CHEVIOT FINANCIAL CORP - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - CHEVIOT FINANCIAL CORP	ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - CHEVIOT FINANCIAL CORP	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - CHEVIOT FINANCIAL CORP	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - CHEVIOT FINANCIAL CORP	ex32-1.htm

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, 2011

OR

o	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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one.)

Large accelerated filer o Accelerated filer o Non-accelerated filer o

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of November 14, 2011, the latest practicable date, 8,864,908 shares of the registrant’s common stock, $.01 par value, were issued and outstanding.

Page 1 of 38

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	35

		Quantitative and Qualitative Disclosures about Market Risk	45

		Controls and Procedures	45

PART II	-	OTHER INFORMATION	46

SIGNATURES			48

Cheviot Financial Corp.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

	September 30,			December 31,
	2011			2010
	(Unaudited)

ASSETS

Cash and due from banks	$	8,884		$	5,776
Federal funds sold		20,933			5,924
Interest-earning deposits in other financial institutions		15,384			6,449
Cash and cash equivalents		45,201			18,149

Investment securities available for sale - at fair value		90,748			88,382
Mortgage-backed securities available for sale - at fair value		8,015			4,279
Mortgage-backed securities held to maturity - at cost, approximate market value of $4,498 and $4,916 at September 30, 2011 and December 31, 2010, respectively		4,340			4,779
Loans receivable - net		394,915			220,998
Loans held for sale - at lower of cost or market		2,545			4,440
Real estate acquired through foreclosure - net		4,190			2,007
Office premises and equipment - at depreciated cost		10,063			4,610
Federal Home Loan Bank stock - at cost		8,366			3,375
Accrued interest receivable on loans		1,661			925
Accrued interest receivable on mortgage-backed securities		29			23
Accrued interest receivable on investments and interest-earning deposits		421			392
Goodwill		10,309			-
Core deposit intangible - net		1,118			-
Prepaid expenses and other assets		4,312			1,510
Bank-owned life insurance		10,246			3,791
Prepaid federal income taxes		885			409
Deferred federal income taxes		3,152			-

Total assets	$	600,516		$	358,069

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits	$	480,390		$	257,852
Advances from the Federal Home Loan Bank		42,024			27,300
Advances by borrowers for taxes and insurance		1,772			1,440
Accrued interest payable		163			99
Accounts payable and other liabilities		4,037			1,955
Deferred federal income taxes		-			4
Total liabilities		528,386			288,650

Commitments and contingencies

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 at September 30, 2011 and December 31, 2010		99			99
Additional paid-in capital		43,870			43,878
Shares acquired by stock benefit plans		(1,270	)		(1,302	)
Treasury stock - at cost, 1,053,843 shares at September 30, 2011 and December 31, 2010		(12,859	)		(12,860	)
Retained earnings - restricted		41,855			40,655
Accumulated comprehensive income (loss), unrealized gains (losses) on securities available for sale, net of related tax effects		435			(1,051	)
Total shareholders’ equity		72,130			69,419

Total liabilities and shareholders’ equity	$	600,516		$	358,069

See accompanying notes to consolidated financial statements.

Cheviot Financial Corp.

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

	Nine months ended						Three months ended
	September 30,						September 30,
	2011			2010			2011			2010
	(Unaudited)
Interest income
Loans	$	14,236		$	10,214		$	5,384		$	3,301
Mortgage-backed securities		208			228			70			66
Investment securities		1,624			1,285			591			436
Interest-earning deposits and other		222			115			85			38
Total interest income		16,290			11,842			6,130			3,841

Interest expense
Deposits		3,503			2,629			1,286			844
Borrowings		912			1,004			297			286
Total interest expense		4,415			3,633			1,583			1,130

Net interest income		11,875			8,209			4,547			2,711

Provision for losses on loans		400			250			200			150

Net interest income after provision for losses on loans		11,475			7,959			4,347			2,561

Other income (expense)
Rental		91			48			33			17
Gain on sale of loans		429			389			204			306
Gain (loss) on sale of real estate acquired through foreclosure		75			(23	)		(47	)		(1	)
Earnings on bank-owned life insurance		208			104			84			35
Other operating		1,086			324			428			116
Total other income		1,889			842			702			473

General, administrative and other expense
Employee compensation and benefits		4,774			3,286			1,652			1,034
Occupancy and equipment		948			503			413			180
Property, payroll and other taxes		892			732			294			233
Data processing		381			175			161			63
Legal and professional		712			469			170			233
Advertising		367			150			87			50
FDIC expense		481			214			177			67
Other operating		1,651			596			682			201
Total general, administrative and other expense		10,206			6,125			3,636			2,061

Earnings before income taxes		3,158			2,676			1,413			973

Federal income taxes
Current		(243	)		785			168			254
Deferred		977			127			276			36
Total federal income taxes		734			912			444			290

NET EARNINGS	$	2,424		$	1,764		$	969		$	683

EARNINGS PER SHARE
Basic	$	.28		$	.20		$	.11		$	.08

Diluted	$	.28		$	.20		$	.11		$	.08

Dividends per common share	$	.36		$	.33		$	.12		$	.11

See accompanying notes to consolidated financial statements.

Cheviot Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the nine and three months ended September 30, 2011 and 2010

(In thousands)

	For the nine months				For the three months
	ended September 30,				ended September 30,
	2011		2010		2011		2010
	(Unaudited)
Net earnings for the period	$	2,424	$	1,764	$	969	$	683
Other comprehensive income, net of tax expense:
Unrealized holding gains on securities during the period, net of tax expense of $766 and $369 for the nine months ended September 30, 2011 and 2010, respectively, and $120 and $53 for the three months ended September 30, 2011 and 2010, respectively		1,486		717		232		102

Comprehensive income	$	3,910	$	2,481	$	1,201	$	785

Accumulated comprehensive income	$	435	$	337	$	435	$	337

See accompanying notes to consolidated financial statements.

Cheviot Financial Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2011 and 2010

(In thousands)

		2011			2010
	(Unaudited)
Cash flows from operating activities:
Net earnings for the period		$	2,424		$	1,764
Adjustments to reconcile net earnings to net cash provided by operating activities:
Amortization of premiums and discounts on investment and mortgage-backed securities, net			(81	)		21
Depreciation			387			240
Amortization expense related to stock benefit plans			10			380
Amortization of deferred loan origination fees - net			88			39
Amortization of intangible assets			180			-
Amortization of fair value adjustments			(1,267	)		-
Proceeds from sale of loans in the secondary market			37,186			15,354
Loans originated for sale in the secondary market			(34,897	)		(18,104	)
Gain on sale of loans			(429	)		(389	)
(Gain) loss on sale of real estate acquired through foreclosure			(75	)		23
Impairment on real estate acquired through foreclosure			358			102
Federal Home Loan Bank stock dividends			-			(6	)
Earnings on bank-owned life insurance			(208	)		(104	)
Provision for losses on loans			400			250
Increase (decrease) in cash, net of acquisition, due to changes in:
Accrued interest receivable on loans			(20	)		64
Accrued interest receivable on mortgage-backed securities			18			10
Accrued interest receivable on investments and interest-earning deposits			100			(10	)
Prepaid expenses and other assets			267			(45	)
Accrued interest payable			(692	)		(36	)
Accounts payable and other liabilities			(2,516	)		35
Federal income taxes (benefits)
Current			560			(110	)
Deferred			977			127
Net cash provided by (used in) operating activities			2,770			(395	)

Cash flows used in investing activities:
Principal repayments on loans			33,500			37,814
Loan disbursements			(13,473	)		(23,785	)
Purchase of investment securities – available for sale			(28,346	)		(76,670	)
Proceeds from maturity of investment securities – available for sale			44,050			72,101
Principal repayments on mortgage-backed securities – available for sale			1,037			542
Principal repayments on mortgage-backed securities – held to maturity			439			740
Additions to real estate acquired through foreclosure			(100	)		(96	)
Proceeds from sale of real estate acquired through foreclosure			2,388			531
Purchase of office premises and equipment			(913	)		(34	)
Cash paid for acquisition, net of cash received			(4,200	)		-
Net cash provided by investing activities			34,382			11,143

Cash flows provided by financing activities:
Net increase in deposits – net of acquisition			1,813			11,877
Proceeds from Federal Home Loan Bank advances – net of acquisition			11,000			10,000
Repayments on Federal Home Loan Bank advances – net of acquisition			(19,254	)		(14,969	)
Advances by borrowers for taxes and insurance – net of acquisition			(960	)		(481	)
Repayments on other borrowings			(1,490	)		-
Treasury stock repurchases			-			(31	)
Stock option expense, net			15			91
Dividends paid on common stock			(1,224	)		(1,122	)
Net cash provided by (used in) financing activities			(10,100	)		5,365

Net increase in cash and cash equivalents			27,052			16,113
Cash and cash equivalents at beginning of period			18,149			11,283
Cash and cash equivalents at end of period		$	45,201		$	27,396

See accompanying notes to consolidated financial statements.

Cheviot Financial Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the nine months ended September 30, 2011 and 2010

(In thousands)

	2011		2010
	(Unaudited)

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes	$	235	$	794

Interest on deposits and borrowings	$	4,479	$	3,597

Supplemental disclosure of noncash investing activities:
Transfer of loans to real estate acquired through foreclosure	$	2,350	$	181

Loans originated upon sales of real estate acquired through foreclosure	$	102	$	-

Recognition of mortgage servicing rights	$	140	$	118

See accompanying notes to consolidated financial statements.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2011 and 2010

1. Basis of Presentation

Cheviot Financial Corp. (“Cheviot Financial” or the “Corporation”) is a savings and loan holding company, the principal asset of which consists of its ownership of Cheviot Savings Bank (the “Savings Bank”). The Savings Bank conducts a general banking business in southwestern Ohio which consists of attracting deposits and applying those funds to the origination of primarily real estate loans. The Corporation is 62% owned by Cheviot Mutual Holding Company. Earnings per share is reported including all shares held by Cheviot Mutual Holding Company. Cheviot Mutual Holding Company has waived the receipt of dividends declared by the Corporation since incorporation. Cheviot Savings’ profitability is significantly dependent on net interest income, which is the difference between interest income from interest-earning assets and the interest expense paid on interest-bearing liabilities. Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances.

On March 16, 2011, the Corporation completed the acquisition of First Franklin Corporation (“First Franklin”) and its wholly-owned subsidiary, The Franklin Savings and Loan Company (“Franklin Savings”). Accordingly, the Corporation’s unaudited consolidated financial statements for the three and nine month periods ended September 30, 2011 includes the accounts of First Franklin for the period March 17, 2011 to September 30, 2011.

On July 12, 2011 Cheviot Mutual Holding Company and the Corporation adopted a Plan of Conversion whereby the mutual holding company would convert from mutual to stock form. As part of the Plan of Conversion the pro forma value of the 62% of the Corporation owed by the Mutual Holding Company would be sold in a subscription and community offering and, if necessary, a syndicated community offering. The Plan of Conversion was conditionally approved by the Federal Reserve Board, and consummation of the transactions contemplated thereby remains subject to certain conditions, including approval by the Mutual Holding Company’s members and the Corporation’s stockholders.

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, 2010. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three and nine month periods ended September 30, 2011, are not necessarily indicative of the results which may be expected for the entire year.

Cheviot Financial evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

2. Principles of Consolidation

The accompanying consolidated financial statements as of and for the three and nine months ended September 30, 2011 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 September 30, 2011 and December 31, 2010, we had $42.0 million and $27.3 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 $157.2 million and $115.3 million, respectively.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

3. Liquidity and Capital Resources (continued)

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.

Our primary investing activities are the origination of one- to four-family real estate loans, commercial real estate, construction and consumer loans, and the purchase of securities. For the nine months ended September 30, 2011, loan originations totaled $48.4 million, compared to $41.9 million for the nine months ended September 30, 2010.

Total deposits increased $222.5 million during the nine months ended September 30, 2011 and increased $11.9 million during the nine months ended September 30, 2010, respectively. The increase during the nine months ended September 30, 2011 is due to the purchase of First Franklin. 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 September 30, 2011.

			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	$	9,952	$	3,326	$	5,318	$	23,428	$	42,024
Certificates of deposit		129,997		75,755		67,957		981		274,690

Amount of loan commitments and expiration per period:
Commitments to originate one- to four-family loans		4,193		-		-		-		4,193
Home equity lines of credit		28,845		-		-		-		28,845
Commercial lines of credit		263		-		-		-		263
Undisbursed loans in process		3,148		-		-		-		3,148

Total contractual obligations	$	176,398	$	79,081	$	73,275	$	24,409	$	353,163

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.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

3. Liquidity and Capital Resources (continued)

At September 30, 2011 and 2010, we exceeded all of the applicable regulatory capital requirements. Our core (Tier 1) capital was $58.6 million and $56.9 million, or 10.0% and 16.7% of total assets at September 30, 2011 and 2010, respectively. In order to be classified as “well-capitalized” under federal banking regulations, we were required to have core capital of at least $36.0 million, or 6.0% of assets as of September 30, 2011. 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 September 30, 2011 and 2010, we had a total risk-based capital ratio of 18.3% and 34.8%, 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. The weighted average common shares outstanding includes 5,455,313 shares held by Cheviot Mutual Holding Company. Weighted-average common shares deemed outstanding gives effect to 107,126 and 142,833 unallocated shares held by the ESOP for the three and nine months ended September 30, 2011 and 2010, respectively.

	For the nine months ended				For the three months ended
	September 30,				September 30,
	2011		2010		2011		2010

Weighted-average common shares outstanding (basic)		8,757,782		8,723,800		8,757,782		8,722,075

Dilutive effect of assumed exercise of stock options		8,850		9,051		9,219		9,179

Weighted-average common shares outstanding (diluted)		8,766,632		8,732,851		8,767,001		8,731,254

5. Stock Incentive Plan

On April 26, 2005, the Corporation approved a Stock Incentive Plan that provides for grants of up to 486,018 stock options. During 2011, 2010, and 2009 approximately 4,400, 8,860, and 8,060 option awards for shares were granted, all of which are subject to five year vesting.

The Corporation follows Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 718 (ASC 718), “Compensation – Stock Compensation,” for its stock option plans, and accordingly, the Corporation recognizes the expense of these grants as required. Stock-based employee compensation costs pertaining to stock options have been reflected as a net increase in shareholders’ equity, for both any new grants, as well as for all unvested options outstanding at December 31, 2005, in both cases using the fair values established by usage of the Black-Scholes option pricing model, and are expensed over the vesting period of the underlying option.

The Corporation elected the modified prospective transition method in applying ASC 718. Under this method, the compensation cost recorded for unvested equity-based awards is based on their grant-date fair value. For the nine months ended September 30, 2011, the Corporation recorded $15,000 in after-tax compensation cost for equity-based awards that vested during the nine months ended September 30, 2011. The Corporation has $73,000 unrecognized pre-tax compensation cost related to non-vested equity-based awards granted under its stock incentive plan as of September 30, 2011, which is expected to be recognized over a weighted-average vesting period of approximately 0.2 years.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

5. Stock Option Plan (continued)

A summary of the status of the Corporation’s stock option plan as of September 30, 2011 and the year ended December 31, 2010, as well as the changes during the periods then ended are presented below:

	Nine months ended				Year ended
	September 30, 2011				December 31, 2010
			Weighted-				Weighted-
			average				average
			exercise				exercise
	Shares		price		Shares		price

Outstanding at beginning of period		421,200	$	11.05		412,340	$	11.17
Granted		4,400		9.04		8,860		8.07
Exercised		-		-		-		-
Forfeited		-		-		-		-

Outstanding at end of period		425,600	$	11.02		421,200	$	11.05

Options exercisable at period-end		404,760	$	11.14		397,260	$	11.16

Fair value of options granted			$	5.30			$	4.83

The following information applies to options outstanding at September 30, 2011:

Number outstanding		425,600
Exercise price		$8.07 - $13.63
Weighted-average exercise price		$11.14
Weighted-average remaining contractual life	4.0 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 2011: dividend yield of 5.22%, expected volatility of 44.17%, risk-free interest rate of 2.98% and an expected life of 10 years for each grant.

The effects of expensing stock options are reported in “cash provided by financing activities” in the Consolidated Statements of Cash Flows.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

6. Investment and Mortgage-backed Securities

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of investment securities at September 30, 2011 and December 31, 2010 are shown below.

			September 30, 2011
			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
			(In thousands)
Available for Sale:
U.S. Government agency securities	$	87,233	$	264	$	9	$	87,488
Municipal obligations		3,140		138		18		3,260

	$	90,373	$	402	$	27	$	90,748

			December 31, 2010
			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
			(In thousands)
Available for Sale:
U.S. Government agency securities	$	88,529	$	102	$	1,622	$	87,009
Municipal obligations		1,545		5		177		1,373

	$	90,074	$	107	$	1,799	$	88,382

The amortized costs of investment securities at September 30, 2011, by contractual term to maturity, are shown below.

	September 30,
	2011
	(In thousands)
Less than one year	$	70,846
One to five years		10,954
Five to ten years		1,325
More than ten years		7,248

	$	90,373

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

6. Investment and Mortgage-backed Securities (continued)

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities at September 30, 2011 and December 31, 2010 are shown below.

			September 30, 2011
			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
			(In thousands)
Available for sale:
Federal Home Loan Mortgage Corporation adjustable-rate participation certificates	$	1,185	$	141	$	1	$	1,325
Federal National Mortgage Association adjustable-rate participation certificates		2,895		55		3		2,947
Government National Mortgage Association adjustable-rate participation certificates		3,650		109		16		3,743

	$	7,730	$	305	$	20	$	8,015

Held to maturity:
Federal Home Loan Mortgage Corporation adjustable-rate participation certificates	$	409	$	9	$	1	$	417
Federal National Mortgage Association adjustable-rate participation certificates		444		8		2		450
Government National Mortgage Association adjustable-rate participation certificates		3,487		145		1		3,631

	$	4,340	$	162	$	4	$	4,498

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

6. Investment and Mortgage-backed Securities (continued)

			December 31, 2010

			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
			(In thousands)
Available for sale:
Federal Home Loan Mortgage Corporation adjustable-rate participation certificates	$	723	$	13	$	-	$	736
Federal National Mortgage Association adjustable-rate participation certificates		548		17		-		565
Government National Mortgage Association adjustable-rate participation certificates		2,908		70		-		2,978

	$	4,179	$	100	$	-	$	4,279

Held to maturity:
Federal Home Loan Mortgage Corporation adjustable-rate participation certificates	$	464	$	10	$	1	$	473
Federal National Mortgage Association adjustable-rate participation certificates		515		7		-		522
Government National Mortgage Association adjustable-rate participation certificates		3,800		121		-		3,921

	$	4,779	$	138	$	1	$	4,916

The amortized cost of mortgage-backed securities, including those designated as available for sale at September 30, 2011, by contractual terms to maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties.

	September 30,
	2011
	(In thousands)

Due in one year or less	$	570
Due in one year through five years		2,411
Due in five years through ten years		3,334
Due in more than ten years		5,755

	$	12,070

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

6. Investment and Mortgage-backed Securities (continued)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2011:

	Less than 12 months						12 months or longer								Total
Description of	Number of		Fair		Unrealized		Number of		Fair		Unrealized		Number of		Fair		Unrealized
securities	investments		value		losses		investments		value		losses		investments		value		losses
							(Dollars in thousands)

U.S. Government agency securities		2	$	9,991	$	9		-	$	-	$	-		2	$	9,991	$	9
Municipal obligations		-		-		-		1		697		18		1		697		18
Mortgage-backed securities		14		761		23		5		43		1		19		804		24

Total temporarily impaired securities		16	$	10,752	$	32		6	$	740	$	19		22	$	11,492	$	51

Management does not intend to sell any of the debt securities with an unrealized loss and does not believe that it is more likely than not that it will be required to sell a security in an unrealized loss position prior to a recovery in value. The fair values are expected to recover as securities approach maturity dates. The Corporation has evaluated these securities and has determined that the decline in their values is temporary.

7. Income Taxes

The Corporation uses an asset and liability approach to accounting for income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are recognized if it is more likely than not that a future benefit will be realized. The Corporation accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which prescribes the recognition and measurement criteria related to tax positions taken or expected to be taken in a tax return.

The Corporation’s principal temporary differences between financial income and taxable income result mainly from different methods of accounting for Federal Home Loan Bank stock dividends, the general loan loss allowance, deferred compensation, stock benefit plans and fair value adjustments arising from the First Franklin acquisition. The Corporation has approximately $6.4 million of operating losses to carryforward for the next 20 years. These loss carryforwards are subject to the Internal Revenue Code section 382 limitations which allow approximately $1.1 million of the losses on an annual basis to offset current year taxable income.

The Corporation recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Corporation has applied this standard to all tax positions for which the statute of limitations remained open. The Corporation was not required to record any liability for unrecognized tax benefits as of September 30, 2011.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

7. Income Taxes (continued)

The Corporation is subject to income taxes in the United States. Tax regulations are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Corporation is no longer subject to U.S. federal, or state and local, tax examinations for years before 2008.

The Corporation will recognize, if applicable, interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

Federal income tax on earnings differs from that computed at the statutory corporate tax rate for the nine months ended September 30, 2011 and 2010:

	2011			2010
	(Dollars in thousands)

Federal income taxes at statutory rate of 34%	$	1,074		$	910
Increase (decrease) in taxes resulting primarily from:
Stock compensation		(7	)		49
Nontaxable interest income		(28	)		(16	)
Cash surrender value of life insurance		(71	)		(35	)
Utilization of net operating loss carryforwards, previously reserved		(241	)		-
Other		7			4

Federal income taxes per consolidated financial statements	$	734		$	912

Effective tax rate		23.2	%		34.1	%

8. Disclosures about Fair Value of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy exists for fair value measurements based upon the inputs to the valuation of an asset or liability.

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Fair value methods and assumptions are set forth below for each type of financial instrument.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

8. Disclosures about Fair Value of Assets and Liabilities (continued)

Securities available for sale: Fair values on available for sale securities were based upon a market approach. Securities which are fixed income instruments that are not quoted on an exchange, but are traded in active markets, are valued using prices obtained from our custodian, which used third party data service providers.

Available for sale securities include U.S. agency securities, municipal bonds and mortgage-backed agency securities.

Fair Value Measurements at September 30, 2011 and December 31, 2010

	Quoted prices
	in active		Significant		Significant
	markets for		other		other
	identical		observable		unobservable
	assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)
Securities available for sale at September 30, 2011:

U.S. Government agency securities		-	$	87,488		-
Municipal obligations		-	$	3,260		-
Mortgage-backed securities		-	$	8,015		-

Securities available for sale at December 31, 2010:

U.S. Government agency securities		-	$	87,009		-
Municipal obligations		-	$	1,373		-
Mortgage-backed securities		-	$	4,279		-

The Corporation is predominately an asset-based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. In addition, on the acquisition date the Corporation independently fair valued $25.0 million of First Franklin’s impaired loans, as well as $173.2 million of performing loans. First Franklin’s impaired loans subject to fair value adjustments are not included in Cheviot Financial’s non-performing loan totals. Such loans are considered performing under Topic ASC 310-30, even though the loans are contractually past due, as any nonpayment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and the resulting loss provisions or future period yield adjustments. The fair values were obtained using independent appraisals, which the Corporation considers to be Level 2 inputs. The aggregate carrying amount of the Corporation’s impaired loans at September 30, 2011 was $5.0 million, compared to $4.9 million at December 31, 2010.

The Corporation has real estate acquired through foreclosure totaling $4.2 million at September 30, 2011, compared to $2.0 million at December 31, 2010. Real estate acquired through foreclosure is carried at the lower of the cost or fair value less estimated selling expenses at the date of acquisition. Fair values are obtained using independent appraisals, based on comparable sales which the Corporation considers to be Level 2 inputs. The aggregate amount of real estate acquired through foreclosure that is carried at fair value was $3.5 million at September 30, 2011 and $1.1 million at December 31, 2010. The aggregate amount of real estate acquired through foreclosure that is carried at cost was $734,000 at September 30, 2011.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

9. Effects of Recent Accounting Pronouncements

We adopted the following accounting guidance in 2011, none of which had a material effect, if any, on our consolidated financial position or results of operations.

In January 2010, the FASB issued ASU No. 2010-06 “Improving Disclosures about Fair Value Measurements,” which amends the guidance for fair value measurements and disclosures. The guidance in ASU 2010-06 requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. Furthermore, ASU 2010-06 requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs; clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amends guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance is effective for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective January 1, 2011 and for interim periods thereafter. In the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption of this guidance did not have a material impact on our annual and interim financial statement disclosures and did not have any impact on our consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal year, and interim periods within those years, beginning after December 15, 2010. Adoption of this guidance on January 1, 2011 did not have a material effect on the Corporation’s results of operation or financial position.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the current and comparable prior annual reporting period. The amendments also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Management has provided the required pro forma disclosures in the period of acquisition of First Franklin for the quarter ended March 31, 2011.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

9. Effects of Recent Accounting Pronouncements (continued)

In April 2011, the FASB ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 will be effective for the Corporation on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 is not expected to have a material impact on the Corporation’s financial statements.

In May 2011, the FASB issued ASU 2011-4, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This Update provides guidance which is expected to result in common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. It changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. It is not intended for this Update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. We do not anticipate any material impact from this Update.

In June 2011, the FASB issued ASU 2011-5, “Comprehensive Income (Topic 220).” In this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. They also do not change the presentation of related tax effects, before related tax effects, or the portrayal or calculation of earnings per share. The amendments in this Update should be applied retrospectively. The amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. We do not anticipate any material impact from this Update.

In September 2011, the FASB issued ASU 2011-8, “Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

10. Fair Value of Financial Instruments

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value, is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity or contracts that convey or impose on an entity the contractual right or obligation to either receive or deliver cash for another financial instrument. These fair value estimates are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price for which an asset could be sold or liability could be settled. However, given there is no active market or observable market transactions for many of the Corporation’s financial instruments, it has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The fair value estimates are determined in accordance with SFAS No. 157.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

10. Fair Value of Financial Instruments (continued)

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments at September 30, 2011:

Cash and cash equivalents: The carrying amounts presented in the consolidated statements of financial condition for cash and cash equivalents are deemed to approximate fair value.

Investment and mortgage-backed securities: For investment and mortgage-backed securities, fair value is deemed to equal the quoted market price.

Loans receivable: The loan portfolio was segregated into categories with similar characteristics, such as one-to four-family residential, multi-family residential and commercial real estate. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts, fair values were deemed to equal the historic carrying values. The historical carrying amount of accrued interest on loans is deemed to approximate fair value.

Federal Home Loan Bank stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value.

Deposits: The fair value of NOW accounts, passbook accounts, and money market demand deposits is deemed to approximate the amount payable on demand at September 30, 2011. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities.

Advances from the Federal Home Loan Bank: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices.

Advances by Borrowers for Taxes and Insurance: The carrying amount of advances by borrowers for taxes and insurance is deemed to approximate fair value.

Commitments to extend credit: For fixed-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At September 30, 2011, the fair value of the derivative loan commitments was not material.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

10. Fair Value of Financial Instruments (continued)

The estimated fair values of the Corporation’s financial instruments at September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
	(In thousands)				(In thousands)
Financial assets
Cash and cash equivalents	$	45,201	$	45,201	$	18,149	$	18,149
Investment securities		90,748		90,748		88,382		88,382
Mortgage-backed securities		12,355		12,513		9,058		9,195
Loans receivable - net		397,460		410,517		225,438		233,272
Accrued interest receivable		2,111		2,111		1,340		1,340
Federal Home Loan Bank stock		8,366		8,366		3,375		3,375

	$	556,241	$	569,456	$	345,742	$	353,713

Financial liabilities
Deposits	$	480,390	$	480,378	$	257,852	$	257,672
Advances from the Federal Home Loan Bank		42,024		43,216		27,300		30,597
Accrued interest payable		163		163		99		99
Advances by borrowers for taxes and insurance		1,772		1,772		1,440		1,440

	$	524,349	$	525,529	$	286,691	$	289,808

11. Acquisition Activity

First Franklin Corporation

As previously stated, on March 16, 2011, Cheviot Financial, and its wholly owned subsidiary, Cheviot Savings Bank, completed the acquisition of First Franklin and its wholly-owned subsidiary, Franklin Savings. The acquisition was consummated in accordance with an Agreement and Plan of Merger (the “Merger Agreement”), dated as of October 12, 2010, by and among Cheviot Financial Corp., Cheviot Savings Bank, Cheviot Merger Subsidiary, Inc., First Franklin and Franklin Savings.

At the effective time of the acquisition, each share of common stock, par value $0.01 per share, of First Franklin (other than shares owned by First Franklin, Cheviot Financial, Cheviot Savings Bank and Merger Subsidiary) was converted into the right to receive $14.50 in cash. Each First Franklin stock option outstanding at the time of the closing was converted into an amount of cash equal to the positive difference, if any, between $14.50 and the exercise price of such stock option. The aggregate cash consideration paid in the acquisition (including the cancellation of stock options) was approximately $24.7 million.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

11. Acquisition Activity (continued)

The acquired assets and assumed liabilities were measured at estimated fair values, as required by the FASB under Business Combinations. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews (including borrower financial statements or tax returns), appraised collateral values, expected cash flows and historical loss factors of Franklin Savings. Real estate acquired through foreclosure was primarily valued based on appraised collateral values. The Corporation also recorded an identifiable intangible asset representing the core deposit base of Franklin Savings based on management’s evaluation of the cost of such deposits relative to alternative funding sources. Management used significant estimates including the average lives of depository accounts, future interest rate levels and the cost of servicing various depository products. Management used market quotations to fair value investment securities and FHLB advances.

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. First Franklin’s loans were deemed impaired at the acquisition date if Cheviot Financial did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a nonaccretable difference. At the acquisition date, Cheviot Financial recorded $25.0 million of purchased credit-impaired loans subject to a nonaccretable difference of $5.5 million. The method of measuring carrying value of purchased loans differs from loans originated by the Corporation (originated loans), and as such, the Corporation identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.

First Franklin’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, First Franklin’s loan portfolio without evidence of deterioration totaled $173.2 million and was recorded at a fair value of $171.6 million.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

11. Acquisition Activity (continued)

The following table summarizes the purchase of First Franklin as of March 16, 2011:

Purchase price
First Franklin common shares outstanding (in thousands)		1,693
Purchase price per share of First Franklin’s common stock	$	14.50
Total value of the First Franklin’s common stock	$	24,549
Fair value of outstanding employee stock awards, net of tax		131

Total purchase price	$	24,680

Allocation of purchase price
Stockholders’ equity	$	20,755

Pre-tax adjustments to reflect acquired assets and liabilities at fair value:
Loans receivable		(2,462	)
Real estate owned		(750	)
Office premises and equipment		1,970
Core deposit intangible		1,298
Certificates of deposit		(2,718	)
Advances from the Federal Home Loan Bank		(838	)
Contractual obligations		(4,390	)
Other assets/liabilities		427
Pre-tax total adjustments		(7,463	)

Deferred income tax benefits, net of valuation allowance		1,079
After-tax total adjustments		(6,384	)
Fair value of net assets acquired		14,371

Goodwill resulting from the First Franklin acquisition	$	10,309

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

11. Acquisition Activity (continued)

The following condensed statement reflects the values assigned to First Franklin’s net assets as of the acquisition date:

	March 16,
	2011
	(in thousands)

Assets:
Cash and cash equivalents	$	20,480
Investment securities		15,618
Mortgage-backed securities		4,497
Loans receivable – net		196,519
Real estate acquired through foreclosure		2,404
Office premises and equipment		4,927
Goodwill and intangible assets		11,607

Other assets		21,509
Total Assets	$	277,561

Liabilities:
Deposits	$	221,528
Advances from the Federal Home Loan Bank		23,216
Other borrowings		1,490
Accrued expenses and other liabilities		6,647
Total liabilities		252,881

Fair value of net assets acquired	$	24,680

The Corporation recorded goodwill and other intangibles associated with the purchase of First Franklin and Franklin Savings totaling $11.6 million. Goodwill is not amortized, but is periodically evaluated for impairment. The Corporation did not recognize any impairment during the quarter ended September 30, 2011. The carrying amount of the goodwill at September 30, 2011 was $10.3 million.

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the quarter ended September 30, 2011, no such adjustments were recorded. The identifiable intangible asset consists of a core deposit intangible which is being amortized on an accelerated basis over the useful life of such asset. The net carrying amount of the core deposit intangible at September 30, 2011 was $1.1 million with $180,000 in accumulated amortization as of that date.

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

11. Acquisition Activity (continued)

As of September 30, 2011, the current year and estimated future amortization expense for the core deposit intangible was:

2011	$	90
2012		282
2013		206
2014		149
2015		116
2016		110
2017		110
2018		55
Total	$	1,118

12. Financing Receivables

The recorded investment in loans was as follows as of September 30, 2011:

	One-to four
	Family			Multi-family
	Residential			Residential			Construction			Commercial			Consumer			Total

Purchased loans	$	125,123		$	15,411		$	-		$	43,667		$	2,918		$	187,119
Credit quality discount		(2,446	)		(208	)		-			(2,408	)		(1,584	)		(6,646	)
Purchased loans book value (3)		122,677			15,203			-			41,259			1,334			180,473
Originated loans (1)		182,991			11,178			5,849	(2)		21,106			262			221,386
Ending balance	$	305,668		$	26,381		$	5,849		$	62,365		$	1,596		$	401,859

(1)	Includes loans held for sale

(2)	Before consideration of undisbursed Loans-in-process

(3)	Loans purchased in acquisition of First Franklin

The carrying amount of purchased loans consisting of credit-impaired purchased loans and non-impaired purchased loans is shown in the following table as of September 30, 2011.

			Credit
	Non-impaired		Impaired
	Purchased Loans		Purchased Loans

One-to-four family residential	$	117,061	$	5,616
Multi-family residential		14,065		1,138
Construction		-		-
Commercial		32,562		8,697
Consumer		63		1,271
Total	$	163,751	$	16,722

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

12. Financing Receivables (continued)

The following summarizes activity in the allowance for credit losses:

	September 30, 2011
	One-to four Family Residential			Multi-family Residential		Construction			Commercial		Consumer			Total

Allowance for loan losses:

Beginning balance	$	979		$	49	$	33		$	180	$	1		$	1,242
Provision		271			100		-			29		-			400
Charge-offs		(212	)		-		(26	)		-		(2	)		(240	)
Recoveries		-			-		-			-		13			13

Ending balance	$	1,038		$	149	$	7		$	209	$	12		$	1,415

Ending balance:
Individually evaluated for impairment	$	373		$	-	$	-		$	8	$	-		$	381

Ending balance:
Collectively evaluated for impairment	$	665		$	149	$	7		$	201	$	12		$	1,034


Loans receivable:

Ending balance	$	305,668		$	26,381	$	5,849		$	62,365	$	1,596		$	401,859

Ending balance:
Individually evaluated for impairment (1)	$	121,909		$	14,162	$	-		$	32,909	$	63		$	169,043

Ending balance:
Collectively evaluated for impairment	$	178,143		$	11,081	$	5,849		$	20,759	$	262		$	216,094

Ending balance:
Loans acquired with deteriorated credit quality	$	5,616		$	1,138	$	-		$	8,697	$	1,271		$	16,722

(1) Includes loans acquired from First Franklin of $163,751

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

12. Financing receivables (continued)

	December 31, 2010
	One-to four Family Residential				Multi-family Residential			Construction			Commercial				Consumer			Total

Allowance for loan losses:

Beginning balance		$	892			$	30		$	28		$	75			$	-		$	1,025
Provision			364				19			5			161				1			550
Charge-offs			(277	)			-			-			(56	)			-			(333	)
Recoveries			-				-			-			-				-			-

Ending balance		$	979			$	49		$	33		$	180			$	1		$	1,242

Ending balance:
Individually evaluated for impairment		$	217			$	-		$	-		$	-			$	-		$	217

Ending balance:
Collectively evaluated for impairment		$	762			$	49		$	33		$	180			$	1		$	1,025

Ending balance:
Loans acquired with deteriorated credit quality		$	-			$	-		$	-		$	-			$	-		$	-

	December 31, 2010
	One-to four Family Residential				Multi-family Residential			Construction			Commercial				Consumer			Total
Loans receivable:

Ending balance		$	195,801			$	8,594		$	7,081		$	19,329			$	207		$	231,012

Ending balance:
Individually evaluated for impairment		$	4,989			$	-		$	-		$	222			$	-		$	5,211

Ending balance:
Collectively evaluated for impairment		$	190,812			$	8,594		$	7,081		$	19,107			$	207		$	225,801

Ending balance:
Loans acquired with deteriorated credit quality			-				-			-			-				-			-

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

12. Financing receivables (continued)

The Corporation assigns credit risk grades to evaluated loans using grading standards employed by regulatory agencies. Loans judged to carry lower-risk attributes assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry a higher-risk attributes are referred to as “classified loans” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” The Corporation’s Loan Classification of Assets committee assigns the credit risk grades to loans and reports to the board on a monthly basis the “classified asset” report.

The following table summarizes the credit risk profile by internally assigned grade:

	Originated Loans at September 30, 2011
	One-to four
	Family		Multi-family
	Residential		Residential		Construction		Commercial		Consumer		Total

Grade:
Pass	$	178,406	$	11,081	$	5,849	$	20,760	$	262	$	216,358
Special mention		-		-		-		-		-		-
Substandard		4,585		97		-		346		-		5,028
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Total	$	182,991	$	11,178	$	5,849	$	21,106	$	262	$	221,386

	Loans Receivable at December 31, 2010
	One-to four
	Family		Multi-family
	Residential		Residential		Construction		Commercial		Consumer		Total

Grade:
Pass	$	190,812	$	8,594	$	7,081	$	19,107	$	207	$	225,801
Special mention		-		-		-		-		-		-
Substandard		4,989		-		-		222		-		5,211
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Total	$	195,801	$	8,594	$	7,081	$	19,329	$	207	$	231,012

	Purchased Loans at September 30, 2011
	One-to four
	Family		Multi-family
	Residential		Residential		Construction		Commercial		Consumer		Total

Grade:
Pass	$	116,605	$	14,899	$	-	$	38,092	$	1,306	$	170,902
Special mention		131		-		-		988		-		1,119
Substandard		5,941		304		-		2,179		28		8,452
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Total	$	122,677	$	15,203	$	-	$	41,259	$	1,334	$	180,473

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

12. Financing receivables (continued)

The following table summarizes loans by delinquency, nonaccrual status and impaired loans:

	Age Analysis of Past Due Originated Loans Receivable
	As of September 30, 2011
													Recorded
													Investment
	30-89 Days		Over 90 days		Total Past		Current and				Total		90 Days and
	Past Due		Past Due		Due		Accruing		Nonaccrual		Loans		Accruing

Real Estate:
1-4 family Residential	$	649	$	4,584	$	5,233	$	178,407	$	4,584	$	182,991		-
Multi-family Residential		-		97		97		11,081		97		11,178		-
Construction		-		-		-		5,849		-		5,849		-
Commercial		-		347		347		20,759		347		21,106		-
Consumer		-		-		-		262		-		262		-
Total	$	649	$	5,028	$	5,677	$	216,358	$	5,028	$	221,386		-

	Age Analysis of Past Due Originated Loans Receivable
	As of December 31, 2010
													Recorded
													Investment
	30-89 Days		Over 90 days		Total Past		Current and				Total		90 Days and
	Past Due		Past Due		Due		accruing		Nonaccrual		Loans		Accruing

Real Estate:
1-4 family Residential	$	1,017	$	4,695	$	5,712	$	191,106	$	4,695	$	195,801		-
Multi-family Residential		-		-		-		8,594		-		8,594		-
Construction		-		-		-		7,081		-		7,081		-
Commercial		46		160		206		19,169		160		19,329		-
Consumer		-		-		-		207		-		207		-
Total	$	1,063	$	4,855	$	5,918	$	226,157	$	4,855	$	231,012		-

	Age Analysis of Past Due Purchased Loans Receivable
	As of September 30, 2011
													Recorded
													Investment
	30-89 Days		Over 90 days		Total Past		Current and				Total		90 Days and
	Past Due		Past Due		Due		Accruing		Nonaccrual		Loans		Accruing

Real Estate:
1-4 family Residential	$	1,744	$	6,352	$	8,096	$	116,325	$	6,352	$	122,677		-
Multi-family Residential		-		488		488		14,715		488		15,203		-
Construction		-		-		-		-		-		-		-
Commercial		11		746		757		40,513		746		41,259		-
Consumer		-		11		11		1,323		11		1,334		-
Total	$	1,755	$	7,597	$	9,352	$	172,876	$	7,597	$	180,473		-

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

12. Financing receivables (continued)

	Impaired Loans
	As of September 30, 2011

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Purchased loans with no related allowance recorded:
Real Estate:
1-4 family Residential	$	5,616	$	5,616	$	-	$	85	$	105
Multi-family
Residential		1,138		1,138		-		228		17
Construction		-		-		-		-		-
Commercial		8,697		8,697		-		457		11
Consumer		1,271		1,271		-		42		1
Total	$	16,722	$	16,722	$	-	$	139	$	134

	Impaired Loans
	As of September 30, 2011

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Originated loans with no related allowance recorded
Real Estate:
1-4 family Residential	$	4,264	$	4,264	$	-	$	112	$	66
Multi-family		97		97		-		97		4
Commercial		187		187		-		93		4
Consumer		-		-		-		-		-
Total	$	4,548	$	4,548	$	-	$	111	$	74
Originated loans with an allowance recorded:
Real Estate:
1-4 family Residential	$	211	$	584	$	373	$	26	$	-
Commercial		152		160		8		152		-
Consumer		-		-		-		-		-
Total	$	363	$	744	$	381	$	40	$	-
Total:
Real Estate:
1-4 family Residential	$	10,091	$	10,464	$	373	$	90	$	171
Multi-family
Residential		1,235		1,235		-		206		21
Construction		-		-		-		-		-
Commercial		9,036		9,044		8		411		15
Consumer		1,271		1,271		-		42		1
Total	$	21,633	$	22,014	$	381	$	127	$	208

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

12. Financing receivables (continued)

	Impaired Loans
	As of December 31, 2010

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

Originated loans
with no related
allowance recorded:
Real Estate:
1-4 family Residential	$	4,038	$	4,038	$	-	$	104	$	126
Multi-family
Residential		-		-		-		-		-
Construction		-		-		-		-		-
Commercial		222		222		-		111		2
Consumer		-		-		-		-		-
Total	$	4,260	$	4,260	$	-	$	215	$	128

	Impaired Loans
	As of December 31, 2010

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

Originated with
an allowance recorded:
Real Estate:
1-4 family Residential	$	734	$	951	$	217	$	56	$	9
Multi-family
Residential		-		-		-		-		-
Construction		-		-		-		-		-
Commercial		-		-		-		-		-
Consumer		-		-		-		-		-
Total	$	734	$	951	$	217	$	56	$	9
Total:
Real Estate:
1-4 family Residential	$	4,772	$	4,989	$	217	$	160	$	135
Multi-family
Residential		-		-		-		-		-
Construction		-		-		-		-		-
Commercial		222		222		-		111		2
Consumer		-		-		-		-		-
Total	$	4,994	$	5,211	$	217	$	203	$	137

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

12. Financing receivables (continued)

	Modifications
	As of September 30, 2011

			Pre-Modification		Post-Modification
					Outstanding
	Number of		Outstanding Recorded		Recorded
	Contracts		Investment		Investment
Troubled Debt Restructurings
Real Estate:
1-4 Family Residential		2	$	1,272	$	1,274
Multi-family Residential		-		-		-
Construction		-		-		-
Commercial		-		-		-
Consumer		-		-		-

	Number of		Recorded
	Contracts		Investment
Troubled Debt Restructurings
That Subsequently Defaulted

Real Estate:
1-4 Family Residential		2	$	1,274
Multi-family Residential		-		-
Construction		-		-
Commercial		-		-
Consumer		-		-

	Modifications
	As of December 31, 2010

			Pre-Modification		Post-Modification
					Outstanding
	Number of		Outstanding Recorded		Recorded
	Contracts		Investment		Investment
Troubled Debt Restructurings
Real Estate:
1-4 Family Residential		6	$	2,283	$	2,361
Multi-family Residential		-		-		-
Construction		-		-		-
Commercial		-		-		-
Consumer		-		-		-

Cheviot Financial Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

12. Financing receivables (continued)

	Number of		Recorded
	Contracts		Investment
Troubled Debt Restructurings
That Subsequently Defaulted

Real Estate:
1-4 Family Residential		3	$	1,955
Multi-family Residential		-		-
Construction		-		-
Commercial		-		-
Consumer		-		-

The modifications related to interest only payments ranging from a three to six month period. Due to the short term cash flow deficiency, no related allowance was recorded as a result of the restructurings.

The collateral value was updated with recent appraisals which gave no indication of impairment.

Cheviot Financial Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the three and nine months ended September 30, 2011 and 2010

ITEM 2.

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.

Recent Developments

Adoption of Plan of Conversion

On July 12, 2011 Cheviot Mutual Holding Company and the Corporation adopted a Plan of Conversion whereby the mutual holding company would convert from mutual to stock form. As part of the Plan of Conversion the pro forma value of the 62% of the Corporation owed by the Mutual Holding Company would be sold in a subscription and community offering and, if necessary, a syndicated community offering. The Plan of Conversion is subject to regulatory approval as well as the approval of the Mutual Holding Company’s members and the Corporation’s stockholders.

Acquisition of First Franklin Corporation

On March 16, 2011, Cheviot Financial, and its wholly owned subsidiary, Cheviot Savings Bank, completed the acquisition of First Franklin and its wholly-owned subsidiary, Franklin Savings. The acquisition was consummated in accordance with an Agreement and Plan of Merger (the “Merger Agreement”), dated as of October 12, 2010, by and among Cheviot Financial Corp., Cheviot Savings Bank, Cheviot Merger Subsidiary, Inc., First Franklin and Franklin Savings.

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. First Franklin’s loans were deemed impaired at the acquisition date if Cheviot Financial did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a nonaccretable difference. At the acquisition date, Cheviot Financial recorded $25.0 million of purchased credit-impaired loans subject to a fair value adjustment of $5.5 million. The method of measuring carrying value of purchased loans differs from loans originated by the Corporation (originated loans), and as such, the Corporation identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.

Cheviot Financial Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

Recent Developments (continued)

First Franklin’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, First Franklin’s loan portfolio without evidence of credit deterioration totaled $173.2 million and was recorded at a fair value of $171.6 million.

As a result of the acquisition, the Corporation now has a total of 12 branches located in Hamilton County. At acquisition, First Franklin had total assets of $265.8 million, deposits of $218.8 million and stockholders’ equity of $16.4 million. We recognize that components of our non-interest expense will increase as we integrate the personnel and operations of First Franklin. We believe however that these costs will more than be offset by the synergies which can be expected from a larger financial institution and the enhanced profitability potential we will have operating as an institution with approximately $600 million in assets.

Legislative Developments

Effective July 21, 2011 Cheviot Financial Corp. became subject to regulation and supervision by the Board of Governors of the Federal Reserve System and the Savings Bank became regulated by the FDIC, in each case, instead of the Office of Thrift Supervision. Compliance with new regulations and being supervised by one or more new regulatory agencies could increase our expenses.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the accounting method used for the allowance for loan losses and the estimation of fair value of assets to be critical accounting policies.

The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for losses on loans which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for Cheviot Financial.

Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlining collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

The analysis has two components, specific and general allocations. Specific percentage allocations can be made for unconfirmed losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan’s carrying value, a charge-off is recorded for the difference. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.

Cheviot Financial Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONTINUED)

Critical Accounting Policies (continued)

The acquired assets and assumed liabilities of First Franklin were measured at estimated fair values, as required by FASB under Business Combinations. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews (including borrower financial statements or tax returns), appraised collateral values, expected cash flows and historical loss factors of Franklin Savings. Real estate acquired through foreclosure was primarily valued based on appraised collateral values. The Corporation also recorded an identifiable intangible asset representing the core deposit base of Franklin Savings based on management’s evaluation of the cost of such deposits relative to alternative funding sources. Management used significant estimates including the average lives of depository accounts, future interest rate levels, the cost of servicing various depository products and other significant estimates. Management used market quotations to determine the fair value of investment securities and FHLB advances.

The acquired assets of First Franklin and Franklin Savings include loans receivable. Loans receivable acquired with a deteriorated credit quality amounted to $25.0 million with a related credit quality discount of $5.5 million. The method of measuring carrying value of purchased loans differs from loans originated by the Corporation, and as such, the Corporation identifies purchased loans and purchased loans with a credit quality discount.

We classify our investments in debt and equity securities as either held-to-maturity or available-for-sale. Securities classified as held-to maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. We obtain our estimated fair values from a third party service. This service’s fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, we expense the impairment of the investment in the period in which the event or change occurred. We also consider how long a security has been in a loss position in determining if it is other than temporarily impaired. Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk -free interest rates, general credit spread widening, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral.

Discussion of Financial Condition Changes at September 30, 2011 and at December 31, 2010

Total assets increased $242.4 million, or 67.7%, to $600.5 million at September 30, 2011, from $358.1 million at December 31, 2010. The increase in total assets is primarily the result of the First Franklin acquisition. As a result of the acquisition, Cheviot Financial Corp. recorded increases in cash and cash equivalents, mortgage-backed securities and loans receivable.

Cheviot Financial Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes at September 30, 2011 and at December 31, 2010 (continued)

Cash, federal funds sold and interest-earning deposits increased $27.1 million, or 149.1%, to $45.2 million at September 30, 2011, from $18.1 million at December 31, 2010. The increase in cash and cash equivalents at September 30, 2011 was due to a $15.0 million increase in federal funds sold, a $8.9 million increase in interest-earning deposits and a $3.1 million increase in cash and due from banks. We acquired $20.5 million in cash and cash equivalents in the First Franklin acquisition. Investment securities increased $2.4 million to $90.7 million at September 30, 2011. At September 30, 2011, all investment securities were classified as available for sale. As of September 30, 2011, none of our investment securities are considered impaired.

Mortgage-backed securities increased $3.3 million, or 36.4%, to $12.4 million at September 30, 2011, from $9.1 million at December 31, 2010. The increase in mortgage-backed securities was due primarily to $4.5 million of mortgage-backed securities designated as available for sale acquired from First Franklin. During the nine months ended September 30, 2011, there were principal prepayments and repayments totaling approximately $1.5 million. At September 30, 2011, $4.3 million of mortgage-backed securities were classified as held to maturity, while $8.0 million were classified as available for sale. As of September 30, 2011, none of the mortgage-backed securities are considered other than temporarily impaired.

Loans receivable, including loans held for sale, increased $172.0 million, or 76.3%, to $397.5 million at September 30, 2011, from $225.4 million at December 31, 2010. The increase in loans receivable is the result of acquiring approximately $198.7 million in net loans receivable in the First Franklin acquisition. In addition, the change in net loans receivable reflects loan sales of 15 or 30 year fixed rate mortgage loans totaling $37.2 million and loan principal repayments of $33.5 million, which were partially offset by loan originations of $48.4 million. The acquisition of First Franklin resulted in changes to the overall composition of the loan portfolio. The portfolio is currently comprised of approximately 48% in fixed rate mortgages and 52% in variable rate mortgages. In addition, as a result of the acquisition, the Company increased the amount of commercial loans to 15.8% of total loans compared to 8.4% of total loans at December 31, 2010.

The allowance for loan losses totaled $1.4 million and $1.2 million at September 30, 2011 and December 31, 2010, 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. During the nine months ended September 30, 2011 the Corporation recorded a $400,000 provision for loan losses reflecting these factors as well as replenishing the allowance for charge-offs. 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. Under applicable accounting guidelines, loans acquired in the acquisition were marked to fair value. Therefore, as of September 30, 2011, the Company has not provided loan losses for the loans acquired in the acquisition. 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, 2011.

Cheviot Financial Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes at September 30, 2011 and at December 31, 2010 (continued)

Non-performing and impaired loans totaled $4.9 million at both September 30, 2011 and December 31, 2010, respectively. At September 30, 2011, non-performing and impaired loans were comprised of 44 loans secured by one- to four-family residential real estate and two loans secured by nonresidential real estate. At September 30, 2011 and December 31, 2010, real estate acquired through foreclosure totaled $4.2 million and $2.0 million, respectively. The allowance for loan losses represented 29.1% and 25.6% of non-performing and impaired loans at September 30, 2011 and December 31, 2010, respectively. Although management believes that the Corporation’s allowance for loan losses conforms to 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 $222.5 million, or 86.3%, to $480.4 million at September 30, 2011, from $257.9 million at December 31, 2010. Deposits assumed at the time of the acquisition were approximately $218.8 million, net of a fair value adjustment of $2.7 million. Deposits acquired include savings deposits totaling approximately $77.7 million and time deposits of approximately $141.1 million with an overall average rate of 1.90%. Advances from the Federal Home Loan Bank of Cincinnati increased by $14.7 million, or 53.9%, to $42.0 million at September 30, 2011, from $27.3 million at December 31, 2010. The increase is a result of assuming $22.4 million in advances as a result of the acquisition of First Franklin. During the nine months ended September 30, 2011, the Corporation had proceeds from Federal Home Loan Bank advances of $11.0 million, which was partially offset by repayments of $19.3 million.

Shareholders’ equity increased $2.7 million, or 3.9%, to $72.1 million at September 30, 2011, from $69.4 million at December 31, 2010. The increase primarily resulted from net earnings of $2.4 million and amortization of stock benefit plans of $25,000, which were partially offset by dividends paid of $1.2 million. Dividends declared by the Corporation were waived by the Corporation’s mutual holding parent company. At September 30, 2011, Cheviot Financial had the ability to purchase an additional 360,818 shares under its announced stock repurchase plan. The repurchase plan has been suspended as a result of Cheviot Mutual Holding Company’s adoption of a Plan of Conversion providing for the conversion of our mutual holding company to stock form and the related stock offering.

Liquidity and Capital Resources

We monitor our liquidity position on a daily basis using reports that recap all deposit activity and loan commitments. A significant portion of our deposit base is made up of time deposits. At September 30, 2011, $130.0 million of time deposits are due to mature within twelve months. The daily deposit activity report allows us to price our time deposits competitively. Because of this and our deposit retention experience, we anticipate that a significant portion of maturing time deposits will be retained.

Borrowings from the Federal Home Loan Bank of Cincinnati increased $14.7 million during the nine months ended September 30, 2011. We have the ability to increase such borrowings by approximately $157.2 million. The additional borrowings can be used to offset any decrease in customer deposits or to fund loan commitments.

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, 2011 and 2010

General

Net earnings for the nine months ended September 30, 2011 totaled $2.4 million, a $660,000 increase from the $1.8 million of net earnings reported for the same period in 2010. The increase in net earnings reflects a growth in net interest income of $3.7 million, an increase in other income of $1.0 million, and a decrease in the provision for federal income taxes of $178,000, which were partially offset by an increase of $150,000 in the provision for losses on loans and an increase of $4.1 million in general, administrative and other expense.

Net Interest Income

Total interest income increased $4.4 million, or 37.6%, to $16.3 million for the nine-months ended September 30, 2011, from the comparable period in 2010. Generally, increases in interest income from loans, investment securities, interest earning assets, deposits and other interest earning assets reflect higher balances resulting from the First Franklin acquisition. Interest income on loans increased $4.0 million, or 39.4%, to $14.2 million during the 2011 period. This increase was due primarily to an increase of $116.6 million, or 48.1%, in average loans outstanding, which was partially offset by a decrease in the average yield on loans to 5.29% for the 2011 period from 5.62% for the 2010 period.

Interest income on mortgage-backed securities decreased $20,000, or 8.8%, to $208,000 for the nine months ended September 30, 2011, from $228,000 for the same period in 2010, due primarily to a 70 basis point decrease in the average yield, which was partially offset by a $1.9 million increase in the average balance of securities. Interest income on investment securities increased $339,000, or 26.4%, to $1.6 million for the nine months ended September 30, 2011, compared to $1.3 million for the same period in 2010, due primarily to an increase of $28.7 million, or 43.9%, increase in the average balance of investment securities outstanding, which was partially offset by a decrease in the average yield of 32 basis points to 2.31% in the 2011 period. Interest income on other interest-earning deposits increased $107,000, or 93.0% to $222,000 for the nine months ended September 30, 2011, as compared to the same period in 2010.

Interest expense increased $782,000, or 21.5% to $4.4 million for the nine months ended September 30, 2011, from $3.6 million for the same period in 2010. Interest expense on deposits increased by $874,000, or 33.2%, to $3.5 million for the nine months ended September 30, 2011, from $2.6 million for the same period in 2010 due primarily to a 38 basis point decrease in the average cost of deposits to 1.12% during the 2011 period, which was partially offset by a $182.8 million, or 78.2%, increase in the average balances outstanding. The decrease in the average cost of deposits is due to the overall changes in the deposit composition and lower market rates for the period. Interest expense on borrowings decreased by $92,000, or 9.2%, due primarily to a 84 basis point decrease in the average cost of borrowings, which was partially offset by an increase of $5.5 million, or 16.0% in the average balance outstanding.

As a result of the foregoing changes in interest income and interest expense, net interest income increased by $3.7 million, or 44.7%, to $11.9 million for the nine months ended September 30, 2011. The average interest rate spread increased to 3.27% for the nine months ended September 30, 2011 from 3.05% for the nine months ended September 30, 2010. The net interest margin decreased to 3.32% for the nine months ended September 30, 2011 from 3.37% for the nine months ended September 30, 2010.

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, 2011 and 2010 (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 collectability of the Savings Bank’s loan portfolio, management recorded a $400,000 provision for losses on loans for the nine months ended September 30, 2011, compared to a $250,000 provision for losses on loans for the nine months ended September 30, 2010. Non-performing loans were 2.3% and 1.5% of total originated loans at September 30, 2011 and September 30, 2010, respectively. The provision for loan losses for the nine months ended September 30, 2011 reflects the amount necessary to maintain an adequate allowance based on the Corporation’s historical loss experience, as well as consideration of other external factors. These other external factors, economic conditions, and collateral value changes, have had a negative impact on non-owner-occupied loans in the portfolio. There can be no assurance that the loan loss allowance will be sufficient to cover losses on non-performing loans in the future; however, management believes it has identified all known and inherent losses that are probable and that can be reasonably estimated within the loan portfolio, and that the allowance is adequate to absorb such losses.

Other Income

Other income increased $1.0 million, or 124.3%, to $1.9 million for the nine months ended September 30, 2011, compared to the same period in 2010, due primarily to an increase in other operating income of $762,000, an increase in the gain on sale of loans of $40,000, an increase of $98,000 in the gain on sale of real estate acquired through foreclosure and an increase of $104,000 in earnings on bank-owned life insurance. The increase in other operating income is a result of increased service fees on deposit accounts and an increase in service fees received from the Federal Home Loan Bank as a result of increased loan sales in the secondary market. During the nine months ended September 30, 2011, the Corporation sold 27 real estate owned properties resulting in proceeds of $2.5 million.

General, Administrative and Other Expense

General, administrative and other expense increased $4.1 million, or 66.6%, to $10.2 million for the nine months ended September 30, 2011, from $6.1 million for the comparable period in 2010. The increase is a result of $1.5 million in employee compensation and benefits, an increase of $243,000 in legal and professional expense, an increase of $267,000 in FDIC expense and a $1.1 million increase in other operating expense. The increase in employee compensation and benefits is a result of the additional employees and related costs resulting from the acquisition of First Franklin. The increase in legal and professional expenses is a result of merger related costs and expenses related to resolving real estate owned properties. The increase in FDIC expense is a result of an increase in deposit insurance following the First Franklin merger. The increase in other operating expense is a result of maintenance expense, real estate tax expense and the fair market value adjustments on real estate owned property.

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, 2011 and 2010 (continued)

FDIC Premiums

The Federal Deposit Insurance Corporation (“FDIC”) imposes an assessment against institutions for deposit insurance. This assessment is based on the risk category of the institution and currently ranges from 5 to 43 basis points of the institution’s deposits. Federal law requires that the designated reserve ratio for the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of estimated insured deposits. If this reserve ratio drops below 1.15% or the FDIC expects that it to do so within nine months, the FDIC must, within 90 days, establish and implement a plan to restore the designated reserve ratio to 1.15% of estimated insured deposits within five years (absent extraordinary circumstances). In addition, the increase in our level of deposits following the First Franklin acquisition resulted in higher assessments.

These actions increased our FDIC insurance premiums for the first nine months of 2011 to $481,000 from $214,000 for the same period in 2010.

Federal Income Taxes

The provision for federal income taxes decreased $178,000, or 19.5%, to $734,000 for the nine months ended September 30, 2011, from $912,000 for the same period in 2010. The effective tax rate was 23.2% and 34.1% for the nine month periods ended September 30, 2011 and 2010. During the nine months ended September 30, 2011 the Corporation was able to reverse approximately $709,000 in valuation allowance previously reserved for as a result of the acquisition of First Franklin. The amount of deferred federal income taxes recorded in the First Franklin acquisition approximated the amount includable in regulatory capital. Cheviot Financial has approximately $6.4 million in remaining operating loss carryforwards to offset future taxable income for 20 years. These losses are subject to the annual allowable Internal Revenue Code Section 382 net operating loss limitations of $1.1 million.

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2011 and 2010

General

Net earnings for the three months ended September 30, 2011 totaled $969,000, a $286,000 increase from the $683,000 earnings reported in the September 2010 period. The increase in net earnings reflects an increase in net interest income of $1.8 million, an increase of $229,000 in other operating income, which was partially offset by an increase of $1.6 million in general, administrative and other expenses, an increase of $154,000 in federal income taxes for the 2011 quarter end and an increase in the provision for losses on loans of $50,000. The results for the entire three month period ended September 30, 2011 include operations acquired in the First Franklin acquisition.

Net Interest Income

Total interest income increased $2.3 million, or 59.6%, to $6.1 million for the three-months ended September 30, 2011, from the comparable quarter in 2010. Interest income on loans increased $2.1 million, or 63.1%, to $5.4 million during the 2011 quarter from $3.3 million for the 2010 quarter. This increase was due primarily to a $165.9 million, or 69.5%, increase in the average balance of loans outstanding, which was partially offset by a 21 basis point decrease in the average yield on loans to 5.32% for the 2011 quarter from 5.53% for the three months ended September 30, 2010.

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, 2011 and 2010 (continued)

Net Interest Income (continued)

Interest income on mortgage-backed securities increased $4,000, or 6.1%, to $70,000 for the three months ended September 30, 2011, from $66,000 for the comparable 2010 quarter, due primarily to a $3.1 million, or 32.5% increase in the average balance of securities outstanding, which was partially offset by a 55 basis point decrease in the average yield. Interest income on investment securities increased $155,000, or 35.6%, to $591,000 for the three months ended September 30, 2011, compared to $436,000 for the same quarter in 2010, due primarily to an increase of $26.8 million, or 40.2% in the average balance of investment securities outstanding, which was partially offset by a 8 basis point decrease in the average yield to 2.53% in the 2011 quarter. Interest income on other interest-earning deposits increased $47,000, or 123.7% to $85,000 for the three months ended September 30, 2011.

Interest expense increased $453,000, or 40.1% to $1.6 million for the three months ended September 30, 2011, from $1.1 million for the same quarter in 2010. Interest expense on deposits increased by $442,000, or 52.4%, to $1.3 million, from $844,000, due primarily to a $236.7 million, or 99.7% increase in the average balance of deposits outstanding, which was partially offset by a 33 basis point decrease in the average costs of deposits to 1.09%. The decrease in the average cost of deposits is due to the overall changes in the deposit composition and lower market rates for the period. Interest expense on borrowings increased by $11,000, or 3.8%, due primarily to a $13.4 million increase in the average balance outstanding, which was partially offset by a 112 basis point decrease in the average cost of borrowings.

As a result of the foregoing changes in interest income and interest expense, net interest income increased by $1.8 million, or 67.7%, to $4.5 million for the three months ended September 30, 2011, as compared to the same quarter in 2010. The average interest rate spread increased to 3.45% for the three months ended September 30, 2011 from 3.02% for the three months ended September 30, 2010. The net interest margin increased to 3.47% for the three months ended September 30, 2011 from 3.33% for the three months ended September 30, 2010.

Provision for Losses on Loans

Management recorded a $200,000 provision for losses on loans for the three months ended September 30, 2011, compared to a $150,000 provision for losses on loans for the three months ended September 30, 2010. The provision for loan losses during the three months ended September 30, 2011 reflects the amount necessary to maintain an adequate allowance based on the historical loss experience and other external factors. There can be no assurance that the loan loss allowance will be sufficient to cover losses on non-performing loans in the future, however management believes they have identified all known and inherent losses that are probable and that can be reasonably estimated within the loan portfolio, and that the allowance for loan losses is adequate to absorb such losses.

Other Income

Other income increased $229,000, or 48.4%, to $702,000 for the three months ended September 30, 2011, compared to the same quarter in 2010, due primarily to an increase in other operating income of $312,000 and an increase in earnings on bank-owned life insurance of $49,000, which was partially offset by a decrease in the gain on the sale of loans of $102,000, an increase of $46,000 in the loss on sale of real estate acquired through foreclosure. The increase in other operating income is a result of increased service fees on deposit accounts and an increase in service fees received from the Federal Home Loan Bank as a result of increased loan sales in the secondary market.

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, 2011 and 2010 (continued)

General, Administrative and Other Expense

General, administrative and other expense increased $1.6 million, or 76.4%, to $3.6 million for of the three months ended September 30, 2011. This increase is a result of an increase in employee compensation and benefits of $618,000, an increase of $110,000 in FDIC expense and an increase of $481,000 in other operating expenses. The increase in employee compensation and benefits is a result of the additional employees and related costs resulting from the acquisition of First Franklin. The increase in FDIC expense is a result of an increase in deposit insurance due to the First Franklin merger. The increase in other operating expense is a result of maintenance expense, real estate tax expense and the fair market value adjustments on real estate owned property.

Federal Income Taxes

The provision for federal income taxes increased $154,000, or 53.1%, to $444,000 for the three months ended September 30, 2011, from $290,000 for the same quarter in 2010. The effective tax rate was 31.4% and 29.8% for the three month periods ended September 30, 2011 and 2010, respectively. The amount of deferred federal income taxes recorded in the acquisition approximated the amount of deferred taxes recorded in regulatory capital. Cheviot Financial has approximately $6.4 million in remaining operating loss carryforwards to offset future taxable income for 20 years. These losses are subject to the Internal Revenue Code Section 382 net operating loss limitations of $1.1 million allowed on an annual basis.

Cheviot Financial Corp.

MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION

AND RESULTS OF OPERATIONS (CONTINUED)

For the three and nine months ended September 30, 2011 and 2010

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, 2010.

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 changes in the Corporation’s internal controls 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.

Cheviot Financial Corp.

PART II

ITEM 1.

Legal Proceedings

None.

ITEM 1A.

Risk Factors

Not applicable.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The Corporation announced a repurchase plan on January 16, 2008 which provides for the repurchase of 5% or 447,584 shares of our common stock. As of September 30, 2011, the Corporation had purchased 86,766 shares pursuant to the program.

					Total # of
					shares purchased
	Total		Average		as part of publicly
	# of shares		price paid		announced plans
Period	purchased		per share		or programs

July 1-31, 2011		-	$	-		86,766
August 1-31, 2011		-	$	-		86,766
September 1-30, 2011		-	$	-		86,766

ITEM 3.

Defaults Upon Senior Securities

Not applicable.

ITEM 4.

Removed and reserved

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.

Cheviot Financial Corp.

PART II (continued)

ITEM 6.

Exhibits (continued)

101

The following financial statements from Cheviot Financial Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 14, 2011, formatted in XBRL: (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

101.INS

Interactive datafile

XBRL Instance Document

101.SCH

Interactive datafile

XBRL Taxonomy Extension Schema Document

101.CAL

Interactive datafile

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Interactive datafile

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Interactive datafile

XBRL Taxonomy Extension Label Linkbase

101.PRE

Interactive datafile

XBRL Taxonomy Extension Presentation Linkbase Document

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 14, 2011	By:	/s/Thomas J. Linneman
		Thomas J. Linneman
		President and Chief Executive Officer

Date: November 14, 2011	By:	/s/Scott T. Smith
		Scott T. Smith
		Chief Financial Officer

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