UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
--------------------------------------------------------------------------------
(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]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 8, 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 18
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 11
Quantitative and Qualitative Disclosures about
Market Risk 16
Controls and Procedures 16
PART II - OTHER INFORMATION 17
SIGNATURES 18
2
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 2005 2004
(Unaudited)
Cash and due from banks $ 2,654 $ 2,836
Federal funds sold 6,927 4,370
Interest-earning deposits in other financial institutions 595 519
---------- ----------
Cash and cash equivalents 10,176 7,725
Investment securities held to maturity - at cost, approximate market value of
$26,597 and $26,864 at September 30, 2005
and December 31, 2004, respectively 27,091 27,102
Mortgage-backed securities available for sale - at fair value 1,330 1,483
Mortgage-backed securities held to maturity - at cost, approximate
market value of $22,485 and $29,315 at September 30, 2005
and December 31, 2004, respectively 22,406 29,204
Loans receivable - net 218,248 203,842
Real estate acquired through foreclosure - net 84 90
Office premises and equipment - at depreciated cost 3,464 2,947
Federal Home Loan Bank stock - at cost 3,013 2,909
Accrued interest receivable on loans 859 750
Accrued interest receivable on mortgage-backed securities 73 80
Accrued interest receivable on investments and interest-earning deposits 261 219
Bank-owned life insurance 3,074 -
Prepaid expenses and other assets 350 236
Prepaid federal income taxes 115 -
---------- ---------
Total assets $290,544 $276,587
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $181,026 $179,989
Advances from the Federal Home Loan Bank 30,001 16,199
Advances by borrowers for taxes and insurance 726 1,014
Accounts payable and other liabilities 1,186 1,003
Accrued federal income taxes - 127
Deferred federal income taxes 379 315
---------- ----------
Total liabilities 213,318 198,647
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
September 30, 2005 and December 31, 2004 99 99
Additional paid-in capital 42,786 42,746
Retained earnings - restricted 39,193 38,374
Shares acquired by stock benefit plans (4,854) (3,273)
Other comprehensive income (loss), unrealized gains (losses) on securities
available for sale, net of related tax effects 2 (6)
---------- ----------
Total shareholders' equity 77,226 77,940
---------- ----------
Total liabilities and shareholders' equity $290,544 $276,587
========== ==========
See accompanying notes to consolidated financial statements.
3
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
2005 2004 2005 2004
Interest income
Loans $ 9,057 $8,320 $3,139 $2,876
Mortgage-backed securities 672 595 233 228
Investment securities 710 547 253 224
Interest-earning deposits and other 166 153 57 20
-------- ------ ------- -------
Total interest income 10,605 9,615 3,682 3,348
Interest expense
Deposits 2,862 2,457 1,047 801
Borrowings 739 410 304 190
-------- ------ ------ ------
Total interest expense 3,601 2,867 1,351 991
-------- ------ ------ ------
Net interest income 7,004 6,748 2,331 2,357
Provision for losses on loans 62 - 30 -
--------- ----- ------- -----
Net interest income after provision for losses on loans 6,942 6,748 2,301 2,357
Other income
Gain on sale of loans 13 59 9 26
Loss on sale of real estate acquired through foreclosure (8) (13) (2) -
Other operating 299 152 105 55
-------- ------ ------ -------
Total other income 304 198 112 81
General, administrative and other expense
Employee compensation and benefits 2,683 2,415 921 811
Occupancy and equipment 310 304 84 93
Property, payroll and other taxes 709 497 231 160
Data processing 201 175 85 56
Legal and professional 383 240 77 74
Advertising 131 117 44 39
Charitable contribution - 1,500 - -
Other operating 402 376 132 119
-------- ------ ------ ------
Total general, administrative and other expense 4,819 5,624 1,574 1,352
-------- ------ ------ ------
Earnings before income taxes 2,427 1,322 839 1,086
Federal income taxes
Current 744 826 274 320
Deferred 60 (118) 5 50
-------- ------ ------- -------
Total federal income taxes 804 708 279 370
-------- ------ ------- -------
NET EARNINGS $ 1,623 $ 614 $ 560 $ 716
======== ====== ======= =======
EARNINGS PER SHARE
Basic $.17 $.06 $.06 $.07
=== === === ===
Diluted $.17 $.06 $.06 $.07
=== === === ===
Dividends declared per share $.18 $.15 $.06 $.05
=== === === ===
See accompanying notes to consolidated financial statements.
4
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(Unaudited)
(In thousands)
2005 2004
Cash flows from operating activities:
Net earnings for the period $ 1,623 $ 614
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts on investment
and mortgage-backed securities, net 27 113
Depreciation 163 173
Amortization of deferred loan origination (fees) costs - net (35) 20
Proceeds from sale of loans in the secondary market 1,595 2,727
Loans originated for sale in the secondary market (1,591) (2,482)
Gain on sale of loans (13) (59)
Loss on sale of real estate acquired through foreclosure 8 13
Federal Home Loan Bank stock dividends (104) (86)
Provision for losses on loans 62 -
Amortization of expense related to stock benefit plans 100 -
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (109) (109)
Accrued interest receivable on mortgage-backed securities 7 (11)
Accrued interest receivable on investments and interest-earning deposits (42) (75)
Prepaid expenses and other assets (114) 838
Accounts payable and other liabilities 183 188
Federal income taxes
Current (242) (4)
Deferred 60 (118)
--------- --------
Net cash provided by operating activities 1,578 1,742
Cash flows provided by (used in) investing activities:
Principal repayments on loans 32,037 30,939
Loan disbursements (46,573) (48,399)
Purchase of U.S. Government and agency obligations (1,977) (26,012)
Proceeds from maturity of U.S. Government and agency obligations 2,000 16,000
Purchase of mortgage-backed securities - (13,940)
Principal repayments on mortgage-backed securities 6,924 4,681
Proceeds from sale of real estate acquired through foreclosure 110 33
Purchase of office premises and equipment (680) (44)
Purchase of bank - owned life insurance (3,000) -
Net increase in the cash surrender value of life insurance (74) -
--------- -------
Net cash used in investing activities (11,233) (36,742)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 1,037 (88,787)
Proceeds from FHLB advances 16,600 9,000
Repayments of Federal Home Loan Bank advances (2,798) (1,512)
Advances by borrowers for taxes and insurance (288) (271)
Purchase of shares for stock benefit plans (1,641) -
Proceeds from issuance of common stock - 39,274
Dividends paid on common stock (804) (669)
-------- --------
Net cash provided by (used in) financing activities 12,106 (42,965)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,451 (77,965)
Cash and cash equivalents at beginning of period 7,725 83,776
-------- -------
Cash and cash equivalents at end of period $10,176 $ 5,811
======== =======
See accompanying notes to consolidated financial statements.
5
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(Unaudited)
(In thousands)
2005 2004
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $1,007 $ 630
===== ======
Interest on deposits and borrowings $3,601 $2,867
===== =====
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ 112 $ 333
====== ======
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 9 $ 18
======= =======
See accompanying notes to consolidated financial statements.
6
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 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 nine month periods ended September 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
nine months ended September 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 nine month periods ended September 30, 2005, which
gives effect to 321,368 unallocated ESOP shares and 35,707 allocated ESOP
shares. For the three and nine months ended September 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 nine month
periods ended September 30, 2004. The Corporation approved a Stock Incentive
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. A tabular presentation of diluted earnings per share has
not been presented as diluted shares are essentially equal to basic shares
outstanding due to the proximity of the strike price and market price.
7
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2005 and 2004
4. Stock Option Plan
The Corporation has a stock option plan that provides for grants of up to
468,018 stock options. The Corporation accounts for its stock option plan in
accordance with SFAS No. 123, "Accounting for Stock-based Compensation," which
contains a fair value based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date based on
the fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue to account for stock options and similar equity instruments
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock options using
APB Opinion No. 25 are required to make pro-forma disclosures of net earnings
and earnings per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied.
The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the Corporation's stock
incentive plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the accounting method utilized in SFAS No.
123, the Corporation's net earnings and earnings per share would have been
reduced to the pro-forma amounts indicated below for the nine and three months
ended September 30:
Nine months ended Three months ended
September 30, September,
2005 2005
Net earnings (In thousands) As reported $1,623 $560
Stock-based compensation, net of tax (21) (13)
------ ------
Pro-forma $1,602 $547
====== ======
Earnings per share
Basic As reported $.17 $.06
Stock-based compensation, net of tax - -
------ ------
Pro-forma $.17 $.06
====== ======
Diluted As reported $.17 $.06
Stock-based compensation, net of tax - -
------ ------
Pro-forma $.17 $.06
====== ======
The fair value of each option granted is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants: dividend yield of 2.15%; expected
volatility of 39.8%; risk-free interest rates of 4.19%; and expected lives of 10
years.
8
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2005 and 2004
4. Stock Option Plan (continued)
A summary of the status of the Corporation's stock option plan as of September
30, 2005, and changes during the period then ended is presented below:
Nine months ended
September 30,
2005
Weighted-
average
exercise
Shares price
Outstanding at beginning of period - $ -
Granted 383,700 11.15
Exercised - -
Forfeited - -
------- ------
Outstanding at end of period 383,700 $11.15
======= =====
Options exercisable at period-end - $ -
======= =====
The following information applies to options outstanding at September 30, 2005:
Number outstanding 383,700
Exercise price $11.15
Weighted-average exercise price 11.15
Weighted-average remaining contractual life 4.6 years
Fair value of options granted $3.36
5. 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.
9
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2005 and 2004
5. Effects of Recent Accounting Pronouncements (continued)
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 at the Corporation's Annual Meeting held on April 26, 2005. The
Stock Incentive Plan provides for the award of restricted stock and options to
purchase common stock. The Corporation will recognize compensation costs on
granted option shares pursuant to SFAS No. 123(R) in calendar 2006. Such costs
should approximate the annualized interim costs set forth in the table above.
10
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 September
30, 2005
--------------------------------------------------------------------------------
Total assets increased $14.0 million, or 5.0%, to $290.5 million at September
30, 2005, from $276.6 million at December 31, 2004. The increase in total assets
reflects the purchase of the bank-owned life insurance totaling $3.0 million
during the nine month period ended September 30, 2005, as well as growth in
interest-earning deposits and loans receivable, which were partially offset by a
decrease in mortgage-backed securities.
Cash, federal funds sold and interest-earning deposits increased $2.5 million,
or 31.7%, to $10.2 million at September 30, 2005, from the $7.7 million total at
December 31, 2004. The increase in cash and cash equivalents was due to a $2.6
million increase in federal funds sold and an increase in interest-earning
deposits of $76,000, which was partially offset by a decrease in cash and cash
due from banks of $182,000, or 6.4%, at September 30, 2005. Investment
securities decreased $11,000, or .04%, to $27.1 million at September 30, 2005.
All investment securities are classified as held to maturity.
Mortgage-backed securities decreased $7.0 million, or 22.7%, to $23.7 million at
September 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 $6.9 million. At September 30, 2005, $22.4 million of
mortgage-backed securities were classified as held to maturity, while $1.3
million were classified as available for sale. Since June 2004, management has
focused on investing in shorter term investments in an effort to further enhance
the Corporation's interest rate risk position in a rising interest rate
environment.
Loans receivable increased $14.4 million, or 7.1%, to $218.2 million at
September 30, 2005, from $203.8 million at December 31, 2004. The increase
reflects loan originations totaling $46.6 million and sales of $1.6 million,
partially offset by loan principal repayments of $32.0 million.
The allowance for loan losses totaled $785,000 and $732,000 at September 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 $30,000 to the provision for loss for the quarter ended September 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 September 30, 2005.
11
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 September
30, 2005 (continued)
--------------------------------------------------------------------------------
Non-performing and impaired loans totaled $205,000 and $251,000 at September 30,
2005 and December 31, 2004, respectively. At September 30, 2005, non-performing
and impaired loans were comprised of loans secured by one-to four-family
residential real estate totaling $111,000 and nonresidential real estate
totaling $94,000. The allowance for loan losses represented 382.9% and 291.6% of
non-performing and impaired loans at September 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 $1.0 million, or 0.6%, to $181.0 million at September 30,
2005, from $180.0 million at December 31, 2004. Advances from the Federal Home
Loan Bank of Cincinnati increased by $13.8 million, or 85.2%, to $30.0 million
at September 30, 2005, from $16.2 million at December 31, 2004. The Corporation
utilized the advance proceeds as the primary funding source for growth in the
loan portfolio.
Shareholders' equity decreased $714,000 , or 0.9%, to $77.2 million at September
30, 2005, from $77.9 million at December 31, 2004. The decrease resulted from
the repurchase of shares for stock benefit plans of $1.6 million and dividends
paid of $804,000, which were partially offset by net earnings of $1.6 million
and amortization of ESOP expense of $100,000.
Cheviot Savings Bank is required to maintain minimum regulatory capital pursuant
to federal regulations. At September 30, 2005, the Savings Bank's regulatory
capital substantially exceeded all minimum regulatory capital requirements.
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2005 and 2004
--------------------------------------------------------------------------------
General
---------
Net earnings for the nine months ended September 30, 2005 totaled $1.6 million,
a $1.0 million increase from the $614,000 net earnings reported for the
September 2004 period. The increase in net earnings reflects an $805,000
decrease in general and administrative expenses in 2005. During the 2004 period,
Cheviot Financial contributed $1.5 million to the Cheviot Savings Bank
Charitable Foundation. In addition, net interest income increased by $256,000
and other income increased by $106,000, which were partially offset by a $96,000
increase in federal income taxes for the 2005 quarter.
Net Interest Income
-------------------
Total interest income increased $990,000, or 10.3%, to $10.6 million for the
nine-months ended September 30, 2005, from the comparable period in 2004.
Interest income on loans increased $737,000, or 8.9%, to $9.1 million during the
2005 period, from $8.3 million for the 2004 period. This increase was due
primarily to a $13.8 million, or 7.1%, increase in the average balance of loans
outstanding, and a 10 basis point increase in the weighted-average yield on
loans, to 5.79% for 2005 period from 5.69% for the nine months ended September
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 Nine-Month Periods Ended September 30,
2005 and 2004 (continued)
--------------------------------------------------------------------------------
Net Interest Income (continued)
--------------------------------
Interest income on mortgage-backed securities increased $77,000, or 12.9%, to
$672,000 for the nine months ended September 30, 2005, from $595,000 for the
2004 period, due primarily to a 52 basis point increase in the average yield,
partially offset by a $1.4 million decrease in the average balance of securities
outstanding. Interest income on investment securities increased $163,000, or
29.8%, to $710,000 for the nine months ended September 30, 2005, compared to
$547,000 for the same period in 2004, due primarily to an 89 basis point
increase in the average yield to 3.27% in the 2005 period, which was partially
offset by a $1.7 million, or 5.4% decrease in the average balance of investment
securities outstanding. Interest income on interest-earning deposits increased
$13,000, or 8.5%, to $166,000 for the nine months ended September 30, 2005, due
primarily to a 164 basis point increase in the weighted-average yield, to 3.02%
for the nine months ended September 30, 2005, partially offset by a $7.5 million
decrease in the average balance of interest-earning deposits, compared to the
same period in 2004.
Interest expense increased $734,000, or 25.6%, to $3.6 million for the nine
months ended September 30, 2005, from $2.9 million for the same period in 2004.
Interest expense on deposits increased by $405,000, or 16.5%, to $2.9 million
from $2.5 million due primarily to a $5.6 million, or 3.1%, decline in the
weighted-average balance outstanding, which was partially offset by a 36 basis
point increase in the weighted average cost of deposits to 2.15% in the 2005
period. Interest expense on borrowings increased by $329,000, or 80.2%, due
primarily to a $9.6 million, or 77.1%, increase in the average balance
outstanding and an 8 basis point increase in the average cost of borrowings. The
increase in the yields on interest-earning assets and cost of interest-bearing
liabilities were due primarily to the overall increase in short-term interest
rates during 2005. Such increases generally reflect the Federal Reserve's
increases in interbank rates during the period.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $256,000, or 3.8%, to $7.0 million for the nine
months ended September 30, 2005, from $6.7 million for the comparable period
ended September 30, 2004. The average interest rate spread decreased to 2.79%
for the nine months ended September 30, 2005 from 2.82% for the nine months
ended September 30, 2004. The net interest margin increased to 3.43% for the
nine months ended September 30, 2005 from 3.35% for the nine months ended
September 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
$62,000 provision for losses on loans for the nine-months ended September 30,
2005. Management's analysis of the allowance resulted in no provision for losses
on loans for the nine months ended September 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 $106,000, or 53.5%, to $304,000 for the nine months ended
September 30, 2005, compared to the same period in 2004, due primarily to an
increase in other operating income of $147,000, or 96.7%, to $299,000 for the
nine months ended September 30, 2005 from $152,000 for the prior period and a
decrease in the loss on sale of real estate acquired through foreclosure of
$5,000, which were partially offset by a decrease in the gain on sale of loans
of $46,000, or 78.0%.
13
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended September 30,
2005 and 2004 (continued)
--------------------------------------------------------------------------------
General, Administrative and Other Expense
------------------------------------------
General, administrative and other expense decreased $805,000, or 14.3%, to $4.8
million for the nine months ended September 30, 2005, from $5.6 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 $268,000, or 11.1% in employee
compensation and benefits expenses, an increase of $212,000, or 42.7% in
property, payroll and other taxes and an increase of $143,000, or 59.6% 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 Corporation'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
Corporation 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 systems documentation.
Federal Income Taxes
--------------------
The provision for federal income taxes increased $96,000, or 13.6%, to $804,000
for the nine months ended September 30, 2005, from $708,000 for the same period
in 2004, due primarily to a $1.1 million increase in pre-tax earnings. The
effective tax rate was 33.1% for the nine month period ended September 30, 2005.
The federal income tax provision for the 2004 period totaled $708,000,
reflecting an effective tax rate of 53.6%. The difference between the 2004
provision and taxes payable 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 September 30,
2005 and 2004
--------------------------------------------------------------------------------
General
--------
Net earnings for the three months ended September 30, 2005 totaled $560,000, a
$156,000 decrease from the $716,000 net earnings reported in the September 2004
period. The decrease in net earnings reflects a $222,000 increase in general and
administrative expense in 2005, which was partially offset by an increase in
other income of $31,000 and a decrease of $91,000 in federal income taxes for
the 2005 quarter.
Net Interest Income
-------------------
Total interest income increased $334,000, or 10.0%, to $3.7 million for the
three-months ended September 30, 2005, from the comparable quarter in 2004.
Interest income on loans increased $263,000, or 9.1%, to $3.1 million during the
2005 period from $2.9 million for the 2004 period. This increase was due
primarily to a $12.8 million, or 6.3%, increase in the average balance of loans
outstanding, and a 15 basis point increase in the weighted-average yield on
loans to 5.81% for 2005 quarter from 5.66% for the three months ended September
30, 2004.
14
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2005 and 2004 (continued)
--------------------------------------------------------------------------------
Net Interest Income (continued)
--------------------------------
Interest income on mortgage-backed securities increased $5,000, or 2.2%, to
$233,000 for the three months ended September 30, 2005, from $228,000 for the
2004 quarter, due primarily to an 89 basis point increase in the average yield
period to period, which was partially offset by a $6.9 million decrease in the
average balance of securities outstanding. Interest income on investment
securities increased $29,000, or 12.9%, to $253,000 for the three months ended
September 30, 2005, compared to $224,000 for the same quarter in 2004, due
primarily to a 49 basis point increase in the average yield to 3.36% in the 2005
quarter, which was partially offset by a $1.2 million, or 3.9% decrease in the
average balance of investment securities outstanding. Interest income on other
interest-earning deposits increased $37,000, or 185.0%, to $57,000 for the three
months ended September 30, 2005, due primarily to a 119 basis point increase in
the weighted-average yield, to 3.27% for the three months ended September 30,
2005 and a $3.0 million increase in the average balance of interest-earning
deposits.
Interest expense increased $360,000, or 36.3%, to $1.4 million for the three
months ended September 30, 2005, from $1.0 million for the same period in 2004.
Interest expense on deposits increased by $246,000, or 30.7%, to $1.0 million
from $801,000 due primarily to a 56 basis point increase in the weighted average
costs of deposits to 2.35% in the 2005 period, which was partially offset by a
$618,000 decrease in the weighted-average balance outstanding. Interest expense
on borrowings increased by $114,000, or 60.0%, due primarily to a $10.4 million,
or 61.7%, increase in the average balance outstanding, which was partially
offset by a 3 basis point decrease 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
September 2005 quarter.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $26,000, or 1.1%, to $2.3 million for the three
months ended September 30, 2005. The average interest rate spread decreased to
2.67% for the three months ended September 30, 2005 from 2.93% for the three
months ended September 30, 2004. The net interest margin decreased to 3.36% for
the three months ended September 30, 2005 from 3.49% for the three months ended
September 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
$30,000 provision for losses on loans for the three-months ended September 30,
2005. Management's analysis in the 2004 period resulted in no provision for
losses on loans for the three months ended September 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 $31,000, or 38.3%, to $112,000 for the three months ended
September 30, 2005, compared to the same quarter in 2004, due primarily to an
increase in other operating income of $50,000, or 90.9%, to $105,000 for the
three months ended September 30, 2005 from $55,000 for the prior period
consisting of a $25,000 increase in the surrender value of life insurance, which
was partially offset by a decrease in the gain on sale of loans of $17,000 and
an increase in the loss on sale of real estate acquired through foreclosure of
$2,000.
15
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2005 and 2004 (continued)
--------------------------------------------------------------------------------
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense increased $222,000, or 16.4%, to $1.6
million for the three months ended September 30, 2005, from $1.4 million for the
comparable quarter in 2004. This increase is a result of an increase of $110,000
in employee compensation and benefits, an increase of $71,000 in property,
payroll, and other taxes and a $13,000 increase in other operating 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
Corporation'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 Corporation following the completion of
its mutual holding company reorganization and minority stock offering in 2004.
The increase in other operating expenses was due primarily to additional
printing and administrative expenses as a result of being a public company.
Federal Income Taxes
---------------------
The provision for federal income taxes decreased $91,000, or 24.6%, to $279,000
for the three months ended September 30, 2005, from $370,000 for the same
quarter in 2004, due primarily to a $247,000, or 22.7%, decrease in pre-tax
earnings. The effective tax rate was 33.3% and 34.1% for the three month periods
ended September 30, 2005 and 2004. The difference between the Corporation's
33.3% 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.
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.
16
Cheviot Financial Corp.
PART II
ITEM 1. Legal Proceedings
------------------
None.
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 September 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
---------------------------------------------------
None.
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits
--------
31.1 Certification of Principal Executive Officer Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
17
Cheviot Financial Corp.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 10, 2005 By: /s/ Thomas J. Linneman
------------------------ -------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
Date: November 10, 2005 By: /s/ Scott T. Smith
------------------------ -------------------------------------
Scott T. Smith
Chief Financial Officer
18
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: November 10, 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: November 10, 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 September 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: November 10, 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 September 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: November 10, 2005