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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended  September 30, 2011   
 
OR 
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from ____________ to _______________
 
Commission File No. 0-50529
CHEVIOT FINANCIAL CORP. 
(Exact name of registrant as specified in its charter)
 
Federal
 
56-2423720
 
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)
 
3723 Glenmore Avenue, Cincinnati, Ohio  45211
(Address of principal executive office)
 
Registrant’s telephone number, including area code: (513) 661-0457
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x                      No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes x                      No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one.)
 
Large accelerated filer o                  Accelerated filer   o                   Non-accelerated filer   o
 
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o                      No x
 
As of November 14, 2011, the latest practicable date, 8,864,908 shares of the registrant’s common stock, $.01 par value, were issued and outstanding.
 
 
Page 1 of 38

 
 
INDEX
 
       
Page
         
PART I
-
FINANCIAL INFORMATION
   
         
   
Consolidated Statements of Financial Condition
 
3
         
   
Consolidated Statements of Earnings
 
4
         
   
Consolidated Statements of Comprehensive Income
 
5
         
   
Consolidated Statements of Cash Flows
 
6
         
   
Notes to Consolidated Financial Statements
 
8
         
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
35
         
   
Quantitative and Qualitative Disclosures about Market Risk
 
45
         
   
Controls and Procedures
 
45
         
PART II
-
OTHER INFORMATION
 
46
         
SIGNATURES
     
48

 
2

 
 
Cheviot Financial Corp.
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(In thousands, except share data)
 
   
September 30,
   
December 31,
 
 
 
2011
   
2010
 
   
(Unaudited)
       
             
ASSETS
               
                 
Cash and due from banks
  $ 8,884     $ 5,776  
Federal funds sold
    20,933       5,924  
Interest-earning deposits in other financial institutions
    15,384       6,449  
Cash and cash equivalents
    45,201       18,149  
                 
Investment securities available for sale - at fair value
    90,748       88,382  
Mortgage-backed securities available for sale - at fair value
    8,015       4,279  
Mortgage-backed securities held to maturity - at cost, approximate market value of $4,498 and $4,916 at September 30, 2011 and December 31, 2010, respectively
    4,340       4,779  
Loans receivable - net
    394,915       220,998  
Loans held for sale - at lower of cost or market
    2,545       4,440  
Real estate acquired through foreclosure - net
    4,190       2,007  
Office premises and equipment - at depreciated cost
    10,063       4,610  
Federal Home Loan Bank stock - at cost
    8,366       3,375  
Accrued interest receivable on loans
    1,661       925  
Accrued interest receivable on mortgage-backed securities
    29       23  
Accrued interest receivable on investments and interest-earning deposits
    421       392  
Goodwill
    10,309       -  
Core deposit intangible - net
    1,118       -  
Prepaid expenses and other assets
    4,312       1,510  
Bank-owned life insurance
    10,246       3,791  
Prepaid federal income taxes
    885       409  
Deferred federal income taxes
    3,152       -  
                 
Total assets
  $ 600,516     $ 358,069  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
Deposits
  $ 480,390     $ 257,852  
Advances from the Federal Home Loan Bank
    42,024       27,300  
Advances by borrowers for taxes and insurance
    1,772       1,440  
Accrued interest payable
    163       99  
Accounts payable and other liabilities
    4,037       1,955  
Deferred federal income taxes
    -       4  
Total liabilities
    528,386       288,650  
                 
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 September 30, 2011 and December 31, 2010
    99       99  
Additional paid-in capital
    43,870       43,878  
Shares acquired by stock benefit plans
    (1,270 )     (1,302 )
Treasury stock - at cost, 1,053,843 shares at September 30, 2011 and December 31, 2010
    (12,859 )     (12,860 )
Retained earnings - restricted
    41,855       40,655  
Accumulated comprehensive income (loss), unrealized gains (losses) on securities available for sale, net of related tax effects
    435       (1,051 )
Total shareholders’ equity
    72,130       69,419  
                 
Total liabilities and shareholders’ equity
  $ 600,516     $ 358,069  
 
See accompanying notes to consolidated financial statements.
 
 
3

 

Cheviot Financial Corp.
 
CONSOLIDATED STATEMENTS OF EARNINGS
 
 (In thousands, except per share data)
 
   
Nine months ended
   
Three months ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
 
Interest income
                       
Loans
  $ 14,236     $ 10,214     $ 5,384     $ 3,301  
Mortgage-backed securities
    208       228       70       66  
Investment securities
    1,624       1,285       591       436  
Interest-earning deposits and other
    222       115       85       38  
Total interest income
    16,290       11,842       6,130       3,841  
                                 
Interest expense
                               
Deposits
    3,503       2,629       1,286       844  
Borrowings
    912       1,004       297       286  
Total interest expense
    4,415       3,633       1,583       1,130  
                                 
Net interest income
    11,875       8,209       4,547       2,711  
                                 
Provision for losses on loans
    400       250       200       150  
                                 
Net interest income after provision for losses on loans
    11,475       7,959       4,347       2,561  
                                 
Other income (expense)
                               
Rental
    91       48       33       17  
Gain on sale of loans
    429       389       204       306  
Gain (loss) on sale of real estate acquired through foreclosure
    75       (23 )     (47 )     (1 )
Earnings on bank-owned life insurance
    208       104       84       35  
Other operating
    1,086       324       428       116  
Total other income
    1,889       842       702       473  
                                 
General, administrative and other expense
                               
Employee compensation and benefits
    4,774       3,286       1,652       1,034  
Occupancy and equipment
    948       503       413       180  
Property, payroll and other taxes
    892       732       294       233  
Data processing
    381       175       161       63  
Legal and professional
    712       469       170       233  
Advertising
    367       150       87       50  
FDIC expense
    481       214       177       67  
Other operating
    1,651       596       682       201  
Total general, administrative and other expense
    10,206       6,125       3,636       2,061  
                                 
Earnings before income taxes
    3,158       2,676       1,413       973  
                                 
Federal income taxes
                               
Current
    (243 )     785       168       254  
Deferred
    977       127       276       36  
Total federal income taxes
    734       912       444       290  
                                 
NET EARNINGS
  $ 2,424     $ 1,764     $ 969     $ 683  
                                 
EARNINGS PER SHARE
                               
Basic
  $ .28     $ .20     $ .11     $ .08  
                                 
Diluted
  $ .28     $ .20     $ .11     $ .08  
                                 
Dividends per common share
  $ .36     $ .33     $ .12     $ .11  
 
See accompanying notes to consolidated financial statements.
 
 
4

 
 
Cheviot Financial Corp.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the nine and three months ended September 30, 2011 and 2010
 (In thousands)
 
   
For the nine months
   
For the three months
 
   
ended September 30,
   
ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
 
Net earnings for the period
  $ 2,424     $ 1,764     $ 969     $ 683  
Other comprehensive income, net of tax expense:
                               
Unrealized holding gains on securities during the period, net of tax expense of $766 and $369 for the nine months ended September 30, 2011 and 2010, respectively, and $120 and $53 for the three months ended September 30, 2011 and 2010, respectively
    1,486       717       232       102  
                                 
Comprehensive income
  $ 3,910     $ 2,481     $ 1,201     $ 785  
                                 
Accumulated comprehensive income
  $ 435     $ 337     $ 435     $ 337  
                                 
See accompanying notes to consolidated financial statements.
 
 
5

 
 
Cheviot Financial Corp.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the nine months ended September 30, 2011 and 2010
 (In thousands)
 
   
2011
   
2010
 
  (Unaudited)
Cash flows from operating activities:
           
Net earnings for the period
  $ 2,424     $ 1,764  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Amortization of premiums and discounts on investment and mortgage-backed securities, net
    (81 )     21  
Depreciation
    387       240  
Amortization expense related to stock benefit plans
    10       380  
Amortization of deferred loan origination fees - net
    88       39  
Amortization of intangible assets
    180       -  
Amortization of fair value adjustments
    (1,267 )     -  
Proceeds from sale of loans in the secondary market
    37,186       15,354  
Loans originated for sale in the secondary market
    (34,897 )     (18,104 )
Gain on sale of loans
    (429 )     (389 )
(Gain) loss on sale of real estate acquired through foreclosure
    (75 )     23  
Impairment on real estate acquired through foreclosure
    358       102  
Federal Home Loan Bank stock dividends
    -       (6 )
Earnings on bank-owned life insurance
    (208 )     (104 )
Provision for losses on loans
    400       250  
Increase (decrease) in cash, net of acquisition, due to changes in:
               
Accrued interest receivable on loans
    (20 )     64  
Accrued interest receivable on mortgage-backed securities
    18       10  
Accrued interest receivable on investments and interest-earning deposits
    100       (10 )
Prepaid expenses and other assets
    267       (45 )
Accrued interest payable
    (692 )     (36 )
Accounts payable and other liabilities
    (2,516 )     35  
Federal income taxes (benefits)
               
Current
    560       (110 )
Deferred
    977       127  
Net cash provided by (used in) operating activities
    2,770       (395 )
                 
Cash flows used in investing activities:
               
Principal repayments on loans
    33,500       37,814  
Loan disbursements
    (13,473 )     (23,785 )
Purchase of investment securities – available for sale
    (28,346 )     (76,670 )
Proceeds from maturity of investment securities – available for sale
    44,050       72,101  
Principal repayments on mortgage-backed securities – available for sale
    1,037       542  
Principal repayments on mortgage-backed securities – held to maturity
    439       740  
Additions to real estate acquired through foreclosure
    (100 )     (96 )
Proceeds from sale of real estate acquired through foreclosure
    2,388       531  
Purchase of office premises and equipment
    (913 )     (34 )
Cash paid for acquisition, net of cash received
    (4,200 )     -  
Net cash provided by investing activities
    34,382       11,143  
                 
Cash flows provided by financing activities:
               
Net increase in deposits – net of acquisition
    1,813       11,877  
Proceeds from Federal Home Loan Bank advances – net of acquisition
    11,000       10,000  
Repayments on Federal Home Loan Bank advances – net of acquisition
    (19,254 )     (14,969 )
Advances by borrowers for taxes and insurance – net of acquisition
    (960 )     (481 )
Repayments on other borrowings
    (1,490 )     -  
Treasury stock repurchases
    -       (31 )
Stock option expense, net
    15       91  
Dividends paid on common stock
    (1,224 )     (1,122 )
Net cash provided by (used in) financing activities
    (10,100 )     5,365  
                 
Net increase in cash and cash equivalents
    27,052       16,113  
Cash and cash equivalents at beginning of period
    18,149       11,283  
Cash and cash equivalents at end of period
  $ 45,201     $ 27,396  
 
See accompanying notes to consolidated financial statements.
 
 
6

 
 
Cheviot Financial Corp.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
For the nine months ended September 30, 2011 and 2010
 (In thousands)
 
   
2011
   
2010
 
   
(Unaudited)
 
             
Supplemental disclosure of cash flow information:
           
Cash paid during the period for:
           
Federal income taxes
  $ 235     $ 794  
                 
Interest on deposits and borrowings
  $ 4,479     $ 3,597  
                 
Supplemental disclosure of noncash investing activities:
               
Transfer of loans to real estate acquired through foreclosure
  $ 2,350     $ 181  
                 
Loans originated upon sales of real estate acquired through foreclosure
  $ 102     $ -  
                 
Recognition of mortgage servicing rights
  $ 140     $ 118  
 
See accompanying notes to consolidated financial statements.
 
 
7

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
For the three and nine months ended September 30, 2011 and 2010
 
1.       Basis of Presentation
 
Cheviot Financial Corp. (“Cheviot Financial” or the “Corporation”) is a savings and loan holding company, the principal asset of which consists of its ownership of Cheviot Savings Bank (the “Savings Bank”).  The Savings Bank conducts a general banking business in southwestern Ohio which consists of attracting deposits and applying those funds to the origination of primarily real estate loans.   The Corporation is 62% owned by Cheviot Mutual Holding Company.  Earnings per share is reported including all shares held by Cheviot Mutual Holding Company. Cheviot Mutual Holding Company has waived the receipt of dividends declared by the Corporation since incorporation. Cheviot Savings’ profitability is significantly dependent on net interest income, which is the difference between interest income from interest-earning assets and the interest expense paid on interest-bearing liabilities.  Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances.
 
On March 16, 2011, the Corporation completed the acquisition of First Franklin Corporation (“First Franklin”) and its wholly-owned subsidiary, The Franklin Savings and Loan Company (“Franklin Savings”).  Accordingly, the Corporation’s unaudited consolidated financial statements for the three and nine month periods ended September 30, 2011 includes the accounts of First Franklin for the period March 17, 2011 to September 30, 2011.
 
On July 12, 2011 Cheviot Mutual Holding Company and the Corporation adopted a Plan of Conversion whereby the mutual holding company would convert from mutual to stock form.  As part of the Plan of Conversion the pro forma value of the 62% of the Corporation owed by the Mutual Holding Company would be sold in a subscription and community offering and, if necessary, a syndicated community offering.  The Plan of Conversion was conditionally approved by the Federal Reserve Board, and consummation of the transactions contemplated thereby remains subject to certain conditions, including approval by the Mutual Holding Company’s members and the Corporation’s stockholders.
 
The accompanying unaudited financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America.  Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Cheviot Financial included in the Annual Report on Form 10-K for the year ended December 31, 2010.  However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the consolidated financial statements have been included.  The results of operations for the three and nine month periods ended September 30, 2011, are not necessarily indicative of the results which may be expected for the entire year.
 
Cheviot Financial evaluates subsequent events through the date of filing with the Securities and Exchange Commission.
 
2.       Principles of Consolidation
 
The accompanying consolidated financial statements as of and for the three and nine months ended September 30, 2011 include the accounts of the Corporation and its wholly-owned subsidiary, the Savings Bank.  All significant intercompany items have been eliminated.
 
3.       Liquidity and Capital Resources
 
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business.  Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures.  Our primary sources of funds are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of securities and funds provided by our operations.  In addition, we may borrow from the Federal Home Loan Bank of Cincinnati.  At September 30, 2011 and December 31, 2010, we had $42.0 million and $27.3 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 $157.2 million and $115.3 million, respectively.
 
 
8

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
3.       Liquidity and Capital Resources (continued)
 
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 nine months ended September 30, 2011, loan originations totaled $48.4 million, compared to $41.9 million for the nine months ended September 30, 2010.
 
Total deposits increased $222.5 million during the nine months ended September 30, 2011 and increased $11.9 million during the nine months ended September 30, 2010, respectively.  The increase during the nine months ended September 30, 2011 is due to the purchase of First Franklin.  Deposit flows are affected by the level of interest rates, the interest rates and products offered by competitors and other factors.
 
The following table sets forth information regarding the Corporation’s obligations and commitments to make future payments under contract as of September 30, 2011.
 
   
 
    Payments due by period              
   
Less
   
More than
   
More than
   
More
       
   
than
      1-3       4-5    
than
       
   
1 year
   
years
   
years
   
5 years
   
Total
 
   
(In thousands)
 
                                   
Contractual obligations:
                                 
Advances from the Federal Home Loan Bank
  $ 9,952     $ 3,326     $ 5,318     $ 23,428     $ 42,024  
Certificates of deposit
    129,997       75,755       67,957       981       274,690  
                                         
Amount of loan commitments and expiration per period:
                                       
Commitments to originate one- to four-family loans
    4,193       -       -       -       4,193  
Home equity lines of credit
    28,845       -       -       -       28,845  
Commercial lines of credit
    263       -       -       -       263  
Undisbursed loans in process
    3,148       -       -       -       3,148  
                                         
Total contractual obligations
  $ 176,398     $ 79,081     $ 73,275     $ 24,409     $ 353,163  
 
We are committed to maintaining a strong liquidity position.  We monitor our liquidity position on a daily basis.  We anticipate that we will have sufficient funds to meet our current funding commitments.  Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

 
9

 

Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
3.       Liquidity and Capital Resources (continued)
 
At September 30, 2011 and 2010, we exceeded all of the applicable regulatory capital requirements.  Our core (Tier 1) capital was $58.6 million and $56.9 million, or 10.0% and 16.7% of total assets at September 30, 2011 and 2010, respectively.  In order to be classified as “well-capitalized” under federal banking regulations, we were required to have core capital of at least $36.0 million, or 6.0% of assets as of September 30, 2011.  To be classified as a well-capitalized bank, we must also have a ratio of total risk-based capital to risk-weighted assets of at least 10.0%.  At September 30, 2011 and 2010, we had a total risk-based capital ratio of 18.3% and 34.8%, respectively.
 
4.       Earnings per Share
 
Basic earnings per share is computed based upon the weighted-average common shares outstanding during the period, less shares in the ESOP that are unallocated and not committed to be released plus shares in the ESOP that have been allocated.  The weighted average common shares outstanding includes 5,455,313 shares held by Cheviot Mutual Holding Company. Weighted-average common shares deemed outstanding gives effect to 107,126 and 142,833 unallocated shares held by the ESOP for the three and nine months ended September 30, 2011 and 2010, respectively.
 
   
For the nine months ended
    For the three months ended  
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Weighted-average common shares outstanding (basic)
    8,757,782       8,723,800       8,757,782       8,722,075  
                                 
Dilutive effect of assumed exercise of stock options
    8,850       9,051       9,219       9,179  
                                 
Weighted-average common shares outstanding (diluted)
    8,766,632       8,732,851       8,767,001       8,731,254  
 
5.       Stock Incentive Plan
 
On April 26, 2005, the Corporation approved a Stock Incentive Plan that provides for grants of up to 486,018 stock options.  During 2011, 2010, and 2009 approximately 4,400, 8,860, and 8,060 option awards for shares were granted, all of which are subject to five year vesting.
 
The Corporation follows Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 718 (ASC 718), “Compensation – Stock Compensation,” for its stock option plans, and accordingly, the Corporation recognizes the expense of these grants as required. Stock-based employee compensation costs pertaining to stock options have been reflected as a net increase in shareholders’ equity, for both any new grants, as well as for all unvested options outstanding at December 31, 2005, in both cases using the fair values established by usage of the Black-Scholes option pricing model, and are expensed over the vesting period of the underlying option.
 
The Corporation elected the modified prospective transition method in applying ASC 718. Under this method, the compensation cost recorded for unvested equity-based awards is based on their grant-date fair value. For the nine months ended September 30, 2011, the Corporation recorded $15,000 in after-tax compensation cost for equity-based awards that vested during the nine months ended September 30, 2011.  The Corporation has $73,000 unrecognized pre-tax compensation cost related to non-vested equity-based awards granted under its stock incentive plan as of September 30, 2011, which is expected to be recognized over a weighted-average vesting period of approximately 0.2 years.

 
10

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
5.       Stock Option Plan (continued)
 
A summary of the status of the Corporation’s stock option plan as of September 30, 2011 and the year ended December 31, 2010, as well as the changes during the periods then ended are presented below:
 
   
Nine months ended
   
Year ended
 
   
September 30, 2011
   
December 31, 2010
 
         
Weighted-
         
Weighted-
 
         
average
         
average
 
         
exercise
         
exercise
 
   
Shares
   
price
   
Shares
   
price
 
                         
Outstanding at beginning of period
    421,200     $ 11.05       412,340     $ 11.17  
Granted
    4,400       9.04       8,860       8.07  
Exercised
    -       -       -       -  
Forfeited
    -       -       -       -  
                                 
Outstanding at end of period
    425,600     $ 11.02       421,200     $ 11.05  
                                 
Options exercisable at period-end
    404,760     $ 11.14       397,260     $ 11.16  
                                 
Fair value of options granted
          $ 5.30             $ 4.83  
 
The following information applies to options outstanding at September 30, 2011:
 
Number outstanding
    425,600  
Exercise price
    $8.07 - $13.63  
Weighted-average exercise price
    $11.14  
Weighted-average remaining contractual life
 
4.0 years
 
 
The expected term of options is based on evaluations of historical and expected future employee exercise behavior.  The risk-free interest rate is based upon the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date.  Volatility is based upon the historical volatility of the Corporation’s stock.
 
The fair value of each option was estimated on the date of grant using the modified Black-Scholes options pricing model with the following weighted-average assumptions used for grants in 2011:  dividend yield of 5.22%, expected volatility of 44.17%, risk-free interest rate of 2.98% and an expected life of 10 years for each grant.
 
The effects of expensing stock options are reported in “cash provided by financing activities” in the Consolidated Statements of Cash Flows.
 
 
11

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
6.   Investment and Mortgage-backed Securities
 
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of investment securities at September 30, 2011 and December 31, 2010 are shown below.
 
         
September 30, 2011
       
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
unrealized
   
unrealized
   
fair
 
   
cost
   
gains
   
losses
   
value
 
         
(In thousands)
       
Available for Sale:
                       
U.S. Government agency securities
  $ 87,233     $ 264     $ 9     $ 87,488  
Municipal obligations
    3,140       138       18       3,260  
                                 
    $ 90,373     $ 402     $ 27     $ 90,748  
 
           
December 31, 2010
         
           
Gross
   
Gross
   
Estimated
 
   
Amortized
   
unrealized
   
unrealized
   
fair
 
   
cost
   
gains
   
losses
   
value
 
           
(In thousands)
         
Available for Sale:
                               
U.S. Government agency securities
  $ 88,529     $ 102     $ 1,622     $ 87,009  
Municipal obligations
    1,545       5       177       1,373  
                                 
    $ 90,074     $ 107     $ 1,799     $ 88,382  
 
The amortized costs of investment securities at September 30, 2011, by contractual term to maturity, are shown below.
 
   
September 30,
 
   
2011
 
   
(In thousands)
 
Less than one year
  $ 70,846  
One to five years
    10,954  
Five to ten years
    1,325  
More than ten years
    7,248  
         
    $ 90,373  
 
 
12

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
6.       Investment and Mortgage-backed Securities (continued)
 
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities at September 30, 2011 and December 31, 2010 are shown below.
 
         
September 30, 2011
       
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
unrealized
   
unrealized
    fair  
    cost    
gains
   
losses
   
value
 
         
(In thousands)
       
Available for sale:
                       
Federal Home Loan Mortgage Corporation adjustable-rate participation certificates
  $ 1,185     $ 141     $ 1     $ 1,325  
Federal National Mortgage Association adjustable-rate participation certificates
    2,895       55       3       2,947  
Government National Mortgage Association adjustable-rate participation certificates
    3,650       109       16       3,743  
                                 
    $ 7,730     $ 305     $ 20     $ 8,015  
                                 
Held to maturity:
                               
Federal Home Loan Mortgage Corporation adjustable-rate participation certificates
  $ 409     $ 9     $ 1     $ 417  
Federal National Mortgage Association adjustable-rate participation certificates
    444       8       2       450  
Government National Mortgage Association adjustable-rate participation certificates
    3,487       145       1       3,631  
                                 
    $ 4,340     $ 162     $ 4     $ 4,498  
 
 
13

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
6.       Investment and Mortgage-backed Securities (continued)
 
         
December 31, 2010
       
                         
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
unrealized
   
unrealized
   
fair
 
   
cost
   
gains
   
losses
   
value
 
          (In thousands)        
Available for sale:
                       
Federal Home Loan Mortgage Corporation adjustable-rate participation certificates
  $ 723     $ 13     $ -     $ 736  
Federal National Mortgage Association adjustable-rate participation certificates
    548       17       -       565  
Government National Mortgage Association adjustable-rate participation certificates
    2,908       70       -       2,978  
                                 
    $ 4,179     $ 100     $ -     $ 4,279  
                                 
Held to maturity:
                               
Federal Home Loan Mortgage Corporation adjustable-rate participation certificates
  $ 464     $ 10     $ 1     $ 473  
Federal National Mortgage Association adjustable-rate participation certificates
    515       7       -       522  
Government National Mortgage Association adjustable-rate participation certificates
    3,800       121       -       3,921  
                                 
    $ 4,779     $ 138     $ 1     $ 4,916  
 
The amortized cost of mortgage-backed securities, including those designated as available for sale at September 30, 2011, by contractual terms to maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties.
 
   
September 30,
 
   
2011
 
   
(In thousands)
 
       
Due in one year or less
  $ 570  
Due in one year through five years
    2,411  
Due in five years through ten years
    3,334  
Due in more than ten years
    5,755  
         
    $ 12,070  
 
 
14

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
6.       Investment and Mortgage-backed Securities (continued)
 
The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2011:
 
   
Less than 12 months
   
12 months or longer
         
Total
       
Description of
 
Number of
   
Fair
   
Unrealized
   
Number of
   
Fair
   
Unrealized
   
Number of
   
Fair
   
Unrealized
 
securities
 
investments
   
value
   
losses
   
investments
   
value
   
losses
   
investments
   
value
   
losses
 
                     
(Dollars in thousands)
                   
 
                                                     
U.S. Government agency securities
    2     $ 9,991     $ 9       -     $ -     $ -       2     $ 9,991     $ 9  
Municipal obligations
    -       -       -       1       697       18       1       697       18  
Mortgage-backed securities
    14       761       23       5       43       1       19       804       24  
                                                                         
Total temporarily impaired securities
    16     $ 10,752     $ 32       6     $ 740     $ 19       22     $ 11,492     $ 51  
          
Management does not intend to sell any of the debt securities with an unrealized loss and does not believe that it is more likely than not that it will be required to sell a security in an unrealized loss position prior to a recovery in value.  The fair values are expected to recover as securities approach maturity dates. The Corporation has evaluated these securities and has determined that the decline in their values is temporary.
 
7.       Income Taxes
 
The Corporation uses an asset and liability approach to accounting for income taxes. The asset and liability approach requires the recognition of deferred tax assets and  liabilities  for the expected  future tax  consequences of temporary differences  between  the  carrying  amounts  and the tax  bases of  assets  and liabilities.  Deferred tax assets are recognized if it is more likely than not that a future benefit will be realized.  The Corporation accounts for income taxes  in  accordance  with  FASB ASC 740, Income Taxes, which prescribes the  recognition  and  measurement  criteria  related to tax positions  taken or expected to be taken in a tax return.
 
The Corporation’s principal temporary differences between financial income and taxable income result mainly from different methods of accounting for Federal Home Loan Bank stock dividends, the general loan loss allowance, deferred compensation, stock benefit plans and fair value adjustments arising from the First Franklin acquisition.  The Corporation has approximately $6.4 million of operating losses to carryforward for the next 20 years.  These loss carryforwards are subject to the Internal Revenue Code section 382 limitations which allow approximately $1.1 million of the losses on an annual basis to offset current year taxable income.
 
The  Corporation  recognizes the financial  statement  benefit of a tax position only after  determining  that the relevant tax authority  would more likely than not sustain the  position  following  an audit.  For tax positions meeting the more-likely-than-not   threshold,   the amount   recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.  The Corporation has applied this standard to all tax positions for which the statute of limitations remained open. The Corporation was not required to record any liability for unrecognized tax benefits as of September 30, 2011.

 
15

 

Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
7.       Income Taxes (continued)
 
The Corporation is subject to income taxes in the United States.  Tax regulations are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply.  With few exceptions, the Corporation is no longer subject to U.S. federal, or state and local, tax examinations for years before 2008.
 
The Corporation will recognize, if applicable, interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
 
Federal income tax on earnings differs from that computed at the statutory corporate tax rate for the nine months ended September 30, 2011 and 2010:
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
             
Federal income taxes at statutory rate of 34%
  $ 1,074     $ 910  
Increase (decrease) in taxes resulting primarily from:
               
Stock compensation
    (7 )     49  
Nontaxable interest income
    (28 )     (16 )
Cash surrender value of life insurance
    (71 )     (35 )
Utilization of net operating loss carryforwards, previously reserved
    (241 )     -  
Other
    7       4  
                 
Federal income taxes per consolidated financial statements
  $ 734     $ 912  
                 
Effective tax rate
    23.2 %     34.1 %
 
8.       Disclosures about Fair Value of Assets and Liabilities
 
Fair value is defined  as the price that would be  received  to sell an asset or paid  to  transfer  a  liability  in  an  orderly   transaction  between  market participants at the measurement  date. A three-level hierarchy exists for fair value measurements based upon the inputs to the valuation of an asset or liability.
 
 
Level 1
Quoted prices in active markets for identical assets or liabilities
 
 
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
 
 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Fair value methods and assumptions are set forth below for each type of financial instrument.
 
 
16

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
8.       Disclosures about Fair Value of Assets and Liabilities (continued)
 
Securities available for sale:  Fair values on available for sale securities were based upon a market approach. Securities which are fixed income instruments that are not quoted on an exchange, but are traded in active markets, are valued using prices obtained from our custodian, which used third party data service providers.
 
Available for sale securities include U.S. agency securities, municipal bonds and mortgage-backed agency securities.
 
                        Fair Value Measurements at September 30, 2011 and December 31, 2010
 
   
Quoted prices
             
   
in active
   
Significant
   
Significant
 
   
markets for
   
other
   
other
 
   
identical
   
observable
   
unobservable
 
   
assets
   
inputs
   
inputs
 
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Securities available for sale at September 30, 2011:
                 
                   
U.S. Government agency securities
    -     $ 87,488       -  
Municipal obligations
    -     $ 3,260       -  
Mortgage-backed securities
    -     $ 8,015       -  
                         
Securities available for sale at December 31, 2010:
                       
                         
U.S. Government agency securities
    -     $ 87,009       -  
Municipal obligations
    -     $ 1,373       -  
Mortgage-backed securities
    -     $ 4,279       -  
 
The Corporation is predominately an asset-based lender with real estate serving as collateral on a substantial majority of loans.  Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral.  In addition, on the acquisition date the Corporation independently fair valued $25.0 million of First Franklin’s impaired loans, as well as $173.2 million of performing loans.  First Franklin’s impaired loans subject to fair value adjustments are not included in Cheviot Financial’s non-performing loan totals.  Such loans are considered performing under Topic ASC 310-30, even though the loans are contractually past due, as any nonpayment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and the resulting loss provisions or future period yield adjustments. The fair values were obtained using independent appraisals, which the Corporation considers to be Level 2 inputs.  The aggregate carrying amount of the Corporation’s impaired loans at September 30, 2011 was $5.0 million, compared to $4.9 million at December 31, 2010.
 
The Corporation has real estate acquired through foreclosure totaling $4.2 million at September 30, 2011, compared to $2.0 million at December 31, 2010.  Real estate acquired through foreclosure is carried at the lower of the cost or fair value less estimated selling expenses at the date of acquisition. Fair values are obtained using independent appraisals, based on comparable sales which the Corporation considers to be Level 2 inputs.  The aggregate amount of real estate acquired through foreclosure that is carried at fair value was $3.5 million at September 30, 2011 and $1.1 million at December 31, 2010.  The aggregate amount of real estate acquired through foreclosure that is carried at cost was $734,000 at September 30, 2011.
 
 
17

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
9.       Effects of Recent Accounting Pronouncements
 
We adopted the following accounting guidance in 2011, none of which had a material effect, if any, on our consolidated financial position or results of operations.
 
In January 2010, the FASB issued ASU No. 2010-06 “Improving Disclosures about Fair Value Measurements,” which amends the guidance for fair value measurements and disclosures. The guidance in ASU 2010-06 requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. Furthermore, ASU 2010-06 requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs; clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amends guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance is effective for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective January 1, 2011 and for interim periods thereafter. In the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption of this guidance did not have a material impact on our annual and interim financial statement disclosures and did not have any impact on our consolidated financial statements.
 
In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal year, and interim periods within those years, beginning after December 15, 2010.  Adoption of this guidance on January 1, 2011 did not have a material effect on the Corporation’s results of operation or financial position.
 
In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the current and comparable prior annual reporting period.  The amendments also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  Management has provided the required pro forma disclosures in the period of acquisition of First Franklin for the quarter ended March 31, 2011.
 
 
18

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
9.       Effects of Recent Accounting Pronouncements (continued)
 
In April 2011, the FASB ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 will be effective for the Corporation on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 is not expected to have a material impact on the Corporation’s financial statements.
 
In May 2011, the FASB issued ASU 2011-4, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This Update provides guidance which is expected to result in common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. It changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. It is not intended for this Update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. We do not anticipate any material impact from this Update.
 
In June 2011, the FASB issued ASU 2011-5, “Comprehensive Income (Topic 220).” In this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. They also do not change the presentation of related tax effects, before related tax effects, or the portrayal or calculation of earnings per share. The amendments in this Update should be applied retrospectively. The amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. We do not anticipate any material impact from this Update.
 
In September 2011, the FASB issued ASU 2011-8, “Intangibles - Goodwill and Other (Topic 350):  Testing Goodwill for Impairment.” The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment.  The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.
 
 
19

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
10.       Fair Value of Financial Instruments
 
Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value, is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity or contracts that convey or impose on an entity the contractual right or obligation to either receive or deliver cash for another financial instrument. These fair value estimates are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price for which an asset could be sold or liability could be settled. However, given there is no active market or observable market transactions for many of the Corporation’s financial instruments, it has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The fair value estimates are determined in accordance with SFAS No. 157.
 
 
20

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
10.       Fair Value of Financial Instruments (continued)
 
 
The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments at September 30, 2011:
 
 
Cash and cash equivalents:  The carrying amounts presented in the consolidated statements of financial condition for cash and cash equivalents are deemed to approximate fair value.
 
 
Investment and mortgage-backed securities:  For investment and mortgage-backed securities, fair value is deemed to equal the quoted market price.
 
 
Loans receivable:  The loan portfolio was segregated into categories with similar characteristics, such as one-to four-family residential, multi-family residential and commercial real estate.  These loan categories were further delineated into fixed-rate and adjustable-rate loans.  The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality.  For loans on deposit accounts, fair values were deemed to equal the historic carrying values.  The historical carrying amount of accrued interest on loans is deemed to approximate fair value.
 
 
Federal Home Loan Bank stock:  The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value.
 
 
Deposits:  The fair value of NOW accounts, passbook accounts, and money market demand deposits is deemed to approximate the amount payable on demand at September 30, 2011.  Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities.
 
 
Advances from the Federal Home Loan Bank:  The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices.
 
 
Advances by Borrowers for Taxes and Insurance:  The carrying amount of advances by borrowers for taxes and insurance is deemed to approximate fair value.
 
 
Commitments to extend credit:  For fixed-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates.  At September 30, 2011, the fair value of the derivative loan commitments was not material.
 
 
21

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
10.       Fair Value of Financial Instruments (continued)
 
The estimated fair values of the Corporation’s financial instruments at September 30, 2011 and December 31, 2010 are as follows:
 
   
September 30, 2011
   
December 31, 2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Value
   
Value
   
Value
   
Value
 
   
(In thousands)
   
(In thousands)
 
Financial assets
                       
Cash and cash equivalents
  $ 45,201     $ 45,201     $ 18,149     $ 18,149  
Investment securities
    90,748       90,748       88,382       88,382  
Mortgage-backed securities
    12,355       12,513       9,058       9,195  
Loans receivable - net
    397,460       410,517       225,438       233,272  
Accrued interest receivable
    2,111       2,111       1,340       1,340  
Federal Home Loan Bank stock
    8,366       8,366       3,375       3,375  
                                 
    $ 556,241     $ 569,456     $ 345,742     $ 353,713  
                                 
Financial liabilities
                               
Deposits
  $ 480,390     $ 480,378     $ 257,852     $ 257,672  
Advances from the Federal Home Loan Bank
    42,024       43,216       27,300       30,597  
Accrued interest payable
    163       163       99       99  
Advances by borrowers for taxes and insurance
    1,772       1,772       1,440       1,440  
                                 
    $ 524,349     $ 525,529     $ 286,691     $ 289,808  
 
11.   Acquisition Activity
 
First Franklin Corporation
 
As previously stated, on March 16, 2011, Cheviot Financial, and its wholly owned subsidiary, Cheviot Savings Bank, completed the acquisition of First Franklin and its wholly-owned subsidiary, Franklin Savings.  The acquisition was consummated in accordance with an Agreement and Plan of Merger (the “Merger Agreement”), dated as of October 12, 2010, by and among Cheviot Financial Corp., Cheviot Savings Bank, Cheviot Merger Subsidiary, Inc., First Franklin and Franklin Savings.
 
At the effective time of the acquisition, each share of common stock, par value $0.01 per share, of First Franklin (other than shares owned by First Franklin, Cheviot Financial, Cheviot Savings Bank and Merger Subsidiary) was converted into the right to receive $14.50 in cash.  Each First Franklin stock option outstanding at the time of the closing was converted into an amount of cash equal to the positive difference, if any, between $14.50 and the exercise price of such stock option.  The aggregate cash consideration paid in the acquisition (including the cancellation of stock options) was approximately $24.7 million.
 
 
22

 

Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
11.   Acquisition Activity (continued)
 
The acquired assets and assumed liabilities were measured at estimated fair values, as required by the FASB under Business Combinations.  Management made significant estimates and exercised significant judgment in accounting for the acquisition.  Management measured loan fair values based on loan file reviews (including borrower financial statements or tax returns), appraised collateral values, expected cash flows and historical loss factors of Franklin Savings.  Real estate acquired through foreclosure was primarily valued based on appraised collateral values.  The Corporation also recorded an identifiable intangible asset representing the core deposit base of Franklin Savings based on management’s evaluation of the cost of such deposits relative to alternative funding sources.  Management used significant estimates including the average lives of depository accounts, future interest rate levels and the cost of servicing various depository products.  Management used market quotations to fair value investment securities and FHLB advances.
 
The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration.  First Franklin’s loans were deemed impaired at the acquisition date if Cheviot Financial did not expect to receive all contractually required cash flows due to concerns about credit quality.  Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a nonaccretable difference.  At the acquisition date, Cheviot Financial recorded $25.0 million of purchased credit-impaired loans subject to a nonaccretable difference of $5.5 million.  The method of measuring carrying value of purchased loans differs from loans originated by the Corporation (originated loans), and as such, the Corporation identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.
 
First Franklin’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds.  At acquisition, First Franklin’s loan portfolio without evidence of deterioration totaled $173.2 million and was recorded at a fair value of $171.6 million.
 
 
23

 

Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
11. Acquisition Activity (continued)
 
The following table summarizes the purchase of First Franklin as of March 16, 2011:
 
Purchase price
     
First Franklin common shares outstanding (in thousands)
    1,693  
Purchase price per share of First Franklin’s common stock
  $ 14.50  
Total value of the First Franklin’s common stock
  $ 24,549  
Fair value of outstanding employee stock awards, net of tax
    131  
         
Total purchase price
  $ 24,680  
         
Allocation of purchase price
       
Stockholders’ equity
  $ 20,755  
         
Pre-tax adjustments to reflect acquired assets and liabilities at fair value:
       
Loans receivable
    (2,462 )
Real estate owned
    (750 )
Office premises and equipment
    1,970  
Core deposit intangible
    1,298  
Certificates of deposit
    (2,718 )
Advances from the Federal Home Loan Bank
    (838 )
Contractual obligations
    (4,390 )
Other assets/liabilities
    427  
Pre-tax total adjustments
    (7,463 )
         
Deferred income tax benefits, net of valuation allowance
    1,079  
After-tax total adjustments
    (6,384 )
Fair value of net assets acquired
    14,371  
         
Goodwill resulting from the First Franklin acquisition
  $ 10,309  

 
24

 
 
Cheviot Financial Corp.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
For the three and nine months ended September 30, 2011 and 2010
 
11. Acquisition Activity (continued)
 
The following condensed statement reflects the values assigned to First Franklin’s net assets as of the acquisition date:
 
</
   
March 16,
 
   
2011
 
   
(in thousands)
 
       
Assets:
     
Cash and cash equivalents
  $ 20,480  
Investment securities
    15,618  
Mortgage-backed securities
    4,497  
Loans receivable – net
    196,519  
Real estate acquired through foreclosure
    2,404  
Office premises and equipment
    4,927  
Goodwill and intangible assets
    11,607  
         
Other assets
    21,509  
Total Assets
  $ 277,561  
         
Liabilities:
       
Deposits
  $ 221,528  
Advances from the Federal Home Loan Bank
    23,216  
Other borrowings
    1,490  
Accrued expenses and other liabilities
    6,647