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, 2004
------------------------------------------------
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]
As of November 1, 2004, the latest practicable date, 9,918,751 shares of the
registrant's common stock, $.01 par value, were issued and outstanding.
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 9
Quantitative and Qualitative Disclosures about
Market Risk 14
Controls and Procedures 15
PART II - OTHER INFORMATION 16
SIGNATURES 18
2
Cheviot Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands, except share data)
September 30, December 31,
ASSETS 2004 2003
Cash and due from banks $ 2,722 $ 3,979
Federal funds sold 823 69,267
Interest-earning deposits in other financial institutions 2,266 10,530
--------- --------
Cash and cash equivalents 5,811 83,776
Investment securities held to maturity:
U.S. Government and agency obligations - at cost, approximate market value of
$26,883 and $17,044 at
September 30, 2004 and December 31, 2003, respectively 27,005 17,035
Municipal obligations - at cost, approximate market value of
$102 and $103 at September 30, 2004 and December 31, 2003, respectively 100 100
Mortgage-backed securities held to maturity - at cost, approximate
market value of $31,102 and $21,808 at September 30, 2004 and
December 31, 2003, respectively 30,994 21,804
Loans receivable - net 203,588 186,424
Loans held for sale - at lower of cost or market 186 429
Real estate acquired through foreclosure - net 333 46
Office premises and equipment - at depreciated cost 2,781 2,910
Federal Home Loan Bank stock - at cost 2,878 2,792
Accrued interest receivable on loans 764 655
Accrued interest receivable on mortgage-backed securities 82 71
Accrued interest receivable on investments and interest-earning deposits 270 195
Prepaid expenses and other assets 324 1,162
---------- ---------
Total assets $275,116 $317,399
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $179,141 $267,927
Advances from the Federal Home Loan Bank 16,695 9,206
Advances by borrowers for taxes and insurance 651 922
Accounts payable and other liabilities 1,089 901
Accrued federal income taxes 255 259
Deferred federal income taxes 199 317
---------- ----------
Total liabilities 198,030 279,532
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 September 30, 2004 99 -
Additional paid-in capital 42,746 -
Shares acquired by employee stock ownership plan (3,571) -
Retained earnings - restricted 37,812 37,867
-------- --------
Total shareholders' equity 77,086 37,867
-------- --------
Total liabilities and shareholders' equity $275,116 $317,399
======= =======
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,
2004 2003 2004 2003
Interest income
Loans $8,320 $8,613 $2,876 $2,789
Mortgage-backed securities 595 633 228 178
Investment securities 547 223 224 67
Interest-earning deposits and other 153 198 20 58
------ ------ ------- -------
Total interest income 9,615 9,667 3,348 3,092
Interest expense
Deposits 2,457 3,186 801 964
Borrowings 410 359 190 112
------ ------ ------ ------
Total interest expense 2,867 3,545 991 1,076
----- ----- ------ -----
Net interest income 6,748 6,122 2,357 2,016
Provision for losses on loans - 290 - 15
----- ------ ----- -------
Net interest income after provision for losses on loans 6,748 5,832 2,357 2,001
Other income
Gain on sale of loans 59 52 26 23
Loss on sale of real estate acquired through foreclosure (13) (28) - (15)
Other operating 152 253 55 55
------ ------ ------- -------
Total other income 198 277 81 63
General, administrative and other expense
Employee compensation and benefits 2,415 2,015 811 603
Occupancy and equipment 304 276 93 93
Property, payroll and other taxes 497 452 160 145
Data processing 175 164 56 55
Legal and professional 240 146 74 49
Advertising 117 109 39 37
Charitable contribution 1,500 - - -
Other operating 376 347 119 109
------ ------ ------ ------
Total general, administrative and other expense 5,624 3,509 1,352 1,091
----- ----- ----- -----
Earnings before income taxes 1,322 2,600 1,086 973
Federal income taxes
Current 826 1,067 320 364
Deferred (118) (180) 50 (34)
------ ------ ------- -------
Total federal income taxes 708 887 370 330
------ ------ ------ ------
NET EARNINGS $ 614 $1,713 $ 716 $ 643
====== ===== ====== ======
EARNINGS PER SHARE
Basic $.06 N/A $.07 N/A
=== === === ===
Diluted $.06 N/A $.07 N/A
=== === === ===
Dividends declared per share $.15 N/A $.05 N/A
=== === === ===
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)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 614 $ 1,713
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 113 61
Depreciation 173 169
Amortization of deferred loan origination (fees) costs - net 20 (142)
Proceeds from sale of loans in the secondary market 2,727 2,018
Loans originated for sale in the secondary market (2,482) (1,982)
Gain on sale of loans (59) (52)
Loss on sale of real estate acquired through foreclosure 13 28
Federal Home Loan Bank stock dividends (86) (81)
Provision for losses on loans - 290
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (109) (65)
Accrued interest receivable on mortgage-backed securities (11) 35
Accrued interest receivable on investments and interest-earning deposits (75) 151
Prepaid expenses and other assets 838 (714)
Accounts payable and other liabilities 188 91
Federal income taxes
Current (4) 240
Deferred (118) (180)
-------- --------
Net cash provided by operating activities 1,742 1,580
Cash flows provided by (used in) investing activities:
Principal repayments on loans 31,605 40,843
Loan disbursements (48,399) (49,204)
Purchase of U.S. Government and agency obligations (26,012) -
Proceeds from maturity of U.S. Government and agency obligations 16,000 -
Purchase of mortgage-backed securities (13,940) (2,000)
Principal repayments on mortgage-backed securities 4,681 7,096
Additions to real estate acquired through foreclosure - (17)
Proceeds from sale of real estate acquired through foreclosure 33 146
Purchase of office premises and equipment (44) (100)
--------- --------
Net cash used in investing activities (36,742) (3,236)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (88,787) 3,352
Proceeds from FHLB advances 9,000 -
Repayments on Federal Home Loan Bank advances (1,512) (1,621)
Advances by borrowers for taxes and insurance (271) (247)
Proceeds from issuance of common stock 39,274 -
Dividends paid on common stock (669) -
-------- -------
Net cash provided by (used in) financing activities (42,965) 1,484
------ -------
Net decrease in cash and cash equivalents (77,965) (172)
Cash and cash equivalents at beginning of period 83,776 19,379
------ ------
Cash and cash equivalents at end of period $ 5,811 $19,207
======= ======
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)
2004 2003
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 630 $ 392
====== ======
Interest on deposits and borrowings $2,867 $3,545
===== =====
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ 333 $ -
====== =====
See accompanying notes to consolidated financial statements.
6
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three months ended September 30, 2004 and 2003
1. Basis of Presentation
Mutual Holding Company Reorganization. For the nine and three month periods
ended September 30, 2003, Cheviot Savings Bank (the "Savings Bank") operated as
a state-chartered mutual financial institution. On June 24, 2003, the Board of
Directors of the Savings Bank adopted a Plan of Reorganization (the "Plan" or
the "Reorganization") pursuant to which the Savings Bank reorganized into a
two-tier mutual holding company structure with the establishment of a stock
holding company, Cheviot Financial Corp. ("Cheviot Financial" or the
"Corporation"), as parent of the Savings Bank, and the Savings Bank converted to
the stock form of ownership and issued all the Savings Bank's outstanding stock
to Cheviot Financial Corp. The Reorganization was completed effective January 5,
2004. Pursuant to the Plan, Cheviot Financial Corp. sold 4,388,438 common shares
in a minority stock offering, representing approximately 44% of its outstanding
common stock, at $10.00 per share, to the Savings Bank's depositors and a newly
formed Employee Stock Ownership Plan ("ESOP"). The net proceeds of the offering
were approximately $39.3 million. In addition, 75,000 shares, or approximately
one percent of its outstanding shares, were issued to a charitable foundation
established by Cheviot Savings Bank. The remaining 5,455,313 shares of common
stock, or 55.0% of the outstanding common stock of Cheviot Financial, were
issued to Cheviot Mutual Holding Company, the federally chartered mutual holding
company of Cheviot Financial Corp.
The accompanying unaudited financial statements were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. Accordingly, these financial
statements should be read in conjunction with the financial statements and notes
thereto of the Corporation for the year ended December 31, 2003. However, in the
opinion of management, all adjustments (consisting of only normal recurring
accruals) which are necessary for a fair presentation of the financial
statements have been included. The results of operations for the nine and three
month periods ended September 30, 2004, are not necessarily indicative of the
results which may be expected for the entire year.
2. Principles of Consolidation
The accompanying consolidated financial statements as of and for the nine and
three months ended September 30, 2004, include the accounts of the Corporation
and its wholly-owned subsidiary, the Savings Bank. All significant intercompany
items have been eliminated. The accompanying financial statements as of December
31, 2003 and for the nine- and three-month periods ended September 30, 2003, are
comprised of the Savings Bank only.
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. Weighted-average common shares
deemed outstanding, which gives effect to 357,075 unallocated ESOP shares,
totaled 9,561,676 for each of the nine and three month periods ended September
30, 2004.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common share equivalents. The Corporation had
no dilutive or potentially dilutive securities during the nine and three month
periods ended September 30, 2004.
7
Cheviot Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2004 and 2003
3. Earnings Per Share (continued)
The provisions of SFAS No. 128, "Earnings Per Share," are not applicable to the
nine and three month periods ended September 30, 2003, as the Savings Bank had
not completed its mutual holding company reorganization until January 5, 2004.
4. Effects of Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (the "FASB") issued
FASB Interpretation No. 46(R) ("FIN 46(R)"), "Consolidation of Variable Interest
Entities." FIN 46(R) requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns, or both. FIN 46(R) also requires disclosures about
variable interest entities that a company is not required to consolidate, but in
which it has a significant variable interest. The consolidation requirements of
FIN 46(R) apply immediately to variable interest entities created after January
31, 2003. The consolidation requirements of FIN 46(R) apply to existing entities
in the first fiscal year ending after December 15, 2004. The Corporation does
not have any variable interest entities, therefore the adoption of FIN 46(R) had
no material effect on the Corporation's financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") issued EITF 03-01 "The
Meaning of Other-than-Temporary Impairment and its Application to Certain
Investments." EITF 03-01 requires that unrealized losses on investment
securities that are deemed other-than-temporary be recorded as an adjustment to
earnings. The Statement applies both to securities designated as held to
maturity and those designated as available for sale. EITF 03-01 provides that
unrealized losses may be viewed as other-than-temporary as a result not only due
to deterioration of the credit quality of the issuer, but due to changes in the
interest rate environment as well. An investor must be able to demonstrate the
positive ability and intent to hold such securities until a forecasted recovery
takes place or until maturity of the security. EITF 03-01 requires separate
disclosure related to unrealized losses for securities that have been in an
unrealized loss position for a period of less than twelve months and for those
that have been in an unrealized loss position for a period greater than twelve
months, for financial statements issued for years ending after December 15,
2003. In September 2004, the FASB issued a final FASB Staff Position, FSP EITF
Issue 03-01-1, which has delayed the effective date for the measurement and
recognition guidance of EITF 03-01. The comment period related to this staff
position ended October 29, 2004. The implementation date is unknown until
further guidance is issued by the FASB. We are currently evaluating the impact
of adopting EITF 03-01.
In March 2004, the FASB issued a proposed Statement, "Share-Based Payment," an
amendment of FASB Statement No. 123 and APB No. 95, that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed Statement would eliminate the ability to account for share-based
compensation transactions, including stock option grants, using APB Opinion No.
25, "Accounting for Stock Issued to Employees," and generally would require
instead that such transactions be accounted for using a fair-value-based method.
Issuance of the final standards and adoption by Cheviot, post-Reorganization,
would be expected to result in recognition of compensation expense for the
effect of stock option grants in future periods.
8
Cheviot Financial Corp.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
This quarterly report 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, 2003 to September
30, 2004
Total assets decreased $42.3 million, or 13.3%, to $275.1 million at September
30, 2004, from $317.4 million at December 31, 2003. The decrease in total assets
reflected cash refunds to subscribers for over-subscribed and unfilled stock
orders in the Corporation's minority stock offering. The Corporation completed
its minority stock offering on January 5, 2004.
Cash, federal funds sold and interest-earning deposits in other financial
institutions decreased $78.0 million, or 93.1%, to $5.8 million at September 30,
2004, from the $83.8 million total at December 31, 2003. The cash and cash
equivalents total at December 31, 2003, included funds received for stock
subscription orders in December 2003. The Corporation's stock offering was
oversubscribed and in January 2004 and subsequently, $36.1 million was refunded
for unfilled stock orders. In addition, cash, federal funds and interest-earning
deposits were invested in higher yielding investments subsequent to our minority
offering. Investment securities increased $10.0 million, or 58.2%, to $27.1
million at September 30, 2004, from $17.1 million at December 31, 2003. During
the nine months ended September 30, 2004, investment securities purchases
consisted of $26.0 million of U.S. Government and agency obligations, which were
partially offset by $16.0 million of maturities. All of our investment
securities are classified as held to maturity.
Mortgage-backed securities increased $9.2 million, or 42.1%, to $31.0 million at
September 30, 2004, from $21.8 million at December 31, 2003. The increase in
mortgage-backed securities was due primarily to $13.9 million of purchases,
which were partially offset by principal prepayments and repayments totaling
$4.7 million. All mortgage-backed securities are classified as held to maturity.
Loans receivable, including loans held for sale, increased $16.9 million, or
9.1%, to $203.8 million at September 30, 2004, from December 31, 2003. The
increase resulted from loan originations of $50.9 million, partially offset by
loan repayments of $31.3 million and sales of $2.7 million. The increase in loan
originations include $13.8 million in loan originations from our new lending
office in Mason, Ohio which opened in March 2004.
The allowance for loan losses decreased $36,000 or 4.7%, to $732,000 at
September 30, 2004, from $768,000, at December 31, 2003. The decrease was due to
charge-offs of loans and the transfer of collateral to real estate acquired
through foreclosure. 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.
The analysis resulted in no additional provision to the allowance at September
30, 2004.
9
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from December 31, 2003 to September
30, 2004 (continued)
Second, the allowance for loan losses entails utilizing our historic loss
experience by applying such loss percentage to the loan types to be collectively
evaluated in the portfolio. This segment of the loss analysis resulted in
assigning no additional allowance at September 30, 2004. The analysis of the
allowance for loan losses requires an element of judgment and is subject to the
possibility that the allowance may need to be increased, with a corresponding
reduction in earnings. To the best of management's knowledge, all known and
inherent losses that are probable and that can be reasonably estimated have been
recorded at September 30, 2004.
Non-performing and impaired loans totaled $131,000 and $462,000 at September 30,
2004 and December 31, 2003, respectively. At September 30, 2004, nonperforming
and impaired loans were comprised of loans secured by one-to four-family
residential real estate totaling $131,000. The allowance for loan losses
represented 558.8% and 166.2% of non-performing and impaired loans at September
30, 2004 and December 31, 2003, respectively. Although management believes that
its allowance for loan losses conforms with generally accepted accounting
principles based upon the available facts and circumstances, there can be no
assurance that additions to the allowance will not be necessary in future
periods, which would adversely affect our results of operations.
Deposits decreased $88.8 million, or 33.1%, to $179.1 million at September 30,
2004, from the $267.9 million at December 31, 2003. The decrease was comprised
of a $72.4 million decrease in transaction accounts, primarily representing
funds received for stock subscription orders, and a $9.9 million decrease in
certificates of deposit. Upon consummation of the stock offering on January 5,
2004, the Savings Bank refunded approximately $36.1 million for over-subscribed
stock subscription orders. Advances from the Federal Home Loan Bank of
Cincinnati increased by $7.5 million, or 81.3%, to $16.7 million at September
30, 2004, from $9.2 million at December 31, 2003. The increase in advances was
due primarily to management's decision to fund loan originations at the Mason
lending center with advances to lock in a positive interest rate spread.
Shareholders' equity increased $39.2 million, or 103.6%, to $77.1 million at
September 30, 2004, from $37.9 million at December 31, 2003. The increase
resulted primarily from the $39.3 million of proceeds (net of $1.7 million of
offering costs and the costs of contributions to the employee stock ownership
plan) from the Corporation's stock offering and net earnings during the period
of $614,000, which were partially offset by dividends paid of $669,000.
Approximately $960,000 of offering costs were included within other assets at
December 31, 2003.
Cheviot Savings Bank is required to maintain minimum regulatory capital pursuant
to federal regulations. At September 30, 2004, 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,
2004 and 2003
- --------------------------------------------------------------------------------
General
The Corporation had net earnings of $614,000 for the nine months ended September
30, 2004, compared to $1.7 million in net earnings for the nine month period
ended September 30, 2003. The decrease in net earnings was due primarily to the
recognition of $1.5 million in expense related to the contribution to the
Cheviot Savings Bank Charitable Foundation. Management elected to contribute
$1.5 million to the newly-formed charitable foundation, consisting of $750,000
in cash contributed by Cheviot Savings Bank and 75,000 shares of Cheviot
Financial Corp. common stock. Excluding the $1.2 million after-tax effect of the
contribution, the Corporation's net earnings for the
10
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,
2004 and 2003 (continued)
- -------------------------------------------------------------------------------
General (continued)
nine month period ended September 30, 2004 totaled $1.8 million, an increase of
$146,000, or 8.5%, over the same period in 2003. This increase was due primarily
to a $626,000 increase in net interest income and a $290,000 decrease in the
provision for losses on loans, which were partially offset by a $79,000 decrease
in other income and a $615,000 increase in general, administrative and other
expense. Management believes that presentation of financial results exclusive of
the one-time expense for the charitable contribution provides an additional and
useful comparison of the Corporation's current results of operations with past
and future periods.
Net Interest Income
Total interest income decreased by $52,000, or 0.5%, to $9.6 million for the
nine-month period ended September 30, 2004, from $9.7 million for the same
period in 2003. Interest income on loans decreased $293,000, or 3.4%, to $8.3
million during the 2004 period, from $8.6 million for the 2003 period. This
decline was due primarily to a 56 basis point decrease in the weighted-average
yield on loans, to 5.69% for the 2004 period from 6.25% for the 2003 period,
which was partially offset by an $11.3 million, or 6.1%, increase in the average
balance of loans outstanding.
Interest income on mortgage-backed securities decreased $38,000, or 6.0%, to
$595,000 from $633,000 due primarily to a 102 basis point decrease in the
average yield, partially offset by a $6.3 million increase in the average
balance year to year. Interest income on investment securities increased
$324,000, or 145.3%, to $547,000 for the nine months ended September 30, 2004,
from $223,000 for the same period in 2003, due primarily to a $21.2 million, or
226.7%, increase in the average balance outstanding, which was partially offset
by a 79 basis point decrease in the average yield to 2.38% in the 2004 period.
Interest income on other interest-earning deposits decreased by $45,000, or
22.7%, to $153,000 during the nine months ended September 30, 2004, from
$198,000 for the same period in 2003, due primarily to a decrease of $4.4
million, or 22.7%, in the average balance of interest-earning deposits to $14.8
million, compared to the same period in 2003.
Interest expense decreased $678,000, or 19.1%, to $2.9 million for the nine
months ended September 30, 2004, from $3.5 million for the same period in 2003.
Interest expense on deposits decreased by $729,000, or 22.9%, to $2.5 million
from $3.2 million due primarily to a 41 basis point decrease in the
weighted-average cost of deposits to 1.79% in the 2004 period and a $10.1
million, or 5.2%, decline in the weighted-average balance outstanding. Interest
expense on borrowings increased by $51,000, or 14.2%, to $410,000 from $359,000
due primarily to a $2.1 million, or 20.8%, increase in the average balance
outstanding, which was partially offset by a 26 basis point decline in the
average cost of advances. The decreases in the yields on interest-earning assets
and costs of interest-bearing liabilities were due primarily to the overall
decrease in market interest rates in the economy during 2004 and 2003. The
recent increase in short-term interest rates and resulting flattening of the
yield curve generally may be expected to cause a negative impact on our net
interest margin. Management believes its investment strategy may minimize the
negative impact on its net interest margin; however, there can be no assurances
or guarantees that this will continue.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $626,000, or 10.2%, to $6.7 million during the
nine months ended September 30, 2004, from $5.8 million during the comparable
period ended September 30, 2003. The average interest rate spread decreased to
2.82% for the nine months ended September 30, 2004 from 3.18% for the nine
months ended September 30, 2003. The net interest margin decreased to 3.35% for
the nine months ended September 30, 2004, from 3.48% for the nine months ended
September 30, 2003.
11
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,
2004 and 2003 (continued)
- --------------------------------------------------------------------------------
Provision for Losses on Loans
As a result of an analysis of historical experience, the volume and type of
lending conducted by the Savings Bank, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to the Savings Bank's market area, and other factors related to the
collectibility of the Savings Bank's loan portfolio, management concluded that
the allowance for loan losses was adequate, and therefore, elected not to record
a provision for losses on loans for the nine-months ended September 30, 2004,
compared to a $290,000 provision recorded for the nine-months ended September
30, 2003. The prior period provision was predicated primarily upon growth in the
loan portfolio and management's perception of the risk prevalent in the economy.
There can be no assurance that the loan loss allowance will be sufficient to
cover losses on nonperforming loans in the future.
Other Income
Other income decreased $79,000, or 28.5%, to $198,000 for the nine months ended
September 30, 2004, from $277,000 for the same period in 2003, due primarily to
a $101,000 decrease in other operating income, which was partially offset by a
$7,000 increase in the gain on sale of loans. The decrease in other operating
income reflects the Corporation's $110,000 settlement received in the 2003
period from a lawsuit related to a real estate owned parcel. The increase in
gain on sale of loans was due primarily to an increase in loan sales volume year
to year.
General, Administrative and Other Expense
General, administrative and other expense increased $2.1 million, or 60.3%, to
$5.6 million for the nine months ended September 30, 2004, compared to $3.5
million for the same period in 2003. This increase was due primarily to the $1.5
million contribution to the Cheviot Savings Bank Charitable Foundation, a
$400,000, or 19.9%, increase in employee compensation and benefits, a $28,000,
or 10.1%, increase in occupancy and equipment expense, a $45,000, or 10.0%,
increase in property, payroll and other taxes and a $94,000, or 64.4%, increase
in legal and professional expense. The increase in employee compensation and
benefits was due primarily to an increase in health insurance costs of
approximately $252,000 year to year, expense related to the employee stock
ownership plan of $314,000, expense related to staffing increases of $71,000
related to the Mason loan production office which opened in March 2004 and
normal merit increases, which were partially offset by a $260,000 decrease in
expense related to the directors deferred compensation plan. The increase in
occupancy and equipment was due to rent and occupancy costs at the Mason loan
production office and increases in utilities costs and repairs expenses at
several of the Savings Bank's office locations. The increase in professional
fees was due primarily to costs associated with changing the Corporation's
reporting year end to December 31 and expenses associated with the reporting
requirements of a public company, including Nasdaq fees of approximately
$15,000.
Federal Income Taxes
The provision for federal income taxes decreased $179,000, or 20.2%, to $708,000
for the nine months ended September 30, 2004, from $887,000 for the same period
in 2003, due primarily to a $1.3 million, or 49.2%, decrease in pre-tax
earnings. The Corporation did not record a tax benefit on the charitable
contribution of 75,000 shares of its common stock, totaling $750,000, to the
Cheviot Savings Bank Charitable Foundation. Management does not anticipate such
contribution to be deductible for federal income tax purposes for at least the
next two years. The effective tax rate was 34.2% and 34.1% for the nine month
periods ended September 30, 2004 and 2003, respectively, excluding the effects
of the nondeductible charitable contribution in the 2004 period.
12
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2004 and 2003
- --------------------------------------------------------------------------------
General
Net earnings increased $73,000, or 11.4%, to $716,000 for the three months ended
September 30, 2004, from $643,000 for the three months ended September 30, 2003.
The increase in net earnings was due primarily to a $356,000 increase in net
interest income and an $18,000 increase in other income, which were partially
offset by a $261,000 increase in general, administrative and other expense and a
$40,000 increase in federal income taxes.
Net Interest Income
Total interest income increased $256,000, or 8.3%, to $3.3 million for the
three-months ended September 30, 2004, from the same period in 2003. Interest
income on loans increased $87,000, or 3.1%, to $2.9 million during the 2004
period, from $2.8 million for the 2003 period. This increase was due primarily
to a $17.9 million, or 9.7%, increase in the average balance of loans
outstanding, which was partially offset by a 36 basis point decrease in the
weighted-average yield on loans, to 5.66% for 2004 period from 6.02% for the
three months ended September 30, 2003.
Interest income on mortgage-backed securities increased $50,000, or 28.1%, to
$228,000 for the three months ended September 30, 2004, from $178,000 for the
prior period, due primarily to an $11.5 million increase in the balance of
securities outstanding, partially offset by a 65 basis point decrease in the
average yield year to year. Interest income on investment securities increased
$157,000, or 234.3%, to $224,000 for the three months ended September 30, 2004,
compared to $67,000 for the same quarter in 2003, due primarily to a $21.1
million, or 207.7%, increase in the average balance of investment securities
outstanding and a 24 basis point increase in the average yield, to 2.87% in the
2004 quarter. Interest income on other interest-earning deposits decreased
$38,000, or 65.5%, to $20,000 for the three months ended September 30, 2004, due
primarily to a $14.3 million decrease in the average balance of interest-earning
deposits, compared to the same period in 2003, partially offset by an 81 basis
point increase in the weighted-average yield, to 2.08% for the three months
ended September 30, 2004.
Interest expense decreased $85,000, or 7.9 %, to $991,000 for the three months
ended September 30, 2004, from $1.1 million for the same period in 2003.
Interest expense on deposits decreased by $163,000, or 16.9%, to $801,000 from
$964,000 due primarily to a 19 basis point decrease in the weighted-average cost
of deposits, to 1.79% in the 2004 period, and a $15.8 million, or 8.1%, decline
in the weighted-average balance outstanding. Interest expense on borrowings
increased by $78,000, or 69.6%, due primarily to a $7.2 million, or 74.5%,
increase in the average balance outstanding, which was partially offset by a 14
basis point decline in the average cost of borrowings. The decreases in the
yields on interest-earning assets and costs of interest-bearing liabilities were
due primarily to the overall decrease in market interest rates during 2004 and
2003.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $341,000, or 16.9%, to $2.4 million for the
three months ended September 30, 2004, from $2.0 million for the comparable
period ended September 30, 2003. The average interest rate spread decreased to
2.93% for the three months ended September 30, 2004 from 3.18% for the three
months ended September 30, 2003. The net interest margin increased to 3.49% for
the three months ended September 30, 2004 from 3.45% for the three months ended
September 30, 2003.
13
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30,
2004 and 2003 (continued)
- --------------------------------------------------------------------------------
Provision for Losses on Loans
As a result of an analysis of historical experience, the volume and type of
lending conducted by the Savings Bank, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to the Savings Bank's market area, and other factors related to the
collectibility of the Savings Bank's loan portfolio, management concluded that
the allowance for loan losses was adequate, and therefore, elected not to record
a provision for losses on loans for the three-months ended September 30, 2004,
compared to a $15,000 provision recorded for the three-months ended September
30, 2003. The prior period provision was predicated primarily upon growth in the
loan portfolio and management's perception of the risk prevalent in the economy.
There can be no assurance that the loan loss allowance will be sufficient to
cover losses on nonperforming loans in the future.
Other Income
Other income increased $18,000, or 28.6%, to $81,000 for the three months ended
September 30, 2004, compared to the same quarter in 2003, due primarily to the
effects of a $15,000 loss on sale of real estate acquired through foreclosure in
the 2003 period.
General, Administrative and Other Expense
General, administrative and other expense increased $261,000, or 23.9%, to $1.4
million for the three months ended September 30, 2004, from $1.1 million for the
same quarter in 2003. This increase was due primarily to a $208,000, or 34.5%,
increase in employee compensation and benefits and a $25,000, or 51.0%, increase
in legal and professional expense. The increase in employee compensation and
benefits was due primarily to expense recognized for the ESOP in the 2004 period
of $100,000 and an increase in health coverage costs of approximately $43,000.
The increase in health coverage costs year to year reflects the effects of a
benefit recorded in the 2003 period due to a change in the estimated costs of
the Savings Bank's self-insurance plan. The increase in professional fees was
due primarily to costs associated with changing the Corporation's reporting year
end to December 31 and expenses associated with the reporting requirements of a
public company.
Federal Income Taxes
The provision for federal income taxes increased $40,000, or 12.1%, to $370,000
for the three months ended September 30, 2004, from $330,000 for the same
quarter in 2003, due primarily to a $113,000, or 11.6%, increase in pre-tax
earnings. The effective tax rates were 34.1% and 33.9% for the three month
periods ended September 30, 2004 and 2003, respectively.
14
Cheviot Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Corporation's market risk since the
Form 10-K filed with the Securities and Exchange Commission for the fiscal year
ended December 31, 2003.
ITEM 4 CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer evaluated
the disclosure controls and procedures (as defined under Rules 13a-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, including
any corrective actions with regard to material deficiencies and weaknesses.
15
Cheviot Financial Corp.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
ITEM 5. Other Information
None.
ITEM 6. Exhibits
3.1* Charter of Cheviot Financial Corp. (incorporated herein by
reference to Exhibit 3.1 to the Corporation's Registration
Statement on Form S-1 (Registration No.: 333-106663) filed with
the Securities and Exchange Commission on September 30, 2003).
3.2* Bylaws of Cheviot Financial Corp. (incorporated herein by
reference to Exhibit 3.2 to the Corporation's Registration
Statement on Form S-1 (Registration No.: 333-106663) filed with
the Securities and Exchange Commission on September 30, 2003).
10.1*Form of Employment Agreement with Thomas J. Linneman
(incorporated herein by reference to Exhibit 10.1 to
Pre-Effective Amendment No. 1 to the Corporation's Registration
Statement on Form S-1 (Registration No.: 333-106663) filed with
the Securities and Exchange Commission on September 2, 2003).
10.2*Form of Change of Control Severance Agreement with Kevin M.
Kappa (incorporated herein by reference to Exhibit 10.2 to
Pre-Effective Amendment No. 1 to the Corporation's Registration
Statement on Form S-1 (Registration No.: 333-106663) filed with
the Securities and Exchange Commission on September 2, 2003).
10.3*Form of Change of Control Severance Agreement with Jeffrey J.
Lenzer (incorporated herein by reference to Exhibit 10.3 to
Pre-Effective Amendment No. 1 to the Corporation's Registration
Statement on Form S-1 (Registration No.: 333-106663) filed with
the Securities and Exchange Commission on September 2, 2003).
10.4.1* Cheviot Savings Bank Directors Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.4 to the
Corporation's Registration Statement on Form S-1 (Registration
No.: 333-106663) filed with the Securities and Exchange
Commission on September 30, 2003).
10.4.2* Amended and Restated Cheviot Savings Bank Deferred
Compensation Plan (incorporated herein by reference to Exhibit 14
to the Corporation's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 25, 2004).
16
Cheviot Financial Corp.
PART II (CONTINUED)
ITEM 6. Exhibits (continued)
---------
10.5*Form of Tax Allocation Agreement between the Corporation and
Cheviot Savings Bank (incorporated herein by reference to Exhibit
10.5 to Pre-Effective Amendment No. 1 to the Corporation's
Registration Statement on Form S-1 (Registration No.: 333-106663)
filed with the Securities and Exchange Commission on September 2,
2003).
10.6*Form of Expense Allocation Agreement between the Corporation and
Cheviot Savings Bank (incorporated herein by reference to Exhibit
10.6 to Pre-Effective Amendment No. 1 to the Corporation's
Registration Statement on Form S-1 (Registration No.: 333-106663)
filed with the Securities and Exchange Commission on September 2,
2003).
10.7.1* Cheviot Building and Loan Co. 401(k) Retirement Savings Plan
(incorporated herein by reference to Exhibit 4.1 to the
Corporation's Registration Statement on Form S-8 (Registration
No.: 333-113919) filed with the Securities and Exchange
Commission on March 25, 2004).
10.7.2* Amendment to Cheviot Savings Bank 401(k) Retirement Savings
Plan effective November 20, 2003 (incorporated herein by
reference to Exhibit 4.2 to the Corporation's Registration
Statement on Form S-8 (Registration No.: 333-113919) filed with
the Securities and Exchange Commission on March 25, 2004).
31.1 Certification of Principal Executive Officer Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Previously filed.
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, 2004 By:/s/ Thomas J. Linneman
---------------------- ------------------------------
Thomas J. Linneman
President and Chief Executive Officer
Date: November 10, 2004 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, 2004 /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, 2004 /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, 2004, 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, 2004
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, 2004, 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, 2004