UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
----------------------------------------------
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 No. 0-50529
CHEVIOT FINANCIAL CORP.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Federal 56-2423720
---------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3723 Glenmore Avenue, Cincinnati, Ohio 45211
--------------------------------------------------------------------------------
(Address of principal executive office)
Registrant's telephone number, including area code: (513) 661-0457
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "accelerated filer, large accelerated filer, and small reporting
company" in Rule 12b-2 of the Exchange Act. (Check one.)
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 4, 2008, the latest practicable date, 8,882,599 shares of the
registrant's common stock, $.01 par value, were issued and outstanding.
Page 1 of 23
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
Quantitative and Qualitative Disclosures about
Market Risk 22
Controls and Procedures 22
PART II - OTHER INFORMATION 23
SIGNATURES 25
2
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 2008 2007
(Unaudited)
Cash and due from banks $ 4,790 $ 3,680
Federal funds sold 2,269 4,313
Interest-earning deposits in other financial institutions 381 1,457
---------- ---------
Cash and cash equivalents 7,440 9,450
Investment securities available for sale - at fair value 25,392 12,178
Investment securities held to maturity - at cost, approximate
market value of $ 7,044 and $23,086 at September 30, 2008
and December 31, 2007, respectively 7,000 23,000
Mortgage-backed securities available for sale - at fair value 675 814
Mortgage-backed securities held to maturity - at cost, approximate
market value of $7,325 and $9,577 at September 30, 2008 and
December 31, 2007, respectively 7,257 9,500
Loans receivable - net 266,600 249,832
Real estate acquired through foreclosure - net 490 625
Office premises and equipment - at depreciated cost 4,986 5,131
Federal Home Loan Bank stock - at cost 3,369 3,238
Accrued interest receivable on loans 1,181 1,119
Accrued interest receivable on mortgage-backed securities 35 51
Accrued interest receivable on investments and interest-earning deposits 516 418
Prepaid expenses and other assets 392 177
Bank-owned life insurance 3,482 3,383
Prepaid federal income taxes - 144
---------- ---------
Total assets $ 328,815 $ 319,060
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $212,716 $219,526
Advances from the Federal Home Loan Bank 46,060 28,665
Advances by borrowers for taxes and insurance 966 1,253
Accrued interest payable 177 117
Accounts payable and other liabilities 1,066 939
Accrued federal income taxes 55 -
Deferred federal income taxes 384 640
---------- ---------
Total liabilities 261,424 251,140
Shareholders' equity
Preferred stock - authorized 5,000,000 shares, $.01 par value; none issued
Common stock - authorized 30,000,000 shares, $.01 par value;
9,918,751 shares issued at September 30, 2008 and December 31, 2007, respectively 99 99
Additional paid-in capital 43,581 43,418
Shares acquired by stock benefit plans (3,186) (3,582)
Treasury stock - at cost, 1,036,152 and 967,077 shares at September 30, 2008
and December 31, 2007, respectively (12,723) (12,074)
Retained earnings - restricted 40,082 40,013
Accumulated comprehensive loss, unrealized losses on securities
available for sale, net of related tax effects (462) 46
---------- ---------
Total shareholders' equity 67,391 67,920
---------- ---------
Total liabilities and shareholders' equity $ 328,815 $ 319,060
========== =========
See accompanying notes to consolidated financial statements.
3
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
2008 2007 2008 2007
(Unaudited)
Interest income
Loans $11,489 $11,179 $ 3,922 $ 3,804
Mortgage-backed securities 369 536 107 170
Investment securities 1,582 1,388 531 502
Interest-earning deposits and other 80 167 10 39
------- ------- ------- -------
Total interest income 13,520 13,270 4,570 4,515
Interest expense
Deposits 5,261 5,956 1,513 2,052
Borrowings 1,226 1,074 480 393
------- ------- ------- -------
Total interest expense 6,487 7,030 1,993 2,445
------- ------- ------- -------
Net interest income 7,033 6,240 2,577 2,070
Provision for losses on loans 413 15 125 15
------- ------- ------- -------
Net interest income after provision for losses on loans 6,620 6,225 2,452 2,055
Other income (expense)
Rental 39 36 13 12
Gain on sale of loans 26 40 17 17
Loss on sale of real estate acquired through foreclosure (48) (3) (5) (3)
Earnings on bank-owned life insurance 99 96 34 32
Other operating 246 242 87 95
------- ------- ------- -------
Total other income 362 411 146 153
General, administrative and other expense
Employee compensation and benefits 3,247 3,293 1,150 1,092
Occupancy and equipment 418 418 140 144
Property, payroll and other taxes 719 664 229 215
Data processing 236 231 77 77
Legal and professional 285 322 93 97
Advertising 150 131 50 44
Other operating 475 476 151 136
------- ------- ------- -------
Total general, administrative and other expense 5,530 5,535 1,890 1,805
------- ------- ------- -------
Earnings before income taxes 1,452 1,101 708 403
Federal income taxes (benefit)
Current 452 274 345 216
Deferred 6 75 (88) (88)
------- ------- ------- -------
Total federal income taxes 458 349 257 128
------- ------- ------- -------
NET EARNINGS $ 994 $ 752 $ 451 $ 275
======= ======= ======= =======
EARNINGS PER SHARE
Basic $ .11 $.08 $.05 $.03
======= ======= ======= =======
Diluted $ .11 $.08 $.05 $.03
======= ======= ======= =======
Dividends per common share $ .27 $.24 $.09 $.08
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
4
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the nine and three months ended September 30, 2008 and 2007
(In thousands)
For the nine months For the three months
ended September 30, ended September 30,
2008 2007 2008 2007
Net earnings for the period $ 994 $ 752 $ 451 $ 275
Other comprehensive income (loss), net of tax (benefits):
Unrealized holding gains (losses) on securities during
the period, net of tax (benefits) of $(262) and $(25)
for the nine months ended September 30, 2008 and 2007,
respectively, and $(151) and $28 for the three months
ended September 30, 2008 and 2007, respectively (508) (49) (294) 54
--- --- --- ---
Comprehensive income $ 486 $ 703 $ 157 $ 329
=== === === ===
Accumulated comprehensive loss $(462) $ (57) $(462) $ (57)
=== === === ===
See accompanying notes to consolidated financial statements.
5
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2008 and 2007
(In thousands)
2008 2007
(Unaudited)
Cash flows from operating activities:
Net earnings for the period $ 994 $ 752
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums and discounts on investment
and mortgage-backed securities, net (15) (10)
Depreciation 214 249
Amortization of deferred loan origination fees - net - 11
Proceeds from sale of loans in the secondary market 2,833 3,148
Loans originated for sale in the secondary market (2,787) (2,943)
Gain on sale of loans (26) (40)
Loss on sale of real estate acquired through foreclosure 48 3
Federal Home Loan Bank stock dividends (131) -
Provision for losses on loans 413 15
Net increase in cash surrender value of bank-owned life insurance (99) (96)
Amortization of expense related to stock benefit plans 376 439
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (62) (35)
Accrued interest receivable on mortgage-backed securities 16 10
Accrued interest receivable on investments and interest-
earning deposits (98) (14)
Prepaid expenses and other assets (215) (143)
Accounts payable and other liabilities 103 20
Accrued interest payable 60 9
Federal income taxes
Current 199 (95)
Deferred 6 75
-------- --------
Net cash provided by operating activities 1,829 1,355
-------- --------
Cash flows used in investing activities:
Principal repayments on loans 39,471 26,950
Loan disbursements (56,758) (35,154)
Loans purchased (455)
Purchase of U.S. Government and agency obligations (18,973) (7,001)
Proceeds from maturity of U.S. Government and agency obligations 21,000 5,000
Principal repayments on mortgage-backed securities 2,386 3,917
Proceeds from sale of real estate acquired through foreclosure 661 113
Additions to real estate acquired through foreclosure (9) (2)
Purchase of office premises and equipment (69) (45)
-------- --------
Net cash used in investing activities (12,746) (6,222)
-------- --------
Cash flows provided by financing activities:
Net increase in deposits (6,810) 9,618
Proceeds from Federal Home Loan Bank advances 25,500 13,000
Repayments on Federal Home Loan Bank advances (8,105) (12,228)
Advances by borrowers for taxes and insurance (287) (326)
Treasury stock repurchases (649) (4,449)
Stock option expense, net 183 181
Dividends paid on common stock (925) (886)
-------- --------
Net cash provided by financing activities 8,907 4,910
-------- --------
Net increase (decrease) in cash and cash equivalents (2,010) 43
Cash and cash equivalents at beginning of period 9,450 5,490
-------- --------
Cash and cash equivalents at end of period $ 7,440 $ 5,533
======== ========
See accompanying notes to consolidated financial statements.
6
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30, 2008 and 2007
(In thousands)
2008 2007
(Unaudited)
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 261 $ 337
======= =======
Interest on deposits and borrowings $ 6,427 $ 7,021
======= =======
Supplemental disclosure of noncash investing activities:
Transfer of loans to real estate acquired through foreclosure $ 541 $ 593
======= =======
Loans originated upon sales of real estate acquired through foreclosure $ 138 $ -
======= =======
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 15 $ 9
======= =======
See accompanying notes to consolidated financial statements.
7
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2008 and 2007
1. Basis of Presentation
Cheviot Financial Corp. ("Cheviot Financial" or the "Corporation") is a
financial holding company, the principal asset of which consists of its
ownership of Cheviot Savings Bank (the "Savings Bank"). The Savings Bank
conducts a general banking business in southwestern Ohio which consists of
attracting deposits and applying those funds to the origination of primarily
real estate loans. The Corporation is 61% owned by Cheviot Mutual Holding
Company. Cheviot Savings' profitability is significantly dependent on net
interest income, which is the difference between interest income from
interest-earning assets and the interest expense paid on interest-bearing
liabilities. Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances.
The accompanying unaudited financial statements were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. Accordingly, these consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto of Cheviot Financial included in the
Annual Report on Form 10-K for the year ended December 31, 2007. However, in the
opinion of management, all adjustments (consisting of only normal recurring
accruals) which are necessary for a fair presentation of the consolidated
financial statements have been included. The results of operations for the three
and nine month periods ended September 30, 2008, are not necessarily indicative
of the results which may be expected for the entire year.
2. Principles of Consolidation
The accompanying consolidated financial statements as of and for the three and
nine months ended September 30, 2008, include the accounts of the Corporation
and its wholly-owned subsidiary, the Savings Bank. All significant intercompany
items have been eliminated.
3. Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in
the ordinary course of business. Liquidity is primarily needed to meet the
borrowing and deposit withdrawal requirements of our customers and to fund
current and planned expenditures. Our primary sources of funds are deposits,
scheduled amortization and prepayments of loan principal and mortgage-backed
securities, maturities and calls of securities and funds provided by our
operations. In addition, we may borrow from the Federal Home Loan Bank of
Cincinnati. At September 30, 2008 and December 31, 2007, we had $46.1 million
and $28.7 million, respectively, in outstanding borrowings from the Federal Home
Loan Bank of Cincinnati and had the capacity to increase such borrowings at
those dates by approximately $98.0 million and $109.4 million, respectively.
Loan repayments and maturing securities are a relatively predictable source of
funds. However, deposit flows, calls of securities and prepayments of loans and
mortgage-backed securities are strongly influenced by interest rates, general
and local economic conditions and competition in the marketplace. These factors
reduce the predictability of these sources of funds.
8
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2008 and 2007
3. Liquidity and Capital Resources (continued)
Our primary investing activities are the origination of one- to four-family real
estate loans, commercial real estate, construction and consumer loans, and, to a
lesser extent, the purchase of securities. For the nine months ended September
30, 2008, loan originations totaled $59.5 million, compared to $38.1 million for
the nine months ended September 30, 2007.
Total deposits decreased $6.8 million during the nine months ended September 30,
2008. Total deposits increased $9.6 million during the nine months ended
September 30, 2007. Deposit flows are affected by the level of interest rates,
the interest rates and products offered by competitors and other factors. The
significant increase in deposits during the nine months ended September 30, 2008
reflects the addition of a branch location and the total composition of deposits
shifting to higher rate certificates of deposit.
The following table sets forth information regarding the Corporation's
obligations and commitments to make future payments under contract as of
September 30, 2008.
Payments due by period
Less More than More than More
than 1-3 4-5 than
1 year years years 5 years Total
(In thousands)
Contractual obligations:
Advances from the Federal Home Loan Bank $ - $ 12,000 $ 3,152 $ 30,908 $ 46,060
Certificates of deposit 68,392 62,472 10,748 - 141,612
Amount of loan commitments and expiration per period:
Commitments to originate one- to four-family
loans 2,757 - - - 2,757
Home equity lines of credit 11,650 - - - 11,650
Undisbursed loans in process 4,039 - - - 4,039
-------- -------- -------- -------- --------
Total contractual obligations $ 86,838 $ 74,472 $ 13,900 $ 30,908 $206,118
======== ======== ======== ======== ========
We are committed to maintaining a strong liquidity position. We monitor our
liquidity position on a daily basis. We anticipate that we will have sufficient
funds to meet our current funding commitments. Based on our deposit retention
experience and current pricing strategy, we anticipate that a significant
portion of maturing time deposits will be retained.
9
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2008 and 2007
3. Liquidity and Capital Resources (continued)
At September 30, 2008 and 2007, we exceeded all of the applicable regulatory
capital requirements. Our core (Tier 1) capital was $55.0 million and $52.8
million, or 16.7 % and 16.7% of total assets at September 30, 2008 and 2007. In
order to be classified as "well-capitalized" under federal banking regulations,
we were required to have core capital of at least $19.7 million, or 6.0% of
assets as of September 30, 2008. To be classified as a well-capitalized bank, we
must also have a ratio of total risk-based capital to risk-weighted assets of at
least 10.0%. At September 30, 2008 and 2007, we had a total risk-based capital
ratio of 32.2% and 32.4%, respectively.
4. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average common
shares outstanding during the period, less shares in the ESOP that are
unallocated and not committed to be released plus shares in the ESOP that have
been allocated. The weighted-average common shares outstanding includes
5,455,313 shares held by our mutual holding company. Weighted-average common
shares deemed outstanding gives effect to 214,247 and 249,954 unallocated shares
held by the ESOP for the three and nine months ended September 30, 2008 and
2007, respectively.
For the nine months ended For the three months ended
September 30, September 30,
2008 2007 2008 2007
Weighted-average common shares
outstanding (basic) 8,692,243 8,961,216 8,668,352 8,801,564
Dilutive effect of assumed exercise
of stock options 50,176 111,081 54,816 101,865
----------- ----------- ----------- ----------
Weighted-average common shares
outstanding (diluted) 8,742,419 9,072,297 8,723,168 8,903,429
========= ========= ========= =========
5. Stock Option Plan
On April 26, 2005, the Corporation approved a Stock Incentive Plan that provides
for grants of up to 486,018 stock options. During 2008, 2007, 2006 and 2005
approximately 8,060, 6,460, 6,100 and 384,000 option shares were granted subject
to five year vesting.
In 2004, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based Payment," which
revises SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123(R) requires that cost related to the fair value of
all equity-based awards to employees, including grants of employee stock
options, be recognized in the financial statements.
10
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2008 and 2007
5. Stock Option Plan (continued)
The Corporation adopted the provisions of SFAS No. 123(R) effective January 1,
2006, using the modified prospective transition method, and therefore has not
restated its financial statements for prior periods. Under this method, the
Corporation has applied the provisions of SFAS No. 123(R) to new equity-based
awards and to equity-based awards modified, repurchased, or cancelled after
January 1, 2006. In addition, the Corporation recognizes compensation cost for
the portion of equity-based awards for which the requisite service period has
not been rendered ("unvested equity-based awards") that are outstanding as of
January 1, 2006. The compensation cost recorded for unvested equity-based awards
is based on their grant-date fair value. For the nine months ended September 30,
2008, the Corporation recorded $183,000 in after-tax compensation cost for
equity-based awards that vested during the nine months ended September 30, 2008.
The Corporation has $445,000 unrecognized pre-tax compensation cost related to
non-vested equity-based awards granted under its stock incentive plan as of
September 30, 2008, which is expected to be recognized over a weighted-average
vesting period of approximately 1.8 years.
A summary of the status of the Corporation's stock option plan as of September
30, 2008, and changes during the period then ended is presented below:
Nine months ended Year ended
September 30, 2008 December 31, 2007
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
Outstanding at beginning of period 396,220 $ 11.21 389,760 $ 11.17
Granted 8,060 9.03 6,460 13.63
Exercised - - - -
Forfeited - - - -
------- ------- ------- --------
Outstanding at end of period 404,280 $ 11.16 396,220 $ 11.21
======= ======= ======= ========
Options exercisable at period-end 233,936 $ 11.17 154,692 $ 11.16
======= ======= ======= ========
Fair value of options granted $ 1.93 $ 2.77
======= ========
The following information applies to options outstanding at September 30, 2008:
Number outstanding 404,280
Exercise price$9.03 - $13.63
Weighted-average exercise price $11.16
Weighted-average remaining contractual life 6.8 years
The expected term of options is based on evaluations of historical and expected
future employee exercise behavior. The risk free interest rate is based upon the
U.S. Treasury rates at the date of grant with maturity dates approximately equal
to the expected life at grant date. Volatility is based upon the historical
volatility of the Corporation's stock.
11
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2008 and 2007
5. Stock Option Plan (continued)
The fair value of each option was estimated on the date of grant using the
modified Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 2008: dividend yield of 3.65%, expected
volatility of 26.13%, risk-free interest rate of 3.78% and an expected life of
10 years for each grant.
The effects of expensing stock options is reported in "cash provided by
financing activities" in the Consolidated Statements of Cash Flows.
6. Income Taxes
The Corporation adopted the provisions of FASB Interpretation 48, "Accounting
for Uncertainty in Income Taxes," on January 1, 2007. Previously, the
Corporation had accounted for tax contingencies in accordance with Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies." As
required by Interpretation 48, which clarifies Statement No. 109, "Accounting
for Income Taxes," the Corporation recognizes the financial statement benefit of
a tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax
authority. At the adoption date, the Corporation applied Interpretation 48 to
all tax positions for which the statute of limitations remained open. As a
result of the implementation of Interpretation 48, the Corporation was not
required to record any liability for unrecognized tax benefits as of January 1,
2007. There have been no material changes in unrecognized tax benefits since
January 1, 2007. As stated in the Annual Report, the only known tax attribute
which can influence the Corporation's effective tax rate is the utilization of
charitable contribution carryforwards.
The Corporation is subject to income taxes in the U.S. federal jurisdiction, as
well as various state jurisdictions. Tax regulations within each jurisdiction
are subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the Corporation is
no longer subject to U.S. federal, state and local, or non U.S. income tax
examinations by tax authorities for the years before 2004.
The Corporation will recognize, if applicable, interest accrued related to
unrecognized tax benefits in interest expense and penalties in operating
expenses.
12
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2008 and 2007
7. Disclosures About Fair Value of Assets and Liabilities
Effective January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. FAS 157 has been applied prospectively as of the
beginning of the year.
FAS 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. FAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the
assets or liabilities
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
Fair value methods and assumptions are set forth below for each type of
financial instrument.
Securities available for sale
Fair value on available for sale securities were based upon a market approach.
Securities which are fixed income instruments that are not quoted on an
exchange, but are traded in active markets, are valued using prices obtained
from our custodian, which used third party data service providers. Available for
sale securities includes U.S. agency securities, municipal bonds and
mortgage-backed agency securities.
Fair Value Measurements at
September 30, 2008
--------------------------------------------------------------------
Quoted prices
in active Significant Significant
markets for other other
identical observable unobservable
assets inputs inputs
September 30, 2008 (Level 1) (Level 2) (Level 3)
------------------ --------- --------- ---------
Securities available for sale $ 26,067 $ 26,067
The Corporation is predominately an asset based lender with real estate serving
as collateral on a substantial majority of loans. Loans which are deemed to be
impaired are primarily valued on a nonrecurring basis at the fair values of the
underlying real estate collateral. Such fair values are obtained using
independent appraisals, which the Corporation considers to be Level 2 inputs.
The aggregate carrying amount of impaired loans at September 30, 2008 was
approximately $1.6 million.
13
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2008 and 2007
7. Disclosures About Fair Value of Assets and Liabilities (continued)
FASB Staff Position Number FAS 157-2 delays the implementation of SFAS 157 until
the first quarter of 2009 with respect to goodwill, other intangible assets,
real estate and other assets acquired through foreclosure and other
non-financial assets measured at fair value on a nonrecurring basis.
8. Effects of Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115." This Statement allows companies the choice to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. This Statement became
effective as of January 1, 2008 as to the Corporation, and interim periods
within those fiscal years. The impact of this new pronouncement was not material
to the Corporation's consolidated financial statements.
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 109,
Written Loan Commitments Recorded at Fair Value Through Earnings (SAB 109) -- In
November 2007, SEC SAB 109 was issued. SAB 109 provides the staff's views on the
accounting for written loan commitments recorded at fair value. To make the
staff's views consistent with Statement No. 156, Accounting for Servicing of
Financial Assets, and Statement No. 159, SAB 109 revises and rescinds portions
of SAB No. 105, Application of Accounting Principles to Loan Commitments, and
requires that the expected net future cash flows related to the associated
servicing of a loan should be included in the measurement of all written loan
commitments that are accounted for at fair value through earnings. The
provisions of SAB 109 are applicable to written loan commitments issued or
modified in fiscal quarters beginning after December 15, 2007. The Corporation
adopted this Statement with no material impact to the Corporation's consolidated
financial statements.
14
Cheviot Financial Corp.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This report on Form 10-Q contains forward-looking statements, which can be
identified by the use of such words as estimate, project, believe, intend,
anticipate, plan, seek, expect and similar expressions. These forward-looking
statements are subject to significant risks, assumptions and uncertainties that
could affect the actual outcome of future events. Because of these
uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions
by management that have, or could have, a material impact on the carrying value
of certain assets or on income to be critical accounting policies. We consider
the accounting method used for the allowance for loan losses to be a critical
accounting policy.
The allowance for loan losses is the estimated amount considered necessary to
cover inherent, but unconfirmed credit losses in the loan portfolio at the
balance sheet date. The allowance is established through the provision for
losses on loans which is charged against income. In determining the allowance
for loan losses, management makes significant estimates and has identified this
policy as one of the most critical for Cheviot Financial.
Management performs a quarterly evaluation of the allowance for loan losses.
Consideration is given to a variety of factors in establishing this estimate
including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlining collateral, the financial strength of the borrower, results of
internal loan reviews and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change.
The analysis has two components, specific and general allocations. Specific
percentage allocations can be made for unconfirmed losses related to loans that
are determined to be impaired. Impairment is measured by determining the present
value of expected future cash flows or, for collateral-dependent loans, the fair
value of the collateral adjusted for market conditions and selling expenses. If
the fair value of the loan is less than the loan's carrying value, a charge-off
is recorded for the difference. The general allocation is determined by
segregating the remaining loans by type of loan, risk weighting (if applicable)
and payment history. We also analyze historical loss experience, delinquency
trends, general economic conditions and geographic and industry concentrations.
This analysis establishes factors that are applied to the loan groups to
determine the amount of the general reserve. Actual loan losses may be
significantly more than the allowances we have established which could result in
a material negative effect on our financial results.
Discussion of Financial Condition Changes at December 31, 2007 and at September
30, 2008
--------------------------------------------------------------------------------
Total assets increased $9.8 million, or 3.1%, to $328.8 million at September 30,
2008, from $319.1 million at December 31, 2007. The increase in total assets
reflects an increase in loans receivable, which were partially offset by a
decrease in cash and cash equivalents, investment securities and mortgage-backed
securities.
Cash, federal funds sold and interest-earning deposits decreased $2.0 million,
or 21.3%, to $7.4 million at September 30, 2008, from $9.5 million at December
31, 2007. The decrease in cash and cash equivalents at September 30, 2008, was
due to a $2.0 million decrease in federal funds sold and a $1.1 million decrease
in interest-earning deposits, which was partially offset by a $1.1 million
increase in cash and due from banks. Investment securities decreased $2.8
million to $32.4 million at September 30, 2008. At September 30, 2008, $7.0
million of investment securities were classified as held to maturity, while
$25.4 million were classified as available for sale.
15
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes at December 31, 2007 and at September
30, 2008 (continued)
--------------------------------------------------------------------------------
Mortgage-backed securities decreased $2.4 million, or 23.1%, to $7.9 million at
September 30, 2008, from $10.3 million at December 31, 2007. The decrease in
mortgage-backed securities was due primarily to principal prepayments and
repayments totaling $2.4 million. At September 30, 2008, $7.3 million of
mortgage-backed securities were classified as held to maturity, while $675,000
were classified as available for sale. As of September 30, 2008, none of the
mortgage-backed securities are considered impaired.
Loans receivable, including loans held for sale, increased $16.8 million, or
6.8%, to $266.6 million at September 30, 2008, from $249.8 million at December
31, 2007. The increase reflects loan originations totaling $59.5 million,
partially offset by loan principal repayments of $39.5 million and sales of $2.8
million. The change in the composition of the Corporation's assets reflects
management's decision to take advantage of opportunities to obtain a higher rate
of return from the origination of loans.
The allowance for loan losses totaled $576,000 and $596,000 at September 30,
2008 and December 31, 2007, respectively. In determining the adequacy of the
allowance for loan losses at any point in time, management and the board of
directors apply a systematic process focusing on the risk of loss in the
portfolio. First, the loan portfolio is segregated by loan types to be evaluated
collectively and loan types to be evaluated individually. Delinquent
multi-family and commercial loans are evaluated individually for potential
impairments in their carrying value. Second, the allowance for loan losses
entails utilizing our five year historic loss experience by applying such loss
percentage to the loan types to be collectively evaluated in the portfolio. The
$413,000 provision for losses on loans during the nine months ended September
30, 2008 is a reflection of these factors, weaker economic conditions in the
greater Cincinnati area, and the charge-off of specific loans totaling $433,000.
The five year historic loss experience has improved from prior year, which has
caused the allowance for loan loss as a percentage of loans to decrease. The
analysis of the allowance for loan losses requires an element of judgment and is
subject to the possibility that the allowance may need to be increased, with a
corresponding reduction in earning. To the best of management's knowledge, all
known and inherent losses that are probable and that can be reasonably estimated
have been recorded at September 30, 2008.
Non-performing and impaired loans totaled $1.6 million and $660,000 at September
30, 2008 and December 31, 2007, respectively. At September 30, 2008,
non-performing and impaired loans were comprised solely of three loans secured
by one- to four-family residential real estate and two loans secured by
multi-family residential real estate. The allowance for loan losses represented
37.1% and 90.3% of non-performing and impaired loans at September 30, 2008 and
December 31, 2007, respectively. Based on individual analyses of these loans,
management believes that the Corporation's allowance for loan losses conforms
with generally accepted accounting principles based upon the available facts and
circumstances, there can be no assurance that additions to the allowance will
not be necessary in future periods, which would adversely affect our results of
operations.
Deposits decreased $6.8 million, or 3.1%, to $212.7 million at September 30,
2008, from $219.5 million at December 31, 2007. Deposits decreased as a result
of the highly competitive rate environment that Cheviot operates in. Cheviot was
able to meet liquidity and cash flow needs with increase borrowings from FHLB at
lower rates than competitors deposit rates. Advances from the Federal Home Loan
Bank of Cincinnati increased by $17.4 million, or 60.7%, to $46.1 million at
September 30, 2008, from $28.7 million at December 31, 2007.
Shareholders' equity decreased $529,000, or 0.8%, to $67.4 million at September
30, 2008, from $67.9 million at December 31, 2007. The decrease primarily
resulted from the repurchase of our common stock totaling $649,000 and dividends
paid of $925,000, which were partially offset by net earnings of $994,000. At
September 30, 2008, Cheviot Financial had the ability to purchase an additional
378,509 shares under its announced stock repurchase plan.
16
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes at December 31, 2007 and at September
30, 2008 (continued)
--------------------------------------------------------------------------------
Liquidity and Capital Resources
We monitor our liquidity position on a daily basis using reports that recap all
deposit activity and loan commitments. A significant portion of our deposit base
is made up of time deposits. At September 30, 2008, $68.4 million of time
deposits are due to mature within twelve months. The daily deposit activity
report allows us to price our time deposits competitively. Because of this and
our deposit retention experience, we anticipate that a significant portion of
maturing time deposits will be retained.
Borrowings from the Federal Home Loan Bank of Cincinnati increased $17.4 million
during the nine months ended September 30, 2008. This increase was used
primarily to fund our primary investing activity which is the origination of
one- to four-family real estate loans, commercial real estate, construction and
consumer loans. We have the ability to increase such borrowings by approximately
$98.0 million. The additional borrowings can be used to offset any decrease in
customer deposits or to fund loan commitments.
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2008 and 2007
--------------------------------------------------------------------------------
General
Net earnings for the nine months ended September 30, 2008 totaled $994,000, a
$242,000 increase from the $752,000 in net earnings reported for the same period
in 2007. The increase in net earnings reflects an increase in net interest
income of $793,000 and a decrease of $5,000 in general, administrative and other
expenses, which were partially offset by an increase in the provision for losses
on loans of $398,000, a decrease in other income of $49,000 and an increase of
$109,000 in federal income taxes for the 2008 period.
Net Interest Income
Total interest income increased $250,000, or 1.9%, to $13.5 million for the
nine-months ended September 30, 2008, from $13.3 million for the comparable
period in 2007. Interest income on loans increased $310,000, or 2.8%, to $11.5
million during the 2008 period from $11.2 million for the 2007 period. This
increase was due primarily to a $12.6 million, or 5.2%, increase in the average
balance of loans outstanding, which was partially offset by a 14 basis point
decrease in the weighted-average yield on loans to 5.94 % for the 2008 period
from 6.08% for the nine months ended September 30, 2007.
Interest income on mortgage-backed securities decreased $167,000, or 31.2%, to
$369,000 for the nine months ended September 30, 2008, from $536,000 for the
same period in 2007, due primarily to a $4.3 million decrease in the average
balance of securities outstanding, which was partially offset by a 12 basis
point increase in the average yield for the nine months ended September 30, 2008
from the comparable period in 2007. Interest income on investment securities
increased $194,000, or 14.0%, to $1.6 million for the nine months ended
September 30, 2008, compared to $1.4 million for the same period in 2007, due
primarily to a 50 basis point increase in the average yield to 5.75% in the 2008
period, and an increase of $1.4 million, or 4.1% in the average balance of
investment securities outstanding. Interest income on other interest-earning
deposits decreased $87,000, or 52.1% to $80,000 for the nine months ended
September 30, 2008, as compared to the same period in 2007.
17
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2008 and 2007 (continued)
--------------------------------------------------------------------------------
Interest expense decreased $543,000, or 7.8% to $6.5 million for the nine months
ended September 30, 2008, from $7.0 million for the same period in 2007.
Interest expense on deposits decreased by $695,000, or 11.7%, to $5.3 million
for the nine months ended September 30, 2008, from $6.0 million for the same
period in 2007 due primarily to a 46 basis point decrease in the weighted
average costs of deposits to 3.29% during the 2008 period, which was partially
offset by a $1.8 million, or 0.9%, increase in the weighted-average balance
outstanding. Interest expense on borrowings increased by $152,000, or 14.2%, due
primarily to a $7.5 million, or 25.3%, increase in the average balance
outstanding, which was partially offset by a 43 basis point decrease in the
average cost of borrowings. The decrease in the average cost of deposits and
borrowings reflects lower shorter term interest rates in 2008 as compared to
2007, as actions by the Federal Reserve to reduce shorter term interest rates
resulted in a steepening of the yield curve and a reduction of short term and
medium term interest rates.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $793,000, or 12.7%, to $7.0 million for the
nine months ended September 30, 2008. The average interest rate spread increased
to 2.41% for the nine months ended September 30, 2008 from 2.06% for the nine
months ended September 30, 2007. The net interest margin increased to 3.05% for
the nine months ended September 30, 2008 from 2.80% for the nine months ended
September 30, 2007.
Provision for Losses on Loans
Management recorded a $413,000 provision for losses on loans for the nine months
ended September 30, 2008. There was a $15,000 provision for losses on loans for
the nine months ended September 30, 2007. The decision to make a larger
provision for loan losses during the nine months ended September 30, 2008, as
compared to recent periods, reflects the amount necessary to maintain an
adequate allowance based on the five year historical loss experience and other
external factors. These other external factors, economic conditions and
collateral value changes, have had a negative impact on non-owner occupied loans
in the portfolio. The $468 million increase in loan portfolio for nine months
has also increased the allowance calculation. There can be no assurance that the
loan loss allowance will be sufficient to cover losses on non-performing loans
in the future, however management believes they have identified all known and
inherent losses that are probable and that can be reasonably estimated within
the loan portfolio, and that the allowance for loan losses is adequate to absorb
such losses.
Other Income
Other income decreased $49,000, or 12.0%, to $362,000 for the nine months ended
September 30, 2008, compared to the same period in 2007, due primarily to a
decrease in the gain on sale of loans of $14,000, an increase of $45,000 in the
loss on sale of real estate acquired through foreclosure, which were partially
offset by an increase of $4,000 in other operating income.
General, Administrative and Other Expense
General, administrative and other expense decreased $5,000, or 0.1%, to $5.5
million for the nine months ended September 30, 2008, from $5.5 million for the
comparable period in 2007. This decrease is a result of a decrease of $46,000 in
employee compensation and benefits, a $37,000 decrease in legal and professional
expense, which were partially offset by a $55,000 increase in property payroll
and other taxes. The decrease in employee compensation and benefits is a result
of the decrease in compensation expense recorded for the fair value of ESOP
shares allocated as a result of the decrease in the average stock price and a
decrease in the expense related to health insurance costs. The decrease in legal
18
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2008 and 2007 (continued)
--------------------------------------------------------------------------------
and professional services was due primarily to expenses incurred for litigation
proceedings wherein the Corporation was defending its security interest in
collateral during the nine months ended September 30, 2007.
The Corporation reached a settlement regarding this litigation for $50,000
during the prior period, accounting for the majority of the decrease in other
operating expense. The increase in property, payroll and other taxes was due
primarily to an increase in the Ohio franchise tax. In 2009 we expect our other
expense to be affected by higher deposit insurance premiums assessments from the
FDIC.
Federal Income Taxes
The provision for federal income taxes increased $109,000, or 31.3%, to $458,000
for the nine months ended September 30, 2008, from $349,000 for the same period
in 2007, due primarily to a $351,000, or 31.9%, increase in pre-tax earnings.
The effective tax rate was 31.6% and 31.7% for the nine month periods ended
September 30, 2008 and 2007. The difference between the Corporation's effective
tax rate in the 2008 and 2007 periods and the 34% statutory corporate rate is
due primarily to the tax-exempt earnings on bank-owned life insurance,
tax-exempt interest on municipal obligations and tax benefits for the
contribution to the Cheviot Savings Bank Foundation.
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2008 and 2007
--------------------------------------------------------------------------------
General
Net earnings for the three months ended September 30, 2008 totaled $451,000, a
$176,000 increase from the $275,000 net earnings reported in the September 2007
period. The increase in net earnings reflects an increase in net interest income
after the provision for losses on loans of $397,000, which was partially offset
by a decrease of $7,000 in other income, an increase of $85,000, in general,
administrative and other expenses and an increase of $129,000 in federal income
taxes for the 2008 quarter.
Net Interest Income
Total interest income increased $55,000, or 1.3%, to $4.6 million for the
three-months ended September 30, 2008, from the comparable quarter in 2007.
Interest income on loans increased $118,000, or 3.1%, to $3.9 million during the
2008 quarter from $3.8 million for the 2007 quarter. This increase was due
primarily to a $17.1 million, or 6.9%, increase in the average balance of loans
outstanding, which was partially offset by a 21 basis point decrease in the
average yield on loans to 5.92% for the 2008 quarter from 6.13% for the three
months ended September 30, 2007.
Interest income on mortgage-backed securities decreased $63,000, or 37.1%, to
$107,000 for the three months ended September 30, 2008, from $170,000 for the
comparable 2007 quarter, due primarily to a $3.7 million decrease in the average
balance of securities outstanding and a 47 basis point decrease in the average
yield period to period. Interest income on investment securities increased
$29,000, or 5.8%, to $531,000 for the three months ended September 30, 2008,
compared to $502,000 for the same quarter in 2007, due primarily to a 61 basis
point increase in the average yield to 6.12% in the 2008 quarter, which was
partially offset by a decrease of $1.7 million, or 4.8% in the average balance
of investment securities outstanding. Interest income on other interest-earning
deposits decreased $29,000, or 74.4% to $10,000 for the three months ended
September 30, 2008.
19
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2008 and 2007 (continued)
--------------------------------------------------------------------------------
Interest expense decreased $452,000, or 18.5% to $2.0 million for the three
months ended September 30, 2008, from $2.4 million for the same quarter in 2007.
Interest expense on deposits decreased by $539,000, or 26.3%, to $1.5 million
from $2.1 million due primarily to a 101 basis point decrease in the average
costs of deposits to 2.89% during the 2008 quarter and a $1.1 million, or 0.6%,
decrease in the average balance outstanding. Interest expense on borrowings
increased by $87,000, or 22.2%, due primarily to a $13.1 million, or 41.5%,
increase in the average balance outstanding, which was partially offset by a 68
basis point decrease in the average cost of borrowings.
As a result of changes in interest income and interest expense, net interest
income increased by $507,000, or 24.5%, to $2.6 million for the three months
ended September 30, 2008, as compared to the same quarter in 2007. The average
interest rate spread increased to 2.76% for the three months ended September 30,
2008 from 2.00% for the three months ended September 30, 2007. The net interest
margin increased to 3.33% for the three months ended September 30, 2008 from
2.77% for the three months ended September 30, 2007.
Provision for Losses on Loans
Management recorded a $125,000 provision for losses on loans for the three
months ended September 30, 2008. There was a $15,000 provision for losses on
loans for the three months ended September 30, 2007. The decision to make a
provision for loan losses during the three months ended September 30, 2008
reflects the amount necessary to maintain an adequate allowance based on the
five year historical loss experience and other external factors. These external
factors, economic conditions and collateral value changes, have had a negative
impact on non-owner occupied loans in the portfolio. The $5.4 million increase
in loan portfolio for the three months has also increased the allowance
calculation. There can be no assurance that the loan loss allowance will be
sufficient to cover losses on non-performing loans in the future, however
management believes they have identified all known and inherent losses that are
probable and that can be reasonably estimated within the loan portfolio, and
that the allowance for loan losses is adequate to absorb such losses.
Other Income
Other income decreased $7,000, or 4.6%, to $146,000 for the three months ended
September 30, 2008, compared to the same quarter in 2007, due primarily to a
decrease in other operating income of $8,000.
General, Administrative and Other Expense
General, administrative and other expense increased $85,000, or 4.7%, to $1.9
million for the three months ended September 30, 2008, from $1.8 million for the
comparable quarter in 2007. This increase is a result of an increase of $58,000
in employee compensation and benefits and a $14,000 increase in property,
payroll and other taxes. The increase in employee compensation and benefits is
due primarily to an increase in the number of employees. The increase in
property, payroll and other taxes is due primarily to an increase in Ohio
franchise tax.
20
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2008 and 2007 (continued)
--------------------------------------------------------------------------------
FDIC Premiums
The Federal Deposit Insurance Corporation ("FDIC") imposes an assessment against
institutions for deposit insurance. This assessment is based on the risk
category of the institution and currently ranges from 5 to 43 basis points of
the institution's deposits. Federal law requires that the designated reserve
ratio for the deposit insurance fund be established by the FDIC at 1.15% to
1.50% of estimated insured deposits. If this reserve ratio drops below 1.15% or
the FDIC expects that it to do so within six months, the FDIC must, within 90
days, establish and implement a plan to restore the designated reserve ratio to
1.15% of estimated insured deposits within five years (absent extraordinary
circumstances).
Recent bank failures coupled with deteriorating economic conditions have
significantly reduced the deposit insurance fund's reserve ratio. As of June 30,
2008, the designated reserve ratio was 1.01% of estimated insured deposits at
March 31, 2008. As a result of this reduced reserve ratio, on October 16, 2008,
the FDIC published a proposed rule that would restore the reserve ratios to its
required level. The proposed rule would raise the current deposit insurance
assessment rates uniformly for all institutions by 7 basis points (to a range
from 12 to 50 basis points) for the first quarter of 2009. The proposed rule
would also alter the way the FDIC calculates federal deposit insurance
assessment rates beginning in the second quarter of 2009 and thereafter.
Under the proposed rule, the FDIC would first establish an institution's initial
base assessment rate. This initial base assessment rate would range, depending
on the risk category of the institution, from 10 to 45 basis points. The FDIC
would then adjust the initial base assessment (higher or lower) to obtain the
total base assessment rate. The adjustments to the initial base assessment rate
would be based upon an institution's levels of unsecured debt, secured
liabilities, and brokered deposits. The total base assessment rate would range
from 8 to 77.5 basis points of the institution's deposits. There can be no
assurance that the proposed rule will be implemented by the FDIC or implemented
in its proposed form.
In addition, the Emergency Economic Stabilization Act of 2008 (EESA) temporarily
increased the limit on FDIC insurance coverage for deposits to $250,000 through
December 31, 2009, and the FDIC took action to provide coverage for newly-issued
senior unsecured debt and non-interest bearing transaction accounts in excess of
the $250,000 limit, for which institutions will be assessed additional premiums.
These actions will significantly increase our non-interest expense in 2009 and
in future years as long as the increased premiums are in place.
Federal Income Taxes
The provision for federal income taxes increased $129,000, or 100.1%, to
$257,000 for the three months ended September 30, 2008, from $128,000 for the
same quarter in 2007, due primarily to a $305,000, or 75.7%, increase in pre-tax
21
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2008 and 2007 (continued)
--------------------------------------------------------------------------------
earnings. The effective tax rate was 36.3% and 31.8% for the three month periods
ended September 30, 2008 and 2007, respectively. The difference between the
Corporation's effective tax rate in the 2008 and 2007 periods and the 34%
statutory corporate rate is due primarily to the tax-exempt earnings on
bank-owned life insurance, tax- exempt interest on municipal obligations and tax
benefits for the contribution to the Cheviot Savings Bank Foundation.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Corporation's market risk since the
Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2007. Cheviot maintains its same approach to managing the operation
of the Bank and the pricing of its products.
ITEM 4 CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer evaluated
the disclosure controls and procedures (as defined under Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of
the period covered by this quarterly report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective.
There were no changes in the Corporation's internal controls or in other factors
that could materially affect, or could reasonably be likely to materially
affect, these controls subsequent to the date of their evaluation by the
Corporation's Chief Executive Officer and Chief Financial Officer.
22
Cheviot Financial Corp.
PART II
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
The Federal Deposit Insurance Corporation ("FDIC") imposes an
assessment against institutions for deposit insurance. This
assessment is based on the risk category of the institution and
currently ranges from 5 to 43 basis points of the institution's
deposits. Federal law requires that the designated reserve ratio
for the deposit insurance fund be established by the FDIC at
1.15% to 1.50% of estimated insured deposits. If this reserve
ratio drops below 1.15% or the FDIC expects that it to do so
within six months, the FDIC must, within 90 days, establish and
implement a plan to restore the designated reserve ratio to 1.15%
of estimated insured deposits within five years (absent
extraordinary circumstances).
Recent bank failures coupled with deteriorating economic
conditions have significantly reduced the deposit insurance
fund's reserve ratio. As of June 30, 2008, the designated reserve
ratio was 1.01% of estimated insured deposits at March 31, 2008.
As a result of this reduced reserve ratio, on October 16, 2008,
the FDIC published a proposed rule that would restore the reserve
ratios to its required level. The proposed rule would raise the
current deposit insurance assessment rates uniformly for all
institutions by 7 basis points (to a range from 12 to 50 basis
points) for the first quarter of 2009. The proposed rule would
also alter the way the FDIC calculates federal deposit insurance
assessment rates beginning in the second quarter of 2009 and
thereafter.
Under the proposed rule, the FDIC would first establish an
institution's initial base assessment rate. This initial base
assessment rate would range, depending on the risk category of
the institution, from 10 to 45 basis points. The FDIC would then
adjust the initial base assessment (higher or lower) to obtain
the total base assessment rate. The adjustments to the initial
base assessment rate would be based upon an institution's levels
of unsecured debt, secured liabilities, and brokered deposits.
The total base assessment rate would range from 8 to 77.5 basis
points of the institution's deposits. There can be no assurance
that the proposed rule will be implemented by the FDIC or
implemented in its proposed form.
In addition, the Emergency Economic Stabilization Act of 2008
(EESA) temporarily increased the limit on FDIC insurance coverage
for deposits to $250,000 through December 31, 2009, and the FDIC
took action to provide coverage for newly-issued senior unsecured
debt and non-interest bearing transaction accounts in excess of
the $250,000 limit, for which institutions will be assessed
additional premiums.
These actions will significantly increase our non-interest
expense in 2009 and in future years as long as the increased
premiums are in place.
23
Cheviot Financial Corp.
PART II (CONTINUED)
ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
--------------------------------------------------------------------------------
The Corporation announced a repurchase plan on January 16, 2008 which
provides for the repurchase of 5% or 447,584 shares of our common stock. As
of September 30, 2008, the Corporation had purchased 69,075 shares pursuant
to the program.
Total # of
shares purchased
Total Average as part of publicly
# of shares price paid announced plans
Period purchased per share or programs
------ --------- --------- ------------
July 1-31, 2008 4,000 $7.86 63,575
August 1-31, 2008 2,500 $8.26 66,075
September 1 - 30, 2008 3,000 $8.70 69,075
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14
of the Securities Exchange Act of 1934, As Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14
of the Securities Exchange Act of 1934, As Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
24
Cheviot Financial Corp.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2008 By: /s/Thomas J. Linneman
--------------------- -------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
Date: November 13, 2008 By: /s/Scott T. Smith
--------------------- -------------------------------------
Scott T. Smith
Chief Financial Officer
25