FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(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, 2004
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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 FINANICAL CORP.
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(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 [ ]
Indicated 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 3, 2004, the latest practicable date, 9,918,751 shares of the
registrant's common stock, $.01 par value, were issued and outstanding.
Page 1 of 17
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Operations 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 17
2
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
ASSETS 2004 2003
Cash and due from banks $ 2,067 $ 3,979
Federal funds sold 2,119 69,267
Interest-bearing deposits in other financial institutions 7,583 10,530
--------- --------
Cash and cash equivalents 11,769 83,776
Investment securities held to maturity:
U.S. Government and agency obligations - at cost, approximate
market value of $28,439 and $17,044 at
June 30, 2004 and December 31, 2003, respectively 29,014 17,035
Municipal obligations - at cost, approximate market value of
$101 and $103 at June 30, 2004 and December 31, 2003, respectively 100 100
Mortgage-backed securities held to maturity - at cost, approximate
market value of $30,155 and $21,808 at June 30, 2004 and
December 31, 2003, respectively 30,756 21,804
Loans receivable - net 199,888 186,424
Loans held for sale - at lower of cost or market 132 429
Real estate acquired through foreclosure - net - 46
Office premises and equipment - at depreciated cost 2,839 2,910
Federal Home Loan Bank stock - at cost 2,848 2,792
Accrued interest receivable on loans 703 655
Accrued interest receivable on mortgage-backed securities 80 71
Accrued interest receivable on investments and interest-bearing deposits 270 195
Prepaid expenses and other assets 370 1,162
---------- ---------
Total assets $278,769 $317,399
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $183,743 $267,927
Advances from the Federal Home Loan Bank 17,090 9,206
Advances by borrowers for taxes and insurance 341 922
Accounts payable and other liabilities 788 901
Accrued federal income taxes 65 259
Deferred federal income taxes 149 317
---------- ----------
Total liabilities 202,176 279,532
Shareholder's 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 June 30, 2004 99 -
Additional paid-in capital 42,746 -
Shares acquired by employee stock ownership plan (3,571) -
Retained earnings - restricted 37,319 37,867
-------- --------
Total shareholders' equity 76,593 37,867
-------- --------
Total liabilities and shareholders' equity $278,769 $317,399
======= =======
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,
2004 2003 2004 2003
Interest income
Loans $5,444 $5,824 $2,728 $2,879
Mortgage-backed securities 367 455 192 212
Investment securities 323 156 210 58
Interest-bearing deposits and other 133 140 52 75
------ ------ ------- -------
Total interest income 6,267 6,575 3,182 3,224
Interest expense
Deposits 1,656 2,222 812 1,060
Borrowings 220 247 115 121
------ ------ ------ ------
Total interest expense 1,876 2,469 927 1,181
----- ----- ------ -----
Net interest income 4,391 4,106 2,255 2,043
Provision for losses on loans - 275 - 15
----- ------ ----- -------
Net interest income after provision for losses on loans 4,391 3,831 2,255 2,028
Other income
Gain on sale of loans 33 29 - 18
Loss on sale of real estate acquired through foreclosure (13) (13) - (5)
Other operating 97 198 41 50
------- ------ ------- -------
Total other income 117 214 41 63
General, administrative and other expense
Employee compensation and benefits 1,604 1,412 799 538
Occupancy and equipment 211 183 100 99
Property, payroll and other taxes 337 307 166 151
Data processing 119 109 53 51
Legal and professional 166 97 94 50
Advertising 78 72 39 36
Charitable contribution 1,500 - - -
Other operating 257 238 149 142
------ ------ ------ ------
Total general, administrative and other expense 4,272 2,418 1,400 1,067
----- ----- ----- -----
Earnings before income taxes 236 1,627 896 1,024
Federal income taxes
Current 506 1,227 254 468
Deferred (168) (670) 52 (120)
------ ------ ------- ------
Total federal income taxes 338 557 306 348
------ ------ ------ ------
NET EARNINGS (LOSS) $ (102) $1,070 $ 590 $ 676
====== ===== ====== ======
EARNINGS (LOSS) PER SHARE
Basic $ (.01) N/A $ .06 N/A
====== ======
Diluted N/A N/A $ .06 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,
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings (loss) for the period $ (102) $ 1,070
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 82 110
Depreciation 116 112
Amortization of deferred loan origination (fees) costs - net 8 (143)
Proceeds from sale of loans in the secondary market 1,518 1,017
Loans originated for sale in the secondary market (1,081) (868)
Gain on sale of loans (33) (29)
Loss on sale of real estate acquired through foreclosure 13 -
Federal Home Loan Bank stock dividends (56) (54)
Provision for losses on loans - 275
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (48) (51)
Accrued interest receivable on mortgage-backed securities (9) 32
Accrued interest receivable on investments and interest-
bearing deposits (75) 124
Prepaid expenses and other assets 792 (278)
Accounts payable and other liabilities (113) 232
Federal income taxes
Current (194) 342
Deferred (168) (670)
-------- --------
Net cash provided by operating activities 650 1,221
Cash flows provided by (used in) investing activities:
Principal repayments on loans 22,906 24,469
Loan disbursements (36,485) (29,399)
Purchase of U.S. Government and agency obligations (26,012) (4,101)
Proceeds from maturity of U.S. Government and agency obligations 14,000 9,000
Purchase of mortgage-backed securities (11,964) -
Principal repayments on mortgage-backed securities 2,962 4,597
Additions to real estate acquired through foreclosure - 12
Proceeds from sale of real estate acquired through foreclosure 33 -
Purchase of office premises and equipment (44) (96)
--------- ---------
Net cash provided by (used in) investing activities (34,604) 4,482
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (84,184) 1,087
Proceeds from FHLB advances 9,000 -
Repayments on Federal Home Loan Bank advances (1,116) (1,396)
Advances by borrowers for taxes and insurance (581) (576)
Proceeds from issuance of common stock 39,274 -
Dividends paid on common stock (446) -
-------- -------
Net cash used in financing activities (38,053) (885)
------ --------
Net increase (decrease) in cash and cash equivalents (72,007) 4,818
Cash and cash equivalents at beginning of period 83,776 19,379
------ ------
Cash and cash equivalents at end of period $11,769 $24,197
====== ======
See accompanying notes to consolidated financial statements.
5
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30,
(In thousands)
2004 2003
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 500 $ 490
====== ======
Interest on deposits and borrowings $ 1,876 $ 2,475
====== ======
See accompanying notes to consolidated financial statements.
6
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three months ended June 30, 2004 and 2003
1. Basis of Presentation
Mutual to Stock Conversion. For the six and three month periods ended June 30,
2003, Cheviot Savings Bank (the "Savings Bank") operated as a state-chartered
mutual financial institution. On June 24, 2003, the Board of Directors of the
Savings Bank adopted a Plan of Reorganization (the "Plan" or the
"Reorganization") pursuant to which the Savings Bank reorganized into a two-tier
mutual holding company structure with the establishment of a stock holding
company, Cheviot Financial Corp. ("Cheviot Financial" or the "Corporation"), as
parent of the Savings Bank, and the Savings Bank converted to the stock form of
ownership and issued all the Savings Bank's outstanding stock to Cheviot
Financial Corp. The Reorganization was completed effective January 5, 2004.
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
were 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, or 55.0% of the outstanding 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 financial
statements should be read in conjunction with the financial statements and notes
thereto of the Company for the year ended December 31, 2003. However, in the
opinion of management, all adjustments (consisting of only normal recurring
accruals) which are necessary for a fair presentation of the financial
statements have been included. The results of operations for the six and three
month periods ended June 30, 2004, 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 six and
three months ended June 30, 2004, include the accounts of the Corporation and
its wholly-owned subsidiary, the Savings Bank. All significant intercompany
items have been eliminated. The accompanying financial statements as of December
31, 2003 and for the six and three months ended June 30, 2003, are comprised of
the Savings Bank only.
3. Earnings (Loss) Per Share
Basic earnings (loss) 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. Weighted-average common shares
deemed outstanding, which gives effect to 357,075 unallocated ESOP shares,
totaled 9,561,676 for each of the six and three month periods ended June 30,
2004.
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 period ended June 30,
2004.
The provisions of SFAS No. 128, "Earnings Per Share," are not applicable to the
six and three month periods ended June 30, 2003, as the Savings Bank had not
completed its conversion to stock form until January 5, 2004.
7
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended June 30, 2004 and 2003
4. Effects of Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (the "FASB") issued
FASB Interpretation No. 46(R) ("FIN 46(R)"), "Consolidation of Variable Interest
Entities." FIN 46(R) requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns, or both. FIN 46(R) also requires disclosures about
variable interest entities that a company is not required to consolidate, but in
which it has a significant variable interest. The consolidation requirements of
FIN 46(R) apply immediately to variable interest entities created after January
31, 2003. The consolidation requirements of FIN 46(R) apply to existing entities
in the first fiscal year ending after December 15, 2004. The Corporation does
not have any variable interest entities, therefore the adoption of FIN 46(R) had
no material effect on the Corporation's financial statements.
8
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from December 31, 2003 to June 30,
2004
Total assets decreased $38.6 million, or 12.2%, to $278.8 million at June 30,
2004, from the $317.4 million total at December 31, 2003. The decrease in total
assets resulted primarily from cash refunds to subscribers for over-subscribed
and unfulfilled stock orders in its minority stock offering. The Corporation
completed its minority stock offering on January 5, 2004.
Cash, federal funds sold and interest-bearing deposits in other financial
institutions decreased $72.0 million, or 86.0%, to $11.8 million at June 30,
2004, from the $83.8 million total at December 31, 2003. The cash and cash
equivalents total at December 31, 2003, included funds received for stock
subscription orders in December 2003. The Corporation's stock offering was
oversubscribed and in January 2004, approximately $36.1 million was refunded for
unfulfilled stock orders. Investment securities increased $12.0 million, or
69.9%, to $29.1 million at June 30, 2004, from $17.1 million at December 31,
2003. During the six months ended June 30, 2004, investment securities purchases
consisted of $26.0 million of U.S. Government and agency obligations, which were
offset by $14.0 million of maturities. All of our investment securities are
classified as held to maturity.
Mortgage-backed securities increased $9.0 million, or 41.1%, to $30.8 million at
June 30, 2004, from $21.8 million at December 31, 2003. The increase in
mortgage-backed securities was due primarily to $12.0 million of purchases,
which were partially offset by principal prepayments and repayments totaling
$3.0 million. All mortgage-backed securities are classified as held to maturity.
Loans receivable, including loans held for sale, increased $13.2 million, or
7.0%, to $200.0 million at June 30, 2004, from December 31, 2003. The increase
resulted from loan originations of $37.6 million and loan repayments of $22.9
million. The Savings Bank realized $12.7 million in loan growth from its new
lending office in Mason, Ohio.
At both June 30, 2004 and December 31, 2003, the allowance for loan losses
totaled $768,000, or 0.41% of net loans. In determining 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.
The analysis resulted in no additional provision to the allowance at June 30,
2004.
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
assigning no additional allowance at June 30, 2004. 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, 2004.
Non-performing and impaired loans totaled $429,000 and $462,000 at June 30, 2004
and December 31, 2003, respectively. At June 30, 2004, nonperforming and
impaired loans were comprised of loans secured by one-to four-family residential
real estate totaling $101,000 and loans secured by multi-family and
non-residential real estate totaling $328,000. The allowance for loan losses
represented 179.0% and 166.2% of non-performing and impaired loans at June 30,
2004 and December 31, 2003, 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.
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, 2003 to June 30,
2004 (continued)
Deposits decreased $84.2 million, or 31.4%, to $183.7 million at June 30, 2004,
from the $267.9 million at December 31, 2003. The decrease was comprised of a
$77.0 million decrease in transaction accounts, primarily representing funds
received for stock subscription orders and a $7.2 million decrease in
certificates of deposit. Upon consummation of the stock offering on January 5,
2004, the Savings Bank refunded approximately $36.1 million for over-subscribed
stock subscription orders. Advances from the Federal Home Loan Bank of
Cincinnati increased by $7.9 million, or 85.6%, to $17.1 million at June 30,
2004, from $9.2 million at December 31, 2003. The increase in advances was due
primarily to management's decision to fund new loan originations at the Mason
lending center with these advances to lock in an acceptable interest rate
spread.
Shareholders' equity increased $38.7 million, or 102.3%, to $76.6 million at
June 30, 2004, from $37.9 million at December 31, 2003. The increase resulted
from the $39.3 million of proceeds (net of $1.7 million of offering costs and
the costs of contributions to the employee stock ownership plan) from the
Corporation's stock offering. This increase was partially offset by the net loss
during the period of $102,000 and dividends paid of $446,000. Approximately
$960,000 of offering costs were included within other assets at December 31,
2003.
Cheviot Savings Bank is required to maintain minimum regulatory capital pursuant
to federal regulations. At June 30, 2004, 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, 2004
and 2003
--------------------------------------------------------------------------------
General
The Corporation had a net loss of $102,000 for the six months ended June 30,
2004, compared to $1.1 million in net earnings for the six month period ended
June 30, 2003. The decrease in net earnings was due primarily to the recognition
of $1.5 million in expense related to the contribution to the Cheviot Savings
Bank Charitable Foundation. As discussed in the Corporation's offering circular,
management elected to contribute $1.5 million to the newly-formed charitable
foundation, consisting of $750,000 in cash contributed by Cheviot Savings Bank
and 75,000 shares of Cheviot Financial Corp. common stock. Excluding the $1.2
million after-tax effect of the contribution, the Corporation's net earnings for
the six month period ended June 30, 2004 totaled $1.1 million, an increase of
$73,000, or 6.8%, over the same period in 2003. This increase was due primarily
to a $285,000 increase in net interest income and a $275,000 decrease in the
provision for losses on loans, which were partially offset by a $97,000 decrease
in other income and a $354,000 increase in general, administrative and other
expense. Management believes that presentation of financial results exclusive of
the one-time expense for the charitable contribution provides the users of the
financial statements with an additional and useful comparison of the
Corporation's current results of operations with past and future periods.
Net Interest Income
Total interest income decreased by $308,000, or 4.7%, to $6.3 million for the
six-month period ended June 30, 2004, from $6.6 million for the same period in
2003. Interest income on loans decreased $380,000, or 6.5%, to $5.4 million
during the 2004 period, from $5.8 million for the 2003 period. This decline was
due primarily to a 66 basis point decrease in the weighted-average yield on
loans, to 5.71% for the 2004 period from 6.37% for the 2003 period, which was
partially offset by a $7.9 million, or 4.3%, increase in the average balance of
loans outstanding.
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, 2004
and 2003 (continued)
--------------------------------------------------------------------------------
Net Interest Income (continued)
Interest income on mortgage-backed securities decreased $88,000, or 19.3%, to
$367,000 from $455,000 due primarily to a 120 basis point decrease in the
average yield year to year. Interest income on investment securities increased
$167,000, or 107.1%, to $323,000 for the six months ended June 30, 2004, from
$156,000 for the same period in 2003, due primarily to a $21.3 million, or
237.4%, increase in the average balance outstanding, which was partially offset
by a 135 basis point decrease in the average yield to 2.13% in the 2004 period.
Interest income on other interest-bearing deposits decreased by $7,000, or 5.0%,
to $133,000 during the six months ended June 30, 2004, from $140,000 for the
same period in 2003 due primarily to an 11 basis point decrease in the
weighted-average yield to 1.31% for the six months ended June 30, 2004, which
was partially offset by an increase in the average balance of interest-bearing
deposits to $635,000, compared to the same period in 2003.
Interest expense decreased $593,000, or 24.0%, to $1.9 million for the six
months ended June 30, 2004, from $2.5 million for the same period in 2003.
Interest expense on deposits decreased by $566,000, or 25.5%, to $1.7 million
from $2.2 million due primarily to a 52 basis point decrease in the
weighted-average cost of deposits to 1.79% in the 2004 period and a $7.2
million, or 3.7%, decline in the weighted-average balance outstanding. Interest
expense on borrowings decreased by $27,000, or 10.9%, to $220,000 from $247,000
due primarily to a $382,000, or 3.6%, decrease in the average balance
outstanding and a 35 basis point decline in the average cost of advances. The
decreases in the yields on interest-earning assets and costs of interest-bearing
liabilities were due primarily to the overall decrease in market interest rates
in the economy during 2003.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $285,000, or 6.9%, to $4.4 million during the
six months ended June 30, 2004, from $4.1 million during the comparable period
ended June 30, 2003. The average interest rate spread decreased to 2.76% for the
six months ended June 30, 2004 from 3.18% for the six months ended June 30,
2003. The net interest margin decreased to 3.27% for the six months ended June
30, 2004 from 3.50% for the six months ended June 30, 2003.
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 concluded that
the allowance for loan losses was adequate, and therefore, elected not to record
a provision for losses on loans for the six-months ended June 30, 2004, compared
to a $275,000 provision recorded for the six-months ended June 30, 2003. The
prior period provision was predicated primarily upon growth in the loan
portfolio and management's perception of the risk prevalent in the economy.
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 decreased $97,000, or 45.3%, to $117,000 for the six months ended
June 30, 2004, from $214,000 for the same period in 2003, due primarily to a
$101,000 decrease in other operating income, which was partially offset by a
$4,000 increase in the gain on sale of loans. The decrease in other operating
income reflects the Corporation's $110,000 settlement received in the 2003
period from a lawsuit related to a real estate owned parcel. The increase in
gain on sale of loans was due primarily to an increase in loan sales volume.
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, 2004
and 2003 (continued)
--------------------------------------------------------------------------------
General, Administrative and Other Expense
General, administrative and other expense increased $1.9 million, or 76.7%, to
$4.3 million for the six months ended June 30, 2004, compared to $2.4 million
for the same period in 2003. This increase was due primarily to the $1.5 million
contribution to the Cheviot Savings Bank Charitable Foundation, a $192,000, or
13.6%, increase in employee compensation and benefits, a $28,000, or 15.3%,
increase in occupancy and equipment expense and a $69,000, or 71.1%, increase in
legal and professional expense. The increase in employee compensation and
benefits was due primarily to an increase in health insurance costs of
approximately $115,000 year to year, expense related to the employee stock
ownership plan of $214,000, staffing increases related to the new Mason loan
production office and normal merit increases, which were partially offset by a
decrease in expense related to the directors deferred compensation plan. The
increase in occupancy and equipment was due to rent and occupancy costs at the
new loan production office in Mason, Ohio and increases in utilities costs and
repairs expenses at several of the Savings Bank's office locations. The increase
in professional fees was due primarily to costs associated with changing the
Corporation's reporting year end to December 31 and expenses associated with the
reporting requirements of a public company, including Nasdaq fees of
approximately $15,000.
Federal Income Taxes
The provision for federal income taxes decreased $219,000, or 39.3%, to $338,000
for the six months ended June 30, 2004, from $557,000 for the same period in
2003, due primarily to a $1.4 million, or 85.5%, decrease in pre-tax earnings.
The Corporation did not record a tax benefit on the charitable contribution of
75,000 shares of its common stock, totaling $750,000, to the Cheviot Savings
Bank Charitable Foundation. Management does not anticipate such contribution to
be deductible for federal income tax purposes for at least the next two years.
The effective tax rate was 34.3% and 34.2% for the six month periods ended June
30, 2004 and 2003, respectively, excluding the effects of the nondeductible
charitable contribution in the 2004 period.
Comparison of Operating Results for the Three-Month Periods Ended June 30, 2004
and 2003
--------------------------------------------------------------------------------
General
Net earnings decreased $86,000, or 12.7%, to $590,000 for the three months ended
June 30, 2004, from $676,000 for the three months ended June 30, 2003. The
decrease in net earnings was due primarily to a $333,000 increase in general
administrative and other expense and a $22,000 decrease in other income, which
were partially offset by a $212,000 increase in net interest income and a
$42,000 decrease in federal income taxes.
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, 2004
and 2003 (continued)
--------------------------------------------------------------------------------
Net Interest Income
Total interest income decreased $42,000, or 1.3%, to $3.2 million for the
three-months ended June 30, 2004, from the same period in 2003. Interest income
on loans decreased $151,000, or 5.2%, to $2.7 million during the 2004 period,
from $2.9 million for the 2003 period. This decline was due primarily to a 67
basis point decrease in the weighted-average yield on loans, to 5.63% for the
2004 period from 6.30% for the three months ended June 30, 2003, which was
partially offset by an $11.2 million, or 6.1%, increase in the average balance
of loans outstanding.
Interest income on mortgage-backed securities decreased $20,000, or 9.4%, to
$192,000 for the three months ended June 30, 2004, from $212,000 for the prior
period due primarily to a 71 basis point decrease in the average yield year to
year. Interest income on investment securities increased $152,000, or 262.1%, to
$210,000 for the three months ended June 30, 2004, compared to $58,000 for the
same quarter in 2003, due primarily to a $22.6 million, or 305.1%, increase in
the average balance of investment securities outstanding, which was partially
offset by a 35 basis point decrease in the average yield, to 2.78% in the 2004
quarter. Interest income on other interest-bearing deposits decreased $23,000,
or 30.7%, to $52,000 for the three months ended June 30, 2004, due primarily to
a $7.1 million decrease in the average balance of interest earning deposits,
compared to the same period in 2003, partially offset by a 6 basis point
increase in the weighted-average yield, to 1.49% for the three months ended June
30, 2004.
Interest expense decreased $254,000, or 21.5%, to $927,000 for the three months
ended June 30, 2004, from $1.2 million for the same period in 2003. Interest
expense on deposits decreased by $248,000, or 23.4%, to $812,000 from $1.1
million due primarily to a 42 basis point decrease in the weighted-average cost
of deposits to 1.77% in the 2004 period and a $9.4 million, or 4.9%, decline in
the weighted-average balance outstanding. Interest expense on borrowings
decreased by $6,000, or 5.0%, due primarily to a 67 basis point decline in the
average cost of borrowings, which was partially offset by a $1.2 million, or
11.7%, increase in the average balance outstanding. The decreases in the yields
on interest-earning assets and costs of interest-bearing liabilities were due
primarily to the overall decrease in market interest rates during 2003.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $212,000, or 10.4%, to $2.3 million for the
three months ended June 30, 2004, from $2.0 million for the comparable period
ended June 30, 2003. The average interest rate spread decreased to 2.92% for the
three months ended June 30, 2004 from 3.21% for the three months ended June 30,
2003. The net interest margin decreased to 3.43% for the three months ended June
30, 2004 from 3.50% for the three months ended June 30, 2003.
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 concluded that
the allowance for loan losses was adequate, and therefore, elected not to record
a provision for losses on loans for the three-months ended June 30, 2004,
compared to a $15,000 provision recorded for the three-months ended June 30,
2003. The prior period provision was predicated primarily upon growth in the
loan portfolio and management's perception of the risk prevalent in the economy.
There can be no assurance that the loan loss allowance will be sufficient to
cover losses on nonperforming loans in the future.
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, 2004
and 2003 (continued)
--------------------------------------------------------------------------------
Other Income
Other income decreased $22,000, or 34.9%, to $41,000 for the three months ended
June 30, 2004, compared to the same quarter in 2003, due primarily to a $9,000
decrease in other operating income and an $18,000 decrease in the gain on sale
of loans.
General, Administrative and Other Expense
General, administrative and other expense increased $333,000, or 31.2%, to $1.4
million for the three months ended June 30, 2004, from $1.1 million for the same
quarter in 2003. This increase was due primarily to a $261,000, or 48.5%,
increase in employee compensation and benefits and a $44,000, or 88.0%, increase
in legal and professional expense. The increase in employee compensation and
benefits was due primarily to expense recognized for the ESOP in the 2004 period
of $101,000 and an increase in health coverage costs of approximately $115,000.
Health coverage costs year to year reflects the effects of a benefit recorded in
the 2003 period due to a change in the estimated costs of the Savings Bank's
self-insurance plan. The increase in professional fees was due primarily to
costs associated with changing the Corporation's reporting year end to December
31 and expenses associated with the reporting requirements of a public company.
Federal Income Taxes
The provision for federal income taxes decreased $42,000, or 12.1%, to $306,000
for the three months ended June 30, 2004, from $348,000 for the same quarter in
2003, due primarily to a $128,000, or 12.5%, decrease in pre-tax earnings. The
effective tax rates were 34.2% and 34.0% for the three month periods ended June
30, 2004 and 2003, respectively.
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 fiscal year
ended December 31, 2003.
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-14(c) and
15d-14(c) 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, including
any corrective actions with regard to material deficiencies and weaknesses.
14
Cheviot Financial Corp.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
------------------------------------------------------------------------
Not applicable
ITEM 3. Defaults Upon Senior Securities
------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
Not applicable
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits:
3.1* Charter of Cheviot Financial Corp. (incorporated herein by
reference to Exhibit 3.1 to the Corporation's Registration
Statement on Form S-1 (Registration No.: 333-106663) filed with
the Securities and Exchange Commission on June 30, 2003).
3.2* Bylaws of Cheviot Financial Corp. (incorporated herein by
reference to Exhibit 3.2 to the Corporation's Registration
Statement on Form S-1 (Registration No.: 333-106663) filed with
the Securities and Exchange Commission on June 30, 2003).
10.1*Form of Employment Agreement with Thomas J. Linneman
(incorporated herein by reference to Exhibit 10.1 to
Pre-Effective Amendment No. 1 to the Corporation's Registration
Statement on Form S-1 (Registration No.: 333-106663) filed with
the Securities and Exchange Commission on September 2, 2003).
10.2*Form of Change of Control Severance Agreement with Kevin M.
Kappa (incorporated herein by reference to Exhibit 10.2 to
Pre-Effective Amendment No. 1 to the Corporation's Registration
Statement on Form S-1 (Registration No.: 333-106663) filed with
the Securities and Exchange Commission on September 2, 2003).
10.3*Form of Change of Control Severance Agreement with Jeffrey J.
Lenzer (incorporated herein by reference to Exhibit 10.3 to
Pre-Effective Amendment No. 1 to the Corporation's Registration
Statement on Form S-1 (Registration No.: 333-106663) filed with
the Securities and Exchange Commission on September 2, 2003).
10.4.1* Cheviot Savings Bank Directors Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.4 to the
Corporation's Registration Statement on Form S-1 (Registration
No.: 333-106663) filed with the Securities and Exchange
Commission on June 30, 2003).
10.4.2* Amended and Restated Cheviot Savings Bank Deferred
Compensation Plan (incorporated herein by reference to Exhibit 14
to the Corporation's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 25, 2004).
15
Cheviot Financial Corp.
PART II (CONTINUED)
ITEM 6. Exhibits and Reports on Form 8-K (continued)
--------------------------------
(a) Exhibits:
10.5*Form of Tax Allocation Agreement between the Corporation and
Cheviot Savings Bank (incorporated herein by reference to Exhibit
10.5 to Pre-Effective Amendment No. 1 to the Corporation's
Registration Statement on Form S-1 (Registration No.: 333-106663)
filed with the Securities and Exchange Commission on September 2,
2003).
10.6*Form of Expense Allocation Agreement between the Corporation and
Cheviot Savings Bank (incorporated herein by reference to Exhibit
10.6 to Pre-Effective Amendment No. 1 to the Corporation's
Registration Statement on Form S-1 (Registration No.: 333-106663)
filed with the Securities and Exchange Commission on September 2,
2003).
10.7.1* Cheviot Building and Loan Co. 401(k) Retirement Savings Plan
(incorporated herein by reference to Exhibit 4.1 to the
Corporation's Registration Statement on Form S-8 (Registration
No.: 333-113919) filed with the Securities and Exchange
Commission on March 25, 2004).
10.7.2* Amendment to Cheviot Savings Bank 401(k) Retirement Savings
Plan effective November 20, 2003 (incorporated herein by
reference to Exhibit 4.2 to the Corporation's Registration
Statement on Form S-8 (Registration No.: 333-113919) filed with
the Securities and Exchange Commission on March 25, 2004).
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.
* Previously filed.
(b) No Form 8-K reports were filed during the quarter.
16
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 3, 2004 By: /s/Thomas J. Linneman
------------------- -------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
Date: August 3, 2004 By: /s/Scott T. Smith
------------------- --------------------------------------
Scott T. Smith
Chief Financial Officer
17