UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2015

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. 001-35399

	Cheviot Financial Corp.
(Exact name of registrant as specified in its charter)

Maryland

90-0789920

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

	3723 Glenmore Avenue, Cheviot, Ohio				45211
(Address of Principal Executive Offices)				Zip Code

	(513) 661-0457
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock, par value $.01 per share

The Nasdaq Stock Market, LLC

(Title of Class)

(Name of Each Exchange

on which Registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES ¨ NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES ¨ NO x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, 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 such shorter period that the Registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 ¨

Accelerated filer x

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x

The aggregate value of the voting and non-voting common stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock as of June 30, 2015 was $89.3 million.

As of March 11, 2016, there were issued and outstanding 6,802,944 shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

TABLE OF CONTENTS

ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	36
ITEM 1B.	UNRESOLVED STAFF COMMENTS	45
ITEM 2.	PROPERTIES	46
ITEM 3.	LEGAL PROCEEDINGS	47
ITEM 4.	MINE SAFETY DISCLOSURES	47
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	48
ITEM 6.	SELECTED FINANCIAL DATA	50
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	52
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	66
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	66
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	120
ITEM 9A.	CONTROLS AND PROCEDURES	120
ITEM 9B.	OTHER INFORMATION	121
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	122
ITEM 11.	EXECUTIVE COMPENSATION	124
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	139
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	140
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	141
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	143

PART I

ITEM 1.

BUSINESS

Forward Looking Statements

This Annual Report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

statements of our goals, intentions and expectations;

statements regarding our business plans and prospects and growth and operating strategies;

statements regarding the asset quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:

significantly increased competition among depository and other financial institutions;

our ability to complete our proposed Merger with MainSource Financial Group, Inc.;

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

our ability to access cost-effective funding;

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

fluctuations in real estate values and both residential and commercial real estate market conditions;

demand for loans and deposits in our market area;

general economic conditions, either nationally or in our market areas, which are worse than expected;

adverse changes in the securities markets and changes in the financial condition, results of operations or future prospects of issuers of securities that we own;

legislative or regulatory changes that adversely affect our business;

our ability to enter new markets successfully and capitalize on growth opportunities;

technological changes that may be more difficult or expensive than expected;

the inability of third party providers to perform as expected;

our ability to manage market risk, credit risk and operational risk in the current economic environment;

changes in consumer spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; and

changes in our organization, compensation and benefit plans.

Because of these and other uncertainties, our actual future results may be materially different from the results anticipated by these forward-looking statements. In addition, see Item 1A. Risk Factors.

General

Cheviot Financial Corp.

On January 18, 2012, Cheviot Financial Corp., a Maryland corporation (the “Company”), completed its second-step conversion and related public stock offering. Cheviot Savings Bank is 100% owned by the Company and the Company is 100% owned by public stockholders. The Company sold a total of 4,675,000 shares of common stock in a subscription, community and syndicated community offerings, including 187,000 shares to the Company’s employee stock ownership plan. All shares were sold at a purchase price of $8.00 per share.

Concurrent with the completion of the offering, shares of common stock of Cheviot Financial Corp., a federal corporation, owned by public stockholders were converted into the right to receive 0.8570 shares of the Company’s common stock. Cash in lieu of fractional shares was paid at a rate of $8.00 per share. As a result of the offering and the exchange, the Company had 7,596,557 shares outstanding.

The Company is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System. Cheviot Financial Corp.’s executive offices are located at 3723 Glenmore Avenue, Cheviot, Ohio 45211, and its telephone number at this address is (513) 661-0457. At December 31, 2015, we had consolidated assets of $572.0 million, deposits of $454.9 million and shareholders’ equity of $96.5 million. References to Cheviot Financial Corp. or the Company refer to the predecessor corporation where appropriate.

Cheviot Savings Bank

Cheviot Savings Bank (the “Bank”) was established in 1911 as an Ohio-chartered savings and loan association. Our business activity is the origination of one- to four-family real estate loans, construction, multi-family, commercial real estate and consumer loans. We also invest in securities, primarily United States Government Agency securities and mortgage-backed securities. At December 31, 2015, the Bank’s Tier 1 leverage, Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital and Total Risk-Based Capital ratios were 13.9%, 21.6%, 21.6% and 22.5%, respectively, which levels were well in excess of regulatory requirements.

Available Information

The Company’s website (www.cheviotsavings.com) contains a direct link to the Company’s filings with the Securities and Exchange Commission, including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these filings, if any. Information on our website shall not be considered a part of this report. Copies may also be obtained, without charge, by written request to Kimberly A. Siener, Investor Relations, Cheviot Financial Corp., 3723 Glenmore Avenue, Cheviot, Ohio 45211.

Merger

On November 23, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MainSource Financial Group, Inc., an Indiana corporation (“MainSource”), pursuant to which the Company will merge with and into MainSource, whereupon the separate corporate existence of the Company will cease and MainSource will survive (the “Merger”). It is anticipated that immediately after the Merger, the Bank will merge with and into MainSource Bank, an Indiana chartered commercial bank and wholly-owned subsidiary of MainSource, with MainSource Bank as the surviving bank.

Subject to the approval of the Company’s shareholders of the Merger, regulatory approvals and other customary closing conditions, the parties anticipate completing the Merger in the second quarter of 2016. At the effective time of the Merger, the Company’s shareholders will have the right to elect to receive either 0.6916 shares of MainSource common stock or $15.00 in cash for each share of Company common stock owned, subject to proration provisions specified in the Merger Agreement that provide for a targeted aggregate split of total consideration of 50% common stock and 50% cash.

Market Area

We conduct our operations from our executive office in Cheviot, Ohio and 11 full-service branches, all of which are located in Hamilton County, Ohio. Cheviot, Ohio is located in Hamilton County and is 10 miles west of downtown Cincinnati. We operate throughout Cincinnati and its surrounding areas. Hamilton County, Ohio represents our primary geographic market area for loans and deposits with our remaining business operations conducted in the larger Cincinnati metropolitan area, which includes Warren, Butler and Clermont Counties. We also conduct a moderate level of business in the southeastern Indiana region, primarily in Dearborn, Ripley, Franklin and Ohio Counties. We also originate loans in the northern Kentucky region secured by properties in Campbell, Kenton and Boone Counties. The local economy is diversified with services, wholesale/retail trade, and finance, insurance, and real estate employment remaining the most prominent employment sectors in Hamilton County. Furthermore, major industries within the Cincinnati metropolitan area include advanced energy, advanced manufacturing, biohealth, consumer products and brand development, food processing and agriculture, and finance, insurance, and information technology. Hamilton County is primarily a developed and urban county. The employment base is diversified and there is no dependence on one area of the economy for continued employment. Major employers in the market include Kroger Co., University of Cincinnati, Cincinnati Children’s Hospital Medical Center, Proctor & Gamble Co, GE Aviation, and city and county governments. Our future growth opportunities will be influenced by the growth and stability of the regional, state and national economies, other demographic trends and the competitive environment.

According to SNL Financial, the southeastern Indiana region counties have experienced a declining population from 2010 to 2015 while the other counties and the City of Cincinnati in which we conduct business had population growth. The limited increase in population in the City of Cincinnati results from the counties in southwest Ohio and northern Kentucky being more successful in attracting new and existing businesses to locate within their areas through economic incentives, including less expensive real estate options for office facilities. Individuals are moving to these other areas to be closer to their place of employment, for newer, less expensive housing and more suburban neighborhoods.

From 2010 to 2015, the population increases in the remainder of our market area ranged from a low of 0.52% in Hamilton County, Ohio to a high of 6.54% in Boone County, Kentucky. Ohio’s population increased by 0.44% during this period and the United States’ population as a whole increased by 3.47%. Over the next six years, population in Hamilton County is projected to continue to increase, reflecting similar state and nationwide trends.

Per capita income for Hamilton County as of 2015 ($29,412) was above comparable measures for both the United States and Ohio ($28,840 and $27,018, respectively), and median household income for Hamilton County as of 2015 ($47,544) was slightly lower than the measure for Ohio ($48,687), although the state and county medians both fell slightly below the comparable measure for the United States ($53,706). Overall, we believe the aforementioned information indicates the relatively stable and diversified economy in the regional market served by Cheviot Savings Bank. Property values and building development are climbing back to levels seen before the recession in much of Ohio, and in particular, within our market area, as the overall economy has improved.

We believe that we have developed products and services that meet the financial needs of our current and future customer base; however, we plan, and believe it is necessary, to expand the range of products and services that we offer to be more competitive in our market area. Marketing strategies focus on the strength of our knowledge of local consumer and small business markets, as well as expanding relationships with current customers and reaching out to develop new, profitable business relationships.

Competition

We face significant competition within our market both in making loans and attracting deposits. Our market area has a high concentration of financial institutions including large money centers and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms, consumer finance companies and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our position as a community bank. As of June 30, 2015, the Bank ranked twelfth in Hamilton county with a deposit market share of 0.60%.

Lending Activities

General. Historically, our principal lending activity has been the origination, for retention in our portfolio, of fixed-rate and adjustable-rate mortgage loans collateralized by one- to four-family residential real estate located within our primary market area. We sell a portion of our fixed-rate loans into the secondary market. We also originate commercial real estate loans, including multi-family residential real estate loans, construction loans, business lines of credit and consumer loans. Our net loan portfolio increased to $376.2 million at December 31, 2015 from $337.1 million at December 31, 2014.

Loan Portfolio Composition. Set forth below is selected information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated.

	At December 31,
	2015						2014						2013
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family residential (1)	$	219,113			55.76	%	$	231,626			67.58	%	$	236,236			69.23	%
Multi-family residential		32,634			8.31			20,501			5.98			22,805			6.68
Construction		23,781			6.05			8,327			2.43			7,141			2.09
Commercial (2)		74,397			18.93			44,996			13.13			47,450			13.91
Other real estate		4,235			1.08			4,569			1.33			4,726			1.39
Commercial business		35,882			9.13			31,792			9.28			20,579			6.03
Consumer (3)		2,894			0.74			921			0.27			2,278			0.67

Total loans		392,936			100.00	%		342,732			100.00	%		341,215			100.00	%

Less:
Undisbursed portion of loans in process		14,229						4,300						3,157
Deferred loan origination fees		(1,001	)					(899	)					(476	)
Allowance for loan losses		3,537						2,236						1,697

Total loans, net	$	376,171					$	337,095					$	336,837

	At December 31,
	2012						2011
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family residential (1)	$	249,202			72.62	%	$	290,808			75.14	%
Multi-family residential		23,866			6.96			26,210			6.77
Construction		1,243			0.36			4,390			1.13
Commercial (2)		42,148			12.28			42,491			10.98
Other real estate		5,134			1.50			5,311			1.37
Commercial business		19,884			5.79			15,592			4.03
Consumer (3)		1,691			0.49			2,210			0.58

Total loans		343,168			100.00	%		387,012			100.00	%

Less:
Undisbursed portion of loans in process		933						1,478
Deferred loan origination fees		(339	)					(209	)
Allowance for loan losses		2,160						1,447

Total loans, net	$	340,414					$	384,296

(1)

Includes home equity lines of credit, loans purchased and loans held for sale.

(2)

Includes land loans.

(3)

For all dates, includes loans secured by deposit accounts.

Loan Maturity Schedule. The following table sets forth certain information as of December 31, 2015, regarding the amount of loans maturing in our portfolio. Demand loans and loans with no stated maturity are reported as due within one year.

	At December 31, 2015
	Within One Year		One Through Three Years		Over Three Through Five Years		Over Five Through Ten Years		Over Ten Through Twenty Years		Beyond Twenty Years		Total
	(In thousands)
Real estate loans:
One- to four-family residential	$	8,423	$	17,873	$	19,339	$	55,566	$	102,141	$	15,771	$	219,113
Multi-family residential		2,567		5,509		6,048		17,841		669		—		32,634
Construction		1,726		3,705		4,067		11,997		2,286		—		23,781
Commercial		11,772		25,216		27,626		9,783		—		—		74,397
Other real estate		323		710		802		2,400		—		—		4,235
Commercial business		3,175		6,812		7,480		18,415		—		—		35,882
Consumer		265		575		642		1,412		—		—		2,894
Total loans	$	28,251	$	60,400	$	66,004	$	117,414	$	105,096	$	15,771	$	392,936

Fixed and Adjustable-Rate Loan Schedule. The following table sets forth at December 31, 2015, the dollar amount of all fixed-rate and adjustable-rate loans and home equity lines of credit due after December 31, 2016.

	At December 31, 2015 and Due After December 31, 2016
	Fixed		Floating or Adjustable		Total
	(In thousands)
Real estate loans:
One- to four-family residential	$	117,986	$	92,704	$	210,690
Multi-family residential		16,838		13,229		30,067
Construction		12,351		9,704		22,055
Commercial		35,070		27,555		62,625
Other real estate		2,191		1,721		3,912
Commercial business		18,316		14,391		32,707
Consumer		1,472		1,157		2,629
Total loans	$	204,224	$	160,461	$	364,685

Residential Mortgage Loans. Cheviot Savings Bank originates mortgage loans secured by one- to four-family properties, most of which serve as the primary residence of the owner. As of December 31, 2015, one- to four-family residential mortgage loans totaled $219.1 million, or 55.8% of our total loan portfolio. At December 31, 2015, our one- to four-family residential loan portfolio consisted of 44% adjustable-rate loans and 56% of fixed-rate loans. Most of our loan originations result from relationships with existing or past customers, members of our local community and referrals from realtors, attorneys and builders.

Our residential mortgage loans generally have terms from 10 to 30 years and amortize on a monthly basis with principal and interest due each month. As of December 31, 2015, we offered the following residential mortgage loan products:

Fixed-rate loans of various terms;

Adjustable-rate loans;

Home equity lines of credit;

Loans tailored for first time home buyers;

Construction/permanent loans;

Short-term (bridge) loans; and

No cost loans.

Residential real estate loans may remain outstanding for significantly shorter periods than their contractual terms as borrowers refinance or prepay loans at their option without penalty. Our residential mortgage loans customarily contain “due on sale” clauses which permit us to accelerate the indebtedness of the loan upon transfer of ownership in the mortgage property.

We currently sell a portion of our conforming fixed-rate loans in the secondary market and hold the remaining fixed-rate loans and adjustable-rate loans in our portfolio. During the years ended December 31, 2015 and 2014, we sold $47.6 million and $24.4 million, respectively, in loans, the majority of which was sold servicing retained. As interest rates that are used to price mortgages rose during the latter half of 2014, the demand for loans decreased significantly. As a result, our loans originated for sale as well as held in portfolio decreased. In order to address these changes in our market place, we reduced the number of employees committed to our mortgage operation business. We lend up to a maximum loan-to-value ratio of 97% on mortgage loans secured by owner-occupied properties, with the condition that private mortgage insurance is required on first mortgage loans with a loan-to-value ratio in excess of 85%. The first time home buyer program allows up to 97% financing and requires private mortgage insurance. During the years ended December 31, 2015 and 2014, we originated $3.6 million and $3.0 million, respectively, in loans under this program. We have an additional loan program in which we lend up to a maximum loan-to-value ratio of 95% on loans secured by owner-occupied properties with no private mortgage insurance. As of December 31, 2015, these loans were performing in accordance with the original terms. To a lesser extent, we originate non-conforming loans that are tailored to the needs of the local community.

Our adjustable-rate mortgage loans are originated with a maximum term of 30 years. Adjustable-rate loans include loans that provide for an interest rate based on the interest paid on U.S. Treasury Securities of corresponding terms, plus a margin. Our adjustable-rate mortgages include limits on the increase or decrease in the interest rate. The interest rate may increase or decrease by a maximum of 2.0% per adjustment with a ceiling rate over the life of the loan, which generally is 5.0%. For all adjustable-rate loans, except for 7/1 adjustable rate mortgage loans, borrowers are qualified at the initial rate and at 2.0% over the initial rate. We do not originate subprime, Alt-A or option ARM residential mortgage loans.

The retention of adjustable-rate loans in our portfolio helps reduce exposure to changes in interest rates. However, there are credit risks resulting from potential increased costs to the borrower as a result of rising interest rates. During periods of rising interest rates, the risk of default on adjustable-rate mortgages may increase due to the upward adjustment of interest cost to the borrower. During periods of declining interest rates, our interest income from adjustable rate loans may be significantly decreased.

During the year ended December 31, 2015, we had new loan originations, including gross lines of credit and construction loans of $195.5 million, $90.1 million of which were adjustable-rate loans and $105.4 million were fixed-rate loans.

Included in residential mortgage loans at December 31, 2015 were $20.1 million of home equity lines of credit and $3.2 million of home equity loans. Home equity lines of credit are generally made for owner-occupied homes and are secured by first or second mortgages on residential properties. We are attempting to increase our originations of home equity lines of credit. We generally offer home equity lines of credit with a maximum loan to appraised value ratio of 90% including senior liens on the subject property and with a maximum loan to appraised value of ratio 85% when the senior lien is held elsewhere. We currently offer these loans for terms of up to 20 years, and with adjustable rates that are tied to the prime rate.

Commercial and Other Real Estate Loans. We originate commercial real estate loans to finance the purchase of real property, which generally consists of land and/or developed real estate. In underwriting commercial real estate loans, consideration is given to the property’s historic and projected cash flow, current and projected occupancy, location, physical condition and credit worthiness of the borrower. At December 31, 2015, our commercial real estate portfolio totaled $78.6 million, or 20.0%, of total loans. A majority of our commercial real estate loans are secured by properties in Hamilton County. Our commercial real estate portfolio is diverse as to borrower and property type.

Commercial real estate lending involves additional risks compared to one- to four-family residential lending because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan. Repayment of such loans may be subject, to a greater extent than residential loans, to adverse conditions in the real estate market or the economy. Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. Our policies limit the amount of loans to a single borrower or group of related borrowers to reduce this risk.

Commercial real estate loans generally have a higher rate of interest and shorter term than residential mortgage loans because of increased risks associated with commercial real estate lending. We offer commercial real estate loans at adjustable rates and fixed rates with a term generally not exceeding 25 years.

Multi-Family Loans. At December 31, 2015, $32.6 million, or 8.3%, of our total loan portfolio consisted of loans secured by multi-family real estate. We originate fixed-rate and adjustable rate multi-family real estate loans with amortization schedules of up to 25 years. We generally lend up to 80% of the property’s appraised value. Appraised values are determined by an outside independent appraiser that we designate. In deciding to originate a multi-family loan, we review the creditworthiness of the borrower, the expected cash flows from the property securing the loan, the cash flow requirements of the borrower, the value of the property and the quality of the management involved with the property. We generally obtain the personal guarantee of the principals when originating multi-family real estate loans.

Multi-family real estate lending is generally considered to involve a higher degree of credit risk than one- to four-family residential lending. Such lending may involve large loan balances concentrated on a single borrower or group of related borrowers. In addition, the payment experience on loans secured by income producing properties typically depends on the successful operation of the related real estate project. Consequently, the repayment of the loan may be subject to adverse conditions in the real estate market or the economy generally.

Construction Loans. Cheviot Savings Bank originates construction loans for owner-occupied residential real estate, and, to a lesser extent, for commercial builders of residential real estate, improvement to existing structures, new construction for commercial purposes and residential land development.

At December 31, 2015, gross construction loans represented $23.8 million, or 6.1%, of Cheviot Savings Bank’s total loans. At December 31, 2015, the unadvanced portion of these construction loans totaled $14.2 million.

Construction loans we originate generally provide for the payment of interest only during the construction phase (12 months for single family residential and varying terms for commercial property and land development). At the end of the construction phase, the loan converts to a permanent mortgage loan. Before making a commitment to fund a construction loan, Cheviot Savings Bank requires detailed cost estimates to complete the project and an appraisal of the property by an independent licensed appraiser. Cheviot Savings Bank also reviews and inspects each property before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method.

Construction lending generally involves a greater degree of risk than other one- to four-family mortgage lending. The repayment of the construction loan is, to a great degree, dependent upon the successful and timely completion of construction. Various potential factors including construction delays or the financial viability of the builder may further impair the borrower’s ability to repay the loan.

Consumer Loans. During 2010, we began offering automobile loans to our customers. In addition, on a limited basis, we make loans secured by deposit accounts up to 90% of the amount of the depositor’s collected deposit account balance. At December 31, 2015, consumer loans totaled $2.9 million, or 0.7%, of total loans.

Commercial Business Loans. We originate commercial business lines of credit and loans, which are secured by non-real estate business assets such as equipment, receivables and inventories. We focus on the origination of commercial business loans in amounts between $50,000 and $750,000. At December 31, 2015, commercial business loans totaled $35.9 million, or 9.1%, or total loans.

Commercial business lending generally involves additional risks compared to one- to four-family residential lending because repayment generally depends on the successful operation of the borrowers’ business. Repayment of such loans may be subject, to a greater extent than residential loans, to adverse conditions in the real estate market or the economy. Commercial and industrial loans have greater credit risk than one- to four-family residential real estate loans. Our policies limit the amount of loans to a single borrower or group of related borrowers to reduce this risk.

Loan Originations, Purchases, Sales and Servicing. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of real estate loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our real estate loan originations can vary from period to period.

Loan Approval Procedures and Authority. The lending activities of Cheviot Savings Bank are subject to the written underwriting standards and loan origination procedures established by the board of directors and management. Loan originations are obtained through a variety of sources, primarily consisting of existing customers and referrals from real estate brokers. Written loan applications are taken by one of Cheviot Savings Bank’s loan officers. Cheviot Savings Bank obtains property appraisals from independent appraisers on substantially all of its loans.

Our loan approval process is intended to provide direction to management on all phases of real estate lending activity since such real estate mortgage lending is the single most important revenue producing investment of Cheviot Savings Bank. Therefore, we believe that the underwriting of mortgage loans should be consistent with safe and sound practices to ensure the financial viability of Cheviot Savings Bank. The loan underwriting policy is also established to provide appropriate limits and standards for all extensions of credit in real estate or for the purpose of financing the construction of a building or other improvement. Individual officer loan approval authorities are up to $1.0 million in the aggregate for one- to four-family residential real estate loans and $250,000 in the aggregate for secured consumer loans. Generally, all multi-family residential and commercial real estate loans and commercial business loans up to $2.0 million require approval by at least two members of our commercial loan committee (our three senior lending officers, including our President and Chief Executive Officer) or at least two members of our executive committee (our President and Chief Executive Officer and two outside directors). Other types of loans that exceed individual approval authorities can be approved in amounts up to $2.0 million in the aggregate by at least two members of our executive committee. The loan committee reviews all loan applications submitted to Cheviot Savings Bank and lists such applications on a review sheet that is submitted to the board of directors. All loans approved by the loan committee or the executive committee are reviewed by the full board of directors, and the board of directors must approve all other loans other than those specifically set forth above.

Loans to One Borrower. State savings and loan institutions are subject to the same loans to one borrower limits as those applicable to national banks, which under current regulations restrict loans to one borrower to an amount equal to 15% of unimpaired equity on an unsecured basis, and an additional amount equal to 10% of unimpaired equity if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate). Our loans to one borrower limit under this regulation at December 31, 2015 was $13.3 million. Our policy generally provides that loans to one borrower (or related borrowers) should not exceed $8.0 million (excluding the borrower’s principal residence). However, the board of directors may approve loans in greater amounts and may amend this limitation annually based on the asset growth and capital position of Cheviot Savings Bank.

At December 31, 2015, the largest aggregate credit exposure to one borrower consisted of one loan totaling $5.7 million. This loan is secured by multi-family real estate and was performing in accordance with contractual terms. There were 50 additional credit relationships, including committed amounts, in excess of $1.0 million at December 31, 2015. At December 31, 2015, all loans extended under these credit relationships were performing, except one loan totaling $1.5 million.

Asset Quality

General. One of our key operating objectives has been, and continues to be, to maintain a high asset quality. Our high proportion of one- to four-family mortgage loans, our maintenance of sound credit standards for new loan originations and our loan administration procedures have resulted in our historical ratios of non-performing loans to total loans being lower than those of our peers. Our originated impaired and non-performing loans totaled $2.4 million, or 0.8% of net originated loans at December 31, 2015, and $2.3 million, or 0.9% of net originated loans at December 31, 2014. We have addressed the consequences of the national and local economy by adhering to our conservative underwriting standards and limiting our exposure on one- to four-family residential investment properties.

Collection Procedures. When a borrower fails to make required payments on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status. Cheviot Savings Bank has implemented certain loan tracking policies and collection procedures to ensure effective management of classified assets. Cheviot Savings Bank generally sends a written notice of non-payment to its borrower after a loan is first past due. If payment has not been received within a reasonable time period, personal contact efforts are attempted by telephone or by letter. If no payment is received the following month, a letter stating that the borrower is two months behind is mailed indicating that the borrower needs to contact our collections department, and make payment arrangements. If the borrower has missed two consecutive payments, a demand letter will be sent by certified mail. On all accounts that are not current ten days after the completion of the last step set forth above our collection manager or staff member contacts the borrower by phone at their home and if necessary, at their place of employment in order to establish communications with the borrower concerning the delinquency and to try to establish a meeting with the borrower to determine what steps are needed to bring the borrower to a current status. If contact with the borrower by telephone is unsuccessful and the loan becomes 60 days delinquent, Cheviot Savings Bank sends a letter stating its intention to begin foreclosure procedures. If no satisfactory agreement has been reached with the borrower within 15 days after the foreclosure intention letter, the Collection Resolution Committee will consider the status of the delinquency and may authorize Cheviot Savings Bank’s attorney to send a letter to the borrower advising the borrower that foreclosure proceedings will be initiated and setting forth the conditions which could forestall the foreclosure. In selected cases, Cheviot Savings Bank may make an economic decision to forego foreclosure and work with the borrower to^-bring the loan current. Repayment schedules may be entered into with chronically delinquent borrowers if management determines this resolution is more advantageous to Cheviot Savings Bank.

In connection with home equity lines of credit, when payment is first past due the collection manager or staff member attempts to contact the borrower by phone at their home. If phone contact is unsuccessful, the collection manager or staff member will mail a late notice to the borrower at the beginning of the following month indicating the need to contact the collections personnel and bring the loan current. If the preceding steps are unsuccessful then the collection manager will implement the steps described above leading to foreclosure.

Cheviot Savings Bank has implemented several credit risk measures in the loan origination process that have served to reduce potential losses. Cheviot Savings Bank also seeks to limit loan portfolio credit risk by originating in the local market generally one- to four-family permanent mortgage loans with a loan-to-value of 85% or less, and one and two family owner-occupied residential mortgage loans with a loan-to-value of 85%, with private mortgage insurance required on first mortgage loans with loan-to-value of greater than 85%. Cheviot Savings Bank consistently observes conservative loan underwriting guidelines and makes exceptions in originating such loans only if there are sound reasons for such exceptions.

Credit risk on commercial real estate loans is managed by generally limiting such lending to local markets and emphasizing sound underwriting and monitoring the financial status of the borrower. In originating such loans Cheviot Savings Bank seeks debt service coverage ratios in excess of 1.00x.

To limit the impact of loan losses in any given quarter, Cheviot Savings Bank seeks to maintain an appropriate level of valuation allowances. Its management and board of directors review the level of general valuation allowances on a quarterly basis to ensure that adequate coverage against known and inherent losses is maintained, based on the level of non-performing and classified assets, our loss history and industry trends and economic trends.

Cheviot Savings Bank has established detailed asset review policies and procedures which are consistent with generally accepted accounting principles. Quarterly reviews of the valuation allowance are conducted by the board of directors. Pursuant to these procedures, when needed, additional valuation allowances are established to cover anticipated losses in the portfolio.

We hold foreclosed property as real estate acquired through foreclosure. We carry foreclosed real estate at lower of cost or fair value less estimated selling costs. If a foreclosure action is commenced and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, we either sell the real property securing the loan at the foreclosure sale or sell the property as soon thereafter as practical.

Marketing real estate owned generally involves listing the property for sale. Cheviot Savings Bank maintains the real estate acquired through foreclosure in good condition to enhance its marketability. As of December 31, 2015, we held 12 properties classified as real estate owned totaling $1.6 million and at December 31, 2014, we held 13 properties classified as real estate owned totaling $1.8 million. At December 31, 2015, our two largest real estate properties acquired through foreclosure were a residential home and land lots totaling in the aggregate $1.2 million. These properties are insured by Cheviot Savings Bank. Cheviot Savings Bank takes actions to ensure that a property does not deteriorate due to neglect while held as real estate owned. New appraisals are ordered at the time Cheviot Savings Bank takes ownership of the property. Updated appraisals may be ordered at future dates depending on the availability of automated estimated value reports, the stability of then-existing market conditions, the continued maintenance of the property and the existence of zoning or environmental changes. We work with preapproved real estate agents to sell the property.

Delinquent Loans and Non-performing Loans and Assets. Our policies require that the collection manager monitor the status of the loan portfolios and report to the board of directors on a monthly and quarterly basis. These reports include information on delinquent loans, criticized and classified assets, foreclosed real estate and our plans to cure the delinquent status of the loans.

It is Cheviot Savings Bank’s policy to underwrite single-family residential loans up to a 97% loan-to-value ratio and all other loans (multi-family, construction, commercial and consumer) on no more than an 85% loan-to-value ratio. We generally stop accruing interest on our one- to four-family residential, construction and commercial loans when interest or principal payments are 90 days in arrears. Consumer loans are comprised of loans secured by deposits, automobile loans and unsecured loans with Cheviot Savings Bank. Suchloans are placed on non-accrual status should they become 90 days delinquent. We will stop accruing interest earlier when the timely collectability of such interest or principal is doubtful.

We designate loans on which we stop accruing interest as non-accrual loans and we reverse outstanding interest that we previously credited. We may recognize income in the period that we collect it, when the ultimate collectability of principal is no longer in doubt. We return a non-accrual loan to accrual status when factors indicating doubtful collection no longer exist and the loan has been brought current. In accordance with industry standards and regulatory requirements, it is Cheviot Savings Bank’s policy to charge-off a loan when it becomes apparent that recovery of amounts due is not probable, either from expected payments from the borrower or from settlement of the collateral.

The following table sets forth certain information regarding delinquencies in our loan portfolio.

	30 to 59 Days Delinquent					60 to 89 Days Delinquent					90 or More Days Delinquent
	Amount		Percent of Net Loans			Amount		Percent of Net Loans			Amount		Percent of Net Loans
	(Dollars in thousands)

At December 31, 2015:
Real Estate Loans:
One- to four-family residential (1)	$	2,265		0.60	%	$	3,090		0.82	%	$	2,598		0.69	%
Multi-family residential		—		—			—		—			193		0.05
Construction		—		—			—		—			—		—
Commercial (2)		143		0.04			266		0.07			349		0.09
Other real estate		—		—			—		—			—		—
Commercial business		—		—			—		—			—		—
Consumer (3)		—		—			—		—			5		—
Total delinquent loans	$	2,408		0.64	%	$	3,356		0.89	%	$	3,145		0.83	%

At December 31, 2014:
Real Estate Loans:
One- to four-family residential (1)	$	1,170		0.35	%	$	1,675		0.50	%	$	3,054		0.91	%
Multi-family residential		—		—			—		—			95		0.03
Construction		—		—			—		—			—		—
Commercial (2)		187		0.06			—		—			762		0.23
Other real estate		—		—			—		—			—		—
Commercial business		—		—			—		—			—		—
Consumer (3)		—		—			—		—			—		—
Total delinquent loans	$	1,357		0.41	%	$	1,675		0.50	%	$	3,911		1.17	%

At December 31, 2013:
Real Estate Loans:
One- to four-family residential (1)	$	3,101		0.92	%	$	1,035		0.31	%	$	5,494		1.63	%
Multi-family residential		55		0.02			—		—			95		0.03
Construction		—		—			—		—			—		—
Commercial (2)		—		—			23		0.01			1,355		0.40
Other real estate		314		0.09			—		—			—		—
Commercial business		—		—			—		—			—		—
Consumer (3)		10		0.00			—		—			18		0.01
Total delinquent loans	$	3,480		1.03	%	$	1,058		0.32	%	$	6,962		2.07	%

At December 31, 2012:
Real Estate Loans:
One- to four-family residential (1)	$	2,617		0.76	%	$	1,390		0.41	%	$	8,448		2.46	%
Multi-family residential		—		—			—		—			94		0.03
Construction		—		—			—		—			—		—
Commercial (2)		—		—			—		—			443		0.13
Other real estate		693		0.20			547		0.16			477		0.14
Commercial business		—		—			—		—			1,219		0.36
Consumer (3)		—		—			—		—			7		—
Total delinquent loans	$	3,310		0.96	%	$	1,937		0.57	%	$	10,688		3.12	%

At December 31, 2011:
Real Estate Loans:
One- to four-family residential (1)	$	3,240		0.84	%	$	3,281		0.85	%	$	10,150		2.64	%
Multi-family residential		—		—			—		—			396		0.10
Construction		—		—			—		—			—		—
Commercial (2)		—		—			—		—			477		0.13
Other real estate		—		—			129		0.03			471		0.12
Commercial business		641		0.17			67		0.02			615		0.16
Consumer (3)		—		—			—		—			10		—
Total delinquent loans	$	3,881		1.01	%	$	3,477		0.90	%	$	12,119		3.15	%

(1)

Includes home equity lines of credit, loans purchased and loans held for sale.

(2)

Includes loans secured by land.

(3)

For all dates, includes loans secured by deposit accounts.

Total delinquencies at December 31, 2015 and 2014 totaled approximately $8.9 million and $6.9 million. Loans delinquent 90 days or more decreased from $3.9 million to $3.1 million as the Bank focused on collection procedures and resolving loans through the foreclosure process.

The following table sets forth information regarding impaired and non-performing loans and assets. Originated loans and assets consisted of loans and assets of Cheviot Savings Bank, excluding the loans and assets acquired from The Franklin Savings and Loan Company, while purchased loans consisted of loans and assets acquired from The Franklin Savings and Loan Company on March 16, 2011 that remained with us.

	At December 31,
	2015			2014			2013			2012			2011
	(Dollars in thousands)
Non-accrual and impaired real estate originated loans:
One- to four-family residential (1)	$	2,148		$	2,031		$	2,207		$	5,002		$	5,311
Multi-family residential		193			95			95			94			96
Construction		—			—			—			—			—
Commercial (2)		62			162			679			620			—
Other real estate		—			—			—			—			338
Commercial business		—			—			—			—			—
Consumer (3)		5			—			—			—			—
Total non-accruing originated loans		2,408			2,288			2,981			5,716			5,745
Accruing originated loans delinquent 90 days or more		—			—			—			—			—
Total non-performing originated loans		2,408			2,288			2,981			5,716			5,745
Real estate acquired through foreclosure		1,404			1,592			2,077			2,749			2,435
Total non-performing originated assets	$	3,812		$	3,880		$	5,058		$	8,465		$	8,180

Non-performing originated assets to total assets		0.67	%		0.68	%		0.86	%		1.34	%		1.33	%
Non-performing originated loans to net originated loans		0.80	%		0.93	%		1.34	%		2.83	%		2.71	%

Non-accrual and impaired real estate purchased loans:
One- to four-family residential (1)	$	2,714		$	2,144		$	3,287		$	3,446		$	4,839
Multi-family residential		109			—			—			—			300
Construction		—			—			—			—			—
Commercial (2)		2,235			655			676			1,519			813
Other real estate		—			—			—			—			97
Commercial business		—			—			—			—			315
Consumer (3)		—			—			18			7			10
Total non-accruing purchased loans		5,058			2,799			3,981			4,972			6,374
Accruing purchased loans delinquent 90 days or more		—			—			—			—			—
Total non-performing purchased loans		5,058			2,799			3,981			4,972			6,374
Real estate acquired through foreclosure		229			223			1,207			1,231			1,360
Total non-performing purchased assets	$	5,287		$	3,022		$	5,188		$	6,203		$	7,734

Non-performing purchased assets to total assets		0.92	%		0.53	%		0.96	%		0.98	%		1.25	%
Non-performing purchased loans to net purchased loans		6.85	%		3.09	%		3.49	%		3.59	%		3.71	%

Non-accrual real estate loans:
One- to four-family residential (1)	$	4,862		$	4,175		$	5,494		$	8,448		$	10,150
Multi-family residential		302			95			95			94			396
Construction		—			—			—			—			—
Commercial (2)		2,297			817			1,355			2,139			813
Other real estate		—			—			—			—			435
Commercial business		—			—			—			—			315
Consumer (3)		5			—			18			7			10
Total non-accruing loans (4)		7,466			5,087			6,962			10,688			12,119
Accruing loans delinquent 90 days or more		—			—			—			—			—
Total non-performing loans		7,466			5,087			6,962			10,688			12,119
Real estate acquired through foreclosure		1,633			1,815			3,284			3,980			3,795
Total non-performing assets	$	9,099		$	6,902		$	10,246		$	14,668		$	15,914

Non-performing assets to total assets		1.59	%		1.21	%		1.75	%		2.32	%		2.58	%
Non-performing loans to net loans		1.98	%		1.51	%		2.07	%		3.14	%		3.15	%

(footnotes on following page)

(1)

Includes home equity lines of credit, loans purchased and loans held for sale.

(2)

Includes loans secured by land.

(3)

For all dates, includes loans secured by deposit accounts.

(4)

For the year ended December 31, 2015, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $279,000. $158,000 in interest income was recorded on such loans during the year ended December 31, 2015.

Non-performing and impaired originated loans totaled $2.4 million and $2.3 million at December 31, 2015 and 2014, respectively. At December 31, 2015 and 2014, total non-performing and impaired loans including loans purchased totaled $7.5 million and $5.1 million.

Our loan review procedures are performed quarterly. With respect to multi-family and commercial loans, we consider a loan impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the loan’s contractual terms.

We review multi-family and commercial loans in amounts greater than $250,000 for impairment. These loans are individually assessed to determine whether the loan’s carrying value is in excess of the fair value of the collateral or the present value of the loan’s expected cash flows. Smaller balance homogenous loans that are collectively evaluated for impairment, such as residential mortgage loans and consumer loans, are specifically excluded from individual impairment review.

As of the year ended December 31, 2015, Cheviot Savings Bank had total troubled debt restructurings of $6.8 million. There were 40 one- to four-family residential loans totaling $4.1 million and three commercial loans totaling $2.7 million in troubled debt restructurings during the year. During the year ended December 31, 2015, there were six troubled debt loans totaling $2.4 million that subsequently defaulted. As of the year ended December 31, 2014, Cheviot Savings Bank had total troubled debt restructurings of $2.6 million. There were eight one- to four-family residential loans totaling $2.5 million and one commercial loan totaling $100,000 in troubled debt restructurings during the year. During the year ended December 31, 2014, there were six troubled debt commercial loans totaling $823,000 that subsequently defaulted. During the year ended December 31, 2013, there was one troubled debt commercial loan totaling $754,000 that subsequently defaulted. During the year ended December 31, 2013, Cheviot Savings Bank had total troubled debt restructurings of $2.2 million. There were four one- to four-family residential loans totaling $316,000 and four commercial loans totaling $1.9 million in troubled debt restructurings during the year. During the year ended December 31, 2012, Cheviot Savings Bank had total troubled debt restructurings of $6.0 million. There were 16 one- to four-family residential loans totaling $1.5 million and one commercial loan totaling $754,000 in troubled debt restructurings during the year. During the year ended December 31, 2011, Cheviot Savings Bank had a total of five one- to four-family residential troubled debt restructurings of $800,000. During the year ended December 31, 2011, there was one troubled debt restructuring that subsequently defaulted totaling $268,000. These loans were modified due to short term concessions with no impairment as Cheviot Savings Bank expects to recognize the full amount of the commitment. Cheviot Savings Bank has no commitments to lend additional funds to these debtors owing receivables whose terms have been modified in troubled debt restructurings.

For the year ended December 31, 2015, gross interest income which would have been recorded had the troubled debt restructurings been current in accordance with their original terms amounted to $300,000. $251,000 in interest income was recorded on such loans during the year ended December 31, 2015.

In addition to troubled debt restructurings, we modify loans to reduce interest rates in the event of reductions in market rates. Except for these interest rate reductions, we do not otherwise modify loans unless such loans are to be classified as troubled debt restructurings.

Classified Assets. Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a higher possibility of loss. An asset classified as a loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated “special mention” also may be established and maintained for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. If a classified asset is deemed to be impaired with measurement of loss, Cheviot Savings Bank will establish a charge-off of the loan pursuant to Accounting Standards Codification Topic 310, “Receivables”. The following table sets forth information regarding classified assets as of December 31, 2015, 2014 and 2013.

	At December 31,
	2015		2014		2013
	(In thousands)
Classification of Assets:
Substandard	$	11,250	$	9,918	$	10,036
Doubtful		—		—		—
Loss		—		—		—
Total Classified Assets	$	11,250	$	9,918	$	10,036
Special Mention	$	—	$	—	$	—

At December 31, 2015, substandard assets were $11.3 million. The assets consisted of 69 one- to four-family residential loans with an aggregate principal balance of $5.5 million, 22 commercial real estate loans with an aggregate principal balance of $5.5 million and two multi-family residential totaling approximately $302,000 and one consumer loans totaling approximately $5,000.

General loss allowances established to cover inherent, but unconfirmed losses in the portfolio may be included in determining an institution’s regulatory capital. Federal examiners may disagree with an insured institution’s classifications and amounts reserved.

Allowance for Loan Losses. We maintain the allowance through provisions for loan losses that we charge to income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. Recoveries on loans charged-off are restored to the allowance for loan losses. The allowance for loan losses is maintained at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio both probable and reasonable to estimate at each reporting date. The level of allowance for loan losses is based on management’s periodic review of the collectability of the loans principally in light of our historical experience, augmented by the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current and anticipated economic conditions in the primary lending area. We evaluate our allowance for loan losses quarterly. We have made changes to the external factors in the calculation during the year as we believe there have been improvements in the local economy, reduction in our overall delinquencies and an improvement in property values. We will continue to monitor all items involved in the allowance calculation closely.

In addition, the regulatory agencies, as an integral part of their examination and review process, periodically review our loan portfolios and the related allowance for loan losses. Regulatory agencies may require us to increase the allowance for loan losses based on their judgments of information available to them at the time of their examination, thereby adversely affecting our results of operations.

At December 31, 2015 and 2014, our allowance for loan losses was $3.5 million and $2.2 million, respectively. Our ratio of the allowance for loan losses as a percentage of net loans receivable was 0.94% and 0.66% at December 31, 2015 and 2014, respectively.

Following the completion of our acquisition of First Franklin Corporation, we recorded $25.0 million of purchased credit-impaired loans subject to a fair value adjustment of $5.5 million. The method of measuring the carrying value of purchased loans differs from loans that we originate. Accordingly, we record purchased loans and purchased loans with a credit quality discount at fair value and our own originated loans at amortized cost.

The following table sets forth the analysis of the activity in the allowance for loan losses for the years indicated:

	At or For the Year Ended December 31,
	2015			2014			2013			2012			2011
	(Dollars in thousands)

Balance at beginning of period	$	2,236		$	1,697		$	2,160		$	1,447		$	1,242

Charge- offs:
One- to four-family residential (1)		(340	)		(520	)		(1,928	)		(537	)		(482	)
Multi-family residential		(79	)		—			—			—			—
Construction		—			—			—			—			(21	)
Commercial (2)		(119	)		(39	)		(8	)		(31	)		—
Other real estate					—			—			—			—
Commercial business					—			—			—			—
Consumer (3)		(1	)		(3	)		(1	)		—			(5	)
Total charge-offs		(539	)		(562	)		(1,937	)		(568	)		(508	)

Recoveries:
One- to four-family residential (1)		168			34			31			—			—
Multi-family residential		—			—			—			—			—
Construction		—			—			—			—			—
Commercial (2)		9			43			—			—			—
Other real estate		—			—			—			—			—
Commercial business		—			—			—			—			—
Consumer (3)		—			—			—			1			13
Total recoveries		177			77			31			1			13

Net charge-offs		(362	)		(485	)		(1,906	)		(567	)		(495	)

Provision for losses on loans		1,663			1,024			1,443			1,280			700

Balance at end of period	$	3,537		$	2,236		$	1,697		$	2,160		$	1,447

Total loans receivable, net (1)	$	376,171		$	337,095		$	336,837		$	340,414		$	384,296

Average loans receivable outstanding (1)	$	353,487		$	331,944		$	335,615		$	359,940		$	367,063

Allowance for loan losses as a percent of originated net loans receivable		0.99	%		0.66	%		0.58	%		0.81	%		0.68	%

Net loans charged off as a percent of average loans outstanding		0.10	%		0.15	%		0.57	%		0.16	%		0.13	%

(1)

Includes home equity lines of credit, loans purchased and loans held for sale.

(2)

Includes loans secured by land.

(3)

For all dates, includes loans secured by deposit accounts.

The following table sets forth the allocation of the allowance for loan losses by loan category for the periods indicated. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes as and when the risk factors of each such component part change. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may be taken nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.

	At December 31
	2015							2014
	Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Real estate - mortgage
One- to four-family residential (1)	$	1,748		219,113		55.76	%	$	1,813	$	231,626		67.58	%
Multi-family residential		439		32,634		8.31			209		20,501		5.98
Construction		25		23,781		6.05			7		8,327		2.43
Commercial (2)		854		74,397		18.93			109		44,996		13.13
Other real estate		48		4,235		1.08			12		4,569		1.33
Commercial business		412		35,882		9.13			78		31,792		9.28
Consumer (3)		11		2,894		0.74			8		921		0.27

Total	$	3,537	$	392,936		100.00	%	$	2,236	$	342,732		100.00	%

	At December 31,
	2013							2012
	Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Real estate - mortgage
One- to four-family residential (1)	$	1,352	$	236,236		69.23	%	$	1,823	$	249,202		72.62	%
Multi-family residential		194		22,805		6.68			172		23,866		6.96
Construction		9		7,141		2.09			1		1,243		0.36
Commercial (2)		85		47,450		13.91			96		42,148		12.28
Other real estate		9		4,726		1.39			12		5,134		1.50
Commercial business		37		20,579		6.03			45		19,884		5.79
Consumer (3)		11		2,278		0.67			11		1,691		0.49

Total	$	1,697	$	341,215		100.00	%	$	2,160	$	343,168		100.00	%

	At December 31, 2011
	Allowance for Loan Losses		Loan Balances by Category		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Real estate - mortgage
One- to four-family residential (1)	$	978	$	290,808		75.14	%
Multi-family residential		162		26,210		6.77
Construction		13		4,390		1.13
Commercial (2)		191		42,491		10.98
Other real estate		24		5,311		1.37
Commercial business		70		15,592		4.03
Consumer (3)		9		2,210		0.58
Total	$	1,242	$	387,012		100.00	%

(1)

Includes home equity lines of credit, loans purchased and loans held for sale.

(2)

Includes loans secured by land.

(3)

For all dates, includes loans secured by deposit accounts.

Securities Activities

General. Our investment policy is established by the board of directors. This policy dictates that investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our interest rate risk management. The board of directors, as a whole, acts in the capacity of an investment committee and is responsible for overseeing our investment program and evaluating on an ongoing basis our investment policy and objectives. Our president, chief financial officer and controller have the authority to purchase securities within specific guidelines established by the investment policy. All transactions are reviewed by the board of directors at its regular meeting.

We account for investment and mortgage-backed securities in accordance with Accounting Standards Codification Topic 320, “Investments - Debt and Equity Securities.” Accounting Standards Codification 320 requires that investments be categorized as held-to maturity, trading, or available for sale. Securities classified as held to maturity are carried at cost only if we have the positive intent and ability to hold these securities to maturity. Trading securities and securities available for sale are carried at fair value with resulting unrealized gains or losses recorded to operations or shareholders’ equity, respectively. During 2015, we purchased $30.0 million of investment securities that were classified as available for sale. During 2014, we purchased $25.1 million of investment and mortgage-backed securities that were classified as available for sale. Realized gains or losses on sales of securities are recognized using the specific identification method.

Our current policies generally limit securities investments to U.S. Government, agency and sponsored entity securities and municipal bonds. The policy also permits investments in mortgage-backed securities guaranteed by the Fannie Mae, Freddie Mac and Ginnie Mae. Our investments in municipal obligations mature in more than five years. The majority of our investments in U.S. Government and agency obligations are scheduled to mature within fifteen years.

Our current investment strategy uses a risk management approach of diversified investing in fixed-rate securities with short- to intermediate-term maturities, as well as adjustable-rate securities, which may have a longer term to maturity. The emphasis of this approach is to increase overall securities yields while managing interest rate risk. To accomplish these objectives, we focus on investments in mortgage-backed securities with short term maturities, and U.S. Government and agency obligations and municipal obligations with maturities in excess of 10 years. We monitor our investment portfolio for losses that may be considered other than temporary. At December 31, 2015 and December 31, 2014, all unrealized losses on securities were viewed by management to be temporary. At December 31, 2015, the amortized cost of our investment and mortgage-backed securities portfolio was $99.4 million, while the estimated fair value was $98.7 million. At December 31, 2014, the amortized cost of our investment and mortgage-backed securities portfolio was $138.7 million, while the estimated fair value was $136.4 million. While the temporary changes in principal value did not impact our net income, such changes will affect our stated book value and tangible book on a given date.

Amortized Cost and Estimated Fair Value of Securities. The following table sets forth certain information regarding the amortized cost and estimated fair values of our securities as of the dates indicated.

	At December 31,
	2015				2014				2013
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)
Investment securities held to maturity:
U.S. Government and agency securities	$	—	$	—	$	—	$	—	$	—	$	—
Municipal obligations		—		—		—		—		—		—
Corporate securities		—		—		—		—		—		—
Total investment securities held to maturity		—		—		—		—		—		—

Mortgage-backed securities held to maturity:
Freddie Mac		—		—		—		—		253		261
Fannie Mae		—		—		—		—		212		218
Ginnie Mae		—		—		—		—		2,651		2,751
Total mortgage-backed securities held to maturity		—		—		—		—		3,116		3,230

Total investments and mortgage-backed securities held to maturity		—		—		—		—		3,116		3,230

Investment securities available for sale:
U.S. Government and agency securities		90,674		89,905		127,607		125,223		160,063		148,349
Municipal obligations		1,256		1,315		1,691		1,776		3,035		3,015
Corporate securities		—		—		—		—		1,920		2,578
Total investment securities available for sale		91,930		91,220		129,298		126,999		165,018		153,942

Mortgage-backed securities available for sale:
Freddie Mac		7,502		7,503		9,443		9,400		677		710
Fannie Mae		—		—		—		—		5,940		5,944
Ginnie Mae		—		—		—		—		2,622		2,707
Total mortgage-backed securities available for sale		7,502		7,503		9,443		9,400		9,239		9,361

Total investment and mortgage-backed securities available for sale		99,432		98,723		138,741		136,399		174,257		163,303

Total investment and mortgage-backed securities	$	99,432	$	98,723	$	138,741	$	136,399	$	177,373	$	166,533

The following table sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of our securities portfolio as of December 31, 2015. Adjustable-rate mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust.

	At December 31, 2015
	One Year or Less					More Than One Year through Five Years					More Than Five Years through Ten Years					More Than Ten Years					Total Securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Estimated Fair Value		Weighted Average Yield
	(Dollars in thousands)
Investment securities available for sale:
U.S. Government and agency obligations	$	25,702		1.73	%	$	44,987		1.77	%	$	19,985		2.35	%	$	—		—	%	$	90,674	$	89,905		1.89	%
Municipal obligations		47		6.63			689		4.07			520		4.00			—		—			1,256		1,315		4.13
Total investment securities available for sale		25,749		1.74			45,676		1.80			20,505		2.39			—		—			91,930		91,220		1.92
Mortgage-backed securities available for sale:
Freddie Mac		7,502		1.78			—		—			—		—			—		—			7,502		7,503		1.78
Fannie Mae		—		—			—		—			—		—			—		—			—		—		—
Ginnie Mae		—		—			—		—			—		—			—		—			—		—		—
Total mortgage backed securities available for sale		7,502		1.78			—		—			—		—			—		—			7,502		7,503		1.78
Total investment and mortgage-backed securities	$	33,251		1.75	%	$	45,676		1.80	%	$	20,505		2.39	%	$	—		—	%	$	99,432	$	98,723		1.91	%

Sources of Funds.

General. Deposits, Federal Home Loan Bank advances, scheduled amortization and prepayments of loan principal, maturities and calls of securities and funds provided by operations are our primary sources of funds for use in lending, investing and for other general purposes.

Deposits. We offer deposit products having a range of interest rates and terms. We currently offer passbook and statement savings accounts, interest-bearing demand accounts, non-interest-bearing demand accounts, money market accounts and certificates of deposit.

Deposit flows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, internal pricing decisions and competition. Our deposits are primarily obtained from areas surrounding our branch offices. In order to attract and retain deposits we rely on paying competitive interest rates and providing quality service.

Savings, NOW and money market rates are generally determined monthly by our President and Chief Executive Officer. Certificate of deposit rates are generally determined weekly by our President and Chief Executive Officer. When we determine our deposit rates, we consider liquidity needs, local competition, Federal Home Loan Bank advance rates and rates charged on other sources of funds. Core deposits, defined as savings accounts, money market accounts and demand deposit accounts, represented 56.2%, 53.7% and 51.8% of total deposits at December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, 2014 and 2013, certificates of deposit with remaining terms to maturity of less than one year amounted to $108.1 million, $114.6 million and $109.5 million, respectively.

The following tables set forth the types of deposit accounts offered by us at the dates indicated.

	At December 31, 2015								At December 31, 2014
	Amount		Percent			Weighted Average Rate			Amount		Percent			Weighted Average Rate
	(Dollars in thousands)

NOW accounts	$	101,375		22.29	%		0.08	%	$	87,783		19.43	%		0.09	%
Passbook accounts		41,115		9.04			0.08			35,841		7.93			0.06
Money market demand deposits		113,277		24.90			0.20			118,747		26.29			0.20
Total demand, transaction and passbook deposits		255,767		56.23			0.13			242,371		53.65			0.14

Certificates of deposit
Due within one year		108,081		23.76			0.83			114,608		25.37			1.14
Over one year through three years		45,691		10.04			1.18			67,156		14.86			1.56
Over three years		45,346		9.97			1.89			27,649		6.12			1.58
Total certificates of deposit		199,118		43.77			1.23			209,413		46.35			1.33

Total	$	454,885		100.00	%		0.61	%	$	451,784		100.00	%		0.69	%

	At December 31, 2013
	Amount		Percent			Weighted Average Rate
	(Dollars in thousands)

NOW accounts	$	86,667		18.46	%		0.09	%
Passbook accounts		35,217		7.50			0.08
Money market demand deposits		121,268		25.84			0.20
Total demand, transaction and passbook deposits		243,152		51.80			0.14

Certificates of deposit
Due within one year		109,518		23.33			1.00
Over one year through three years		92,283		19.66			1.98
Over three years		24,434		5.21			1.43
Total certificates of deposit		226,235		48.20			1.45

Total	$	469,387		100.00	%		0.77	%

As of December 31, 2015, the aggregate amount of outstanding certificates of deposit at Cheviot Savings Bank in amounts greater than or equal to $100,000 was approximately $69.5 million. The following table presents the maturity of these certificates of deposit at such date.

Maturity Period	At December 31, 2015
	(In thousands)

Less than three months	$	8,322
Three to six months		11,063
Seven months to one year		14,743
Over one year to three years		15,603
Over three years		19,780
Total	$	69,511

Borrowed Funds. As a member of the Federal Home Loan Bank of Cincinnati, Cheviot Savings Bank is eligible to obtain advances upon the security of the Federal Home Loan Bank common stock owned and certain residential mortgage loans, provided certain standards related to credit-worthiness have been met. Federal Home Loan Bank advances are available pursuant to several credit programs, each of which has its own interest rate and range of maturities. The following table sets forth information with respect to our Federal Home Loan Bank advances, which were our only outstanding borrowings for the periods indicated.

	At or For the Year Ended December 31,
	2015			2014			2013
	(Dollars in thousands)
FHLB Advances:
Maximum month end-end balance	$	25,559		$	19,002		$	23,985
Balance at the end of period	$	12,578		$	14,851		$	19,261
Average balance	$	17,490		$	16,739		$	21,561
Weighted average interest rate at the end of period		3.80	%		3.77	%		3.69	%
Weighted average interest rate during period		2.42	%		3.19	%		3.29	%

Leases

The Corporation has lease obligations on three of its branch facilities.

	(In thousands)

Less than one year	$	97
More than one to three years		148
More than three to five years		119
More than five years		84
Total	$	448

Employees

As of December 31, 2015, we had 89 full-time employees and 22 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.

REGULATION

General

Cheviot Savings Bank is an Ohio-chartered savings institution that is regulated, examined and supervised by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation. The Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation have extensive authority over the operations of Ohio-chartered savings institutions. Under this authority, Ohio-chartered savings institutions are required to file periodic reports with the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation and are subject to periodic examinations by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation. Cheviot Savings Bank also is subject to certain requirements established by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Cheviot Savings Bank is also a member of and owns stock in the Federal Home Loan Bank of Cincinnati, which is one of the twelve regional banks in the Federal Home Loan Bank System.

As a savings and loan holding company, Cheviot Financial Corp. is required to comply with the rules and regulations of the Federal Reserve Board. We must file certain reports with and are subject to examination by and the enforcement authority of the Federal Reserve Board. Cheviot Financial Corp. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in applicable laws or regulations, whether by the Ohio Division of Financial Institutions, the Federal Deposit Insurance Corporation, the Federal Reserve Board or Congress, could have a material adverse impact on Cheviot Financial Corp. and Cheviot Savings Bank and their operations.

Set forth below is a brief description of material regulatory requirements that are or will be applicable to Cheviot Savings Bank and Cheviot Financial Corp. The description is limited to certain material aspects of the statutes and regulations addressed and is not intended to be a complete description of such statutes and regulations and their effects on Cheviot Savings Bank and Cheviot Financial Corp.

Ohio Savings and Loan Law

The Ohio Division of Financial Institutions is responsible for the regulation and supervision of Ohio savings institutions in accordance with the laws of the State of Ohio. Ohio law prescribes, subject to applicable federal laws and regulations, the permissible investments and activities of Ohio savings and loan associations, including the types of lending that such institutions may engage in and the investments that such institutions may make.

The Ohio Division of Financial Institutions also has authority to grant necessary approvals for the payment of dividends and any mergers involving or acquisitions of control of Ohio savings institutions. The Ohio Division of Financial Institutions may initiate certain supervisory measures or formal enforcement actions against Ohio savings institutions. Ultimately, if the grounds provided by law exist, the Ohio Division of Financial Institutions may place an Ohio association in conservatorship or receivership.

The Ohio Division of Financial Institutions conducts periodic regular examinations of Cheviot Savings Bank. Such examinations are typically conducted jointly with the federal regulator. The Ohio Division of Financial Institutions imposes assessments on Ohio savings institutions based on their asset size to cover the cost of supervision and examination.

Loans-to-One-Borrower

Pursuant to federal law, we generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of our unimpaired capital and unimpaired surplus. An additional amount may be lent, equal to 10% of unimpaired capital and unimpaired surplus, if the loan is secured by readily marketable collateral, which is defined to include certain financial instruments and bullion, but generally does not include real estate. As of December 31, 2015, we were in compliance with our loans-to-one-borrower limitations.

Qualified Thrift Lender Test

We are required by federal law to satisfy a qualified thrift lender (“QTL”) test under which we either must qualify as a “domestic building and loan” association as defined by the Internal Revenue Code or maintain at least 65% of our “portfolio assets” in “qualified thrift investments.” “Qualified thrift investments” consist primarily of residential mortgages and related investments, including mortgage-backed and related securities. “Portfolio assets” generally means total assets less specified liquid assets up to 20% of total assets, goodwill and other intangible assets and the value of property used to conduct business. A savings institution that fails the qualified thrift lender test must operate under specified restrictions. The Dodd-Frank Act made noncompliance with the QTL test also subject to agency enforcement action for a violation of law. As of December 31, 2015, we maintained 65.66% of our portfolio assets in qualified thrift investments and, therefore, we met the qualified thrift lender test.

Standards for Safety and Soundness

Federal law requires each federal banking agency to prescribe for insured depository institutions under its jurisdiction standards relating to, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, employee compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the Federal Deposit Insurance Corporation determines that a state savings institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to submit or implement an acceptable plan, the appropriate federal banking agency may issue an enforceable order requiring correction of the deficiencies.

Investment Activities

Federal law generally limits all state-chartered savings institutions in their activities as principal and direct equity investments to those permitted for federal savings associations, notwithstanding state law. The law allows for certain exceptions such as (i) directly engaging in activities as principal not permissible for federal savings associations if approved upon application to the Federal Deposit Insurance Corporation and (ii) investments in service corporations in an amount greater than permitted for federal savings associations or in service corporations engaged in activities not permitted for corporations of federal savings associations if approved upon application to the Federal Deposit Insurance Corporation.

Capital Requirements

Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. These capital requirements were effective January 1, 2015 and are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

Any institution that fails any of the regulatory capital requirements is subject to enforcement action by the FDIC. Such action may include a capital directive, a cease and desist order, civil money penalties, restrictions on an institution’s operations, termination of federal deposit insurance, and the appointment of a conservator or receiver. Such action, through enforcement proceedings or otherwise, may require a variety of corrective measures.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. We believe we were in compliance with such fully phased in requirements as if such requirements had been in effect as of December 31, 2015.

Prompt Corrective Regulatory Action

Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The applicable FDIC regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. Under the amended regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

A capital restoration plan must be filed with and approved by the Federal Deposit Insurance Corporation after an institution becomes “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the capital restoration plan must be guaranteed by any controlling holding company in an amount of lesser of 5% of the institution’s total assets at the time it became undercapitalized or the amount necessary to bring the institution into compliance with capital standards at the time the institution falls out of compliance with the capital restoration plan. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution including, but not limited to, restrictions on growth, capital distributions and geographic and product expansion. The Federal Deposit Insurance Corporation may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive, the replacement of senior executive officers and directors and restrictions on affiliate transactions. Generally, the banking regulator is required to appoint a receiver or conservator for an institution that is “critically undercapitalized,” within specified time frames.

Capital Distributions

Federal regulations restrict capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution. A savings institution must file an application or notice with the Federal Deposit Insurance Corporation for approval of the capital distribution if (i) the total capital distributions for the applicable calendar year exceeds the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years that is still available for dividend, (ii) the institution would not be at least well capitalized following the distribution, (iii) the distribution would violate any applicable statute, regulation, agreement or written regulatory condition, or (iv) the institution is not eligible for expedited review of its filings (i.e., generally, institutions that do not have safety and soundness, compliance and Community Reinvestment Act ratings in the top two categories or fail a capital requirement). Savings institutions that are a subsidiary of a holding company, which is the case with Cheviot Savings Bank, must file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.

In the event that a savings institution’s capital falls below its regulatory requirements or it is notified by the regulator that it is in need of more than normal supervision, its ability to make capital distributions would be restricted. In addition, any proposed capital distribution could be prohibited if the regulator determines that the distribution would constitute an unsafe or unsound practice.

Transactions with Related Parties

A savings institution’s authority to engage in transactions with related parties or “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing regulation, Federal Reserve Board Regulation W. The term “affiliate” generally means any company that controls or is under common control with an institution, including Cheviot Financial Corp. and its non-savings institution subsidiaries. Applicable law limits the aggregate amount of “covered” transactions with any individual affiliate, including loans to the affiliate, to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain covered transactions with affiliates, such as loans to or guarantees issued on behalf of affiliates, are required to be secured by specified amounts of collateral. Purchasing low quality assets from affiliates is generally prohibited. Regulation W also provides that transactions with affiliates, including covered transactions, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited by law from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

Our authority to extend credit to executive officers, directors and 10% or greater shareholders (“insiders”), as well as entities controlled by these persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and its implementing regulation, Federal Reserve Board Regulation O. Among other things, loans to insiders must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for bank-wide lending programs that do not discriminate in favor of insiders. Regulation O also places individual and aggregate limits on the amount of loans that may be made to insiders based, in part, on the institution’s capital position, and requires that certain prior board approval procedures be followed. Extensions of credit to executive officers are subject to additional restrictions on the types and amounts of loans that may be made. At December 31, 2015, we were in compliance with these regulations.

Enforcement

The Federal Deposit Insurance Corporation has federal enforcement responsibility over state-chartered savings institutions, including the authority to bring enforcement action against “institution-related parties,” including officers, directors, certain shareholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day.

Deposit Insurance

Cheviot Savings Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. Deposit accounts in Cheviot Savings Bank are insured up to a maximum of $250,000 for each separately insured depositor.

The Federal Deposit Insurance Corporation imposes an assessment for deposit insurance on all depository institutions. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by Federal Deposit Insurance Corporation regulations, with less risky institutions paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2 ½ to 45 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.

In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation is authorized to impose and collect, through the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the Financing Corporation in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the Financing Corporation are due to mature in 2017 through 2019. For the quarter ended December 31, 2014, the annualized Financing Corporation assessment was equal to 60 basis points of assessable deposits.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long term fund ratio of 2%.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Cheviot Savings Bank. Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of Cheviot Savings Bank does not know of any practice, condition or violation that may lead to termination of our deposit insurance.

Federal Home Loan Bank System

Cheviot Savings Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Cincinnati, we are required to acquire and hold a specified amount of shares of capital stock in Federal Home Loan Bank.

Community Reinvestment Act and Fair Lending Laws

Savings institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on certain activities such as branching and acquisitions. Cheviot Savings Bank received a “Satisfactory” Community Reinvestment Act rating in its most recent examination.

Other Regulations

Interest and other charges collected or contracted for by Cheviot Savings Bank are subject to state usury laws and federal laws concerning interest rates. Cheviot Savings Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

Truth in Savings Act; and

Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of Cheviot Savings Bank also are subject to the:

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

Electronic Funds Transfer Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

Check Clearing for the 21^st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

The USA PATRIOT Act, which requires banks and savings institutions to, among other things, establish broadened anti-money laundering compliance programs and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement pre-existing compliance requirements that apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties and requires all financial institutions offering products or services to retail customers to provide such customers with the financial institution’s privacy policy and allow such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

Cheviot Financial Corp. is a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board, which replaced the Office of Thrift Supervision in that capacity due to the Dodd-Frank Act regulatory restructuring. The Federal Reserve Board has enforcement authority over Cheviot Financial Corp. and its non-savings institution subsidiaries. Among other things, that authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Cheviot Savings Bank.

As a savings and loan holding company, Cheviot Financial Corp.’s activities are limited to those activities permissible by law for financial holding companies or multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending activities, insurance and underwriting equity securities. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, and certain additional activities authorized by federal regulation.

Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board and from acquiring or retaining control of any depository not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. An acquisition by a savings and loan holding company of a savings institution in another state to be held as a separate subsidiary may not be approved unless it is a supervisory acquisition under Section 13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.

Historically, savings and loan holding companies have not been subject to regulatory capital requirements. The Dodd-Frank Act, however, required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to savings and loan holding companies (of greater than $1 billion in consolidated assets) as of January 1, 2015. As is the case with the savings bank subsidiary, the capital conservation buffer will be phased in between 2016 and 2019.

The Dodd-Frank Act extends the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing the “source of strength” policy, which requires holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends’ previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory consultation prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of Cheviot Financial Corp. to pay dividends, repurchase shares of stock or otherwise engage in capital distributions.

Federal Securities Laws

Cheviot Financial Corp. common stock is registered with the Securities and Exchange Commission. Cheviot Financial Corp. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have existing policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Change in Control Regulations

Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as Cheviot Financial Corp. unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with Cheviot Financial Corp., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Federal Reserve Board.

TAXATION

Cheviot Financial Corp. and Cheviot Savings Bank are subject to income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Cheviot Financial Corp. or Cheviot Savings Bank.

Federal Taxation

For federal income tax purposes, Cheviot Financial Corp. and Cheviot Savings Bank file a consolidated federal income tax return on a calendar year basis using the accrual method of accounting.

As a result of the enactment of the Small Business Job Protection Act of 1996, all savings banks and savings associations may convert to a commercial bank charter, diversify their lending, or merge into a commercial bank without having to recapture any of their pre-1988 tax bad debt reserve accumulations. However, transactions which would require recapture of the pre-1988 tax bad debt reserve include redemption of Cheviot Savings Bank’s stock, payment of dividends or distributions in excess of earnings and profits, or failure by the institution to qualify as a bank for federal income tax purposes. At December 31, 2014, Cheviot Savings Bank had pre-1988 bad debt reserves totaling approximately $1.0 million. A deferred tax liability has not been provided on this amount as management does not intend to make distributions, redeem stock or fail certain bank tests that would result in recapture of the reserve.

Deferred income taxes arise from the recognition of items of income and expense for tax purposes in years different from those in which they are recognized in the consolidated financial statements. Cheviot Financial Corp. will account for deferred income taxes by the asset and liability method, applying the enacted statutory rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. The resulting deferred tax liabilities and assets will be adjusted to reflect changes in the tax laws.

Cheviot Financial Corp. is subject to the corporate alternative minimum tax to the extent it exceeds Cheviot Financial Corp.’s regular income tax for the year. The alternative minimum tax will be imposed at the rate of 20% of a specially computed tax base. Included in this base are a number of preference items, including interest on certain tax-exempt bonds issued after August 7, 1986, and an “adjusted current earnings” computation which is similar to a tax earnings and profits computation. In addition, for purposes of the alternative minimum tax, the amount of alternative minimum taxable income that maybe offset by net operating losses is limited to 90% of alternative minimum taxable income.

State Taxation

Cheviot Financial Corp. and Cheviot Savings Bank are subject to Ohio taxation in the same general manner as other corporations. In particular, Cheviot Financial Corp. and Cheviot Savings Bank are subject to the Ohio corporation franchise tax, which is an excise tax imposed on corporations for the privilege of doing business in Ohio, owning capital or property in Ohio, holding a charter or certificate of compliance authorizing the corporation to do business in Ohio, or otherwise having nexus with Ohio during a calendar year. The franchise tax is imposed on the value of a corporation’s issued and outstanding shares of stock. Financial institutions determine the value of their issued and outstanding shares based upon the net worth of the shares. For Ohio franchise tax purposes, savings institutions are currently taxed at a rate equal to 1.3% of taxable net worth.

As a Maryland business corporation, Cheviot Financial Corp. is required to file an annual report with and pay franchise taxes to the state of Maryland.

MANAGEMENT

Executive Officers of Cheviot Financial Corp.

The following individuals hold the following executive officer positions with Cheviot Financial Corp.

Name	Age	Position

Mark T. Reitzes	55	President and Chief Executive Officer
Scott T. Smith	46	Senior Vice President - Chief Financial Officer

ITEM 1A.

RISK FACTORS

A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could adversely affect our operations, financial condition and earnings.

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in the Cincinnati, Ohio metropolitan area, which includes the Ohio Counties of Hamilton, Warren, Butler and Clermont. We also conduct a moderate level of business in the southeastern Indiana region, primarily in Dearborn, Ripley, Franklin and Ohio Counties, and we originate loans in the northern Kentucky region secured by properties in Campbell, Kenton and Boone Counties. Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans.

A deterioration in economic conditions could have the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

demand for our products and services may decline;

loan delinquencies, problem assets and foreclosures may increase;

collateral for loans, especially real estate, may decline in value, in turn reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Strong competition within our market area may limit our growth and profitability.

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we have and offer certain services that we do not or cannot provide. In addition, some of our competitors offer loans with lower interest rates on more attractive terms than loans that we offer, which we expect to continue in the foreseeable future. Competition also makes it more difficult and costly to attract and retain qualified employees. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase our interest earning assets. For additional information see “Item 1. Business—Competition.”

Because we intend to increase our commercial real estate and commercial business loan originations, our credit risk will increase and downturns in the real estate market or local economy could adversely affect our earnings.

We intend to emphasize the origination of commercial real estate and commercial business loans as a strategic complement to our traditional emphasis on originating one- to four-family residential real estate loans. Commercial real estate and commercial business loans generally have more risk than the one- to four-family residential real estate loans we originate. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial loans also may involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely impact the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of non-performing loans. Further, unlike residential mortgage loans or multi-family and commercial real estate loans, commercial business loans may be secured by collateral other than real estate, such as inventory and accounts receivable, the value of which may be more difficult to appraise and may be more susceptible to fluctuation in value at default. As our commercial real estate and commercial loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase. Furthermore, it may be difficult to assess the future performance of newly originated commercial loans, as such loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance.

Our business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

Our business strategy includes growth in assets, deposits and the scale of our operations. Achieving our growth targets will require us to attract customers that currently bank at other financial institutions in our market, thereby increasing our share of the market. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competition from other financial institutions in our market area and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected.

Future changes in interest rates may reduce our profits.

Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:

the interest income we earn on our interest-earning assets, such as loans and securities; and

the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions, our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities. In a period of declining interest rates, the interest income we earn on our assets may decrease more rapidly than the interest we pay on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called, requiring us to reinvest those cash flows at lower interest rates.

In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities.

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, such changes can still have a material adverse effect on our financial condition and results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.

For further discussion of how changes in interest rates could impact us, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk.”

A continuation of the historically low interest rate environment may adversely affect our net interest income and profitability.

In recent years the Federal Reserve Board’s policy has been to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, market interest rates on the loans we have originated and the yields on securities we have purchased since 2008 have been lower than in prior years. Our ability to reduce our interest expense is limited at current interest rate levels while the average yield on our interest-earning assets may continue to decrease. A continuation of a low interest rate environment may adversely affect our net interest income, which in turn would likely have an adverse effect on our profitability.

The need to account for certain assets at estimated fair value, such as loans held for sale and investment securities, may adversely affect our financial condition and results of operations.

We report certain assets, such as loans held for sale and investment securities, at estimated fair value. The balance of loans held for sale was $1.9 million at December 31, 2015, while the balance of investment securities was $98.7 million at December 31, 2015. Generally, for assets that are reported at fair value, we use quoted market prices or valuation models that utilize observable market inputs to estimate fair value. Because we carry these assets on our financial records at their estimated fair value, we may incur losses even if the subject asset presents minimal credit risk. For the year ended December 31, 2015, investment securities resulted in reductions to other comprehensive income of $468,000, but we did not recognize a loss on investment securities or loans held for sale during those periods.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions or the results of our analyses are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. In addition, our emphasis on loan growth and on increasing our portfolios of commercial real estate and commercial business loans, as well as any future credit deterioration, could require us to increase our allowance for loan losses in the future. Our allowance for loan losses was 0.94% of net loans and 47.4% of non-performing loans at December 31, 2015. Material additions to our allowance would materially decrease our net income.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our financial condition and results of operations.

Our emphasis on one- to four-family residential mortgage loans exposes us to increased credit risks.

At December 31, 2015, $219.3 million, or 55.8% of our total loan portfolio, was secured by one- to four-family real estate, which included $3.2 million of home equity loans and $20.1 million of home equity lines of credit. Recent economic conditions have resulted in declines in real estate values in our market areas. These declines in real estate values could cause some of our mortgage loans and home equity lines of credit to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral or if borrowers who sell their homes are unable to repay their loans in full from the sale proceeds.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

The Company and the Bank are subject to extensive regulation, supervision and examination by the Ohio Division of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Board. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the federal deposit insurance fund and the depositors and borrowers of the Bank, rather than for our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations.

The Dodd-Frank Act has significantly changed the regulation of banks and savings institutions and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have been given significant discretion in drafting the implementing rules and regulations, many of which are not in final form. As a result, we cannot at this time predict the extent to which the Dodd-Frank Act will impact our business, operations or financial condition. However, compliance with the Dodd-Frank Act and its implementing regulations and policies has already resulted in changes to our business and operations, as well as additional costs, and diverted management’s time from other business activities, which adversely affects our financial condition and results of operations.

We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

A final capital rule, effective for us on January 1, 2015, includes new minimum risk-based capital and leverage ratios and refines the definition of what constitutes “capital” for calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank has elected to opt out of the requirement under the final rule to include certain “available-for-sale” securities holdings for calculating its regulatory capital requirements. The final rule also establishes a “capital conservation buffer” of 2.5%, and, when fully phased in, will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

We have analyzed the effects of these new capital requirements, and we believe that we meet all of these new requirements, including the full 2.5% capital conservation buffer, as if it had been fully phased in.

The application of more stringent capital requirements could, among other things, result in lower returns on equity, and may require raising additional capital in the future, and result in regulatory actions if we are unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding sources, change our business models or increase our holdings of liquid assets. The implementation of changes to asset risk weightings for risk-based capital calculations, changes to items included in or deducted from regulatory capital or additional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, including paying dividends or repurchasing our shares. Specifically, beginning in 2016, the Bank’s ability to pay dividends to the Company will be limited if it does not have the capital conservation buffer required by the new capital rules, which may further limit the Company’s ability to pay dividends to stockholders. See “Item 1. Business—Supervision and Regulation—Capital Requirements.”

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations.

Our ability to originate and sell loans could be restricted by recently adopted federal regulations.

The Consumer Financial Protection Bureau has issued a rule intended to clarify how lenders can avoid legal liability under the Dodd-Frank Act, which holds lenders accountable for ensuring a borrower’s ability to repay a mortgage loan. Under the rule, loans that meet the “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the rule, a “qualified mortgage” loan must not contain certain specified features, including:

excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

interest-only payments;

negative amortization; and

terms of longer than 30 years.

Also, to qualify as a “qualified mortgage,” a loan must be made to a borrower whose total monthly debt-to-income ratio does not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify a borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments.

In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.” The regulatory agencies have issued a final rule to implement this requirement. The final rule provides that the definition of “qualified residential mortgage” includes loans that meet the definition of qualified mortgage issued by the Consumer Financial Protection Bureau.

These final rules could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans, any of which could limit our growth or profitability.

Our success depends on hiring and retaining certain key personnel.

Our performance largely depends on the talents and efforts of highly skilled individuals. We rely on key personnel to manage and operate our business, including major revenue generating functions such as loan and deposit generation, as well as operational functions such as regulatory compliance and information technology. The loss of key staff may adversely affect our ability to maintain and manage these functions effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could reduce our net income. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

We face significant operational risks because the financial services business involves a high volume of transactions.

We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity. In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and/or suffer damage to our reputation.

Cyber-attacks or other security breaches could adversely affect our operations, net income or reputation.

We regularly collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our own business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf.

Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing. Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent e-mail, text or voice mail, is an emerging threat targeting the customers of popular financial entities. A failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error, malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses.

If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss.

Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of information does occur, those events will be promptly detected and addressed. Similarly, when confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party agree to maintain the confidentiality of the information, establish and maintain policies and procedures designed to preserve the confidentiality of the information, and permit us to confirm the third party’s compliance with the terms of the agreement. As information security risks and cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.

Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur and may not be adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any systems failures, interruptions, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

Legal and regulatory proceedings and related matters could adversely affect us or the financial services industry in general.

We, and other participants in the financial services industry upon whom we rely, have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we, or other participants in the financial services industry, may not prevail in any proceedings or litigation. There could be substantial cost and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

Managing reputational risk is important to attracting and maintaining customers, investors and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased governmental regulation, all of which could adversely affect our operating results.

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

In preparing this annual report as well as other periodic reports we are required to file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our valuation of investment securities, our determination of our income tax provision and goodwill, and our evaluation of the adequacy of our allowance for loan losses.

Changes in our accounting policies or in accounting standards could materially affect how we report our financial condition and results of operations.

Our accounting policies are essential to understanding our financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain, and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.

From time to time, the Financial Accounting Standards Board and the Securities and Exchange Commission change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial statements. These changes are beyond our control, can be difficult to predict and could materially affect how we report our financial condition and results of operations. We could also be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements in material amounts.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on non-residential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.

PROPERTIES

We conduct our business through our main banking office located in Cheviot, Ohio, and 11 other full-service branch offices located in Hamilton County, Ohio. The aggregate net book value of our premises and equipment was $10.9 million at December 31, 2015. The following table sets forth certain information with respect to our offices at December 31, 2015, including lease expiration dates for leased properties.

Location	Leased or Owned	Year Opened/ Acquired	Net Book Value
			(In thousands)
Main Office
3723 Glenmore Avenue Cheviot, Ohio 45211	Owned	1912/2012	$	4,557

Branches
5550 Cheviot Road Cincinnati, Ohio 45247	Owned	1982		229

6060 Bridgetown Road Cincinnati, Ohio 45248	Owned	1991		317

1194 Stone Road Harrison, Ohio 45030	Owned	1997		468

5791 Glenway Avenue	Owned – building
Cincinnati, Ohio 45238	Leased – land June 2022	2003		651

585 Anderson Ferry Road Cincinnati, Ohio 45238	Owned	2006		937

7072 Harrison Avenue Cincinnati, Ohio 45247	Owned	2006		1,270

2000 Madison Road
Cincinnati, Ohio 45208	Owned	1981		691

7615 Reading Road Cincinnati, Ohio 45237	Leased February 2018	1971		69

1100 West Kemper Road Cincinnati, Ohio 45240	Owned	2014		645

11186 Reading Road Cincinnati, Ohio 45241	Owned	1974		1,028

7944 Beechmont Avenue Cincinnati, Ohio 45255	Leased October 2017	2001		7
			$	10,869

ITEM 3.

LEGAL PROCEEDINGS

On January 15, 2016, a putative shareholder class action lawsuit was filed by Raymond J. Neiheisel against the Company, the Company’s directors and MainSource in the Court of Common Pleas, Hamilton County, Ohio, Civil Division (the "Neiheisel Action"). In the Neiheisel Action, the plaintiff alleges that the directors of the Company breached their fiduciary duties of due care, independence, good faith and fair dealing to the shareholders of the Company, that the consideration to be received by the shareholders is inadequate and undervalues the Company, that the Merger Agreement includes improper deal-protection devices that purportedly lock up the Merger and may operate to prevent other bidders from making successful competing offers for the Company, that the deal protection devices unreasonably inhibit the ability of the directors of the Company to act with respect to investigating and pursuing superior proposals and alternatives and that the Merger Agreement involves conflicts of interests. The complaint further alleges that the Company and MainSource aided and abetted the alleged breaches of fiduciary duty by the directors of the Company. The complaint was amended on February 29, 2016 to also allege that the Registration Statement of which the proxy statement/prospectus is a part, provides materially misleading and incomplete information rendering the stockholders of the Company unable to make an informed decision with respect to the Merger. The amended complaint contains both direct class action claims as well as indirect shareholder derivative claims.

On February 16, 2016, a putative shareholder class action lawsuit was filed by Stephen Bushansky against the Company, the Company’s directors and MainSource in the Court of Common Pleas, Hamilton County, Ohio, Civil Division (the "Bushansky Action"). In the Bushansky Action, the plaintiff alleges that the directors of the Company breached their fiduciary duties of loyalty, good faith and due care to the shareholders of the Company, that the consideration to be received by the shareholders is unfair and inadequate, that the Merger Agreement includes improper deal-protection devices that purportedly lock up the Merger and may operate to prevent other bidders from providing the Company’s shareholders with a premium for their shares. The complaint further alleges that MainSource aided and abetted the alleged breaches of fiduciary duty by the directors of the Company. The plaintiff seeks an order that the matter may be maintained as a class action, preliminary and permanent injunctive relief, including enjoining or rescinding the Merger, and an award of unspecified damages, attorneys' fees and other relief.

The outcome of these actions and their impact on any party or the Merger cannot be predicted with certainty. A preliminary injunction could delay or jeopardize the completion of the Merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the Merger. Additional lawsuits arising out of or relating to the Merger Agreement or the Merger may be filed in the future. Cheviot, Cheviot's directors and MainSource believe that the claims asserted in these actions are without merit and intend to vigorously defend against these lawsuits. The complaint was amended on February 29, 2016 to also allege that the Registration Statement of which the proxy statement/prospectus is a part, provides materially misleading and incomplete information rendering the stockholders of the Company unable to make an informed decision with respect to the Merger. The amended complaint contains both direct class action claims as well as indirect shareholder derivative claims.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is listed on the Nasdaq Capital Market under the symbol “CHEV”.

The following table sets forth the range of the high and low sales prices of the Company’s Common Stock for the prior eight calendar quarters, and is based upon information provided by Nasdaq, and dividend information for these periods.

	Prices of Common Stock
	High		Low		Dividends Paid
Calendar Quarter Ended
March 31, 2015	$	16.35	$	12.66	$	0.09
June 30, 2015		15.89		14.60		0.10
September 30, 2015		14.87		13.81		0.10
December 31, 2015		15.82		13.90		0.10

	Prices of Common Stock
	High		Low		Dividends Paid
Calendar Quarter Ended
March 31, 2014	$	10.65	$	10.17	$	0.09
June 30, 2014		12.46		10.26		0.09
September 30, 2014		12.85		12.33		0.09
December 31, 2014		14.21		12.33		0.09

As of December 31, 2015, the Company had 1,080 stockholders of record.

The Company is not permitted to pay dividends on its common stock if its stockholders’ equity would be reduced below the amount of the liquidation account established by the Company in connection with the mutual-to-conversion. In addition, the Company is be subject to state law limitations and federal bank regulatory policy on the payment of dividends. Maryland law generally limits dividends if the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend or if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution. Please see “Item 1. Business— Regulation—Capital Distributions” for a discussion of restrictions on the ability of the Bank to pay the Company dividends.

On October 15, 2013, the Corporation amended the authorization of a stock repurchase plan. Under this program the Corporation is authorized to repurchase 341,845 shares constituting 5% of the outstanding shares of common stock. As of December 31, 2015, the Corporation had repurchased 127,000 shares at an average price of $11.37. During the fourth quarter of 2015, the Company’s did not repurchase any common stock. The stock repurchase plan does not have an expiration date.

Set forth below is information as of December 31, 2015 regarding equity compensation plans. Other than the ESOP, the Company does not have any equity compensation plans that were not approved by its stockholders.

Plan		Number of securities to be issued upon exercise of outstanding options and rights				Weighted average exercise price				Number of securities remaining available for issuance under plan
Equity compensation plans approved by stockholders			544,168			$	13.29				-

Performance Graph

The stock performance graph below compares the Company’s cumulative shareholder return on its common stock from December 31, 2010 to December 31, 2015 with the cumulative total return of the NASDAQ Composite and the SNL Thrift Nasdaq Index. Total shareholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period plus share price change for the period from the share price at the beginning of the measurement period. The return is based on an initial investment of $100.00.

			Period Ending
Index	12/31/10		12/31/11		12/31/12		12/31/13		12/31/14		12/31/15
Cheviot Financial Corp.		100.00		88.40		98.21		112.44		159.83		176.95
Nasdaq Composite		100.00		99.21		116.82		163.75		188.03		201.40
SNL Thrift Nasdaq		100.00		89.30		106.57		135.13		149.66		171.02

Source: SNL Financial LC, Charlottesville, VA

ITEM 6.

SELECTED FINANCIAL DATA

The following tables set forth selected financial and other data of Cheviot Financial Corp. at the dates and for the years presented.

	At December 31,
	2015		2014		2013		2012		2011
	(In thousands)
Selected Financial Condition Data:
Total assets	$	572,000	$	571,237	$	587,110	$	631,982	$	616,304
Cash and cash equivalents		43,005		42,439		22,112		25,114		45,140
Investment securities available for sale		91,220		126,999		153,942		195,963		121,042
Mortgage-backed securities available for sale		7,503		9,400		9,361		6,029		7,459
Mortgage-backed securities held to maturity – at cost		-		-		3,116		3,581		4,167
Loans receivable, net ⁽¹⁾		376,171		337,095		336,837		340,414		384,296
Deposits		454,885		451,784		469,387		490,646		492,321
Advances from the Federal Home Loan Bank		12,578		14,851		19,261		24,314		31,327
Shareholders’ equity		96,469		96,182		90,927		107,900		72,910

	For the Year Ended
	December 31,
	2015		2014		2013		2012		2011
	(In thousands, except per share data)
Selected Operating Data:
Total interest income	$	18,049	$	18,434	$	19,312	$	21,689	$	22,126
Total interest expense		3,411		3,520		4,331		5,601		5,981
Net interest income		14,638		14,914		14,981		16,088		16,145
Provision for losses on loans		1,663		1,024		1,443		1,280		700
Net interest income after provision for losses on loans		12,975		13,890		13,538		14,808		15,445
Total other income		2,967		3,863		2,701		4,326		3,000
Total general, administrative and other expense		14,588		13,330		14,386		14,561		13,926
Earnings before income taxes		1,354		4,423		1,853		4,573		4,519
Federal income taxes		434		1,344		421		1,218		1,153
Net earnings	$	920	$	3,079	$	1,432	$	3,355	$	3,366

Earnings per share – basic and diluted (2)	$	0.14	$	0.47	$	0.21	$	0.45	$	0.38

(1) Includes loans held for sale, net of allowance for loan losses and deferred loan costs.

(2) Earnings per share for the year 2011 – represent actual earnings per share based upon the average number of shares outstanding during the year, without regard to the exchange ratio that was utilized in our second step conversion.

	At or For the
	Year Ended
	December 31,
	2015			2014			2013			2012			2011
Selected Financial Ratios and Other Data:⁽¹⁾
Performance Ratios:
Return on average assets		0.16	%		0.53	%		0.24	%		0.53	%		0.61	%
Return on average equity		0.95			3.28			1.43			3.16			5.03
Average equity to average assets		16.82			16.23			16.47			16.70			12.14

Other Financial Ratios:
Net interest margin ⁽²⁾		2.92			2.94			2.81			2.88			3.26
Average interest-earning assets to average interest-bearing liabilities		106.00			106.31			106.82			105.08			102.09
Total general, administrative and other expenses to average total assets		2.53			2.30			2.37			2.29			2.53
Efficiency ratio ⁽³⁾		82.86			70.99			81.36			71.33			72.74
Dividend payout ratio – per share basis ⁽⁴⁾		278.57			76.60			171.43			71.11			126.32
Dividend payout ratio- net income basis ⁽⁴⁾		280.98			76.88			170.18			70.07			46.97
Equity to total assets at end of period		16.87			16.84			15.49			17.07			11.83
Interest rate spread ⁽²⁾		2.88			2.89			2.75			2.81			3.21
Tangible common equity to tangible assets		15.30			15.25			13.90			15.60			10.18

Asset Quality Ratios:
Nonperforming loans as a percent of net loans ⁽⁵⁾		1.98			1.51			2.20			3.14			3.15
Nonperforming assets as a percent of total assets ⁽⁵⁾		1.59			1.21			1.82			2.32			2.58
Allowance for loan losses as a percent of net loans		0.94			0.66			0.50			0.63			0.38
Allowance for loan losses as a percent of nonperforming assets ⁽⁵⁾		38.87			32.40			15.88			14.73			9.09
Allowance for loan losses as a percent of net originated loans ⁽⁶⁾		0.99			0.66			0.58			0.81			0.68
Allowance for loan losses as a percent of net purchased loans ⁽⁷⁾		0.83			0.77			0.53			0.54			-
Allowance for loan losses as a percent of originated non-performing assets ⁽⁶⁾		78.73			41.88			25.38			19.41			17.69
Allowance for loan losses as a percent of purchased non-performing assets ⁽⁷⁾		10.13			20.23			9.64			11.17			-
Net charge-offs to average loans		0.10			0.15			0.57			0.16			0.13

Regulatory Capital Ratios:
Common equity tier 1 risk-based capital		21.57			N/A			N/A			N/A			N/A
Tier 1 risk-based capital		21.57			24.53			24.72			24.80			18.36
Tier 1 leverage		13.94			13.88			13.46			12.39			9.95
Total risk-based capital		22.54			25.23			25.26			25.50			18.80
Number of:
Banking offices		12			12			12			12			12

(1)

With the exception of end of period ratios, all ratios are based on average monthly balances during the periods.

(2)

Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-earning assets.

(3)

Efficiency ratio represents the ratio of general, administrative and other expenses divided by the sum of net interest income and total other income.

(4)

Per share dividend payout ratio is calculated by dividing dividends declared per share by earnings per share. Net income dividend payout ratio is calculated as total dividends paid to minority shareholders by total net income.

(5)

Nonperforming loans consist of non-accrual loans and accruing loans greater than 90 days delinquent, while nonperforming assets consist of non-performing loans and real estate acquired through foreclosure. Includes non-performing assets acquired from First Franklin Corporation.

(6)

Ratios exclude the effects of loans and non-performing assets acquired from First Franklin Corporation, as such purchased loans and assets are recorded at fair value at the time of acquisition, and without the related allowance for loan losses as reflected on the target entity’s financial statements.

(7)

Net purchased loans and non-performing assets includes one-to-four family residential loans without a credit quality discount applied.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis reflects Cheviot Financial’s financial statements and other relevant statistical data and is intended to enhance your understanding of our consolidated financial condition and results of operations. You should read the information in this section in conjunction with Cheviot Financial’s consolidated financial statements and the related notes included in this Annual Report. The preparation of financial statements involves the application of accounting policies relevant to the business of Cheviot Financial. Certain of Cheviot Financial’s accounting policies are important to the portrayal of Cheviot Financial’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers.

General

Our results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on our loans and securities and our cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for losses on loans, loan sales and servicing activities, and service charges and fees collected on our loan and deposit accounts. Our general, administrative and other expense primarily consists of employee compensation and benefits, occupancy and equipment expense, property, payroll and other taxes, legal and professional expenses, other operating expenses, and federal income taxes. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.

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 to be a critical accounting policy.

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 accounting policies 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 underlying 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 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.

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 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.

Cheviot Financial Corp.

Average Balances, Net Interest Income and Yields Earned and Rates PaiD

Net interest income represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income also depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them, respectively.

The following tables set forth certain information for the years ended December 31, 2015, 2014, and 2013. For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, is expressed both in dollars and rates. No tax equivalent adjustments were deemed necessary as the effect thereof would have been immaterial. Average balances are based on monthly averages. In the opinion of management, monthly averages do not differ materially from daily averages.

	For the Years Ended December 31,
	2015							2014							2013
	Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)

Assets:
Interest-earning assets:
Loans receivable, net ⁽¹⁾	$	353,487	$	15,066		4.26	%	$	331,944	$	14,720		4.43	%	$	335,615	$	15,622		4.65	%
Mortgage-backed securities		8,498		150		1.77			15,639		290		1.85			10,932		196		1.79
Investment securities		117,985		2,449		2.08			144,501		3,067		2.12			171,458		3,114		1.82
Interest-earning deposits and other ⁽²⁾		21,112		384		1.82			15,219		357		2.35			15,060		380		2.52
Total interest-earning assets		501,082		18,049		3.60			507,303		18,434		3.63			533,065		19,312		3.62

Total non-interest-earning assets		76,339							71,035							72,995

Total assets	$	577,421						$	578,338						$	606,060

Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Deposits	$	455,233	$	2,987		0.66	%	$	460,458	$	2,986		0.65	%	$	477,476	$	3,622		0.76	%
FHLB advances		17,490		424		2.42			16,739		534		3.19			21,561		709		3.29
Total interest-bearing liabilities		472,723		3,411		0.72			477,197		3,520		0.74			499,037		4,331		0.87

Total non-interest-bearing liabilities		7,584							7,299							7,202

Total liabilities		480,307							484,496							506,239

Shareholders’ equity		97,114							93,842							99,821

Total liabilities and shareholders’ equity	$	577,421						$	578,338						$	606,060

Net interest income			$	14,638						$	14,914						$	14,981

Interest rate spread ⁽³⁾						2.88	%						2.89	%						2.75	%

Net interest margin ⁽⁴⁾						2.92	%						2.94	%						2.81	%

Average interest-earning assets to average interest-bearing liabilities						106.00	%						106.31	%						106.82	%

(1)

Includes nonaccruing loans. Interest income on loans receivable, net includes amortized loan origination fees/costs.

(2)

Includes interest-earning demand deposits, other interest-earning deposits and FHLB stock.

(3)

Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.

(4)

Net interest margin is net interest income divided by average interest-earning assets.

Rate/Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Year ended December 31,
	2015 vs. 2014									2014 vs. 2013
	Increase									Increase
	(decrease)									(decrease)
	due to									due to
							Net									Net
	Volume			Rate			Change			Volume			Rate			Change
	(In thousands)
Interest-earnings assets:
Loans receivable, net	$	924		$	(578	)	$	346		$	(174	)	$	(728	)	$	(902	)
Mortgage-backed securities		(127	)		(13	)		(140	)		88			6			94
Investment securities		(559	)		(59	)		(618	)		(520	)		473			(47	)
Interest-earning assets		117			(90	)		27			3			(26	)		(23	)

Total interest-earning assets		355			(740	)		(385	)		(603	)		(275	)		(878	)

Interest-bearing liabilities:
Deposits		1			-			1			(136	)		(500	)		(636	)
FHLB advances		24			(134	)		(110	)		(153	)		(22	)		(175	)

Total interest-bearing liabilities		25			(134	)		(109	)		(289	)		(522	)		(811	)

Increase (decrease) in net interest income	$	330		$	(606	)	$	(276	)	$	(314	)	$	247		$	(67	)

Comparison of Financial Condition at December 31, 2015 and December 31, 2014

At December 31, 2015, Cheviot Financial had total assets of $572.0 million, an increase of $763,000, or 0.1%, from $571.2 million at December 31, 2014. The increase in total assets is primarily the result of an increase of $39.1 million in loans receivable, including loans held for sale, which was partially offset by a decrease of $35.8 million in investment securities and a decrease of $1.9 million in mortgage-backed securities.

Cash, federal funds sold and interest-earning deposits in other financial institutions totaled $43.0 million at December 31, 2015, an increase of $566,000, or 1.3%, from $42.4 million at December 31, 2014. The increase in cash and cash equivalents at December 31, 2015 was due to a $9.7 million increase in interest-earning deposits and a $5.8 million increase in cash and due from banks, which were partially offset by a decrease of $14.9 million in federal funds sold.

Investment securities totaled $91.2 million at December 31, 2015, a decrease of $35.8 million, or 28.2%, from $127.0 million at December 31, 2014. During the year ended December 31, 2015, investment securities purchases consisted of $30.0 million of U.S. Government agency obligations, which was partially offset by $67.0 million of maturities of U.S. Government agency obligations and $435,000 of maturities of municipal obligations. At December 31, 2015, all of our investment securities were classified as available for sale. Consequently as interest rates move we may have fluctuations in principal value which, absent other than-temporary impairment, will be reflected in other comprehensive gain or loss in our financial statements. As of December 31, 2015, none of the investment securities were considered impaired.

Mortgage-backed securities totaled $7.5 million at December 31, 2015, a decrease of $1.9 million, or 20.2%, from $9.4 million at December 31, 2014. The decrease in mortgage-backed securities was due primarily to principal prepayments and repayments of $1.9 million. At December 31, 2015, all of our mortgage-backed securities were classified as available for sale. As of December 31, 2015, none of the mortgage-backed securities were considered impaired.

Loans receivable, including loans held for sale, totaled $376.2 million at December 31, 2015, an increase of $39.1 million, or 11.6%, from $337.1 million at December 31, 2014. The change in loans receivable reflects loan originations of $166.4 million, which was partially offset by loan sales totaling $47.6 million and loan principal repayments of $78.8 million. At December 31, 2015, the portfolio was comprised of 55.7% in fixed-rate mortgage loans and 44.3% in variable-rate mortgage loans.

At December 31, 2015, the allowance for loan losses totaled $3.5 million, or 0.94% of net loans, compared to $2.2 million, or 0.66% of net loans at December 31, 2014. 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 three-year historic loss experience by applying such loss percentage to the loan types to be collectively evaluated in the portfolio. The $1.7 million provision for losses on loans recorded during the year ended December 31, 2015 is a reflection of these factors, changes in the composition of the loan portfolio and the need to charge-off during 2015 approximately $539,000 in loans receivable during 2015. 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. As stated previously, Cheviot Financial’s allowance at December 31, 2015 does not include any credit quality discount related to loans acquired from First Franklin, other than $535,000, net of charge-offs of $195,000, added during the year ended 2015 for certain one- to four-family residential and nonresidential and commercial real estate loans. 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 December 31, 2015.

Originated nonperforming and impaired loans totaled $2.4 million and $2.3 million at December 31, 2015 and 2014. At December 31, 2015, originated nonperforming and impaired loans were comprised of 27 loans secured by one- to four-family residential real estate, two loans secured by nonresidential real estate, one loan secured by multi-family residential real estate and one consumer loan. At December 31, 2015 and 2014, real estate acquired through foreclosure totaled $1.6 million and $1.8 million, respectively. The Corporation has an allowance for loan losses intended to absorb losses inherent in our loan portfolio. The allowance for loan losses totaled 124.6% and 71.0% of originated nonperforming and impaired loans at December 31, 2015 and 2014, respectively. During the year ended December 31, 2015, management determined an additional allowance of $18,000 should be recorded for certain one-to-four family and nonresidential and commercial real estate purchased loans. This allowance for loan losses represented 0.83% of purchased non-performing and impaired one-to-four family residential and nonresidential and commercial real estate loans. Based on individual analyses of these loans, management believes that the Corporation’s allowance for loan losses conforms to generally accepted accounting principles based upon the available facts and circumstances. However, there can be no assurance that additions to the allowance will not be necessary in future periods, which would in turn adversely affect our results of operations.

Deposits totaled $454.9 million at December 31, 2015, an increase of $3.1 million, or 0.7%, from $451.8 million at December 31, 2014. The increase in deposits consisted of an increase of $13.4 million in demand, transaction and passbook deposits, which was partially offset by a $10.3 million decrease in certificates of deposit.

Advances from the Federal Home Loan Bank of Cincinnati decreased by $2.3 million, or 15.3%, to a total of $12.6 million at December 31, 2015 from $14.9 million at December 31, 2014. The decrease is the result of the repayments of $14.2 million in advances, which was partially offset by new advances of $12.0 million.

Shareholders’ equity totaled $96.5 million at December 31, 2015, a $287,000, or 0.3%, increase from December 31, 2014. The increase primarily resulted from net earnings of $920,000 and a decrease of $1.1 million (net of tax) in the unrealized loss on securities designated as available for sale, which were partially offset by common stock issued for stock options exercised of $535,000 and dividends paid of $2.6 million. It is expected that as our securities portfolio matures, or individual securities are called, the value of individual securities will revert to its face value thereby reducing the level of unrealized loss on securities designated as available for sale. Cheviot Savings Bank is required to maintain minimum regulatory capital pursuant to federal regulations. At December 31, 2015, Cheviot Savings Bank’s regulatory capital substantially exceeded all minimum regulatory capital requirements.

Comparison of Results of Operations for the Years Ended December 31, 2015 and December 31, 2014

General

Cheviot Financial’s net earnings totaled $920,000 for the year ended December 31, 2015, a decrease of $2.2 million, or 70.1%, compared to the net earnings recorded for the year ended December 31, 2014. The decrease in net earnings reflects an increase of $1.3 million in general, administrative and other expense, a decrease of $896,000 in other income, an increase of $639,000 in the provision for losses on loans and a decrease of $276,000 in net interest income, which were partially offset by a decrease of $910,000 in the provision for federal income taxes.

Interest Income

Total interest income for the year ended December 31, 2015, totaled $18.0 million, a decrease of $385,000, or 2.1%, compared to the year ended December 31, 2014. The decrease in interest income is a result of a $6.2 million decrease in the average balance of interest earning assets and by a three basis point decrease in the average yield on interest-earning assets to 3.60% from 3.63% during the year ended December 31, 2015 as compared to the year ended December 31, 2014.

Interest income on loans increased by $346,000, or 2.4%, for the year ended December 31, 2015. The increase in interest income on loans was due primarily to an increase of $21.5 million, or 6.5% in average loans outstanding, which was partially offset by a 17 basis point decrease in the average yield on loans to 4.26% for the 2015 period from 4.43% for the 2014 period.

Interest income on mortgage-backed securities decreased by $140,000, or 48.3%, during the year ended December 31, 2015, due primarily to a $7.1 million decrease in the average balance outstanding and a decrease in average yield of eight basis points from 2014. Interest income on investment securities decreased by $618,000, or 20.1%, during the year ended December 31, 2015, due to a decrease of $26.5 million, or 18.4%, in the average balance outstanding and a decrease in the average yield of four basis point from 2014. Interest income on other interest-earning deposits increased by $27,000, or 7.6%, during the year ended December 31, 2015. The increase was due to an increase of $5.9 million in the average balance outstanding, which was partially offset by a 53 basis point decrease in the average yield.

Interest Expense

Interest expense totaled $3.4 million for the year ended December 31, 2015, a decrease of $109,000, or 3.1%, compared to the year ended December 31, 2014. The average balance of interest-bearing liabilities outstanding decreased by $4.5 million during 2015 and the average cost of liabilities decreased by two basis points to 0.72% for the year ended December 31, 2015. Interest expense on deposits totaled $3.0 million for the year ended December 31, 2015, an increase of $1,000 from the year ended December 31, 2014. This increase was a result of a one basis point increase in the average cost of deposits to 0.66%, which was partially offset by a decrease in the average balance outstanding of $5.2 million, or 1.1%, during 2015.

Interest expense on borrowings totaled $424,000 for the year ended December 31, 2015, a decrease of $110,000, or 20.6%, from 2014. This decrease resulted from a decrease of 77 basis points in the average costs of borrowings, which was partially offset by an increase of $751,000 in the average balance of borrowings outstanding.

Net Interest Income

As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $276,000, or 1.9%, during the year ended December 31, 2015 from the year ended December 31, 2014. The average interest rate spread decreased to 2.88% for the year ended December 31, 2014 from 2.89% for the year ended December 31, 2014. The net interest margin decreased to 2.92% for the year ended December 31, 2015 from 2.94% for the year ended December 31, 2014.

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 $1.7 million provision for losses on loans for the year ended December 31, 2015 compared to a provision of $1.0 million for the year ended December 31, 2014. Non-performing originated loans were 0.8% and 0.9% of net originated loans at December 31, 2015 and 2014, respectively. The provision for loan losses for the year ended December 31, 2015 reflects the amount necessary to maintain an adequate allowance based on our historical loss experience, as well as consideration of other external factors. These other external factors, which include, but are not limited to, 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 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 is adequate to absorb such losses. Cheviot Financial’s allowance at December 31, 2015 does not include any credit quality discount related to loans acquired from First Franklin, other than $535,000 for certain one- to four-family and nonresidential and commercial real estate loans.

Other Income

Other income decreased $896,000, or 23.2%, to $3.0 million for the year ended December 31, 2015, compared to the same period in 2014, due primarily to the absence during 2015 of gains on sale of investment and mortgage-backed securities of $1.1 million, which was partially offset by the increase on the gain on sale of loans of $434,000.

General, Administrative and Other Expense

General, administrative and other expense increased $1.3 million, or 9.4%, to $14.6 million for the year ended December 31, 2015, from $13.3 million for the comparable period in 2014. The increase is a result of an increase of $1.0 million in employee compensation and benefits, an increase of $477,000 in legal and professional expense, an increase of $173,000 in property, payroll and other taxes, an increase of $146,000 in data processing expense, which were partially offset by a decrease of $419,000 in real estate owned loss expense and a decrease of $142,000 in occupancy and equipment expense. The increase in legal and professional expense was due primarily to fees of $485,000 incurred in relation to our proposed merger with MainSource Financial Group.

As previously announced, on February 3, 2015 we entered into a severance agreement (the “Agreement”) with our former President and Chief Executive Officer in connection with his retirement. The Agreement included non-competition, non-solicitation and confidentiality provisions and a full and final release of claims, in exchange for which we paid the former President and Chief Executive officer a total of approximately $765,000 upon his retirement. The execution of the Agreement and resulting payments caused the majority of the increase in employee compensation and benefits and related property, payroll and other taxes for the year ended December 31, 2015.

Federal Income Taxes

The provision for federal income taxes totaled $434,000 for the year ended December 31, 2015, a decrease of $910,000 compared to the $1.3 million provision recorded for 2014. The effective tax rates were 32.1% and 30.4% for the years ended December 31, 2015 and 2014, respectively. During the year ended December 31, 2015, Cheviot Financial has approximately $394,000 in remaining operating loss carryforwards to offset future taxable income for 17 years.

Comparison of Results of Operations for the Years Ended December 31, 2014 and December 31, 2013

General

Cheviot Financial’s net earnings totaled $3.1 million for the year ended December 31, 2014, an increase of $1.6 million, or 115.0%, compared to the net earnings recorded for the year ended December 31, 2013. The increase in net earnings reflects a decrease of $419,000 in the provision for losses on loans, an increase in other income of $1.2 million, and a decrease in general, administrative and other expense of $1.1 million, which was partially offset by a decrease of $67,000 in net interest income and an increase of $923,000 in the provision for federal income taxes.

Interest Income

Total interest income for the year ended December 31, 2014, totaled $18.4 million, a decrease of $878,000, or 4.5%, compared to the year ended December 31, 2013. The decrease in interest income is a result of a $25.8 million decrease in the average balance of interest earning assets, which was offset by a two basis point increase in the average yield on interest-earning assets to 3.70% from 3.68% during the year ended December 31, 2014 as compared to the year ended December 31, 2013.

Interest income on loans decreased by $902,000, or 5.8%, for the year ended December 31, 2014. The decrease in interest income on loans was due primarily to a decrease of $3.7 million, or 1.1% in average loans outstanding and by a 22 basis point decrease in the average yield on loans to 4.43% for the 2014 period from 4.65% for the 2013 period. Interest income on mortgage-backed securities increased by $94,000, or 48.0%, during the year ended December 31, 2014, due primarily to a $4.7 million increase in the average balance outstanding and an increase in average yield of six basis points from 2013.

Interest income on investment securities decreased by $47,000, or 1.5%, during the year ended December 31, 2014, due to a decrease of $27.0 million, or 15.7%, decrease in the average balance outstanding, which was partially offset by an increase in the average yield of 30 basis point from 2013. Interest income on other interest-earning deposits decreased by $23,000, or 6.1%, during the year ended December 31, 2014. The decrease was due to a 17 basis point decrease in the average yield, which was offset by a $159,000 increase in the average balance outstanding.

Interest Expense

Interest expense totaled $3.5 million for the year ended December 31, 2014, a decrease of $811,000, or 18.7%, compared to the year ended December 31, 2013. The average balance of interest-bearing liabilities outstanding decreased by $21.8 million during 2014 and the average cost of liabilities decreased by 13 basis points to 0.74% for the year ended December 31, 2014. Interest expense on deposits totaled $3.0 million for the year ended December 31, 2014, a decrease of $636,000, or 17.6%, from the year ended December 31, 2013. This decrease was a result of an 11 basis point decrease in the average cost of deposits to 0.65%, and by a decrease in the average balance outstanding of $17.0 million, or 3.6% during 2014. The decrease in the average cost of deposits is due to the overall changes in our deposit composition and lower market rates for the 2014 period.

Interest expense on borrowings totaled $534,000 for the year ended December 31, 2014, a decrease of $175,000, or 24.7%, from the 2013 period. This decrease resulted from a decrease of $4.8 million in the average balance of borrowings outstanding, and by a 10 basis point decrease in the average costs of borrowings for the year ended December 31, 2014.

Net Interest Income

As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $67,000, or 0.4%, during the year ended December 31, 2014 from the year ended December 31, 2013. The average interest rate spread increased to 2.89% for the year ended December 31, 2014 from 2.75% for the year ended December 31, 2013. The net interest margin increased to 2.94% for the year ended December 31, 2014 from 2.81% for the year ended December 31, 2013.

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 $1.0 million provision for losses on loans for the year ended December 31, 2014. Non-performing originated loans were 0.9% and 1.3% of net originated loans at December 31, 2014 and 2013, respectively. The provision for loan losses for the year ended December 31, 2014 reflects the amount necessary to maintain an adequate allowance based on our historical loss experience, as well as consideration of other external factors. These other external factors, which include, but are not limited to, 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 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 is adequate to absorb such losses. Cheviot Financial’s allowance at December 31, 2014 does not include any credit quality discount related to loans acquired from First Franklin, other than $611,000 for certain one- to four-family and nonresidential and commercial real estate loans.

Other Income

Other income increased $1.2 million, or 43.0%, to $3.9 million for the year ended December 31, 2014, compared to the same period in 2013, due primarily to gains on sale of investment and mortgage-backed securities of $1.1 million and the absence during the 2014 period of the loss on the sale of office premises and equipment comprised of the former Franklin Savings headquarters of $255,000.

General, Administrative and Other Expense

General, administrative and other expense decreased $1.1 million, or 7.3%, to $13.3 million for the year ended December 31, 2014, from $14.4 million for the comparable period in 2013. The decrease is a result of $332,000 decrease in employee compensation and benefits, a decrease of $220,000 in occupancy and equipment expense, a decrease of $276,000 in property, payroll and other taxes, and a decrease of $199,000 in other operating expense, which were partially offset by an increase of $89,000 in data processing expense.

Federal Income Taxes

The provision for federal income taxes totaled $1.3 million for the year ended December 31, 2014, an increase of $923,000 compared to the provision recorded for the 2013 period. The effective tax rates were 30.4% and 22.7% for the years ended December 31, 2014 and 2013, respectively. During the year ended December 31, 2014, Cheviot Financial has approximately $2.3 million in remaining operating loss carryforwards to offset future taxable income for 18 years. These losses are subject to the annual allowable Internal Revenue Code Section 382 net operating loss limitations of $1.1 million.

Management of Market Risk

Qualitative Analysis

Our most significant form of market risk is interest rate risk. The primary objective of our interest rate risk policy is to manage the exposure of net interest income to changes in interest rates. Our board of directors and management evaluates the interest rate risk inherent in certain assets and liabilities, determines the level of risk appropriate given our business strategy, operating environment, capital and liquidity requirements and performance objectives and modifies lending, investing, deposit and borrowing strategies accordingly. Our board of directors reviews management’s activities and strategies, the effect of those strategies on the net portfolio value, and the effect that changes in market interest rates would have on net portfolio value. Since 2009, short term interest rates have been at historically low levels. The short term rates are used to price our deposit products and are used in determining our cost of borrowing. Medium and long term interest rates are used to determine the pricing of our loan products. These rates have decreased during 2015. This has resulted in a decrease of our interest rate spread. Consequently, our net interest income decreased slightly in 2015 as compared to 2014.

We actively monitor interest rate risk in connection with our lending, investing, deposit and borrowing activities. We emphasize the origination of residential and multi-family fixed-rate mortgage loans, including 10, 15, 20 and 30 year first mortgage loans, residential, multi-family and commercial real estate adjustable-rate loans, construction loans and consumer loans. Depending on market interest rates and our capital and liquidity position, we may sell our newly originated fixed-rate mortgage loans on a servicing-retained or servicing-released basis. We also invest in short-term securities, which generally have lower yields compared to longer-term investments.

Quantitative Analysis

As part of its monitoring procedures, the Asset and Liability Management Committee regularly reviews interest rate risk by analyzing the impact of alternative interest rate environments on the market value of portfolio equity. Cheviot uses an interest rate model prepared by a third party consulting firm. This model uses an economic value of equity (EVE) to determine the level of interest rate risk. This analysis measures interest rate risk by computing changes in net economic value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Economic value of equity represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. These analyses assess the risk of loss in market risk-sensitive instruments in the event of a sudden and sustained increase in interest rates ranging from up 100 to up 300 basis points and a sudden and sustained decrease in interest rates ranging from down 100 to down 200 basis points. The model does not provide any steps that we might take to counter the effect of that interest rate movement. Because of the low level of market interest rates, these analyses are not performed for decreases of more than 200 basis points.

The following table presents the change in our net economic value of equity at December 31, 2015 that would occur in the event of an immediate change in interest rates, with no effect given to any steps that we might take to counteract that change.

	Economic Value of Equity
	(Dollars in Thousands)

Change in rates ⁽¹⁾	Amount		Change			% Change			Economic Value Ratio ⁽²⁾

+300 bp	$	83,904	$	(16,703	)		(16.60	)%		15.91	%
+200 bp		91,855		(8,752	)		(8.70	)		16.89
+100 bp		97,626		(2,981	)		(2.96	)		17.41
0 bp		100,607		-			-			17.43
-100 bp		93,176		(7,431	)		(7.39	)		15.92
-200 bp		85,070		(15,537	)		(15.44	)		14.44

(1)

Assumes an instantaneous uniform change in interest rates at all maturities.

(2)

Economic Value Ratio represents the economic value of equity to the economic value of assets.

The model reflects that the Savings Bank’s EVE is less sensitive to an increase in interest rates than a decrease in interest rates at the 100bp increase or decrease. The Bank is less sensitive to significant increase in interest rates. The above table indicates that as of December 31, 2015, in the event of a 100 basis point increase in interest rates, we would experience a 3.0%, or $3.0 million, decrease in economic value of equity. In the event of a 100 basis point decrease in interest rates, we would experience an 7.4%, or $7.4 million, decrease in economic value of equity.

The model uses various assumptions in assessing interest rate risk. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analyses presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. Prepayment rates can have a significant impact on interest income. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe these assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurement. Modeling changes in net portfolio value requires the making of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the EVE table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on our net portfolio value and will differ from actual results.

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 December 31, 2015 and 2014, we had $12.6 million and $14.9 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 $139.1 million and $132.1 million, respectively.

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 year ended December 31, 2015, loan originations totaled $166.4 million, compared to $92.6 million for the year ended December 31, 2014. Purchases of mortgage-backed securities, investment and corporate securities totaled $30.0 million for the year ended December 31, 2015 and $25.1 million for the year ended December 31, 2014.

Total deposits increased $3.1 million during the year ended December 31, 2015 and decreased $17.6 million during the year ended December 31, 2014. Deposit flows are affected by the level of interest rates, the interest rates and products offered by competitors and other factors. At December 31, 2015, certificates of deposit scheduled to mature within one year totaled $108.1 million. Our ability to retain these deposits will be determined in part by the interest rates we are willing to pay on such deposits.

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.

At December 31, 2015 and 2014, we exceeded all of the applicable regulatory capital requirements. Our Tier 1 leverage capital was $78.7 million and $77.8 million, or 13.9% of total assets, at both December 31, 2015 and 2014, respectively. Our Tier 1 risk-based capital was $78.7 million and $77.8 million, or 21.6% and 24.5% of total assets, at December 31, 2015 and 2014, respectively. To be classified as a well-capitalized savings bank, we must also have a ratio of total risk-based capital to risk-weighted assets of at least 10.0%. At December 31, 2015 and 2014, we had a total risk-based capital ratio of 22.5% and 25.2%, respectively.

Impact of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented herein regarding Cheviot Financial have been prepared in accordance with accounting principles generally accepted in the United States of America, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of Cheviot Financial’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on Cheviot Financial’s performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, because such prices are affected by inflation to a larger extent than interest rates.

Commitments and Contingencies

The following table sets forth information regarding the Corporation’s obligations and commitments to make future payments under contract as of December 31, 2015.

			Payments due by period
	Less		More than		More than		More
	than		1-3		3-5		than
	1 year		years		years		5 years		Total
	(In thousands)

Contractual obligations:
Advances from the Federal Home Loan Bank	$	10,104	$	196	$	840	$	1,438	$	12,578
Certificates of deposit		108,081		45,691		45,346		-		199,118
Lease obligations		97		148		119		84		448

Amount of loan commitments and expiration per period:
Commitments to originate one- to four-family loans		1,528		-		-		-		1,528
Commitments to originate commercial loans		270		-		-		-		270
Home equity lines of credit		25,533		-		-		-		25,533
Commercial lines of credit		15,017		-		-		-		15,017
Undisbursed loans in process		14,229		-		-		-		14,229
Total contractual obligations	$	174,859	$	46,035	$	46,305	$	1,522	$	268,721

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The required financial statements begin on the following page.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Shareholders of Cheviot Financial Corp.

We have audited the accompanying consolidated statements of financial condition of Cheviot Financial Corp. as of December 31, 2015 and 2014, and the related statements of earnings, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015, 2014, and 2013. We also have audited Cheviot Financial Corp.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cheviot Financial Corp.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

	one east fourth street, suite 1200
	cincinnati, ohio 45202

	www.cshco.com
	p. 513.241.3111
	f. 513.241.1212

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cheviot Financial Corp. as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Cheviot Financial Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Cincinnati, Ohio

March 11, 2016

CHEVIOT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31, 2015 and 2014

(In thousands), except share data

	2015			2014
ASSETS

Cash and due from banks	$	28,597		$	22,757
Federal funds sold		-			14,941
Interest-earning deposits in other financial institutions		14,408			4,741
Cash and cash equivalents		43,005			42,439

Investment securities available for sale - at fair value		91,220			126,999
Mortgage-backed securities available for sale - at fair value		7,503			9,400
Loans receivable – net		374,274			335,763
Loans held for sale-at lower of cost or market		1,897			1,332
Real estate acquired through foreclosure – net		1,633			1,815
Office premises and equipment - at depreciated cost		10,869			11,428
Federal Home Loan Bank stock - at cost		8,651			8,651
Accrued interest receivable on loans		1,046			1,031
Accrued interest receivable on mortgage-backed securities		27			35
Accrued interest receivable on investments and interest-bearing deposits		597			735
Goodwill		10,309			10,309
Core deposit intangible - net		274			391
Prepaid expenses and other assets		4,001			3,915
Bank-owned life insurance		16,407			15,960
Prepaid federal income taxes		-			12
Deferred federal income taxes		287			1,022

Total assets	$	572,000		$	571,237

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits	$	454,885		$	451,784
Advances from the Federal Home Loan Bank		12,578			14,851
Advances by borrowers for taxes and insurance		2,494			2,651
Accrued interest payable		50			58
Accounts payable and other liabilities		5,485			5,711
Accrued federal income taxes		39			-
Total liabilities		475,531			475,055

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; 6,802,944 and 6,718,795 shares issued at December 31, 2015 and 2014, respectively		68			67
Additional paid-in capital		56,757			55,980
Shares acquired by stock benefit plans		(1,374	)		(1,470	)
Retained earnings – restricted		41,486			43,151
Accumulated comprehensive loss, unrealized losses on securities available for sale, net of tax effects		(468	)		(1,546	)
Total shareholders’ equity		96,469			96,182

Total liabilities and shareholders’ equity	$	572,000		$	571,237

CHEVIOT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF EARNINGS

For the years ended December 31, 2015, 2014, and 2013

(In thousands, except per share data)

	2015			2014			2013

Interest income
Loans	$	15,066		$	14,720		$	15,622
Mortgage-backed securities		150			290			196
Investment securities		2,449			3,067			3,114
Interest-earning deposits and other		384			357			380
Total interest income		18,049			18,434			19,312

Interest expense
Deposits		2,987			2,986			3,622
Borrowings		424			534			709
Total interest expense		3,411			3,520			4,331

Net interest income		14,638			14,914			14,981

Provision for losses on loans		1,663			1,024			1,443

Net interest income after provision for losses on loans		12,975			13,890			13,538

Other income
Rental		97			102			121
Gain on sale of investment securities		-			1,051			36
Gain (loss) on sale of real estate acquired through foreclosure		(47	)		131			(82	)
Gain on sale of loans		1,005			571			651
Loss on sale of office premises and equipment		(31	)		(11	)		(255	)
Earnings on bank-owned life insurance		447			465			483
Service fee income		1,490			1,546			1,523
Other operating		6			8			224
Total other income		2,967			3,863			2,701

General, administrative and other expense
Employee compensation and benefits		6,899			5,885			6,217
Occupancy and equipment		1,284			1,426			1,646
Property, payroll and other taxes		1,288			1,115			1,391
Data processing		839			693			604
Legal and professional		1,308			831			810
Advertising		293			286			321
FDIC expense		346			392			446
Jeanie expense		441			383			383
Real estate owned loss expense		128			547			540
Core deposit intangible amortization		116			149			206
Other operating		1,646			1,623			1,822
Total general, administrative and other expense		14,588			13,330			14,386

Earnings before income taxes		1,354			4,423			1,853

Federal income taxes (benefits)
Current		254			365			(97	)
Deferred		180			979			518
Total federal income taxes		434			1,344			421

NET EARNINGS	$	920		$	3,079		$	1,432

Earnings per share - basic and diluted	$	0.14		$	0.47		$	0.21

CHEVIOT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31, 2015, 2014, and 2013

(In thousands)

	2015			2014			2013

Net earnings	$	920		$	3,079		$	1,432

Other comprehensive income (loss), net of tax expense (benefit):
Unrealized holding gains (losses) on securities during the period, net of tax expense (benefits) of $555, $3,285 and $(4,021) for the years ended December 31, 2015, 2014 and 2013, respectively		1,078			6,376			(7,805	)

Reclassification adjustment for gains on securities available for sale included in income, net of tax expense (benefit) of $0, $358 and $12 for the years ended December 31, 2015, 2014 and 2013, respectively.		-			(693	)		(24	)

Comprehensive income (loss)	$	1,998		$	8,762		$	(6,397	)

Accumulated comprehensive income (loss)	$	(468	)	$	(1,546	)	$	(7,229	)

CHEVIOT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the years ended December 31, 2015, 2014, and 2013

(In thousands, except per share data)

													Unrealized
							Shares						gains (losses) on
				Additional			acquired by						on securities			Total
	Common			paid-in			stock benefit			Retained			available			shareholders’
	stock			capital			plans			earnings			for sale			equity

Balance at January 1, 2013	$	76		$	65,772		$	(1,992	)	$	43,444		$	600		$	107,900
Net earnings for the year ended December 31, 2013		-			-			-			1,432			-			1,432
Cash dividends of $.36 per share		-			-			-			(2,437	)		-			(2,437	)
Amortization expense of stock benefit plans		-			1			418			-			-			419
Stock option expense		-			23			-			-			-			23
Common stock repurchases		-			(8,581	)		-			-			-			(8,581	)
Unrealized losses on securities designated as available for sale, net of related benefits		-			-			-			-			(7,829	)		(7,829	)
Balance at December 31, 2013		76			57,215			(1,574	)		42,439			(7,229	)		90,927

Net earnings for the year ended December 31, 2014		-			-			-			3,079			-			3,079
Cash dividends of $.36 per share		-			-			-			(2,367	)		-			(2,367	)
Amortization expense of stock benefit plans		-			24			104			-			-			128
Stock option expense		-			71			-			-			-			71
Stock options exercised		-			111			-			-			-			111
Common stock repurchases		(9	)		(1,441	)		-			-			-			(1,450	)
Unrealized gains on securities designated as available for sale, net of related benefits		-			-			-			-			5,683			5,683
Balance at December 31, 2014	$	67		$	55,980		$	(1,470	)	$	43,151		$	(1,546	)	$	96,182

Net earnings for the year ended December 31, 2015		-			-			-			920			-			920
Cash dividends of $.39 per share		-			-			-			(2,585	)		-			(2,585	)
Amortization expense of stock benefit plans		-			63			96			-			-			159
Stock option expense		-			180			-			-			-			180
Stock options exercised		1			534			-			-			-			535
Unrealized gains on securities designated as available for sale, net of related benefits		-			-			-			-			1,078			1,078
Balance at December 31, 2015	$	68		$	56,757		$	(1,374	)	$	41,486		$	(468	)	$	96,469

CHEVIOT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2015, 2014, and 2013

(In thousands)

	2015			2014			2013

Cash flows from operating activities:
Net earnings for the year	$	920		$	3,079		$	1,432
Adjustments to reconcile net earnings to net cash provided (used in) by operating activities:
Amortization of premiums and discounts on investment and mortgage-backed securities, net		(10	)		(14	)		(25	)
Depreciation		649			724			783
Charitable donation of real estate owned property		-			-			32
Amortization expense related to stock benefit plans		159			128			419
Amortization of deferred loan origination fees		167			90			(46	)
Amortization of intangible assets		116			149			206
Amortization of fair value adjustments		(346	)		(453	)		(707	)
Proceeds from sale of loans in the secondary market		47,583			24,444			39,615
Loans originated for sale in the secondary market		(47,705	)		(24,591	)		(36,045	)
Gain on sale of loans		(1,005	)		(571	)		(651	)
Gain on sale of investment securities		-			(1,051	)		(36	)
Loss on sale of office premises and equipment		31			11			255
(Gain) loss on sale of real estate acquired through foreclosure		47			(127	)		130
Impairment on real estate acquired through foreclosure		128			557			540
Earnings on bank-owned life insurance		(447	)		(465	)		(483	)
Provision for losses on loans		1,663			1,024			1,443
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans		(15	)		142			130
Accrued interest receivable on mortgage-backed securities		8			(12	)		(3	)
Accrued interest receivable on investments and interest-bearing deposits		138			40			166
Prepaid expenses and other assets		(86	)		(378	)		1,059
Accrued interest payable		(8	)		(13	)		(19	)
Accounts payable and other liabilities		(324	)		506			(1,692	)
Federal income taxes
Current		51			1,272			(92	)
Deferred		180			979			518
Net cash flows provided by operating activities	$	1,894		$	5,470		$	6,929

CHEVIOT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the years ended December 31, 2015, 2014, and 2013

(In thousands)

	2015			2014			2013

Net cash flows provided by operating activities balance brought forward	$	1,894		$	5,470		$	6,929

Cash flows provided by (used in) investing activities:
Principal repayments on loans		78,841			66,896			67,708
Loan disbursements		(118,646	)		(68,034	)		(67,099	)
Loans purchased		-			-			(4,239	)
Purchase of investment securities		(29,996	)		(14,978	)		(80,928	)
Proceeds from sale of investment securities		-			9,139			7,036
Proceeds from maturity of investment securities		67,400			42,500			106,175
Purchase of corporate securities		-			-			(1,920	)
Purchase of mortgage-backed securities		-			(10,095	)		(4,977	)
Principal repayments on mortgage-backed securities		1,915			2,521			1,967
Proceeds from sale of mortgage-backed securities		-			10,608			-
Additions to real estate acquired through foreclosure		-			-			(7	)
Proceeds from sale of real estate acquired through foreclosure		384			1,618			3,080
Proceeds from sale of office premises and equipment		55			-			1,167
Purchase of office premises and equipment		(176	)		(658	)		(1,229	)
Proceeds from bank owned life insurance		-			237			-
Net cash flows provided by (used in) investing activities		(223	)		39,754			26,734

Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits		3,101			(17,235	)		(20,728	)
Proceeds from Federal Home Loan Bank Advances		12,000			-			-
Repayments on Federal Home Loan Bank Advances		(14,179	)		(4,321	)		(4,968	)
Advances by borrowers for taxes and insurance		(157	)		294			26
Stock option expense, net		180			71			23
Stock options exercised		534			111			-
Common stock issued		1			(9	)		-
Common stock repurchased		-			(1,441	)		(8,581	)
Dividends paid on common stock		(2,585	)		(2,367	)		(2,437	)
Net cash flows (used in) financing activities		(1,105	)		(24,897	)		(36,665	)

Net increase (decrease) in cash and cash equivalents		566			20,327			(3,002	)

Cash and cash equivalents at beginning of period		42,439			22,112			25,114

Cash and cash equivalents at end of period	$	43,005		$	42,439		$	22,112

CHEVIOT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the years ended December 31, 2015, 2014, and 2013

(In thousands)

	2015		2014		2013

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes	$	169	$	-	$	-

Interest on deposits and borrowings	$	3,419	$	3,533	$	4,350

Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure	$	388	$	579	$	3,080

Recognition of mortgage servicing rights	$	311	$	148	$	279

Deferred gain on real estate acquired through foreclosure	$	-	$	4	$	48

CHEVIOT FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2015, 2014, and 2013

NOTE A - SUMMARY OF ACCOUNTING POLICIES

In 2004, Cheviot Savings Bank (the Savings Bank) reorganized into a two-tier mutual holding company structure (the “Reorganization”) and established Cheviot Financial Corp., a federal holding company as the parent of the Savings Bank. On January 18, 2012, we completed our “second-step” conversion to a fully stock company. As a result of the second step conversion, all of our outstanding common stock is held by public shareholders and Cheviot Financial Corp., a Maryland holding company (“Cheviot Financial” or the “Corporation” refers to either Cheviot Financial Corp., the federal corporation or Cheviot Financial Corp., the Maryland corporation depending on the content).

The Corporation conducts a general banking business in southwestern Ohio which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, commercial and consumer purposes. The Corporation’s profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). 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. The level of interest rates paid or received by the Corporation can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management’s control.

The financial information presented herein has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general accounting practices within the financial services industry. In preparing financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates.

The following is a summary of significant accounting policies which have been consistently applied in the preparation of the accompanying financial statements.

1. Principles of Consolidation

The accompanying consolidated financial statements as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014, and 2013, include the accounts of the Corporation and its wholly-owned subsidiary, the Savings Bank. All significant intercompany items have been eliminated.

2. Investment and Mortgage-backed Securities

The Corporation accounts for investment and mortgage-backed securities using 3 categories: held to maturity, trading, or available for sale. Securities classified as held to maturity are carried at cost only if the Corporation has the positive intent and ability to hold these securities to maturity. Securities available for sale are carried at fair value with resulting unrealized gains or losses recorded in shareholders’ equity. Realized gains or losses on sales of securities are recognized using the specific identification method.

3. Loans Receivable

Loans receivable are stated at the principal amount outstanding, adjusted for deferred loan origination fees and the allowance for loan losses. Interest is accrued as earned unless the collectability of the loan is in doubt. Loans are generally placed on nonaccrual status when they are contractually past due 90 days or more. Interest on loans that are contractually past due more than 90 days is charged off, or an allowance is established based on management’s periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status. If the ultimate collectability of the loan is in doubt, in whole or in part, all payments received on nonaccrual loans are applied to reduce principal until such doubt is eliminated.

Loans held for sale are carried at the lower of cost (less principal payments received) or fair value (market value), calculated on an aggregate basis. At December 31, 2015 and 2014, the Corporation had $1.9 million and $1.3 million in loans held for sale.

The Corporation recognizes, as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained must allocate some of the cost of the loans to the mortgage servicing rights at fair value. The Corporation has opted to account for the capitalized servicing rights as being amortized in proportion to and over the estimated period of servicing income.

The Corporation recorded mortgage servicing rights totaling $114,000, $(100,000), and $(1,000), net of amortization of $204,000, $250,000, and $281,000, during the years ended December 31, 2015, 2014, and 2013, respectively. The carrying value of the Corporation’s mortgage servicing rights totaled approximately $1.3 million and $1.2 million at December 31, 2015 and 2014, respectively.

The Corporation was servicing mortgage loans of approximately $160.4 million and $144.8 million at December 31, 2015 and 2014, respectively, all of which had been sold to the Federal Home Loan Bank of Cincinnati and Federal Home Loan Mortgage Corporation.

4. Loan Origination Fees and Costs

Origination fees received from loans, net of direct origination costs, are deferred and amortized to interest income using the level-yield method, giving effect to actual loan prepayments. Additionally, loan origination costs are limited to the direct costs attributable to originating a loan, i.e., principally actual personnel costs. Fees received for loan commitments that are expected to be drawn upon, based on the Corporation’s experience with similar commitments, are deferred and amortized over the life of the loan using the level-yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis.

5. Allowance for Loan Losses

It is the Corporation’s policy to provide valuation allowances for estimated losses on loans primarily based on past loan loss experience and economic factors such as level of delinquencies, collateral values and overall employment and economy in the market area. Additionally, the Corporation considers changes in the composition of the loan portfolio, trends in the level of delinquent and problem loans, adverse situations that may affec

Cheviot Financial Corp. 10-K