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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _____________________
COMMISSION FILE NUMBER: 000-33405
CHEVIOT FINANCIAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
FEDERAL 56-2423720
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3723 GLENMORE AVENUE, CHEVIOT, OHIO 45211
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(Address of Principal Executive Offices) (Zip Code)
(513) 661-0457
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-22).
YES NO X
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As of June 30, 2004, there were 9,918,751 shares outstanding of the
Registrant's Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the average bid
and asked prices of the Common Stock as of June 30, 2004, ($10.55) was
$41,235,983.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2005 Annual Meeting of Stockholders (Parts I and
III).
TABLE OF CONTENTS
Item 1. Business..............................................................2
Regulation...........................................................22
Taxation.............................................................29
Management...........................................................30
Item 2. Properties...........................................................30
Item 3. Legal Proceedings....................................................30
Item 4. Submission of Matters to a Vote of Security Holders..................31
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities.................31
Item 6. Selected Financial Data..............................................31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........31
Item 8. Financial Statements and Supplementary Data..........................31
Item 9. Changes in and Disagreements With Accountants On
Accounting and Financial Disclosure..................................32
Item 9A. Controls and Procedures..............................................32
Item 9B. Other Information....................................................32
Item 10. Directors and Executive Officers of the Registrant...................32
Item 11. Executive Compensation...............................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...................................33
Item 13. Certain Relationships and Related Transactions.......................33
Item 14. Principal Accountant Fees and Services...............................33
Item 15. Exhibits and Financial Statement Schedules...........................34
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
This Annual Report contains certain "forward-looking statements" which
may be identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage, commercial and
other loans, real estate values, competition, changes in accounting principles,
policies, or guidelines, changes in legislation or regulation, and other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing products and services.
GENERAL
CHEVIOT FINANCIAL CORP.
Following completion of our mutual holding company reorganization and
stock offering on January 5, 2004, Cheviot Financial Corp. became the mid-tier
stock holding company for Cheviot Savings Bank. The business of Cheviot
Financial Corp. consists of holding all of the outstanding common stock of
Cheviot Savings Bank. Cheviot Financial Corp. is chartered under Federal law. As
part of our reorganization, we issued a total of 9,918,751 shares of common
stock. Our mutual holding company parent, Cheviot Mutual Holding Company,
received 5,455,313 of our common shares, and we sold 4,388,438 shares to our
depositors and a newly formed Employee Stock Ownership Plan. In addition, 75,000
shares were issued to a charitable foundation formed by Cheviot Savings Bank.
Under federal regulations, so long as Cheviot Mutual Holding Company exists, it
will own at least 50.1% of the voting stock of Cheviot Financial Corp. At
December 31, 2004, Cheviot Financial Corp. had total consolidated assets of
$276.6 million, total deposits of $180.0 million, and stockholders' equity of
$77.9 million. Our executive offices are located at 3723 Glenmore Avenue,
Cheviot, Ohio 45211, and our telephone number is (513) 661-0457.
In 2003, Cheviot Savings Bank's board of directors decided to change the
Bank's fiscal year end from March 31 to December 31. In this regard, the
Company's fiscal year ends on December 31.
CHEVIOT SAVINGS BANK
Cheviot Savings Bank was established in 1911 as an Ohio-chartered
savings and loan association. Following our reorganization we became an
Ohio-chartered stock savings and loan. Our primary business activity is the
origination of one- to four-family real estate loans. To a lesser extent, we
originate construction, multi-family, commercial real estate and consumer loans.
We also invest in securities, primarily United States Government Agency
securities and mortgage-backed securities.
MARKET AREA
We conduct our operations from our executive office in Cheviot, Ohio,
three full-service branches, all of which are located in the western section of
Hamilton County, Ohio, and a lending center in Warren County, Ohio. Cheviot,
Ohio is located in Hamilton County and is 10 miles west of downtown
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Cincinnati. Hamilton County, Ohio represents our primary geographic market area
for loans and deposits with our remaining business operations conducted in the
larger Cincinnati metropolitan area which includes Warren, Butler and Clermont
Counties. We also conduct a moderate level of business in the southeastern
Indiana region, primarily in Dearborn, Ripley, Franklin and Union Counties. We
will also originate loans secured by properties in Northern Kentucky. The local
economy is diversified into most economic sectors, with services, trade and
manufacturing employment remaining the most prominent employment sectors in
Hamilton County. Hamilton County is a primarily developed and urban county. The
employment base is well diversified and there is no dependence on one area of
the economy for continued employment. Our future growth opportunities will be
influenced by the growth and stability of the regional, state and national
economies, other demographic trends and the competitive environment.
Hamilton County and Cincinnati have experienced a declining population
since the 1990 census while the other counties in which we conduct business have
experienced an increasing population. The population decline in both Hamilton
County and the City of Cincinnati results from the other counties and Northern
Kentucky being more successful in attracting new and existing businesses to
locate within their areas through economic incentives, including less expensive
real estate options for office facilities. Individuals are moving to these other
areas to be closer to their place of employment, for newer, less expensive
housing and more suburban neighborhoods. Median household and per capita income
measures for Hamilton County are above comparable measures for both the United
States and Ohio, which we believe indicates the relatively stable and
diversified economy in the regional market served by Cheviot Savings Bank.
Recent employment trends indicate lower levels of unemployment in Hamilton
County compared to national and state-wide unemployment rates.
We believe that we have developed products and services that will meet
the financial needs of our current and future customer base; however, we, plan
and believe it is necessary, to expand the range of products and services that
we offer to be more competitive in-our market area. Marketing strategies will
focus on the strength of our knowledge of local consumer and small business
markets, as well as expanding relationships with current customers and reaching
out to develop new, profitable business relationships.
COMPETITION.
We face intense competition within our market both in making loans and
attracting deposits. Hamilton County has a high concentration of financial
institutions including large money center and regional banks, community banks
and credit unions. Some of our competitors offer products and services that we
currently do not offer, such as trust services and private banking. Our
competition for loans and deposits comes principally from commercial banks,
savings institutions, mortgage banking firms, consumer finance companies and
credit unions. We face additional competition for deposits from short-term money
market funds, brokerage firms, mutual funds and insurance companies. Our primary
focus is to build and develop profitable customer relationships across all lines
of business while maintaining our position as a community bank.
LENDING ACTIVITIES.
GENERAL. Historically, our principal lending activity has been the
origination, for retention in our portfolio, of fixed-rate and adjustable-rate
mortgage loans collateralized by one- to four-family residential real estate
located within our primary market area. During 2003, we began selling certain
fixed-rate loans into the secondary market. We also originate commercial real
estate loans, including multi-family residential real estate loans, construction
loans and consumer loans.
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LOAN PORTFOLIO COMPOSITION. Set forth below is selected information
concerning the composition of our loan portfolio in dollar amounts and in
percentages as of the dates indicated.
AT DECEMBER 31, AT MARCH 31,
--------------------------------------- ----------------------------------------------------------
2004 2003 2003 2002 2001
------------------ ------------------ ------------------ ----------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to four-family
residential(1)........ $182,016 86.86% $166,998 86.11% $163,232 85.91% $146,747 85.51% $122,019 83.43%
Multi-family residential. 9,944 4.75 7,714 3.98 7,787 4.10 7,281 4.24 9,264 6.33
Construction............. 10,718 5.11 13,770 7.10 12,368 6.51 10,773 6.28 5,454 3.73
Commercial(2)............ 6,750 3.22 5,278 2.72 6,305 3.32 6,569 3.83 9,309 6.37
Consumer(3)................. 133 0.06 169 0.09 303 0.16 240 0.14 200 0.14
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans................. 209,561 100.00% 193,929 100.00% 189,995 100.00% 171,610 100.00% 146,246 100.00%
====== ====== ====== ====== ======
Less:.......................
Undisbursed portion of
loans in process...... 4,754 6,038 6,584 4,452 2,365
Net deferred loan
origination fees...... 233 270 232 125 95
Allowance for loan
losses................ 732 768 735 483 239
-------- -------- -------- -------- --------
Total loans, net............ $203,842 $186,853 $182,444 $166,550 $143,547
======== ======== ======== ======== ========
- --------------------------
(1) Includes home equity lines of credit, loans purchased and loans held for
sale.
(2) Includes land loans.
(3) Loans secured by deposit accounts.
4
LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of December 31, 2004, regarding the amount of loans maturing in
our portfolio.
AT DECEMBER 31, 2004
--------------------------------------------------------------------------------------
TEN
ONE THREE FIVE THROUGH BEYOND
WITHIN ONE THROUGH THROUGH THROUGH TWENTY TWENTY
YEAR(2) THREE YEARS FIVE YEARS TEN YEARS YEARS YEARS TOTAL
--------------------------------------------------------------------------------------
(IN THOUSANDS)
Real estate loans:
One-to four-family
residential(1).......... $ 4,826 $ 10,487 $ 11,708 $ 35,587 $ 108,594 $ 10,814 $ 182,016
Multi-family residential 273 606 699 2,245 6,121 -- 9,944
Construction............ 264 577 648 1,993 7,236 -- 10,718
Commercial(2)........... 185 412 474 1,524 4,155 -- 6,750
Consumer(3)................ 93 40 -- -- -- -- 133
----------- ---------- ---------- ---------- ---------- ---------- ----------
Total loans................ $ 5,641 $ 12,122 $ 13,529 $ 41,349 $ 126,106 $ 10,814 $ 209,561
=========== ========== ========== ========== ========== ========== ==========
- ----------------------------
(1) Includes home equity lines of credit, loans purchased, loans held for
sale and construction loans.
(2) Includes land loans.
(3) Loans secured by deposit accounts.
FIXED AND ADJUSTABLE-RATE LOAN SCHEDULE. The following table sets forth
at December 31, 2004, the dollar amount of all fixed-rate and adjustable-rate
first mortgage loans and home equity lines of credit due after December 31,
2005.
DUE AFTER DECEMBER 31, 2005
--------------------------------
FLOATING
OR
FIXED ADJUSTABLE TOTAL
--------- ------------ ---------
(IN THOUSANDS)
Real estate loans:
One-to four-family
residential(1).......... $142,638 $ 34,552 $177,190
Multi-family residential 7,785 1,886 9,671
Construction ........... 10,454 -- 10,454
Commercial(2)........... 5,285 1,280 6,565
Consumer(3)................ 40 -- 40
-------- -------- --------
Total loans................ $166,202 $ 37,718 $203,920
======== ======== ========
-----------------------
(1) Includes home equity lines of credit, loans purchased, loans
held for sale and construction loans.
(2) Includes land loans.
(3) Loans secured by deposit accounts.
RESIDENTIAL MORTGAGE LOANS. Cheviot Savings Bank originates mortgage
loans secured by one-to four-family properties, most of which serve as the
primary residence of the owner. As of December 31, 2004, one-to four-family
residential mortgage loans totaled $182.0 million, or 86.9% of our total loan
portfolio. At December 31, 2004, our one-to four-family residential loan
portfolio consisted of 23.3% in adjustable-rate loans and 76.7% in fixed-rate
loans. Most of our loan originations result from relationships with existing or
past customers, members of our local community and referrals from realtors,
attorneys and builders.
Our mortgage loans generally, have terms from 15 to 30 years and
amortize on a monthly basis with principal and interest due each month. As of
December 31, 2004, we offered the following residential mortgage loan products:
o Fixed-rate loans of various terms;
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o Adjustable-rate loans;
o Home equity lines of credit;
o Loans tailored for first time home buyers; and
o Construction/permanent loans.
Residential real estate loans may remain outstanding for significantly
shorter periods than their contractual terms as borrowers refinance or prepay
loans at their option without penalty. Our residential mortgage loans
customarily contain "due on sale" clauses which permit us to accelerate the
indebtedness of the loan upon transfer of ownership in the mortgage property.
We currently sell a portion of our conforming fixed-rate loans in the
secondary market and hold the remaining fixed-rate loans and adjustable-rate
loans in our portfolio. We retain servicing on all loans sold. We lend up to a
maximum loan-to-value ratio of 100% on mortgage loans secured by owner-occupied
properties, with the condition that private mortgage insurance is required on
loans with a loan-to-value ratio in excess of 85%. To a lesser extent, we
originate non-conforming loans that are tailored to the needs of the local
community.
Our adjustable-rate mortgage loans are originated with a maximum term of
30 years. Adjustable-rate loans include loans that provide for an interest rate
based on the interest paid on U.S. Treasury Securities of corresponding terms,
plus a margin. Our adjustable-rate mortgages include limits on the increase or
decrease in the interest rate. The interest rate may increase or decrease by a
maximum of 2.0% per adjustment with a ceiling rate over the life of the loan,
which generally is 5.0%. We currently offer adjustable-rate loans with initial
rates below those which would prevail under the foregoing computations based
upon our determination of market factors and competitive rates for
adjustable-rate loans in our market. For one year adjustable-rate loans,
borrowers are qualified at the initial rate and at 2.0% over the initial rate.
For all other adjustable-rate loans, borrowers are qualified at the initial
rate.
The retention of adjustable-rate loans in our portfolio helps reduce
exposure to changes in interest rates. However, there are credit risks resulting
from potential increased costs to the borrower as a result of rising interest
rates. During periods of rising interest rates, the risk of default on
adjustable-rate mortgages may increase due to the upward adjustment of interest
cost to the borrower.
During the year ended December 31, 2004, we originated $17.1 million in
adjustable-rate mortgage loans and $43.5 million in fixed-rate mortgage loans.
Home equity lines of credit are generally made for owner-occupied homes
and are secured by first or second mortgages on residential properties. We are
attempting to increase our originations of home equity lines of credit. We
generally offer home equity lines of credit with a maximum loan to appraised
value ratio of 85% including senior liens on the subject property. We currently
offer these loans for terms of up to 10 years, and with adjustable rates that
are tied to the prime rate. At December 31, 2004, home equity lines of credit
represented $7.3 million of our one-to four-family residential loans.
CONSTRUCTION LOANS. Cheviot Savings Bank originates construction loans
for owner-occupied residential real estate, and, to a lesser extent, for
commercial builders of residential real estate, improvement to existing
structures, new construction for commercial purposes and residential land
development.
6
At December 31, 2004, construction loans represented $10.7 million, or
5.1%, of Cheviot Savings Bank's total loans. At December 31, 2004, the
unadvanced portion of these constructions loans totaled $4.8 million.
Cheviot Savings Bank's construction loans generally provide for the
payment of interest only during the construction phase (12 months for single
family residential and varying terms for commercial property and land
development). At the end of the construction phase, the loan converts to a
permanent mortgage loan. Before making a commitment to fund a construction loan,
Cheviot Savings Bank requires detailed cost estimates to complete the project
and an appraisal of the property by an independent licensed appraiser. Cheviot
Savings Bank also reviews and inspects each property before disbursement of
funds during the term of the construction loan. Loan proceeds are disbursed
after inspection based on the percentage of completion method.
Construction lending generally involves a greater degree of risk than
other one-to four-family mortgage lending. The repayment of the construction
loan is, to a great degree, dependent upon the successful and timely completion
of construction. Various potential factors including construction delays or the
financial viability of the builder may further impair the borrower's ability to
repay the loan.
MULTI-FAMILY LOANS. At December 31, 2004, $9.9 million, or 4.8%, of our
total loan portfolio consisted of loans secured by multi-family real estate. We
originate fixed-rate and adjustable rate multi-family real estate loans with
amortization schedules of up to 25 years. We generally lend up to 80% of the
property's appraised value. Appraised values are determined by an outside
independent appraiser that we designate. In deciding to originate a multi-family
loan, we review the creditworthiness of the borrower, the expected cash flows
from the property securing the loan, the cash flow requirements of the borrower,
the value of the property and the quality of the management involved with the
property. We generally obtain the personal guarantee of the principals when
originating multi-family real estate loans.
Multi-family real estate lending is generally considered to involve a
higher degree of credit risk than one-to four-family residential lending. Such
lending may involve large loan balances concentrated on a single borrower or
group of related borrowers. In addition, the payment experience on loans secured
by income producing properties typically depends on the successful operation of
the related real estate project. Consequently, the repayment of the loan may be
subject to adverse conditions in the real estate market or the economy
generally.
COMMERCIAL REAL ESTATE LOANS. We originate commercial real estate loans
to finance the purchase of real property, which generally consists of land
and/or developed real estate. In underwriting commercial real estate loans,
consideration is given to the property's historic and projected cash flow,
current and projected occupancy, location, physical condition and credit
worthiness of the borrower. At December 31, 2004, our commercial real estate
portfolio totaled $6.8 million, or 3.2%, of total loans. A majority of our
commercial real estate loans are secured by properties in Hamilton County. Our
commercial real estate portfolio is diverse as to borrower and property type.
7
Commercial real estate lending involves additional risks compared to
one- to four-family residential lending because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, and/or the collateral value of the
commercial real estate securing the loan. Repayment of such loans may be
subject, to a greater extent than residential loans, to adverse conditions in
the real estate market or the economy. Also, commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. Our policies limit the amount of loans to a single borrower or group
of related borrowers to reduce this risk.
Commercial real estate loans generally have a higher rate of interest
and shorter term than residential mortgage loans because of increased risks
associated with commercial real estate lending. Commercial real estate loans are
generally offered at one year adjustable-rates and fixed-rates with a term
generally not exceeding 25 years.
CONSUMER LOANS. On a limited basis, we make loans secured by deposit
accounts up to 90% of the amount of the depositor's collected deposit account
balance. At December 31, 2004, these loans totaled $133,000, or 0.06%, of total
loans. Consumer loans are generally offered for terms of one to five years
depending on the collateral and at fixed or variable rates of interest depending
on the product.
LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. While we originate
both fixed-rate and adjustable-rate loans, our ability to generate each type of
loan depends upon relative borrower demand and the pricing levels as set in the
local marketplace by competing banks, thrifts, credit unions, and mortgage
banking companies. Our volume of real estate loan originations is influenced
significantly by market interest rates, and, accordingly, the volume of our real
estate loan originations can vary from period to period. Our volume of
commercial real estate lending has decreased in recent years due to our effort
to improve asset quality and to emphasize relationship banking.
The following table sets forth the loan origination, sales and repayment
activities of Cheviot Savings Bank for the periods indicated.
FOR THE
FOR THE NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 DECEMBER 31, FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------------------------
2004 2003 2003 2002 2001
-----------------------------------------------------------------
(IN THOUSANDS)
Balance outstanding at beginning or period $186,853 $182,444 $166,550 $143,547 $139,076
Originations, including purchased loans
Real estate loans:
One-to four-family residential(1)... 47,736 42,667 54,106 49,330 18,831
Multi-family residential............ 2,406 998 3,936 1,671 382
Construction........................ 8,886 9,023 11,784 3,676 8,291
Commercial(2)....................... 1,541 926 2,922 2,290 839
Consumer(3)............................ 39 30 192 351 123
-----------------------------------------------------------------
Total loan originations........... 60,608 53,644 72,940 57,318 28,466
-----------------------------------------------------------------
Less:
Principal repayments................... 40,605 46,669 56,260 33,872 23,953
Transfers to foreclosed real estate.... 293 46 157 196 107
Loans sold in the secondary market(4).. 2,793 2,598 481 --- ---
Other(5)............................... (72) (78) 148 247 (65)
-----------------------------------------------------------------
Total deductions.................... 43,619 49,235 57,046 34,315 23,995
-----------------------------------------------------------------
Balance outstanding at end of period... $203,842 $186,853 $182,444 $166,550 $143,547
======== ======== ======== ======== ========
- ----------------------------
(1) Includes home equity lines of credit, loans purchased and loans held for
sale.
(2) Includes land loans.
(3) Loans secured by deposit accounts.
(4) Loans sold to the Federal Home Loan Bank of Cincinnati.
(5) Other items consist of loans in process, deferred loan origination fees,
unearned interest and the allowance for loan losses.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The lending activities of
Cheviot Savings Bank are subject to the written underwriting standards and loan
origination procedures established by the board of directors and management.
Loan originations are obtained through a variety of sources, primarily
consisting of existing customers and referrals from real estate brokers. Written
loan applications are taken by one of Cheviot Savings Bank's loan officers. The
loan officer also supervises the procurement
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of reports, appraisals and other documentation involved with a loan. Cheviot
Savings Bank obtains property appraisals from independent appraisers on
substantially all of its loans.
Cheviot Savings Bank's loan approval process is intended to provide
direction to management on all phases of real estate lending activity since such
real estate mortgage lending is the single most important revenue producing
investment of Cheviot Savings Bank. Therefore, Cheviot Savings Bank believes
that the underwriting of mortgage loans should be consistent with safe and sound
practices to ensure the financial viability of the Bank. The loan underwriting
policy is also established to provide appropriate limits and standards for all
extensions of credit in real estate or for the purpose of financing the
construction of a building or other improvement. Cheviot Savings Bank's loan
committee has the authority to approve or deny loan applications on one-to
four-family owner occupied properties up to $500,000. This committee also has
the authority for approving or denying loan applications on non-owner occupied
properties up to $100,000. The loan committee reviews all loan applications
submitted to Cheviot Savings Bank and lists such applications on a review sheet
that is submitted to the board of directors. The board of directors ratifies all
loans approved by the loan committee and approves all other loans other than
those specifically set forth above.
LOANS TO ONE BORROWER. State savings and loan institutions are subject
to the same loans to one borrower limits as those applicable to national banks,
which under current regulations restrict loans to one borrower to an amount
equal to 15% of unimpaired equity on an unsecured basis, and an additional
amount equal to 10% of unimpaired equity if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). Our loans to one borrower limit under this regulation is $8.9
million. Our policy provides that loans to one borrower (or related borrowers)
should not exceed $4.0 million (excluding the borrower's principal residence).
However, the board of directors may amend this limitation annually based on the
asset growth and capital position of Cheviot Savings Bank.
At December 31, 2004, the largest aggregate credit exposure to one
borrower consisted of five loans totaling $3.0 million. These loans were
performing in accordance with their terms. There were nine additional credit
relationships, including committed amounts, in excess of $1.0 million at
December 31, 2004.
ASSET QUALITY.
GENERAL. One of our key operating objectives has been, and continues to
be, to maintain a high asset quality. Our high proportion of one- to four-family
mortgage loans, our maintenance of sound credit standards for new loan
originations and our loan administration procedures have resulted in our
impaired and non-performing loans totaling to $251,000, or 0.12% of total loans
at December 31, 2004.
COLLECTION PROCEDURES. When a borrower fails to make required payments
on a loan, we take a number of steps to induce the borrower to cure the
delinquency and restore the loan to a current status. Cheviot Savings Bank has
implemented certain loan tracking policies and collection procedures to ensure
effective management of classified assets. Cheviot Savings Bank generally sends
a written notice of non-payment to its borrower after a loan is first past due.
If payment has not been received within a reasonable time period, personal
contact efforts are attempted by telephone or by letter. If no payment is
received the following month, a letter stating that the borrower is two months
behind is mailed indicating that the borrower needs to contact our collections
department, and make payment arrangements. If the borrower has missed two
consecutive payments, a demand letter will be sent by certified mail. On all
accounts that are not current ten days after the completion of the last step set
forth above our collection manager or staff member contacts the borrower by
phone at their home and if necessary, at their place of employment in order to
establish communications with the borrower concerning the delinquency and to try
to establish a
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meeting with the borrower to determine what steps are needed to bring the
borrower to a current status. If contact with the borrower by telephone is
unsuccessful and the loan becomes 60 days delinquent Cheviot Savings Bank sends
a letter stating its intention to begin foreclosure procedures. If no
satisfactory agreement has been reached with the borrower within 15 days after
the foreclosure intention letter, the Board of Directors will consider the
status of the delinquency and may authorize Cheviot Savings Bank's attorney to
send a letter to the borrower advising the borrower that foreclosure proceedings
will be initiated and setting forth the conditions which could forestall the
foreclosure. In selected cases, Cheviot Savings Bank may make an economic
decision to forego foreclosure and work with the borrower to-bring the loan
current. Repayment schedules may be entered into with chronically delinquent
borrowers if management determines this resolution is more advantageous to
Cheviot Savings Bank.
In connection with home equity lines of credit, when payment is first
past due the collection manager or staff member attempts to contact the borrower
by phone at their home. If phone contact is unsuccessful, the collection manager
or staff member will mail a late notice to the borrower at the beginning of the
following month indicating the need to contact the collections personnel and
bring the loan current. If the preceding steps are unsuccessful then the
collection manager will implement the steps described above leading to
foreclosure.
Cheviot Savings Bank has implemented several credit risk measures in the
loan origination process that have served to reduce potential losses. Cheviot
Savings Bank also seeks to limit loan portfolio credit risk by originating in
the local market generally one- to four-family permanent mortgage loans with a
loan-to-value of 85% or less, and one and two family owner-occupied residential
mortgage loans with a loan-to-value of 85%, with private mortgage insurance,
required on loans originated with a loan-to-value above 85%. Cheviot Savings
Bank has implemented conservative loan underwriting guidelines and makes
exceptions in originating such loans only if there are sound reasons for such
exceptions.
Credit risk on commercial real estate loans is managed by generally
limiting such lending to local markets and emphasizing sound underwriting and
monitoring the financial status of the borrower. In originating such loans
Cheviot Savings Bank seeks debt service coverage ratios in excess of 1.00x.
To limit the impact of loan losses in any given quarter, Cheviot Savings
Bank seeks to maintain an adequate level of valuation allowances. Its management
and board of directors review the level of general valuation allowances on a
quarterly basis to ensure that adequate coverage against known and inherent
losses is maintained, based on the level of non-performing and classified
assets, our loss history and industry trends and economic trends.
Cheviot Savings Bank has established detailed asset review policies and
procedures which are consistent with generally accepted accounting principles.
Quarterly reviews of the valuation allowance are conducted by the board of
directors. Pursuant to these procedures, when needed, additional valuation
allowances are established to cover anticipated losses in the portfolio.
We hold foreclosed property as other real estate owned. We carry
foreclosed real estate at lower of cost or fair value less estimated selling
costs. If a foreclosure action is commenced and the loan is not brought current,
paid in full, or refinanced before the foreclosure sale, we either sell the real
property securing the loan at the foreclosure sale or sell the property as soon
thereafter as practical.
Marketing real estate owned generally involves listing the property for
sale. Cheviot Savings Bank maintains the real estate owned in good condition to
enhance its marketability. As of December 31, 2004, we had one property
classified as real estate owned. The carrying value of this property was $90,000
at December 31, 2004.
10
DELINQUENT LOANS AND NON-PERFORMING LOANS AND ASSETS. Our policies
require that the collection manager monitor the status of the loan portfolios
and report to the Board on a monthly basis. These reports include information on
delinquent loans, criticized and classified assets, foreclosed real estate and
our plans to cure the delinquent status of the loans.
It is Cheviot Savings Bank's policy to underwrite single-family
residential loans on no more than an 85% loan-to-value ratio and all other loans
(multi-family, construction, commercial and consumer) on no more than an 80%
loan-to-value ratio. It has been the Bank's experience that interest on
delinquent loans is generally recovered in ultimate settlement of the loan due
to this conservative underwriting policy. We generally stop accruing interest on
our one-to four-family residential, construction and commercial loans when
interest or principal payments are 150 days in arrears. Consumer loans are
comprised exclusively of loans secured by deposits with Cheviot Savings Bank.
Such loans are placed on non-accrual status should they become 90 days
delinquent. The Bank will stop accruing interest earlier when the timely
collectibility of such interest or principal is doubtful.
We designate loans on which we stop accruing interest as non-accrual
loans and we reverse outstanding interest that we previously credited. We may
recognize income in the period that we collect it, when the ultimate
collectibility of principal is no longer in doubt. We return a non-accrual loan
to accrual status when factors indicating doubtful collection no longer exist
and the loan has been brought current. In accordance with industry standards and
regulatory requirements, it is Cheviot Savings Bank's policy to charge-off a
loan when it becomes apparent that recovery of amounts due is not probable,
either from expected payments from the borrower or from settlement of the
collateral.
The following table sets forth certain information regarding
delinquencies in our loan portfolio as of December 31, 2004.
AT DECEMBER 31, 2004
---------------------------------------------------------------
30-59 60-89 90 OR MORE
------------------- ------------------- -------------------
DAYS DELINQUENT DAYS DELINQUENT DAYS DELINQUENT
PERCENT PERCENT PERCENT
OF NET OF NET OF NET
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Real Estate Loans:
One-to four-family
residential(1)........... $ 109 0.05% $ 29 0.01% $ 141 0.07%
Multi-family residential.... -- -- -- -- -- --
Construction................ -- -- -- -- -- --
Commercial(2)............... -- -- -- -- 94 0.05
Consumer(3).................... -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total delinquent loans......... $ 109 0.05% $ 29 0.01% $ 235 0.12%
======== ====== ======== ====== ======== ======
- --------------------------
(Footnotes on next page).
11
The following table sets forth information regarding impaired and
non-performing loans and assets.
AT DECEMBER 31, AT MARCH 31,
------------------------- --------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Non-accrual real estate loans:
One-to four-family residential(1)......... $ 96 $ 4 $ 137 $ 162 $ 280
Multi-family residential.................. -- -- -- -- --
Construction.............................. -- -- -- -- --
Commercial(2)............................. 94 226 -- 29 93
Consumer(3)................................. -- -- -- -- --
---------- --------- ---------- ---------- ----------
Total non-accruing loans(4)................. 190 230 137 191 373
Impaired loans.............................. 33 38 40 40 40
Accruing loans delinquent 90 days or more... 28 194 58 385 135
---------- --------- ---------- ---------- ----------
Total non-performing loans.................. 251 462 235 616 548
Other real estate owned..................... 90 46 154 1,737 3,183
---------- --------- ---------- ---------- ----------
Total non-performing assets................. $ 341 $ 508 $ 376 $ 770 $ 2,285
========== ========= ========== ========== ==========
Non-performing assets to total assets....... 0.12% 0.16% 0.15% 0.34% 1.01%
Non-performing loans to net loans........... 0.12% 0.25% 0.13% 0.37% 0.38%
- --------------------------------
(1) Includes home equity lines of credit, loans purchased and loans held for
sale.
(2) Includes loans secured by land.
(3) Loans secured by deposit accounts.
(4) For the year ended December 31, 2004, and the nine months ended December
31, 2003, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms
amounted to $17,000 and $16,000, respectively.
Non-performing and impaired loans totaled $251,000 at December 31, 2004.
Our $28,000 in accruing loans delinquent 90 days or more at December 31, 2004
consisted of one residential mortgage loan.
Our loan review procedures are performed quarterly. With respect to
multi-family and commercial loans, we consider a loan impaired when, based on
current information and events, it is probable, that we will be unable to
collect all amounts due according to the loan's contractual terms.
We review all multi-family and commercial loans for impairment. These
loans are individually assessed to determine whether the loan's carrying value
is in excess of the fair value of the collateral or the present value of the
loan's expected cash flows. Smaller balance homogenous loans that are
collectively evaluated for impairment, such as residential mortgage loans and
consumer loans, are specifically excluded from the impairment review. However,
homogenous loans with similar risk of loss characteristics are evaluated for
specific losses.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a higher possibility of loss.
An asset classified as a loss is considered uncollectible and of such little
value that continuance as an asset of the institution is not warranted. Another
category designated "special mention" also may be established and maintained for
assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification as substandard, doubtful or loss. If a
classified asset is deemed to be impaired with measurement of loss, Cheviot
Savings Bank may establish a specific
12
allowance pursuant to SFAS No. 114. Similarly, with respect to homogenous loan
types with specific common risks, a specific loan loss allowance is established.
The following table sets forth information regarding classified assets as of
December 31, 2004 and 2003.
AT DECEMBER 31,
-------------------------
2004 2003
----------- -----------
(IN THOUSANDS)
Classification of Assets:
Special Mention................ $ -- $ --
Substandard.................... 770 721
Doubtful....................... -- --
Loss........................... -- --
-------------------------
Total............................ $ 770 $ 721
=========================
General loss allowances established to cover losses related to assets
classified substandard and doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. Federal examiners may disagree with
an insured institution's classifications and amounts reserved.
ALLOWANCE FOR LOAN LOSSES. We maintain the allowance through provisions
for loan losses that we charge to income. We charge losses on loans against the
allowance for loan losses when we believe the collection of loan principal is
unlikely. Recoveries on loans charged-off are restored to the allowance for loan
losses. The allowance for loan losses is maintained at a level believed, to the
best of management's knowledge, to cover all known and inherent losses in the
portfolio both probable and reasonable to estimate at each reporting date. The
level of allowance for loan losses is based on management's periodic review of
the collectibility of the loans principally in light of our historical
experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral and current and anticipated economic conditions in the primary
lending area.
In addition, the regulatory agencies, as an integral part of their
examination and review process, periodically review our loan portfolios and the
related allowance for loan losses. Regulatory agencies may require us to
increase the allowance for loan losses based on their judgments of information
available to them at the time of their examination, thereby adversely affecting
our results of operations.
At December 31, 2004, our allowance for loan losses was $732,000. Our
ratio of the allowance for loan losses as a percentage of net loans receivable
decreased to 0.36% at December 31, 2004 as compared to 0.41% at December 31,
2003.
13
The following table sets forth the analysis of the activity in the
allowance for loan losses for the periods indicated:
AT OR FOR THE AT OR FOR THE
AT OR FOR THE NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31 AT OR FOR THE YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------
2004 2003 2002 2003 2002 2001
----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.... $ 768 $ 735 $ 483 $ 483 $ 239 $ 1,103
Charge offs:
One-to four-family
residential(1)............... -- (12) -- -- (85) (85)
Multi-family residential........ (36) -- -- -- -- (724)
Construction.................... -- -- -- -- -- --
Commercial(2)................... -- -- -- -- -- (76)
Consumer(3)..................... -- -- -- -- -- --
----------------------------------------------------------------------------------------
Total charge-offs................. (36) (12) -- -- (85) (885)
----------------------------------------------------------------------------------------
Recoveries:
One-to four-family
residential(1)............... -- -- -- -- 17 18
Multi-family residential........ -- -- -- -- -- 3
Construction.................... -- -- -- -- -- --
Commercial(2)................... -- -- -- -- -- --
Consumer(3)..................... -- -- -- -- -- --
----------------------------------------------------------------------------------------
Total recoveries.................. -- -- -- 2 17 21
----------------------------------------------------------------------------------------
Net recoveries (charge offs)...... (36) (12) -- 2 (68) (864)
Provision for losses on loans..... -- 45 (8) 250 312 --
----------------------------------------------------------------------------------------
Balance at end of period.......... $ 732 $ 768 $ 475 $ 735 $ 483 $ 239
========================================================================================
Total loans receivable, net....... $ 203,842 $ 186,853 $ 179,240 $ 182,444 $ 166,550 $ 143,547
========================================================================================
Average loans receivable
outstanding.................... $ 197,000 $ 185,149 $ 174,711 $ 176,728 $ 155,973 $ 141,067
========================================================================================
Allowance for loan losses as a
percent of net loans
receivable..................... 0.36% 0.41% 0.27% 0.40% 0.29% 0.17%
Net loans charged off as a
percent of average loans
outstanding.................... 0.02% 0.01% 0.00% 0.00% 0.04% 0.61%
- ----------------------------------
(1) Includes home equity lines of credit, loans purchased and loans held for
sale.
(2) Includes loans secured by land.
(3) Loans secured by deposit.
14
The following table sets forth the allocation of the allowance for loan
losses by loan category for the years indicated. This allocation is based on
management's assessment, as of a given point in time, of the risk
characteristics of each of the component parts of the total loan portfolio and
is subject to changes as and when the risk factors of each such component part
change. The allocation is neither indicative of the specific amounts or the loan
categories in which future charge-offs may be taken nor is it an indicator of
future loss trends. The allocation of the allowance to each category does not
restrict the use of the allowance to absorb losses in any category.
AT DECEMBER 31,
-----------------------------------------------------------------------------
2004 2003
-----------------------------------------------------------------------------
LOAN PERCENT OF LOAN PERCENT OF
ALLOWANCE BALANCES LOANS IN EACH ALLOWANCE BALANCES LOANS IN EACH
FOR LOAN BY CATEGORY TO FOR LOAN BY CATEGORY TO
LOSSES CATEGORY TOTAL LOANS LOSSES CATEGORY TOTAL LOANS
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Loan Category
Allocated:
Real estate - mortgage
One-to four-family residential(1).. $353 $182,016 86.86% $308 $166,998 86.11%
Multi-family residential........... 166 9,944 4.75 213 7,714 3.98
Construction....................... 22 10,718 5.11 5 13,770 7.10
Commercial(2)...................... 191 6,750 3.22 242 5,278 2.72
Consumer(3).......................... -- 133 0.06 -- 169 0.09
-----------------------------------------------------------------------------
Total................................ $732 $209,561 100.00% $768 $193,929 100.00%
=============================================================================
AT MARCH 31,
-----------------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------------
LOAN PERCENT OF LOAN PERCENT OF
ALLOWANCE BALANCES LOANS IN EACH ALLOWANCE BALANCES LOANS IN EACH
FOR LOAN BY CATEGORY TO FOR LOAN BY CATEGORY TO
LOSSES CATEGORY TOTAL LOANS LOSSES CATEGORY TOTAL LOANS
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Loan Category
Allocated:
Real estate - mortgage
One-to four-family residential(1).. $249 $163,232 85.91% $161 $146,747 85.51%
Multi-family residential........... 242 7,787 4.10 161 7,271 4.24
Construction 4 12,368 6.51 11 10,773 6.28
Commercial(2)...................... 240 6,305 3.32 150 6,569 3.83
Consumer(3).......................... -- 303 1.06 -- 240 0.14
-----------------------------------------------------------------------------
Total................................ $735 $189,995 100.00% $483 $171,610 100.00%
=============================================================================
AT MARCH 31,
---------------------------------------
2001
---------------------------------------
LOAN PERCENT OF
ALLOWANCE BALANCES LOANS IN EACH
FOR LOAN BY CATEGORY TO
LOSSES CATEGORY TOTAL LOANS
---------------------------------------
(DOLLARS IN THOUSANDS)
Loan Category
Allocated:
Real estate - mortgage
One-to four-family residential(1).. $85 $122,019 83.43%
Multi-family residential........... 84 9,264 6.33
Construction 3 5,454 3.73
Commercial(2)...................... 67 9,309 6.37
Consumer(3).......................... -- 200 0.14
---------------------------------------
Total................................ $239 $146,246 100.00%
=======================================
- ----------------------------------
(1) Includes home equity lines of credit, loans purchased and loans held for
sale.
(2) Includes loans secured by land.
(3) Loans secured by deposit accounts.
15
SECURITIES ACTIVITIES.
GENERAL. Our investment policy is established by the board of directors.
This policy dictates that investment decisions will be made based on the safety
of the investment, liquidity requirements, potential returns, cash flow targets,
and consistency with our interest rate risk management. The board of directors,
as a whole, acts in the capacity of an investment committee and is responsible
for overseeing our investment program and evaluating on an ongoing basis our
investment policy and objectives. Our president and chief financial officer have
the authority to purchase securities within specific guidelines established by
the investment policy. All transactions are reviewed by the board of directors
at its regular meeting.
We account for investment and mortgage-backed securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires
that investments be categorized as held-to maturity, trading, or available for
sale. Securities classified as held to maturity are carried at cost only if we
have the positive intent and ability to hold these securities to maturity.
Trading securities and securities available for sale are carried at fair value
with resulting unrealized gains or losses recorded to operations or
shareholders' equity, respectively. During 2004, we purchased one
mortgage-backed security that was designated as available for sale. All other
investment and mortgage-backed securities were designated as held-to-maturity.
At December 31, 2003 and March 31, 2003, we designated all investment and
mortgage-backed securities as held-to-maturity. Realized gains or losses on
sales of securities are recognized using the specific identification method.
Our current policies generally limit securities investments to U.S.
Government, agency and sponsored entity securities and municipal bonds. The
policy also permits investments in mortgage-backed securities guaranteed by
Fannie Mae, Freddie Mac and Ginnie Mae. Our investment in municipal obligations
mature in fiscal 2026. The majority of our investment in U.S. Government and
agency obligations were scheduled to mature within one year, or step up in rate
within one year at December 31, 2004 and 2003 and March 31, 2003.
Our current investment strategy uses a risk management approach of
diversified investing in fixed-rate securities with short- to intermediate-term
maturities, as well as adjustable-rate securities, which may have a longer term
to maturity. The emphasis of this approach is to increase overall securities
yields while managing interest rate risk. To accomplish these objectives, we
focus on investments in mortgage-backed securities and short-term investments.
16
AMORTIZED COST AND ESTIMATED FAIR VALUE OF SECURITIES. The following
tables sets forth certain information regarding the amortized cost and estimated
fair values of our securities as of the dates indicated.
AT DECEMBER 31, AT MARCH 31,
----------------------------------------------- ---------------------------------------------------
2004 2003 2003 2002
----------------------- ----------------------- ------------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- ----------- ------------- ----------- ------------ -----------
(IN THOUSANDS)
Investment securities
held to maturity:
U.S. Government and
agency obligations.... $27,002 $26,762 $17,035 $17,044 $6,046 $6,062 $11,144 $11,225
Municipal obligations.... 100 102 100 103 100 103 100 97
--------------------------------------------------------------------------------------------------
Total investment
securities............. 27,102 26,864 17,135 17,147 6,146 6,165 11,244 11,322
Mortgage-backed securities
held to maturity:
Freddie Mac.............. 1,507 1,503 2,001 1,998 2,398 2,394 3,113 3,102
Fannie Mae............... 1,684 1,700 2,127 2,124 2,658 2,654 3,325 3,320
Ginnie Mae............... 26,013 26,112 17,676 17,686 18,537 18,934 16,523 16,742
--------------------------------------------------------------------------------------------------
Total mortgage-backed
securities held-to-
maturity.................... 29,204 29,315 21,804 21,808 23,593 23,982 22,961 23,164
Total investments and
mortgage-backed securities
held to maturity............ 56,306 56,179 38,939 38,955 29,739 30,147 34,205 34,486
Mortgage-backed securities
available for sale:
Ginnie Mae............... 1,492 1,483 -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
Total mortgage-backed
securities.................. $57,798 $57,662 $38,939 $38,955 $29,739 $30,147 $34,205 $34,486
==================================================================================================
17
The following table sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of our
securities portfolio as of December 31, 2004. Adjustable-rate mortgage-backed
securities are included in the period in which interest rates are next scheduled
to adjust.
AT DECEMBER 31, 2004
----------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS
----------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AMORTIZED WEIGHTED AMORTIZED AVERAGE AMORTIZED AVERAGE
COST AVERAGE YIELD COST YIELD COST YIELD
---------- ------------- ---------- ------------- ---------- -------------
(DOLLARS IN THOUSANDS)
Investment securities
held to maturity:
Step up bonds............... $23,001 2.82% $-- --% $-- --%
U.S. Government and agency
obligations.............. 2,002 1.24 1,999 3.25 -- --
Municipal obligations....... -- -- -- -- -- --
----------------------------------------------------------------------------------
Total investment
securities............ 25,003 2.69 1,999 3.25 -- --
----------------------------------------------------------------------------------
Mortgage-backed securities
held to maturity:
Freddie Mac.............. 1,507 2.99 -- -- -- --
Fannie Mae............... 1,684 2.19 -- -- -- --
Ginnie Mae............... 26,013 3.01 -- -- -- --
----------------------------------------------------------------------------------
Total mortgage backed
securities held to
maturity................... 29,204 2.96 -- -- -- --
Mortgage-backed securities
available for sale:
Ginnie Mae 1,492 3.06
----------------------------------------------------------------------------------
Total mortgage-backed
securities................. $55,699 2.84% $1,999 3.25% $-- --%
==================================================================================
(continued)
AT DECEMBER 31, 2004
------------------------------------------------------------------
MORE THAN TEN YEARS TOTAL SECURITIES
------------------------------------------------------------------
WEIGHTED
AMORTIZED WEIGHTED AMORTIZED ESTIMATED AVERAGE
COST AVERAGE YIELD COST FAIR VALUE YIELD
---------- ------------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
Investment securities
held to maturity:
Step up bonds............... $-- --% $23,001 $22,813 2.82%
U.S. Government and agency
obligations.............. -- -- 4,001 3,949 2.24
Municipal obligations....... 100 5.13 100 102 5.13
------------------------------------------------------------------
Total investment
securities............ 100 5.13 27,102 26,864 2.74
------------------------------------------------------------------
Mortgage-backed securities
held to maturity:
Freddie Mac.............. -- -- 1,506 1,503 2.99
Fannie Mae............... -- -- 1,684 1,700 2.19
Ginnie Mae............... -- -- 26,013 26,112 3.01
------------------------------------------------------------------
Total mortgage backed
securities held to
maturity................... -- -- 29,204 29,315 2.96
------------------------------------------------------------------
Mortgage-backed securities
available for sale:
Ginnie Mae 1,492 1,483 3.06
------------------------------------------------------------------
Total mortgage-backed
securities................. $100 5.13% $57,798 $57,662 2.86%
==================================================================
18
SOURCES OF FUNDS.
GENERAL. Deposits, FHLB advances, scheduled amortization and prepayments
of loan principal, maturities and calls of securities and funds provided by
operations are our primary sources of funds for use in lending, investing and
for other general purposes.
DEPOSITS. We offer deposit products having a range of interest rates and
terms. We currently offer passbook and statement savings accounts,
interest-bearing demand accounts, non-interest-bearing demand accounts, money
market accounts and certificates of deposit.
Deposit flows are significantly influenced by general and local economic
conditions, changes in prevailing interest rates, internal pricing decisions and
competition. Our deposits are primarily obtained from areas surrounding our
branch offices. In order to attract and retain deposits we rely on paying
competitive interest rates and providing quality service.
Savings, NOW and money market rates are generally determined monthly by
the board of directors. Certificates of deposit rates are generally determined
weekly by the Savings Bank's President. When we determine our deposit rates, we
consider local competition, FHLB advance rates and rates charged on other
sources of funds. Core deposits, defined as savings accounts, money market
accounts and demand deposit accounts, represented 42.3% and 58.0% of total
deposits at December 31, 2004 and 2003. At December 31, 2004 and 2003,
certificates of deposit with remaining terms to maturity of less than one year
amounted to $83.1 million and $89.7 million, respectively.
19
The following tables set forth the various types of deposit accounts
offered by us at the dates indicated.
AT DECEMBER 31, AT MARCH 31,
--------------------------------------------------------------- ------------------------------
2004 2003 2003
------------------------------- ------------------------------ ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT PERCENT RATE AMOUNT PERCENT RATE AMOUNT PERCENT RATE
-------- --------- --------- -------- --------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
NOW accounts.................. $12,534 6.96% 0.24% $83,458 31.15% 0.30% $10,676 5.47% 0.43%
Passbook accounts............. 19,573 10.88 0.70 21,539 8.04 0.70 20,457 10.47 1.07
Money market demand
deposits................... 44,009 24.45 1.15 50,497 18.85 1.16 43,600 22.32 1.67
--------------------------------------------------------------------------------------------------
Total demand, transaction
and Passbook deposits... 76,116 42.29 0.85 155,494 58.04 0.63 74,733 38.26 1.33
--------------------------------------------------------------------------------------------------
Certificates of deposit
Due within one year........ 83,072 46.15 1.98 89,676 7.96 1.19 23,663 12.12 1.73
Over 1 year through
3 years................. 20,330 11.30 2.08 21,546 26.17 2.09 77,448 39.65 2.78
Over 3 years............... 471 0.26 4.65 1,211 7.83 4.73 19,468 9.97 5.04
--------------------------------------------------------------------------------------------------
Total certificates of
deposit.............. 103,873 57.71 2.01 112,433 41.96 1.40 120,579 61.74 2.94
--------------------------------------------------------------------------------------------------
Total......................... $179,989 100.00% 1.47% $267,927 100.00% 0.95% $195,312 100.00% 2.32%
==================================================================================================
(continued)
AT MARCH 31,
-------------------------------
2002
-------------------------------
WEIGHTED
AVERAGE
AMOUNT PERCENT RATE
-------- --------- ---------
NOW accounts.................. $10,070 5.30% 1.01%
Passbook accounts............. 18,308 9.63 1.73
Money market demand
deposits................... 37,408 19.67 2.37
-------------------------------
Total demand, transaction
and Passbook deposits... 65,786 34.60 1.98
-------------------------------
Certificates of deposit
Due within one year........ 25,717 13.52 2.59
Over 1 year through
3 years................. 81,809 43.02 4.14
Over 3 years............... 16,860 8.86 5.92
-------------------------------
Total certificates of
deposit.............. 124,386 65.40 4.06
-------------------------------
Total......................... $190,172 100.00% 3.34%
===============================
20
The following table presents our deposit activity for the years
indicated.
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, YEAR ENDED MARCH 31,
--------------- -------------- -------------------------------
2004 2003 2003 2002
--------------- -------------- --------------- ---------------
(IN THOUSANDS)
Net deposits (withdrawals)(1)................... $(91,223) $69,680 $(333) $(11,759)
--------------------------------------------------------------
Interest credited on deposit account............ 3,285 2,935 5,473 8,319
--------------------------------------------------------------
Total increase (decrease) in deposit accounts... $(87,938) $72,615 $5,140 $(3,440)
==============================================================
- -------------------
(1) A substantial amount of the increase depicted for the nine months ended
December 31, 2003, was comprised of funds received for stock
subscription orders. A substantial amount of the decrease depicted for
the year ended December 31, 2004 was comprised of the return of funds
for such orders and the reclassification of net offering proceeds to
shareholders' equity.
MATURITIES OF CERTIFICATES OF DEPOSIT ACCOUNTS. The following table sets
forth the amount and maturities of certificates of deposit accounts at the dates
indicated.
AT DECEMBER 31, 2004
------------------------------------------------------------------------------------
OVER ONE
LESS THAN SIX MONTHS YEAR TO OVER THREE PERCENT OF
SIX MONTHS TO ONE YEAR THREE YEARS YEARS TOTAL TOTAL
-------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
2.00% and below.......... $32,844 $12,269 $4,772 $-- $49,885 48.03%
2.01% to 3.00%.......... 8,296 11,299 13,548 149 33,292 32.05
3.01% to 4.00%........... -- 5,077 2,010 322 7,409 7.13
4.01% to 5.00%........... 113 7,871 -- -- 7,984 7.69
5.01% to 6.00%........... 487 140 -- -- 627 0.60
6.01% to 7.00%........... 1,754 2,922 -- -- 4,676 4.50
-------------- ------------- ------------- ------------- ------------- -------------
Total................. $43,494 $39,578 $20,330 $471 $103,873 100.00%
============== ============= ============= ============= ============= =============
As of December 31, 2004, the aggregate amount of outstanding
certificates of deposit at Cheviot Savings Bank in amounts greater than or equal
to $100,000, was approximately $12.9 million. The following table presents the
maturity of these certificates of deposit at such date.
AT DECEMBER
31, 2004
---------------
MATURITY PERIOD AMOUNT
------------------------------------ ---------------
(IN THOUSANDS)
Less than six months........... $ 1,874
Six months to one year......... 2,499
Over one year to three years... 5,794
Over three years............... 2,729
---------------
Total....................... $ 12,896
===============
21
BORROWED FUNDS. As a member of the FHLB of Cincinnati, Cheviot Savings
Bank is eligible to obtain advances upon the security of the FHLB common stock
owned and certain residential mortgage loans, provided certain standards related
to credit-worthiness have been met. FHLB advances are available pursuant to
several credit programs, each of which has its own interest rate and range of
maturities.
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, FOR THE YEAR ENDED MARCH 31,
-------------- --------------- -----------------------------
2004 2003 2003 2002
-------------- --------------- ------------- --------------
(DOLLARS IN THOUSANDS)
FHLB ADVANCES:
Maximum month end-end balance................ $ 17,090 $ 10,686 $ 11,856 $ 3,974
Balance at the end of period................. 16,199 9,206 10,765 3,948
Average balance.............................. 13,417 9,772 10,305 992
Weighted average interest rate at the
end of period............................. 4.49% 4.61% 4.56% 4.78%
Weighted average interest rate during
period.................................... 4.44% 4.68% 4.40% 3.63%
REGULATION
REGULATION
LOANS-TO-ONE-BORROWER. Federal savings banks generally may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of unimpaired capital and surplus on an unsecured basis. An additional amount
may be lent, equal to 10% of unimpaired capital and surplus, if the loan is
secured by readily marketable collateral, which is defined to include certain
securities and bullion, but generally does not include real estate. As of
December 31, 2004, we were in compliance with our loans-to-one-borrower
limitations.
QUALIFIED THRIFT LENDER TEST. As a federal savings bank, we are required
to satisfy a qualified thrift lender test whereby we must maintain at least 65%
of our "portfolio assets" in "qualified thrift investments." These consist
primarily of residential mortgages and related investments, including
mortgage-backed and related securities. "Portfolio assets" generally means total
assets less specified liquid assets up to 20% of total assets, goodwill and
other intangible assets, and the value of property used to conduct business. A
savings bank that fails the qualified thrift lender test must either convert to
a bank charter or operate under specified restrictions. As of December 31, 2004,
we maintained 93.95% of our portfolio assets in qualified thrift investments
and, therefore, we met the qualified thrift lender test.
CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations govern
capital distributions by savings institutions, which include cash dividends,
stock repurchases and other transactions charged to the capital account of a
savings institution. A savings institution must file an application for Office
of Thrift Supervision approval of the capital distribution if either (1) the
total capital distributions for the applicable calendar year exceed the sum of
the institution's net income for that year to date plus the institution's
retained net income for the preceding two years, (2) the institution would not
be at least adequately capitalized following the distribution, (3) the
distribution would violate any applicable statute, regulation, agreement or
Office of Thrift Supervision-imposed condition, or (4) the institution is not
eligible for expedited review of its filings. If an application is not required
to be filed, savings institutions which are a subsidiary of a holding company,
as well as certain other institutions, must still file a notice with the Office
of Thrift Supervision at least 30 days before the board of directors declares a
dividend or approves a capital distribution.
Any additional capital distributions would require prior regulatory
approval. In the event our capital falls below our fully phased-in requirement
or the Office of Thrift Supervision notifies us that we are in need of more than
normal supervision, our ability to make capital distributions could be
restricted.
22
In addition, the Office of Thrift Supervision could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if it determines that the distribution would constitute an unsafe or
unsound practice.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING LAWS. Savings banks have a
responsibility under the Community Reinvestment Act and related regulations of
the Office of Thrift Supervision to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of the Community Reinvestment Act could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Equal
Credit Opportunity Act and the Fair Housing Act could result in enforcement
actions by the Office of Thrift Supervision, as well as other federal regulatory
agencies and the Department of Justice. We received a Satisfactory Community
Reinvestment Act rating in our most recent examination by the Office of Thrift
Supervision.
TRANSACTIONS WITH RELATED PARTIES. Our authority to engage in
transactions with related parties or "affiliates" or to make loans to specified
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act. The
term "affiliate" for these purposes generally means any company that controls or
is under common control with an institution, including Cheviot Financial Corp.
and its non-savings institution subsidiaries. Section 23A limits the aggregate
amount of certain "covered" transactions with any individual affiliate to 10% of
the capital and surplus of the savings institution and also limits the aggregate
amount of covered transactions with all affiliates to 20% of the savings
institution's capital and surplus. Covered transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A, and purchasing low quality assets from affiliates is generally
prohibited. Section 23B provides that covered transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
Our authority to extend credit to executive officers, directors and 10%
stockholders, as well as entities controlled by these persons, is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and also by
Regulation O. Among other things, these regulations generally require these
loans to be made on terms substantially the same as those offered to
unaffiliated individuals and do not involve more than the normal risk of
repayment. However, recent regulations now permit executive officers and
directors to receive the same terms through benefit or compensation treatment
compared to other participating employees. Regulation O also places individual
and aggregate limits on the amount of loans we may make to these persons based,
in part, on our capital position, and requires approval procedures to be
followed. At December 31, 2003, we were in compliance with these regulations.
ENFORCEMENT. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institution, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1plans that are widely
available to other employees, as long as the director or executive officer is
not given preferential.0 million per day. The Federal Deposit Insurance
Corporation also has the authority to
23
recommend to the Director of the Office of Thrift Supervision that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the Federal Deposit Insurance Corporation has
authority to take action under specified circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under the Federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal controls and
information systems; internal audit systems; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to
submit a compliance plan.
CAPITAL REQUIREMENTS
Office of Thrift Supervision capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard. Office of Thrift Supervision regulations also
require that in meeting the tangible, leverage and risk-based capital standards,
institutions must generally deduct investments in and loans to subsidiaries
engaged in activities as principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core
capital is defined as common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets, and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. For the present time, the Office of Thrift
Supervision has deferred implementation of the interest rate risk capital
charge. At December 31, 2004, Cheviot Savings Bank met each of its capital
requirements.
24
PROMPT CORRECTIVE REGULATORY ACTION
Under the Office of Thrift Supervision Prompt Corrective Action
regulations, the Office of Thrift Supervision is required to take supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's level of capital. Generally, a savings institution that
has total risk-based capital of less than 8.0%, or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0%, is considered to be undercapitalized.
A savings institution that has total risk-based capital less than 6.0%, a Tier 1
core risk-based capital ratio of less than 3.0% or a leverage ratio that is less
than 3.0% is considered to be "significantly undercapitalized." A savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Generally, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the Office of Thrift Supervision
within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The Office of Thrift Supervision may also take any one
of a number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The Federal Deposit Insurance Corporation has adopted a risk-based
deposit insurance assessment system. The Federal Deposit Insurance Corporation
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, and one of three supervisory subcategories
within each capital group. The three capital categories are well capitalized,
adequately capitalized and undercapitalized. The supervisory subgroup to which
an institution is assigned is based on a supervisory evaluation provided to the
Federal Deposit Insurance Corporation by the institution's primary federal
regulator and information which the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates. The Federal Deposit Insurance Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If
this type of action is taken by the Federal Deposit Insurance Corporation, it
could have an adverse effect on our earnings.
FEDERAL HOME LOAN BANK SYSTEM
We are a member of the Federal Home Loan Bank System, which consists of
12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides
a central credit facility primarily for member institutions. As a member of the
Federal Home Loan Bank of Cincinnati we are required to acquire and hold shares
of capital stock in the Federal Home Loan Bank in an amount equal to at least 1%
of the aggregate principal amount of our unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of our borrowings
from the Federal Home Loan Bank, whichever is greater. As of December 31, 2004,
we were in compliance with this requirement. The Federal Home Loan Banks are
required to provide funds for the resolution of insolvent thrifts and to
contribute funds for affordable housing programs. These requirements could
reduce the amount of dividends that the Federal Home Loan Banks pay to their
members and could also result in the Federal Home Loan Banks imposing a higher
rate of interest on advances to their members.
25
OHIO SAVINGS AND LOAN LAW
The Ohio Division of Financial Institutions is responsible for the
regulation and supervision of Ohio savings institutions in accordance with the
laws of the State of Ohio. Ohio law prescribes the permissible investments and
activities of Ohio savings and loan associations, including the types of lending
that such associations may engage in and the investments in real estate,
subsidiaries, and corporate or government securities that such associations may
make. The ability of Ohio associations to engage in these state-authorized
investments or activities are not permissible for a federally chartered savings
and loan association.
The Ohio Division of Financial Institutions also has approval authority
over the payment of dividends and any mergers involving or acquisitions of
control of Ohio savings institutions. The Ohio Division of Financial
Institutions may initiate certain supervisory measures or formal enforcement
actions against Ohio associations. Ultimately, if the grounds provided by law
exist, the Ohio Division of Financial Institutions may place an Ohio association
in conservatorship or receivership.
The Ohio Division of Financial Institutions conducts regular
examinations of Cheviot Savings Bank approximately once every twelve months.
Such examinations are usually conducted jointly with one or both federal
regulators. The Ohio Division of Financial Institutions imposes assessments on
Ohio associations based on their asset size to cover the cost of supervision and
examination.
HOLDING COMPANY REGULATION
GENERAL. Cheviot Mutual Holding Company and Cheviot Financial Corp. are
nondiversified mutual savings and loan holding companies within the meaning of
the Home Owners' Loan Act. As such, Cheviot Mutual Holding Company and Cheviot
Financial Corp. are registered with the Office of Thrift Supervision and are
subject to Office of Thrift Supervision regulations, examinations, supervision
and reporting requirements. In addition, the Office of Thrift Supervision has
enforcement authority over Cheviot Financial Corp. and Cheviot Mutual Holding
Company and their subsidiaries. Among other things, this authority permits the
Office of Thrift Supervision to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings institution. As
federal corporations, Cheviot Financial Corp. and Cheviot Mutual Holding Company
are generally not subject to state business organization laws.
PERMITTED ACTIVITIES. Pursuant to Section 10(o) of the Home Owners' Loan
Act and Office of Thrift Supervision regulations and policy, a mutual holding
company, such as Cheviot Mutual Holding Company, and a federally chartered
mid-tier holding company such as Cheviot Financial Corp. may engage in the
following activities: (i) investing in the stock of a savings association; (ii)
acquiring a mutual association through the merger of such association into a
savings association subsidiary of such holding company or an interim savings
association subsidiary of such holding company; (iii) merging with or acquiring
another holding company, one of whose subsidiaries is a savings association;
(iv) investing in a corporation, the capital stock of which is available for
purchase by a savings association under federal law or under the law of any
state where the subsidiary savings association or associations share their home
offices; (v) furnishing or performing management services for a savings
association subsidiary of such company; (vi) holding, managing or liquidating
assets owned or acquired from a savings subsidiary of such company; (vii)
holding or managing properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which
26
multiple savings and loan holding companies were authorized (by regulation) to
directly engage on March 5, 1987; (x) any activity permissible for financial
holding companies under Section 4(k) of the Bank Holding Company Act, including
securities and insurance underwriting; and (xi) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (xi) above, and has a period of two years to
cease any nonconforming activities and divest of any nonconforming investments.
The Home Owners' Loan Act prohibits a savings and loan holding company,
including Cheviot Financial Corp. and Cheviot Mutual Holding Company, directly
or indirectly, or through one or more subsidiaries, from acquiring another
savings institution or holding company thereof, without prior written approval
of the Office of Thrift Supervision. It also prohibits the acquisition or
retention of, with certain exceptions, more than 5% of a nonsubsidiary savings
institution, a nonsubsidiary holding company, or a nonsubsidiary company engaged
in activities other than those permitted by the Home Owners' Loan Act; or
acquiring or retaining control of an institution that is not federally insured.
In evaluating applications by holding companies to acquire savings institutions,
the Office of Thrift Supervision must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
WAIVERS OF DIVIDENDS BY CHEVIOT MUTUAL HOLDING COMPANY. Office of Thrift
Supervision regulations require Cheviot Mutual Holding Company to notify the
Office of Thrift Supervision of any proposed waiver of its receipt of dividends
from Cheviot Financial Corp. The Office of Thrift Supervision reviews dividend
waiver notices on a case-by-case basis, and, in general, does not object to any
such waiver if: (i) the mutual holding company's board of directors determines
that such waiver is consistent with such directors' fiduciary duties to the
mutual holding company's members; (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company are considered as a restriction
on the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with SFAS 5,
where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; and (iv) the amount of any waived dividend is considered as
having been paid by the savings association in evaluating any proposed dividend
under Office of Thrift Supervision capital distribution regulations. Cheviot
Mutual Holding Company may waive dividends paid by Cheviot Financial Corp. Under
Office of Thrift Supervision regulations, our public stockholders would not be
diluted because of any dividends waived by Cheviot Mutual Holding Company (and
waived dividends would not be considered in determining an appropriate exchange
ratio) in the event Cheviot Mutual Holding Company converts to stock form.
27
CONVERSION OF CHEVIOT MUTUAL HOLDING COMPANY TO STOCK FORM. Office of
Thrift Supervision regulations permit Cheviot Mutual Holding Company to convert
from the mutual form of organization to the capital stock form of organization
(a "Conversion Transaction"). There can be no assurance when, if ever, a
Conversion Transaction will occur, and the Board of Directors has no current
intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to Cheviot
Financial Corp. (the "New Holding Company"), Cheviot Mutual Holding Company's
corporate existence would end, and certain depositors of Cheviot Savings Bank
would receive the right to subscribe for additional shares of the New Holding
Company. In a Conversion Transaction, each share of common stock held by
stockholders other than Cheviot Mutual Holding Company ("Minority Stockholders")
would be automatically converted into a number of shares of common stock of the
New Holding Company determined pursuant an exchange ratio that ensures that
Minority Stockholders own the same percentage of common stock in the New Holding
Company as they owned in Cheviot Financial Corp. immediately prior to the
Conversion Transaction. Under Office of Thrift Supervision regulations, Minority
Stockholders would not be diluted because of any dividends waived by Cheviot
Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio), in the event Cheviot Mutual Holding
Company converts to stock form. The total number of shares held by Minority
Stockholders after a Conversion Transaction also would be increased by any
purchases by Minority Stockholders in the stock offering conducted as part of
the Conversion Transaction.
THE USA PATRIOT ACT
In response to the events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the Federal Government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements.
SARBANES-OXLEY ACT OF 2002
The Sarbanes-Oxley Act of 2002 was enacted in response to public
concerns regarding corporate accountability in connection with recent accounting
scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws. The Sarbanes-Oxley Act generally applies to all companies that
file or are required to file periodic reports with the SEC, under the Securities
Exchange Act of 1934.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules requiring the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and
other related rules, and mandates further studies of certain issues by the SEC.
The Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
Although we anticipate that we will incur additional expense in
complying with the provisions of the Sarbanes-Oxley Act and the regulations that
have been promulgated to implement the Sarbanes-Oxley Act, management does not
expect that such compliance will have a material impact on our results of
operations or financial condition.
28
TAXATION
FEDERAL TAXATION
For federal income tax purposes, Cheviot Financial Corp. and Cheviot
Savings Bank file separate federal income tax returns on a calendar year basis
using the accrual method of accounting.
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or merge into a commercial bank without
having to recapture any of their pre-1988 tax bad debt reserve accumulations.
However, transactions which would require recapture of the pre-1988 tax bad debt
reserve include redemption of Cheviot Savings Bank's stock, payment of dividends
or distributions in excess of earnings and profits, or failure by the
institution to qualify as a bank for federal income tax purposes. At December
31, 2004, Cheviot Savings Bank had pre-1988 bad debt reserves totaling
approximately $3.0 million. A deferred tax liability has not been provided on
this amount as management does not intend to make distributions, redeem stock or
fail certain bank tests that would result in recapture of the reserve.
Deferred income taxes arise from the recognition of items of income and
expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. Cheviot Financial Corp.
will account for deferred income taxes by the asset and liability method,
applying the enacted statutory rates in effect at the balance sheet date to
differences between the book basis and the tax basis of assets and liabilities.
The resulting deferred tax liabilities and assets will be adjusted to reflect
changes in the tax laws.
Cheviot Financial Corp. is subject to the corporate alternative minimum
tax to the extent it exceeds Cheviot Financial Corp.'s regular income tax for
the year. The alternative minimum tax will be imposed at the rate of 20% of a
specially computed tax base. Included in this base are a number of preference
items, including interest on certain tax-exempt bonds issued after August 7,
1986, and an "adjusted current earnings" computation which is similar to a tax
earnings and profits computation. In addition, for purposes of the alternative
minimum tax, the amount of alternative minimum taxable income that may be offset
by net operating losses is limited to 90% of alternative minimum taxable income.
Cheviot Savings Bank's income tax returns have not been audited by the
Internal Revenue Service within the past five years.
STATE TAXATION
Cheviot Financial Corp. and Cheviot Savings Bank are subject to Ohio
taxation in the same general manner as other corporations. In particular,
Cheviot Financial Corp. and Cheviot Savings Bank are subject to the Ohio
corporation franchise tax, which is an excise tax imposed on corporations for
the privilege of doing business in Ohio, owning capital or property in Ohio,
holding a charter or certificate of compliance authorizing the corporation to do
business in Ohio, or otherwise having nexus with Ohio during a calendar year.
The franchise tax is imposed on the value of a corporation's issued and
outstanding shares of stock. Financial institutions determine the value of their
issued and outstanding shares based upon the net worth of the shares. For Ohio
franchise tax purposes, savings institutions are currently taxed at a rate equal
to 1.3% of taxable net worth. Cheviot Savings Bank is not currently under audit
with respect to its Ohio franchise tax returns.
29
MANAGEMENT
EXECUTIVE OFFICERS OF CHEVIOT FINANCIAL CORP.
The following individuals hold the following executive officer positions
of Cheviot Financial Corp.
NAME AGE POSITION
- -------------------------- ------- -----------------------------------------
Thomas J. Linneman 51 President and Chief Executive Officer
Scott T. Smith 35 Chief Financial Officer
James E. Williamson 60 Executive Secretary
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
Our Annual Report on Form 10-K may be accessed on our website at
www.cheviotsavings.com.
ITEM 2. PROPERTIES
We conduct our business through our main banking office located in
Cheviot, Ohio, and other full-service branch offices located in Hamilton County,
Ohio. The aggregate net book value of our premises and equipment was $2.9
million at December 31, 2004. The following table sets forth certain information
with respect to our offices at December 31, 2004.
YEAR OPENED/
LOCATION LEASED OR OWNED ACQUIRED NET BOOK VALUE
- --------------------------------------------------------------------------------------------
(IN THOUSANDS)
MAIN OFFICE
3723 Glenmore Avenue Owned 1915 $1,124
Cheviot, Ohio 45211
BRANCHES
5550 Cheviot Road Owned 1982 436
Cincinnati, Ohio 45247
6060 Bridgetown Road Owned 1991 666
Cincinnati, Ohio 45248
1194 Stone Road Owned 1997 701
Harrison, Ohio 45030
LENDING CENTER
6676 Tri-way Drive Leased 2004 20
Mason, Ohio 45040
-----------------
TOTAL NET BOOK VALUE $2,947
=================
ITEM 3. LEGAL PROCEEDINGS
Cheviot Savings Bank is not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of
business which, in the aggregate, involve amounts which are believed by
management to be immaterial to its financial condition or results of operations.
30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock is quoted on the Nasdaq SmallCap Market under
the symbol "CHEV." The Common Stock began trading on January 5, 2004.
The following table sets forth the range of the high and low bid prices
of the Company's Common Stock for the prior four calendar quarters and is based
upon information provided by Nasdaq. The Company has not paid any dividends
since the completion of its initial public offering.
PRICES OF COMMON STOCK
---------------------------------
HIGH LOW
--------------- ---------------
CALENDAR QUARTER ENDED
March 31, 2004.......................... $ 13.75 $ 13.00
June 30, 2004........................... 13.49 10.17
September 30, 2004...................... 12.31 10.47
December 31, 2004....................... 13.24 10.91
As of December 31, 2004, the Company had 1,025 stockholders of record.
The Company did not repurchase any shares of its common stock during the
fourth quarter of 2004.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data is incorporated by reference to the Annual
Report to Shareholders included as Exhibit 13 to this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference to the Annual Report to Shareholders included
as Exhibit 13 to the Form 10-K.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to the Annual Report to Shareholders included
as Exhibit 13 to the Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements identified in Item 15(a)(1) hereof are
incorporated by reference to the Annual Report to Shareholders included as
Exhibit 13 to the Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer, President and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as
of the end of the fiscal year (the "Evaluation Date"). Based upon that
evaluation, the Chief Executive Officer, President and Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to us (or our consolidated subsidiaries) required to be included in our
periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement (the "Proxy
Statement"), specifically the section captioned "Proposal I--Election of
Directors." In addition, see "Executive Officers of Cheviot Financial Corp." in
Item 1 for information concerning the Company's executive officers.
The Board of Directors has adopted a Code of Ethics, applicable to the
Chief Executive Officer, President and Chief Financial Officer. The Code of
Ethics may be accessed through our website at WWW.CHEVIOTSAVINGS.COM and is
filed as Exhibit 14 hereto.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's Proxy Statement, specifically the section captioned
"Executive Compensation."
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain owners and
management is incorporated herein by reference from the Company's Proxy
Statement, specifically the section captioned "Voting Securities and Principal
Holder Thereof."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from the Company's Proxy Statement, specifically the section
captioned "Transactions with Certain Related Persons."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services is
incorporated herein by reference from the Company's Proxy Statement.
33
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(a)(1) FINANCIAL STATEMENTS
o Report of Independent Registered Public Accounting Firm
o Consolidated Statements of Financial Condition at
December 31, 2004 and 2003
o Consolidated Statements of Earnings for the Year Ended
December 31, 2004, the nine months ended December 31,
2003 and 2002 and the fiscal year ended March 31, 2003
o Consolidated Statements of Stockholders' Equity for the
Year Ended December 31, 2004, the nine months ended
December 31, 2003 and the fiscal year ended March 31,
2003
o Consolidated Statements of Cash Flows for the Year Ended
December 31, 2004, the nine months ended December 31,
2003, and 2002 and the fiscal year ended March 31, 2003
o Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated
financial statements or related notes.
(a)(3) EXHIBITS
13 Annual Report to Shareholders
14 Code of Ethics
21 Subsidiaries of the Registrant
31.1 Certification of President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) The exhibits listed under (a)(3) above are filed herewith.
(c) Not applicable.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CHEVIOT FINANCIAL CORP.
Date: March 29, 2005 By: /s/ Thomas J. Linneman
--------------------------
Thomas J. Linneman,
President and Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
By: /s/ Thomas J. Linneman By: /s/ Scott T. Smith
-------------------------------- -----------------------------
Thomas J. Linneman, President Scott T. Smith, Chief Financial
and Chief Executive Officer Officer (principal financial
officer and principal
accounting officer)
Date: March 29, 2005 Date: March 29, 2005
By: /s/ Gerhard H. Hillmann By: /s/ Edward L. Kleemeier
-------------------------------- -----------------------------
Gerhard H. Hillmann, Director Edward L. Kleemeier, Director
Date: March 29, 2005 Date: March 29, 2005
By: /s/ John T. Smith By: /s/ Robert Thomas
-------------------------------- -----------------------------
John T. Smith, Director Robert Thomas, Director
Date: March 29, 2005 Date: March 29, 2005
By: /s/ James E. Williamson
--------------------------------
James E. Williamson, Director
Date: March 29, 2005
35