Page 1 of 16
Page 1 of 18
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 March 31, 2006
--------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-50529
CHEVIOT FINANCIAL CORP.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Federal 56-2423720
---------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3723 Glenmore Avenue, Cincinnati, Ohio 45211
--------------------------------------------------------------------------------
(Address of principal executive office)
Registrant's telephone number, including area code: (513) 661-0457
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one.)
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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 May 12, 2006, the latest practicable date, 9,550,907 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 Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
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)
March 31, December 31,
ASSETS 2006 2005
(Unaudited)
Cash and due from banks $ 2,146 $ 2,425
Federal funds sold 642 1,715
Interest-earning deposits in other financial institutions 3,076 4,963
--------- ---------
Cash and cash equivalents 5,864 9,103
Investment securities held to maturity - at cost, approximate market value of
$26,422 and $26,509 at March 31, 2006
and December 31, 2005, respectively 27,088 27,084
Mortgage-backed securities available for sale - at fair value 1,205 1,269
Mortgage-backed securities held to maturity - at cost, approximate
market value of $18,838 and $20,193 at March 31, 2006 and
December 31, 2005, respectively 18,898 20,285
Loans receivable - net 228,374 222,053
Loans held for sale - at lower of cost or market 157 658
Real estate acquired through foreclosure - net 89 89
Office premises and equipment - at depreciated cost 4,013 3,628
Federal Home Loan Bank stock - at cost 3,100 3,057
Accrued interest receivable on loans 941 873
Accrued interest receivable on mortgage-backed securities 68 72
Accrued interest receivable on investments and interest-earning deposits 236 298
Prepaid expenses and other assets 403 145
Bank-owned life insurance 3,158 3,121
Prepaid federal income taxes - 56
--------- ---------
Total assets $293,594 $291,791
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $183,328 $181,238
Advances from the Federal Home Loan Bank 33,891 33,209
Advances by borrowers for taxes and insurance 654 1,063
Accounts payable and other liabilities 1,031 1,090
Accrued federal income taxes 268 -
Deferred federal income taxes 378 381
--------- ---------
Total liabilities 219,550 216,981
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 March 31, 2006 and December 31, 2005 99 99
Additional paid-in capital 42,894 42,824
Shares acquired by stock benefit plans (5,092) (5,092)
Treasury stock - at cost, 301,595 and 216,208 shares at March 31, 2006
and December 31, 2005 (3,539) (2,537)
Retained earnings - restricted 39,693 39,524
Accumulated comprehensive loss, unrealized losses on securities available
for sale, net of tax benefits (11) (8)
--------- ---------
Total shareholders' equity 74,044 74,810
--------- ---------
Total liabilities and shareholders' equity $293,594 $291,791
========= =========
See accompanying notes to consolidated financial statements.
3
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended March 31, 2006 and 2005
(In thousands, except per share data)
2006 2005
Interest income
Loans $3,323 $2,953
Mortgage-backed securities 214 217
Investment securities 265 218
Interest-earning deposits and other 42 41
------- -------
Total interest income 3,844 3,429
Interest expense
Deposits 1,221 865
Borrowings 387 202
------- -------
Total interest expense 1,608 1,067
------- -------
Net interest income 2,236 2,362
Other income
Gain on sale of loans 7 1
Loss on sale of real estate acquired through foreclosure - (6)
Earnings on bank-owned life insurance 37 11
Other operating 76 73
------- -------
Total other income 120 79
General, administrative and other expense
Employee compensation and benefits 1,019 825
Occupancy and equipment 101 116
Data processing 67 59
Property, payroll and other taxes 206 169
Legal and professional 102 128
Advertising 44 44
Other operating 141 135
------- -------
Total general, administrative and other expense 1,680 1,476
------- -------
Earnings before federal income taxes 676 965
Federal income taxes
Current 217 284
Deferred (2) 42
------- -------
Total federal income taxes 215 326
------- --------
NET EARNINGS $ 461 $ 639
======= =======
EARNINGS PER SHARE
Basic $ .05 $.07
======= =======
Diluted $ .05 $.07
======= =======
Dividends declared per share $ .07 $.06
======= =======
See accompanying notes to consolidated financial statements.
4
CHEVIOT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the three months ended March 31, 2006 and 2005
(In thousands)
2006 2005
Net earnings for the period $461 $639
Other comprehensive gain (loss), net of tax (benefits):
Unrealized holding losses on securities during the
period, net of taxes (benefits) of $(2) and $2 for the periods
ended March 31, 2006 and 2005 (3) 3
----- -----
Comprehensive income $458 $642
===== =====
Accumulated comprehensive loss $ (11) $ (3)
===== =====
See accompanying notes to consolidated financial statements.
5
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 31, 2006 and 2005
(In thousands)
2006 2005
Cash flows from operating activities:
Net earnings for the period $ 461 $ 639
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums and discounts on investment
and mortgage-backed securities, net - 20
Depreciation 53 61
Amortization of deferred loan origination fees - net (9) (1)
Proceeds from sale of loans in the secondary market 744 91
Loans originated for sale in the secondary market (900) (90)
Amortization of expense related to stock benefit plans 11 100
Gain on sale of loans (7) (1)
Loss on sale of real estate acquired through foreclosure - 6
Federal Home Loan Bank stock dividends (43) (32)
Net increase in cash surrender value of bank-owned life insurance (37) (11)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (68) (32)
Accrued interest receivable on mortgage-backed securities 4 9
Accrued interest receivable on investments and interest-earning deposits 62 (1)
Prepaid expenses and other assets (258) (137)
Accounts payable and other liabilities (59) (387)
Federal income taxes
Current 324 104
Deferred (2) 42
-------- -------
Net cash flows provided by operating activities 276 380
Cash flows used in investing activities:
Principal repayments on loans 7,077 9,557
Loan disbursements (12,725) (9,014)
Principal repayments on mortgage-backed securities 1,443 1,933
Proceeds from sale of real estate acquired through foreclosure - 84
Purchase of office premises and equipment (438) (58)
Purchase of bank-owned life insurance - (3,000)
-------- -------
Net cash flows used in investing activities (4,717) (520)
Cash flows provided by financing activities:
Net increase (decrease) in deposits 2,090 (54)
Proceeds from Federal Home Loan Bank advances 2,000 5,000
Repayments on Federal Home Loan Bank advances (1,318) (509)
Advances by borrowers for taxes and insurance (409) (343)
Stock option expense, net 59 -
Treasury stock repurchases (1,002) -
Dividends paid on common stock (292) (268)
-------- -------
Net cash flows provided by financing activities 1,128 3,826
-------- -------
Net increase (decrease) in cash and cash equivalents (3,239) 3,708
Cash and cash equivalents at beginning of period 9,103 7,725
-------- -------
Cash and cash equivalents at end of period $ 5,864 $11,433
======== =======
See accompanying notes to consolidated financial statements.
6
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED)
For the three months ended March 31, 2006 and 2005
(In thousands)
2006 2005
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 208 $ 200
======= ======
Interest on deposits and borrowings $ 1,608 $1,067
======= ======
Supplemental disclosure of non-cash investing activities:
Recognition of mortgage servicing rights in
accordance with SFAS No. 140 $ 6 $ 1
======= ======
See accompanying notes to consolidated financial statements.
7
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2006 and 2005
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, 2005. 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
month period ended March 31, 2006, 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
months ended March 31, 2006, include the accounts of the Corporation and its
wholly-owned subsidiary, the Savings Bank. All significant intercompany items
have been eliminated.
3. Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in
the ordinary course of business. Liquidity is primarily needed to meet the
borrowing and deposit withdrawal requirements of our customers and to fund
current and planned expenditures. Our primary sources of funds are deposits,
scheduled amortization and prepayments of loan principal and mortgage-backed
securities, maturities and calls of securities and funds provided by our
operations. In addition, we may borrow from the Federal Home Loan Bank of
Cincinnati. At March 31, 2006 and December 31, 2005, we had $33.9 million and
$33.2 million, respectively, in outstanding borrowings from the Federal Home
Loan Bank of Cincinnati and had the capacity to increase such borrowings at
those dates by approximately $98.6 million.
Loan repayments and maturing securities are a relatively predictable source of
funds. However, deposit flows, calls of securities and prepayments of loans and
mortgage-backed securities are strongly influenced by interest rates, general
and local economic conditions and competition in the marketplace. These factors
reduce the predictability of these sources of funds.
8
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2006 and 2005
3. Liquidity and Capital Resources (continued)
Our primary investing activities are the origination of one- to four-family real
estate loans, commercial real estate, construction and consumer loans, and, to a
lesser extent, the purchase of securities. For the three months ended March 31,
2006, loan originations totaled $13.6 million, compared to $9.1 million for the
three months ended March 31, 2005.
Total deposits increased $2.1 million during the three months ended March 31,
2006, while total deposits decreased $54,000 during the three months ended March
31, 2005. Deposit flows are affected by the level of interest rates, the
interest rates and products offered by competitors and other factors.
The following table sets forth information regarding the Corporation's
obligations and commitments to make future payments under contract as of March
31, 2006.
Payments due by period
Less More than More than More
than 1-3 4-5 than
1 year years years 5 years Total
(In thousands)
Contractual obligations:
Advances from the Federal Home Loan Bank $ 2,000 $ - $ - $31,891 $ 33,891
Certificates of deposit 82,034 32,741 395 - 115,170
Construction of branch (1) 307 - - - 307
Amount of loan commitments and expiration per period:
Commitments to originate one- to four-family
loans 2,527 - - - 2,527
Home equity lines of credit 10,660 - - - 10,660
Undisbursed loans in process 5,494 - - - 5,494
Lease obligations 4 1 - - 5
-------- ------- ----- ------- --------
Total contractual obligations $103,026 $32,742 $ 395 $31,891 $168,054
======== ======= ===== ======= ========
---------------------
(1) The total commitment related to the branch was $794,000 of which $487,000
has been disbursed. In addition, at March 31, 2006, we were in contract
negotiations for the construction of an additional new branch.
We are committed to maintaining a strong liquidity position. We monitor our
liquidity position on a daily basis. We anticipate that we will have sufficient
funds to meet our current funding commitments. Based on our deposit retention
experience and current pricing strategy, we anticipate that a significant
portion of maturing time deposits will be retained.
9
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2006 and 2005
3. Liquidity and Capital Resources (continued)
At March 31, 2006 and 2005, we exceeded all of the applicable regulatory capital
requirements. Our core (Tier 1) capital was $49.2 million and $59.2 million, or
16.8% and 21.1% of total assets at March 31, 2006 and 2005, respectively. In
order to be classified as "well-capitalized" under federal banking regulations,
we were required to have core capital of at least $17.6 million, or 6.0% of
assets as of March 31, 2006. To be classified as a well-capitalized bank, we
must also have a ratio of total risk-based capital to risk-weighted assets of at
least 10.0%. At March 31, 2006 and 2005, we had a total risk-based capital ratio
of 34.4% and 44.7%, respectively.
4. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average common
shares outstanding during the period, less shares in the ESOP that are
unallocated and not committed to be released plus shares in the ESOP that have
been allocated. Weighted-average common shares deemed outstanding gives effect
to 285,661 and 321,368 unallocated shares held by the ESOP for the three months
ended March 31, 2006 and 2005, respectively.
For the three months ended
March 31,
2006 2005
Weighted-average common shares
outstanding (basic) 9,363,410 9,597,383
Dilutive effect of assumed exercise
of stock options 16,468 -
--------- ---------
Weighted-average common shares
outstanding (diluted) 9,379,878 9,597,383
========= =========
5. Stock Option Plan
On April 26, 2005, the Corporation approved a Stock Incentive Plan that provides
for grants of up to 486,018 stock options. On May 5, 2005, approximately 384,000
option shares were granted subject to five year vesting.
Prior to January 1, 2006, the Corporation utilized APB Opinion No. 25 and
related Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost had been recognized for the plan. As the Stock Incentive Plan
was approved subsequent to March 31, 2005, no pro-forma disclosures were
required for the three months then ended.
In 2004, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based Payment," which
revises SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123(R) requires that cost related to the fair value of
all equity-based awards to employees, including grants of employee stock
options, be recognized in the financial statements.
The Corporation adopted the provisions of SFAS No. 123(R) effective January 1,
2006, using the modified prospective transition method, and therefore has not
restated its financial statements for prior periods. Under this method, the
Corporation will apply the provisions of SFAS No. 123(R) to new equity-based
awards and to equity-based awards modified, repurchased, or cancelled after
January 1, 2006. In addition, the Corporation will recognize compensation cost
for the portion of equity-based awards for which the requisite service period
10
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2006 and 2005
5. Stock Option Plan (continued)
has not been rendered ("unvested equity-based awards") that are outstanding as
of January 1, 2006. The compensation cost recorded for unvested equity-based
awards is based on their grant-date fair value. For the three months ended March
31, 2006, the Company recorded $59,000 in after-tax compensation cost for
equity-based awards that vested during the three months ended March 31, 2006.
The Corporation has $1.0 million unrecognized pre-tax compensation cost related
to non-vested equity-based awards granted under its stock incentive plan as of
March 31, 2006, which is expected to be recognized over a weighted-average
vesting period of approximately 4 years.
A summary of the status of the Corporation's stock option plan as of March 31,
2006, and changes during the period then ended is presented below:
Three months ended Year ended
March 31, 2006 December 31, 2005
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
Outstanding at beginning of period 383,700 $11.15 - $ -
Granted - - 383,700 11.15
Exercised - - - -
Forfeited - - - -
-------- ------ -------- --------
Outstanding at end of period 383,700 $11.15 383,700 $11.15
======== ====== ======== =======
Options exercisable at period-end - $ - - $ -
======== ====== ======== =======
Options expected to be exercisable at year-end 76,740 -
======== ========
Fair value of options granted $ - $ 3.36
====== =======
The following information applies to options outstanding at March 31, 2006:
Number outstanding 383,700
Exercise price $11.15
Weighted-average exercise price $11.15
Weighted-average remaining contractual life 9.1 years
The expected term of options is based on evaluations of historical and expected
future employee exercise behavior. The risk free interest rate is based upon the
U.S. Treasury rates at the date of grant with maturity dates approximately equal
to the expected life at grant date. Volatility is based upon the historical
volatility of the Corporation's stock.
The fair value of each option was estimated on the date of grant using the
modified Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 2005: dividend yield of 2.15%, expected
volatility of 22.5% risk-free interest rate of 4.19% and an expected life of 10
years for each grant.
The effects of expensing stock options is reported in the cash provided by
financing activities in the Consolidated Statements of Cash Flows.
11
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2006 and 2005
6. Effects of Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Instruments - an amendment of FASB Statements No. 133 and 140," to simplify and
make more consistent the accounting for certain financial instruments.
Specifically, SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to permit fair value remeasurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on a
fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," to allow a
qualifying special purpose entity to hold a derivative instrument that pertains
to a beneficial interest other than another derivative financial instrument.
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006, or January 1, 2007 as to the Corporation, with earlier application
allowed. The Corporation is currently evaluating SFAS No. 155, but does not
expect it to have a material effect on the Corporation's financial position or
results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of SFAS No. 140," to simplify the accounting for
separately recognized servicing assets and servicing liabilities. Specifically,
SFAS No. 156 amends SFAS No. 140 to require an entity to take the following
steps:
o Separately recognize financial assets as servicing assets or servicing
liabilities, each time it undertakes an obligation to service a
financial asset by entering into certain kinds of servicing contracts;
o Initially measure all separately recognized servicing assets and
liabilities at fair value, if practicable, and;
o Separately present servicing assets and liabilities subsequently
measured at fair value in the statement of financial position and
additional disclosures for all separately recognized servicing assets
and servicing liabilities.
Additionally, SFAS No. 156 permits, but does not require, an entity to choose
either the amortization method or the fair value measurement method for
measuring each class of separately recognized servicing assets and servicing
liabilities. SFAS No. 156 also permits a servicer that uses derivative financial
instruments to offset risks on servicing to use fair value measurement when
reporting both the derivative financial instrument and related servicing asset
or liability.
SFAS No. 156 applies to all separately recognized servicing assets and
liabilities acquired or issued after the beginning of an entity's fiscal year
that begins after September 15, 2006, or January 1, 2007 as to the Corporation,
with earlier application permitted. The Corporation is currently evaluating SFAS
No. 156, but does not expect it to have a material effect on the Corporation's
financial position or results of operations.
12
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 31,2005 to March 31,2006
--------------------------------------------------------------------------------
Total assets increased $1.8 million, or 0.6%, to $293.6 million at March 31,
2006, from $291.8 million at December 31, 2005. The increase in total assets
reflects an increase in loans receivable and office premises and equipment,
which were partially offset by a decrease in cash and cash equivalents and
mortgage-backed securities.
Cash, federal funds sold and interest-earning deposits decreased $3.2 million,
or 35.6%, to $5.9 million at March 31, 2006, from $9.1 million at December 31,
2005. The decrease in cash and cash equivalents was due to a $1.1 million
decrease in federal funds sold and a decrease in interest-earning deposits of
$1.9 million, and a decrease in cash and cash due from banks of $279,000, or
11.5%, at March 31, 2006. Investment securities increased $4,000 to $27.1
million at March 31, 2006. All investment securities are classified as held to
maturity.
Mortgage-backed securities decreased $1.5 million, or 6.7%, to $20.1 million at
March 31, 2006, from $21.6 million at December 31, 2005. The decrease in
mortgage-backed securities was due primarily to principal prepayments and
repayments totaling $1.4 million. At March 31, 2006, $18.9 million of
mortgage-backed securities were classified as held to maturity, while $1.2
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 $5.8 million, or 2.6%, to $228.5 million at March 31,
2006, from $222.7 million at December 31, 2005. The increase reflects loan
originations totaling $13.6 million and sales of $737,000, partially offset by
loan principal repayments of $7.1 million.
The allowance for loan losses totaled $808,000 at both March 31, 2006 and
December 31, 2005, 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 no
addition to the provision for loss for the quarter ended March 31, 2006. 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 March 31, 2006.
13
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from December 31, 2005 to March 31,
2006 (continued)
------------------------------------------------------------------------------
Non-performing and impaired loans totaled $149,000 at both March 31, 2006 and
December 31, 2005, respectively. At March 31, 2006, non-performing and impaired
loans were comprised of loans secured by one- to four-family residential real
estate totaling $14,000 and by multi-family residential real estate totaling
$135,000. The allowance for loan losses represented 542.3% of non-performing and
impaired loans at both March 31, 2006 and December 31, 2005, 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 $2.1 million, or 1.2%, to $183.3 million at March 31, 2006,
from $181.2 million at December 31, 2005. Advances from the Federal Home Loan
Bank of Cincinnati increased by $682,000, or 2.1%, to $33.9 million at March 31,
2006, from $33.2 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 $766,000, or 1.0%, to $74.0 million at March 31,
2006, from $74.8 million at December 31, 2005. The decrease primarily resulted
from the repurchase of treasury shares of $1.0 million and dividends paid of
$292,000, which were partially offset by net earnings of $461,000.
Comparison of Operating Results for the Three-Month Periods Ended
March 31, 2006 and 2005
------------------------------------------------------------------
General
-------
Net earnings for the three months ended March 31, 2006 totaled $461,000, a
$178,000 decrease from the $639,000 net earnings reported in the March 2005
period. The decrease in net earnings reflects a $204,000 increase in general and
administrative expense in 2006 and a decrease in net interest income of
$126,000, which was partially offset by an increase in other income of $41,000
and a decrease of $111,000 in federal income taxes for the 2006 quarter.
Net Interest Income
Total interest income increased $415,000, or 12.1%, to $3.8 million for the
three-months ended March 31, 2006, from the comparable quarter in 2005. Interest
income on loans increased $370,000, or 12.5%, to $3.3 million during the 2006
period from $3.0 million for the 2005 period. This increase was due primarily to
a $23.2 million, or 11.5%, increase in the average balance of loans outstanding,
and a 5 basis point increase in the weighted-average yield on loans to 5.88% for
2006 quarter from 5.83% for the three months ended March 31, 2005.
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
March 31, 2006 and 2005 (continued)
------------------------------------------------------------------
Net Interest Income (continued)
-------------------------------
Interest income on mortgage-backed securities decreased $3,000, or 1.4%, to
$214,000 for the three months ended March 31, 2006, from $217,000 for the 2005
quarter, due primarily to a $7.3 million decrease in the average balance of
securities outstanding, which was partially offset by a 105 basis point increase
in the average yield period to period. Interest income on investment securities
increased $47,000, or 21.6%, to $265,000 for the three months ended March 31,
2006, compared to $218,000 for the same quarter in 2005, due primarily to a 101
basis point increase in the average yield to 3.91% in the 2006 quarter, which
was partially offset by a $2.9 million, or 9.8% decrease in the average balance
of investment securities outstanding. Interest income on other interest-earning
deposits increased $1,000, or 2.4%, to $42,000 for the three months ended March
31, 2006, due primarily to a 237 basis point increase in the weighted-average
yield, to 5.10% for the three months ended March 31, 2006, which was partially
offset by a $2.7 million decrease in the average balance of interest-earning
deposits.
Interest expense increased $541,000, or 50.7%, to $1.6 million for the three
months ended March 31, 2006, from $1.1 million for the same period in 2005.
Interest expense on deposits increased by $356,000, or 41.2%, to $1.2 million
from $865,000 due primarily to a 78 basis point increase in the weighted average
costs of deposits to 2.74% during the 2006 period and a $1.6 million increase in
the weighted-average balance outstanding. Interest expense on borrowings
increased by $185,000, or 91.6%, due primarily to a $14.9 million, or 81.8%,
increase in the average balance outstanding and a 24 basis point increase in the
average cost of borrowings. The increase in the yields on interest-earning
assets and costs of interest-bearing liabilities were due primarily to the
overall increase in market rates in the March 2006 quarter.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $126,000, or 5.3%, to $2.2 million for the
three months ended March 31, 2006. The average interest rate spread decreased to
2.51% for the three months ended March 31, 2006 from 2.96% for the three months
ended March 31, 2005. The net interest margin decreased to 3.23% for the three
months ended March 31, 2006 from 3.54% for the three months ended March 31,
2005.
Provision for Losses on Loans
-----------------------------
As a result of the allowance for loan losses analysis described elsewhere in
this document, management concluded that the allowance for loan loss was
adequate, and therefore, elected not to record a provision for losses on loans
for the three-months ended March 31, 2006 and 2005. There can be no assurance
that the loan loss allowance will be sufficient to cover losses on
non-performing loans in the future.
Other Income
------------
Other income increased $41,000, or 51.9%, to $120,000 for the three months ended
March 31, 2006, compared to the same quarter in 2005, due primarily to an
increase of $26,000 in the surrender value of life insurance, an increase in the
gain on sale of loans of $6,000, an increase in other operating income of $3,000
and the absence of a $6,000 loss on sale of real estate acquired through
foreclosure.
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
March 31, 2006 and 2005 (continued)
------------------------------------------------------------------
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense increased $204,000, or 13.8%, to $1.7
million for the three months ended March 31, 2006, from $1.5 million for the
comparable quarter in 2005. This increase is a result of an increase of $194,000
in employee compensation and benefits, an increase of $37,000 in property,
payroll, and other taxes and a $6,000 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 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 scale of the
Corporation's operations year over year. The increase in other operating
expenses was due primarily to services provided to identify and improve branch
operations.
Federal Income Taxes
--------------------
The provision for federal income taxes decreased $111,000, or 34.0%, to $215,000
for the three months ended March 31, 2006, from $326,000 for the same quarter in
2005, due primarily to a $289,000, or 29.9%, decrease in pre-tax earnings. The
effective tax rate was 31.8% and 33.8% for the three month periods ended March
31, 2006 and 2005. The difference between the Corporation's 31.8% effective tax
rate in the 2006 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, 2005.
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 1A. Risk Factors
------------
There have been no changes to the Corporation's risk factors since the
filing of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2005.
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 which
provides for the repurchase of 5% or 495,937 of our common stock. As
of March 31, 2006, the Corporation had purchased 301,595 shares
pursuant to the program, leaving 194,342 common shares available for
repurchase.
Total # of
shares purchased
Total Average as part of publicly
# of shares price paid announced plans
Period purchased per share or programs
------ --------- --------- ------------
January 1-31, 2006 39,472 $11.67 39,472
February 1-28 2006 35,131 $11.79 35,131
March 1-31, 2006 10,784 $11.77 10,784
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: May 12, 2006 By: /s/ Thomas J. Linneman
----------------- ------------------------------------
Thomas J. Linneman
President and Chief Executive Officer
Date: May 12, 2006 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, 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: May 12, 2006 /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, 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: May 12, 2006 /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 March 31, 2006, 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: May 12, 2006
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 March 31, 2006, 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: May 12, 2006