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 June 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
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CHEVIOT FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Federal 56-2423720
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3723 Glenmore Avenue, Cincinnati, Ohio 45211
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(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 August 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 [ ]
1 of 28
INDEX
Page
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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 18
Quantitative and Qualitative Disclosures about
Market Risk 25
Controls and Procedures 25
PART II - OTHER INFORMATION 26
SIGNATURES 28
2
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
ASSETS 2009 2008
(Unaudited)
Cash and due from banks $ 4,081 $ 4,192
Federal funds sold 4,839 4,063
Interest-earning deposits in other financial institutions 9,811 1,758
--------- ---------
Cash and cash equivalents 18,731 10,013
Investment securities available for sale - at fair value 43,350 23,909
Investment securities held to maturity - at cost, approximate
market value of $ - and $7,074 at June 30, 2009
and December 31, 2008, respectively - 7,000
Mortgage-backed securities available for sale - at fair value 5,496 648
Mortgage-backed securities held to maturity - at cost, approximate
market value of $6,475 and $6,830 at June 30, 2009 and
December 31, 2008, respectively 6,368 6,915
Loans receivable - net 251,145 267,754
Loans held for sale-at lower of cost or market 865 729
Real estate acquired through foreclosure - net 1,995 1,064
Office premises and equipment - at depreciated cost 5,019 4,969
Federal Home Loan Bank stock - at cost 3,369 3,369
Accrued interest receivable on loans 1,138 1,159
Accrued interest receivable on mortgage-backed securities 42 32
Accrued interest receivable on investments and interest-earning deposits 267 466
Prepaid expenses and other assets 872 297
Bank-owned life insurance 3,584 3,516
Prepaid federal income taxes 270 160
--------- ---------
Total assets $342,511 $332,000
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $229,782 $216,048
Advances from the Federal Home Loan Bank 40,336 44,604
Advances by borrowers for taxes and insurance 541 1,464
Accrued interest payable 165 172
Accounts payable and other liabilities 2,673 1,069
Deferred federal income taxes 457 412
---------- ----------
Total liabilities 273,954 263,769
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 June 30, 2009 and December 31, 2008, respectively 99 99
Additional paid-in capital 43,719 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 June 30, 2009
and December 31, 2008, respectively (12,827) (12,799)
Retained earnings - restricted 40,114 40,276
Accumulated comprehensive loss, unrealized losses on securities
available for sale, net of related tax effects (122) (141)
---------- ----------
Total shareholders' equity 68,557 68,231
-------- ---------
Total liabilities and shareholders' equity $342,511 $332,000
======= =======
See accompanying notes to consolidated financial statements.
3
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
2009 2008 2009 2008
(Unaudited)
Interest income
Loans $7,527 $7,567 $3,678 $3,761
Mortgage-backed securities 231 262 126 123
Investment securities 654 1,052 286 498
Interest-earning deposits and other 25 70 15 38
------- ------- ------- -------
Total interest income 8,437 8,951 4,105 4,420
Interest expense
Deposits 2,636 3,749 1,262 1,739
Borrowings 928 746 456 370
------ ------ ------ ------
Total interest expense 3,564 4,495 1,718 2,109
----- ----- ----- -----
Net interest income 4,873 4,456 2,387 2,311
Provision for losses on loans 452 288 115 25
------ ------ ------ -------
Net interest income after provision for losses on loans 4,421 4,168 2,272 2,286
Other income (expense)
Rental 25 25 12 13
Gain on sale of loans 272 9 141 5
Gain (loss) on sale of real estate acquired through foreclosure (49) (43) (29) 16
Earnings on bank-owned life insurance 68 65 34 33
Other operating 158 159 85 86
------ ------ ------- -------
Total other income 474 215 243 153
General, administrative and other expense
Employee compensation and benefits 2,284 2,096 1,166 1,078
Occupancy and equipment 281 278 138 128
Property, payroll and other taxes 509 491 259 250
Data processing 184 159 99 77
Legal and professional 220 192 88 68
Advertising 100 100 50 50
FDIC expense 157 13 147 6
Other operating 426 310 234 174
------ ------ ------ ------
Total general, administrative and other expense 4,161 3,639 2,181 1,831
----- ----- ----- -----
Earnings before income taxes 734 744 334 608
Federal income taxes
Current 181 108 16 56
Deferred 35 93 93 106
------- ------- ------ -----
Total federal income taxes 216 201 109 162
------ ------ ----- -----
NET EARNINGS $ 518 $ 543 $ 225 $ 446
====== ====== ====== ======
EARNINGS PER SHARE
Basic $.06 $.06 $.03 $.05
=== === === ===
Diluted $.06 $.06 $.03 $.05
=== === === ===
Dividends per common share $.20 $.18 $.10 $.09
=== === === ===
See accompanying notes to consolidated financial statements.
4
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the six and three months ended June 30, 2009 and 2008
(In thousands)
For the six months For the three months
ended June 30, ended June 30,
2009 2008 2009 2008
(Unaudited)
Net earnings for the period $ 518 $ 543 $ 225 $ 446
Other comprehensive income (loss), net of tax expense (benefits):
Unrealized holding gains (losses) on securities during the
period, net of tax expense (benefits) of $10 and $(110) for
the six months ended June 30, 2009 and 2008, respectively,
and $39 and $(163) for the three months ended June 30,
2009 and 2008, respectively 19 (214) 76 (317)
---- --- ---- ---
Comprehensive income $ 537 $ 329 $ 301 $ 129
=== === === ===
Accumulated comprehensive loss $(122) $(168) $(122) $(168)
=== === === ===
See accompanying notes to consolidated financial statements
5
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2009 and 2008
(In thousands)
2009 2008
(Unaudited)
Cash flows from operating activities:
Net earnings for the period $ 518 $ 543
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums and discounts on investment
and mortgage-backed securities, net 4 (7)
Depreciation 152 140
Amortization of deferred loan origination fees - net (12) -
Proceeds from sale of loans in the secondary market 16,073 1,726
Loans originated for sale in the secondary market (15,801) (1,700)
Gain on sale of loans (272) (9)
Loss on sale of real estate acquired through foreclosure 49 43
Federal Home Loan Bank stock dividends - (87)
Net increase in cash surrender value of bank-owned life insurance (68) (65)
Provision for losses on loans 452 288
Amortization of expense related to stock benefit plans 373 387
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 21 (16)
Accrued interest receivable on mortgage-backed securities (10) 12
Accrued interest receivable on investments and interest-
earning deposits 199 (96)
Prepaid expenses and other assets (575) (349)
Accrued interest payable (7) 21
Accounts payable and other liabilities 1,604 (58)
Federal income taxes
Current (110) (23)
Deferred 35 93
-------- --------
Net cash provided by operating activities 2,625 843
Cash flows used in investing activities:
Principal repayments on loans 41,481 27,699
Loan disbursements (26,588) (39,830)
Purchase of investment securities - available for sale (40,039) (18,973)
Proceeds from maturity of investment securities - available for sale 20,565 2,000
Proceeds from maturity of investment securities - held to maturity 7,000 16,000
Purchase of mortgage-backed securities - available for sale (5,267) -
Principal repayments on mortgage-backed securities - available for sale 476 125
Principal repayments on mortgage-backed securities - held to maturity 548 1,776
Proceeds from sale of real estate acquired through foreclosure 219 636
Additions to real estate acquired through foreclosure (59) (9)
Purchase of office premises and equipment (202) (19)
------- --------
Net cash used in investing activities (1,866) (10,595)
Cash flows provided by financing activities:
Net increase (decrease) in deposits 13,734 (4,820)
Proceeds from Federal Home Loan Bank advances - 19,500
Repayments on Federal Home Loan Bank advances (4,268) (5,996)
Advances by borrowers for taxes and insurance (923) (709)
Treasury stock repurchases (28) (571)
Stock option expense, net 124 122
Dividends paid on common stock (680) (618)
-------- --------
Net cash provided by financing activities 7,959 6,908
------- -------
Net decrease in cash and cash equivalents 8,718 (2,844)
Cash and cash equivalents at beginning of period 10,013 9,450
------- -------
Cash and cash equivalents at end of period $ 18,731 $ 6,606
======= =======
See accompanying notes to consolidated financial statements.
6
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30, 2009 and 2008
(In thousands)
2009 2008
(Unaudited)
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 287 $ 138
====== ======
Interest on deposits and borrowings $3,571 $4,474
====== ======
Supplemental disclosure of noncash investing activities:
Transfer of loans to real estate acquired through foreclosure $1,140 $ 443
====== ======
Loans originated upon sales of real estate acquired through foreclosure $ - $ 138
====== ======
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 126 $ 6
====== ======
See accompanying notes to consolidated financial statements.
7
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 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 to the origination of
primarily 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
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, 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 six month periods
ended June 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 six months ended June 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 June 30, 2009 and December 31, 2008, we
had $40.3 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 $101.3
million and $99.3 million, respectively.
Loan repayments and maturing securities are a relatively predictable source
of fun ds. 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 six months ended June 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 six months
ended June 30, 2009, loan originations totaled $42.4 million, compared to
$41.5 million for the six months ended June 30, 2008.
Total deposits increased $13.7 million during the six months ended June 30,
2009 and decreased $4.8 million during the six months ended June 30, 2008,
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 contract as of
June 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 $ 1,165 $ 1,271 $ 25,900 $ 40,336
Certificates of deposit 109,727 21,942 12,810 - 144,479
Amount of loan commitments and expiration per period:
Commitments to originate one- to four-family
loans 3,059 - - - 3,059
Home equity lines of credit 11,775 - - - 11,775
Undisbursed loans in process 1,838 - - - 1,838
------- ------ ------ ------ -------
Total contractual obligations $ 138,399 $ 23,107 $ 14,081 $ 25,900 $ 201,487
======= ====== ====== ====== =======
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 six months ended June 30, 2009 and 2008
3. Liquidity and Capital Resources (continued)
-------------------------------
At June 30, 2009 and 2008, we exceeded all of the applicable regulatory
capital requirements. Our core (Tier 1) capital was $57.0 million and $54.5
million, or 17.0% and 16.7% of total assets at June 30, 2009 and 2008,
respectively. 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 June 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 June 30, 2009 and
2008, we had a total risk-based capital ratio of 34.2% and 32.1%,
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 parent.
Weighted-average common shares deemed outstanding gives effect to 178,540
and 214,247 unallocated shares held by the ESOP for the three and six
months ended June 30, 2009 and 2008, respectively.
For the six months ended For the three months ended
June 30, June 30,
2009 2008 2009 2008
Weighted-average common shares
outstanding (basic) 8,692,768 8,702,161 8,691,585 8,677,852
Dilutive effect of assumed exercise
of stock options 36,436 55,256 33,062 57,298
--------- --------- --------- --------
Weighted-average common shares
outstanding (diluted) 8,729,204 8,757,417 8,724,647 8,735,150
========= ========= ========= =========
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 awards for shares were
granted, all of which are subject to five year vesting.
In 2004, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based
Payment," which revises SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R)
requires that cost related to the fair value of all equity-based awards to
employees, including grants of employee stock options, be recognized in the
financial statements.
10
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and six months ended June 30, 2009 and 2008
5. Stock Option Plan (continued)
-----------------
The Corporation adopted the provisions of SFAS No. 123(R) effective January
1, 2006, using the modified prospective transition method, and therefore
has not restated its financial statements for prior periods. Under this
method, the Corporation has applied the provisions of SFAS No. 123(R) to
new equity-based awards and to equity-based awards modified, repurchased,
or cancelled after January 1, 2006. In addition, the Corporation recognizes
compensation cost for the portion of equity-based awards for which the
requisite service period has not been rendered ("unvested equity-based
awards") that is outstanding as of January 1, 2006. The compensation cost
recorded for unvested equity-based awards is based on their grant-date fair
values. For the six months ended June 30, 2009, the Corporation recorded
$123,000 in after-tax compensation cost for equity-based awards that vested
during the six months ended June 30, 2009. The Corporation has $269,000
unrecognized pre-tax compensation cost related to non-vested equity-based
awards granted under its stock incentive plan as of June 30, 2009, which is
expected to be recognized over a weighted-average vesting period of
approximately 1.1 years.
A summary of the status of the Corporation's stock option plan as of June
30, 2009, and changes during the period then ended is presented below:
Six months ended Year ended
June 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
======= ===== ======= =====
Options expected to be exercisable at year-end
Fair value of options granted $ 3.31 $1.93
==== ====
The following information applies to options outstanding at June 30, 2009:
Number outstanding 412,340
Exercise price $8.48 - $13.63
Weighted-average exercise price $11.11
Weighted-average remaining contractual life 6.1 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 six months ended June 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. Income Taxes
------------
The Corporation adopted the provisions of FASB Interpretation 48,
"Accounting for Uncertainty in Income Taxes," on January 1, 2007.
Previously, the Corporation had accounted for tax contingencies in
accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies." As required by Interpretation 48, which
clarifies Statement No. 109, "Accounting for Income Taxes," 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 the adoption date, the Corporation applied Interpretation 48
to all tax positions for which the statute of limitations remained open. As
a result of the implementation of Interpretation 48, 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.
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 2004.
The Corporation will recognize, if applicable, interest accrued related to
unrecognized tax benefits in interest expense and penalties in operating
expenses.
7. Disclosures About Fair Value of Assets and Liabilities
------------------------------------------------------
Effective January 1, 2008, the Corporation adopted Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157
defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. FAS 157 has been applied
prospectively as of the beginning of the year.
FAS 157 defines fair value 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. FAS 157 also establishes a
fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that
may be used to measure fair value:
12
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended June 30, 2009 and 2008
7. Disclosures About Fair Value of Assets and Liabilities (continued)
------------------------------------------------------
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 iabilities; 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 values 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 include U.S. agency securities, municipal
bonds and mortgage-backed agency securities.
Fair Value Measurements at
June 30, 2009
Quoted prices
in active Significant Significant
markets for other other
identical observable unobservable
assets inputs inputs
June 30, 2009 (Level 1) (Level 2) (Level 3)
------------- --------- --------- ---------
Securities available for sale $48,846 $48,846
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 and other real estate owned 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 June 30, 2009 was approximately
$759,000, with total loss recognized of $71,000. At June 30, 2009, the
carrying value of other real estate owned was $2.0 million.
13
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended June 30, 2009 and 2008
8. Effects of Recent Accounting Pronouncements
-------------------------------------------
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements". SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value estimates.
In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 157-2
which delayed the effective date of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis,
to fiscal years beginning after November 15, 2008. The Corporation elected
to defer the adoption of SFAS No. 157 for its nonfinancial assets and
nonfinancial liabilities until January 1, 2009. Adoption of this standard
on January 1, 2009 had no impact on the Corporation's results of operations
and financial position.
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141(R), "Business
Combinations" ("SFAS No. 141(R)"), which requires all assets acquired and
liabilities assumed in a business combination (with a few exceptions, such
as deferred tax assets and liabilities) to be measured at fair value in
accordance with SFAS No.157, "Fair Value Measurements" ("SFAS No. 157").
SFAS No. 141(R) is effective prospectively for fiscal years beginning on or
after December 15, 2008. The Corporation adopted SFAS No. 141(R) during the
first quarter of 2009, and the adoption was not applicable to its
consolidated financial statements for the periods reported.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"), which is intended to
improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Corporation adopted SFAS No. 161 during the first
quarter of 2009, and the adoption did not have a material effect on its
consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position ("FSP") FAS 107-1 and
Accounting Principles Board ("APB") 28-1, "Interim Disclosures about Fair
Value of Financial Instruments", to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This FSP also amends
APB Opinion No. 28, "Interim Financial Reporting", to require those
disclosures in summarized financial information at interim reporting
periods. This FSP shall be effective for interim reporting periods ending
after June 15, 2009. The Corporation adopted FSP FAS 107-1 and APB 28-1
during the second quarter of 2009.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition
and Presentation of Other-Than-Temporary Impairments", to amend the
other-than-temporary impairment guidance in U.S. GAAP for debt securities
to make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity
securities in the financial statements. This FSP does not amend existing
recognition and measurement guidance related to other-than-temporary
impairments of equity securities. The FSP shall be effective for interim
and annual reporting periods ending after June 15, 2009. The Corporation
adopted FSP FAS 115-2 and FAS 124-2 during the second quarter of 2009.
14
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended June 30, 2009 and 2008
8. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
Also in April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly",
to provide additional guidance for estimating fair value in accordance with
SFAS No. 157, "Fair Value Measurements", when the volume and level of
activity for the asset or liability have significantly decreased. This FSP
also includes guidance on identifying circumstances that indicate a
transaction is not orderly. It shall be effective for interim and annual
reporting periods ending after June 15, 2009, and shall be applied
prospectively. The Corporation adopted FSP FAS 157-4 during the second
quarter of 2009, and the adoption did not have a material effect on its
consolidated financial statements.
The Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") No. 111, "Other Than Temporary Impairment of Certain Investments in
Equity Securities" ("SAB No. 111"), in April 2009 in response to the FASB's
April 2009 release of Final FSP FAS 115-2 and FAS 124-2. SAB No. 111 amends
and replaces "Other Than Temporary Impairment of Certain Investments in
Debt and Equity Securities", ("Topic 5.M"), in the SEC's Staff Accounting
Bulletin series. With the amendments in SAB No. 111, debt securities are
excluded from the scope of Topic 5.M, but the SEC staff's views on equity
securities are still included within the topic. According to the revision
to Topic 5.M, the SEC does not interpret the FASB's use of the term
other-than-temporary to mean permanent. The Corporation has considered this
interpretative guidance for the disclosures in its interim financial
statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS No.
165"), which sets forth the circumstances under which an entity should
recognize events occurring after the balance sheet date and the disclosures
that should be made. Also, this statement requires disclosure of the date
through which the entity has evaluated subsequent events (for public
companies, and other companies that expect to widely distribute their
financial statements, this date is the date of financial statement
issuance, and for nonpublic companies, the date the financial statements
are available to be issued). The effective date is for interim and annual
periods ending after June 15, 2009. The Corporation adopted SFAS No. 165
during the second quarter of 2009, and the adoption did not have a material
effect on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets" ("SFAS No. 166"), which is a revision to SFAS No. 140,
eliminates the concept of a qualifying special purpose entity (QSPE),
changes the requirements for derecognizing financial assets, and requires
additional disclosures, including information about continuing exposure to
risks related to transferred financial assets. SFAS No. 166 is effective
for financial asset transfers occurring after the beginning of fiscal years
beginning after November 15, 2009. The disclosure requirements must be
applied to transfers that occurred before and after the effective date. The
Corporation is currently evaluating the impact on its financial statements
of adopting SFAS No. 166.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB
Interpretation No. 46(R)" ("SFAS No. 167"), which revises FIN 46(R),
contains new criteria for determining the primary beneficiary, eliminates
the exception to consolidating QSPE's, requires continual reconsideration
of conclusions reached in determining the primary beneficiary, and requires
additional disclosures. SFAS No. 167 is effective as of the beginning of
fiscal years beginning after November 15, 2009 and is applied using a
cumulative effect adjustment to retained earnings for any carrying amount
adjustments (e.g., for newly- consolidated VIE's). The Corporation has not
evaluated the effect of the adoption of SFAS No. 167 on its consolidated
financial statements.
15
. Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended June 30, 2009 and 2008
8. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
Also in June 2009, the FASB issued SFAS No. 168, "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles" ("SFAS No. 168"). The Codification will become the source of
authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities and will supersede all non-SEC accounting and
reporting standards. This statement is effective for financial statements
issued for interim and annual financial statements ending after September
15, 2009. The Corporation is currently evaluating the impact of adopting
SFAS No. 168.
9. 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 fair value estimates are determined in accordance with SFAS No.
157.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at June 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.
16
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended June 30, 2009 and 2008
9. Fair Value of Financial Instruments (continued)
-----------------------------------
Deposits: The fair value of NOW accounts, passbook accounts, and
money market demand deposits is deemed to approximate the amount
payable on demand at June 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.
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 June 30, 2009,
the fair value of the derivative loan commitments was not
material.
June 30, 2009
Carrying Fair
Value Value
(In thousands)
Financial assets
Cash and cash equivalents $ 18,731 $ 18,731
Investment securities 43,350 43,350
Mortgage-backed securities 11,864 11,971
Loans receivable - net 252,010 261,357
Federal Home Loan Bank stock 3,369 3,369
--------- ---------
$329,324 $338,778
Financial liabilities
Deposits $229,782 $229,715
Advances from the Federal Home
Loan Bank 40,336 42,969
Advances by borrowers for taxes
and insurance 541 541
--------- ---------
$270,659 $273,225
17
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.
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.
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 June 30,
2009
--------------------------------------------------------------------------------
Total assets increased $10.5 million, or 3.2%, to $342.5 million at June 30,
2009, from $332.0 million at December 31, 2008. The increase in total assets
reflects increases in cash and cash equivalents and mortgage-backed securities,
which was partially offset by a decrease in loans receivable and investment
securities. 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 increased $8.7 million,
or 87.1%, to $18.7 million at June 30, 2009, from $10.0 million at December 31,
2008. The increase in cash and cash equivalents at June 30, 2008, was due to a
$8.1 million increase in interest-earning deposits and a $776,000 increase in
federal funds sold, which was partially offset by a $111,000 decrease in cash
and due from banks. Investment securities increased $12.4 million to $43.3
million at June 30, 2009. At June 30, 2009, $43.3 million of investment
securities were classified as available for sale. As of June 30, 2009, none of
the investment securities are considered impaired.
18
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 June 30,
2009 (continued)
--------------------------------------------------------------------------------
Mortgage-backed securities increased $4.3 million, or 56.9%, to $11.9 million at
June 30, 2009, from $7.6 million at December 31, 2008. The increase in
mortgage-backed securities was due primarily to purchases of $5.3 million ,
which was partially offset by principal prepayments and repayments totaling $1.0
million. At June 30, 2009, $6.4 million of mortgage-backed securities were
classified as held to maturity, while $5.5 million were classified as available
for sale. As of June 30, 2009, none of the mortgage-backed securities are
considered impaired.
Loans receivable, including loans held for sale, decreased $16.5 million, or
6.1%, to $252.0 million at June 30, 2009, from $268.5 million at December 31,
2008. The decrease reflects loan principal repayments of $41.5 million and sales
of $16.1 million, partially offset by loan originations totaling $42.4 million.
The allowance for loan losses totaled $996,000 and $709,000 at June 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
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 $164,000 increase in the provision for losses on
loans during the six months ended June 30, 2009 is a reflection of these
factors, weaker economic conditions in the greater Cincinnati area, loan
charge-offs of $134,000 and the need to allocate approximately $32,000 in
specific reserves for two residential properties totaling $131,000 which were
acquired through foreclosure during the six months ended June 30, 2009. 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 June 30, 2009.
Non-performing and impaired loans totaled $759,000 and $1.8 million at June 30,
2009 and December 31, 2008, respectively. At June 30, 2009, non-performing and
impaired loans were comprised of seven loans secured by one- to four-family
residential real estate. The decrease in impaired loans was mainly the result of
transferring $1.2 million of impaired loans to other real estate owned. At June
30, 2009 and December 31, 2008 real estate acquired through foreclosure totaled
$2.0 million and $1.1 million, respectively. The allowance for loan losses
represented 36.2% and 38.4% of non-performing and impaired loans at June 30,
2009 and December 31, 2008, respectively. Although management believes that the
Corporation's allowance for loan losses conforms to 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 $13.7 million, or 6.4%, to $229.8 million at June 30, 2009,
from $216.0 million at December 31, 2008. Advances from the Federal Home Loan
Bank of Cincinnati decreased by $4.3 million, or 9.6%, to $40.3 million at June
30, 2009, from $44.6 million at December 31, 2008.
Shareholders' equity increased $326,000, or 0.5%, to $68.6 million at June 30,
2009, from $68.2 million at December 31, 2008. The increase primarily resulted
from net earnings of $518,000, amortization of stock benefit plans of $373,000,
which was partially offset by dividends paid of $680,000. At June 30, 2009,
Cheviot Financial had the ability to purchase an additional 364,616 shares under
its announced stock repurchase plan.
19
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 June 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 June 30, 2009, $109.7 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.
Borrowings from the Federal Home Loan Bank of Cincinnati decreased $4.3 million
during the six months ended June 30, 2009. We have the ability to increase such
borrowings by approximately $101.3 million.
Comparison of Operating Results for the Six-Month Periods Ended June 30, 2009
and 2008
--------------------------------------------------------------------------------
General
-------
Net earnings for the six months ended June 30, 2009 totaled $518,000, a $25,000
decrease from the $543,000 net earnings reported for the same period in 2008.
The decrease in net earnings reflects an increase in general, administrative and
other expenses of $522,000, an increase of $164,000 in the provision for losses
on loans and an increase of $15,000 in federal income taxes, which were
partially offset by an increase of $417,000 in net interest income and an
increase in other income of $259,000 for the 2009 period.
Net Interest Income
-------------------
Total interest income decreased $514,000, or 5.7%, to $8.4 million for the
six-months ended June 30, 2009, from the comparable period in 2008. Interest
income on loans decreased $40,000, or 0.5%, to $7.6 million during the 2009
period. This decrease was due primarily to an 8 basis point decrease in the
average yield on loans to 5.88% for the 2009 period from 5.96% for the 2008
period, which was partially offset by a $1.9 million, or 0.8%, increase in the
average balance of loans outstanding for the six months ended June 30, 2009.
Interest income on mortgage-backed securities decreased $31,000, or 11.8%, to
$231,000 for the six months ended June 30, 2009, from $262,000 for the same
period in 2008, due primarily to a 153 basis point decrease in the average
yield, which was partially offset by a $1.8 million increase in the average
balance of securities outstanding period to period. Interest income on
investment securities decreased $398,000, or 37.8%, to $654,000 for the six
months ended June 30, 2009, compared to $1.1 million for the same period in
2008, due primarily to an 142 basis point decrease in the average yield to 4.16%
in the 2009 period, and a decrease of $6.2 million, or 16.6% in the average
balance of investment securities outstanding. Interest income on other
interest-earning deposits decreased $45,000, or 64.3% to $25,000 for the six
months ended June 30, 2009, as compared to the same period in 2008.
20
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods Ended June 30, 2009
and 2008(continued)
--------------------------------------------------------------------------------
Interest expense decreased $931,000, or 20.7% to $3.6 million for the six months
ended June 30, 2009, from $4.5 million for the same period in 2008. Interest
expense on deposits decreased by $1.1 million, or 29.7%, to $2.6 million for the
six months ended June 30, 2009, from $3.7 million for the same period in 2008
due primarily to a 109 basis point decrease in the average costs of deposits to
2.39% during the 2009 period, which was partially offset by a $5.5 million, or
2.6%, increase in the average balances outstanding. Interest expense on
borrowings increased by $182,000, or 24.4%, due primarily to a $9.0 million, or
26.9%, increase in the average balance outstanding, which was partially offset
by a 9 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 $417,000, or 9.4%, to $4.9 million for the six
months ended June 30, 2009. The average interest rate spread increased to 2.64%
for the six months ended June 30, 2009 from 2.23% for the six months ended June
30, 2008. The net interest margin increased to 3.09% for the six months ended
June 30, 2009 from 2.91% for the six months ended June 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
$452,000 provision for losses on loans for the six months ended June 30, 2009,
compared to a $288,000 provision for losses on loans for the six months ended
June 30, 2008. The decision to make a provision for loan losses during the six
months ended June 30, 2009 reflects the amount necessary to maintain an adequate
allowance based on the five year 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 increased $259,000, or 120.5%, to $474,000 for the six months ended
June 30, 2009, compared to the same period in 2008, due primarily to an increase
in the gain on the sale of loans of $263,000, which was partially offset by an
increase of $6,000 in the loss on sale of real estate acquired through
foreclosure.
21
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods Ended June 30, 2009
and 2008 (continued)
--------------------------------------------------------------------------------
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense increased $522,000, or 14.3%, to $4.2
million for the six months ended June 30, 2009, from $3.6 million for the
comparable period in 2008. This increase is a result of an increase of $188,000
in employee compensation and benefits, an increase of $25,000 in data processing
expense, an increase of $144,000 in FDIC expense and a $116,000 increase in
other operating expense. The increase in employee compensation and benefits is a
result of the increase in compensation expense for additional employees and an
increase in the health costs as a result of overall company 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 Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation ("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 will be payable by us on September 30, 2009. It is
expected that an additional special assessment may occur in 2009.
22
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods Ended June 30, 2009
and 2008 (continued)
--------------------------------------------------------------------------------
Federal Income Taxes
--------------------
The provision for federal income taxes increased $15,000, or 7.5%, to $216,000
for the six months ended June 30, 2009, from $201,000 for the same period in
2008. The effective tax rate was 29.4% and 27.0% for the six month periods ended
June 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.
Comparison of Operating Results for the Three-Month Periods Ended June 30,
2009 and 2008
--------------------------------------------------------------------------------
General
-------
Net earnings for the three months ended June 30, 2009 totaled $225,000, a
$221,000 decrease from the $446,000 earnings reported in the June 2008 period.
The decrease in net earnings reflects an increase in general, administrative and
other expenses of $350,000 and an increase in the provision for losses on loans
of $90,000, which were partially offset by an increase of $76,000 in net
interest income, an increase in other income of $90,000 and a decrease of
$53,000 in federal income taxes for the 2009 quarter.
Net Interest Income
-------------------
Total interest income decreased $315,000, or 7.1%, to $4.1 million for the
three-months ended June 30, 2009, from the comparable quarter in 2008. Interest
income on loans decreased $83,000, or 2.2%, to $3.7 million during the 2009
quarter from $3.8 million for the 2008 quarter. This decrease was due primarily
to a $7.6 million, or 3.0%, decrease in the average balance of loans
outstanding, which was partially offset by a 5 basis point increase in the
average yield on loans to 5.90% for the 2009 quarter from 5.85% for the three
months ended June 30, 2008.
Interest income on mortgage-backed securities increased $3,000, or 2.4%, to
$126,000 for the three months ended June 30, 2009, from $123,000 for the
comparable 2008 quarter, due primarily to a $3.3 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 $212,000, or 42.6%, to $286,000 for the three
months ended June 30, 2009, compared to $498,000 for the same quarter in 2008,
due primarily to a 266 basis point decrease in the average yield to 3.12% in the
2009 quarter, which was partially offset by an increase of $2.2 million, or 6.3%
in the average balance of investment securities outstanding. Interest income on
other interest-earning deposits decreased $23,000, or 60.5% to $15,000 for the
three months ended June 30, 2009.
Interest expense decreased $391,000, or 18.5% to $1.7 million for the three
months ended June 30, 2009, from $2.1 million for the same quarter in 2008.
Interest expense on deposits decreased by $477,000, or 27.4%, to $1.3 million,
from $1.7 million, due primarily to a 100 basis point decrease in the average
costs of deposits to 2.25% during the 2009 quarter due to the lower rate
repricings of certificates of deposit, as deposit rates were lower in 2009 as
compared to 2008. This was partially offset by a $9.9 million, or 4.6%, increase
in the average balance outstanding. Interest expense on borrowings increased by
$86,000, or 23.2%, due primarily to a $7.0 million, or 20.0%, increase in the
average balance outstanding and a 12 basis point increase in the average cost of
borrowings.
23
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 June 30, 2009
and 2008(continued)
--------------------------------------------------------------------------------
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $76,000, or 3.3%, to $2.4 million for the three
months ended June 30, 2009, as compared to the same quarter in 2008. The average
interest rate spread increased to 2.66% for the three months ended June 30, 2009
from 2.38% for the three months ended June 30, 2008. The net interest margin
increased slightly to 3.05% for the three months ended June 30, 2009 from 3.02%
for the three months ended June 30, 2008.
Provision for Losses on Loans
-----------------------------
Management recorded a $115,000 provision for losses on loans for the three
months ended June 30, 2009, compared to a $25,000 provision for losses on loans
for the three months ended June 30, 2008. The decision to make a provision for
loan losses during the three months ended June 30, 2009 reflects the amount
necessary to maintain an adequate allowance based on the five year historical
loss experience and other external factors. 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 $90,000, or 58.8%, to $243,000 for the three months ended
June 30, 2009, compared to the same quarter in 2008, due primarily to an
increase in the gain on the sale of loans of $136,000, which was partially
offset by an increase in the loss on sale of real estate acquired through
foreclosure of $45,000.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense increased $350,000, or 19.1%, to $2.2
million for of the three months ended June 30, 2009. This increase is a result
of an increase of $88,000 in employee compensation and benefits, an increase of
$141,000 in FDIC expense and an increase of $60,000 in other operating expense.
The increase in employee compensation and benefits is a result of the increase
in compensation expense for additional employees and an increase in the health
costs as a result of overall company growth. The increase in FDIC expense is a
result of the special assessment from the Federal Deposit Insurance Corporation
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.
Federal Income Taxes
--------------------
The provision for federal income taxes decreased $53,000, or 32.7%, to $109,000
for the three months ended June 30, 2009, from $162,000 for the same quarter in
2008, due primarily to a $274,000, or 45.1%, decrease in pre-tax earnings. The
effective tax rate was 32.6% and 26.6% for the three month periods ended June
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.
24
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.
25
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 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 June 30, 2009, the Corporation had purchased 82,968 shares
pursuant to the program.
Total # of
shares purchased
Total Average as part of publicly
# of shares price paid announced plans
Period purchased per share or programs
------ --------- --------- ------------
April 1-30, 2009 - $ - 79,170
May 1-31, 2009 3,798 $7.51 82,968
June 1-30, 2009 - $ - 82,968
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Corporation held its Annual Meeting of Shareholders on April 28,
2009. Two matters were presented to the shareholders for a vote: The
shareholders elected two directors by the following votes:
For Withheld
--- --------
Steven R. Hausfeld 8,276,609 61,272
Thomas J. Linneman 7,847,004 490,877
In addition, the following are the continuing directors of the
Corporation:
Edward L. Kleemeier
John T. Smith
Robert L. Thomas
James E. Williamson
The shareholders ratified the selection of Clark, Schaefer, Hackett &
Co. as the Corporation's auditors for the 2009 calendar year by the
following vote:
For: 8,318,567 Against: 17,766 Abstain: 1,548 Broker Non-Vote: 0
ITEM 5. Other Information
-----------------
None.
26
Cheviot Financial Corp.
PART II (CONTINUED)
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.
27
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: August 12, 2009 By: /s/ Thomas J. Linneman
-------------------------- -------------------------------
Thomas J. Linneman
President and Chief Executive
Officer
Date: August 12, 2009 By: /s/ Scott T. Smith
-------------------------- -------------------------------
Scott T. Smith
Chief Financial Officer
28
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: August 12, 2009 /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: August 12, 2009 /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 June 30, 2009, 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: August 12, 2009
---------------
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 June 30, 2009, 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: August 12, 2009
---------------