Attached files
file | filename |
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10-K - FORM 10-K - CHEVIOT FINANCIAL CORP | t67373_10k.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 |
Exhibit
13
ANNUAL
REPORT TO SHAREHOLDERS
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![]() 2009 Annual Report
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TABLE
OF CONTENTS
Page
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President’s
Letter to Shareholders and Customers
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1
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Business
of Cheviot Financial Corp.
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2
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Financial
Highlights
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3
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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5
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Financial
Statements:
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Management’s
Annual Report on Internal Control Over Financial Reporting
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25
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Report
of Independent Registered Public Accounting Firm
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26
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Consolidated
Statements of Financial Condition
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27
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Consolidated
Statements of Earnings
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28
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Consolidated
Statements of Comprehensive Income
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29
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Consolidated
Statements of Shareholders’ Equity
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30
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Consolidated
Statements of Cash Flows
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31-32
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Notes
to Consolidated Financial Statements
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33
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Directors
and Officers
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64
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Investor
and Corporate Information
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65
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Office
Locations
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66
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LETTER
FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER
To Our
Shareholders and Customers:
We are
pleased to present the Annual Report to Shareholders of Cheviot Financial Corp.
(the “Corporation”), the holding company which owns 100% of the outstanding
stock of Cheviot Savings Bank (the “Bank”). This is the sixth annual
report to reflect the consolidated results of operations and financial condition
of the Corporation and Bank.
During a difficult year for the national and local economy, the Corporation had
net earnings of $1.1 million during 2009 and ended the year with assets of
$341.9 million.
The mission of Cheviot Savings Bank has always been to offer the best financial
services and products with the expertise and friendliness a customer
wants. During these difficult economic times, Cheviot Savings Bank
continues to offer superior financial services, coupled with the financial
strength necessary to prosper in this market. In 2009, we continued our focus on
customer service by extending our business hours and completing a core computer
conversion allowing for enhanced processing, internet banking and mobile
banking. We continue to adhere to our conservative lending and investment
practices, which we believe will help the Corporation to maintain its financial
strength during these severe economic times.
The staff of
Cheviot Savings Bank is dedicated to helping the community through involvement
and participation in various community organizations and groups. Over the
years, many of the Directors and employees have been
members of organizations helping to enrich and support the
community. We believe our continued involvement within the community gives
us a greater understanding of our customer base and the needs of our
community.
Over the
past six years, Cheviot Savings Bank Charitable Foundation has demonstrated
their support in the community through various contributions. The
Foundation made sizable donations to area high schools for scholarships for
higher education. The Foundation has donated and supported various
non-profit organizations and groups such as: housing related activities,
community projects and improvements, organizations including The Boy Scouts of
America, American Red Cross, youth camps and special needs organizations.
The Foundation is committed to serving the community by reaching out and making
a positive impact to as many lives as possible.
I want to personally thank you for your support as a shareholder and pledge to
continue to advance the interests of the Corporation, the Bank, the community,
our customers and shareholders.
Sincerely,
Cheviot Financial Corp.
By /s/ Thomas J. Linneman
Cheviot Financial Corp.
By /s/ Thomas J. Linneman
Thomas J. Linneman
President and Chief Executive
Officer
- 1
-
Cheviot
Financial Corp.
BUSINESS
OF CHEVIOT FINANCIAL CORP.
Cheviot
Savings Bank (the “Savings Bank”) was established in 1911 as an Ohio chartered
mutual savings and loan association. As an Ohio-chartered savings
association, the Savings Bank is subject to the regulation and supervision of
the Ohio Department of Financial Institutions and the Office of Thrift
Supervision.
In 2004,
the Savings Bank reorganized into a two-tier mutual holding company structure
(the “Reorganization”) and established Cheviot Financial Corp. (“Cheviot
Financial” or the “Corporation”) as the parent of the Savings
Bank. Pursuant to the Plan, Cheviot Financial issued 9,918,751 common
shares, of which approximately 55.0% was issued to Cheviot Mutual Holding
Company, a federally chartered mutual holding company. Cheviot
Financial sold 4,388,438 common shares, representing approximately 44.0% of the
outstanding common stock, to the Savings Bank’s depositors and a newly formed
Employee Stock Ownership Plan (“ESOP”) at an initial issuance price of $10.00
per share. In addition, 75,000 shares, or approximately one percent
of the outstanding shares, were issued to a charitable foundation established by
the Savings Bank. Cheviot Financial’s issuance of common shares
resulted in proceeds, net of offering costs and shares issued to the ESOP,
totaling $39.3 million. At December 31, 2009, Cheviot Financial had
3,413,393 shares issued and outstanding to persons other than Cheviot Mutual
Holding Company.
The
Savings Bank is a community and customer-oriented savings and loan operating six
full-service offices, all of which are located in Hamilton County, Ohio, which
we consider our primary market area. We emphasize personal service
and customer convenience in serving the financial needs of the individuals,
families and businesses residing in our markets.
Cheviot
Financial’s executive offices are located at 3723 Glenmore Avenue, Cheviot,
Ohio 45211-4744, and our telephone number is (513)
661-0457.
The
following are highlights of Cheviot Savings Bank’s operations:
●
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a
98-year history of providing financial products and services to
individuals, families and small business customers in southwestern
Ohio;
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●
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a
commitment to single family residential mortgage
lending;
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●
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maintaining
capital strength and exceeding regulatory “well capitalized” capital
requirements; and
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●
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a
business strategy designed to expand our banking relationships with
existing and future customers.
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- 2
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Cheviot
Financial Corp.
SELECTED
FINANCIAL AND OTHER DATA
The
following tables set forth selected financial and other data of Cheviot
Financial Corp. at the dates and for the periods
presented.
At
December 31,
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2009
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2008
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2007
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2006
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2005
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||||||||||||||||
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(In
thousands)
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|||||||||||||||||||
Selected
Financial Condition Data:
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||||||||||||||||||||
Total
assets
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$ | 341,860 | $ | 332,000 | $ | 319,060 | $ | 309,780 | $ | 291,791 | ||||||||||
Cash
and cash equivalents
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11,283 | 10,013 | 9,450 | 5,490 | 9,103 | |||||||||||||||
Investment
securities available for sale
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55,851 | 23,909 | 12,178 | 9,085 | - | |||||||||||||||
Investment
securities held to maturity – at cost
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— | 7,000 | 23,000 | 25,099 | 27,084 | |||||||||||||||
Mortgage-backed
securities available for sale
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4,920 | 648 | 814 | 1,042 | 1,269 | |||||||||||||||
Mortgage-backed
securities held to maturity – at cost
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5,744 | 6,915 | 9,500 | 14,237 | 20,285 | |||||||||||||||
Loans
receivable, net (1)
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247,002 | 268,483 | 249,832 | 241,178 | 222,711 | |||||||||||||||
Deposits
|
235,904 | 216,048 | 219,526 | 205,450 | 181,238 | |||||||||||||||
Advances
from the Federal Home Loan Bank
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33,672 | 44,604 | 28,665 | 29,236 | 33,209 | |||||||||||||||
Shareholders’
equity
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68,750 | 68,231 | 67,920 | 72,200 | 74,810 | |||||||||||||||
For
the Year Ended
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||||||||||||||||||||
December
31,
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||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Selected
Operating Data:
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||||||||||||||||||||
Total
interest income
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$ | 16,473 | $ | 18,058 | $ | 17,791 | $ | 16,509 | $ | 14,408 | ||||||||||
Total
interest expense
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6,585 | 8,445 | 9,499 | 7,782 | 5,129 | |||||||||||||||
Net
interest income
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9,888 | 9,613 | 8,292 | 8,727 | 9,279 | |||||||||||||||
Provision
for losses on loans
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853 | 668 | 116 | 25 | 97 | |||||||||||||||
Net
interest income after provision for losses on
loans
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9,035 | 8,945 | 8,176 | 8,702 | 9,182 | |||||||||||||||
Total
other income
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813 | 503 | 545 | 538 | 445 | |||||||||||||||
Total
general, administrative and other expense
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8,141 | 7,440 | 7,367 | 6,770 | 6,418 | |||||||||||||||
Earnings
before income taxes
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1,707 | 2,008 | 1,354 | 2,470 | 3,209 | |||||||||||||||
Federal
income taxes
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606 | 592 | 428 | 774 | 1,056 | |||||||||||||||
Net
earnings
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$ | 1,101 | $ | 1,416 | $ | 926 | $ | 1,696 | $ | 2,153 | ||||||||||
Earnings
per share – basic and diluted
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$ | 0.13 | $ | 0.16 | $ | 0.10 | $ | 0.18 | $ | 0.22 |
(1) Includes
loans held for sale, net of allowance for loan losses and deferred loan
costs.
- 3
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Cheviot
Financial Corp.
SELECTED
FINANCIAL AND OTHER DATA (CONTINUED)
At
or For the
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Year
Ended
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December
31,
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2009
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2008
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2007
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2006
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2005
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Selected
Financial Ratios and Other Data:(1)
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Performance
Ratios:
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Return
on average assets
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0.32 | % | 0.43 | % | 0.29 | % | 0.56 | % | 0.76 | % | ||||||||||
Return
on average equity
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1.60 | 2.09 | 1.33 | 2.32 | 2.79 | |||||||||||||||
Average
equity to average assets
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20.26 | 20.75 | 22.16 | 24.21 | 27.17 | |||||||||||||||
Equity
to total assets at end of period
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20.11 | 20.55 | 21.29 | 23.31 | 25.64 | |||||||||||||||
Interest
rate spread (2)
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2.67 | 2.49 | 2.00 | 2.27 | 2.72 | |||||||||||||||
Net
interest margin (2)
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3.10 | 3.11 | 2.78 | 3.03 | 3.39 | |||||||||||||||
Average
interest-earning assets to average interest-bearing
liabilities
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120.80 | 122.59 | 124.51 | 128.42 | 135.63 | |||||||||||||||
Total
general, administrative and other expenses to average total
assets
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2.40 | 2.28 | 2.34 | 2.24 | 2.26 | |||||||||||||||
Efficiency
ratio (3)
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76.08 | 73.55 | 83.37 | 73.07 | 66.00 | |||||||||||||||
Dividend
payout ratio
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307.69 | 225.00 | 320.00 | 155.56 | 109.09 | |||||||||||||||
Asset
Quality Ratios:
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||||||||||||||||||||
Nonperforming
loans as a percent of total loans (4)
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0.99 | 0.69 | 0.26 | 0.12 | 0.07 | |||||||||||||||
Nonperforming
assets as a percent of total assets (4)
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1.31 | 0.88 | 0.40 | 0.09 | 0.08 | |||||||||||||||
Allowance
for loan losses as a percent of total loans
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0.41 | 0.26 | 0.24 | 0.35 | 0.36 | |||||||||||||||
Allowance
for loan losses as a percent of nonperforming
assets
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22.82 | 24.36 | 46.39 | 296.44 | 339.50 | |||||||||||||||
Regulatory
Capital Ratios:
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||||||||||||||||||||
Tangible
capital
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16.24 | 16.84 | 16.75 | 16.60 | 16.70 | |||||||||||||||
Core
capital
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16.24 | 16.84 | 16.75 | 16.60 | 16.70 | |||||||||||||||
Risk-based
capital
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32.39 | 32.53 | 32.67 | 33.29 | 34.90 | |||||||||||||||
Number
of:
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||||||||||||||||||||
Banking
offices
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6 | 6 | 6 | 6 | 4 | |||||||||||||||
(1)
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With
the exception of end of period ratios, all ratios are based on average
monthly balances during the
periods.
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(2)
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Interest
rate spread represents the difference between the weighted-average yield
on interest-earning assets and the weighted-average rate on
interest-bearing liabilities. Net interest margin represents
net interest income as a percentage of average interest-earning
assets.
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(3)
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Efficiency
ratio represents the ratio of general, administrative and other expenses
divided by the sum of net interest income and total other
income.
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(4)
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Nonperforming
loans consist of non-accrual loans and accruing loans greater than 90 days
delinquent, while nonperforming assets consist of nonperforming loans and
real estate acquired through
foreclosure.
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- 4
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Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This
discussion and analysis reflects Cheviot Financial’s financial statements and
other relevant statistical data and is intended to enhance your understanding of
our consolidated financial condition and results of operations. You
should read the information in this section in conjunction with Cheviot
Financial’s consolidated financial statements and the related notes included in
this Annual Report. The preparation of financial statements involves
the application of accounting policies relevant to the business of Cheviot
Financial. Certain of Cheviot Financial’s accounting policies are
important to the portrayal of Cheviot Financial’s financial condition, since
they require management to make difficult, complex or subjective judgments, some
of which may relate to matters that are inherently
uncertain. Estimates associated with these policies are susceptible
to material changes as a result of changes in facts and
circumstances. Facts and circumstances which could affect these
judgments include, but without limitation, changes in interest rates, in the
performance of the economy or in the financial condition of
borrowers.
General
Our
results of operations are dependent primarily on net interest income, which is
the difference between the interest income earned on our loans and securities
and our cost of funds, consisting of the interest paid on deposits and
borrowings. Results of operations are also affected by the provision
for losses on loans, loan sales and servicing activities, and service charges
and fees collected on our loan and deposit accounts. Our general,
administrative and other expense primarily consists of employee compensation and
benefits, advertising expense, data processing expense, other operating
expenses, FDIC expense, and federal income taxes. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
Recent
Developments
The U.S.
Treasury Department recently suggested legislation that would significantly
change the current bank regulatory system. The proposal would create a new
federal banking regulator, the National Bank Supervisor, and merge our current
primary federal regulator, the Office of Thrift Supervision, as well as the
Office of the Comptroller of the Currency (the primary federal regulator for
national banks) into the new federal bank regulator. The proposal would
also eliminate federal savings banks and require all federal savings banks to
elect, within six months of the effective date of the legislation, to convert to
either, a national bank, state bank or state savings
association. A federal savings bank that does not make the
election would, by operation of law, be converted to a national bank within one
year of the effective date of the legislation. Cheviot Savings Bank
is an Ohio-chartered savings and loan association, and would continue to have
its Ohio charter.
Cheviot
Financial Corp. would become a bank holding company subject to regulation and
supervision by the Board of Governors of the Federal Reserve System instead of
the Office of Thrift Supervision. As a bank holding company, Cheviot
Financial Corp. may become subject to regulatory capital requirements it is not
currently subject to as a savings and loan holding company and certain
additional restrictions on its activities. In addition, compliance with new
regulations and being supervised by one or more new regulatory agencies could
increase our expenses.
- 5
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Recent
Developments (continued)
The
Federal Deposit Insurance Corporation has adopted a rule pursuant to which all
insured depository institutions were required 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 made on December 31,
2009. Under the rule, 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 will be calculated using its
third quarter assessment base, adjusted quarterly for an estimated 5% annual
growth rate in the assessment base through the end of 2012.
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.
Critical
Accounting Policies
We
consider accounting policies involving significant judgments and assumptions by
management that have, or could have, a material impact on the carrying value of
certain assets or on income to be critical accounting policies. We
consider the accounting method used for the allowance for loan losses to be a
critical accounting policy.
The
allowance for loan losses is the estimated amount considered necessary to cover
inherent, but unconfirmed, credit losses in the loan portfolio at the balance
sheet date. The allowance is established through the provision for
losses on loans which is charged against income. In determining the
allowance for loan losses, management makes significant estimates and has
identified this policy as one of the most critical accounting policies for
Cheviot Financial.
Management
performs a quarterly evaluation of the allowance for loan
losses. Consideration is given to a variety of factors in
establishing this estimate including, but not limited to, current economic
conditions, delinquency statistics, geographic and industry concentrations, the
adequacy of the underlying collateral, the financial strength of the borrower,
results of internal loan reviews and other relevant factors. This
evaluation is inherently subjective as it requires material estimates that may
be susceptible to significant change.
- 6
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Critical Accounting
Policies (continued)
The
analysis has two components, specific and general
allocations. Specific percentage allocations can be made for
unconfirmed losses related to loans that are determined to be
impaired. Impairment is measured by determining the present value of
expected future cash flows or, for collateral-dependent loans, the fair value of
the collateral adjusted for market conditions and selling expenses. If the fair
value of the loan is less than the loan’s carrying value, a charge-off is
recorded for the difference. The general allocation is determined by segregating
the remaining loans by type of loan, risk weighting (if applicable) and payment
history. We also analyze historical loss experience, delinquency
trends, general economic conditions and geographic and industry
concentrations. This analysis establishes factors that are applied to
the loan groups to determine the amount of the general
reserve. Actual loan losses may be significantly more than the
allowances we have established which could result in a material negative effect
on our financial results.
We
classify our investments in debt and equity securities as either
held-to-maturity or available-for-sale. Securities classified as held-to
maturity are recorded at cost or amortized cost. Available-for-sale securities
are carried at fair value. We obtain our fair values from a third party
service. This service’s fair value calculations are based on quoted
market prices when such prices are available. If quoted market prices are not
available, estimates of fair value are computed using a variety of techniques,
including extrapolation from the quoted prices of similar instruments or recent
trades for thinly traded securities, fundamental analysis, or through obtaining
purchase quotes. Due to the subjective nature of the valuation process, it is
possible that the actual fair values of these investments could differ from the
estimated amounts, thereby affecting our financial position, results of
operations and cash flows. If the estimated value of investments is less than
the cost or amortized cost, we evaluate whether an event or change in
circumstances has occurred that may have a significant adverse effect on the
fair value of the investment. If such an event or change has occurred and we
determine that the impairment is other-than-temporary, we expense the impairment
of the investment in the period in which the event or change
occurred. We also consider how long a security has been in a loss
position in determining if it is other than temporarily
impaired. Management also assesses the nature of the unrealized
losses taking into consideration factors such as changes in risk –free interest
rates, general credit spread widening, market supply and demand,
creditworthiness of the issuer, and quality of the underlying
collateral.
- 7
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
This
Annual Report contains forward-looking statements, which can be identified by
the use of such words as estimate, project, believe, intend, anticipate, plan,
seek, expect and similar expressions. These forward-looking
statements include:
●
|
statements
of our goals, intentions and
expectations;
|
●
|
statements
regarding our business plans and prospects and growth and operating
strategies;
|
●
|
statements
regarding the asset quality of our loan and investment portfolios;
and
|
●
|
estimates
of our risks and future costs and
benefits.
|
These
forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following important factors
that could affect the actual outcome of future events:
●
|
significantly
increased competition among depository and other financial
institutions;
|
●
|
inflation
and changes in the interest rate environment that reduce our margins or
reduce the fair value of financial
instruments;
|
●
|
general
economic conditions, either nationally or in our market areas, which are
worse than expected;
|
●
|
adverse
changes in the securities markets;
|
●
|
legislative
or regulatory changes that adversely affect our
business;
|
●
|
our
ability to enter new markets successfully and capitalize on growth
opportunities;
|
●
|
changes
in consumer spending, borrowing and savings
habits;
|
●
|
changes
in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board and the
Public Company Accounting Oversight Board;
and
|
●
|
changes
in our organization, compensation and benefit
plans.
|
Because
of these and other uncertainties, our actual future results may be materially
different from the results anticipated by these forward-looking
statements.
- 8
-
Cheviot
Financial Corp.
AVERAGE
BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
Net
interest income represents the difference between interest income on
interest-earning assets and interest expense on interest-bearing
liabilities. Net interest income also depends on the relative amounts
of interest-earning assets and interest-bearing liabilities and the interest
rate earned or paid on them, respectively.
The
following tables set forth certain information for the years ended December 31,
2009, 2008 and 2007. For the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
is expressed both in dollars and rates. No tax equivalent adjustments
were deemed necessary based on materiality. Average balances are
based on monthly averages. In the opinion of management, monthly
averages do not differ materially from daily averages.
|
For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||
|
2009
|
|
2008
|
2007
|
||||||||||||||||||||||||||||||||
Average
|
Yield/
|
Average
|
|
Yield/
|
Average
|
Yield/
|
||||||||||||||||||||||||||||||
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
||||||||||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
Assets:
|
||||||||||||||||||||||||||||||||||||
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
Loans
receivable, net (1)
|
$ | 253,302 | $ | 14,643 | 5.78 | % | $ | 260,708 | $ | 15,436 | 5.92 | % | $ | 246,335 | $ | 15,007 | 6.09 | % | ||||||||||||||||||
Mortgage-backed
securities
|
11,080 | 437 | 3.94 | 8,505 | 464 | 5.46 | 12,444 | 693 | 5.57 | |||||||||||||||||||||||||||
Investment
securities
|
42,562 | 1,197 | 2.81 | 35,488 | 2,074 | 5.84 | 35,148 | 1,865 | 5.31 | |||||||||||||||||||||||||||
Interest-earning
deposits and other (2)
|
12,103 | 196 | 1.62 | 4,507 | 84 | 1.86 | 4,427 | 226 | 5.11 | |||||||||||||||||||||||||||
Total
interest-earning assets
|
319,047 | 16,473 | 5.16 | 309,208 | 18,058 | 5.84 | 298,354 | 17,791 | 5.96 | |||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Total
non-interest-earning assets
|
19,786 | 17,289 | 17,054 | |||||||||||||||||||||||||||||||||
Total
assets
|
$ | 338,833 | $ | 326,497 | $ | 315,408 | ||||||||||||||||||||||||||||||
Liabilities
and Shareholders’ Equity:
|
||||||||||||||||||||||||||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
Deposits
|
$ | 224,324 | 4,844 | 2.16 | $ | 212,963 | 6,727 | 3.16 | $ | 209,989 | 8,066 | 3.84 | ||||||||||||||||||||||||
FHLB
advances
|
39,783 | 1,741 | 4.38 | 39,257 | 1,718 | 4.38 | 29,630 | 1,433 | 4.84 | |||||||||||||||||||||||||||
Total interest-bearing
liabilities
|
264,107 | 6,585 | 2.49 | 252,220 | 8,445 | 3.35 | 239,619 | 9,499 | 3.96 | |||||||||||||||||||||||||||
Total
non-interest-bearing liabilities
|
6,069 | 6,535 | 5,904 | |||||||||||||||||||||||||||||||||
Total
liabilities
|
270,176 | 258,755 | 245,523 | |||||||||||||||||||||||||||||||||
Shareholders’
equity
|
68,657 | 67,742 | 69,885 | |||||||||||||||||||||||||||||||||
Total
liabilities and shareholders’ equity
|
$ | 338,833 | $ | 326,497 | $ | 315,408 | ||||||||||||||||||||||||||||||
Net
interest income
|
$ | 9,888 | $ | 9,613 | $ | 8,292 | ||||||||||||||||||||||||||||||
Interest
rate spread (3)
|
2.67 | % | 2.49 | % | 2.00 | % | ||||||||||||||||||||||||||||||
Net
interest margin (4)
|
3.10 | % | 3.11 | % | 2.78 | % | ||||||||||||||||||||||||||||||
Average
interest-earning assets to average interest-bearing
liabilities
|
120.80 | % | 122.59 | % | 124.51 | % |
(1)
|
Includes
nonaccruing loans. Interest income on loans receivable, net
includes amortized loan origination
fees.
|
(2)
|
Includes
interest-earning demand deposits, other interest-earning deposits and FHLB
stock.
|
(3)
|
Interest
rate spread represents the difference between the weighted-average yield
on interest-earning assets and the weighted-average rate on
interest-bearing liabilities.
|
(4)
|
Net
interest margin is net interest income divided by average interest-earning
assets.
|
- 9
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Rate/Volume
Analysis
The
following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
|
Year ended December 31, | |||||||||||||||||||||||
2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||
Increase
|
Increase
|
|||||||||||||||||||||||
(decrease)
|
(decrease)
|
|||||||||||||||||||||||
due
to
|
due
to
|
|||||||||||||||||||||||
|
|
Net
|
Net
|
|||||||||||||||||||||
Volume
|
Rate
|
Change
|
Volume
|
Rate
|
Change
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Interest-earnings
assets:
|
||||||||||||||||||||||||
Loans
receivable, net
|
$ | (434 | ) | $ | (359 | ) | $ | (793 | ) | $ | 857 | $ | (428 | ) | $ | 429 | ||||||||
Mortgage-backed
securities
|
120 | (147 | ) | (27 | ) | (215 | ) | (14 | ) | (229 | ) | |||||||||||||
Investment
securities
|
354 | (1,231 | ) | (877 | ) | 18 | 191 | 209 | ||||||||||||||||
Interest-earning
assets
|
124 | (12 | ) | 112 | 4 | (146 | ) | (142 | ) | |||||||||||||||
Total
interest-earning assets
|
164 | (1,749 | ) | (1,585 | ) | 664 | (397 | ) | 267 | |||||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
Deposits
|
343 | (2,226 | ) | (1,883 | ) | 113 | (1,452 | ) | (1,339 | ) | ||||||||||||||
FHLB
advances
|
23 | - | 23 | 432 | (147 | ) | 285 | |||||||||||||||||
Total
interest-bearing liabilities
|
366 | (2,226 | ) | (1,860 | ) | 545 | (1,599 | ) | (1,054 | ) | ||||||||||||||
Increase
(decrease) in net interest income
|
$ | (202 | ) | $ | 477 | $ | 275 | $ | 119 | $ | 1,202 | $ | 1,321 |
- 10
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison
of Financial Condition at December 31, 2009 and December 31,
2008
At
December 31, 2009, Cheviot Financial had total assets of $341.9 million, an
increase of $9.9 million, or 3.0%, from $332.0 million at December 31,
2008. The increase in total assets reflects an increase in investment
securities totaling $24.9 million and an increase in mortgage-backed securities
of $3.1 million, which was partially funded by the decrease in loans receivable
of $21.5 million.
Cash,
federal funds sold and interest-earning deposits in other financial institutions
totaled $11.3 million at December 31, 2009, an increase of $1.3 million, or
12.9%, from $10.0 million at December 31, 2008. Investment securities
totaled $55.9 million at December 31, 2009, an increase of $24.9 million, or
80.7%, from $30.9 million at December 31, 2008. During the year ended
December 31, 2009, investment securities purchases consisted of $76.9 million of
U.S. Government agency obligations, which were partially offset by $51.0 million
of maturities. At December 31, 2009, $55.9 million of investment
securities were classified as available for sale. As of December 31, 2009, none
of the investment securities are considered impaired.
Mortgage-backed
securities totaled $10.7 million at December 31, 2009, an increase of $3.1
million, or 41.0%, from $7.6 million at December 31, 2008. The
increase in mortgage-backed securities was due to purchases of $5.3 million,
which was partially offset by $2.2 million of principal
repayments. At December 31, 2009, $5.7 million of mortgage-backed
securities were classified as held to maturity, while $4.9 million were
classified as available for sale. As of December 31, 2009, none of
the mortgage-backed securities are considered impaired.
Loans
receivable, including loans held for sale, totaled $247.0 million at December
31, 2009, a decrease of $21.5 million, or 8.0%, from $268.5 million at December
31, 2008. The decrease resulted from loan repayments of $63.4 million
and loans sales of $23.1 million, which were partially offset by loan
originations of $42.7 million. The change in the composition of
the Corporation’s assets reflects management’s decision to take advantage of
opportunities to obtain a higher rate of return by selling certain mortgage
loans and recording gains. Cheviot Savings Bank will sell selected one- to
four-family residential fixed-rate loans to the Federal Home Loan Bank of
Cincinnati. Loans sold and serviced totaled $27.9 million at December
31, 2009. There were approximately $1.1 million of loans held for sale in our
loan portfolio at December 31, 2009.
At
December 31, 2009, the allowance for loan losses totaled $1.0 million, or 0.41%
of net loans, compared to $709,000, or 0.26% of net loans at December 31,
2008. In determining the appropriate level of our allowance for loan
losses at any point in time, management and the board of directors apply a
systematic process focusing on the risk of loss in the
portfolio. First, the loan portfolio is segregated by loan types to
be evaluated collectively and loan types to be evaluated individually.
Delinquent multi-family and commercial loans are evaluated individually for
potential impairments in their carrying value. Second, the allowance
for loan losses entails utilizing our three year historic loss experience by
applying such loss percentage to the loan types to be collectively evaluated in
the portfolio. The $185,000 increase in the provision for losses on
loans during the year ended December 31, 2009 is a reflection of the following
factors: weaker economic conditions in the greater Cincinnati area, loan
charge-offs of $487,000 and the need to allocate approximately $50,000 in
specific reserves for three residential properties with principal balances
totaling $453,000 which were acquired through foreclosure. The analysis of the
allowance for loan losses requires an element of judgment and is subject to the
possibility that the allowance may need to be increased, with a corresponding
reduction in earnings. To the best of management’s knowledge, all known and
inherent losses that are probable and that can be reasonably estimated have been
recorded at December 31, 2009.
- 11
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison
of Financial Condition at December 31, 2009 and December 31, 2008
(continued)
Nonperforming
and impaired loans totaled $2.4 million at December 31, 2009, compared to $1.8
million at December 31, 2008. At December 31, 2009,
non-performing and impaired loans were comprised of thirty-two loans secured by
one-to-four family residential real estate and one loan secured by commercial
real estate. At December 31, 2009 and December 31, 2008, real estate
acquired through foreclosure totaled $2.0 million and $1.1 million,
respectively.
The Corporation has an allowance for loan losses intended to absorb losses
inherent in our loan portfolio. The allowance for loan losses totaled 41.9% and
38.4% of nonperforming loans at December 31, 2009 and 2008,
respectively. Based on individual analyses of these loans, management
believes that the Corporation’s allowance for loan losses conforms to generally
accepted accounting principles based upon the available facts and circumstances.
However, there can be no assurance that additions to the allowance will not be
necessary in future periods, which would adversely affect our results of
operations.
Deposits
totaled $235.9 million at December 31, 2009, an increase of $19.9 million, or
9.2%, from $216.0 million at December 31, 2008. The increase in
deposits consisted of a $19.7 million increase in demand transaction and
passbook accounts and an increase in certificates of deposits of
$199,000.
Advances
from the Federal Home Loan Bank of Cincinnati decreased by $10.9 million, or
24.5%, to a total of $33.7 million at December 31, 2009. During 2009,
FHLB advances were not used as a funding source for loan originations as the
Corporation sold more loans to the FHLB.
Shareholders’
equity totaled $68.8 million at December 31, 2009, a $519,000, or 0.8%, increase
from December 31, 2008. The increase in shareholders’ equity resulted
primarily from net earnings of $1.1 million and an increase in shares acquired
by stock benefit plans of $760,000, which was partially offset the payment of
dividends of $1.3 million paid during 2009. At December 31, 2009, Cheviot
Financial had the ability to purchase an additional 364,616 shares under its
announced stock repurchase plan.
Cheviot
Savings Bank is required to maintain minimum regulatory capital pursuant to
federal regulations. At December 31, 2009, Cheviot Savings Bank’s
regulatory capital substantially exceeded all minimum regulatory capital
requirements.
- 12
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison
of Results of Operations for the Years Ended December 31, 2009 and December 31,
2008
General
Cheviot
Financial’s net earnings totaled $1.1 million for the year ended December 31,
2009, a decrease of $315,000, or 22.2%, compared to the net earnings recorded
for the year ended December 31, 2008. The decrease in net earnings
reflects a $701,000 increase in general, administrative and other expenses, a
$185,000 increase in the provision for loan losses and an increase of $14,000 in
the provision for federal income taxes, which was partially offset by a $275,000
increase in net interest income and a $310,000 increase in other
income.
Interest
Income
Total
interest income for the year ended December 31, 2009, totaled $16.5 million, a
decrease of $1.6 million, or 8.8%, compared to the year ended December 31,
2008. The decrease in interest income reflects the impact of a 68
basis point decrease in the average yield to 5.16% from 5.84%, which was
partially offset by a $9.8 million increase in the average balance of
interest-earning assets during the year ended December 31, 2009 as compared to
the year ended December 31, 2008.
Interest
income on loans decreased by $793,000, or 5.1%, for the year ended December 31,
2009. The decrease in interest income on loans reflects a $7.4
million, or 2.8%, decrease in the average balance outstanding during 2009 and a
decrease of 14 basis points in the average yield to 5.78%. Interest
income on mortgage-backed securities decreased by $27,000, or 5.8%, during the
year ended December 31, 2009, due primarily to a decrease in the average yield
of 152 basis points from 2008, which was partially offset by an increase in the
average balance outstanding of $2.6 million.
Interest
income on investment securities decreased by $877,000, or 42.3%, during the year
ended December 31, 2009, due to a decrease in the average yield of 303 basis
points from 2008, which was partially offset by an increase of $7.1 million, or
19.9%, increase in the average balance outstanding. Interest income
on other interest-earning assets increased by $112,000, or 133.3%, during the
year ended December 31, 2009. The increase was due to a $7.6 million
increase in the average balance outstanding, which was partially offset by a 24
basis point decrease in the average yield.
- 13
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison
of Results of Operations for the Year ended December 31, 2009 and December 31,
2008 (continued)
Interest
Expense
Interest
expense totaled $6.6 million for the year ended December 31, 2009, a decrease of
$1.9 million, or 22.0%, compared to the year ended December 31,
2008. The average balance of interest-bearing liabilities outstanding
increased by $11.9 million during 2009, which was partially offset by a decrease
in the average cost of liabilities of 86 basis points to 2.49% for the year
ended December 31, 2009. Interest expense on deposits totaled $4.8
million for the year ended December 31, 2009, a decrease of $1.9 million, or
28.0%, from the year ended December 31, 2008. This decrease was a
result of a decrease in the average cost of deposits of 100 basis points to
2.16% for 2009, which was partially offset by an increase in the average balance
outstanding of $11.4 million, or 5.3%, for 2009. Interest expense on
borrowings totaled $1.7 million for the year ended December 31, 2009, an
increase of $23,000, or 1.3%, from the 2008 period. This increase
resulted from an increase in the average balance of borrowings outstanding of
$526,000, or 1.3% for the year ended December 31,
2009. The decrease in the average cost of deposits and
borrowings reflects lower shorter
term interest rates in 2009 as
compared to 2008, as actions by the Federal Reserve to
reduce shorter term interest rates resulted in
a steepening of the yield curve and a
reduction of short term and medium term interest rates.
Net
Interest Income
As a
result of the foregoing changes in interest income and interest expense, net
interest income increased by $275,000, or 2.9%, during the year ended December
31, 2009 from the year ended December 31, 2008. The Savings Bank’s cost of its
liabilities decreased more significantly than the yield on its assets during
2009. The average interest rate spread increased to 2.67% for the year ended
December 31, 2009 from 2.49% for the year ended December 31,
2008. The net interest margin decreased to 3.10% for the year ended
December 31, 2009 from 3.11% for the year ended December 31, 2008.
- 14
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison
of Results of Operations for the Year ended December 31, 2009 and December 31,
2008 (continued)
Provision
for Losses on Loans
As a
result of an analysis of historical experience, the volume and type of lending
conducted by the Savings Bank, the status of past due principal and interest
payments, general economic conditions, particularly as such conditions relate to
the Savings Bank’s market area, and other factors related to the collectability
of the Savings Bank’s loan portfolio, management recorded a $853,000 provision
for losses on loans for the year ended December 31,
2009. Management’s analysis of the allowance resulted in a $668,000
provision for losses on loans for the year ended December 31,
2008. The decision to make a larger
provision for loan losses during the year
ended December 31, 2009, as compared to
recent periods, reflects the
amount necessary to maintain an
adequate allowance based on historical loss experience,
changes in the local economy, and other
external factors. These other external factors, economic
conditions, increase in delinquent loans, and collateral value changes, have had
a negative impact on non-owner occupied loans in the portfolio. These
other external factors, economic conditions and collateral value changes, have
had a negative impact on all types of loans in the portfolio. There
can be no assurance that the loan loss allowance will be sufficient to cover
losses on nonperforming loans in the future. At December 31, 2009,
the allowance for loan losses totaled $1.0 million, or 0.41% of net loans,
compared to $709,000, or 0.26% of net loans at December 31,
2008. Management believes all nonperforming loans are adequately
collateralized; however, there can be no assurance that the loan loss allowance
will be adequate to absorb losses on known nonperforming loans or that the
allowance will be adequate to cover losses on nonperforming loans in the
future.
Other
Income
Other
income totaled $813,000 for the year ended December 31, 2009, an increase of
$310,000, or 61.6%, compared to the year ended December 31, 2008. This increase
is due primarily to an increase in the gain on sale of loans of $333,000 and an
increase in other operating income of $11,000, which was partially offset by a
an increase in loss on sale of real estate acquired through foreclosure of
$54,000.
General,
Administrative and Other Expense
General,
administrative and other expense totaled $8.1 million for the year ended
December 31, 2009, an increase of $701,000, or 9.4%, compared to the year ended
December 31, 2008. This increase is a result of a $273,000, or 6.3%,
increase in employee compensation and benefits, an increase of $217,000, or
700.0%, in FDIC insurance premium expense and an increase of $133,000, or 20.6%
in other operating expense. The increase in employee compensation and
benefits is a result of the increase in compensation expense as we increased our
number of full time equivalent employees to accommodate the Corporation’s
growth. The increase in FDIC expense is a result of the special
assessment from the FDIC to replenish the Deposit Insurance Fund of
approximately $140,000. The increase in other operating expense is a
result of real estate taxes, maintenance and insurance expense on properties
acquired through foreclosure.
- 15
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison
of Results of Operations for the Year ended December 31, 2009 and December 31,
2008 (continued)
FDIC
Premiums
The FDIC
imposed an assessment against institutions for deposit
insurance. This assessment is based on
the risk category of the institution and
currently ranges from 5 to 43 basis points of
the institution’s deposits. Federal law
requires that the designated reserve ratio for the deposit insurance fund be
established by the FDIC at 1.15% to 1.50% of estimated insured
deposits. If this reserve ratio drops below 1.15% or the
FDIC expects it to do so within six months, the FDIC
must, within 90 days, establish and implement a plan to
restore the designated reserve ratio to 1.15% of
estimated insured deposits within five
years (absent extraordinary
circumstances). Final rules increased the assessment rates for all
institutions by 7 basis points and up to 50 basis points for certain financial
institutions for the first quarter of 2009. It is expected that the
FDIC will adopt a new risk based assessment system.
In
addition, the Emergency Economic Stabilization Act of 2008 (EESA) temporarily
increased the limit on FDIC insurance coverage for deposits to $250,000 through
December 31, 2013, and the FDIC took action to provide coverage for newly-issued
senior unsecured debt and non-interest bearing transaction accounts in excess of
the $250,000 limit, for which institutions will be assessed additional
premiums.
On
February 27, 2009, the FDIC announced an amendment to its restoration plan for
the Deposit Insurance Fund by imposing an emergency special assessment on all
insured financial institutions. This special assessment of $140,000 occurred on
June 30, 2009, and was payable by us on September 30, 2009. In
September 2009, the FDIC issued a Notice of Proposed Rulemaking that would
require insured institutions to prepay their estimated quarterly risk-based
assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.
The FDIC also adopted a uniform three-basis point increase in assessment rates
effective on January 1, 2011. The Corporation’s prepayment of FDIC
assessments is approximately $968,000 which will be amortized to expense over
three years.
Federal
Income Taxes
The
provision for federal income taxes totaled $606,000 for the year ended December
31, 2009, an increase of $14,000, or 2.4%, compared to the provision recorded
for the 2008 period. The effective tax rates were 35.5% and 29.5% for
the years ended December 31, 2009 and 2008, respectively. The difference between
the Corporation’s effective tax rate in the 2009 and 2008 periods and the 34%
statutory corporate rate is due primarily to the tax-exempt earnings on
bank-owned life insurance, tax-exempt interest on municipal obligations and tax
benefits for the contribution to the Cheviot Savings Bank Foundation offset by
the difference in the stock compensation deduction for tax
purposes.
- 16
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison
of Results of Operations for the Years Ended December 31, 2008 and December 31,
2007
General
Cheviot
Financial’s net earnings totaled $1.4 million for the year ended December 31,
2008, an increase of $490,000, or 52.9%, compared to the net earnings recorded
for the year ended December 31, 2007. The increase in net earnings
reflects a $1.3 million increase in net interest income, which was partially
offset by a $42,000 decrease in other income, a $73,000 increase in general,
administrative and other expenses and an increase in the provision for federal
income taxes of $164,000.
Interest
Income
Total
interest income for the year ended December 31, 2008, totaled $18.1 million, an
increase of $267,000, or 1.5%, compared to the year ended December 31,
2007. The increase in interest income reflects the impact of an
increase of $10.9 million, or 3.6%, in the average balance of interest-earning
assets outstanding during the year ended December 31, 2008 as compared to the
year ended December 31, 2007, which was partially offset by a decrease of 12
basis points in the average yield, to 5.84% from 5.96%.
Interest
income on loans increased by $429,000, or 2.9%, for the year ended December 31,
2008. The increase in interest income on loans reflects a $14.4
million, or 5.8%, increase in the average balance outstanding during 2008, which
was partially offset by a decrease of 17 basis points in the average yield to
5.92%. Interest income on mortgage-backed securities decreased by
$229,000, or 33.0%, during the year ended December 31, 2008, due primarily to a
decrease in the average balance outstanding of $3.9 million and a decrease in
the average yield of 11 basis points from 2007. Interest income on
investment securities increased by $209,000, or 11.2%, during the year ended
December 31, 2008, due to an increase in the average yield of 53 basis points
from 2007 and a $340,000, or 1.0%, increase in the average balance
outstanding. Interest income on other interest-earning assets
decreased by $142,000, or 62.8%, during the year ended December 31,
2008. The decrease was due to a 325 basis point decrease in the
average yield, which was partially offset by a $80,000 increase in the average
balance outstanding.
Interest
Expense
Interest
expense totaled $8.4 million for the year ended December 31, 2008, a decrease of
$1.1 million, or 11.1%, compared to the year ended December 31,
2007. The average balance of interest-bearing liabilities outstanding
increased by $12.6 million during 2008, which was partially offset by a decrease
in the average cost of liabilities of 61 basis points to 3.35% for the year
ended December 31, 2008. Interest expense on deposits totaled $6.7
million for the year ended December 31, 2008, a decrease of $1.3 million, or
16.6%, from the year ended December 31, 2007. This decrease was a
result of a decrease in the average cost of deposits of 68 basis points to 3.16%
for 2008, which was partially offset by an increase in the average balance
outstanding of $3.0 million, or 1.4%, for 2008. Interest expense on
borrowings totaled $1.7 million for the year ended December 31, 2008, an
increase of $285,000, or 19.9%, from the 2007 period. This increase
resulted from an increase in the average balance of borrowings outstanding of
$9.6 million, or 32.5%, which was partially offset by a 46 basis point decrease
in the average cost of borrowings for the year ended December 31, 2008 compared
to 2007. The decrease in the average cost of
deposits and borrowings reflects lower shorter
term interest rates in 2008 as
compared to 2007, as actions by the Federal Reserve to
reduce shorter term interest rates resulted in
a steepening of the yield curve and a
reduction of short term and medium term interest rates.
- 17
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison
of Results of Operations for the Year ended December 31, 2008 and December 31,
2007 (continued)
Net
Interest Income
As a
result of the foregoing changes in interest income and interest expense, net
interest income increased by $1.3 million, or 15.9%, during the year ended
December 31, 2008 from the year ended December 31, 2007. The Savings Bank’s cost
of its liabilities decreased more significantly than the yield on its assets
during 2008. The average interest rate spread increased to 2.49% for the year
ended December 31, 2008 from 2.00% for the year ended December 31,
2007. The net interest margin increased to 3.11% for the year ended
December 31, 2008 from 2.78% for the year ended December 31, 2007.
Provision
for Losses on Loans
As a
result of an analysis of historical experience, the volume and type of lending
conducted by the Savings Bank, the status of past due principal and interest
payments, general economic conditions, particularly as such conditions relate to
the Savings Bank’s market area, and other factors related to the collectability
of the Savings Bank’s loan portfolio, management recorded a $668,000 provision
for losses on loans for the year ended December 31,
2008. Management’s analysis of the allowance resulted in a $116,000
provision for losses on loans for the year ended December 31,
2007. The decision to make a larger
provision for loan losses during the year
ended December 31, 2008, as compared to
recent periods, reflects the
amount necessary to maintain an
adequate allowance based on the five year historical loss
experience and other external factors. These other
external factors, economic conditions, increase in delinquent loans, and
collateral value changes, have had a negative impact on non-owner occupied loans
in the portfolio. There can be no assurance that the loan loss
allowance will be sufficient to cover losses on nonperforming loans in the
future. At December 31, 2008, the allowance for loan losses totaled
$709,000, or 0.26% of net loans, compared to $596,000, or 0.24% of net loans at
December 31, 2007. Management believes all nonperforming loans are
adequately collateralized; however, there can be no assurance that the loan loss
allowance will be adequate to absorb losses on known nonperforming loans or that
the allowance will be adequate to cover losses on nonperforming loans in the
future.
Other
Income
Other
income totaled $503,000 for the year ended December 31, 2008, a decrease of
$42,000, or 7.7%, compared to the year ended December 31, 2007. This decrease is
due primarily to an increase in the loss on sale of real estate acquired through
foreclosure of $43,000, a loss on sale of office premises and equipment of
$15,000, and a reduction in gain on sales of loans, which losses were partially
offset by an increase in other income of $14,000.
- 18
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison
of Results of Operations for the Year ended December 31, 2008 and December 31,
2007 (continued)
General,
Administrative and Other Expense
General,
administrative and other expense totaled $7.4 million for the year ended
December 31, 2008, an increase of $73,000, or 1.0%, compared to the year ended
December 31, 2007. This increase is a result of a $55,000, or 6.1%,
increase in property, payroll, and other taxes and an increase of $21,000, or
3.7%, in occupancy and equipment expenses. The increase in property,
payroll and other taxes is due primarily to an increase in the Ohio franchise
tax. The increase in occupancy and equipment expense was due
primarily to expense incurred for routine maintenance and repair on our six
branch facilities, including furniture and fixtures.
Federal
Income Taxes
The
provision for federal income taxes totaled $592,000 for the year ended December
31, 2008, an increase of $164,000, or 38.3%, compared to the provision recorded
for the 2007 period. The increase resulted primarily from the
increase in earnings before taxes of $654,000, or 48.3%. The
effective tax rates were 29.5% and 31.6% for the years ended December 31, 2008
and 2007, respectively.
- 19
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management
of Market Risk
Qualitative
Analysis
Our most
significant form of market risk is interest rate risk. The primary
objective of our interest rate risk policy is to manage the exposure of net
interest income to changes in interest rates. Our board of directors
and management evaluates the interest rate risk inherent in certain assets and
liabilities, determines the level of risk appropriate given our business
strategy, operating environment, capital and liquidity requirements and
performance objectives and modifies lending, investing, deposit and borrowing
strategies accordingly. Our board of directors reviews management’s
activities and strategies, the effect of those strategies on the net portfolio
value, and the effect that changes in market interest rates would have on net
portfolio value. During 2009, short term interest rates declined,
which are used to price our deposit products and are used in determining our
cost of borrowings, medium and long term interest rates increased, which are
used to determine the pricing of our loan products. This has resulted
in a increase of our interest rate spread. Consequently, our net
interest income increased in 2009 as compared to 2008.
We
actively monitor interest rate risk in connection with our lending, investing,
deposit and borrowing activities. We emphasize the origination of
residential and multi-family fixed-rate mortgage loans, including 15, 20 and 30
year first mortgage loans, residential, multi-family and commercial real estate
adjustable-rate loans, construction loans and consumer
loans. Depending on market interest rates and our capital and
liquidity position, we may sell our newly originated fixed-rate mortgage loans
on a servicing-retained or servicing-released basis. We also invest
in short-term securities, which generally have lower yields compared to
longer-term investments.
Quantitative
Analysis
As part
of its monitoring procedures, the Asset and Liability Management Committee
regularly reviews interest rate risk by analyzing the impact of alternative
interest rate environments on the market value of portfolio equity, which is
defined as the net present value of an institution’s existing assets,
liabilities and off-balance-sheet instruments, and evaluating such impacts
against the maximum potential changes in market value of portfolio equity that
are authorized by the Savings Bank’s board of directors.
The
Office of Thrift Supervision provides the Savings Bank with the information
presented in the following tables. They present the change in the
Savings Bank’s net portfolio value (“NPV”) at December 31, 2009 and 2008, that
would occur upon an immediate change in interest rate based on Office of Thrift
Supervision assumptions, but without effect to any steps that management might
take to counteract that change. The application of the methodology
attempts to quantify interest rate risk as the change in NPV which would result
from a theoretical change in market interest rates of 100, 200 and 300 basis
points. Generally, NPV is the discounted present value of the
difference between incoming cash flows on interest-earning assets and outgoing
cash flows on interest-bearing liabilities.
- 20
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Quantitative Analysis
(continued)
|
|||||||||||||||||||||
December 31, 2009 | |||||||||||||||||||||
Change
in
|
|||||||||||||||||||||
Interest
Rates in
|
|||||||||||||||||||||
Basis
Points
|
|
Net Portfolio Value | |||||||||||||||||||
(“bp”) | Net Portfolio Value(3) | as% of PV of Assets(4) | |||||||||||||||||||
(Rate
Shock
|
|
||||||||||||||||||||
in
Rates)(1)
|
$Amount
|
$Change
|
%
Change
|
NPV
Ratio(5)
|
Change
|
||||||||||||||||
(In
thousands)
|
|||||||||||||||||||||
+300
|
bp | $ | 46,959 | $ | (20,354 | ) | (30.2 | %) | 14.44 | % | (462 | ) bp | |||||||||
+200
|
bp | 55,227 | (12,086 | ) | (18.0 | ) | 16.44 | (261 | ) | ||||||||||||
+100
|
bp | 62,446 | (4,866 | ) | (7.2 | ) | 18.07 | (99 | ) | ||||||||||||
0
|
bp | 67,313 | -- | -- | 19.06 | -- | |||||||||||||||
-100
|
bp | 69,839 | 2,527 | 3.8 | 19.48 | 42 | |||||||||||||||
-200
|
bp(2) | -- | -- | -- | -- | -- | |||||||||||||||
December
31, 2008
|
|||||||||||||||||||||
Change
in
|
|
||||||||||||||||||||
Interest
Rates in
|
|||||||||||||||||||||
Basis
Points
|
|
|
Net Portfolio Value | ||||||||||||||||||
(“bp”) | Net Portfolio Value(3) | as% of PV of Assets(4) | |||||||||||||||||||
(Rate
Shock
|
|
||||||||||||||||||||
in
Rates)(1)
|
$Amount
|
$Change
|
%
Change
|
NPV
Ratio(5)
|
Change
|
||||||||||||||||
(In
thousands)
|
|||||||||||||||||||||
+300
|
bp | $ | 45,589 | $ | (12,509 | ) | (21.5 | %) | 14.19 | % | (269 | ) bp | |||||||||
+200
|
bp | 51,957 | (6,141 | ) | (10.6 | ) | 15.71 | (117 | ) | ||||||||||||
+100
|
bp | 56,292 | (1,806 | ) | (3.1 | ) | 16.62 | (26 | ) | ||||||||||||
0
|
bp | 58,098 | -- | -- | 16.88 | -- | |||||||||||||||
-100
|
bp | 56,808 | (1,290 | ) | (2.2 | ) | 16.39 | (49 | ) | ||||||||||||
-200
|
bp(2) | -- | -- | -- | -- | -- |
(1)
|
Assumes
an instantaneous uniform change in interest rates at all
maturities.
|
(2)
|
Not
meaningful because some market rates would compute at a rate less than
zero.
|
(3)
|
Net
portfolio value represents the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and
outgoing cash flows on interest-bearing
liabilities.
|
(4)
|
Present
value of assets represents the discounted present value of incoming cash
flows on interest-earning assets.
|
(5)
|
NPV
Ratio represents the net portfolio value divided by the present value of
assets.
|
The model
reflects that the Savings Bank’s NPV is more sensitive to an increase in
interest rates than a decrease in interest rates. The above table
indicates that as of December 31, 2009, in the event of a 100 basis point
increase in interest rates, we would experience a 7.2%, or $4.9 million,
decrease in net portfolio value. In the event of a 100 basis point
decrease in interest rates, we would experience a 3.8%, or $2.5 million,
increase in net portfolio value. However, given the current level of
market interest rates and the low probability of further significant declines in
absolute rates, we did not calculate net portfolio value for interest rate
decreases of greater than 200 basis points.
- 21
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Quantitative
Analysis (continued)
Certain
shortcomings are inherent in the methodologies used in the above interest rate
risk measurement. Modeling changes in net portfolio value requires
the making of certain assumptions regarding prepayment and deposit decay rates,
which may or may not reflect the manner in which actual yields and costs respond
to changes in market interest rates. While we believe such
assumptions to be reasonable, there can be no assurance that assumed prepayment
rates and decay rates will approximate actual future loan prepayment and deposit
withdrawal activity. Moreover, the NPV table presented assumes that
the composition of our interest- sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV table
provides an indication of our interest rate risk exposure at a particular point
in time, such measurement is not intended to and does not provide a precise
forecast of the effect of changes in market interest rates on our net portfolio
value and will differ from actual results.
Liquidity
and Capital Resources
Liquidity
describes our ability to meet the financial obligations that arise in the
ordinary course of business. Liquidity is primarily needed to meet
the borrowing and deposit withdrawal requirements of our customers and to fund
current and planned expenditures. Our primary sources of funds are
deposits, scheduled amortization and prepayments of loan principal and
mortgage-backed securities, maturities and calls of securities and funds
provided by our operations. In addition, we may borrow from the
Federal Home Loan Bank of Cincinnati. At December 31, 2009 and 2008,
we had $33.7 million and $44.6 million, respectively, in outstanding borrowings
from the Federal Home Loan Bank of Cincinnati and had the capacity to increase
such borrowings at those dates by approximately $109.3 million and $99.3
million, respectively.
Loan
repayments and maturing securities are a relatively predictable source of
funds. However, deposit flows, calls of securities and prepayments of
loans and mortgage-backed securities are strongly influenced by interest rates,
general and local economic conditions and competition in the
marketplace. These factors reduce the predictability of these sources
of funds.
Our
primary investing activities are the origination of one- to four-family real
estate loans, commercial real estate, construction and consumer loans, and the
purchase of securities. For the year ended December 31, 2009, loan
originations totaled $65.8 million, compared to $69.6 million for the year ended
December 31, 2008. Purchases of investment securities totaled $76.9
million for the year ended December 31, 2009 and $19.0 million for the year
ended December 31, 2008.
Total
deposits increased $19.9 million during the year ended December 31, 2009, while
total deposits decreased $3.5 million during the year ended December 31,
2008. Deposit flows are affected by the level of interest rates, the
interest rates and products offered by competitors and other
factors. At December 31, 2009, certificates of deposit scheduled to
mature within one year totaled $100.1 million. Our ability to retain these
deposits will be determined in part by the interest rates we are willing to pay
on such deposits.
- 22
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources
(continued)
The
following table sets forth information regarding the Corporation’s obligations
and commitments to make future payments under contract as of December 31,
2009.
Payments
due by period
|
||||||||||||||||||||
Less
|
More
than
|
More
than
|
More
|
|||||||||||||||||
than
|
1-3 | 3-5 |
than
|
|||||||||||||||||
1
year
|
years
|
years
|
5
years
|
Total
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Contractual
obligations:
|
||||||||||||||||||||
Advances
from the Federal Home Loan Bank
|
$ | 9,000 | $ | 2,023 | $ | 10,760 | $ | 11,889 | $ | 33,672 | ||||||||||
Certificates
of deposit
|
100,050 | 30,770 | 11,013 | - | 141,833 | |||||||||||||||
|
||||||||||||||||||||
Amount
of loan commitments and expiration
|
||||||||||||||||||||
per
period:
|
||||||||||||||||||||
Commitments
to originate one- to four-family loans
|
2,779 | - | - | - | 2,779 | |||||||||||||||
Home
equity lines of credit
|
12,841 | - | - | - | 12,841 | |||||||||||||||
Undisbursed
loans in process
|
2,696 | - | - | - | 2,696 | |||||||||||||||
Total
contractual obligations
|
$ | 127,366 | $ | 32,793 | $ | 21,773 | $ | 11,889 | $ | 193,821 |
We are
committed to maintaining a strong liquidity position. We monitor our
liquidity position on a daily basis. We anticipate that we will have
sufficient funds to meet our current funding commitments. Based on
our deposit retention experience and current pricing strategy, we anticipate
that a significant portion of maturing time deposits will be
retained.
At
December 31, 2009 and 2008, we exceeded all of the applicable regulatory capital
requirements. Our core (Tier 1) capital was $54.6 million and $55.9
million, or 16.2% and 16.8% of total assets, at December 31, 2009 and 2008,
respectively. In order to be classified as “well-capitalized” under
federal banking regulations, we were required to have core capital of at least
$20.1 million, or 6.0% of assets, as of December 31, 2009. To be
classified as a well-capitalized savings bank, we must also have a ratio of
total risk-based capital to risk-weighted assets of at least
10.0%. At December 31, 2009 and 2008, we had a total risk-based
capital ratio of 32.9% and 32.5%, respectively.
- 23
-
Cheviot
Financial Corp.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Impact
of Inflation and Changing Prices
The
consolidated financial statements and related consolidated financial data
presented herein regarding Cheviot Financial have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which generally require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial
companies, virtually all of Cheviot Financial’s assets and liabilities are
monetary in nature. As a result, interest rates generally have a more
significant impact on Cheviot Financial’s performance than does the effect of
inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, because
such prices are affected by inflation to a larger extent than interest
rates.
- 24
-
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Cheviot Financial Corp. (the “Corporation”) is responsible for
establishing and maintaining adequate internal control over financial reporting.
The Corporation’s internal control system was designed to provide reasonable
assurance to the Corporation’s management and Board of Directors regarding the
preparation and fair presentation of published financial
statements.
The
Corporation’s management assessed the effectiveness of the Corporation’s
internal control over financial reporting as of December 31, 2009. In making
this assessment, the Corporation’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on its assessment, the
Corporation’s management believes that as of December 31, 2009, the
Corporation’s internal control over financial reporting was effective based on
those criteria.
This
annual report does not include an attestation report of the Corporation’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Corporation’s registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the Corporation to provide
only management’s report in this annual report.
![]() |
![]() |
||
Thomas J. Linneman | Scott T. Smith | ||
President
and Chief Executive Officer
|
Chief
Financial Officer
|
||
(principal
financial officer and principal
|
|||
accounting
officer)
|
March 17,
2010
- 25
-
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Cheviot
Financial Corp.
We have
audited the accompanying consolidated statements of financial condition of
Cheviot Financial Corp. as of December 31, 2009 and 2008 and the related
consolidated statements of earnings, comprehensive income, shareholders’ equity
and cash flows for the year ended December 31, 2009, 2008, and
2007. These consolidated financial statements are the responsibility
of the Corporation’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Corporation is not required to have, nor were we engaged to perform an audit of
its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the
Corporation’s internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cheviot
Financial Corp. as of December 31, 2009 and 2008, and the consolidated results
of its operations and its cash flows for the years ended December 31, 2009,
2008, and 2007, in conformity with accounting principles generally accepted in
the United States of America.

Cincinnati,
Ohio
March 17,
2010
- 26
-
CHEVIOT
FINANCIAL CORP.
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
December
31, 2009 and 2008
(In
thousands)
ASSETS
|
2009
|
2008
|
||||||
Cash
and due from banks
|
$ | 3,217 | $ | 4,192 | ||||
Federal
funds sold
|
4,582 | 4,063 | ||||||
Interest-earning
deposits in other financial institutions
|
3,484 | 1,758 | ||||||
Cash
and cash equivalents
|
11,283 | 10,013 | ||||||
Investment
securities available for sale - at fair value
|
55,851 | 23,909 | ||||||
Investment
securities held to maturity - at cost, approximate market
value of $- and $7,074 at December 31, 2009 and 2008,
respectively
|
- | 7,000 | ||||||
Mortgage-backed
securities available for sale - at fair value
|
4,920 | 648 | ||||||
Mortgage-backed
securities held to maturity - at cost, approximate market
value of $5,816 and $6,830 at December 31, 2009 and 2008,
respectively
|
5,744 | 6,915 | ||||||
Loans
receivable - net
|
245,905 | 267,754 | ||||||
Loans
held for sale-at lower of cost or market
|
1,097 | 729 | ||||||
Real
estate acquired through foreclosure - net
|
2,048 | 1,064 | ||||||
Office
premises and equipment - at depreciated cost
|
4,889 | 4,969 | ||||||
Federal
Home Loan Bank stock - at cost
|
3,369 | 3,369 | ||||||
Accrued
interest receivable on loans
|
1,074 | 1,159 | ||||||
Accrued
interest receivable on mortgage-backed securities
|
36 | 32 | ||||||
Accrued
interest receivable on investments and interest-bearing
deposits
|
322 | 466 | ||||||
Prepaid
expenses and other assets
|
1,591 | 297 | ||||||
Bank-owned
life insurance
|
3,653 | 3,516 | ||||||
Prepaid
federal income taxes
|
78 | 160 | ||||||
Total
assets
|
$ | 341,860 | $ | 332,000 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Deposits
|
$ | 235,904 | $ | 216,048 | ||||
Advances
from the Federal Home Loan Bank
|
33,672 | 44,604 | ||||||
Advances
by borrowers for taxes and insurance
|
1,501 | 1,464 | ||||||
Accrued
interest payable
|
136 | 172 | ||||||
Accounts
payable and other liabilities
|
1,625 | 1,069 | ||||||
Deferred
federal income taxes
|
272 | 412 | ||||||
Total
liabilities
|
273,110 | 263,769 | ||||||
Commitments
and contingencies
|
||||||||
Shareholders’
equity
|
||||||||
Preferred
stock - authorized 5,000,000 shares, $.01 par value; none
issued
|
||||||||
Common
stock - authorized 30,000,000 shares, $.01 par value;
|
||||||||
9,918,751
shares issued at December 31, 2009 and 2008
|
99 | 99 | ||||||
Additional
paid-in capital
|
43,819 | 43,625 | ||||||
Shares
acquired by stock benefit plans
|
(2,069 | ) | (2,829 | ) | ||||
Treasury
stock - at cost, 1,050,045 and 1,046,247 shares
|
||||||||
at
December 31, 2009 and 2008
|
(12,828 | ) | (12,799 | ) | ||||
Retained
earnings - restricted
|
40,109 | 40,276 | ||||||
Accumulated
comprehensive loss, unrealized losses on securities
|
||||||||
available
for sale, net of tax benefits
|
(380 | ) | (141 | ) | ||||
Total
shareholders’ equity
|
68,750 | 68,231 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 341,860 | $ | 332,000 |
The
accompanying notes are an integral part of these statements.
- 27
-
CHEVIOT
FINANCIAL CORP.
CONSOLIDATED
STATEMENTS OF EARNINGS
For the
years ended December 31, 2009, 2008 and 2007
(In
thousands, except per share data)
2009
|
2008
|
2007
|
||||||||||
Interest
income
|
||||||||||||
Loans
|
$ | 14,643 | $ | 15,436 | $ | 15,007 | ||||||
Mortgage-backed
securities
|
437 | 464 | 693 | |||||||||
Investment
securities
|
1,197 | 2,074 | 1,865 | |||||||||
Interest-earning
deposits and other
|