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 June 30, 2005
-----------------------------------------
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
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(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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of August 5, 2005, the latest practicable date, 9,918,751 shares of the
registrant's common stock, $.01 par value, were issued and outstanding.
Page 1 of 16
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Quantitative and Qualitative Disclosures about
Market Risk 14
Controls and Procedures 14
PART II - OTHER INFORMATION 15
SIGNATURES 16
2
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
ASSETS 2005 2004
(Unaudited)
Cash and due from banks $ 2,463 $ 2,836
Federal funds sold 3,032 4,370
Interest-earning deposits in other financial institutions 3,209 519
--------- ----------
Cash and cash equivalents 8,704 7,725
Investment securities held to maturity - at cost, approximate market value of
$26,803 and $26,864 at June 30, 2005
and December 31, 2004, respectively 27,080 27,102
Mortgage-backed securities available for sale - at fair value 1,434 1,483
Mortgage-backed securities held to maturity - at cost, approximate
market value of $25,246 and $29,315 at June 30, 2005
and December 31, 2004, respectively 25,068 29,204
Loans receivable - net 207,838 203,842
Real estate acquired through foreclosure - net 28 90
Office premises and equipment - at depreciated cost 3,440 2,947
Federal Home Loan Bank stock - at cost 2,977 2,909
Accrued interest receivable on loans 799 750
Accrued interest receivable on mortgage-backed securities 69 80
Accrued interest receivable on investments and interest-earning deposits 282 219
Bank-owned life insurance 3,048 -
Prepaid expenses and other assets 202 236
Prepaid federal income taxes 197 -
---------- ---------
Total assets $281,166 $276,587
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $180,879 $179,989
Advances from the Federal Home Loan Bank 20,985 16,199
Advances by borrowers for taxes and insurance 390 1,014
Accounts payable and other liabilities 904 1,003
Accrued federal income taxes - 127
Deferred federal income taxes 372 315
---------- ----------
Total liabilities 203,530 198,647
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 and outstanding at both
June 30, 2005 and December 31, 2004 99 99
Additional paid-in capital 42,786 42,746
Retained earnings - restricted 38,901 38,374
Shares acquired by stock benefit plans (4,148) (3,273)
Other comprehensive income (loss), unrealized losses on securities available
for sale, net of tax effects (2) (6)
---------- ---------
Total shareholders' equity 77,636 77,940
---------- ---------
Total liabilities and shareholders' equity $281,166 $276,587
========== =========
See accompanying notes to consolidated financial statements.
3
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
2005 2004 2005 2004
Interest income
Loans $5,918 $5,444 $2,965 $2,728
Mortgage-backed securities 439 367 222 192
Investment securities 457 323 239 210
Interest-earning deposits and other 109 133 68 52
------ ------ ------ -------
Total interest income 6,923 6,267 3,494 3,182
Interest expense
Deposits 1,815 1,656 949 812
Borrowings 435 220 233 115
------ ------ ------ ------
Total interest expense 2,250 1,876 1,182 927
----- ----- ----- ------
Net interest income 4,673 4,391 2,312 2,255
Provision for losses on loans 32 - 32 -
------- ----- ------- -----
Net interest income after provision for losses on loans 4,641 4,391 2,280 2,255
Other income (expense)
Gain on sale of loans 4 33 3 -
Loss on sale of real estate acquired through foreclosure (6) (13) - -
Other operating 194 97 110 41
------ ------- ------ -------
Total other income 192 117 113 41
General, administrative and other expense
Employee compensation and benefits 1,763 1,604 937 799
Occupancy and equipment 226 211 110 100
Property, payroll and other taxes 477 337 309 166
Data processing 115 119 56 53
Legal and professional 306 166 178 94
Advertising 88 78 44 39
Contribution to Cheviot Savings Bank Charitable Foundation - 1,500 - -
Other operating 270 257 135 149
------ ------ ------ ------
Total general, administrative and other expense 3,245 4,272 1,769 1,400
----- ----- ----- -----
Earnings before income taxes 1,588 236 624 896
Federal income taxes
Current 470 506 186 254
Deferred 55 (168) 14 52
------ ------ ------ ------
Total federal income taxes 525 338 200 306
------ ------ ------ ------
NET EARNINGS (LOSS) $1,063 $ (102) $ 424 $ 590
====== ====== ====== ======
EARNINGS (LOSS) PER SHARE
Basic $ .11 $ (.01) $ .04 $ .06
====== ====== ====== ======
Diluted $ .11 N/A $ .04 N/A
====== ======
See accompanying notes to consolidated financial statements.
4
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2005 and 2004
(In thousands)
2005 2004
Cash flows from operating activities:
Net earnings (loss) for the period $ 1,063 $ (102)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts on investment
and mortgage-backed securities, net 32 82
Depreciation 123 116
Amortization of deferred loan origination (fees) costs - net (15) 8
Proceeds from sale of loans in the secondary market 651 1,518
Loans originated for sale in the secondary market (648) (1,081)
Gain on sale of loans (4) (33)
Loss on sale of real estate acquired through foreclosure 6 13
Federal Home Loan Bank stock dividends (68) (56)
Provision for losses on loans 32 -
Amortization of expense related to stock benefit plans 100 -
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (49) (48)
Accrued interest receivable on mortgage-backed securities 11 (9)
Accrued interest receivable on investments and interest-
bearing deposits (63) (75)
Prepaid expenses and other assets 34 792
Accounts payable and other liabilities (99) (113)
Federal income taxes
Current (324) (194)
Deferred 55 (168)
--------- --------
Net cash provided by operating activities 837 650
Cash flows provided by (used in) investing activities:
Principal repayments on loans 19,661 22,906
Loan disbursements (23,701) (36,485)
Purchase of U.S. Government and agency obligations (1,977) (26,012)
Proceeds from maturity of U.S. Government and agency obligations 2,000 14,000
Purchase of mortgage-backed securities - (11,964)
Principal repayments on mortgage-backed securities 4,158 2,962
Proceeds from sale of real estate acquired through foreclosure 84 33
Purchase of office premises and equipment (616) (44)
Purchase of bank-owned life insurance (3,000) -
Net increase in the cash surrender value of life insurance (48) -
--------- -------
Net cash used in investing activities (3,439) (34,604)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 890 (84,184)
Proceeds from Federal Home Loan Bank advances 7,000 9,000
Repayments on Federal Home Loan Bank advances (2,214) (1,116)
Advances by borrowers for taxes and insurance (624) (581)
Repurchase of shares for stock benefit plans (935) -
Proceeds from issuance of common stock - 39,274
Dividends paid on common stock (536) (446)
--------- -------
Net cash provided by (used in) financing activities 3,581 (38,053)
--------- -------
Net increase (decrease) in cash and cash equivalents 979 (72,007)
Cash and cash equivalents at beginning of period 7,725 83,776
--------- ------
Cash and cash equivalents at end of period $ 8,704 $11,769
========= ======
5
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30, 2005 and 2004
(In thousands)
2005 2004
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 794 $ 500
======= =======
Interest on deposits and borrowings $2,250 $ 1,876
======= =======
Supplemental disclosure of noncash investing activities:
Transfer of loans to real estate acquired through foreclosure $ 28 $ -
======= =======
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 1 $ 11
======== =======
See accompanying notes to consolidated financial statements.
6
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2005 and 2004
1. Basis of Presentation
---------------------
In January 2004, Cheviot Financial Corp. ("Cheviot Financial" or the
"Corporation") completed a Plan of Reorganization (the "Plan" or the
"Reorganization") pursuant to which Cheviot Savings Bank (the "Savings
Bank") reorganized into a two-tier mutual holding company structure with
the establishment of Cheviot Financial, as parent of the Savings Bank, with
the Savings Bank converting to stock form and issuing all the Savings
Bank's outstanding stock to Cheviot Financial. Pursuant to the Plan,
Cheviot Financial Corp. sold 4,388,438 common shares in a minority stock
offering, representing approximately 44% of its outstanding common stock at
$10.00 per share to the Savings Bank's depositors and a newly formed
Employee Stock Ownership Plan ("ESOP"). The net proceeds of the offering
totaled approximately $39.3 million. In addition, 75,000 shares, or
approximately one percent of its outstanding shares, were issued to a
charitable foundation established by Cheviot Savings Bank. The remaining
5,455,313 shares of common stock of Cheviot Financial were issued to
Cheviot Mutual Holding Company, the federally chartered mutual holding
company of Cheviot Financial Corp.
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, 2004. 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 six month periods
ended June 30, 2005, 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 six months ended June 30, 2005, include the accounts of the Corporation
and its wholly-owned subsidiary, the Savings Bank. All significant
intercompany items have been eliminated.
3. Earnings Per Share
------------------
Basic earnings per share is computed based upon the weighted-average common
shares outstanding during the period less shares in the ESOP that are
unallocated and not committed to be released plus shares in the ESOP that
have been allocated. Weighted-average common shares deemed outstanding
totaled 9,597,383 for the three and six month periods ended June 30, 2005,
which gives effect to 321,368 unallocated ESOP shares and 35,707 allocated
ESOP shares. For the three and six months ended June 30, 2004,
weighted-average shares deemed outstanding totaled 9,561,676, which gives
effect to 357,075 unallocated ESOP shares.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common share equivalents. The
Corporation had no dilutive or potentially dilutive securities during the
three and six month periods ended June 30, 2004. The Corporation approved a
Stock Option Plan on April 26, 2005, which provides for the issuance of
486,018 shares under option. On May 5, 2005, approximately 384,000 option
shares were granted subject to five year vesting. None of these shares were
included in diluted earnings per share for the three or six months ended
June 30, 2005 as the strike price closely approximated market price at that
date.
7
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and six months ended June 30, 2005 and 2004
4. Effects of Recent Accounting Pronouncements
-------------------------------------------
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued a revision to Statement of Financial Accounting Standards ("SFAS")
No. 123 which establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services,
primarily on accounting for transactions in which an entity obtains
employee services in share-based transactions. This Statement, SFAS No. 123
(R) "Share-Based Payment", requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award, with limited exceptions.
That cost will be recognized over the period during which an employee is
required to provide services in exchange for the award - the requisite
service period. No compensation cost is recognized for equity instruments
for which employees do not render the requisite service. Employee share
purchase plans will not result in recognition of compensation cost if
certain conditions are met.
Initially, the cost of employee services received in exchange for an award
of liability instruments will be measured based on current fair value; the
fair value of that award will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during the
requisite service period will be recognized as compensation cost over that
period. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments (unless observable market
prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will
be recognized in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award immediately before
the modification.
Excess tax benefits, as defined by SFAS 123(R) will be recognized as an
addition to additional paid in capital. Cash retained as a result of those
excess tax benefits will be presented in the statement of cash flows as
financing cash inflows. The write-off of deferred tax assets relating to
unrealized tax benefits associated with recognized compensation cost will
be recognized as income tax expense unless there are excess tax benefits
from previous awards remaining in additional paid in capital to which it
can be offset.
As stated previously, Cheviot Financial's shareholders approved a stock
incentive plan (the "Plan") at the Corporation's Annual Meeting held on
April 26, 2005. The Plan provides for the award of restricted stock and
options to purchase common stock. The Corporation will recognize
compensation costs on option shares pursuant to SFAS No. 123(R) in calendar
2006.
8
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.
Discussion of Financial Condition Changes from December 31, 2004 to June 30,
2005
--------------------------------------------------------------------------------
Total assets increased $4.6 million, or 1.7%, to $281.2 million at June 30,
2005, from $276.6 million at December 31, 2004. The increase in total assets is
primarily due to the purchase of the bank-owned life insurance totaling $3.0
million during the six month period ended June 30, 2005, as well as increases in
interest-earning deposits and loans receivable, partially offset by a decrease
in mortgage-backed securities.
Cash, federal funds sold and interest-earning deposits increased $1.0 million,
or 12.7%, to $8.7 million at June 30, 2005, from the $7.7 million total at
December 31, 2004. The increase in cash and cash equivalents was due to a $2.7
million increase in interest-earning deposits, which was partially offset by a
decrease in cash and cash due from banks of $373,000, or 13.2%, and a decrease
in federal funds sold of $1.3 million, or 30.6%, at June 30, 2005. Investment
securities decreased $22,000, or 0.1%, to $27.1 million at June 30, 2005. All
investment securities are classified as held to maturity.
Mortgage-backed securities decreased $4.2 million, or 13.6%, to $26.5 million at
June 30, 2005, from $30.7 million at December 31, 2004. The decrease in
mortgage-backed securities was due primarily to principal prepayments and
repayments totaling $4.2 million. At June 30, 2005, $25.1 million of
mortgage-backed securities were classified as held to maturity, while $1.4
million were classified as available for sale. Since June 2004, management has
focused on shorter term investments primarily in an effort to further enhance
the Corporation's interest rate risk position.
Loans receivable increased $4.0 million, or 2.0%, to $207.8 million at June 30,
2005, from $203.8 million at December 31, 2004. The increase resulted from loan
originations totaling $23.7 million and sales of $648,000, partially offset by
loan principal repayments of $19.7 million.
The allowance for loan losses totaled $764,000 and $732,000 at June 30, 2005 and
December 31, 2004, respectively. In determining the adequacy of the allowance
for loan losses at any point in time, management and the board of directors
apply a systematic process focusing on the risk of loss in the portfolio. First,
the loan portfolio is segregated by loan types to be evaluated collectively and
loan types to be evaluated individually. Delinquent multi-family and commercial
loans are evaluated individually for potential impairments in their carrying
value.
Second, the allowance for loan losses entails utilizing our historic loss
experience by applying such loss percentage to the loan types to be collectively
evaluated in the portfolio. This segment of the loss analysis resulted in an
additional $32,000 to the provision for loss for the quarter ended June 30,
2005. The analysis of the allowance for loan losses requires an element of
judgment and is subject to the possibility that the allowance may need to be
increased, with a corresponding reduction in earnings. To the best of
management's knowledge, all known and inherent losses that are probable and that
can be reasonably estimated have been recorded at June 30, 2005.
9
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from December 31, 2004 to June 30,
2005 (continued)
--------------------------------------------------------------------------------
Non-performing and impaired loans totaled $206,000 and $251,000 at June 30, 2005
and December 31, 2004, respectively. At June 30, 2005, non-performing and
impaired loans were comprised of loans secured by one-to four-family residential
real estate totaling $112,000 and nonresidential real estate totaling $94,000.
The allowance for loan losses represented 370.9% and 291.6% of non-performing
and impaired loans at June 30, 2005 and December 31, 2004, respectively.
Although management believes that its allowance for loan losses conforms with
generally accepted accounting principles based upon the available facts and
circumstances, there can be no assurance that additions to the allowance will
not be necessary in future periods, which would adversely affect our results of
operations.
Deposits increased $890,000, or 0.5%, to $180.9 million at June 30, 2005, from
$180.0 million at December 31, 2004. Advances from the Federal Home Loan Bank of
Cincinnati increased by $4.8 million, or 29.5%, to $21.0 million at June 30,
2005, from $16.2 million at December 31, 2004. The Corporation utilized the
advance proceeds to partially fund growth in the loan portfolio.
Shareholders' equity decreased $304,000, or 0.4%, to $77.6 million at June 30,
2005, from $77.9 million at December 31, 2004. The decrease resulted from the
repurchase of shares for stock benefit plans of $935,000 and dividends paid of
$536,000, which were partially offset by net earnings of $1.1 million and
amortization of ESOP expense of $100,000.
Cheviot Savings Bank is required to maintain minimum regulatory capital pursuant
to federal regulations. At June 30, 2005, the Savings Bank's regulatory capital
substantially exceeded all minimum regulatory capital requirements.
Comparison of Operating Results for the Six-Month Periods Ended June 30, 2005
and 2004
--------------------------------------------------------------------------------
General
-------
Net earnings for the six months ended June 30, 2005 totaled $1.1 million, a $1.2
million increase from the $102,000 net loss reported for the June 2004 period.
The increase in net earnings reflects $1.0 million decrease in general and
administrative expenses in 2005 reflecting the absence of a nonrecurring $1.5
million contribution to the Cheviot Savings Bank Charitable Foundation in 2004.
In addition, net interest income increased by $282,000 and other income
increased by $75,000, which were partially offset by a $187,000 increase in
federal income taxes for the 2005 quarter.
Net Interest Income
--------------------
Total interest income increased $656,000, or 10.5%, to $6.9 million for the
six-months ended June 30, 2005, from the comparable period in 2004. Interest
income on loans increased $474,000, or 8.7%, to $5.9 million during the 2005
period, from $5.4 million for the 2004 period. This increase was due primarily
to a $15.8 million, or 8.3%, increase in the average balance of loans
outstanding, and a 2 basis point increase in the weighted-average yield on
loans, to 5.73 % for 2005 period from 5.71% for the six months ended June 30,
2004.
10
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods Ended June 30, 2005
and 2004 (continued)
--------------------------------------------------------------------------------
Net Interest Income (continued)
-------------------------------
Interest income on mortgage-backed securities increased $72,000, or 19.6%, to
$439,000 for the six months ended June 30, 2005, from $367,000 for the 2004
period, due primarily to a 55 basis point increase in the average yield,
partially offset by a $182,000 decrease in the average balance of securities
outstanding. Interest income on investment securities increased $134,000, or
41.5%, to $457,000 for the six months ended June 30, 2005, compared to $323,000
for the same period in 2004, due primarily to a 122 basis point increase in the
average yield to 3.35% in the 2005 period, which was partially offset by a $3.0
million, or 9.9% decrease in the average balance of investment securities
outstanding. Interest income on interest-earning deposits decreased $24,000, or
18.0%, to $109,000 for the six months ended June 30, 2005, due primarily to a
$11.3 million decrease in the average balance of interest-earning deposits,
compared to the same period in 2004, partially offset by a 113 basis point
increase in the weighted-average yield, to 2.44% for the six months ended June
30, 2005.
Interest expense increased $374,000, or 19.9%, to $2.3 million for the six
months ended June 30, 2005, from $1.9 million for the same period in 2004.
Interest expense on deposits increased by $159,000, or 9.6%, to $1.8 million
from $1.7 million due primarily to a $7.5 million, or 4.0%, decline in the
weighted-average balance outstanding, which was partially offset by a 25 basis
point increase in the weighted average costs of deposits to 2.04% in the 2005
period. Interest expense on borrowings increased by $215,000, or 97.7%, due
primarily to a $10.4 million, or 101.4%, increase in the average balance
outstanding, which was partially offset by an 8 basis point decline in the
average cost of borrowings. The increase in the yields on interest-earning
assets and costs of interest-bearing liabilities were due primarily to the
overall increase in short-term interest rates during 2005.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $282,000, or 6.4%, to $4.7 million for the six
months ended June 30, 2005, from $4.4 million for the comparable period ended
June 31, 2004. The average interest rate spread increased to 2.87% for the six
months ended June 30, 2005 from 2.76% for the six months ended June 30, 2004.
The net interest margin increased to 3.47% for the six months ended June 30,
2005 from 3.27% for the six months ended June 30, 2004.
Provision for Losses on Loans
-----------------------------
As a result of an analysis of historical experience, the volume and type of
lending conducted by the Savings Bank, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to the Savings Bank's market area, and other factors related to the
collectibility of the Savings Bank's loan portfolio, management recorded a
$32,000 provision for losses on loans for the six-months ended June 30, 2005.
Management's analysis of the allowance resulted in no provision for losses on
loans for the six months ended June 30, 2004. There can be no assurance that the
loan loss allowance will be sufficient to cover losses on nonperforming loans in
the future.
Other Income
------------
Other income increased $75,000, or 64.1%, to $192,000 for the six months ended
June 30, 2005, compared to the same period in 2004, due primarily to an increase
in other operating income of $97,000, or 100%, to $194,000 for the six months
ended June 30, 2005 from $97,000 for the prior period and a decrease in the loss
on sale of real estate acquired through foreclosure of $7,000, which were
partially offset by a decrease in the gain on sale of loans of $29,000, or
87.9%.
11
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods Ended June 30, 2005
and 2004 (continued)
--------------------------------------------------------------------------------
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense decreased $1.0 million, or 24.0%, to
$3.2 million for the six months ended June 30, 2005, from $4.3 million for the
comparable period in 2004. This decrease is a result of a $1.5 million expense
recorded during the first quarter of 2004 in connection with the Corporation's
contribution to the Cheviot Savings Bank Charitable Foundation. This decrease
was partially offset by an increase of $159,000, or 9.9% in employee
compensation and benefits expenses, an increase of $140,000, or 41.5% in
property, payroll and other taxes and an increase of $140,000, or 84.3% in legal
and professional expenses. The increase in employee compensation and benefits is
due primarily to an increase in expense related to stock benefit plans, an
increase in contributions to the retirement plan and an increase in the number
of employees as a result of the Company's growth. The increase in property,
payroll and other taxes is due primarily to an increase in the Ohio Franchise
tax imposed as a result of the overall increase in the net worth of the Company
following the completion of its mutual holding company reorganization and
minority stock offering in 2004. The increase in legal and professional expense
was due primarily to expenses associated with the reporting requirements of a
public company and professional services in connection with the implementation
and design of Sarbanes-Oxley audit documentation.
Federal Income Taxes
--------------------
The provision for federal income taxes increased $187,000, or 55.3%, to $525,000
for the six months ended June 30, 2005, from $338,000 for the same period in
2004, due primarily to a $1.4 million increase in pre-tax earnings. The
effective tax rate was 33.1% for the six month period ended June 30, 2005. The
federal income tax provision for the 2004 period totaled $338,000. The
difference between the 2004 provision and tax benefits refundable at the 34%
statutory corporate rate results from the inability to fully deduct
contributions to the Cheviot Savings Bank Foundation.
Comparison of Operating Results for the Three-Month Periods Ended June 30, 2005
and 2004
--------------------------------------------------------------------------------
General
--------
Net earnings for the three months ended June 30, 2005 totaled $424,000, a
$166,000 decrease from the $590,000 net earnings reported in the June 2004
period. The decrease in net earnings reflects a $369,000 increase in general and
administrative expenses in 2005, which was partially offset by an increase in
net interest income of $57,000, an increase in other income of $72,000 and a
decrease of $106,000 in federal income taxes for the 2005 quarter.
Net Interest Income
-------------------
Total interest income increased $312,000, or 9.8%, to $3.5 million for the
three-months ended June 30, 2005, from the comparable quarter in 2004. Interest
income on loans increased $237,000, or 8.7%, to $3.0 million during the 2005
period from $2.7 million for the 2004 period. This increase was due primarily to
a $11.0 million, or 5.7%, increase in the average balance of loans outstanding,
and a 16 basis point increase in the weighted-average yield on loans to 5.79%
for 2005 quarter from 5.63% for the three months ended June 30, 2004.
12
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 June 30, 2005
and 2004 (continued)
--------------------------------------------------------------------------------
Net Interest Income (continued)
-------------------------------
Interest income on mortgage-backed securities increased $30,000, or 15.6%, to
$222,000 for the three months ended June 30, 2005, from $192,000 for the 2004
quarter, due primarily to a 55 basis point increase in the average yield year to
year, which was partially offset by a $1.3 million decrease in the average
balance of securities outstanding. Interest income on investment securities
increased $29,000, or 13.8%, to $239,000 for the three months ended June 30,
2005, compared to $210,000 for the same quarter in 2004, due primarily to a 58
basis point increase in the average yield to 3.37% in the 2005 quarter, which
was partially offset by a $1.7 million, or 5.6% decrease in the average balance
of investment securities outstanding. Interest income on other interest-earning
deposits increased $16,000, or 30.8%, to $68,000 for the three months ended June
30, 2005, due primarily to a 215 basis point increase in the weighted-average
yield, to 3.64% for the three months ended June 30, 2005, partially offset by a
$6.5 million decrease in the average balance of interest-earning deposits.
Interest expense increased $255,000, or 27.5%, to $1.2 million for the three
months ended June 30, 2005, from $927,000 for the same period in 2004. Interest
expense on deposits increased by $137,000, or 16.9%, to $949,000 from $812,000
due primarily to a 37 basis point increase in the weighted average costs of
deposits to 2.14% in the 2005 period, which was partially offset by a $6.5
million decrease in the weighted-average balance outstanding. Interest expense
on borrowings increased by $118,000, or 102.6%, due primarily to a $7.9 million,
or 69.0%, increase in the average balance outstanding and an 80 basis point
increase in the average cost of borrowings. The increase in the yields on
interest-earning assets and costs of interest-bearing liabilities were due
primarily to the overall increase in market rates in the June 2005 quarter.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $57,000, or 2.5%, to $2.3 million for the three
months ended June 30, 2005. The average interest rate spread decreased to 2.79%
for the three months ended June 30, 2005 from 2.86% for the three months ended
June 31, 2004. The net interest margin increased to 3.44% for the three months
ended June 30, 2005 from 3.37% for the three months ended June 30, 2004.
Provision for Losses on Loans
-----------------------------
As a result of an analysis of historical experience, the volume and type of
lending conducted by the Savings Bank, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to the Savings Bank's market area, and other factors related to the
collectibility of the Savings Bank's loan portfolio, management recorded a
$32,000 provision for losses on loans for the three-months ended June 30, 2005.
Management's analysis in the 2004 period resulted in no provision for losses on
loans for the three months ended June 30, 2004. There can be no assurance that
the loan loss allowance will be sufficient to cover losses on nonperforming
loans in the future.
Other Income
------------
Other income increased $72,000, or 175.6%, to $113,000 for the three months
ended June 30, 2005, compared to the same quarter in 2004, due primarily to an
increase in other operating income of $69,000, or 168.3%, to $110,000 for the
three months ended June 30, 2005 from $41,000 for the prior period and an
increase in the gain on sale of loans of $3,000.
13
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 June 30, 2005
and 2004 (continued)
--------------------------------------------------------------------------------
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense increased $369,000, or 26.4%, to $1.8
million for the three months ended June 30, 2005, from $1.4 million for the
comparable quarter in 2004. This increase is a result of an increase of $138,000
in employee compensation and benefits, an increase of $143,000 in property,
payroll, and other taxes and a $84,000 increase in legal and professional
expenses. These increases were partially offset by a decrease of $14,000, or
9.4% in other operating expense. The increase in employee compensation and
benefits is due primarily to an increase in expense related to stock benefit
plans, an increase in contributions to the retirement plan and an increase in
the number of employees as a result of the Company's growth. The increase in
property, payroll, and other taxes is due primarily to an increase in Ohio
franchise tax imposed as a result of the overall increase in the net worth of
the Company following the completion of its mutual holding company
reorganization and minority stock offering in 2004. The increase in legal and
professional expense was due primarily to expenses associated with the reporting
requirements of a public company and professional services in connection with
the implementation and design of Sarbanes-Oxley audit documentation.
Federal Income Taxes
---------------------
The provision for federal income taxes decreased $106,000, or 34.6%, to $200,000
for the three months ended June 30, 2005, from $306,000 for the same quarter in
2004, due primarily to a $272,000, or 30.4%, decrease in pre-tax earnings. The
effective tax rate was 32.1% and 34.2% for the three month periods ended June
30, 2005 and 2004. The difference between the Corporation's 32.1% effective tax
rate in the 2005 period and the 34% statutory corporate rate is due primarily to
the tax exempt earnings on bank owned life insurance. The difference between the
2004 provision and tax benefits refundable at the statutory rate results from
the inability to fully deduct contributions 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, 2004.
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 significant 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.
14
Cheviot Financial Corp.
PART II
ITEM 1. Legal Proceedings
----------------
Not applicable
ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
-----------------------------------------------------------------------
The Corporation announced a repurchase plan on March 29, 2005. This
program provides for the repurchase of 5%, or 495,937 shares of our
common stock. As of June 30, 2005, the Corporation had not repurchased
any shares pursuant to the repurchase program.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Corporation held its Annual Meeting of Shareholders on April 26,
2005. Three matters were presented to the shareholders for a vote: The
shareholders elected two directors by the following votes:
For Against Abstain
Robert Thomas 9,378,501 274,749 0
John T. Smith 9,311,458 207,706 0
The shareholders ratified the selection of Grant Thornton LLP as the
Company's auditors for the 2006 fiscal year by the following vote:
For: 9,530,500 Against: 32,111 Abstain: 23,596
The shareholders also approved of the 2005 Cheviot Financial
Stock-Based Incentive Plan by the following vote:
For: 7,563,868 Against: 646,972 Abstain: 1,375,377
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.
15
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: August 12, 2005 By: /s/ Thomas J. Linneman
----------------- -------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
Date: August 12, 2005 By: /s/ Scott T. Smith
----------------- -------------------------------------
Scott T. Smith
Chief Financial Officer
16
Exhibit 31.1
CERTIFICATION 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
I, Thomas J. Linneman, President and Chief Executive Officer of Cheviot
Financial Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cheviot Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures or caused such
disclosure controls to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such
evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2005 /s/Thomas J. Linneman
--------------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
(principal executive officer)
Exhibit 31.2
CERTIFICATION 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
I, Scott T. Smith, Chief Financial Officer of Cheviot Financial Corp., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Cheviot Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures or caused such
disclosure controls to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this quarterly report based on such
evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2005 /s/Scott T. Smith
------------------------------
Scott T. Smith
Chief Financial Officer
(principal financial officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cheviot Financial Corp. (the
"Company"), on Form 10-Q for the period ended June 30, 2005, as filed with the
Securities and Exchange Commission on the date of this Certification (the
"Report"), I, Thomas J. Linneman, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been
provided to Cheviot Financial Corporation and will be retained by Cheviot
Financial Corporation and furnished to the Securities and Exchange Commission or
its staff upon request.
/s/Thomas J. Linneman
----------------------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
Date: August 12, 2005
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cheviot Financial Corp. (the
"Company"), on Form 10-Q for the period ended June 30, 2005, as filed with the
Securities and Exchange Commission on the date of this Certification (the
"Report"), I, Scott T. Smith, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been
provided to Cheviot Financial Corporation and will be retained by Cheviot
Financial Corporation and furnished to the Securities and Exchange Commission or
its staff upon request.
/s/Scott T. Smith
------------------------------------------------------
Scott T. Smith
Chief Financial Officer
Date: August 12, 2005