. Investment and Mortgage-backed Securities (continued)
-----------------------------------------
The amortized costs of investment securities at March 31, 2010, by contractual
term to maturity, are shown below.
March 31,
2010
(In thousands)
Less than one year $ 34,209
One to five years 35,994
Five to ten years 310
More than ten years 3,235
-------
$ 73,748
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at March 31, 2010 and
December 31, 2009 are shown below.
March 31, 2010
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 $ 785 $ 10 $ - $ 795
Federal National Mortgage
Association adjustable-rate
participation certificates 693 11 - 704
Government National Mortgage
Association adjustable-rate
participation certificates 3,255 35 - 3,290
----- -- - -----
$4,733 $ 56 $ - $4,789
===== == == =====
Held to maturity:
Federal Home Loan Mortgage
Corporation adjustable-rate
participation certificates $ 574 $ 2 $ 19 $ 557
Federal National Mortgage
Association adjustable-rate
participation certificates 611 5 1 615
Government National Mortgage
Association adjustable-rate
participation certificates 4,298 95 - 4,393
----- -- -- -----
$5,483 $ 102 $ 20 $5,565
===== === == =====
13
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2010 and 2009
6. Investment and Mortgage-backed Securities (continued)
-----------------------------------------
December 31, 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 $ 829 $ 1 $ - $830
Federal National Mortgage
Association adjustable-rate
participation certificates 700 9 - 709
Government National Mortgage
Association adjustable-rate
participation certificates 3,358 24 1 3,381
----- -- - -----
$4,887 $34 $ 1 $4,920
===== == == =====
Held to maturity:
Federal Home Loan Mortgage
Corporation adjustable-rate
participation certificates $ 603 $ 1 $ 7 $597
Federal National Mortgage
Association adjustable-rate
participation certificates 640 3 1 642
Government National Mortgage
Association adjustable-rate
participation certificates 4,501 76 - 4,577
----- -- -- -----
$5,744 $80 $8 $5,816
===== == = =====
The amortized cost of mortgage-backed securities, including those designated as
available for sale, at March 31, 2010, by contractual terms to maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may generally prepay obligations without prepayment penalties.
March 31,
2010
(In thousands)
Due in one year or less $ 597
Due in one year through five years 2,642
Due in five years through ten years 3,952
Due in more than ten years 3,025
------
$10,216
14
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2010 and 2009
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 March 31, 2010:
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 17 $38,993 $365 - $ - $ - 17 $38,993 $ 365
Municipal obligations - - - 2 1,235 143 2 1,235 143
Mortgage-backed
securities 4 88 1 5 197 19 9 285 20
-- ------ --- - ----- --- - ------ ----
Total temporarily
impaired securities 21 $39,081 $366 7 $1,432 $162 28 $40,513 $ 528
== ====== === = ===== === == ====== ===
Management does not intend to sell any of the debt securities with an unrealized
loss and do not believe that it is more likely than not that we will be required
to sell a security in an unrealized loss position prior to a recovery in value.
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 months ended March 31, 2010 and 2009
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 2007.
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
------------------------------------------------------
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 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 months ended March 31, 2010 and 2009
8. Disclosures About Fair Value of Assets and Liabilities (continued)
------------------------------------------------------
Fair Value Measurements at March 31, 2010 and December 31, 2009
Quoted prices
in active Significant Significant
markets for other other
identical observable unobservable
assets inputs inputs
(Level 1) (Level 2) (Level 3)
--------- --------- ---------
Securities available for sale at March 31, 2010:
U.S. Government agency securities $71,961
Municipal obligations $ 1,407
Mortgage-backed securities $ 4,789
Securities available for sale at December 31, 2009:
U.S. Government agency securities $54,455
Municipal obligations $ 1,396
Mortgage-backed securities $ 4,920
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 March 31, 2010 was
approximately $1.7 million, compared to approximately $2.4 million at December
31, 2009.
The Corporation has real estate acquired through foreclosure totaling $2.0
million at both March 31, 2010 and December 31, 2009. Real estate acquired
through foreclosure is carried at the lower of the cost or fair value less
estimated selling expenses at the date of acquisition. Fair values are obtained
using independent appraisals, based on comparable sales which the Corporation
considers to be Level 2 inputs. The aggregate amount of real estate acquired
through foreclosure that is carried at fair value was approximately $1.9 million
at March 31, 2010 and $732,000 at December 31, 2009. The aggregate amount of
real estate acquired through foreclosure that is carried at cost was $1.3
million at December 31, 2009.
17
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2010 and 2009
9. Effects of Recent Accounting Pronouncements
-------------------------------------------
In April 2010, the FASB issued Codification Accounting Standards Update No.
2010-18 (ASU No. 2010-18) Effect of Loan Modification when the Loan is Part of a
Pool that is accounted for as a Single Asset (a consensus of the FASB Emerging
Issues Task Force). The amendments in this update affect any entity that
acquires loans subject to ASC Subtopic 310-30, that accounts for some or all of
those loans within pools, and that subsequently modifies one or more of those
loans after acquisition. ASU No. 2010-18 is effective for modifications of loans
accounted for within pools under Subtopic 310-30 occurring in the interim period
ending September 30, 2010, and the amendments are to be applied prospectively.
Management is currently evaluating the impact, if any, that the adoption of this
amendment will have on its consolidated financial statements.
In June 2009, the FASB amended previous guidance relating to transfers of
financial assets and eliminates the concept of a qualifying special purpose
entity. This guidance must be applied as of the beginning of each reporting
entity's first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. This guidance must be applied to transfers
occurring on or after the effective date. Additionally, on and after the
effective date, the concept of a qualifying special-purpose entity is no longer
relevant for accounting purposes. Therefore, formerly qualifying special-purpose
entities should be evaluated for consolidation by reporting entities on and
after the effective date in accordance with the applicable consolidation
guidance. The disclosure provisions were also amended and apply to transfers
that occurred both before and after the effective date of this guidance.
Adoption of this guidance on January 1, 2010 did not have a material effect on
the Company's results of operations or financial position.
In June 2009, the FASB amended guidance for consolidation of variable interest
entity guidance by replacing the quantitative-based risks and rewards
calculation for determining which enterprise, if any, has a controlling
financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a
variable interest entity that most significantly impact the entity's economic
performance and (1) the obligation to absorb losses of the entity or (2) the
right to receive benefits from the entity. Additional disclosures about an
enterprise's involvement in variable interest entities are also required. This
guidance is effective as of the beginning of each reporting entity's first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter. Early adoption is prohibited. Adoption of this guidance on
January 1, 2010 did not have a material effect on the Company's results of
operations or financial position.
In January 2010, the FASB issued ASU No. 2010-01 "Accounting for Distributions
to Shareholders with Components of Stock and Cash," which updated the
Codification on accounting for distributions to shareholders that offers them
the ability to elect to receive their entire distribution in cash or stock with
a potential limitation on the total amount of cash that all shareholders can
receive in the aggregate is considered a share issuance that is reflected in EPS
prospectively and is not a stock dividend. The new guidance is effective for
interim and annual periods after December 15, 2009, and would be applied on a
retrospective basis. The adoption of this guidance did not have any effect on
our consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06 "Improving Disclosures About
Fair Value Measurements," which amends the guidance for fair value measurements
and disclosures. The guidance in ASU 2010-06 requires a reporting entity to
disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and to describe the reasons for the
transfers. Furthermore, ASU 2010-06 requires a reporting entity to present
separately information about purchases, sales, issuances, and settlements in the
reconciliation for fair value measurements using significant unobservable
inputs; clarifies existing fair value disclosures about the level of
disaggregation
18
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2010 and 2009
9. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
and about inputs and valuation techniques used to measure fair value; and amends
guidance on employers' disclosures about postretirement benefit plan assets to
require that disclosures be provided by classes of assets instead of by major
categories of assets. The new guidance is effective for interim and annual
reporting periods beginning January 1, 2010, except for the disclosures about
purchases, sales, issuances, and settlements in the rollforward of activity in
Level 3 fair value measurements. Those disclosures are effective January 1, 2011
and for interim periods thereafter. In the period of initial adoption, entities
will not be required to provide the amended disclosures for any previous periods
presented for comparative purposes. Early adoption is permitted. The adoption of
this guidance is not expected to significantly impact our annual and interim
financial statement disclosures and will not have any impact on our consolidated
financial statements.
In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic
855): Amendments to Certain Recognition and Disclosure Requirements. The
amendments in the ASU remove the requirement for companies that are subject to
the periodic reporting requirements of the Exchange Act to disclose a date
through which subsequent events have been evaluated in both issued and revised
financial statements. Revised financial statements include financial statements
revised as a result of either correction of an error or retrospective
application of U.S. generally accepted accounting principals ("U.S. GAAP"). The
FASB also clarified that if the financial statements have been revised, then an
entity that is not an SEC filer should disclose both the date that the financial
statements were issued or available to be issued and the date the revised
financial statements were issued or available to be issued. The FASB believes
these amendments remove potential conflicts with the SEC's literature. All of
the amendments in the ASU were effective upon issuance, except for the use of
the issued date for conduit debt obligors, which will be effective for interim
or annual periods ending after June 15, 2010. The adoption of this guidance is
not expected to have a material effect on the consolidated financial statements.
In March 2010, the FASB issued ASU No. 2010-11, "Derivatives and Hedging (Topic
815)," which clarifies that the only type of embedded credit derivative feature
related to the transfer of credit risk that is exempt from derivative
bifurcation requirements is one that is in the form of subordination of one
financial instrument to another. As a result, entities that have contracts
containing an embedded credit derivative feature in a form other than such
subordination will need to assess those embedded credit derivatives to determine
if bifurcation and separate accounting as a derivative is required. This
guidance is effective on July 1, 2010. Early adoption is permitted at the
beginning of an entity's first interim reporting period beginning after issuance
of this guidance. The adoption of this guidance is not expected to have any
impact on our consolidated financial statements.
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.
19
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2010 and 2009
10. Fair Value of Financial Instruments (continued)
-----------------------------------
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments at March 31, 2010:
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 March 31, 2010. 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.
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 March 31, 2010, the fair value of the
derivative loan commitments was not material.
20
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2010 and 2009
10. Fair Value of Financial Instruments (continued)
-----------------------------------
The estimated fair values of the Company's financial instruments at March 31,
2010 and December 31, 2009 are as follows:
March 31, 2010 December 31, 2009
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands) (In thousands)
Financial assets
Cash and cash equivalents $ 6,144 $ 6,144 $ 11,283 $ 11,283
Investment securities 73,368 73,368 55,851 55,851
Mortgage-backed securities 10,272 10,354 10,664 10,736
Loans receivable - net 242,527 254,836 247,002 258,986
Federal Home Loan Bank stock 3,375 3,375 3,369 3,369
--------- --------- --------- ---------
$ 335,686 $348,077 $328,169 $ 340,225
========= ========= ========= =========
Financial liabilities
Deposits $ 238,950 $ 238,819 $235,904 $ 235,771
Advances from the Federal Home
Loan Bank 38,221 41,842 33,672 37,807
Advances by borrowers for taxes
and insurance 1,008 1,008 1,501 1,501
--------- --------- --------- ---------
$ 278,179 $ 281,669 $271,077 $ 275,079
========= ========= ========= =========
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.
21
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
-------------------
Congress is considering 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 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.
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.
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.
22
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Critical Accounting Policies (continued)
----------------------------
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 review 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, 2009 and at March 31,
2010
--------------------------------------------------------------------------------
Total assets increased $7.7 million, or 2.3%, to $349.6 million at March 31,
2010, from $341.9 million at December 31, 2009. The increase in total assets
reflects increases in investment securities, which was partially offset by a
decrease in loans receivable and cash and cash equivalents. The change in the
composition of our interest earning assets reflects management's decision to
increase its liquidity during a period of low interest rates during the economic
downturn.
Cash, federal funds sold and interest-earning deposits decreased $5.1 million,
or 45.5%, to $6.1 million at March 31, 2010, from $11.3 million at December 31,
2009. The decrease in cash and cash equivalents at March 31, 2010, was due to a
$2.5 million decrease in federal funds sold, a decrease in cash and due from
banks of $2.1 million and a $602,000 decrease in interest-earning deposits.
Investment securities increased $17.5 million, or 31.4%, to $73.4 million at
March 31, 2010. At March 31, 2010, all investment securities were classified as
available for sale. During the first quarter of 2010, the Corporation borrowed
$10.0 million from the FHLB to purchase investment securities to take advantage
of the interest rate spread to increase net interest income.
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, 2009 and at March 31,
2010 (continued)
--------------------------------------------------------------------------------
Mortgage-backed securities decreased $392,000, or 3.7%, to $10.3 million at
March 31, 2010, from $10.7 million at December 31, 2009. The decrease in
mortgage-backed securities was due primarily to principal prepayments and
repayments totaling $412,000. At March 31, 2010, $5.5 million of mortgage-backed
securities were classified as held to maturity, while $4.8 million were
classified as available for sale. As of March 31, 2010, none of the
mortgage-backed securities are considered other than temporarily impaired.
Loans receivable, including loans held for sale, decreased $4.5 million, or
1.8%, to $242.5 million at March 31, 2010, from $247.0 million at December 31,
2009. The decrease reflects loan sales totaling $2.8 million and loan principal
repayments of $10.1 million, which was partially offset by loan originations of
$8.4 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 $1.0 million at both March 31, 2010 and
December 31, 2009, 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
loan types to be evaluated 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 $40,000 provision for losses on loans during the
quarter ended March 31, 2010 is a reflection of these factors, weaker economic
conditions in the greater Cincinnati area, and the need to allocate
approximately $35,000 in specific reserves for two residential properties
totaling $84,000 classified as real estate 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 earnings. 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 March 31, 2010.
Non-performing and impaired loans totaled $1.7 million and $2.4 million at March
31, 2010 and December 31, 2009, respectively. At March 31, 2010, non-performing
and impaired loans were comprised solely of loans secured by one- to four-family
residential real estate. At both March 31, 2010, and December 31, 2009 real
estate acquired through foreclosure was $2.0 million. The allowance for loan
losses represented 61.4% and 41.9% of non-performing and impaired loans at March
31, 2010 and December 31, 2009, respectively. Although management believes that
the Corporation's allowance for loan losses conforms with generally accepted
accounting principles 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 $3.0 million or 1.3%, to $238.9 million at March 31, 2010,
from $235.9 million at December 31, 2009. Advances from the Federal Home Loan
Bank of Cincinnati increased by $4.5 million, or 13.5%, to $38.2 million at
March 31, 2010, from $33.7 million at December 31, 2009.
24
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes at December 31, 2009 and at March 31,
2010 (continued)
--------------------------------------------------------------------------------
Shareholders' equity increased $347,000, or 0.5%, from December 31, 2009. The
increase primarily resulted from net earnings of $503,000 and a decrease in
unrealized losses on securities of $167,000, which was partially offset by
dividends paid of $374,000. Dividends declared by the Corporation were waived by
the Corporation's mutual holding company parent. At March 31, 2010, Cheviot
Financial had the ability to purchase an additional 364,616 shares under its
announced stock repurchase plan.
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 March 31, 2010, $99.4 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 March 31, 2010, we had loan commitments of $1.3
million. 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 increased $4.5 million
during the three months ended March 31, 2010. We have the ability to increase
such borrowings by approximately $104.9 million. At March 31, 2010, 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 Three-Month Periods Ended March 31, 2010
and 2009
--------------------------------------------------------------------------------
General
-------
Net earnings for the three months ended March 31, 2010 totaled $503,000, a
$210,000 increase from the $293,000 in net earnings reported for the March 2009
period. The increase in net earnings reflects an increase in net interest income
of $239,000 and a decrease in the provision for losses on loans of $297,000,
which was partially offset by a decrease in other income of $49,000, an increase
in general, administrative and other expense of $118,000 and an increase in
federal income taxes of $159,000 for the 2010 quarter.
Net Interest Income
-------------------
Total interest income decreased $325,000, or 7.5%, to $4.0 million for the
three-months ended March 31, 2010, from the comparable quarter in 2009. Interest
income on loans decreased $340,000, or 8.8%, to $3.5 million during the 2010
period from $3.8 million for the 2009 period. This decrease was due primarily to
a $17.0 million, or 6.5%, decrease in the average balance of loans outstanding
and a 15 basis point decrease in the weighted-average yield on loans to 5.72% at
March 31, 2010.
Interest income on mortgage-backed securities decreased $19,000, or 18.1%, to
$86,000 for the three months ended March 31, 2010, from $105,000 for the 2009
quarter, due primarily to a 89 basis point decrease in the average yield, which
was partially offset by a $373,000 increase in the average balance of securities
outstanding period to period. Interest income on investment securities increased
$4,000, or 1.1%, to $373,000 for the three months ended March 31, 2010, compared
to $369,000 for the same quarter in 2009, due primarily to an increase of $36.9
million, or 140.8%, in the average balance of investment securities outstanding,
which was partially offset by a 327 basis point decrease in the average yield to
2.36% in the 2010 quarter. Interest income on other interest-earning deposits
increased $30,000, or 300.0%, to $40,000 for the three months ended March 31,
2010, as compared to the same period in 2009.
25
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 March 31, 2010
and 2009 (continued)
--------------------------------------------------------------------------------
Net Interest Income (continued)
-------------------
Interest expense decreased $564,000, or 30.6%, to $1.3 million for the three
months ended March 31, 2010, from $1.8 million for the same period in 2009.
Interest expense on deposits decreased by $459,000, or 33.4%, to $915,000 from
$1.4 million due primarily to a 94 basis point decrease in the weighted average
costs of deposits to 1.59% during the 2010 period, which was partially offset by
a $12.0 million, or 5.5%, increase in the weighted-average balance outstanding.
Interest expense on borrowings decreased by $105,000, or 22.3%, due primarily to
a $6.8 million, or 15.6%, decrease in the average balance outstanding and a 34
basis point decrease in the average cost of borrowings.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $239,000, or 9.6%, to $2.7 million for the
three months ended March 31, 2010. The average interest rate spread increased 40
basis points to 3.03% for the three months ended March 31, 2010 from 2.63% for
the three months ended March 31, 2009. The net interest margin increased to
3.37% for the three months ended March 31, 2010 from 3.13% for the three months
ended March 31, 2009.
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
$40,000 provision for losses on loans for the three months ended March 31, 2010,
compared to $337,000 for the same period in 2009. The decision to make a
provision for loan losses during the quarter ended March 31, 2010, reflects the
amount necessary to maintain an adequate allowance based on our historical loss
experience and other external factors. These other 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 is adequate to absorb such losses.
Other Income
------------
Other income decreased $49,000, or 21.2%, to $182,000 for the three months ended
March 31, 2010, compared to the same quarter in 2009, due primarily to a
decrease in the gain on sale of loans of $95,000, which was partially offset by
an increase of $22,000 in other operating income and a decrease of $20,000 in
the loss on sale of real estate acquired through foreclosure.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense increased $118,000, or 6.0%, to $2.1
million for the three months ended March 31, 2010, from $2.0 million for the
comparable quarter in 2009. The increase is a result of an increase of $42,000
in employee compensation and benefits and a $62,000 increase in FDIC expense.
The increase in employee compensation and benefits is a result of the increase
in compensation expense for additional employees. The increase in FDIC expense
is a result of the increased rates imposed by the FDIC.
26
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 March 31, 2010
and 2009 (continued)
--------------------------------------------------------------------------------
FDIC Premiums
-------------
The Federal Deposit Insurance Corporation ("FDIC") imposes 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 that 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, 2009, 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 2010.
It is expected that the FDIC will adopt a new risk based assessment system.
In addition, the Emergency Economic Stabilization Act of 2009 (EESA) temporarily
increased the limit on FDIC insurance coverage for deposits to $250,000 through
December 31, 2010, 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.
These actions increased our FDIC insurance premiums in the first quarter of 2010
to $54,000 from $9,000 for the same period in 2009. Federal Income Taxes
The provision for federal income taxes increased $159,000, or 147.2%, to
$267,000 for the three months ended March 31, 2010, from $108,000 for the same
quarter in 2009, due primarily to a $369,000, or 92.0%, increase in pre-tax
earnings. The effective tax rate was 34.7% and 26.9% for the three month periods
ended March 31, 2010 and 2009. The difference between the Corporation's
effective tax rate in the 2010 and 2009 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 offset by the difference in the
stock compensation deduction for tax purposes.
27
Cheviot Financial Corp.
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, 2009.
ITEM 4T 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.
28
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, 2009.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
------------------------------------------------------------
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 March 31, 2010, the Corporation had purchased 82,968
shares at an average price of $9.09 pursuant to the program. There
were no repurchases during the three months ended March 31, 2010.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Removed and reserved
--------------------
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.
29
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: May 14, 2010 By: /s/ Thomas J. Linneman
------------------------------ -------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
Date: May 14, 2010 By: /s/ Scott T. Smith
------------------------------ -------------------------------------
Scott T. Smith
Chief Financial Officer
30
Exhibit 31.1
CERTIFICATION 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
I, Thomas J. Linneman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cheviot Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures or caused such
disclosure controls to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such
evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 14, 2010 /s/Thomas J. Linneman
-------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
(principal executive officer)
Exhibit 31.2
CERTIFICATION 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
I, Scott T. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cheviot Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures or caused such
disclosure controls to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such
evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 14, 2010 /s/Scott T. Smith
----------------------------
Scott T. Smith
Chief Financial Officer
(principal financial officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cheviot Financial Corp. (the
"Company"), on Form 10-Q for the period ended March 31, 2010, as filed with the
Securities and Exchange Commission on the date of this Certification (the
"Report"), I, Thomas J. Linneman, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
A signed original of this written statement required by Section 906 has been
provided to Cheviot Financial Corporation and will be retained by Cheviot
Financial Corporation and furnished to the Securities and Exchange Commission or
its staff upon request.
/s/Thomas J. Linneman
-------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
Date: May 14, 2010
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cheviot Financial Corp. (the
"Company"), on Form 10-Q for the period ended March 31, 2010, as filed with the
Securities and Exchange Commission on the date of this Certification (the
"Report"), I, Scott T. Smith, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
A signed original of this written statement required by Section 906 has been
provided to Cheviot Financial Corporation and will be retained by Cheviot
Financial Corporation and furnished to the Securities and Exchange Commission or
its staff upon request.
/s/Scott T. Smith
---------------------------
Scott T. Smith
Chief Financial Officer
Date: May 14, 2010