CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 2007 2006
(Unaudited)
Cash and due from banks $ 3,179 $ 2,736
Federal funds sold 1,947 2,640
Interest-earning deposits in other financial institutions 407 114
---------- ----------
Cash and cash equivalents 5,533 5,490
Investment securities available for sale - at fair value 13,095 9,085
Investment securities held to maturity - at cost, approximate
market value of $23,090 and $24,739 at September 30, 2007
and December 31, 2006, respectively 23,100 25,099
Mortgage-backed securities available for sale - at fair value 877 1,042
Mortgage-backed securities held to maturity - at cost, approximate
market value of $10,540 and $14,251 at September 30, 2007 and
December 31, 2006, respectively 10,487 14,237
Loans receivable - net 248,598 241,013
Loans held for sale - at lower of cost or market - 165
Real estate acquired through foreclosure - net 479 -
Office premises and equipment - at depreciated cost 5,193 5,397
Federal Home Loan Bank stock - at cost 3,238 3,238
Accrued interest receivable on loans 1,108 1,073
Accrued interest receivable on mortgage-backed securities 55 65
Accrued interest receivable on investments and interest-earning deposits 453 439
Prepaid expenses and other assets 326 183
Bank-owned life insurance 3,350 3,254
Prepaid federal income taxes 46 -
---------- ----------
Total assets $ 315,938 $ 309,780
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $215,068 $205,450
Advances from the Federal Home Loan Bank 30,008 29,236
Advances by borrowers for taxes and insurance 877 1,203
Accrued interest payable 124 115
Accounts payable and other liabilities 1,059 1,039
Accrued federal income taxes - 49
Deferred federal income taxes 614 488
---------- ----------
Total liabilities 247,750 237,580
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, 2007 and December 31, 2006, respectively 99 99
Additional paid-in capital 43,343 43,113
Shares acquired by stock benefit plans (3,939) (4,329)
Treasury stock - at cost, 900,371 and 568,968 shares at September 30, 2007
and December 31, 2006, respectively (11,295) (6,846)
Retained earnings - restricted 40,037 40,171
Accumulated comprehensive loss, unrealized losses on securities
available for sale, net of related tax effects (57) (8)
---------- ----------
Total shareholders' equity 68,188 72,200
---------- ----------
Total liabilities and shareholders' equity $ 315,938 $ 309,780
========== ==========
|
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,
2007 2006 2007 2006
(Unaudited)
Interest income
Loans $ 11,179 $ 10,360 $ 3,804 $ 3,584
Mortgage-backed securities 536 628 170 204
Investment securities 1,388 938 502 380
Interest-earning deposits and other 167 225 39 115
-------- -------- ------- -------
Total interest income 13,270 12,151 4,515 4,283
Interest expense
Deposits 5,956 4,422 2,052 1,782
Borrowings 1,074 1,138 393 349
-------- -------- ------- -------
Total interest expense 7,030 5,560 2,445 2,131
-------- -------- ------- -------
Net interest income 6,240 6,591 2,070 2,152
Provision for losses on loans 15 - 15 -
-------- -------- ------- -------
Net interest income after provision for losses on loans 6,225 6,591 2,055 2,152
Other income (expense)
Rental 36 33 12 11
Gain on sale of loans 40 23 17 10
Loss on sale of real estate acquired through foreclosure (3) (21) (3) -
Gain on sale of office premises and equipment - 44 - 44
Earnings on bank-owned life insurance 96 100 32 32
Other operating 242 220 95 79
-------- -------- ------- -------
Total other income 411 399 153 176
General, administrative and other expense
Employee compensation and benefits 3,293 3,105 1,092 1,063
Occupancy and equipment 418 321 144 114
Property, payroll and other taxes 664 581 215 165
Data processing 231 209 77 71
Legal and professional 322 309 97 99
Advertising 131 131 44 44
Other operating 476 416 136 134
-------- -------- ------- -------
Total general, administrative and other expense 5,535 5,072 1,805 1,690
-------- -------- ------- -------
Earnings before income taxes 1,101 1,918 403 638
Federal income taxes (benefit)
Current 274 485 216 189
Deferred 75 129 (88) 12
-------- -------- ------- -------
Total federal income taxes 349 614 128 201
-------- -------- ------- -------
NET EARNINGS $ 752 $ 1,304 $ 275 $ 437
======== ======== ======= =======
EARNINGS PER SHARE
Basic $ .08 $ .14 $ .03 $ .05
======== ======== ======= =======
Diluted $ .08 $ .14 $ .03 $ .05
======== ======== ======= =======
Dividends per common share $ .24 $ .21 $ .08 $ .07
======== ======== ======= =======
|
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, 2007 and 2006
(In thousands)
For the nine months For the three months
ended September 30, ended September 30,
2007 2006 2007 2006
Net earnings for the period $ 752 $1,304 $ 275 $ 437
Other comprehensive income (loss), net of tax (benefits):
Unrealized holding gains (losses) on securities during
the period, net of benefits of $(25) and $6 for the nine
months ended September 30, 2007 and 2006, respectively,
and $28 and $9 for the three months ended September 30,
2007 and 2006, respectively (49) 12 54 17
------ ------ ------ ------
Comprehensive income $ 703 $1,316 $ 329 $ 454
====== ====== ====== ======
Accumulated comprehensive income (loss) $ (57) $ 4 $ (57) $ 4
====== ====== ====== =======
|
See accompanying notes to consolidated financial statements.
5
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2007 and 2006
(In thousands)
2007 2006
(Unaudited)
Cash flows from operating activities:
Net earnings for the period $ 752 $ 1,304
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums and discounts on investment
and mortgage-backed securities, net (10) (9)
Depreciation 249 191
Amortization of deferred loan origination fees - net 11 (21)
Proceeds from sale of loans in the secondary market 3,148 2,008
Loans originated for sale in the secondary market (2,943) (1,985)
Gain on sale of loans (40) (23)
Loss on sale of real estate acquired through foreclosure 3 21
Gain on sale of office premises and equipment - (44)
Federal Home Loan Bank stock dividends - (133)
Provision for losses on loans 15 -
Net increase in cash surrender value of bank-owned life insurance (96) (100)
Amortization of expense related to stock benefit plans 439 36
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (35) (128)
Accrued interest receivable on mortgage-backed securities 10 12
Accrued interest receivable on investments and interest-
earning deposits (14) (197)
Prepaid expenses and other assets (143) (171)
Accounts payable and other liabilities 20 362
Accrued interest payable 9 -
Federal income taxes
Current (95) 103
Deferred 75 129
-------- --------
Net cash provided by operating activities 1,355 1,355
-------- --------
Cash flows used in investing activities:
Principal repayments on loans 26,950 29,463
Loan disbursements (35,154) (45,400)
Purchase of U.S. Government and agency obligations (7,001) (8,998)
Proceeds from maturity of U.S. Government and agency obligations 5,000 -
Purchase of municipal obligations - (2,080)
Principal repayments on mortgage-backed securities 3,917 4,678
Proceeds from sale of real estate acquired through foreclosure 113 68
Additions to real estate acquired through foreclosure (2) -
Proceeds from sale of office premises and equipment - 85
Purchase of office premises and equipment (45) (1,279)
-------- --------
Net cash used in investing activities (6,222) (23,463)
-------- --------
Cash flows provided by financing activities:
Net increase in deposits 9,618 27,708
Proceeds from Federal Home Loan Bank advances 13,000 3,500
Repayments on Federal Home Loan Bank advances (12,228) (8,301)
Advances by borrowers for taxes and insurance (326) (303)
Treasury stock repurchases (4,449) (3,356)
Stock option expense, net 181 179
Dividends paid on common stock (886) (854)
-------- --------
Net cash provided by financing activities 4,910 18,573
-------- --------
Net increase (decrease) in cash and cash equivalents 43 (3,535)
Cash and cash equivalents at beginning of period 5,490 9,103
-------- --------
Cash and cash equivalents at end of period $ 5,533 $ 5,568
======== ========
|
See accompanying notes to consolidated financial statements.
6
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30, 2007 and 2006
(In thousands)
2007 2006
(Unaudited)
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 337 $ 512
======= =======
Interest on deposits and borrowings $ 7,021 $ 5,560
======= =======
Supplemental disclosure of noncash investing activities:
Transfer of loans to real estate acquired through foreclosure $ 593 $ -
======= =======
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 9 $ 16
======= =======
|
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, 2007 and 2006
1. Basis of Presentation
Cheviot Financial Corp. ("Cheviot Financial" or the "Corporation") is a
financial holding company, the principal asset of which consists of its
ownership of Cheviot Savings Bank (the "Savings Bank"). The Savings Bank
conducts a general banking business in southwestern Ohio which consists of
attracting deposits and applying those funds to the origination of primarily
real estate loans. The Corporation is 55% owned by Cheviot Mutual Holding
Company. Cheviot Savings' profitability is significantly dependent on net
interest income, which is the difference between interest income from
interest-earning assets and the interest expense paid on interest-bearing
liabilities. Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances.
The accompanying unaudited financial statements were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. Accordingly, these consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto of Cheviot Financial included in the
Annual Report on Form 10-K for the year ended December 31, 2006. 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, 2007, are not necessarily indicative
of the results which may be expected for the entire year.
2. Principles of Consolidation
The accompanying consolidated financial statements as of and for the three and
nine months ended September 30, 2007, 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, 2007 and December 31, 2006, we had $30.0 million
and $29.2 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 $108.2 million and $110.3 million.
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.
8
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2007 and 2006
3. Liquidity and Capital Resources (continued)
Our primary investing activities are the origination of one- to four-family real
estate loans, commercial real estate, construction and consumer loans, and, to a
lesser extent, the purchase of securities. For the nine months ended September
30, 2007, loan originations totaled $38.1 million, compared to $47.4 million for
the nine months ended September 30, 2006.
Total deposits increased $9.6 million and $27.7 million during the nine months
ended September 30, 2007 and 2006, respectively. Deposit flows are affected by
the level of interest rates, the interest rates and products offered by
competitors and other factors. The significant increase in deposits during the
nine months ended September 30, 2006 reflects the addition of a branch location
and the total composition of deposits shifting to higher rate certificates of
deposit.
The following table sets forth information regarding the Corporation's
obligations and commitments to make future payments under contract as of
September 30, 2007.
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 $ - 2,000 - $28,008 $30,008
Certificates of deposit 127,681 19,494 5,567 - 152,742
Amount of loan commitments and expiration per period:
Commitments to originate one- to four-family
loans 2,194 - - - 2,194
Home equity lines of credit 11,588 - - - 11,588
Undisbursed loans in process 5,937 - - - 5,937
Lease obligations 2 - - - 2
--------- ------- ------- ------- --------
Total contractual obligations $ 147,402 $21,494 $ 5,567 $28,008 $202,471
========= ======= ======= ======= ========
|
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, 2007 and 2006
3. Liquidity and Capital Resources (continued)
At September 30, 2007 and 2006, we exceeded all of the applicable regulatory
capital requirements. Our core (Tier 1) capital was $52.8 million and $50.5
million, or 16.7% and 16.2% of total assets at September 30, 2007 and 2006. In
order to be classified as "well-capitalized" under federal banking regulations,
we were required to have core capital of at least $18.9 million, or 6.0% of
assets as of September 30, 2007. 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, 2007 and 2006, we had a total risk-based capital
ratio of 32.4% and 33.3%, 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. Weighted-average common shares deemed outstanding gives effect
to 285,661 and 321,368 unallocated shares held by the ESOP for the three and
nine months ended September 30, 2007 and 2006, respectively.
For the nine months ended For the three months ended
September 30, September 30,
2007 2006 2007 2006
Weighted-average common shares
outstanding (basic) 8,961,216 9,262,744 8,801,564 9,164,950
Dilutive effect of assumed exercise
of stock options 111,081 23,578 101,865 26,584
---------- ---------- --------- ---------
Weighted-average common shares
outstanding (diluted) 9,072,297 9,286,322 8,903,429 9,191,534
========== ========== ========= =========
|
5. Stock Option Plan
On April 26, 2005, the Corporation approved a Stock Incentive Plan that provides
for grants of up to 486,018 stock options. On May 5, 2005, approximately 384,000
option shares were granted subject to five year vesting. On May 23, 2006,
approximately 6,100 option shares were granted subject to five year vesting. On
May 22, 2007, approximately 6,500 option shares were granted subject to five
year vesting.
In 2004, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based Payment," which
revises SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123(R) requires that cost related to the fair value of
all equity-based awards to employees, including grants of employee stock
options, be recognized in the financial statements.
10
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2007 and 2006
5. Stock Option Plan (continued)
The Corporation adopted the provisions of SFAS No. 123(R) effective January 1,
2006, using the modified prospective transition method, and therefore has not
restated its financial statements for prior periods. Under this method, the
Corporation has applied the provisions of SFAS No. 123(R) to new equity-based
awards and to equity-based awards modified, repurchased, or cancelled after
January 1, 2006. In addition, the Corporation will recognize compensation cost
for the portion of equity-based awards for which the requisite service period
has not been rendered ("unvested equity-based awards") that are outstanding as
of January 1, 2006. The compensation cost recorded for unvested equity-based
awards is based on their grant-date fair value. For the nine months ended
September 30, 2007, the Corporation recorded $130,000 in after-tax compensation
cost for equity-based awards that vested during the nine months ended September
30, 2007. The Corporation has $695,000 unrecognized pre-tax compensation cost
related to non-vested equity-based awards granted under its stock incentive plan
as of September 30, 2007, which is expected to be recognized over a
weighted-average vesting period of approximately 2.7 years.
A summary of the status of the Corporation's stock option plan as of September
30, 2007, and changes during the period then ended is presented below:
Nine months ended Year ended
September 30, 2007 December 31, 2006
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
Outstanding at beginning of period 389,760 $11.17 383,700 $11.15
Granted 6,460 $13.63 6,060 12.12
Exercised - - - -
Forfeited - - - -
------- ------- ------- ------
Outstanding at end of period 396,220 $11.21 389,760 $11.17
======= ======= ======= ======
Options exercisable at period-end 154,692 $11.16 76,740 $11.15
======= ======= ======= ======
Options expected to be exercisable at year-end
Fair value of options granted $ 2.77 $ 2.97
======= ======
|
The following information applies to options outstanding at September 30, 2007:
Number outstanding 396,220
Exercise price$11.15 - $13.63
Weighted-average exercise price $11.21
Weighted-average remaining contractual life 7.7 years
Aggregate intrinsic value of vested options $303,196
|
The expected term of options is based on evaluations of historical and expected
future employee exercise behavior. The risk free interest rate is based upon the
U.S. Treasury rates at the date of grant with maturity dates approximately equal
to the expected life at grant date. Volatility is based upon the historical
volatility of the Corporation's stock.
11
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2007 and 2006
5. Stock Option Plan (continued)
The fair value of each option was estimated on the date of grant using the
modified Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 2007: dividend yield of 2.35%, expected
volatility of 10.12%, risk-free interest rate of 4.83% and an expected life of
10 years for each grant.
The effects of expensing stock options is reported in "cash provided by
financing activities" in the Consolidated Statements of Cash Flows.
6. Income Taxes
The Corporation adopted the provisions of FASB Interpretation 48, "Accounting
for Uncertainty in Income Taxes," on January 1, 2007. Previously, the
Corporation had accounted for tax contingencies in accordance with Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies." As
required by Interpretation 48, which clarifies Statement No. 109, "Accounting
for Income Taxes," the Corporation recognizes the financial statement benefit of
a tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax
authority. At the adoption date, the Corporation applied Interpretation 48 to
all tax positions for which the statute of limitations remained open. As a
result of the implementation of Interpretation 48, the Corporation was not
required to record any liability for unrecognized tax benefits as of January 1,
2007. There have been no material changes in unrecognized tax benefits since
January 1, 2007. As stated in the Annual Report, the only known tax attribute
which can influence the Corporation's effective tax rate is the utilization of
charitable contribution carryforwards.
The Corporation is subject to income taxes in the U.S. federal jurisdiction, as
well as various state jurisdictions. Tax regulations within each jurisdiction
are subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the Corporation is
no longer subject to U.S. federal, state and local, or non U.S. income tax
examinations by tax authorities for the years before 2003.
The Corporation will recognize, if applicable, interest accrued related to
unrecognized tax benefits in interest expense and penalties in operating
expenses.
7. Effects of Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Instruments - an amendment of FASB Statements No. 133 and 140," to simplify and
make more consistent the accounting for certain financial instruments.
Specifically, SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to permit fair value remeasurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on a
fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," to allow a
qualifying special purpose entity to hold a derivative instrument that pertains
to a beneficial interest other than another derivative financial instrument.
12
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2007 and 2006
7. Effects of Recent Accounting Pronouncements (continued)
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006, or January 1, 2007 as to the Corporation, with earlier application
allowed. The Corporation adopted SFAS No. 155 as of January 1, 2007 without
material effect on the Corporation's financial position or results of
operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of SFAS No. 140," to simplify the accounting for
separately recognized servicing assets and servicing liabilities. Specifically,
SFAS No. 156 amends SFAS No. 140 to require an entity to take the following
steps:
o Separately recognize financial assets as servicing assets or servicing
liabilities, each time it undertakes an obligation to service a
financial asset by entering into certain kinds of servicing contracts;
o Initially measure all separately recognized servicing assets and
liabilities at fair value, if practicable, and;
o Separately present servicing assets and liabilities subsequently
measured at fair value in the statement of financial position and
additional disclosures for all separately recognized servicing assets
and servicing liabilities.
Additionally, SFAS No. 156 permits, but does not require, an entity to choose
either the amortization method or the fair value measurement method for
measuring each class of separately recognized servicing assets and servicing
liabilities. SFAS No. 156 also permits a servicer that uses derivative financial
instruments to offset risks on servicing to use fair value measurement when
reporting both the derivative financial instrument and related servicing asset
or liability.
SFAS No. 156 applies to all separately recognized servicing assets and
liabilities acquired or issued after the beginning of an entity's fiscal year
that begins after September 15, 2006, or January 1, 2007 as to the Corporation,
with earlier application permitted. The Corporation adopted SFAS No. 156 as of
January 1, 2007, applying the amortization method without financial statement
effect. The Corporation's mortgage servicing rights totaled approximately
$75,000 at September 30, 2007, and therefore, the remaining disclosures required
under SFAS No. 156 have been omitted based on materiality.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes." The interpretation clarifies the accounting
for uncertainty in income taxes recognized in a company's financial statements
in accordance with SFAS No. 109, "Accounting for Income Taxes." Specifically,
FIN 48 prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of a tax provision taken or
expected to be taken on a tax return. FIN 48 also provides guidance on the
related derecognition, classification, interest and penalties, accounting for
interim periods, disclosure, and transition of uncertain tax positions. FIN 48
is effective for fiscal years beginning after December 15, 2006, or January 1,
2007 as to the Corporation. The Corporation has adopted FIN 48 without material
adverse effect on the Corporation's financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. This Statement emphasizes
that fair value is a market-based measurement and should be determined based on
assumptions that a market participant would use when pricing an asset or
liability. This Statement clarifies that
13
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2007 and 2006
7. Effects of Recent Accounting Pronouncements (continued)
market participant assumptions should include assumptions about risk as well as
the effect of a restriction on the sale or use of an asset. Additionally, this
Statement establishes a fair value hierarchy that provides the highest priority
to quoted prices in active markets and the lowest priority to unobservable data.
This Statement is effective for fiscal years beginning after November 15, 2007,
or January 1, 2008 as to the Company, and interim periods within those fiscal
years. The adoption of this Statement is not expected to have a material adverse
effect on the Company's financial position or results of operations.
In September 2006, the FASB ratified the Emerging Issues Task Force's (EITF)
Issue 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements," which requires
companies to recognize a liability and related compensation costs for
endorsement split-dollar life insurance policies that provide a benefit to an
employee extending to postretirement periods. The liability should be recognized
based on the substantive agreement with the employee. Issue 06-4 is effective
beginning January 1, 2008. The Issue can be applied as either a change in
accounting principle through a cumulative-effect adjustment to retained earnings
as of the beginning of the year of adoption, or a change in accounting principle
through retrospective application to all periods. The Corporation is in the
process of evaluating the impact the adoption of Issue 06-4 will have on the
financial statements.
In September 2006, the FASB ratified a consensus opinion reached by the EITF on
EITF Issue 06-5, "Accounting for Purchases of Life Insurance - Determining the
Amount that Could be Realized in Accordance with FASB Technical Bulletin No.
85-4." The guidance in EITF Issue 06-5 requires policyholders to consider other
amounts included in the contractual terms of an insurance policy, in addition to
cash surrender value, for purposes of determining the amount that could be
realized under the terms of the insurance contract. If it is probable that
contractual terms would limit the amount that could be realized under the
insurance contract, those contractual limitations should be considered when
determining the realizable amounts. The amount that could be realized under the
insurance contract should be determined on an individual policy (or certificate)
level and should include any amount realized on the assumed surrender of the
last individual policy or certificate in a group policy.
The Company holds several life insurance policies, however, the policies do not
contain any provisions that would restrict or reduce the cash surrender value of
the policies. The consensus in EITF Issue 06-5 is effective for fiscal years
beginning after December 15, 2006. The Corporation applied the guidance in EITF
Issue 06-5 effective January 1, 2007 which did not have any effect on the
Corporation's financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115." This Statement allows companies the choice to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007, or January 1, 2008 as to the Corporation, and interim periods within
those fiscal years. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provisions of SFAS No. 157, "Fair Value Measurements." The
Corporation is currently evaluating the impact the adoption of SFAS No. 159 will
have on the financial statements.
14
Cheviot Financial Corp.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
This report on Form 10-Q contains forward-looking statements, which can be
identified by the use of such words as estimate, project, believe, intend,
anticipate, plan, seek, expect and similar expressions. These forward-looking
statements are subject to significant risks, assumptions and uncertainties that
could affect the actual outcome of future events. Because of these
uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions
by management that have, or could have, a material impact on the carrying value
of certain assets or on income to be critical accounting policies. We consider
the accounting method used for the allowance for loan losses to be a critical
accounting policy.
The allowance for loan losses is the estimated amount considered necessary to
cover inherent, but unconfirmed credit losses in the loan portfolio at the
balance sheet date. The allowance is established through the provision for
losses on loans which is charged against income. In determining the allowance
for loan losses, management makes significant estimates and has identified this
policy as one of the most critical for Cheviot Financial.
Management performs a quarterly evaluation of the allowance for loan losses.
Consideration is given to a variety of factors in establishing this estimate
including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlining collateral, the financial strength of the borrower, results of
internal loan reviews and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change.
The analysis has two components, specific and general allocations. Specific
percentage allocations can be made for unconfirmed losses related to loans that
are determined to be impaired. Impairment is measured by determining the present
value of expected future cash flows or, for collateral-dependent loans, the fair
value of the collateral adjusted for market conditions and selling expenses. If
the fair value of the loan is less than the loan's carrying value, a charge-off
is recorded for the difference. The general allocation is determined by
segregating the remaining loans by type of loan, risk weighting (if applicable)
and payment history. We also analyze historical loss experience, delinquency
trends, general economic conditions and geographic and industry concentrations.
This analysis establishes factors that are applied to the loan groups to
determine the amount of the general reserve. Actual loan losses may be
significantly more than the allowances we have established which could result in
a material negative effect on our financial results.
Discussion of Financial Condition Changes at December 31, 2006 and at September
30, 2007
Total assets increased $6.2 million, or 2.0%, to $315.9 million at September 30,
2007, from $309.8 million at December 31, 2006. The increase in total assets
reflects an increase in investment securities and loans receivable, which were
partially offset by a decrease in mortgage-backed securities.
Cash, federal funds sold and interest-earning deposits increased $43,000, or
0.8%, to $5.5 million at September 30, 2007, from $5.5 million at December 31,
2006. The increase in cash and cash equivalents at September 30, 2007, was due
to a $443,000 increase in cash and due from banks and a $293,000 increase in
interest earning deposits, which was partially offset by a $693,000 decrease in
federal funds sold. Investment securities increased $2.0 million to $36.2
million at September 30, 2007. At September 30, 2007, $23.1 million of
investment securities were classified as held to maturity, while $13.1 million
were classified as available for sale.
15
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes at December 31, 2006 and at September
30, 2007 (continued)
Mortgage-backed securities decreased $3.9 million, or 25.6%, to $11.4 million at
September 30, 2007, from $15.3 million at December 31, 2006. The decrease in
mortgage-backed securities was due primarily to principal prepayments and
repayments totaling $3.9 million. At September 30, 2007, $10.5 million of
mortgage-backed securities were classified as held to maturity, while $877,000
were classified as available for sale. Management has focused on investing in
shorter term instruments in an effort to enhance the Corporation's liquidity in
the current interest rate environment.
Loans receivable, including loans held for sale, increased $7.4 million, or
3.1%, to $248.6 million at September 30, 2007, from $241.2 million at December
31, 2006. The increase reflects loan originations totaling $38.1 million,
partially offset by loan principal repayments of $27.0 million and sales of $2.9
million.
The allowance for loan losses totaled $507,000 and $833,000 at September 30,
2007 and December 31, 2006, respectively. In determining the adequacy of the
allowance for loan losses at any point in time, management and the board of
directors apply a systematic process focusing on the risk of loss in the
portfolio. First, the loan portfolio is segregated by loan types to be evaluated
collectively and loan types to be evaluated individually. Delinquent
multi-family and commercial loans are evaluated individually for potential
impairments in their carrying value. Second, the allowance for loan losses
entails utilizing our historic loss experience by applying such loss percentage
to the loan types to be collectively evaluated in the portfolio. This segment of
the loss analysis resulted in a $15,000 addition to the provision for loss for
the three and nine months ended September 30, 2007. 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 September 30, 2007.
Non-performing and impaired loans totaled $687,000 and $281,000 at September 30,
2007 and December 31, 2006, respectively. At September 30, 2007, non-performing
and impaired loans were comprised solely of 6 loans secured by one- to
four-family residential real estate. The allowance for loan losses represented
73.8% and 296.4% of non-performing and impaired loans and 0.28% and 0.12% of
total loans at September 30, 2007 and December 31, 2006, respectively. The
decrease in the allowance for loan losses is a result of approximately $341,000
charged-off for valuation adjustments on real estate acquired through
foreclosure. Real estate was adjusted to fair market value based on updated
appraisals. As of September 30, 2007, there were eleven properties comprising
real estate acquired through foreclosure. Four of these properties are under
contract to sell and are anticipated to close during the third quarter. There is
no estimated gain or loss on the sale of these properties. Although management
believes that the Corporation's allowance for loan losses conforms with
generally accepted accounting principles based upon the available facts and
circumstances, there can be no assurance that additions to the allowance will
not be necessary in future periods, which would adversely affect our results of
operations.
Deposits increased $9.6 million, or 4.7%, to $215.1 million at September 30,
2007, from $205.5 million at December 31, 2006. The increase in deposits is due
primarily to offering competitive rates on certificates of deposits to increase
our customer base and provide liquidity. Advances from the Federal Home Loan
Bank of Cincinnati increased by $772,000, or 2.6%, to $30.0 million at September
30, 2007, from $29.2 million at December 31, 2006.
Shareholders' equity decreased $4.0 million, or 5.6%, to $68.2 million at
September 30, 2007, from $72.2 million at December 31, 2006. The decrease
primarily resulted from the repurchase of $4.4 million in common stock
classified as treasury shares and dividends paid of $886,000, which were
partially offset by net earnings of $752,000. At September 30, 2007, Cheviot
Financial had the ability to purchase an additional 66,706 shares under its
announced stock repurchase plan.
16
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2007 and 2006
General
Net earnings for the nine months ended September 30, 2007 totaled $752,000, a
$552,000 decrease from the $1.3 million net earnings reported for the same
period in 2006. The decrease in net earnings reflects a decrease in net interest
income of $351,000 and an increase of $463,000 in general, administrative and
other expenses, which were partially offset by an increase in other income of
$12,000 and a decrease of $265,000 in federal income taxes for the 2007 period.
Net Interest Income
Total interest income increased $1.1 million, or 9.2%, to $13.3 million for the
nine-months ended September 30, 2007, from the comparable period in 2006.
Interest income on loans increased $819,000, or 7.9%, to $11.2 million during
the 2007 period from $10.4 million for the 2006 period. This increase was due
primarily to a $14.1 million, or 6.1%, increase in the average balance of loans
outstanding, and a 10 basis point increase in the weighted-average yield on
loans to 6.08% for the 2007 period from 5.98% for the nine months ended
September 30, 2006.
Interest income on mortgage-backed securities decreased $92,000, or 14.6%, to
$536,000 for the nine months ended September 30, 2007, from $628,000 for the
same period in 2006, due primarily to a $5.9 million decrease in the average
balance of securities outstanding, which was partially offset by a 107 basis
point increase in the average yield period to period. The average balance of
mortgage-backed securities is down as a result of the Corporation's ability to
use adjustable rate mortgages as an investment alternative for interest rate
risk purposes. Interest income on investment securities increased $450,000, or
48.0%, to $1.4 million for the nine months ended September 30, 2007, compared to
$938,000 for the same period in 2006, due primarily to a 99 basis point increase
in the average yield to 5.25% in the 2007 period, and an increase of $5.9
million, or 20.1% in the average balance of investment securities outstanding.
The average balance of investment securities increased as a result of the
Corporation's increased liquidity and ability to invest in higher yielding
securities. Interest income on other interest-earning deposits decreased
$58,000, or 25.8% to $167,000 for the nine months ended September 30, 2007, as
compared to the same period in 2006.
Interest expense increased $1.5 million, or 26.4% to $7.0 million for the nine
months ended September 30, 2007, from $5.6 million for the same period in 2006.
Interest expense on deposits increased by $1.5 million, or 34.7%, to $6.0
million for the nine months ended September 30, 2007, from $4.4 million for the
same period in 2006 due primarily to an 64 basis point increase in the weighted
average costs of deposits to 3.75 % during the 2007 period and a $21.9 million,
or 11.6%, increase in the weighted-average balance outstanding. Interest expense
on borrowings decreased by $64,000, or 5.6%, due primarily to a $1.9 million, or
6.0%, decrease in the average balance outstanding, which was partially offset by
a 2 basis point increase in the average cost of borrowings. The increase in the
yields on interest-earning assets and costs of interest-bearing liabilities were
due primarily to the overall increase in interest rates during the 2007 period.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $351,000, or 5.3%, to $6.2 million for the nine
months ended September 30, 2007. The average interest rate spread decreased to
2.06% for the nine months ended September 30, 2007 from 2.33% for the nine
months ended September 30, 2006. The net interest margin decreased to 2.80% for
the nine months ended September 30, 2007 from 3.08% for the nine months ended
September 30, 2006.
17
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2007 and 2006 (continued)
Provision for Losses on Loans
As a result of the allowance for loan losses analysis described elsewhere in
this document, management recorded a $15,000 provision for losses on loans for
the nine months ended September 30, 2007. There was no provision for losses on
loans for the nine months ended September 30, 2006. There can be no assurance
that the loan loss allowance will be sufficient to cover losses on
non-performing loans in the future, however management believes they have
identified all known and inherent losses that are probable and that can be
reasonably estimated within the loan portfolio, and that the allowance for loan
losses is adequate to absorb such losses.
Other Income
Other income increased $12,000, or 3.0%, to $411,000 for the nine months ended
September 30, 2007, compared to the same period in 2006, due primarily to an
increase in other operating income of $22,000, a decrease of $18,000 in the loss
on sale of real estate acquired through foreclosure and an increase in the gain
on the sale of loans of $17,000, which were partially offset by a decrease of
$44,000 in the gain on sale of office premises and equipment.
General, Administrative and Other Expense
General, administrative and other expense increased $463,000, or 9.1%, to $5.5
million for the nine months ended September 30, 2007, from $5.1 million for the
comparable period in 2006. This increase is a result of an increase of $188,000
in employee compensation and benefits, a $97,000 increase in occupancy and
equipment, a $83,000 increase in property payroll and other taxes, a $13,000
increase in legal and professional services and an increase of $60,000 in other
operating expense. The increase in employee compensation and benefits is due
primarily to an increase in the number of employees reflecting three complete
quarter's of operation of two additional branches during 2007 as compared to two
quarter's of operation in 2006. The increase in occupancy and equipment is due
primarily to expense incurred for the operation of the two new branches opened
in the latter quarters of 2006. The increase in property, payroll and other
taxes is due primarily to an increase in the Ohio franchise tax. The increase in
legal and professional services was due primarily to expenses incurred for
litigation proceedings wherein the Corporation was defending its security
interest in collateral. The Corporation has reached a settlement regarding this
litigation of $50,000, accounting for the majority of the increase in other
operating expense for the 2007 nine month period.
Federal Income Taxes
The provision for federal income taxes decreased $265,000, or 43.2%, to $349,000
for the nine months ended September 30, 2007, from $614,000 for the same period
in 2006, due primarily to a $817,000, or 42.6%, decrease in pre-tax earnings.
The effective tax rate was 31.7% and 32.0% for the nine month periods ended
September 30, 2007 and 2006. The difference between the Corporation's effective
tax rate in the 2007 and 2006 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.
18
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2007 and 2006
General
Net earnings for the three months ended September 30, 2007 totaled $275,000, a
$162,000 decrease from the $437,000 net earnings reported in the September 2006
period. The decrease in net earnings reflects a decrease in net interest income
after the provision for losses on loans of $97,000, a decrease of $23,000 in
other income and an increase of $115,000, in general, administrative and other
expenses, which was partially offset by an a decrease of $73,000 in federal
income taxes for the 2007 quarter.
Net Interest Income
Total interest income increased $232,000, or 5.4%, to $4.5 million for the
three-months ended September 30, 2007, from the comparable quarter in 2006.
Interest income on loans increased $220,000, or 6.1%, to $3.8 million during the
2007 quarter from $3.6 million for the 2006 quarter. This increase was due
primarily to a $11.9 million, or 5.0%, increase in the average balance of loans
outstanding, and a 6 basis point increase in the average yield on loans to 6.13%
for the 2007 quarter from 6.07% for the three months ended September 30, 2006.
Interest income on mortgage-backed securities decreased $34,000, or 16.7%, to
$170,000 for the three months ended September 30, 2007, from $204,000 for the
comparable 2006 quarter, due primarily to a $5.6 million decrease in the average
balance of securities outstanding, which was partially offset by a 108 basis
point increase in the average yield period to period. Interest income on
investment securities increased $122,000, or 32.1%, to $502,000 for the three
months ended September 30, 2007, compared to $380,000 for the same quarter in
2006, due primarily to a 102 basis point increase in the average yield to 5.51%
in the 2007 quarter, and an increase of $2.6 million, or 7.6% in the average
balance of investment securities outstanding. Interest income on other
interest-earning deposits decreased $76,000, or 66.1% to $39,000 for the three
months ended September 30, 2007.
Interest expense increased $314,000, or 14.7% to $2.4 million for the three
months ended September 30, 2007, from $2.1 million for the same quarter in 2006.
Interest expense on deposits increased by $270,000, or 15.2%, to $2.1 million
from $1.8 million due primarily to a 40 basis point increase in the average
costs of deposits to 3.90% during the 2007 quarter due to the total composition
of deposits shifting to higher rate certificates of deposit and a $6.5 million,
or 3.2%, increase in the average balance outstanding. Interest expense on
borrowings increased by $44,000, or 12.6%, due primarily to a $2.6 million, or
8.9%, increase in the average balance outstanding and a 17 basis point increase
in the average cost of borrowings. The increase in the yields on
interest-earning assets and costs of interest-bearing liabilities were due
primarily to the overall increase in interest rates during the September 2007
quarter.
As a result of changes in interest income and interest expense, net interest
income decreased by $82,000, or 3.8%, to $2.1 million for the three months ended
September 30, 2007, as compared to the same quarter in 2006. The average
interest rate spread decreased to 2.00% for the three months ended September 30,
2007 from 2.13% for the three months ended September 30, 2006. The net interest
margin decreased to 2.77% for the three months ended September 30, 2007 from
2.91% for the three months ended September 30, 2006.
19
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Provision for Losses on Loans
As a result of the allowance for loan losses analysis described elsewhere in
this document, management recorded a $15,000 provision for losses on loans for
the three months ended September 30, 2007. There was no provision for losses on
loans for the nine months ended September 30, 2006. There can be no assurance
that the loan loss allowance will be sufficient to cover losses on
non-performing loans in the future, however management believes they have
identified all known and inherent losses that are probable and that can be
reasonably estimated within the loan portfolio, and that the allowance for loan
losses is adequate to absorb such losses.
Other Income
Other income decreased $23,000, or 13.1%, to $153,000 for the three months ended
September 30, 2007, compared to the same quarter in 2006, due primarily to a
decrease in the gain on sale of office premises and equipment of $44,000, which
was partially offset by an increase in other operating income of $16,000 and an
increase in the gain on the sale of loans of $7,000.
General, Administrative and Other Expense
General, administrative and other expense increased $115,000, or 6.8%, to $1.8
million for the three months ended September 30, 2007, from $1.7 million for the
comparable quarter in 2006. This increase is a result of an increase of $29,000
in employee compensation and benefits, a $30,000 increase in occupancy and
equipment, a $50,000 increase in property, payroll and other taxes. The increase
in employee compensation and benefits is due primarily to an increase in the
number of employees reflecting the full operation of two additional branches
during the 2007 period as compared with the 2006 period. The increase in
property, payroll and other taxes is due primarily to an increase in Ohio
franchise tax.
Federal Income Taxes
The provision for federal income taxes decreased $73,000, or 36.3%, to $128,000
for the three months ended September 30, 2007, from $201,000 for the same
quarter in 2006, due primarily to a $235,000, or 36.8%, decrease in pre-tax
earnings. The effective tax rate was 31.8% and 31.5% for the three month periods
ended September 30, 2007 and 2006, respectively. The difference between the
Corporation's effective tax rate in the 2007 and 2006 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.
20
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)