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CHEV > SEC Filings for CHEV > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for CHEVIOT FINANCIAL CORP.


10-May-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2.

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.

Recent Developments

On April 23, 2013, shareholders approved the 2013 Equity Incentive Plan.

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 underlying collateral, the financial strength of the borrower, results of internal loan review 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 allocations are 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 allowance. 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.

The acquired assets and assumed liabilities of First Franklin were measured at estimated fair values, as required by 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, the cost of servicing various depository products and other significant estimates. Management used market quotations to determine the fair value of investment securities and FHLB advances.


Cheviot Financial Corp.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

Critical Accounting Policies (continued)

The acquired assets of First Franklin and Franklin Savings include loans receivable. Loans receivable acquired with a deteriorated credit quality amounted to $25.0 million with a related credit quality discount of $5.5 million. The method of measuring carrying value of purchased loans differs from loans originated by the Corporation, and as such, the Corporation identifies purchased loans and purchased loans with a credit quality discount.

We classify our investments in debt and equity securities as either held-to-maturity or available-for-sale. Securities classified as held-to maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. We obtain our estimated fair values from a third party service. This service's fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, we expense the impairment of the investment in the period in which the event or change occurred. We also consider how long a security has been in a loss position in determining if it is other than temporarily impaired. Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk -free interest rates, general credit spread widening, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral.

Discussion of Financial Condition Changes at March 31, 2013 and December 31, 2012

Total assets decreased $11.7 million, or 1.9%, to $620.3 million at March 31, 2013, from $632.0 million at December 31, 2012. The decrease in total assets primarily reflects a decrease in investment securities as $61.2 million in investment securities matured during the three months ended March 31, 2013 and a decrease in loans receivable as a result of selling $16.6 million of loans in the secondary market.

Cash, federal funds and interest-earning deposits increased $23.5 million, or 93.5% to $48.6 million at March 31, 2013. The increase in cash and cash equivalents at March 31, 2013 was due to a $12.6 million increase in federal funds sold, an increase of $9.5 million increase in interest-earning deposits and an increase of $1.3 million in cash and due from banks. Investment securities decreased $28.4 million, or 14.5%, to $167.6 million at March 31, 2013. The decrease in investment securities is primarily the result of $61.2 million of investment securities maturing, which was partially offset by investing approximately $31.3 million in U.S. Government agencies and $1.9 million in corporate securities during the three months ended March 31, 2013. At March 31, 2013, all investment securities were classified as available for sale. During this period of prolonged low interest rates the Bank is investing in shorter-term and more liquid investments in order to position the Bank to be prepared for investment opportunities when interest rates begin to in increase.

Mortgage-backed securities decreased $555,000, or 5.8%, to $9.1 million at March 31, 2013, from $9.6 million at December 31, 2012. The decrease in mortgage-backed securities was due primarily to $510,000 in principal repayments. At March 31, 2013, $5.6 million of mortgage-backed securities were classified as available for sale, while $3.5 million were classified as held to maturity. As of March 31, 2013, none of the mortgage-backed securities were considered other than temporarily impaired.


Cheviot Financial Corp.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes at March 31, 2013 and December 31, 2012 (continued)

Loans receivable, including loans held for sale, decreased $7.0 million, or 2.0%, to $333.4 million at March 31, 2013, from $340.4 million at December 31, 2012. The change in net loans receivable reflects loan sales totaling $16.6 million and loan principal repayments of $18.4 million, which were partially offset by loan originations of $28.8 million. The change in the composition of the Corporation's assets reflects management's decision to service our customer base by originating loans for sale and recording gains, while simultaneously managing interest rate risk.

The allowance for loan losses totaled $1.6 million and $2.2 million at March 31, 2013 and December 31, 2012, 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. The $55,000 provision for losses on loans during the quarter ended March 31, 2013 reflected these factors, as well as, replenishing the allowance for charge-offs and the need to provide approximately $577,000 in specific reserves for five residential properties with principal balances totaling $1.6 million that were transferred to real estate owned during the quarter. 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 March 31, 2013.

Originated non-performing and impaired loans totaled $4.9 million and $5.7 million at March 31, 2013 and December 31, 2012, respectively. At March 31, 2013, originated non-performing and impaired loans were comprised of forty-two loans secured by one- to four-family residential real estate totaling $3.9 million, one multi-family loan totaling $95,000 and four commercial and non-residential loans totaling $941,000. At March 31, 2013 and December 31, 2012 real estate acquired through foreclosure was $4.6 million and $3.9 million, respectively. The allowance for loan losses represented 24.6% and 25.2% of Cheviot Financial's originated non-performing and impaired loans at March 31, 2013 and December 31, 2012, respectively. Although management believes that the Corporation's allowance for loan losses conforms to 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 totaled $486.2 million at March 31, 2013, a decrease of $4.4 million, or 0.9% from $490.6 million at December 31, 2012. Advances from the Federal Home Loan Bank of Cincinnati decreased by $2.0 million, or 8.2%, to $22.3 million at March 31, 2013, from $24.3 million at December 31, 2012. The decrease is a result of approximately $2.0 million in repayments during the three months ended March 31, 2013.

Shareholders' equity decreased $2.7 million, or 2.5%, from December 31, 2012. The decrease primarily resulted from purchasing 233,231 shares through the stock buyback program for a total cost of $2.5 million, dividend payments on common stock of $663,000 and a decrease in the unrealized gain on securities designated as available for sale of $297,000. These decreases were partially offset by net income of $791,000.


Cheviot Financial Corp.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes at March 31, 2013 and December 31, 2012 (continued)

Liquidity and Capital Resources

We monitor our liquidity position on a daily basis using reports that summarize all deposit activity and loan commitments. A significant portion of our deposit base is comprised of time deposits. At March 31, 2013, $122.1 million of time deposits are due to mature within one year. The daily deposit activity report allows us to price our time deposits competitively. Because of this and our deposit retention experience, we anticipate that a significant portion of maturing time deposits will be retained. At March 31, 2013, we had loan commitments of $4.8 million. Our loan commitments are funded or expire within 45 days from the date of the commitment.

Borrowings from the Federal Home Loan Bank of Cincinnati decreased $2.0 million during the three months ended March 31, 2013. At March 31, 2013, we had the ability to increase such borrowings by approximately $132.6 million. The additional borrowings can be used to offset any decrease in customer deposits or to fund loan commitments. The Corporation's other borrowings were primarily limited to $902,000 of lease obligations.

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2013 and 2012

General

Net earnings for the three months ended March 31, 2013 totaled $791,000, a $92,000 decrease from the $883,000 in net earnings reported for the March 2012 period. The decrease in net earnings reflects a decrease in net interest income of $112,000 and a decrease in other income of $29,000 and an increase in general, administrative and other expense of $101,000, which were partially offset by and a decrease of $95,000 in the provision for losses on loans and a decrease in the provision for federal income taxes of $55,000.

Net Interest Income

Total interest income decreased $476,000, or 8.6%, to $5.1 million for the three-months ended March 31, 2013, from the comparable quarter in 2012. Interest income on loans decreased $758,000, or 15.7%, to $4.1 million during the 2013 period from $4.8 million for the 2012 period. This decrease was due primarily to a $41.5 million decrease in the average balance of loans outstanding and by a 27 basis point decrease in the average yield to 4.84% from 5.11% in the 2012 quarter.

Interest income on mortgage-backed securities decreased $19,000, or 31.7%, to $41,000 for the three months ended March 31, 2013, from $60,000 for the 2012 quarter, due primarily to a 36 basis point decrease in the average yield and a $2.0 million decrease in the average balance of securities outstanding period to period. Interest income on investment securities increased $300,000, or 52.7%, to $869,000 for the three months ended March 31, 2013, compared to $569,000 for the same quarter in 2012, due primarily to an increase of $63.6 million, or 52.3%, in the average balance of investment securities outstanding and a 1 basis point increase in the average yield to 1.88% in the 2013 quarter. Interest income on other interest-earning deposits increased $1,000, or 1.0%, to $97,000 for the three months ended March 31, 2013, as compared to the same period in 2012.


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 March 31, 2013 and 2012 (continued)

Interest expense decreased $364,000, or 23.9%, to $1.2 million for the three months ended March 31, 2013, from $1.5 million for the same period in 2012. Interest expense on deposits decreased by $305,000, or 24.0%, to $967,000 from $1.3 million, due primarily to a $9.8 million decrease in the average balance outstanding, which was partially offset by 23 basis point decrease in the average costs of deposits to 0.80% during the 2013 period. Interest expense on borrowings decreased by $59,000, or 23.4%, due primarily to a $6.7 million, or 22.2%, decrease in the average balance outstanding and a 5 basis point decrease in the average cost of borrowings. As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $112,000, or 2.8%, to $3.9 million for the three months ended March 31, 2013. The average interest rate spread decreased 11 basis points to 2.86% for the three months ended March 31, 2013 from 2.97% for the three months ended March 31, 2012. The net interest margin decreased to 2.91% for the three months ended March 31, 2013 from 3.00% for the three months ended March 31, 2012.

Provision for Losses on Loans

As a result of an analysis of historical experience, the volume and type of lending conducted by the Savings Bank, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Savings Bank's market area, and other factors related to the collectability of the Savings Bank's loan portfolio, management recorded a $55,000 provision for losses on loans for the three months ended March 31, 2013 and $150,000 for the three months ended March 31, 2012. Non-performing originated loans were 2.4% and 2.7% of net originated loans at March 31, 2013 and December 31, 2012, respectively. The 2013 provision for loan losses reflects the amount necessary to maintain an adequate allowance based on our historical loss experience and other external factors. These other external factors, economic conditions, and collateral value changes, have had a negative impact on non-owner-occupied loans in the portfolio. There can be no assurance that the loan loss allowance will be sufficient to cover losses on 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 is adequate to absorb such losses.

Other Income

Other income decreased $29,000, or 3.0%, to $947,000 for the three months ended March 31, 2013, compared to the same quarter in 2012, due primarily to a decrease in the gain on sale of loans of $139,000 and a decrease in service fee income of $39,000, which was partially offset by an increase in other operating income of $137,000.

General, Administrative and Other Expense

General, administrative and other expense increased $101,000, or 2.8%, to $3.7 million for the three months ended March 31, 2013, from $3.6 million for the comparable quarter in 2012. The increase is a result of an increase of $73,000 in property, payroll and other taxes and an increase of $49,000 in real estate owned loss expense. The increase in property, payroll and other taxes is due to an increase in franchise tax expense. The increase in real estate owned loss expense is a result of the impairment of two properties acquired through foreclosure based on updated appraised values. It is expected that our compensation expense will increase following shareholder approval of our stock equity benefit plan.


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 March 31, 2013 and 2012 (continued)

Federal Income Taxes

The provision for federal income taxes decreased $55,000, or 14.1%, for the three months ended March 31, 2013. Cheviot Financial has approximately $3.6 million in remaining operating loss carryforwards to offset future taxable income for 20 years. These losses are subject to the Internal Revenue Code
Section 382 net operating loss limitations of $1.1 million allowed on an annual basis. The effective tax rate for the three months ended March 31, 2013 and 2012 was 29.8% and 30.6%, respectively.


Cheviot Financial Corp.

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