Attached files

file filename
10-K - FORM 10-K - CHEVIOT FINANCIAL CORPt67373_10k.htm
EX-32 - EXHIBIT 32 - CHEVIOT FINANCIAL CORPex32.htm
EX-23.1 - EXHIBIT 23.1 - CHEVIOT FINANCIAL CORPex23-1.htm
EX-31.2 - EXHIBIT 31.2 - CHEVIOT FINANCIAL CORPex31-2.htm
EX-31.1 - EXHIBIT 31.1 - CHEVIOT FINANCIAL CORPex31-1.htm

Exhibit 13
 
ANNUAL REPORT TO SHAREHOLDERS
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(cheviot logo)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2009 Annual Report
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
TABLE OF CONTENTS
 
     
   
Page
     
President’s Letter to Shareholders and Customers
 
1
     
Business of Cheviot Financial Corp.
 
2
     
Financial Highlights
 
3
     
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
5
     
Financial Statements:
   
Management’s Annual Report on Internal Control Over Financial Reporting
 
25
Report of Independent Registered Public Accounting Firm
 
26
Consolidated Statements of Financial Condition
 
27
Consolidated Statements of Earnings
 
28
Consolidated Statements of Comprehensive Income
 
29
Consolidated Statements of Shareholders’ Equity
 
30
Consolidated Statements of Cash Flows
 
31-32
Notes to Consolidated Financial Statements
 
33
     
Directors and Officers
 
64
     
Investor and Corporate Information
 
65
     
Office Locations
 
66
 
 
 

 
 
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
       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:
 
a 98-year history of providing financial products and services to individuals, families and small business customers in southwestern Ohio;
 
a commitment to single family residential mortgage lending;
 
maintaining capital strength and exceeding regulatory “well capitalized” capital requirements; and
 
a business strategy designed to expand our banking relationships with existing and future customers.
 
- 2 -


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,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
 
 
 (In thousands)
 
Selected Financial Condition Data:
                             
Total assets
  $ 341,860     $ 332,000     $ 319,060     $ 309,780     $ 291,791  
Cash and cash equivalents
    11,283       10,013       9,450       5,490       9,103  
Investment securities available for sale
    55,851       23,909       12,178       9,085       -  
Investment securities held to maturity – at cost
          7,000       23,000       25,099       27,084  
Mortgage-backed securities available for sale
    4,920       648       814       1,042       1,269  
Mortgage-backed securities held to maturity – at cost
    5,744       6,915       9,500       14,237       20,285  
Loans receivable, net (1)
    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
    33,672       44,604       28,665       29,236       33,209  
Shareholders’ equity
    68,750       68,231       67,920       72,200       74,810  
       
   
For the Year Ended
 
   
December 31,
 
     2009      2008      2007      2006      2005  
    (In thousands, except per share data)  
Selected Operating Data:
                                       
Total interest income
  $ 16,473     $ 18,058     $ 17,791     $ 16,509     $ 14,408  
Total interest expense
    6,585       8,445       9,499       7,782       5,129  
Net interest income
    9,888       9,613       8,292       8,727       9,279  
Provision for losses on loans
    853       668       116       25       97  
Net interest income after provision for losses on loans
    9,035       8,945       8,176       8,702       9,182  
Total other income
    813       503       545       538       445  
Total general, administrative and other expense
    8,141       7,440       7,367       6,770       6,418  
Earnings before income taxes
    1,707       2,008       1,354       2,470       3,209  
Federal income taxes
    606       592       428       774       1,056  
Net earnings
  $ 1,101     $ 1,416     $ 926     $ 1,696     $ 2,153  
 
Earnings per share – basic and diluted
  $ 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 -

 
Cheviot Financial Corp.
 
SELECTED FINANCIAL AND OTHER DATA (CONTINUED)
 

  
   
At or For the
 
   
Year Ended
 
   
December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
Selected Financial Ratios and Other Data:(1)
                             
Performance Ratios:
                             
Return on average assets
    0.32 %     0.43 %     0.29 %     0.56 %     0.76 %
Return on average equity
    1.60       2.09       1.33       2.32       2.79  
Average equity to average assets
    20.26       20.75       22.16       24.21       27.17  
Equity to total assets at end of period
    20.11       20.55       21.29       23.31       25.64  
Interest rate spread (2)
    2.67       2.49       2.00       2.27       2.72  
Net interest margin (2)
    3.10       3.11       2.78       3.03       3.39  
Average interest-earning assets to average interest-bearing liabilities
    120.80       122.59       124.51       128.42       135.63  
Total general, administrative and other expenses to average total assets
    2.40       2.28       2.34       2.24       2.26  
Efficiency ratio (3)
    76.08       73.55       83.37       73.07       66.00  
Dividend payout ratio
    307.69       225.00       320.00       155.56       109.09  
Asset Quality Ratios:
                                       
Nonperforming loans as a percent of total loans (4)
    0.99       0.69       0.26       0.12       0.07  
Nonperforming assets as a percent of total assets (4)
    1.31       0.88       0.40       0.09       0.08  
Allowance for loan losses as a percent of total loans
    0.41       0.26       0.24       0.35       0.36  
Allowance for loan losses as a percent of nonperforming assets
    22.82       24.36       46.39       296.44       339.50  
Regulatory Capital Ratios:
                                       
Tangible capital
    16.24       16.84       16.75       16.60       16.70  
Core capital
    16.24       16.84       16.75       16.60       16.70  
Risk-based capital
    32.39       32.53       32.67       33.29       34.90  
Number of:
                                       
Banking offices
    6       6       6       6       4  
                                         


 
(1)
With the exception of end of period ratios, all ratios are based on average monthly balances during the periods.
 
(2)
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.
 
(3)
Efficiency ratio represents the ratio of general, administrative and other expenses divided by the sum of net interest income and total other income.
 
(4)
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.
 
- 4 -


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.
 
GRAPHIC
 
GRAPHIC
 
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.
 
GRAPHIC
 
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