Attached files
file | filename |
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EX-13 - EXHIBIT 13 - CHEVIOT FINANCIAL CORP | ex13.htm |
EX-32 - EXHIBIT 32 - CHEVIOT FINANCIAL CORP | ex32.htm |
EX-23.1 - EXHIBIT 23.1 - CHEVIOT FINANCIAL CORP | ex23-1.htm |
EX-31.2 - EXHIBIT 31.2 - CHEVIOT FINANCIAL CORP | ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - CHEVIOT FINANCIAL CORP | ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
FORM
10-K
x |
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the Fiscal Year Ended December 31, 2009
|
|
OR | |
o |
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.
000-33405
Cheviot Financial Corp. | ||
(Exact name of registrant as specified in its charter) |
Federal | 56-2423720 | |||||
(State or other
jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification Number) |
3723 Glenmore Avenue, Cheviot, Ohio | 45211 | |||||
(Address of Principal Executive Offices) | Zip Code |
(513) 661-0457 | ||
(Registrant’s telephone number) |
Securities Registered Pursuant to Section 12(b) of the Act: | Common Stock, par value $.01 per share | The Nasdaq Stock Market, LLC | ||||
(Title of Class) |
(Name of Each
Exchange
on which
Registered)
|
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |||||
Common Stock, $0.01 par value | The NASDAQ Stock Market, LLC |
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES o NO x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES o NO x
Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the 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
o
Indicate by check mark
whether the Registrant has submitted electronically and posted on its corporate
website, 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 such
shorter period that the Registrant was required to submit and post such
files). YES o NO
o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company x |
(Do not check if a smaller reporting company) |
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES o NO
x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the last sale price
on June 30, 2009, as reported by the Nasdaq Capital Market, was approximately
$22.6 million.
As of
March 1, 2010, there was issued and outstanding 8,868,706 shares of the
Registrant’s Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE:
(1)
Proxy Statement for the 2010 Annual Meeting of Stockholders of the Registrant
(Part III).
(2)
Annual Report to Stockholder (Part II and IV).
TABLE
OF CONTENTS
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36
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PART
I
Forward
Looking Statements
This Annual Report
contains certain “forward-looking statements” which may be identified by the use
of words such as “believe,” “expect,” “anticipate,” “should,” “planned,”
“estimated” and “potential.” Examples of forward-looking statements
include, but are not limited to, estimates with respect to our financial
condition, results of operations and business that are subject to various
factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in
nature. These factors include, but are not limited to, general and
local economic conditions, changes in interest rates, deposit flows, demand for
mortgage, commercial and other loans, real estate values, competition, changes
in accounting principles, policies, or guidelines, changes in legislation or
regulation, and other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing products and
services.
General
Cheviot
Financial Corp.
Following
completion of our mutual holding company reorganization and stock offering on
January 5, 2004, Cheviot Financial Corp. (the “Company”) became the mid-tier
stock holding company for Cheviot Savings Bank. The business of
Cheviot Financial Corp. consists of holding all of the outstanding common stock
of Cheviot Savings Bank. Cheviot Financial Corp. is chartered under
Federal law. As part of our reorganization, we issued a total of
9,918,751 shares of common stock. Our mutual holding company parent,
Cheviot Mutual Holding Company, received 5,455,313 of our common shares, and we
sold 4,388,438 shares to our depositors and a newly formed Employee Stock
Ownership Plan. In addition, 75,000 shares were issued to a
charitable foundation formed by Cheviot Savings Bank. Under federal
regulations, so long as Cheviot Mutual Holding Company exists, it will own at
least 50.1% of the voting stock of Cheviot Financial Corp. At
December 31, 2009, Cheviot Financial Corp. had total consolidated assets of
$341.9 million, total deposits of $235.9 million, and stockholders’ equity of
$68.8 million. For the years ended December 31, 2009, 2008 and 2007
we had net income of $1.1 million, $1.4 million and $926,000,
respectively. Our executive offices are located at 3723 Glenmore
Avenue, Cheviot, Ohio 45211, and our telephone number is (513)
661-0457.
Cheviot
Savings Bank
Cheviot
Savings Bank (the “Bank”) was established in 1911 as an Ohio-chartered savings
and loan association. Following our reorganization, we became an
Ohio-chartered stock savings and loan. Our primary business activity
is the origination of one- to four-family real estate loans. To a
lesser extent, we originate construction, multi-family, commercial real estate
and consumer loans. We also invest in securities, primarily United
States Government Agency securities and mortgage-backed
securities. At December 31, 2009, the Bank’s tangible core and
risk-based capital ratios were 16.2%, 16.2% and 32.9%, levels well in excess of
regulatory requirements.
Market
Area
We
conduct our operations from our executive office in Cheviot, Ohio and six full-service
branches, all of which are located in the western section of Hamilton County,
Ohio. Cheviot, Ohio is located in Hamilton County and is 10 miles west of
downtown Cincinnati. Hamilton County, Ohio represents our primary
geographic market area for loans and deposits with our remaining business
operations conducted in the larger Cincinnati metropolitan area which includes
Warren, Butler and Clermont Counties. We also conduct a moderate level of
business in the southeastern Indiana region, primarily in Dearborn, Ripley,
Franklin and Ohio Counties. We also originate loans in the Northern
Kentucky region secured by properties in Campbell, Kenton and Boone
Counties. The local economy is diversified with services, trade and
manufacturing employment remaining the most prominent employment sectors in
Hamilton County. Hamilton County is primarily a developed and urban
county. The employment base is well diversified and there is no
dependence on one area of the economy for continued employment. Our
future growth opportunities will be influenced by the growth and stability of
the regional, state and national economies, other demographic trends and the
competitive environment.
Hamilton
County and Cincinnati have experienced a declining population since the 1990
census while the other counties in which we conduct business had population
growth. The population decline in both Hamilton County and the City
of Cincinnati results from the other counties and Northern Kentucky being more
successful in attracting new and existing businesses to locate within their
areas through economic incentives, including less expensive real estate options
for office facilities. Individuals are moving to these other areas to be closer
to their place of employment, for newer, less expensive housing and more
suburban neighborhoods. Median household and per capita income
measures for Hamilton County are above comparable measures for both the United
States and Ohio, which we believe indicates the relatively stable and
diversified economy in the regional market served by Cheviot Savings Bank.
Recent employment trends indicate lower levels of unemployment in Hamilton
County compared to national and state-wide unemployment rates. During
the current economic times our market area has experienced a decrease in
property values and building development.
We
believe that we have developed products and services that will meet the
financial needs of our current and future customer base; however, we plan, and
believe it is necessary, to expand the range of products and services that we
offer to be more competitive in our market area. Marketing strategies focus on
the strength of our knowledge of local consumer and small business markets, as
well as expanding relationships with current customers and reaching out to
develop new, profitable business relationships.
Competition.
We face
significant competition within our market both in making loans and attracting
deposits. Hamilton County has a high concentration of financial institutions
including large money center and regional banks, community banks and credit
unions. Some of our competitors offer products and services that we currently do
not offer, such as trust services and private banking. Our competition for loans
and deposits comes principally from commercial banks, savings institutions,
mortgage banking firms, consumer finance companies and credit unions. We face
additional competition for deposits from short-term money market funds,
brokerage firms, mutual funds and insurance companies. Our primary focus is to
build and develop profitable customer relationships across all lines of business
while maintaining our position as a community bank.
Lending
Activities.
General.
Historically, our principal lending activity has been the origination,
for retention in our portfolio, of fixed-rate and adjustable-rate mortgage loans
collateralized by one- to four-family residential real estate located within our
primary market area. We will sell a portion of our fixed-rate loans
into the secondary market. We also originate commercial real estate loans,
including multi-family residential real estate loans, construction loans,
business lines of credit and consumer loans. During
the past year our loan portfolio decreased to $247.0 million at December 31,
2009 from $268.5 million at December 31, 2008. The decrease in our
loan portfolio reflects management’s decision to take advantage of opportunities
to obtain a higher rate of return by selling certain mortgage loans to the
Federal Home Loan Bank.
2
Loan
Portfolio Composition. Set forth below is selected information concerning
the composition of our loan portfolio in dollar amounts and in percentages as of
the dates indicated.
At
December 31,
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||||||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
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||||||||||||||||||||||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
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|||||||||||||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
Real
estate loans:
|
||||||||||||||||||||||||||||||||||||||||
One-
to four-family residential(1)
|
$ | 220,714 | 88.05 | % | $ | 234,822 | 86.38 | % | $ | 216,958 | 84.39 | % | $ | 209,996 | 84.06 | % | $ | 195,059 | 84.97 | % | ||||||||||||||||||||
Multi-family
residential
|
9,114 | 3.64 | 9,385 | 3.45 | 10,638 | 4.14 | 11,250 | 4.50 | 11,144 | 4.86 | ||||||||||||||||||||||||||||||
Construction
|
4,868 | 1.94 | 11,646 | 4.28 | 19,421 | 7.55 | 19,022 | 7.61 | 12,360 | 5.38 | ||||||||||||||||||||||||||||||
Commercial(2)
|
15,925 | 6.35 | 15,942 | 5.87 | 10,018 | 3.90 | 9,466 | 3.80 | 10,883 | 4.74 | ||||||||||||||||||||||||||||||
Consumer(3)
|
51 | 0.02 | 48 | 0.02 | 66 | 0.02 | 82 | 0.03 | 110 | 0.05 | ||||||||||||||||||||||||||||||
Total loans
|
250,672 | 100.00 | % | 271,843 | 100.00 | % | 257,101 | 100.00 | % | 249,816 | 100.00 | % | 229,556 | 100.00 | % | |||||||||||||||||||||||||
Less:
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||||||||||||||||||||||||||||||||||||||||
Undisbursed
portion of loans in process
|
2,696 | 2,623 | 6,585 | 7,646 | 5,849 | |||||||||||||||||||||||||||||||||||
Deferred
loan origination fees
|
(51 | ) | 28 | 88 | 159 | 188 | ||||||||||||||||||||||||||||||||||
Allowance
for loan losses
|
1,025 | 709 | 596 | 833 | 808 | |||||||||||||||||||||||||||||||||||
Total loans,
net
|
$ | 247,002 | $ | 268,483 | $ | 249,832 | $ | 241,178 | $ | 222,711 |
(1) | Includes home equity lines of credit, loans purchased and loans held for sale. |
(2) | Includes land loans. |
(3) | Loans secured by deposit accounts. |
3
Loan
Maturity Schedule. The following table sets forth certain information as
of December 31, 2009, regarding the amount of loans maturing in our
portfolio. Demand loans and loans with no stated maturity are
reported as due within one year.
At
December 31, 2009
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Within
One
Year
|
One
Through
Three
Years
|
Three
Through
Five
Years
|
Five
Through
Ten
Years
|
Ten
Through
Twenty
Years
|
Beyond
Twenty
Years
|
Total
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||||||||||||||||||||||
(In
thousands)
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||||||||||||||||||||||||||||
Real
estate loans:
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One-
to four-family real estate
|
$ | 5,381 | $ | 11,689 | $ | 13,045 | $ | 39,623 | $ | 120,722 | $ | 30,254 | $ | 220,714 | ||||||||||||||
Multi-family
residential
|
208 | 463 | 536 | 1,738 | 6,097 | 72 | 9,114 | |||||||||||||||||||||
Construction
|
113 | 249 | 282 | 879 | 2,847 | 498 | 4,868 | |||||||||||||||||||||
Commercial
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363 | 810 | 937 | 3,036 | 10,654 | 125 | 15,925 | |||||||||||||||||||||
Consumer
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51 | — | — | — | — | — | 51 | |||||||||||||||||||||
Total loans
|
$ | 6,116 | $ | 13,211 | $ | 14,800 | $ | 45,276 | $ | 140,320 | $ | 30,949 | $ | 250,672 |
Fixed
and Adjustable-Rate Loan Schedule. The following table sets forth at
December 31, 2009, the dollar amount of all fixed-rate and adjustable-rate
mortgage loans and home equity lines of credit due after December 31,
2010.
Due
After December 31, 2010
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Fixed
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Floating
or
Adjustable
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Total
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(In
thousands)
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||||||||||||
Real
estate loans:
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One-
to four-family real estate
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$ | 175,496 | $ | 39,837 | $ | 215,333 | ||||||
Multi-family
residential
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7,258 | 1,648 | 8,906 | |||||||||
Construction
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4,755 | — | 4,755 | |||||||||
Commercial
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12,683 | 2,879 | 15,562 | |||||||||
Consumer
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— | — | — | |||||||||
Total loans
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$ | 200,192 | $ | 44,364 | $ | 244,556 |
Residential
Mortgage Loans. Cheviot Savings Bank originates mortgage loans secured by
one- to four-family properties, most of which serve as the primary residence of
the owner. As of December 31, 2009, one- to four-family residential mortgage
loans totaled $220.7 million, or 88.1% of our total loan
portfolio. At December 31, 2009, our one- to four-family residential
loan portfolio consisted of 18.5% in adjustable-rate loans and 81.5% in
fixed-rate loans. Most of our loan originations result from relationships with
existing or past customers, members of our local community and referrals from
realtors, attorneys and builders.
Our
mortgage loans generally have terms from 15 to 30 years and amortize on a
monthly basis with principal and interest due each month. As of December 31,
2009, we offered the following residential mortgage loan products:
●
|
Fixed-rate
loans of various terms;
|
●
|
Adjustable-rate
loans;
|
●
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Home
equity lines of credit;
|
●
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Loans
tailored for first time home
buyers;
|
●
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Construction/permanent
loans; and
|
●
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Short-term
(bridge) loans.
|
4
Residential
real estate loans may remain outstanding for significantly shorter periods than
their contractual terms as borrowers refinance or prepay loans at their option
without penalty. Our residential mortgage loans customarily contain “due on
sale” clauses which permit us to accelerate the indebtedness of the loan upon
transfer of ownership in the mortgage property.
We
currently sell a portion of our conforming fixed-rate loans in the secondary
market and hold the remaining fixed-rate loans and adjustable-rate loans in our
portfolio. During, 2009, we sold $23.1 million in loans on a servicing retained
basis. We lend up to a maximum loan-to-value ratio of 95% on mortgage
loans secured by owner-occupied properties, with the condition that private
mortgage insurance is required on first mortgage loans with a loan-to-value
ratio in excess of 85%. The first time home buyer program allows 100% financing
and does not require private mortgage insurance. During 2009, we
originated $987,000 in loans under this program. As of December 31,
2009, these loans were performing in accordance with the original
terms. To a lesser extent, we originate non-conforming loans that are
tailored to the needs of the local community.
Our
adjustable-rate mortgage loans are originated with a maximum term of 30 years.
Adjustable-rate loans include loans that provide for an interest rate based on
the interest paid on U.S. Treasury Securities of corresponding terms, plus a
margin. Our adjustable-rate mortgages include limits on the increase or decrease
in the interest rate. The interest rate may increase or decrease by a maximum of
2.0% per adjustment with a ceiling rate over the life of the loan, which
generally is 5.0%. For all adjustable-rate loans, borrowers are qualified at the
initial rate and at 2.0% over the initial rate. We do not originate
subprime, Alt-A or option arm loans.
The
retention of adjustable-rate loans in our portfolio helps reduce exposure to
changes in interest rates. However, there are credit risks resulting from
potential increased costs to the borrower as a result of rising interest rates.
During periods of rising interest rates, the risk of default on adjustable-rate
mortgages may increase due to the upward adjustment of interest cost to the
borrower. During periods of declining interest rates, our interest
income from adjustable rate loans may be significantly decreased.
During
the year ended December 31, 2009, we originated $6.7 million in adjustable-rate
loans and $56.7 million in fixed-rate loans.
Home
equity lines of credit are generally made for owner-occupied homes and are
secured by first or second mortgages on residential properties. We are
attempting to increase our originations of home equity lines of credit. We
generally offer home equity lines of credit with a maximum loan to appraised
value ratio of 85% including senior liens on the subject property and with a
maximum loan to appraised value of ratio 80% when the senior lien is held
elsewhere. We currently offer these loans for terms of up to 10 years, and with
adjustable rates that are tied to the prime rate. At December 31, 2009, home
equity lines of credit represented $8.1 million of our one- to four-family
residential loans.
Construction
Loans. Cheviot Savings Bank originates construction loans for
owner-occupied residential real estate, and, to a lesser extent, for commercial
builders of residential real estate, improvement to existing structures, new
construction for commercial purposes and residential land
development.
At
December 31, 2009, construction loans represented $4.9 million, or 1.9%, of
Cheviot Savings Bank’s total loans. At December 31, 2009, the unadvanced portion
of these constructions loans totaled $2.7 million.
5
Cheviot
Savings Bank’s construction loans generally provide for the payment of interest
only during the construction phase (12 months for single family residential and
varying terms for commercial property and land development). At the end of the
construction phase, the loan converts to a permanent mortgage loan. Before
making a commitment to fund a construction loan, Cheviot Savings Bank requires
detailed cost estimates to complete the project and an appraisal of the property
by an independent licensed appraiser. Cheviot Savings Bank also reviews and
inspects each property before disbursement of funds during the term of the
construction loan. Loan proceeds are disbursed after inspection based on the
percentage of completion method.
Construction
lending generally involves a greater degree of risk than other one- to
four-family mortgage lending. The repayment of the construction loan is, to a
great degree, dependent upon the successful and timely completion of
construction. Various potential factors including construction delays or the
financial viability of the builder may further impair the borrower’s ability to
repay the loan.
Multi-Family
Loans. At December 31, 2009, $9.1 million, or 3.6%, of our total loan
portfolio consisted of loans secured by multi-family real estate. We originate
fixed-rate and adjustable rate multi-family real estate loans with amortization
schedules of up to 25 years. We generally lend up to 80% of the property’s
appraised value. Appraised values are determined by an outside independent
appraiser that we designate. In deciding to originate a multi-family loan, we
review the creditworthiness of the borrower, the expected cash flows from the
property securing the loan, the cash flow requirements of the borrower, the
value of the property and the quality of the management involved with the
property. We generally obtain the personal guarantee of the principals when
originating multi-family real estate loans.
Multi-family
real estate lending is generally considered to involve a higher degree of credit
risk than one-to four-family residential lending. Such lending may involve large
loan balances concentrated on a single borrower or group of related borrowers.
In addition, the payment experience on loans secured by income producing
properties typically depends on the successful operation of the related real
estate project. Consequently, the repayment of the loan may be subject to
adverse conditions in the real estate market or the economy
generally.
Commercial
Real Estate Loans. We originate commercial real estate loans to finance
the purchase of real property, which generally consists of land and/or developed
real estate. In underwriting commercial real estate loans, consideration is
given to the property’s historic and projected cash flow, current and projected
occupancy, location, physical condition and credit worthiness of the borrower.
At December 31, 2009, our commercial real estate portfolio totaled $15.9
million, or 6.4%, of total loans. A majority of our commercial real estate loans
are secured by properties in Hamilton County. Our commercial real estate
portfolio is diverse as to borrower and property type.
Commercial
real estate lending involves additional risks compared to one- to four-family
residential lending because payments on loans secured by commercial real estate
properties are often dependent on the successful operation or management of the
properties, and/or the collateral value of the commercial real estate securing
the loan. Repayment of such loans may be subject, to a greater extent than
residential loans, to adverse conditions in the real estate market or the
economy. Also, commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. Our policies limit
the amount of loans to a single borrower or group of related borrowers to reduce
this risk.
Commercial
real estate loans generally have a higher rate of interest and shorter term than
residential mortgage loans because of increased risks associated with commercial
real estate lending. Commercial real estate loans are generally offered at
adjustable-rates and fixed-rates with a term generally not exceeding 25
years.
6
Consumer
Loans. On a limited basis, we make loans secured by deposit accounts up
to 90% of the amount of the depositor’s collected deposit account balance. At
December 31, 2009, these loans totaled $51,000, or 0.02%, of total loans.
Consumer loans are payable upon demand.
Loan
Originations, Purchases, Sales and Servicing. While we originate both
fixed-rate and adjustable-rate loans, our ability to generate each type of loan
depends upon relative borrower demand and the pricing levels as set in the local
marketplace by competing banks, thrifts, credit unions, and mortgage banking
companies. Our volume of real estate loan originations is influenced
significantly by market interest rates, and, accordingly, the volume of our real
estate loan originations can vary from period to period. Our volume of
commercial real estate lending has decreased in recent years due to our effort
to improve asset quality and to emphasize relationship
banking. Conversely during the past year, due to management’s
decision to sell certain mortgage loans to the Federal Home Loan Bank, our level
of one- to four-family and construction loan originations
decreased.
The
following table sets forth the loan origination, sales and repayment activities
of Cheviot Savings Bank for the periods indicated.
For
the Year Ended December 31,
|
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2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Balance
outstanding at beginning of period
|
$ | 268,483 | $ | 249,832 | $ | 241,178 | $ | 222,711 | $ | 203,842 | ||||||||||
Originations,
including purchased loans
|
||||||||||||||||||||
Real
estate loans:
|
||||||||||||||||||||
One-
to four-family residential(1)
|
59,288 | 55,126 | 36,136 | 46,924 | 53,174 | |||||||||||||||
Multi-family
residential
|
1,700 | 1,600 | 200 | 2,791 | 2,974 | |||||||||||||||
Construction
|
5,030 | 12,154 | 9,259 | 8,406 | 7,023 | |||||||||||||||
Commercial(2)
|
1,373 | 1,116 | 2,018 | 1,472 | 1,310 | |||||||||||||||
Consumer(3)
|
71 | 26 | 92 | 448 | 111 | |||||||||||||||
Total
loan originations
|
67,462 | 70,022 | 47,705 | 60,041 | 64,592 | |||||||||||||||
Less:
|
||||||||||||||||||||
Principal
repayments
|
63,429 | 45,625 | 34,565 | 39,175 | 43,884 | |||||||||||||||
Transfers
to real estate acquired through foreclosure
|
1,574 | 1,294 | 773 | — | 201 | |||||||||||||||
Loans
sold in the secondary market(4)
|
23,486 | 3,836 | 3,670 | 2,440 | 1,595 | |||||||||||||||
Other(5)
|
454 | 616 | 43 | (41 | ) | 43 | ||||||||||||||
Total
deductions
|
88,943 | 51,371 | 39,051 | 41,574 | 45,723 | |||||||||||||||
Balance
outstanding at end of period
|
$ | 247,002 | $ | 268,483 | $ | 249,832 | $ | 241,178 | $ | 222,711 |
(1) | Includes home equity lines of credit, loans purchased and loans held for sale. |
(2) | Includes land loans. |
(3) | Loans secured by deposit accounts. |
(4) | Loans sold to the Federal Home Loan Bank of Cincinnati. |
(5) | Other items consist of loans in process, deferred loan origination fees, unearned interest and the allowance for loan losses. |
Loan
Approval Procedures and Authority. The lending activities of Cheviot
Savings Bank are subject to the written underwriting standards and loan
origination procedures established by the board of directors and management.
Loan originations are obtained through a variety of sources, primarily
consisting of existing customers and referrals from real estate brokers. Written
loan applications are taken by one of Cheviot Savings Bank’s loan officers. The
loan officer also supervises the procurement of reports, appraisals and other
documentation involved with a loan. Cheviot Savings Bank obtains property
appraisals from independent appraisers on substantially all of its
loans.
7
Cheviot
Savings Bank’s loan approval process is intended to provide direction to
management on all phases of real estate lending activity since such real estate
mortgage lending is the single most important revenue producing investment of
Cheviot Savings Bank. Therefore, Cheviot Savings Bank believes that the
underwriting of mortgage loans should be consistent with safe and sound
practices to ensure the financial viability of the Bank. The loan underwriting
policy is also established to provide appropriate limits and standards for all
extensions of credit in real estate or for the purpose of financing the
construction of a building or other improvement. Cheviot Savings Bank’s loan
committee has the authority to approve or deny loan applications on one- to
four-family owner occupied properties up to $750,000. This committee also has
the authority for approving or denying loan applications on non-owner occupied
properties up to $500,000. The loan committee reviews all loan applications
submitted to Cheviot Savings Bank and lists such applications on a review sheet
that is submitted to the board of directors. The board of directors ratifies all
loans approved by the loan committee and approves all other loans other than
those specifically set forth above.
Loans
to One Borrower. State savings and loan institutions are subject to the
same loans to one borrower limits as those applicable to national banks, which
under current regulations restrict loans to one borrower to an amount equal to
15% of unimpaired equity on an unsecured basis, and an additional amount equal
to 10% of unimpaired equity if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real
estate). Our loans to one borrower limit under this regulation at
December 31, 2009 was $8.2 million. Our policy generally provides
that loans to one borrower (or related borrowers) should not exceed $4.0 million
(excluding the borrower’s principal residence). However, the board of directors
may approve loans in greater amounts and may amend this limitation annually
based on the asset growth and capital position of Cheviot Savings
Bank.
At
December 31, 2009, the largest aggregate credit exposure to one borrower
consisted of one loan totaling $5.3 million. This loan was performing
in accordance with contractual terms. There were thirteen additional credit
relationships, including committed amounts, in excess of $1.0 million at
December 31, 2009. All of the loans extended under these credit
relationships were performing as of December 31, 2009.
Asset
Quality.
General.
One of our key operating objectives has been, and continues to be, to
maintain a high asset quality. Our high proportion of one- to four-family
mortgage loans, our maintenance of sound credit standards for new loan
originations and our loan administration procedures have resulted in our
impaired and non-performing loans totaling to $2.4 million, or 1.0% of net loans
at December 31, 2009. During 2009, we addressed the consequences of a
weakening national and local economy by adhering to our conservative
underwriting standards and limiting our exposure on one-to four-family
residential investment properties.
Collection
Procedures. When a borrower fails to make required payments on a loan, we
take a number of steps to induce the borrower to cure the delinquency and
restore the loan to a current status. Cheviot Savings Bank has implemented
certain loan tracking policies and collection procedures to ensure effective
management of classified assets. Cheviot Savings Bank generally sends a written
notice of non-payment to its borrower after a loan is first past due. If payment
has not been received within a reasonable time period, personal contact efforts
are attempted by telephone or by letter. If no payment is received the following
month, a letter stating that the borrower is two months behind is mailed
indicating that the borrower needs to contact our collections department, and
make payment arrangements. If the borrower has missed two consecutive payments,
a demand letter will be sent by certified mail. On all accounts that are not
current ten days after the completion of the last step set forth above our
collection manager or staff member contacts the borrower by phone at their home
and if necessary, at their place of employment in order to establish
communications with the borrower concerning the delinquency and to try to
establish a meeting with the borrower to determine what steps are needed to
bring the borrower to a current status. If contact with the borrower by
telephone is unsuccessful and the loan becomes 60 days delinquent Cheviot
Savings Bank sends a letter stating its intention to begin foreclosure
procedures. If no satisfactory agreement has been reached with the borrower
within 15 days after the foreclosure intention letter, the Board of Directors
will consider the status of the delinquency and may authorize Cheviot Savings
Bank’s attorney to send a letter to the borrower advising the borrower that
foreclosure proceedings will be initiated and setting forth the conditions which
could forestall the foreclosure. In selected cases, Cheviot Savings Bank may
make an economic decision to forego foreclosure and work with the borrower
to-bring
the loan current. Repayment schedules may be entered into with chronically
delinquent borrowers if management determines this resolution is more
advantageous to Cheviot Savings Bank.
8
In
connection with home equity lines of credit, when payment is first past due the
collection manager or staff member attempts to contact the borrower by phone at
their home. If phone contact is unsuccessful, the collection manager or staff
member will mail a late notice to the borrower at the beginning of the following
month indicating the need to contact the collections personnel and bring the
loan current. If the preceding steps are unsuccessful then the collection
manager will implement the steps described above leading to
foreclosure.
Cheviot
Savings Bank has implemented several credit risk measures in the loan
origination process that have served to reduce potential
losses. Cheviot Savings Bank also seeks to limit loan portfolio
credit risk by originating in the local market generally one- to four-family
permanent mortgage loans with a loan-to-value of 85% or less, and one and two
family owner-occupied residential mortgage loans with a loan-to-value of 85%,
with private mortgage insurance required on first mortgage loans with
loan-to-value of greater than 85%. Cheviot Savings Bank consistently observed
conservative loan underwriting guidelines and makes exceptions in originating
such loans only if there are sound reasons for such exceptions.
Credit
risk on commercial real estate loans is managed by generally limiting such
lending to local markets and emphasizing sound underwriting and monitoring the
financial status of the borrower. In originating such loans Cheviot Savings Bank
seeks debt service coverage ratios in excess of 1.00x.
To limit
the impact of loan losses in any given quarter, Cheviot Savings Bank seeks to
maintain an adequate level of valuation allowances. Its management and board of
directors review the level of general valuation allowances on a quarterly basis
to ensure that adequate coverage against known and inherent losses is
maintained, based on the level of non-performing and classified assets, our loss
history and industry trends and economic trends.
Cheviot
Savings Bank has established detailed asset review policies and procedures which
are consistent with generally accepted accounting principles. Quarterly reviews
of the valuation allowance are conducted by the board of directors. Pursuant to
these procedures, when needed, additional valuation allowances are established
to cover anticipated losses in the portfolio.
We hold
foreclosed property as real estate acquired through foreclosure. We carry
foreclosed real estate at lower of cost or fair value less estimated selling
costs. If a foreclosure action is commenced and the loan is not brought current,
paid in full, or refinanced before the foreclosure sale, we either sell the real
property securing the loan at the foreclosure sale or sell the property as soon
thereafter as practical.
Marketing
real estate owned generally involves listing the property for sale. Cheviot
Savings Bank maintains the real estate acquired through foreclosure in good
condition to enhance its marketability. As of December 31, 2009, we held four
properties classified as real estate owned totaling $2.0
million. These properties are insured by the Bank. The
Bank takes actions to ensure that the property does not deteriorate due to
neglect while held as real estate owned. New appraisals are ordered
at the time the Bank takes ownership of the property. We then work
with preapproved real estate agents to sell the property.
9
Delinquent
Loans and Non-performing Loans and Assets. Our policies require that the
collection manager monitor the status of the loan portfolios and report to the
Board on a monthly basis. These reports include information on delinquent loans,
criticized and classified assets, foreclosed real estate and our plans to cure
the delinquent status of the loans.
It is
Cheviot Savings Bank’s policy to underwrite single-family residential loans up
to a 95% loan-to-value ratio and all other loans (multi-family, construction,
commercial and consumer) on no more than an 80% loan-to-value
ratio. It has been the Bank’s experience that interest on delinquent
loans is generally recovered in ultimate settlement of the loan due to this
conservative underwriting policy. We generally stop accruing interest on our
one-to four-family residential, construction and commercial loans when interest
or principal payments are 90 days in arrears. Consumer loans are comprised
exclusively of loans secured by deposits with Cheviot Savings Bank. Such loans
are placed on non-accrual status should they become 90 days delinquent. The Bank
will stop accruing interest earlier when the timely collectibility of such
interest or principal is doubtful.
We
designate loans on which we stop accruing interest as non-accrual loans and we
reverse outstanding interest that we previously credited. We may recognize
income in the period that we collect it, when the ultimate collectibility of
principal is no longer in doubt. We return a non-accrual loan to accrual status
when factors indicating doubtful collection no longer exist and the loan has
been brought current. In accordance with industry standards and regulatory
requirements, it is Cheviot Savings Bank’s policy to charge-off a loan when it
becomes apparent that recovery of amounts due is not probable, either from
expected payments from the borrower or from settlement of the
collateral.
The
following table sets forth certain information regarding delinquencies in our
loan portfolio as of December 31, 2009.
At
December 31, 2009
|
||||||||||||||||||||||||
30-59
Days
Delinquent
|
60-89
Days
Delinquent
|
90
or More
Days
Delinquent
|
||||||||||||||||||||||
Amount
|
Percent
of
Net
Loans
|
Amount
|
Percent
of
Net
Loans
|
Amount
|
Percent
of
Net
Loans
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Real
Estate Loans:
|
||||||||||||||||||||||||
One-
to four-family residential(1)
|
$ | 995 | 0.40 | % | $ | 879 | 0.36 | % | $ | 2,229 | 0.90 | % | ||||||||||||
Multi-family
residential
|
— | — | — | — | — | — | ||||||||||||||||||
Construction
|
— | — | — | — | — | — | ||||||||||||||||||
Commercial(2)
|
47 | 0.02 | — | — | 217 | 0.09 | ||||||||||||||||||
Consumer(3)
|
― | — | — | — | — | — | ||||||||||||||||||
Total
delinquent loans
|
$ | 1,042 | 0.42 | % | $ | 879 | 0.36 | % | $ | 2,446 | 0.99 | % |
At
December 31, 2008
|
||||||||||||||||||||||||
30-59
Days
Delinquent
|
60-89
Days
Delinquent
|
90
or More
Days
Delinquent
|
||||||||||||||||||||||
Amount
|
Percent
of
Net
Loans
|
Amount
|
Percent
of
Net
Loans
|
Amount
|
Percent
of
Net
Loans
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Real
Estate Loans:
|
||||||||||||||||||||||||
One-
to four-family residential(1)
|
$ | 388 | 0.14 | % | $ | 488 | 0.18 | % | $ | 856 | 0.32 | % | ||||||||||||
Multi-family
residential
|
— | — | — | — | 1,194 | 0.44 | ||||||||||||||||||
Construction
|
— | — | — | — | — | — | ||||||||||||||||||
Commercial(2)
|
— | — | 436 | 0.15 | — | — | ||||||||||||||||||
Consumer(3)
|
― | — | — | — | — | — | ||||||||||||||||||
Total
delinquent loans
|
$ | 388 | 0.14 | % | $ | 924 | 0.33 | % | $ | 2,050 | 0.76 | % |
(Footnotes
on next page)
10
At
December 31, 2007
|
||||||||||||||||||||||||
30-59
Days
Delinquent
|
60-89
Days
Delinquent
|
90
or More
Days
Delinquent
|
||||||||||||||||||||||
Amount
|
Percent
of
Net
Loans
|
Amount
|
Percent
of
Net
Loans
|
Amount
|
Percent
of
Net
Loans
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Real
Estate Loans:
|
||||||||||||||||||||||||
One-
to four-family residential(1)
|
$ | 171 | 0.07 | % | $ | 130 | 0.05 | % | $ | 1,601 | 0.64 | % | ||||||||||||
Multi-family
residential
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Construction
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Commercial(2)
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Consumer(3)
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Total
delinquent loans
|
$ | 171 | 0.07 | % | $ | 130 | 0.05 | % | $ | 1,601 | 0.64 | % |
At
December 31, 2006
|
||||||||||||||||||||||||
30-59
Days
Delinquent
|
60-89
Days
Delinquent
|
90
or More
Days
Delinquent
|
||||||||||||||||||||||
Amount
|
Percent
of
Net
Loans
|
Amount
|
Percent
of
Net
Loans
|
Amount
|
Percent
of
Net
Loans
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Real
Estate Loans:
|
||||||||||||||||||||||||
One-
to four-family residential(1)
|
$ | 506 | 0.21 | % | $ | 265 | 0.11 | % | $ | 468 | 0.19 | % | ||||||||||||
Multi-family
residential
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Construction
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Commercial(2)
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Consumer(3)
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Total
delinquent loans
|
$ | 506 | 0.21 | % | $ | 265 | 0.11 | % | $ | 468 | 0.19 | % |
At
December 31, 2005
|
||||||||||||||||||||||||
30-59
Days
Delinquent
|
60-89
Days
Delinquent
|
90
or More
Days
Delinquent
|
||||||||||||||||||||||
Amount
|
Percent
of
Net
Loans
|
Amount
|
Percent
of
Net
Loans
|
Amount
|
Percent
of
Net
Loans
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Real
Estate Loans:
|
||||||||||||||||||||||||
One-
to four-family residential(1)
|
$ | 367 | 0.16 | % | $ | 299 | 0.13 | % | $ | 15 | 0.01 | % | ||||||||||||
Multi-family
residential
|
― | ― | ― | ― | 134 | 0.06 | ||||||||||||||||||
Construction
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Commercial(2)
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Consumer(3)
|
― | ― | ― | ― | ― | ― | ||||||||||||||||||
Total
delinquent loans
|
$ | 367 | 0.16 | % | $ | 299 | 0.13 | % | $ | 149 | 0.07 | % |
(1) | Includes home equity lines of credit, loans purchased and loans held for sale. |
(2) | Includes loans secured by land. |
(3) | Loans secured by deposit accounts. |
11
The
following table sets forth information regarding impaired and non-performing
loans and assets.
At
December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||
Non-accrual
real estate loans:
|
||||||||||||||||||||
One-
to four-family residential(1)
|
$ | 2,229 | $ | 652 | $ | 660 | $ | 269 | $ | — | ||||||||||
Multi-family
residential
|
— | 1,194 | — | — | 134 | |||||||||||||||
Construction
|
— | — | — | — | — | |||||||||||||||
Commercial(2)
|
217 | — | — | — | — | |||||||||||||||
Consumer(3)
|
— | — | — | — | — | |||||||||||||||
Total
non-accruing
loans(4)
|
2,446 | 1,846 | 660 | 269 | 134 | |||||||||||||||
Impaired
loans
|
— | — | — | 12 | 15 | |||||||||||||||
Accruing
loans delinquent 90 days or more
|
— | 204 | — | — | — | |||||||||||||||
Total
non-performing loans
|
2,446 | 2,050 | 660 | 281 | 149 | |||||||||||||||
Real
estate acquired through foreclosure
|
2,048 | 1,064 | 625 | — | 89 | |||||||||||||||
Total
non-performing assets
|
$ | 4,494 | $ | 3,114 | $ | 1,285 | $ | 281 | $ | 238 | ||||||||||
Non-performing
assets to total assets
|
1.31 | % | 0.94 | % | 0.40 | % | 0.09 | % | 0.08 | % | ||||||||||
Non-performing
loans to net loans
|
0.99 | % | 0.75 | % | 0.26 | % | 0.12 | % | 0.07 | % |
(1) |
Includes
home equity lines of credit, loans purchased and loans held for
sale.
|
(2) |
Includes
loans secured by land.
|
(3) |
Loans
secured by deposit accounts.
|
(4)
|
For
the year ended December 31, 2009, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $92,000. $92,000 in interest
income was recorded on such loans during the year ended December 31,
2009.
|
Non-performing
and impaired loans totaled $2.4 million at December 31, 2009.
Our loan
review procedures are performed quarterly. With respect to multi-family and
commercial loans, we consider a loan impaired when, based on current information
and events, it is probable that we will be unable to collect all amounts due
according to the loan’s contractual terms.
We review
multi-family and commercial loans in amounts greater than $250,000 for
impairment. These loans are individually assessed to determine whether the
loan’s carrying value is in excess of the fair value of the collateral or the
present value of the loan’s expected cash flows. Smaller balance
homogenous loans that are collectively evaluated for impairment, such as
residential mortgage loans and consumer loans, are specifically excluded from
individual impairment review.
During
the year ended December 31, 2009, the Corporation had total troubled debt
restructurings of $3.7 million. These loans were modified due to
short term concessions with no impairment as the Corporation expects to
recognize the full amount of the commitment. The Corporation has no
commitments to lend additional funds to these debtors owing receivables whose
terms have been modified in troubled debt restructurings.
Classified
Assets. Federal regulations require that each insured savings institution
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: “substandard,” “doubtful” and “loss.”
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the
weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a higher
possibility of loss. An asset classified as a loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. Another category designated “special mention” also
may be established and maintained for assets which do not currently expose an
insured institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. If a classified asset is deemed to be impaired
with measurement of loss, Cheviot Savings Bank will establish a charge-off of
the loan pursuant to SFAS No. 114. The following table sets forth information
regarding classified assets as of December 31, 2009, 2008 and
2007.
12
At
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(In
thousands)
|
||||||||||||
Classification
of Assets:
|
||||||||||||
Special
Mention
|
$ | — | $ | — | $ | — | ||||||
Substandard
|
4,487 | 3,281 | 1,964 | |||||||||
Doubtful
|
— | — | — | |||||||||
Loss
|
— | — | — | |||||||||
Total
|
$ | 4,487 | $ | 3,281 | $ | 1,964 |
General
loss allowances established to cover inherent, but unconfirmed losses in the
portfolio may be included in determining an institution’s regulatory capital.
Federal examiners may disagree with an insured institution’s classifications and
amounts reserved.
Allowance
for Loan Losses. We maintain the allowance through provisions
for loan losses that we charge to income. We charge losses on loans against the
allowance for loan losses when we believe the collection of loan principal is
unlikely. Recoveries on loans charged-off are restored to the allowance for loan
losses. The allowance for loan losses is maintained at a level believed, to the
best of management’s knowledge, to cover all known and inherent losses in the
portfolio both probable and reasonable to estimate at each reporting date. The
level of allowance for loan losses is based on management’s periodic review of
the collectibility of the loans principally in light of our historical
experience, augmented by the nature and volume of the loan portfolio, adverse
situations that may affect the borrower’s ability to repay, estimated value of
any underlying collateral and current and anticipated economic conditions in the
primary lending area. We evaluate our allowance for loan losses
quarterly. We have not made any changes to the external factors in
the calculation during the year as we believe the local economy has
stabilized. We will continue to monitor all items involved in the
allowance calculation closely.
In
addition, the regulatory agencies, as an integral part of their examination and
review process, periodically review our loan portfolios and the related
allowance for loan losses. Regulatory agencies may require us to increase the
allowance for loan losses based on their judgments of information available to
them at the time of their examination, thereby adversely affecting our results
of operations.
At
December 31, 2009 and 2008, our allowance for loan losses was $1.0 million and
$709,000, respectively. Our ratio of the allowance for loan losses as
a percentage of net loans receivable was 0.41% and 0.26% at December 31, 2009
and 2008.
13
The
following table sets forth the analysis of the activity in the allowance for
loan losses for the periods indicated:
At
or For the Year Ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||
Balance
at beginning of year
|
$ | 709 | $ | 596 | $ | 833 | $ | 808 | $ | 732 | ||||||||||
Charge
offs:
|
||||||||||||||||||||
One-
to four-family residential(1)
|
(537 | ) | (488 | ) | (353 | ) | — | (21 | ) | |||||||||||
Multi-family
residential
|
— | — | — | — | — | |||||||||||||||
Construction
|
— | — | — | — | — | |||||||||||||||
Commercial(2)
|
— | (84 | ) | — | — | — | ||||||||||||||
Consumer(3)
|
— | — | — | — | — | |||||||||||||||
Total
charge-offs
|
(537 | ) | (572 | ) | (353 | ) | — | (21 | ) | |||||||||||
Recoveries:
|
||||||||||||||||||||
One-
to four-family residential(1)
|
— | 17 | — | — | — | |||||||||||||||
Multi-family
residential
|
— | — | — | — | — | |||||||||||||||
Construction
|
— | — | — | — | — | |||||||||||||||
Commercial(2)
|
— | — | — | — | — | |||||||||||||||
Consumer(3)
|
— | — | — | — | — | |||||||||||||||
Total
recoveries
|
— | 17 | — | — | — | |||||||||||||||
Net
charge-offs
|
(537 | ) | (555 | ) | (353 | ) | — | (21 | ) | |||||||||||
Provision
for losses on loans
|
853 | 668 | 116 | 25 | 97 | |||||||||||||||
Balance
at end of year
|
$ | 1,025 | $ | 709 | $ | 596 | $ | 833 | $ | 808 | ||||||||||
Total
loans receivable, net (1)
|
$ | 247,002 | $ | 268,483 | $ | 249,832 | $ | 241,178 | $ | 222,771 | ||||||||||
Average
loans receivable outstanding (1)
|
$ | 253,302 | $ | 260,708 | $ | 246,335 | $ | 233,331 | $ | 211,736 | ||||||||||
Allowance
for loan losses as a percent of
net loans receivable
|
0.41 | % | 0.26 | % | 0.24 | % | 0.35 | % | 0.36 | % | ||||||||||
Net
loans charged off as a percent of
average loans outstanding
|
0.21 | % | 0.22 | % | 0.14 | % | 0.00 | % | 0.01 | % |
(1) |
Includes
home equity lines of credit, loans purchased and loans held for
sale.
|
(2) |
Includes
loans secured by land.
|
(3) |
Loans
secured by deposit.
|
14
The
following table sets forth the allocation of the allowance for loan losses by
loan category for the years indicated. This allocation is based on management’s
assessment, as of a given point in time, of the risk characteristics of each of
the component parts of the total loan portfolio and is subject to changes as and
when the risk factors of each such component part change. The allocation is
neither indicative of the specific amounts or the loan categories in which
future charge-offs may be taken nor is it an indicator of future loss trends.
The allocation of the allowance to each category does not restrict the use of
the allowance to absorb losses in any category.
At
December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Allowance
for
Loan
Losses
|
Loan
Balances
by
Category
|
Percent
of
Loans
in Each
Category
to
Total
Loans
|
Allowance
for
Loan
Losses
|
Loan
Balances
by
Category
|
Percent
of
Loans
in Each
Category
to
Total
Loans
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Loan
Category
|
||||||||||||||||||||||||
Allocated:
|
||||||||||||||||||||||||
Real
estate - mortgage
|
||||||||||||||||||||||||
One-to
four-family residential(1)
|
$ | 959 | $ | 220,714 | 88.05 | % | $ | 604 | $ | 234,822 | 86.38 | % | ||||||||||||
Multi-family
residential
|
17 | 9,114 | 3.64 | 22 | 9,385 | 3.45 | ||||||||||||||||||
Construction
|
21 | 4,868 | 1.94 | 53 | 11,646 | 4.28 | ||||||||||||||||||
Commercial(2)
|
28 | 15,925 | 6.35 | 30 | 15,942 | 5.87 | ||||||||||||||||||
Consumer(3)
|
— | 51 | 0.02 | — | 48 | 0.02 | ||||||||||||||||||
Total
|
$ | 1,025 | $ | 250,672 | 100.00 | % | $ | 709 | $ | 271,843 | 100.00 | % |
At
December 31,
|
||||||||||||||||||||||||
2007
|
2006
|
|||||||||||||||||||||||
Allowance
for
Loan
Losses
|
Loan
Balances
by
Category
|
Percent
of
Loans
in Each
Category
to
Total
Loans
|
Allowance
for
Loan
Losses
|
Loan
Balances
by
Category
|
Percent
of
Loans
in Each
Category
to
Total
Loans
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Loan
Category
|
||||||||||||||||||||||||
Allocated:
|
||||||||||||||||||||||||
Real
estate - mortgage
|
||||||||||||||||||||||||
One-to
four-family residential(1)
|
$ | 320 | $ | 216,958 | 84.39 | % | $ | 318 | $ | 209,996 | 84.06 | % | ||||||||||||
Multi-family
residential
|
20 | 10,638 | 4.14 | 236 | 11,250 | 4.50 | ||||||||||||||||||
Construction
|
7 | 19,421 | 7.55 | 4 | 19,022 | 7.61 | ||||||||||||||||||
Commercial(2)
|
249 | 10,018 | 3.90 | 275 | 9,466 | 3.80 | ||||||||||||||||||
Consumer(3)
|
— | 66 | 0.02 | — | 82 | 0.03 | ||||||||||||||||||
Total
|
$ | 596 | $ | 257,101 | 100.00 | % | $ | 833 | $ | 249,816 | 100.00 | % |
At
December 31,
|
||||||||||||
2005
|
||||||||||||
Allowance
for
Loan
Losses
|
Loan
Balances
by
Category
|
Percent
of
Loans
in Each
Category
to
Total
Loans
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Loan
Category
|
||||||||||||
Allocated:
|
||||||||||||
Real
estate - mortgage
|
||||||||||||
One-to
four-family residential(1)
|
$ | 200 | $ | 195,059 | 84.97 | % | ||||||
Multi-family
residential
|
275 | 11,144 | 4.86 | |||||||||
Construction
|
5 | 12,360 | 5.38 | |||||||||
Commercial(2)
|
328 | 10,883 | 4.74 | |||||||||
Consumer(3)
|
— | 110 | 0.05 | |||||||||
Total
|
$ | 808 | $ | 229,556 | 100.00 | % |
(1) | Includes home equity lines of credit, loans purchased and loans held for sale. |
(2) | Includes loans secured by land. |
(3) | Loans secured by deposit accounts. |
15
Securities
Activities.
General.
Our investment policy is established by the board of directors. This
policy dictates that investment decisions will be made based on the safety of
the investment, liquidity requirements, potential returns, cash flow targets,
and consistency with our interest rate risk management. The board of directors,
as a whole, acts in the capacity of an investment committee and is responsible
for overseeing our investment program and evaluating on an ongoing basis our
investment policy and objectives. Our president and chief financial officer have
the authority to purchase securities within specific guidelines established by
the investment policy. All transactions are reviewed by the board of directors
at its regular meeting.
We
account for investment and mortgage-backed securities in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for
Certain Investments in Debt and Equity Securities.” SFAS No. 115 requires that
investments be categorized as held-to maturity, trading, or available for sale.
Securities classified as held to maturity are carried at cost only if we have
the positive intent and ability to hold these securities to maturity. Trading
securities and securities available for sale are carried at fair value with
resulting unrealized gains or losses recorded to operations or shareholders’
equity, respectively. During 2009, we purchased fifty-four investment securities
that were designated as available for sale. During 2008, we purchased
nine investment securities that were designated as available for sale. During
2007, we purchased six investment securities that were designated as available
for sale. All other investment and mortgage-backed securities
purchases have been designated as held-to-maturity. Realized gains or
losses on sales of securities are recognized using the specific identification
method.
Our
current policies generally limit securities investments to U.S. Government,
agency and sponsored entity securities and municipal bonds. The policy also
permits investments in mortgage-backed securities guaranteed by the Federal
National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation
(FHLMC) and the Government National Mortgage Association (GNMA). Our investment
in municipal obligations mature in more than five years. The majority of our
investment in U.S. Government and agency obligations are scheduled to mature
within fifteen years.
Our
current investment strategy uses a risk management approach of diversified
investing in fixed-rate securities with short- to intermediate-term maturities,
as well as adjustable-rate securities, which may have a longer term to maturity.
The emphasis of this approach is to increase overall securities yields while
managing interest rate risk. To accomplish these objectives, we focus on
investments in mortgage-backed securities with short term maturities, and U.S.
government and agency obligations and municipal obligations with maturities in
excess of 10 years. We monitor our investment portfolio for losses
that may be considered other than temporary. At December 31, 2009,
all unrealized losses on securities are viewed by management to be
temporary. At December 31, 2009, the amortized cost of our investment
and mortgage-backed securities portfolio was $67.1 million, while the estimated
fair value was $66.6 million.
16
Amortized
Cost and Estimated Fair Value of Securities. The following table sets
forth certain information regarding the amortized cost and estimated fair values
of our securities as of the dates indicated.
At
December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
Amortized
Cost
|
Estimated
Fair
Value
|
Amortized
Cost
|
Estimated
Fair
Value
|
Amortized
Cost
|
Estimated
Fair
Value
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Investment
securities held to maturity:
|
||||||||||||||||||||||||
U.S. Government and agency securities
|
$ | — | $ | — | $ | 7,000 | $ | 7,074 | $ | 23,000 | $ | 23,086 | ||||||||||||
Municipal
obligations
|
— | — | — | — | — | — | ||||||||||||||||||
Total investment securities held to maturity
|
— | — | 7,000 | 7,074 | 23,000 | 23,086 | ||||||||||||||||||
Mortgage-backed
securities held to maturity:
|
||||||||||||||||||||||||
FHLMC
|
603 | 597 | 683 | 683 | 802 | 809 | ||||||||||||||||||
FNMA
|
640 | 642 | 757 | 752 | 930 | 934 | ||||||||||||||||||
GNMA
|
4,501 | 4,577 | 5,475 | 5,395 | 7,768 | 7,834 | ||||||||||||||||||
Total
mortgage-backed
securities held to maturity
|
5,744 | 5,816 | 6,915 | 6,830 | 9,500 | 9,577 | ||||||||||||||||||
Total
investments and mortgage-backed securities
held to maturity
|
5,744 | 5,816 | 13,915 | 13,904 | 32,500 | 32,663 | ||||||||||||||||||
Investment
securities available for sale:
|
||||||||||||||||||||||||
U.S. Government and agency securities
|
$ | 54,915 | $ | 54,455 | $ | 21,995 | $ | 22,012 | $ | 10,001 | $ | 10,088 | ||||||||||||
Municipal obligations
|
1,545 | 1,396 | 2,110 | 1,897 | 2,110 | 2,090 | ||||||||||||||||||
Total
investment securities available for sale
|
56,460 | 55,851 | 24,105 | 23,909 | 12,111 | 12,178 | ||||||||||||||||||
Mortgage-backed
securities available for sale:
|
||||||||||||||||||||||||
FHLMC | 829 | 830 | — | — | — | — | ||||||||||||||||||
FNMA | 700 | 709 | — | — | — | — | ||||||||||||||||||
GNMA | 3,358 | 3,381 | 666 | 648 | 811 | 814 | ||||||||||||||||||
Total mortgage-backed securities available for sale | 4,887 | 4,920 | 666 | 648 | 811 | 814 | ||||||||||||||||||
Total
investment and mortgage-backed securities available for
sale
|
61,347 | 60,771 | 24,771 | 24,557 | 12,922 | 12,992 | ||||||||||||||||||
Total
investment and mortgage-backed securities
|
$ | 67,091 | $ | 66,587 | $ | 38,686 | $ | 38,461 | $ | 45,422 | $ | 45,655 |
17
The following table sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of our securities portfolio
as of December 31, 2009. Adjustable-rate mortgage-backed securities are included
in the period in which interest rates are next scheduled to
adjust.
At
December 31, 2009
|
||||||||||||||||||||||||||||||||||||||||||||
One
Year or Less
|
More
Than One Year
through
Five Years
|
More
Than Five Years
through
Ten Years
|
More
Than Ten Years
|
Total
Securities
|
||||||||||||||||||||||||||||||||||||||||
Amortized
Cost
|
Weighted
Average
Yield
|
Amortized
Cost
|
Weighted
Average
Yield
|
Amortized
Cost
|
Weighted
Average
Yield
|
Amortized
Cost
|
Weighted
Average
Yield
|
Amortized
Cost
|
Estimated
Fair
Value
|
Weighted
Average
Yield
|
||||||||||||||||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||
Investment
securities held to maturity:
|
||||||||||||||||||||||||||||||||||||||||||||
U.S.
Government and agency obligations
|
$ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | $ | — | — | % | ||||||||||||||||||||||
Municipal
obligations
|
— | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Total
investment securities held to maturity
|
— | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Mortgage-backed
securities held to maturity:
|
||||||||||||||||||||||||||||||||||||||||||||
FHLMC
|
— | — | 361 | 3.04 | 242 | 2.89 | — | — | 603 | 597 | 2.98 | |||||||||||||||||||||||||||||||||
FNMA
|
— | — | 597 | 2.96 | 43 | 3.82 | — | — | 640 | 642 | 3.02 | |||||||||||||||||||||||||||||||||
GNMA
|
— | — | 2,447 | 3.89 | 1,580 | 4.08 | 474 | 3.94 | 4,501 | 4,577 | 3.96 | |||||||||||||||||||||||||||||||||
Total
mortgage backed securities held to maturity
|
— | — | 3,405 | 3.63 | 1,865 | 3.92 | 474 | 3.94 | 5,744 | 5,816 | 3.75 | |||||||||||||||||||||||||||||||||
Investment
securities available for sale:
|
||||||||||||||||||||||||||||||||||||||||||||
U.S.
Government and agency obligations
|
24,919 | 2.14 | 22,996 | 2.27 | 2,000 | 3.00 | 5,000 | 4.38 | 54,915 | 54,455 | 2.43 | |||||||||||||||||||||||||||||||||
Municipal
obligations
|
— | — | — | — | 310 | 4.00 | 1,235 | 4.20 | 1,545 | 1,396 | 4.16 | |||||||||||||||||||||||||||||||||
Total
investment securities available for sale
|
24,919 | 2.14 | 22,996 | 2.27 | 2,310 | 3.13 | 6,235 | 4.34 | 56,460 | 55,851 | 2.48 | |||||||||||||||||||||||||||||||||
Mortgage-backed
securities available for sale:
|
||||||||||||||||||||||||||||||||||||||||||||
FHLMC | — | — | 829 | 3.25 | — | — | — | — | 829 | 830 | 3.25 | |||||||||||||||||||||||||||||||||
FNMA | — | — | — | — | — | — | 700 | 2.68 | 700 | 709 | 2.68 | |||||||||||||||||||||||||||||||||
GNMA
|
— | — | 3,002 | 3.34 | 356 | 3.53 | — | — | 3,358 | 3,381 | 3.36 | |||||||||||||||||||||||||||||||||
Total
mortgage backed
securities available for
sale
|
3,831 | 3.32 | 356 | 3.53 | 700 | 2.68 | 4,887 | 4,920 | 3.24 | |||||||||||||||||||||||||||||||||||
Total
investment and mortgage-backed securities
|
$ | 24,919 | 2.14 | % | $ | 30,232 | 2.55 | % | $ | 4,531 | 3.49 | % | $ | 7,409 | 4.29 | % | $ | 67,091 | $ | 66,587 | 2.64 | % |
18
Sources
of Funds.
General.
Deposits, FHLB advances, scheduled amortization and prepayments of loan
principal, maturities and calls of securities and funds provided by operations
are our primary sources of funds for use in lending, investing and for other
general purposes.
Deposits.
We offer deposit products having a range of interest rates and terms. We
currently offer passbook and statement savings accounts, interest-bearing demand
accounts, non-interest-bearing demand accounts, money market accounts and
certificates of deposit.
Deposit
flows are significantly influenced by general and local economic conditions,
changes in prevailing interest rates, internal pricing decisions and
competition. Our deposits are primarily obtained from areas surrounding our
branch offices. In order to attract and retain deposits we rely on paying
competitive interest rates and providing quality service.
Savings,
NOW and money market rates are generally determined monthly by the board of
directors. Certificates of deposit rates are generally determined weekly by the
Savings Bank’s President. When we determine our deposit rates, we consider
liquidity needs, local competition, FHLB advance rates and rates charged on
other sources of funds. Core deposits, defined as savings accounts, money market
accounts and demand deposit accounts, represented 39.9% and 34.4% of total
deposits at December 31, 2009 and 2008, respectively. At December 31, 2009 and
2008, certificates of deposit with remaining terms to maturity of less than one
year amounted to $100.1 million and $104.9 million, respectively.
The
following tables set forth the various types of deposit accounts offered by us
at the dates indicated.
At
December 31,
|
||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
Amount
|
Percent
|
Weighted
Average
Rate
|
Amount
Amount
|
Percent
|
Weighted
Average
Rate
|
Amount
|
Percent
|
Weighted
Average
Rate
|
||||||||||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
NOW
accounts
|
$ | 24,426 | 10.36 | % | 0.29 | % | $ | 18,940 | 8.77 | % | 0.49 | % | $ | 15,830 | 7.21 | % | 0.67 | % | ||||||||||||||||||
Passbook
accounts
|
15,096 | 6.40 | 0.24 | 14,405 | 6.67 | 0.34 | 14,938 | 6.80 | 0.99 | |||||||||||||||||||||||||||
Money
market demand deposits
|
54,549 | 23.12 | 0.92 | 41,069 | 19.00 | 1.52 | 33,069 | 15.06 | 2.23 | |||||||||||||||||||||||||||
Total
demand, transaction and Passbook
deposits
|
94,071 | 39.88 | 0.65 | 74,414 | 34.44 | 1.03 | 63,837 | 29.07 | 1.55 | |||||||||||||||||||||||||||
Certificates
of deposit
|
||||||||||||||||||||||||||||||||||||
Due
within one year
|
100,050 | 42.41 | 1.97 | 104,868 | 48.54 | 2.82 | 128,962 | 58.75 | 4.72 | |||||||||||||||||||||||||||
Over
1 year through 3 years
|
30,770 | 13.04 | 2.83 | 23,193 | 10.74 | 3.53 | 26,559 | 12.10 | 4.81 | |||||||||||||||||||||||||||
Over
3 years
|
11,013 | 4.67 | 3.83 | 13,573 | 6.28 | 4.45 | 168 | 0.08 | 4.31 | |||||||||||||||||||||||||||
Total
certificates of deposit
|
141,833 | 60.12 | 2.30 | 141,634 | 65.56 | 3.45 | 155,689 | 70.93 | 4.73 | |||||||||||||||||||||||||||
Total
|
$ | 235,904 | 100.00 | % | 1.60 | % | $ | 216,048 | 100.00 | % | 2.62 | % | $ | 219,526 | 100.00 | % | 3.81 | % |
The
following table presents our deposit activity for the years
indicated.
For
the Year Ended
December
31,
|
For
the Year Ended
December
31,
|
For
the Year Ended
December
31,
|
||||||||||
2009
|
2008
|
2007
|
||||||||||
(In
thousands)
|
||||||||||||
Net
deposits
(withdrawals)
|
$ | 15,012 | $ | (10,205 | ) | $ | 6,010 | |||||
Interest
credited on deposit account
|
4,844 | 6,727 | 8,066 | |||||||||
Total
increase (decrease) in deposit accounts
|
$ | 19,856 | $ | (3,478 | ) | $ | 14,076 |
19
Maturities
of Certificates
of Deposit Accounts. The following table sets forth the amount and
maturities of certificates of deposit accounts at the dates
indicated.
At
December 31, 2009
|
||||||||||||||||||||||||
Less
than Six
Months |
Six
Months to
One Year |
Over
One
Year to Three Years |
Over
Three
Years |
Total
|
Percent
of
Total |
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
2.00%
and
below
|
$ | 38,589 | $ | 32,641 | $ | 8,472 | $ | — | $ | 79,702 | 56.20 | % | ||||||||||||
2.01% to
3.00%
|
5,010 | 3,773 | 13,799 | 2,258 | 24,840 | 17.51 | ||||||||||||||||||
3.01%
to
4.00%
|
10,990 | 4,854 | 627 | 5,000 | 21,471 | 15.14 | ||||||||||||||||||
4.01%
to
5.00%
|
2,474 | 1,564 | 6,418 | 3,755 | 14,211 | 10.02 | ||||||||||||||||||
5.01%
to
6.00%
|
81 | 74 | 1,454 | — | 1,609 | 1.13 | ||||||||||||||||||
Total
|
$ | 57,144 | $ | 42,906 | $ | 30,770 | $ | 11,013 | $ | 141,833 | 100.00 | % |
As of
December 31, 2009, the aggregate amount of outstanding certificates of deposit
at Cheviot Savings Bank in amounts greater than or equal to $100,000, was
approximately $31.3 million. The following table presents the maturity of these
certificates of deposit at such date.
At
December 31, 2009
|
|||||
Maturity
Period
|
Amount
|
||||
(In
thousands)
|
|||||
Less
than three
months
|
$ | 5,400 | |||
Three
to six
months
|
5,852 | ||||
Six
months to one
year
|
9,706 | ||||
Over
one year to three years
|
9,340 | ||||
Over
three
years
|
1,019 | ||||
Total
|
$ | 31,317 |
Borrowed
Funds. As a member of the FHLB of Cincinnati, Cheviot Savings
Bank is eligible to obtain advances upon the security of the FHLB common stock
owned and certain residential mortgage loans, provided certain standards related
to credit-worthiness have been met. FHLB advances are available
pursuant to several credit programs, each of which has its own interest rate and
range of maturities.
For
the Year
Ended December 31, |
For
the Year
Ended December 31, |
For
the Year
Ended December 31, |
||||||||||
2009
|
2008
|
2007
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
FHLB
Advances:
|
||||||||||||
Maximum
month end-end balance
|
$ | 44,210 | $ | 46,528 | $ | 34,088 | ||||||
Balance
at the end of
year
|
$ | 33,672 | $ | 44,604 | $ | 28,665 | ||||||
Average
balance
|
$ | 39,783 | $ | 39,257 | $ | 29,630 | ||||||
Weighted
average interest rate at the end of year
|
4.33 | % | 4.29 | % | 4.83 | % | ||||||
Weighted
average interest rate during year
|
4.38 | % | 4.38 | % | 4.84 | % |
Regulation
Loans-to-One-Borrower.
Federal savings banks generally may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of unimpaired capital and
unimpaired surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and unimpaired surplus, if the loan is secured by readily
marketable collateral, which is defined to include certain securities and
bullion, but generally does not include real estate. As of December
31, 2009, we were in compliance with our loans-to-one-borrower
limitations.
20
Qualified
Thrift Lender Test. As
a federal savings bank, we are required to satisfy a qualified thrift lender
test whereby we must maintain at least 65% of our “portfolio assets” in
“qualified thrift investments.” These consist primarily of
residential mortgages and related investments, including mortgage-backed and
related securities. “Portfolio assets” generally means total assets
less specified liquid assets up to 20% of total assets, goodwill and other
intangible assets, and the value of property used to conduct
business. A savings bank that fails the qualified thrift lender test
must either convert to a commercial bank charter or operate under specified
restrictions. As of December 31, 2009, we maintained 90.54% of our
portfolio assets in qualified thrift investments and, therefore, we met the
qualified thrift lender test.
Capital
Distributions. Office
of Thrift Supervision regulations govern capital distributions by savings
institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings
institution. A savings institution must file an application for
Office of Thrift Supervision approval of the capital distribution if either (1)
the total capital distributions for the applicable calendar year exceed the sum
of the institution’s net income for that year to date plus the institution’s
retained net income for the preceding two years that is still available for
dividend, (2) the institution would not be at least adequately capitalized
following the distribution, (3) the distribution would violate any applicable
statute, regulation, agreement or Office of Thrift Supervision-imposed
condition, or (4) the institution is not eligible for expedited review of its
filings. If an application is not required to be filed, savings institutions
which are a subsidiary of a holding company, as well as certain other
institutions, must file a notice with the Office of Thrift Supervision at least
30 days before the board of directors declares a dividend or approves a capital
distribution.
Any additional capital
distributions would require prior regulatory approval. In the event
our capital falls below our adequately capitalized requirement or the Office of
Thrift Supervision notifies us that we are in need of more than normal
supervision, our ability to make capital distributions could be
restricted. In addition, the Office of Thrift Supervision could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if it determines that the distribution
would constitute an unsafe or unsound practice.
Community
Reinvestment Act and Fair Lending Laws. Savings
banks have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income
neighborhoods. In addition, the Equal Credit Opportunity Act and the
Fair Housing Act prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An
institution’s failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Equal Credit Opportunity Act and the
Fair Housing Act could result in enforcement actions by the Office of Thrift
Supervision, as well as other federal regulatory agencies and the Department of
Justice. We received a “Satisfactory” Community Reinvestment Act
rating in our most recent examination by the Office of Thrift
Supervision.
Transactions
with Related Parties. Our authority to engage in transactions
with related parties or “affiliates” is limited by Sections 23A and 23B of the
Federal Reserve Act and its implementing regulation, Regulation
W. The term “affiliate” for these purposes generally means any
company that controls or is under common control with an institution, including
Cheviot Financial Corp. and its non-savings institution
subsidiaries. Regulation W limits the aggregate amount of certain
“covered” transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution and also limits the aggregate amount of
covered transactions with all affiliates to 20% of the savings institution’s
capital and surplus. Covered transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Regulation W, and purchasing low quality assets from affiliates is generally
prohibited. Regulation W also provides that covered transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition,
savings institutions are prohibited by Office of Thrift Supervision regulations
from lending to any affiliate that is engaged in activities that are not
permissible for bank holding companies and no savings institution may purchase
the securities of any affiliate other than a subsidiary.
21
Our authority to extend
credit to executive officers, directors and 10% or greater stockholders, as well
as entities controlled by these persons, is governed by Sections 22(g) and
22(h) of the Federal Reserve Act and its implementing regulation,
Regulation O. Among other things, these regulations generally
require these loans to be made on terms substantially the same as those offered
to unaffiliated individuals and do not involve more than the normal risk of
repayment. However, executive officers and directors may receive
beneficial treatment available on a bank-wide basis to all participating
employees. Regulation O also places individual and aggregate limits on the
amount of loans we may make to these persons based, in part, on our capital
position, and requires that prior approval procedures be followed. At
December 31, 2009, we were in compliance with these
regulations.
Enforcement. The
Office of Thrift Supervision has primary enforcement responsibility over savings
institutions and has the authority to bring enforcement action against all
“institution-related parties,” including stockholders, and attorneys, appraisers
and accountants who knowingly or recklessly participate in wrongful action
likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors of the institution,
receivership, conservatorship or the termination of deposit
insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1.0 million per
day. The Federal Deposit Insurance Corporation also has the authority
to recommend to the Director of the Office of Thrift Supervision that
enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the Federal
Deposit Insurance Corporation has authority to take action under specified
circumstances.
Standards
for Safety and Soundness.
Federal law requires each federal banking agency to prescribe for all insured
depository institutions standards relating to, among other things, internal
controls, information systems and audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, compensation, and other
operational and managerial standards as the agency deems
appropriate. The federal banking agencies adopted Interagency
Guidelines Prescribing Standards for Safety and Soundness to implement the
safety and soundness standards required under the Federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal
controls and information systems; internal audit systems; credit underwriting;
loan documentation; interest rate risk exposure; asset growth; and compensation,
fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an
institution fails to meet these standards, the appropriate federal banking
agency may require the institution to submit a compliance
plan.
22
Capital
Requirements
Office of Thrift
Supervision capital regulations require savings institutions to meet three
minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio
(3% for institutions receiving the highest rating on the CAMELS rating system)
and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMELS financial institution rating system), and,
together with the risk-based capital standard itself, a 4% Tier 1 risk-based
capital standard. Office of Thrift Supervision regulations also require that in
meeting the tangible, leverage and risk-based capital standards, institutions
must generally deduct investments in and loans to subsidiaries engaged in
activities as principal that are not permissible for a national
bank.
The risk-based capital
standard for savings institutions requires the maintenance of Tier 1 (core) and
total capital (which is defined as core capital and supplementary capital) to
risk-weighted assets of at least 4% and 8%, respectively. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the
Office of Thrift Supervision capital regulation based on the risks believed
inherent in the type of asset. Core capital is defined as common stockholders’
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in equity accounts of
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and credit card relationships. The components of supplementary
capital currently include cumulative preferred stock, long-term perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock, the allowance for loan and lease losses limited to
a maximum of 1.25% of risk-weighted assets, and up to 45% of unrealized gains on
available-for-sale equity securities with readily determinable fair market
values. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
The capital regulations
also incorporate an interest rate risk component. Savings
institutions with “above normal” interest rate risk exposure are subject to a
deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the Office of Thrift Supervision has
deferred implementation of the interest rate risk capital charge. At December
31, 2009, Cheviot Savings Bank met each of its capital
requirements.
Prompt
Corrective Regulatory Action
Under the Office of Thrift
Supervision Prompt Corrective Action regulations, the Office of Thrift
Supervision is required to take supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution’s level of
capital. Generally, a savings institution that has total risk-based
capital of less than 8.0% or a leverage ratio or a Tier 1 core capital
ratio that is less than 4.0% is considered to be undercapitalized. A
savings institution that has total risk-based capital less than 6.0%, a
Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio
that is less than 3.0% is considered to be “significantly
undercapitalized.” A savings institution that has a tangible capital
to assets ratio equal to or less than 2.0% is deemed to be “critically
undercapitalized.” Generally, the banking regulator is required to
appoint a receiver or conservator for an institution that is “critically
undercapitalized.” The regulation also provides that a capital
restoration plan must be filed with the Office of Thrift Supervision within 45
days of the date an institution receives notice that it is “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized.” In
addition, numerous mandatory supervisory actions become immediately applicable
to the institution, including, but not limited to, restrictions on growth,
investment activities, capital distributions, and affiliate
transactions. The Office of Thrift Supervision may also take any one
of a number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
23
Insurance
of Deposit Accounts
We are a
member of the Deposit Insurance Fund, which is administered by the Federal
Deposit Insurance Corporation. Our deposit accounts are insured by the Federal
Deposit Insurance Corporation, generally up to a maximum of $100,000 for each
separately insured depositor and up to a maximum of $250,000 for self-directed
retirement accounts. However, the Federal Deposit Insurance Corporation
increased the deposit insurance available on all deposit accounts to $250,000,
effective until December 31, 2013. In addition, certain
noninterest-bearing transaction accounts maintained with financial institutions
participating in the Federal Deposit Insurance Corporation’s Temporary Liquidity
Guarantee Program are fully insured regardless of the dollar amount until June
30, 2010. We have opted not to participate in the Federal Deposit
Insurance Corporation’s Temporary Liquidity Guarantee Program.
The
Federal Deposit Insurance Corporation imposes an assessment against institutions
for deposit insurance. This assessment is based on the risk category
of the institution and, prior to 2009, ranged from 5 to 43 basis points of the
institution’s deposits. On December 22, 2008, the Federal Deposit
Insurance Corporation published a final rule that raised the current deposit
insurance assessment rates uniformly for all institutions by 7 basis points (to
a range from 12 to 50 basis points) effective for the first quarter of
2009. On February 27, 2009, the Federal Deposit Insurance Corporation
issued a final rule that will alter the way the Federal Deposit Insurance
Corporation calculates federal deposit insurance assessment rates beginning in
the second quarter of 2009 and thereafter.
Under the
rule, the Federal Deposit Insurance Corporation first establishes an
institution’s initial base assessment rate. This initial base
assessment rate ranges, depending on the risk category of the institution, from
12 to 45 basis points. The Federal Deposit Insurance Corporation then
adjusts the initial base assessment (higher or lower) to obtain the total base
assessment rate. The adjustments to the initial base assessment rate
are based upon an institution’s levels of unsecured debt, secured liabilities,
and brokered deposits. The total base assessment rate ranges from 7
to 77.5 basis points of the institution’s deposits. Additionally, the Federal
Deposit Insurance Corporation imposed a special 5 basis points assessment on
each FDIC-insured depository institution’s assets, minus its Tier 1 capital on
June 30, 2009, which was collected on September 30, 2009. The special assessment
was capped at 10 basis points of an institution’s domestic deposits. Future
special assessments could also be assessed. Our premium assessment for the
second quarter of 2009 increased by approximately $140,000 to reflect the
special assessment, our total FDIC insurance expense totaled $248,000 for the
year ended December 31, 2009, and prepaid insurance totaled $968,000 at December
31, 2009.
The
Federal Deposit Insurance Corporation has required all depository institutions
to prepay their estimated assessments for the fourth quarter of 2009, and for
all of 2010, 2011 and 2012. Under the rule, this pre-payment was due
on December 30, 2009. The assessment rate for the fourth quarter of
2009 and for 2010 was based on each institution’s total base assessment rate for
the third quarter of 2009, modified to assume that the assessment rate in effect
on September 30, 2009 had been in effect for the entire third quarter, and the
assessment rate for 2011 and 2012 will be equal to the modified third quarter
assessment rate plus an additional 3 basis points. In addition, each
institution’s base assessment rate for each period was calculated using its
third quarter assessment base, adjusted quarterly for an estimated 5% annual
growth rate in the assessment base through the end of 2012. Our
prepayment amount was approximately $968,000.
24
Insurance of deposits may
be terminated by the Federal Deposit Insurance Corporation upon a finding that
an institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the Federal Deposit Insurance
Corporation. We do not currently know of any practice, condition or violation
that may lead to termination of our deposit insurance.
In addition to the Federal
Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is
authorized to impose and collect, with the approval of the Federal Deposit
Insurance Corporation, assessments for anticipated payments, issuance costs and
custodial fees on bonds issued by the FICO in the 1980s to recapitalize the
former Federal Savings and Loan Insurance Corporation. The bonds issued by the
FICO are due to mature in 2017 through 2019. For the quarter ended December 31,
2009, the annualized FICO assessment was equal to 1.06 basis points for each
$100 in domestic deposits maintained at an institution.
Temporary
Liquidity Guarantee Program
On October 14, 2008, the
Federal Deposit Insurance Corporation announced a new program – the Temporary
Liquidity Guarantee Program, which guarantees newly issued senior unsecured debt
of a participating organization, up to certain limits established for each
institution, issued between October 14, 2008 and June 30, 2009. The Federal
Deposit Insurance Corporation will pay the unpaid principal and interest on
Federal Deposit Insurance Corporation-guaranteed debt instruments upon the
uncured failure of the participating entity to make timely payments of principal
or interest in accordance with the terms of the instrument. The
guarantee will remain in effect until June 30, 2012. In return for the Federal
Deposit Insurance Corporation’s guarantee, participating institutions will pay
the Federal Deposit Insurance Corporation a fee based on the amount and maturity
of the debt. We opted not to participate in this part of the
Temporary Liquidity Guarantee Program.
The other part of the
Temporary Liquidity Guarantee Program provides full federal deposit insurance
coverage for noninterest-bearing transaction deposit accounts, regardless of
dollar amount, until December 31, 2009. An annualized 10 basis point assessment
on balances in noninterest-bearing transaction accounts that exceed the existing
deposit insurance limit of $250,000 will be assessed on a quarterly basis to
insured depository institutions that have not opted out of this component of the
Temporary Liquidity Guarantee Program. We opted to not participate in
this component of the Temporary Liquidity Guarantee Program. On August 26, 2009,
the Federal Deposit Insurance Corporation extended the program until June 30,
2010. Institutions have until November 2, 2009 to decide whether they will opt
out of the extension which takes effect on January 1, 2010. An annualized
assessment rate between 15 and 25 basis points on balances in
noninterest-bearing transaction accounts that exceed the existing deposit
insurance limit of $250,000 will be assessed depending on the institution’s risk
category. We did not opt into the extension.
Federal
Home Loan Bank System
We are a member of the
Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan
Banks. The Federal Home Loan Bank System provides a central credit
facility primarily for member institutions. As a member of the
Federal Home Loan Bank of Cincinnati we are required to acquire and hold shares
of capital stock in the Federal Home Loan Bank in an amount equal to at least 1%
of the aggregate principal amount of our unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of our borrowings
from the Federal Home Loan Bank, whichever is greater. As of December
31, 2009, we were in compliance with this requirement. The Federal
Home Loan Banks are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of dividends
that the Federal Home Loan Banks pay to their members and could also result in
the Federal Home Loan Banks imposing a higher rate of interest on advances to
their members.
25
Ohio
Savings and Loan Law
The Ohio Division of
Financial Institutions is responsible for the regulation and supervision of Ohio
savings institutions in accordance with the laws of the State of
Ohio. Ohio law prescribes the permissible investments and activities
of Ohio savings and loan associations, including the types of lending that such
associations may engage in and the investments in real estate, subsidiaries, and
corporate or government securities that such associations may
make.
The Ohio Division of
Financial Institutions also has approval authority over the payment of dividends
and any mergers involving or acquisitions of control of Ohio savings
institutions. The Ohio Division of Financial Institutions may
initiate certain supervisory measures or formal enforcement actions against Ohio
associations. Ultimately, if the grounds provided by law exist, the
Ohio Division of Financial Institutions may place an Ohio association in
conservatorship or receivership.
The Ohio Division of
Financial Institutions conducts regular examinations of Cheviot Savings Bank
approximately once every eighteen months. Such examinations are
usually conducted jointly with one or both federal regulators. The
Ohio Division of Financial Institutions imposes assessments on Ohio associations
based on their asset size to cover the cost of supervision and
examination.
Holding
Company Regulation
General. Cheviot
Mutual Holding Company and Cheviot Financial Corp. are nondiversified mutual
savings and loan holding companies within the meaning of the Home Owners’ Loan
Act. As such, Cheviot Mutual Holding Company and Cheviot Financial
Corp. are registered with the Office of Thrift Supervision and are subject to
Office of Thrift Supervision regulations, examinations, supervision and
reporting requirements. In addition, the Office of Thrift Supervision
has enforcement authority over Cheviot Financial Corp. and Cheviot Mutual
Holding Company and their subsidiaries. Among other things, this
authority permits the Office of Thrift Supervision to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. As federal corporations, Cheviot Financial Corp. and
Cheviot Mutual Holding Company are generally not subject to state business
organization laws.
Permitted
Activities. Pursuant to Section 10(o) of the Home Owners’
Loan Act and Office of Thrift Supervision regulations and policy, a mutual
holding company, such as Cheviot Mutual Holding Company, and a federally
chartered mid-tier holding company such as Cheviot Financial Corp. may engage in
the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired
from a savings subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity
(A) that the Federal Reserve Board, by regulation, has determined to be
permissible for bank holding companies under Section 4(c) of the Bank
Holding Company Act of 1956, unless the Director, by regulation, prohibits or
limits any such activity for savings and loan holding companies; or (B) in
which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; (x) any activity
permissible for financial holding companies under Section 4(k) of the Bank
Holding Company Act, including securities and insurance underwriting; and
(xi) purchasing, holding, or disposing of stock acquired in connection with
a qualified stock issuance if the purchase of such stock by such savings and
loan holding company is approved by the Director. If a mutual holding
company acquires or merges with another holding company, the holding company
acquired or the holding company resulting from such merger or acquisition may
only invest in assets and engage in activities listed in (i) through
(xi) above, and has a period of two years to cease any nonconforming
activities and divest of any nonconforming investments.
26
The Home Owners’ Loan Act
prohibits a savings and loan holding company, including Cheviot Financial Corp.
and Cheviot Mutual Holding Company, directly or indirectly, or through one or
more subsidiaries, from acquiring another savings institution or holding company
thereof, without prior written approval of the Office of Thrift
Supervision. It also prohibits the acquisition or retention of, with
certain exceptions, more than 5% of a nonsubsidiary savings institution, a
nonsubsidiary holding company, or a nonsubsidiary company engaged in activities
other than those permitted by the Home Owners’ Loan Act; or acquiring or
retaining control of an institution that is not federally insured. In
evaluating applications by holding companies to acquire savings institutions,
the Office of Thrift Supervision must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
The Office of Thrift
Supervision is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws
of the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.
Waivers
of Dividends by Cheviot Mutual Holding Company. Office of
Thrift Supervision regulations require Cheviot Mutual Holding Company to notify
the Office of Thrift Supervision of any proposed waiver of its receipt of
dividends from Cheviot Financial Corp. The Office of Thrift Supervision reviews
dividend waiver notices on a case-by-case basis, and, in general, does not
object to any such waiver if: (i) the mutual holding company’s board of
directors determines that such waiver is consistent with such directors’
fiduciary duties to the mutual holding company’s members; (ii) for as long as
the savings association subsidiary is controlled by the mutual holding company,
the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under Office of Thrift Supervision capital
distribution regulations. Cheviot Mutual Holding Company may waive
dividends paid by Cheviot Financial Corp. Under Office of Thrift Supervision
regulations, our public stockholders would not be diluted because of any
dividends waived by Cheviot Mutual Holding Company (and waived dividends would
not be considered in determining an appropriate exchange ratio) in the event
Cheviot Mutual Holding Company converts to stock form.
27
Conversion
of Cheviot Mutual Holding Company to Stock Form. Office of
Thrift Supervision regulations permit Cheviot Mutual Holding Company to convert
from the mutual form of organization to the capital stock form of organization
(a “Conversion Transaction”). There can be no assurance when, if
ever, a Conversion Transaction will occur, and the Board of Directors has no
current intention or plan to undertake a Conversion Transaction. In a
Conversion Transaction a new holding company would be formed as the successor to
Cheviot Financial Corp. (the “New Holding Company”), Cheviot Mutual Holding
Company’s corporate existence would end, and certain depositors of Cheviot
Savings Bank would receive the right to subscribe for additional shares of the
New Holding Company. In a Conversion Transaction, each share of
common stock held by stockholders other than Cheviot Mutual Holding Company
(“Minority Stockholders”) would be automatically converted into a number of
shares of common stock of the New Holding Company determined pursuant an
exchange ratio that ensures that Minority Stockholders own the same percentage
of common stock in the New Holding Company as they owned in Cheviot Financial
Corp. immediately prior to the Conversion Transaction. Under Office
of Thrift Supervision regulations, Minority Stockholders would not be diluted
because of any dividends waived by Cheviot Mutual Holding Company (and waived
dividends would not be considered in determining an appropriate exchange ratio),
in the event Cheviot Mutual Holding Company converts to stock
form. The total number of shares held by Minority Stockholders after
a Conversion Transaction also would be increased by any purchases by Minority
Stockholders in the stock offering conducted as part of the Conversion
Transaction.
Sarbanes-Oxley
Act of 2002
The Sarbanes-Oxley Act of
2002 was enacted in response to public concerns regarding corporate
accountability in connection with a number of accounting scandals. The stated
goals of the Sarbanes-Oxley Act were to increase corporate responsibility, to
provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies, and to protect investors by improving the accuracy
and reliability of corporate disclosures pursuant to the securities laws. The
Sarbanes-Oxley Act generally applies to all companies that file or are required
to file periodic reports with the SEC, under the Securities Exchange Act of
1934.
The
Sarbanes-Oxley Act includes very specific additional disclosure requirements and
new corporate governance rules requiring the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules, and mandates further studies of certain issues by the SEC. The
Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
Federal
Taxation
For federal income tax
purposes, Cheviot Financial Corp. and Cheviot Savings Bank file a consolidated
federal income tax returns on a calendar year basis using the accrual method of
accounting.
As a result of the
enactment of the Small Business Job Protection Act of 1996, all savings banks
and savings associations may convert to a commercial bank charter, diversify
their lending, or merge into a commercial bank without having to recapture any
of their pre-1988 tax bad debt reserve accumulations. However,
transactions which would require recapture of the pre-1988 tax bad debt reserve
include redemption of Cheviot Savings Bank’s stock, payment of dividends or
distributions in excess of earnings and profits, or failure by the institution
to qualify as a bank for federal income tax purposes. At December 31,
2009, Cheviot Savings Bank had pre-1988 bad debt reserves totaling approximately
$3.0 million. A deferred tax liability has not been provided on this
amount as management does not intend to make distributions, redeem stock or fail
certain bank tests that would result in recapture of the
reserve.
28
Deferred income taxes
arise from the recognition of items of income and expense for tax purposes in
years different from those in which they are recognized in the consolidated
financial statements. Cheviot Financial Corp. will account for
deferred income taxes by the asset and liability method, applying the enacted
statutory rates in effect at the balance sheet date to differences between the
book basis and the tax basis of assets and liabilities. The resulting
deferred tax liabilities and assets will be adjusted to reflect changes in the
tax laws.
Cheviot Financial Corp. is
subject to the corporate alternative minimum tax to the extent it exceeds
Cheviot Financial Corp.’s regular income tax for the year. The alternative
minimum tax will be imposed at the rate of 20% of a specially computed tax base.
Included in this base are a number of preference items, including interest on
certain tax-exempt bonds issued after August 7, 1986, and an “adjusted current
earnings” computation which is similar to a tax earnings and profits
computation. In addition, for purposes of the alternative minimum
tax, the amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable
income.
Cheviot Savings Bank’s
income tax returns have not been audited by the Internal Revenue Service within
the past five years.
State
Taxation
Cheviot Financial Corp.
and Cheviot Savings Bank are subject to Ohio taxation in the same general manner
as other corporations. In particular, Cheviot Financial Corp. and Cheviot
Savings Bank are subject to the Ohio corporation franchise tax, which is an
excise tax imposed on corporations for the privilege of doing business in Ohio,
owning capital or property in Ohio, holding a charter or certificate of
compliance authorizing the corporation to do business in Ohio, or otherwise
having nexus with Ohio during a calendar year. The franchise tax is imposed on
the value of a corporation’s issued and outstanding shares of stock. Financial
institutions determine the value of their issued and outstanding shares based
upon the net worth of the shares. For Ohio franchise tax purposes, savings
institutions are currently taxed at a rate equal to 1.3% of taxable net worth.
Cheviot Savings Bank is currently under audit with respect to its 2005 Ohio
franchise tax returns.
Executive
Officers of Cheviot Financial Corp.
The following individuals
hold the following executive officer positions with Cheviot Financial
Corp.
Name
|
Age
|
Position
|
||
Thomas
J. Linneman
|
56
|
President
and Chief Executive Officer
|
||
Scott
T. Smith
|
40
|
Chief
Financial Officer
|
29
Availability
of Annual Report on Form 10-K
Our Annual Report on Form
10-K may be accessed on our website at www.cheviotsavings.com.
ITEM
1A. RISK FACTORS
Changing
Interest Rates May Cause Net Earnings to Decline.
In the event that interest
rates rise, our net interest margin and interest rate spread will be adversely
affected by the high level of assets with fixed rates of interest which we
retain in our portfolio. As market interest rates rise, we will have
competitive pressures to increase the rates we pay on deposits, which will
result in a decrease of our net interest income. Furthermore, the
value of our loans will be less should we choose to sell such loans in the
secondary market. Since, as a general matter, our interest-bearing
liabilities reprice or mature more quickly than our interest-earning assets, an
increase in interest rates generally would result in a decrease in our average
interest rate spread and net interest income.
If
Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our
Earnings Could Decrease.
Our loan customers may not
repay their loans according to their terms, and the collateral securing the
payment of these loans may be insufficient to pay any remaining loan
balance. We may experience significant loan losses, which could have
a material adverse effect on our operating results. We make various
assumptions and judgments about the collectibility of our portfolio, including
the creditworthiness of our borrowers and the value of the real estate and other
assets serving as collateral for the repayment of many of our
loans.
In determining the amount
of the allowance for loan losses, we review individual delinquent multi-family
and commercial real estate loans for potential impairments in their carrying
values. Additionally, we apply a factor to the loan portfolio
principally based on historical loss experience as applied to the composition of
the one- to-four family loan portfolio and integrated with our perception of
risk in the economy related to past experience. Since we must use
assumptions regarding individual loans and the economy, our current allowance
for loan losses may not be sufficient to cover actual loan losses, and increases
in the allowance may be necessary. Consequently, we may need to
significantly increase our provision for losses on loans, particularly if one or
more of our larger loans or credit relationships becomes delinquent or if we
expand our non-residential, multi-family or commercial business
lending. In addition, federal and state regulators periodically
review our allowance for loan losses and may require us to increase our
provision for loan losses or recognize loan charge-offs.
If
Economic Conditions Deteriorate, Our Earnings Could be Adversely Impacted as
Borrowers’ Ability to Repay Loans Declines and the Value of the Collateral
Securing Our Loans Decreases.
Our financial results may
be adversely affected by changes in prevailing economic conditions, including
decreases in real estate values, changes in interest rates which may cause a
decrease in interest rate spreads, adverse employment conditions, the monetary
and fiscal policies of the federal government and other significant external
events. Since we have a significant amount of real estate loans,
decreases in real estate values could adversely affect the value of property
used as collateral. Advance changes in the economy may also have a
negative effect on the ability of our borrowers to make timely repayments of
their loans, which would have an adverse impact on our
earnings.
30
In addition, substantially
all of our loans are to individuals and businesses in Hamilton County,
Ohio. Consequently, any decline in the economy of this market area
could have an adverse impact on our earnings.
Our
Public Shareholders Do Not Exercise Voting Control Over Cheviot Financial
Corp.
A majority of the voting
stock of Cheviot Financial Corp. is owned by Cheviot Mutual Holding
Company. Cheviot Mutual Holding Company is controlled by its board of
directors, who consist of those persons who are members of the board of
directors of Cheviot Financial Corp. and Cheviot Savings
Bank. Cheviot Mutual Holding Company elects all members of the board
of directors of Cheviot Financial Corp., and, as a general matter, controls the
outcome of all matters presented to the stockholders of Cheviot Financial Corp.
for resolution by vote, except for matters that require a vote greater than a
majority vote. Consequently, Cheviot Mutual Holding Company, acting
through its board of directors, is able to control the business and operations
of Cheviot Financial Corp. and may be able to prevent any challenge to the
ownership or control of Cheviot Financial Corp. by stockholders other than
Cheviot Mutual Holding Company. There is no assurance that Cheviot
Mutual Holding Company will not take actions that the public stockholders
believe are against their interests.
We
Operate in a Highly Regulated Environment and may be Adversely Affected by
Changes in Laws and Regulations.
We are subject to
extensive regulation, supervision and examination by the Office of Thrift
Supervision, our chartering authority, and by the Federal Deposit Insurance
Corporation, as insurer of deposits. As federally chartered holding
companies, Cheviot Financial Corp. and Cheviot Mutual Holding Company also will
be subject to regulation and oversight by the Office of Thrift
Supervision. Such regulation and supervision govern the activities in
which an institution and its holding companies may engage and are intended
primarily for the protection of the insurance fund and
depositors. Regulatory authorities have extensive discretion in
connection with their supervisory and enforcement activities, including the
imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution’s
allowance for loan losses. Any change in such regulation and
oversight, whether in the form of regulatory policy, regulations, or
legislation, including changes in the regulations governing mutual holding
companies, could have a material impact on Cheviot Savings Bank, Cheviot
Financial Corp., and our operations.
ITEM
1B. UNRESOLVED STAFF
COMMENTS
Not
applicable.
31
ITEM
2. PROPERTIES
We
conduct our business through our main banking office located in Cheviot, Ohio,
and other full-service branch offices located in Hamilton County, Ohio. The
aggregate net book value of our premises and equipment was $4.9 million at
December 31, 2009. The following table sets forth certain information with
respect to our offices at December 31, 2009.
Location
|
Leased
or Owned
|
Year
Opened/
Acquired |
Net
Book Value
|
|||
(In
thousands)
|
||||||
Main
Office
|
||||||
3723
Glenmore Avenue
Cheviot,
Ohio 45211
|
Owned
|
1912
|
$ | 786 | ||
Branches
|
||||||
5550
Cheviot Road
Cincinnati,
Ohio 45247
|
Owned
|
1982
|
367 | |||
6060
Bridgetown Road
Cincinnati,
Ohio 45248
|
Owned
|
1991
|
496 | |||
1194
Stone Road
Harrison,
Ohio 45030
|
Owned
|
1997
|
594 | |||
585
Anderson Ferry Road
Cincinnati,
Ohio 45238
|
Owned
|
2006
|
1,148 | |||
7072
Harrison Avenue
Cincinnati,
Ohio 45247
|
Owned
|
2006
|
1,495 | |||
Total
Net Book Value
|
$ | 4,886 |
ITEM
3. LEGAL PROCEEDINGS
At
December 31, 2009, Cheviot Savings Bank was not involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business which, in the aggregate, involve amounts which are believed
by management to be immaterial to its financial condition or results of
operations.
None.
32
PART
II
The Company’s common stock
is listed on the Nasdaq Capital Market under the symbol
“CHEV”.
The following table sets
forth the range of the high and low sales prices of the Company’s Common Stock
for the prior eight calendar quarters and is based upon information provided by
Nasdaq.
Prices of Common Stock | ||||||||||||
High | Low | Dividends Paid | ||||||||||
Calendar
Quarter Ended
|
||||||||||||
March
31,
2009
|
$ | 7.70 | $ | 5.52 | $ | 0.10 | ||||||
June
30,
2009
|
9.80 | 6.65 | 0.10 | |||||||||
September
30,
2009
|
9.00 | 7.09 | 0.10 | |||||||||
December
31,
2009
|
8.77 | 7.00 | 0.10 |
Prices of Common Stock | ||||||||||||
High | Low | Dividends Paid | ||||||||||
Calendar
Quarter Ended
|
||||||||||||
March
31,
2008
|
$ | 10.55 | $ | 7.85 | $ | 0.09 | ||||||
June
30,
2008
|
10.00 | 7.48 | 0.09 | |||||||||
September
30,
2008
|
9.09 | 6.77 | 0.09 | |||||||||
December
31,
2008
|
8.50 | 5.15 | 0.09 |
As of
December 31, 2009, the Company had 800 stockholders of record. Please
see “Item 1. Business— Regulation—Capital Distributions” for a discussion of
restrictions on the ability of the Bank to pay the Company
dividends.
Set forth
below is information relating to the Company’s common stock repurchase activity
during the fourth quarter of 2009.
Month
|
Total
Number of
Shares
Purchased
|
Average
Price Paid
per
share
|
Total
shares
purchased
as part of a
publicly
announced
program
or plan
|
Maximum
number of
shares that may yet be purchased under the program or plan |
||||||||||||
October
|
— | $ | — | 82,968 | 364,616 | |||||||||||
November
|
— | — | 82,968 | 364,616 | ||||||||||||
December
|
— | — | 82,968 | 364,616 |
Set forth
below is information as of December 31, 2009 regarding equity compensation
plans. Other than the ESOP, the Company does not have any equity
compensation plans that were not approved by its stockholders.
Plan
|
Number
of securities to be
issued upon exercise of outstanding options and rights |
Weighted
average
exercise
price
|
Number
of securities remaining available for issuance
under
plan |
Equity
compensation plans approved by stockholders
|
680,426
|
$11.11
|
100,531
|
Equity
compensation plans not approved by stockholders
|
—
|
—
|
—
|
Total
|
680,426
|
$11.11
|
100,531
|
33
ITEM
6. SELECTED FINANCIAL DATA
The Selected Financial
Data is incorporated by reference to the Annual Report to Shareholders included
as Exhibit 13 to this Form 10-K.
Incorporated by reference
to the Annual Report to Shareholders included as Exhibit 13 to the Form
10-K.
Incorporated by reference
to the Annual Report to Shareholders included as Exhibit 13 to the Form
10-K.
The financial statements
identified in Item 15(a)(1) hereof are incorporated by reference to the Annual
Report to Shareholders included as Exhibit 13 to the Form
10-K.
None.
ITEM
9A(T).
|
(a) Evaluation of
Disclosure Controls and Procedures
Under the
supervision, and with the participation, of our Chief Executive Officer and
Chief Financial Officer, our management evaluated the effectiveness of the
design and operation of the Company’s disclosure controls and procedures
pursuant to Rule 13a-15(b), as adopted by the Securities and Exchange Commission
(the “SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were
effective as of the end of the period covered by this annual
report.
Disclosure
controls and procedures are the controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
34
(b)
Management’s Report on Internal Control Over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. Our system of internal control is designed
under the supervision of management, including our Chief Executive Officer and
Chief Financial Officer, to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles (“GAAP”).
Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of assets; provide reasonable
assurances that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that receipts and expenditures
are made only in accordance with the authorization of management and the Boards
of Directors of the Company and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on our financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions or that the degree of compliance
with policies and procedures may deteriorate.
As of
December 31, 2009, management assessed the effectiveness of the Company’s
internal control over financial reporting based upon the framework established
in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based upon its assessment,
management believes that the Company’s internal control over financial reporting
as of December 31, 2009 is effective using these criteria.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
(c)
Changes in Internal Control over Financial Reporting
There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
See the Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
ITEM
9B. OTHER INFORMATION
None.
35
PART
III
Information concerning
Directors of the Company is incorporated herein by reference from the Company’s
definitive Proxy Statement (the “Proxy Statement”), specifically the section
captioned “Proposal I—Election of Directors.” In addition, see
“Executive Officers of Cheviot Financial Corp.” in Item 1 for information
concerning the Company’s executive officers. Information concerning
corporate governance matters is incorporated by reference from the Company’s
Proxy Statement.
The Board
of Directors has adopted a Code of Ethics, applicable to the Chief Executive
Officer and Chief Financial Officer. The Code of Ethics may be
accessed through our website at www.cheviotsavings.com
and is filed as Exhibit 14 hereto.
ITEM
11.
EXECUTIVE
COMPENSATION
Information concerning
executive compensation is incorporated herein by reference from the Company’s
Proxy Statement, specifically the section captioned “Executive
Compensation.”
ITEM
12.
|
Information concerning
security ownership of certain owners and management is incorporated herein by
reference from the Company’s Proxy Statement, specifically the section captioned
“Voting Securities and Principal Holder Thereof.”
Information concerning
relationships and transactions, and director independence, is incorporated
herein by reference from the Company’s Proxy Statement, specifically the
sections captioned “Transactions with Certain Related Persons” and “Proposal
I-Election of Directors.”
Information concerning
principal accountant fees and services is incorporated herein by reference from
the Company’s Proxy Statement under the caption “Proposal II-Ratification of
Independent Registered Public Accountants.”
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
The
exhibits and financial statement schedules filed as a part of this Form 10-K are
as follows:
(a)(1)
Financial Statements
|
||
•
|
Report
of Independent Registered Public Accounting Firm.
|
|
•
|
Consolidated
Statements of Financial Condition at December 31, 2009 and
2008.
|
|
•
|
Consolidated
Statements of Earnings for the Years Ended December 31, 2009, 2008 and
2007.
|
|
•
|
Consolidated
Statements of Comprehensive Income for the Years Ended December 31, 2009,
2008 and 2007.
|
|
•
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2009,
2008 and 2007.
|
36
•
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007.
|
|
•
|
Notes
to Consolidated Financial
Statements.
|
(a)(2)
|
Financial Statement
Schedules
|
|
No
financial statement schedules are filed because the required information
is not applicable or is included in the consolidated financial statements
or related notes.
|
||
(a)(3)
|
Exhibits
|
|
3.1
|
Charter
of Cheviot Financial Corp.(1)
|
|
3.2
|
Bylaws
of Cheviot Financial Corp. (1)
|
|
4
|
Stock
Certificate of Cheviot Financial Corp. (2)
|
|
10.1
|
Employment
Agreement with Thomas J. Linneman(3)
|
|
10.2
|
Change
in Control Severance Agreement with Kevin Kappa(4)
|
|
10.3
|
Change
in Control Severance Agreement with Jeffrey Lenzer(5)
|
|
10.4
|
Change
in Control Severance Agreement with Scott Smith(6)
|
|
10.5
|
Directors
Deferred Compensation Plan(7)
|
|
10.6
|
Tax
Allocation Agreement(8)
|
|
10.7
|
Expense
Allocation Agreement(9)
|
|
10.8
|
2005
Stock Based Incentive Plan(10)
|
|
10.9
|
Supplemental
Insurance Plan(11)
|
|
13
|
Annual
Report to Shareholders
|
|
14
|
Code
of Ethics(12)
|
|
21
|
Subsidiaries
of the Registrant(13)
|
|
23.1
|
Consent
of Clark, Schaefer, Hackett & Co.
|
|
31.1
|
Certification
of President and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
(1)
|
Incorporated
by reference to Exhibit 3.1 of the Registration Statement on Form S-1
filed with the Securities and Exchange Commission on June 30,
2003.
|
|
(2)
|
Incorporated
by reference to Exhibit 4 of the Pre-Effective Amendment No.1 to the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on September 2, 2003.
|
|
(3)
|
Incorporated
by reference to Exhibit 10.1 of the Pre-Effective Amendment No.1 to the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on September 2,
2003.
|
37
(4)
|
Incorporated
by reference to Exhibit 10.2 of the Pre-Effective Amendment No.1 to the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on September 2, 2003.
|
|
(5)
|
Incorporated
by reference to Exhibit 10.3 of the Pre-Effective Amendment No.1 to the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on September 2, 2003.
|
|
(6)
|
Incorporated
by reference to Exhibit 10.3 of the Pre-Effective Amendment No.1 to the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on September 2, 2003.
|
|
(7)
|
Incorporated
by reference to Exhibit 10.4 of the Registration Statement on Form S-1
filed with the Securities and Exchange Commission on June 30,
2003.
|
|
(8)
|
Incorporated
by reference to Exhibit 10.5 of the Pre-Effective Amendment No.1 to the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on September 2, 2003.
|
|
(9)
|
Incorporated
by reference to Exhibit 10.6 of the Pre-Effective Amendment No.1 to the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on September 2, 2003.
|
|
(10)
|
Incorporated
by reference to Exhibit A of the Definitive Proxy Statement filed with the
Securities and Exchange Commission on March 25, 2005.
|
|
(11)
|
Incorporated
by reference to Exhibit 99 of the Form 8-K filed with the Securities and
Exchange Commission on July 7, 2005.
|
|
(12)
|
Incorporated
by reference to Exhibit 14 of the Form 10-K filed with the Securities and
Exchange Commission on March 25, 2004.
|
|
(13)
|
Incorporated
by reference to Exhibit 21 of the Form 10-K filed with the Securities and
Exchange Commission on March 30, 2007.
|
|
(b)
|
The
exhibits listed under (a)(3) above are filed herewith.
|
|
(c)
|
Not
applicable.
|
38
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHEVIOT
FINANCIAL CORP.
|
||||
Date:
|
March
17, 2010
|
By:
|
/s/
Thomas J. Linneman
|
|
Thomas
J. Linneman,
|
||||
President
and Chief Executive Officer and
Director
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By:
|
/s/
Thomas J. Linneman
|
By:
|
/s/
Scott T. Smith
|
||
Thomas
J. Linneman, President and
Chief Executive Officer
|
Scott
T. Smith, Chief Financial Officer
|
||||
|
(principal
financial officer and principal accounting
officer)
|
||||
Date:
|
March
17, 2010
|
Date:
|
March
17, 2010
|
||
By:
|
/s/
Edward L. Kleemeier
|
By:
|
/s/
John T. Smith
|
||
Edward
L. Kleemeier, Director
|
John
T. Smith, Director
|
||||
Date:
|
March
17, 2010
|
Date:
|
March
17, 2010
|
||
By:
|
/s/
Robert L. Thomas
|
By:
|
/s/
James E. Williamson
|
||
Robert
L. Thomas, Director
|
James
E. Williamson, Director
|
||||
Date:
|
March
17, 2010
|
Date:
|
March
17, 2010
|
||
By:
|
/s/
Steven R. Hausfeld
|
||||
Steven
R. Hausfeld, Director
|
|||||
Date:
|
March
17, 2010
|
39