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EX-32 - EXHIBIT 32 - Cincinnati Bancorptv506234_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Cincinnati Bancorptv506234_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Cincinnati Bancorptv506234_ex31-1.htm

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

xQuarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

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

 

For the transition period from _______________ to _______________

 

Commission File No. 000-55529

 

Cincinnati Bancorp

(Exact name of registrant as specified in its charter)

 

Federal   47-4931771

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

     
6581 Harrison Avenue, Cincinnati, Ohio   45247
(Address of Principal Executive Offices)   (Zip Code)

 

(513) 574-3025

(Registrant’s telephone number)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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 requirements for the past 90 days.

YES x     NO ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES x     NO ¨

 

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

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer x   Smaller reporting company x
    Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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

YES ¨     NO x

 

As of November 12, 2018, 1,816,329 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding, of which 1,008,969 shares were owned by CF Mutual Holding Company.

 

 

 

 

 

 

Cincinnati Bancorp

Form 10-Q

 

Index

 

    Page
  Part I. Financial Information  
     
Item 1. Condensed Consolidated Financial Statements  
     
  Condensed Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017 1
     
  Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2018 and 2017 (Unaudited) 2
     
  Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2018 and 2017 (Unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited) 4
     
  Notes to Condensed Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 44
     
Item 4. Controls and Procedures 44
     
  Part II. Other Information  
     
Item 1. Legal Proceedings 44
     
Item 1A. Risk Factors 44
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
     
Item 3. Defaults upon Senior Securities 44
     
Item 4. Mine Safety Disclosures 44
     
Item 5. Other Information 44
     
Item 6. Exhibits 45
     
  Signature Page 46

 

 

 

  

Part I. – Financial Information

 

Item 1.Financial Statements

 

Cincinnati Bancorp

Condensed Consolidated Balance Sheets

September 30, 2018 (Unaudited) and December 31, 2017

 

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
         
Assets          
Cash and due from banks  $1,633,037   $2,567,495 
Interest-bearing demand deposits in banks   3,208,359    4,294,461 
Federal funds sold   4,941,000    3,404,868 
           
Cash and cash equivalents   9,782,396    10,266,824 
           
Available-for-sale securities   709,670    910,222 
Loans held for sale   2,663,349    2,221,084 
Loans, net of allowance for loan losses of  $1,405,072  and $1,360,072, respectively   153,307,179    147,020,218 
Premises and equipment, net   2,436,148    2,525,484 
Federal Home Loan Bank stock   1,039,800    1,021,100 
Interest receivable   505,050    448,727 
Mortgage servicing rights   1,104,077    909,821 
Federal Home Loan Bank lender risk account receivable   1,606,760    1,708,593 
Bank-owned life insurance   3,309,989    3,254,330 
Other assets   189,581    166,523 
           
Total assets  $176,653,999   $170,452,926 
           
Liabilities and Stockholders' Equity          
           
Liabilities          
Deposits          
Demand  $24,760,625   $22,957,095 
Savings   25,427,637    23,839,361 
Certificates of Deposits   65,706,195    67,151,270 
Total deposits   115,894,457    113,947,726 
           
Federal Home Loan Bank advances   38,323,281    34,309,810 
Advances from borrowers for taxes and insurance   1,204,561    1,480,777 
Interest payable   62,819    38,626 
Directors deferred compensation   475,467    440,632 
Other liabilities   740,513    783,962 
           
Total liabilities   156,701,098    151,001,533 
           
Commitments and Contingent Liabilities          
           
Temporary Equity          
ESOP Shares subject to mandatory redemption   160,311    126,612 
           
Stockholders' Equity          
Preferred stock - authorized 1,000,000 shares, $0.01 par value, none issued   -    - 
Common stock - authorized 9,000,000 shares, $0.01 par value 1,752,947 and 1,752,947 issued and outstanding at September 30, 2018 and December 31, 2017, respectively   17,192    17,192 
Additional paid-in-capital   6,222,214    6,172,924 
Unearned ESOP Shares   (505,477)   (539,176)
Retained earnings - substantially restricted   14,308,603    13,877,826 
Accumulated other comprehensive loss   (249,942)   (203,985)
           
Total stockholders' equity   19,792,590    19,324,781 
           
Total liabilities and stockholders' equity  $176,653,999   $170,452,926 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 1 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Income

Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
   (Unaudited)   (Unaudited) 
                 
Interest and Dividend Income                    
Loans, including fees  $1,678,088   $1,460,841   $4,875,357   $4,200,102 
Securities   4,764    (1,235)   12,362    2,687 
Dividends on Federal Home Loan Bank stock and other   48,738    20,883    131,505    51,484 
Total interest and dividend income   1,731,590    1,480,489    5,019,224    4,254,273 
                     
Interest Expense                    
Deposits   343,449    254,295    984,254    743,414 
Federal Home Loan Bank advances   193,208    117,132    481,392    295,668 
Total interest expense   536,657    371,427    1,465,646    1,039,082 
                     
Net Interest Income   1,194,933    1,109,062    3,553,578    3,215,191 
                     
Provision for Loan Losses   15,000    -    45,000    10,000 
                     
Net Interest Income After Provision for Loan Losses   1,179,933    1,109,062    3,508,578    3,205,191 
                     
Noninterest Income                    
Gain on sales of loans   479,925    380,814    1,284,450    1,231,835 
Mortgage servicing fees   3,073    56,345    182,747    151,593 
Other   178,938    101,063    552,903    452,243 
Total noninterest income   661,936    538,222    2,020,100    1,835,671 
                     
Noninterest Expense                    
Salaries and employee benefits   851,748    850,604    2,497,539    2,332,026 
Occupancy and equipment   114,114    109,770    354,223    327,094 
Directors compensation   42,250    38,500    126,750    159,000 
Data processing   158,181    148,367    450,535    422,570 
Professional fees   68,843    68,276    219,431    201,122 
Franchise tax   38,570    37,243    116,427    111,893 
Deposit insurance premiums   12,860    12,094    38,245    26,160 
Advertising   43,871    21,816    116,583    67,871 
Software Licenses   21,677    23,512    65,234    63,022 
Loan costs   97,147    77,231    314,299    222,587 
Merger-related expenses   148,836    -    231,029    - 
Other   148,983    139,777    433,582    422,153 
Total noninterest expense   1,747,080    1,527,190    4,963,877    4,355,498 
                     
Income Before Income Tax   94,789    120,094    564,801    685,364 
                     
Provision for Income Taxes   68,951    34,719    174,086    218,395 
                     
Net Income  $25,838   $85,375   $390,715   $466,969 
                     
Earnings per common share - basic   0.01    0.05    0.23    0.28 
Earnings per common share - diluted   0.01    0.05    0.23    0.28 
Weighted-average shares outstanding - basic   1,681,504    1,669,823    1,678,234    1,664,948 
Weighted-average shares outstanding - diluted   1,692,564    1,669,823    1,681,101    1,664,948 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 2 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
   (Unaudited)   (Unaudited) 
                 
Net Income  $25,838   $85,375   $390,715   $466,969 
                     
Other Comprehensive Income (Loss):                    
Net unrealized gains (losses) on available-for-sale securities   (1,390)   (13,764)   354    (16,875)
Tax (expense) benefit   292    4,679    (74)   5,738 
Changes in directors' retirement plan prior service costs   (2,664)   3,536    (7,991)   10,607 
Tax benefit (expense)   559    (1,204)   1,678    (3,607)
Other comprehensive income (loss)   (3,203)   (6,753)   (6,033)   (4,137)
                     
Comprehensive Income  $22,635   $78,622   $384,682   $462,832 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 3 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

   Nine Months Ended September 30, 
   2018   2017 
   (Unaudited) 
         
Operating Activities          
Net income  $390,715   $466,969 
Items not requiring (providing) cash:          
Depreciation and amortization   101,322    102,323 
Provision for loan losses   45,000    10,000 
Amortization of premiums and discounts on securities   7,128    20,572 
Amortization of deferred prepayment penalty on Federal Home Loan Bank advances   3,471    30,873 
Change in deferred income taxes   726    48,334 
Gain on sale of loans   (1,284,450)   (1,231,835)
Proceeds from the sale of loans held for sale   43,362,891    44,178,359 
Origination of loans held for sale   (42,520,706)   (45,340,635)
Net gain on sale of foreclosed assets   -    (873)
Earnings on cash surrender value of bank-owned life insurance   (55,659)   (61,381)
Stock based compensation expense   82,989    34,377 
ESOP shares earned   33,699    33,137 
Mortgage servicing rights   (194,256)   (135,761)
Changes in:          
Interest receivable   (56,323)   42,473 
Federal Home Loan Bank lender risk account receivable   101,833    28,724 
Other assets   (23,058)   (74,752)
Interest payable   24,193    12,174 
Other liabilities   (15,725)   212,589 
Net cash provided by (used in) operating activities   3,790    (1,624,333)
           
Investing Activities          
Proceeds from maturities of available-for-sale securities   193,914    551,168 
Purchase of Federal Home Loan Bank stock   (18,700)   (113,100)
Net change in loans   (6,331,961)   (9,942,807)
Purchase of premises and equipment   (11,986)   (62,981)
Proceeds from sales of foreclosed assets   -    38,823 
Net cash used in investing activities   (6,168,733)   (9,528,897)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 4 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Cash Flows (Continued)

Nine Months Ended September 30, 2018 and 2017 (Unaudited)

  

   Nine Months Ended September 30, 
   2018   2017 
   (Unaudited) 
         
Financing Activities          
Net increase in deposits   1,946,731    1,783,666 
Proceeds from Federal Home Loan Bank advances   109,248,924    118,503,000 
Repayment of Federal Home Loan Bank advances   (105,238,924)   (109,578,591)
Net decrease in advances from borrowers for taxes and insurance   (276,216)   (192,732)
Net cash provided by financing activities   5,680,515    10,515,343 
           
Decrease in Cash and Cash Equivalents   (484,428)   (637,887)
Cash and Cash Equivalents, Beginning of Period   10,266,824    11,128,155 
Cash and Cash Equivalents, End of Period  $9,782,396   $10,490,268 
           
Supplemental Cash Flows Information          
Interest paid  $1,441,453   $1,026,908 
Income taxes paid   222,229    134,717 
Real estate acquired in settlement of loans   -    37,950 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 5 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 1:Nature of Operations and Summary of Significant Account Policies

 

Nature of Operations

 

Cincinnati Bancorp (“Company”) is the mid-tier holding company for Cincinnati Federal (the “Bank”), a federally chartered stock savings and loan association that is primarily engaged in providing a full range of banking and financial services to individual and corporate customers in Hamilton County, Ohio and surrounding areas. On October 14, 2015, the Bank reorganized into the mutual holding company structure. As part of the reorganization, the Company sold 773,663 shares of common stock at a price of $10.00 per share in a public offering and issued 945,587 shares of common stock to CF Mutual Holding Company, the Company’s parent mutual holding company. The Company is subject to competition from other financial institutions. The Company is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements as of September 30, 2018 and December 31, 2017 and for the three months and nine months ended September 30, 2018 and 2017 include the accounts of Cincinnati Bancorp and the Bank. All significant intercompany items have been eliminated.

 

Interim Financial Statements

 

The interim financial statements as of September 30, 2018, and for the three months and nine months ended September 30, 2018 and 2017 are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments contained in the interim financial statements. The results of operations for the three months and nine months ended September 30, 2018, are not necessarily indicative of the results to be achieved for the year ending December 31, 2018, or any other period.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, loan servicing rights, lender reserve account and fair values of financial instruments.

 

NOTE 2:Securities

 

Available-for-sale securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

 

 6 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

For debt securities with fair value below amortized cost, when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

 

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
                 
Available-for-Sale Securities:                    
                     
September 30, 2018 (Unaudited):                    
Mortgage-backed securities of government sponsored entities  $708,255   $4,518   $(3,103)  $709,670 
                     
December 31, 2017:                    
Mortgage-backed securities of government sponsored entities  $909,161   $4,470   $(3,409)  $910,222 

 

The Company had no sales of investment securities during the three and nine month periods ended September 30, 2018 and 2017. The Company had not pledged any of its investment securities as of September 30, 2018 or December 31, 2017.

 

The amortized cost and fair value of available-for-sale securities at September 30, 2018 and December 31, 2017, by contractual maturity, if applicable, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties, as is the case with mortgage-backed securities included in the following table:

 

   September 30, 2018   December 31, 2017 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
   (Unaudited)         
Mortgage-backed securities of government sponsored entities  $708,255   $709,670   $909,161   $910,222 

 

Certain investments in debt securities have fair values at an amount less than their historical cost primarily due to the interest rate environment. The total fair value of these investments at September 30, 2018 and December 31, 2017 was $357,309 and $785,539, respectively, which is approximately 50% and 86%, respectively, of the Company’s investment portfolio.

 

 7 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporary impaired, aggregated by investment class and length of time that the individual securities have been in continuous unrealized loss position at September 30, 2018 and December 31, 2017:

 

   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
                         
September 30, 2018 (Unaudited):                              
Mortgage-backed securities of government sponsored entities  $277,317   $(369)  $79,992   $(2,734)  $357,309   $(3,103)
                               
December 31, 2017:                              
Mortgage-backed securities of government sponsored entities  $785,539   $(3,409)  $-   $-   $785,539   $(3,409)

 

NOTE 3:Loans and Allowance for Loan Losses

 

Categories of loans at September 30, 2018 and December 31, 2017 include:

 

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
         
One to four family mortgage loans -owner occupied  $82,153,295   $77,532,809 
One to four family - investment   10,947,199    11,354,976 
Multi-family mortgage loans   25,297,741    23,895,594 
Nonresidential mortgage loans   20,046,569    18,138,584 
Construction and land loans   5,950,055    6,173,341 
Real estate secured lines of credit   11,954,241    11,713,943 
Commercial loans   435,846    334,628 
Other consumer loans   481,144    471,386 
Total loans   157,266,090    149,615,261 
           
Less:          
Net deferred loan costs   (498,027)   (479,795)
Undisbursed portion of loans   3,051,866    1,714,766 
Allowance for loan losses   1,405,072    1,360,072 
           
Net loans  $153,307,179   $147,020,218 

 

 8 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three and nine months ended September 30, 2018 and 2017 and year ended December 31, 2017:

 

   Nine Months Ended September 30, 2018 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of period  $338,697   $171,674   $240,896   $196,811   $82,669   $312,638   $6,934   $9,753   $1,360,072 
Provision (credit) charged to expense   68,900    (34,786)   5,139    6,874    (1,388)   (1,632)   1,918    (25)   45,000 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    - 
Balance, end of period  $407,597   $136,888   $246,035   $203,685   $81,281   $311,006   $8,852   $9,728   $1,405,072 
                                              
Ending balance: Individually evaluated for impairment  $-   $38,113   $9,055   $-   $-   $-   $-   $-   $47,168 
                                              
Ending balance: Collectively evaluated for impairment  $407,597   $98,775   $236,980   $203,685   $81,281   $311,006   $8,852   $9,728   $1,357,904 
Loans:                                             
Ending balance  $82,153,295   $10,947,199   $25,297,741   $20,046,569   $5,950,055   $11,954,241   $435,846   $481,144   $157,266,090 
                                              
Ending balance: Individually evaluated for impairment  $1,009,709   $753,605   $626,317   $154,674   $-   $49,729   $-   $-   $2,594,034 
                                              
Ending balance: Collectively evaluated for impairment  $81,143,586   $10,193,594   $24,671,424   $19,891,895   $5,950,055   $11,904,512   $435,846   $481,144   $154,672,056 

 

   Three Months Ended September 30, 2018 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of period  $423,442   $102,086   $252,836   $208,247   $75,211   $312,283   $6,210   $9,757   $1,390,072 
Provision (credit) charged to expense   (15,845)   34,802    (6,801)   (4,562)   6,070    (1,277)   2,642    (29)   15,000 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    - 
Balance, end of period  $407,597   $136,888   $246,035   $203,685   $81,281   $311,006   $8,852   $9,728   $1,405,072 

 

 9 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

   Nine Months Ended September 30, 2017 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of period  $413,194   $129,628   $175,295   $167,431   $64,297   $364,191   $11,916   $312   $1,326,264 
Provision (credit) charged to expense   (56,837)   83,249    29,442    (25,365)   26,395    (54,932)   (962)   9,010    10,000 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   3,808    -    -    -    -    -    -    -    3,808 
Balance, end of period  $360,165   $212,877   $204,737   $142,066   $90,692   $309,259   $10,954   $9,322   $1,340,072 

 

   Three Months Ended September 30, 2017 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of period  $386,742   $204,473   $206,958   $144,078   $77,275   $303,675   $12,860   $203   $1,336,264 
Provision (credit) charged to expense   (30,385)   8,404    (2,221)   (2,012)   13,417    5,584    (1,906)   9,119    - 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   3,808    -    -    -    -    -    -    -    3,808 
Balance, end of period  $360,165   $212,877   $204,737   $142,066   $90,692   $309,259   $10,954   $9,322   $1,340,072 

 

 10 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

   Year Ended December 31, 2017 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of year  $413,194   $129,628   $175,295   $167,431   $64,297   $364,191   $11,916   $312   $1,326,264 
Provision (credit) charged to expense   (78,305)   42,046    65,601    29,380    18,372    (51,553)   (4,982)   9,441    30,000 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   3,808    -    -    -    -    -    -    -    3,808 
Balance, end of year  $338,697   $171,674   $240,896   $196,811   $82,669   $312,638   $6,934   $9,753   $1,360,072 
                                              
Ending balance:  Individually evaluated for impairment  $-   $42,396   $9,055   $-   $-   $-   $-   $-   $51,451 
                                              
Ending balance:  Collectively evaluated for impairment  $338,697   $129,278   $231,841   $196,811   $82,669   $312,638   $6,934   $9,753   $1,308,621 
Loans:                                             
Ending balance  $77,532,809   $11,354,976   $23,895,594   $18,138,584   $6,173,341   $11,713,943   $334,628   $471,386   $149,615,261 
                                              
Ending balance:  Individually evaluated for impairment  $747,022   $1,068,714   $632,447   $179,558   $-   $39,687   $-   $-   $2,667,428 
                                              
Ending balance:  Collectively evaluated for impairment  $76,785,787   $10,286,262   $23,263,147   $17,959,026   $6,173,341   $11,674,256   $334,628   $471,386   $146,947,833 

 

 11 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The Company has adopted a standard grading system for all loans.

 

Definitions are as follows:

 

Prime (1) loans are of superior quality with excellent credit strength and repayment ability proving a nominal credit risk.

 

Good (2) loans are of above average credit strength and repayment ability proving only a minimal credit risk.

 

Satisfactory (3) loans are of reasonable credit strength and repayment ability proving an average credit risk due to one or more underlying weaknesses.

 

Acceptable (4) loans are of the lowest acceptable credit strength and weakened repayment ability providing a cautionary credit risk due to one or more underlying weaknesses. New borrowers are typically not underwritten within this classification.

 

Special Mention (5) loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.

 

Substandard (6) loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful (7) loans have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.

 

Loss (8) loans are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off even though partial recovery may be realized in the future.

 

 12 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of September 30, 2018 and December 31, 2017:

 

   September 30, 2018 
   One- to Four-
Family Mortgage
Loans - Owner
Occupied
   One- to Four-
Family Mortgage
Loans -
Investment
   Multi-Family
Mortgage Loans
   Nonresidential
Mortgage Loans
   Construction &
Land Loans
   Real Estate
Secured Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Pass  $81,694,683   $9,441,951   $24,662,827   $19,338,337   $5,950,055   $11,322,323   $435,846   $481,144   $153,327,166 
Special mention   -    1,370,607    139,547    640,403    -    508,266    -    -    2,658,823 
Substandard   458,612    134,641    495,367    67,829    -    123,652    -    -    1,280,101 
Doubtful   -    -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    -    -    - 
                                              
Total  $82,153,295   $10,947,199   $25,297,741   $20,046,569   $5,950,055   $11,954,241   $435,846   $481,144   $157,266,090 

 

   December 31, 2017 
   One- to Four-
Family Mortgage
Loans - Owner
Occupied
   One- to Four-
Family Mortgage
Loans -
Investment
   Multi-Family
Mortgage Loans
   Nonresidential
Mortgage Loans
   Construction &
Land Loans
   Real Estate
Secured Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Pass  $77,239,158   $9,723,639   $23,254,092   $17,341,292   $6,173,341   $11,021,251   $334,628   $471,386   $145,558,787 
Special mention   -    384,819    -    617,734    -    489,700    -    -    1,492,253 
Substandard   293,651    1,246,518    641,502    179,558    -    202,992    -    -    2,564,221 
Doubtful   -    -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    -    -    - 
                                              
Total  $77,532,809   $11,354,976   $23,895,594   $18,138,584   $6,173,341   $11,713,943   $334,628   $471,386   $149,615,261 

 

Pass rated portfolio within the tables above consists of loans graded Prime (1) through Acceptable (4).

 

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the three or nine months ended September 30, 2018.

 

 13 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables present the loan portfolio aging analysis of the recorded investment in loans as of September 30, 2018 and December 31, 2017:

 

   September 30, 2018 (Unaudited) 
   30-59 Past
Due
   60-89 Days
Past Due
   90 Days and
Greater
Past Due
   Total Past
Due
   Current   Total Loans
Receivable
   Total Loans >
90 Days &
Accruing
 
                             
One to Four-family mortgage loans  $25,801   $-   $312,815   $338,616   $81,814,679   $82,153,295   $- 
One to Four Family - Investment   134,641    27,137    -    161,778    10,785,421    10,947,199    - 
Multi-family mortgage loans   495,367    -    -    495,367    24,802,374    25,297,741    - 
Nonresidential mortgage loans   -    -    67,829    67,829    19,978,740    20,046,569    - 
Construction & Land Loans   -    -    -    -    5,950,055    5,950,055    - 
Real estate secured lines of credit   110,615    -    -    110,615    11,843,626    11,954,241    - 
Commercial Loans   -    -    -    -    435,846    435,846    - 
Other consumer loans   -    -    -    -    481,144    481,144    - 
                                    
Total  $766,424   $27,137   $380,644   $1,174,205   $156,091,885   $157,266,090   $- 

 

   December 31, 2017 
   30-59 Past
Due
   60-89 Days
Past Due
   90 Days and
Greater
Past Due
   Total Past
Due
   Current   Total Loans
Receivable
   Total Loans >
90 Days &
Accruing
 
                             
One to Four-family mortgage loans  $92,143   $-   $144,357   $236,500   $77,296,309   $77,532,809   $- 
One to Four Family - Investment   -    -    8,755    8,755    11,346,221    11,354,976    - 
Multi-family mortgage loans   -    -    -    -    23,895,594    23,895,594    - 
Nonresidential mortgage loans   -    -    -    -    18,138,584    18,138,584    - 
Construction & Land Loans   -    -    -    -    6,173,341    6,173,341    - 
Real estate secured lines of credit   80,000    -    -    80,000    11,633,943    11,713,943    - 
Commercial Loans   -    -    -    -    334,628    334,628    - 
Other consumer loans   -    -    -    -    471,386    471,386    - 
                                    
Total  $172,143   $-   $153,112   $325,255   $149,290,006   $149,615,261   $- 

 

 14 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310, Receivables), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans and also include loans modified in troubled debt restructurings (“TDRs”).

 

The following tables present impaired loans at September 30, 2018, September 30, 2017 and December 31, 2017:

 

               For the Three Months Ended   For the Nine Months Ended 
   As of September 30, 2018       September 30, 2018   September 30, 2018 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest Income
Recognized
   Average
Investment
in Impaired
Loans
   Interest Income
Recognized
 
               (Unaudited)         
Loans without a specific valuation allowance                                   
One- to four-family mortgage loans  $1,009,709   $1,009,709   $-   $1,012,936    10,539   $1,017,445   $26,434 
One to Four family - Investment   319,210    319,211    -    320,767    4,296    324,377    12,333 
Multi-family mortgage loans   517,814    517,814    -    518,490    7,216    520,339    24,455 
Nonresidential mortgage loans   154,674    154,674    -    166,650    1,218    170,216    4,660 
Construction & Land loans   -    -    -    -    -    -    - 
Real estate secured lines of credit   49,729    49,729    -    50,470    838    51,331    2,255 
Commercial Loans   -    -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    -    - 
Loans with a specific valuation allowance                       -           
One- to four-family mortgage loans   -    -    -    -    -    -    - 
One to Four family - Investment   434,395    472,509    38,113    474,478    4,531    479,303    16,286 
Multi-family mortgage loans   108,503    117,100    9,055    117,285    1,277    117,928    4,730 
Nonresidential mortgage loans   -    -    -    -    -    -    - 
Construction & Land loans   -    -    -    -    -    -    - 
Real estate secured lines of credit   -    -    -    -    -    -    - 
Commercial Loans   -    -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    -    - 
                                    
   $2,594,034   $2,640,746   $47,168  $2,661,076   $29,915   $2,680,939   $91,153 

 

               For the Three Months Ended   For the Nine Months Ended 
   As of September 30, 2017       September 30, 2017   September 30, 2017 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest Income
Recognized
   Average
Investment
in Impaired
Loans
   Interest Income
Recognized
 
               (Unaudited)         
Loans without a specific valuation allowance                                   
One- to four-family mortgage loans  $765,822   $765,822   $-   $735,768    6,971   $749,061   $22,259 
One to Four family - Investment   581,055    581,055    -    583,665    8,873    590,507    25,163 
Multi-family mortgage loans   525,050    525,050    -    525,718    7,251    527,639    26,803 
Nonresidential mortgage loans   183,207    183,207    -    184,935    3,101    188,445    9,319 
Construction & Land loans   -    -    -    -    -    -    - 
Real estate secured lines of credit   40,421    40,421    -    41,487    2,175    42,931    3,030 
Commercial Loans   -    -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    -    - 
Loans with a specific valuation allowance                       -           
One- to four-family mortgage loans   -    -    -    -    -    -    - 
One to Four family - Investment   499,655    542,051    42,396    544,694    2,865    548,498    18,825 
Multi-family mortgage loans   110,508    119,563    9,055    119,956    1,959    120,491    5,569 
Nonresidential mortgage loans   -    -    -    -    -    -    - 
Construction & Land loans   -    -    -    -    -    -    - 
Real estate secured lines of credit   -    -    -    -    -    -    - 
Commercial Loans   -    -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    -    - 
                                    
   $2,705,718   $2,757,169   $51,451  $2,736,223   $33,195   $2,767,572   $110,968 

 

 15 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

   December 31, 2017 
               Average     
       Unpaid       Investment     
   Recorded   Principal   Specific   in Impaired   Interest Income 
   Balance   Balance   Allowance   Loans   Recognized 
Loans without a specific valuation allowance                         
One- to four-family mortgage loans  $747,022   $747,022   $-   $753,098   $28,104 
One to Four family - Investment   574,375    574,375    -    587,247    34,059 
Multi-family mortgage loans   522,818    522,818    -    522,817    38,940 
Nonresidential mortgage loans   179,558    179,558    -    186,670    12,352 
Construction & Land loans   -    -    -    -    - 
Real estate secured lines of credit   39,687    39,687    -    42,229    3,540 
Commercial Loans   -    -    -    -    - 
Other consumer loans   -    -    -    -    - 
Loans with a specific valuation allowance                         
One- to four-family mortgage loans   -    -    -    -    - 
One to Four family - Investment   494,339    536,735    42,396    546,369    25,911 
Multi-family mortgage loans   109,629    118,684    9,055    120,196    8,153 
Nonresidential mortgage loans   -    -    -    -    - 
Construction & Land loans   -    -    -    -    - 
Real estate secured lines of credit   -    -    -    -    - 
Commercial Loans   -    -    -    -    - 
Other consumer loans   -    -    -    -    - 
                          
   $2,667,428   $2,718,879   $51,451   $2,758,626   $151,059 

 

Income recognized on a cash basis was not materially different than interest income recognized on an accrual basis. The following table presents the nonaccrual loans at September 30, 2018 and December 31, 2017. This table excludes TDRs not in non-accrual status, which amounted to $1.4 million at September 30, 2018 and $1.5 million at December 31, 2017.

 

   September 30,   December 31, 
   2018   2017 
         
One- to four-family mortgage loans  $312,815   $144,357 
One to four family - Investment   -    8,755 
Multi-family mortgage loans   -    - 
Nonresidential mortgage loans   67,829    - 
Land loans   -    - 
Real estate secured lines of credit   -    - 
Commercial Loans   -    - 
Other consumer loans   -    - 
           
Total  $380,644   $153,112 

 

 16 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

At September 30, 2018, the Company had no loans that were modified in TDRs and impaired.

 

At December 31, 2017, the Company had no loans that were modified in TDRs and impaired and there were no troubled debt restructurings during the year.

 

There were no newly classified TDRs during the three and nine month period ended September 30, 2018.

 

There were no TDRs modified during the three and nine months ended September 30, 2018 that subsequently defaulted. There were six TDR’s that were not performing under the modified terms as of September 30, 2018. The net balance of these TDR’s was $642,000 as of September 30, 2018. There was $19,000 in specific allowances associated with these loans as of September 30, 2018.

 

As of September 30, 2018, borrowers with loans designated as TDRs totaling $748,000 of residential real estate loans and $635,000 of multifamily loans, met the criteria for placement back on accrual status. This criteria is a minimum of six consecutive months of payment performance under existing or modified terms. As of September 30, 2018, the Company had no performing TDRs that did not meet the criteria for placement back on accrual status.

 

There were no foreclosed real estate properties at September 30, 2018 or December 31, 2017. There were two consumer mortgage loans in process of foreclosure at September 30, 2018 with a total net loan balance of $59,000.

 

 17 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 4:Earnings Per Common Share

 

Basic earnings per common share (“EPS”) excludes dilution and is calculated by dividing net income applicable to common stock by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Unallocated common shares held by the Company’s Employee Stock Ownership Plan (“the ESOP”) are shown as a reduction in stockholders’ equity and are excluded from weighted-average common shares outstanding for both basic and diluted EPS calculations until they are committed to be released. The computations for the three month and nine month periods ended September 30, 2018 and 2017 are as follows:

 

   Three months ended September 30,   Nine months ended September 30, 
   2018   2017   2018   2017 
   (Unaudited) 
                 
Net Income  $25,838   $85,375   $390,715   $466,969 
Less allocation of earnings to participating securities   705    1,356    9,184    3,327 
Net income allocated to common shareholders   25,133    84,019    381,531    463,642 
                     
Shares outstanding for basic earnings per share:                    
                     
Weighted Average shares outstanding:   1,733,178    1,725,989    1,730,155    1,722,237 
Less: Average Unearned ESOP and unvested   51,674    56,166    51,921    57,289 
restricted stock:   1,681,504    1,669,823    1,678,234    1,664,948 
                     
Basic earnings per common share:  $0.01   $0.05   $0.23   $0.28 
                     
Effect of dilutive securities:                    
Stock Options   11,060    -    2,867    - 
Weighted average number of shares outstanding used in the calculation of basic earnings per common share   1,692,564    1,669,823    1,681,101    1,664,948 
Diluted earnings per share:  $0.01   $0.05   $0.23   $0.28 

 

NOTE 5:Regulatory Matters

 

The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

 

 18 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), common equity Tier I capital (as defined) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). Management believes that, as of September 30, 2018 and December 31, 2017, the Company met all capital adequacy requirements to which it was subject at such dates.

 

Effective January 1, 2015, new regulatory capital requirements commonly referred to as ‘Basel III” were implemented and are reflected below. Management opted out of the accumulated comprehensive income treatment under the new requirements, and as such unrealized gains and losses from available-for-sale securities will continue to be excluded from regulatory capital.

 

The below minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer was 1.875% at September 30, 2018 and 1.25% at December 31, 2017.

 

As of the most recent notification from the Office of the Comptroller of the Currency, the Bank was categorized as "well-capitalized" under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. Management believes that no conditions or events have occurred since the last notification that would change the Bank's category.

 

The Bank’s actual capital amounts and ratios are also presented in the following table:

 

   Actual   Minimum Capital
Requirement
   Minimum to Be Well
Capitalized Under Prompt
Corrective Action
Provisions
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in thousands) 
                         
As of  September 30, 2018 (Unaudited)                              
                               
Total risk-based capital (to risk-weighted assets)  $21,126    16.5%  $10,246    8.0%  $12,807    10.0%
                               
Tier I capital (to risk-weighted assets)   19,721    15.4%   7,684    6.0%   10,246    8.0%
                               
Common Equity Tier I capital (to risk-weighted assets)   19,721    15.4%   5,763    4.5%   8,325    6.5%
                               
Tier I capital (to adjusted total assets)   19,721    11.2%   7,054    4.0%   8,818    5.0%
                               
As of  December 31, 2017                              
                               
Total risk-based capital (to risk-weighted assets)  $20,158    16.5%  $9,789    8.0%  $12,236    10.0%
                               
Tier I capital (to risk-weighted assets)   18,798    15.4%   7,342    6.0%   9,789    8.0%
                               
Common Equity Tier I capital (to risk-weighted assets)   18,798    15.4%   5,506    4.5%   7,953    6.5%
                               
Tier I capital (to adjusted total assets)   18,798    11.3%   6,633    4.0%   8,291    5.0%

 

 

 19 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 6:Disclosure About Fair Values of Assets and Liabilities

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

 

  Level 1 Quoted prices in active markets for identical assets or liabilities.
     
  Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full-term of the assets or liabilities.
     
  Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities.

 

Recurring Measurements

 

The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2018 and December 31, 2017:

 

       Fair Value Measurements Using 
   Fair Value   Quoted Prices in
Active Markets
for Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
       (Level 1)   (Level 2)   (Level 3) 
                 
September 30, 2018                    
Mortgage-backed securities of government sponsored entities  $709,670   $-   $709,670   $- 
Mortgage servicing rights   1,104,077    -    -    1,104,077 
                     
December 31, 2017                    
Mortgage-backed securities of government sponsored entities  $910,222   $-   $910,222   $- 
Mortgage servicing rights   909,821    -    -    909,821 

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

Available-for-sale Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 and Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

 

 20 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Mortgage Servicing Rights

 

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of loan balance, weighted average coupon, weighted average maturity, escrow payments, servicing fees, prepayment speeds, float, cost to service, ancillary income, and discount rate. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

 

Management measures mortgage servicing rights through use of a third-party independent valuation. Inputs to the model are reviewed by management.

 

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements related to mortgage servicing rights recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs:

 

   Three Months   Three Months   Nine Months   Nine Months 
   Ended   Ended   Ended   Ended 
   September 30,   September 30,   September 30,   September 30, 
   2018   2017   2018   2017 
   (Unaudited) 
                 
Fair value as of the beginning of the period  $1,084,654   $916,348   $909,821   $730,164 
Recognition of mortgage servicing rights on the sale of loans   64,282    44,127    169,465    165,160 
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model   (44,859)   (94,550)   24,791    (29,399)
                     
Fair value at the end of the period  $1,104,077   $865,925   $1,104,077   $865,925 

 

Mortgage servicing rights are carried in the condensed consolidated balance sheet at fair value and the changes in fair value are reported in other noninterest income in the period in which the changes occur.

 

 21 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Nonrecurring Measurements

 

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at September 30, 2018 and December 31, 2017.

 

       Fair Value Measurements Using 
   Carrying   Quoted
Prices in
Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Amount   (Level 1)   (Level 2)   (Level 3) 
                 
September 30, 2018                    
(Unaudited)                    
                     
Collateral-dependent impaired loans  $380,644   $-   $-   $380,644 
                     
December 31, 2017                    
                     
Collateral-dependent impaired loans  $153,112   $-   $-   $153,112 

 

Collateral-dependent Impaired Loans, Net of Allowance for Loan Losses

 

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved independent appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results.

 

Foreclosed Assets Held for Sale

 

Foreclosed assets held for sale are carried at fair value, less estimated cost to sell. Estimated fair value of real estate is based on appraisals or evaluations. Foreclosed assets held for sale are classified within Level 3 of the fair value hierarchy.

 

Appraisals of real estate are obtained when the real estate is acquired and an appraisal is subsequently deemed necessary by events in the environment by the Chief Financial Officer. Appraisals are reviewed internally for accuracy and consistency in accordance with regulatory requirements. Appraisers are selected from the list of approved independent appraisers maintained by management. There were no foreclosed assets at September 30, 2018 and December 31, 2017.

 

 22 

 

  

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Unobservable (Level 3) Inputs

 

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at September 30, 2018 and December 31, 2017:

 

   Fair Value at
September 30, 2018
   Valuation
Technique
  Unobservable
Inputs
  Range
(Weighted
Average)
Mortgage servicing rights  $1,104,077   Discounted
cash flow
  Discount rate
PSA prepayment speeds
  10%
130%-317%
               
Impaired loans (collateral dependent)  $380,644   Market comparable properties  Marketability discount  10%-15% (12%)

 

   Fair Value at
December 31, 2017
   Valuation
Technique
  Unobservable
Inputs
  Range
(Weighted
Average)
Mortgage servicing rights  $909,821   Discounted
cash flow
  Discount rate
PSA prepayment speeds
  10%
130%-272%
               
Impaired loans (collateral dependent)  $153,112   Market comparable properties  Marketability discount  10%-15% (12%)

 

Fair Value of Financial Instruments

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

 

Cash and cash equivalents, Federal Home Loan Bank Stock and Interest Receivable

 

The carrying amount approximates fair value.

 

Loans Held for Sale

 

Fair value of loans held for sale is based on quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.

 

Loans

 

The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.

 

 23 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Federal Home Loan Bank Lender Risk Account Receivable

 

The fair value of the Federal Home Loan Bank lender risk account receivable is estimated by discounting the estimated remaining cash flows of each strata of the receivable at current rates applicable to each strata for the same remaining maturities.

 

Deposits

 

Deposits include demand deposits and savings accounts. The fair value is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of a similar structure. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

 

Federal Home Loan Bank Advances

 

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market.

 

If a quoted market price is not available, an expected present value technique is used to estimate fair value.

 

Advances from Borrowers for Taxes and Insurance and Interest Payable

 

The carrying amount approximates fair value.

 

Commitments to Originate Loans, Forward Sale Commitments, Letters of Credit and Lines of Credit

 

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. At September 30, 2018 and December 31, 2017, the fair value of commitments was not material.

 

 24 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following table presents estimated fair values of the Company’s financial instruments not previously presented at September 30, 2018 and December 31, 2017:

 

       Fair Value Measurements Using 
   Carrying   Quoted
Prices in
Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
   Amount   (Level 1)   (Level 2)   (Level 3) 
                 
September 30, 2018                    
Financial Assets:                    
Cash and cash equivalents  $9,782,396   $9,782,396   $-   $- 
Loans held for sale   2,663,349    -    2,729,037    - 
Loans, net of allowance for loan losses   153,307,179    -    -    155,174,976 
Federal Home Loan Bank stock   1,039,800    1,039,800    -    - 
Interest receivable   505,050    -    505,050    - 
Federal Home Loan Bank lender risk account receivable   1,606,760    -    -    1,654,983 
                     
Financial Liabilities:                    
Deposits   115,894,457    50,188,262    65,243,816    - 
Federal Home Loan Bank advances   38,323,281    -    38,141,203    - 
Advances from borrowers for taxes and insurance   1,204,561    -    1,204,561    - 
Interest payable   62,819    -    62,819    - 
                     
December 31, 2017                    
Financial Assets:                    
Cash and cash equivalents  $10,266,824   $10,266,824   $-   $- 
Loans held for sale   2,221,084    -    2,278,225    - 
Loans, net of allowance for loan losses   147,020,218    -    -    149,839,913 
Federal Home Loan Bank stock   1,021,000    1,021,000    -    - 
Interest receivable   448,727    -    448,727    - 
Federal Home Loan Bank lender risk account receivable   1,708,593    -    -    1,762,223 
                     
Financial Liabilities:                    
Deposits   113,947,726    46,796,456    66,965,227    - 
Federal Home Loan Bank advances   34,309,810    -    34,222,713    - 
Advances from borrowers for taxes and insurance   1,480,777    -    1,480,777    - 
Interest payable   38,626    -    38,626    - 

 

NOTE 7:Commitments and Credit Risk

 

Commitments to Originate Loans

 

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

 

 25 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Forward sale commitments are commitments to sell groups of residential mortgage loans that the Company originates or purchases as part of its mortgage banking activities. The Company commits to sell the loans at specified prices in a future period. These commitments are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale since the Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market.

 

The dollar amount of commitments to fund fixed rate loans at September 30, 2018 and December 31, 2017 follows:

 

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
       Interest Rate       Interest Rate 
   Amount   Range   Amount   Range 
                 
Commitments to fund fixed-rate loans  $3,007,021    4.38% - 6.25%  $3,247,703    3.75% - 4.50%

 

Lines of Credit

 

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

 

Loan commitments outstanding at September 30, 2018 and December 31, 2017 were composed of the following:

 

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
         
Commitments to originate loans  $3,222,521   $6,360,251 
Forward sale commitments   5,670,226    5,468,787 
Lines of credit   15,642,704    12,637,670 

 

 26 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 8:Accumulated Other Comprehensive Loss

 

The components of other comprehensive loss, net of tax, included in stockholders’ equity at September 30, 2018 and December 31, 2017 are as follows:

 

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
         
Net unrealized gain on available for sale securities  $1,117   $700 
           
Directors' Retirement Plan   (318,253)   (310,262)
           
Tax benefit   67,194    105,577 
           
Net of tax amount  $(249,942)  $(203,985)

 

NOTE 9:Equity Incentive Plan

 

In May 2017, the Company’s stockholders approved the Cincinnati Bancorp 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan authorizes the issuance or delivery to participants of up to 117,940 shares of the Company’s common stock pursuant to the grants of restricted stock awards, restricted stock unit awards, incentive stock options, and non-qualified stock options. Of this number, the maximum number of shares of Company common stock that may be issued under the 2017 Plan pursuant to the exercise of stock options is 84,243 shares and the maximum number of shares of Company common stock that may be issued as restricted stock awards or restricted stock units is 33,697 shares. Stock options awarded to employees may be incentive stock options or non-qualified stock options. Shares subject to award under the 2017 Plan may be authorized but unissued shares or treasury shares. The 2017 Plan contains annual and lifetime limits on certain types of awards to individual participants. 

 

Awards may vest or become exercisable only upon the achievement of performance measures or based solely on the passage of time after award. Stock options and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the 2017 Plan).

 

In June 2017, the Company granted stock options for 79,187 shares to members of the Board of Directors and certain members of management. Options granted in June 2017 have an exercise price of $9.55, as determined on the grant date and expire ten years from the grant date.

 

The fair value was calculated for stock options granted in June 2017 using the following assumptions: expected volatility of 11.45%, a risk-free interest rate of 2.31%, and an expected term of ten years.

 

The weighted-average grant-date fair value of options granted during the year 2017 was $3.64 per share. The weighted-average grant date fair value of shares granted during 2017 was $9.55.

 

At September 30, 2018, a total of 15,837 incentive stock options were exercisable.

 

 27 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In June 2017, the Company awarded 33,697 restricted shares to members of the Board of Directors and certain members of management. The restricted stock awards have a five year vesting period. Shares of restricted stock granted to employees under the 2017 Plan are subject to vesting based on continuous employment for a specified time period following the date of grant. During the restricted period, the holder is entitled to full voting rights and dividends, thus are considered participating securities.

 

Total compensation cost recognized in the income statement for share-based payment arrangements during the three months and nine months ended September 30, 2018 was $25,792 and $82,989, respectively. Total compensation cost for share-based payment arrangements during the three months and nine months ended September 30, 2017 was $26,387 and $34,377, respectively.

 

As of September 30, 2018, there was approximately $387,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a remaining weighted-average period of 4 years.

 

NOTE 10:Subsequent Event

 

On October 12, 2018, Cincinnati Federal completed the acquisition of Kentucky Federal Savings and Loan Association, a federally chartered mutual savings bank headquartered in Covington, Kentucky. The transaction qualified as a tax-free reorganization for federal income tax purposes. On the effective date of the merger, the Company issued from its authorized but unissued shares of common stock, 63,382 shares of common stock to CF Mutual Holding Company. The number of shares issued was in consideration of Kentucky Federal’s appraised value of $858,000. The share price was based on the average of the reported closing prices for the preceding ten days on which the Company’s common stock traded which was determined to be $13.54.

 

As of October 12, 2018, Kentucky Federal had total assets of approximately $30.0 million, total deposits of approximately $26.5 million and total net loans of approximately $16.1 million.

 

The accounting for the business combination is not yet complete and therefore all required disclosures for a business combination have not been provided.

 

NOTE 11:Recent Accounting Pronouncements

 

Cincinnati Bancorp is an “emerging growth company.” As an “emerging growth company”, we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to the financial statements of public companies that comply with such new or revised accounting standards.

 

 28 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

 

ASU No. 2018-13 was issued in August 2018 and applies to all entities that are required to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update modify fair value disclosure requirements, including the deletion, modification, and addition of certain targeted disclosures. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of the update and delay adoption of the additional disclosures until the effective date. The amendments are to be applied on a retrospective basis to all periods presented upon adoption, except for certain amendments described in the update that are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans 

 

ASU No. 2018-14 was issued in August 2018. The amendments in this update modify disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including the deletion, modification, and addition of certain targeted disclosures. The amendments are effective for fiscal years beginning after December 15, 2021. Early adoption is permitted. The amendments are to be applied on a retrospective basis to all periods presented upon adoption. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

 ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract 

 

ASU No. 2018-15 was issued in August 2018 and applies to entities that are a customer in a hosting arrangement, as defined, that is accounted for as a service contract. The amendments in this update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Capitalized implementation costs are to be expensed over the term of the hosting arrangement. The amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company has assessed ASU 2018-15 and does not expect a significant impact on its accounting and financial statement disclosures.

 

FASB ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 

ASU No. 2018-02 was issued in February 2018 and addresses a narrow-scope financial reporting issue that arose as a consequence of the passage of H.R. 1, originally known as the “Tax Cuts and Jobs Act.” GAAP requires adjustment of deferred tax assets and liabilities for the effect of a change in tax laws or rates with the effect to be included in income from continuing operations in the reporting period that includes the enactment date. This guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income rather than in income from continuing operations. As a consequence, the tax effects of items within accumulated other comprehensive income, referred to as stranded tax effects in the update, do not reflect the appropriate tax rate. The amendments in ASU No. 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act. Because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. ASU No. 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company early adopted ASU No. 2018-02 on January 1, 2018 and reclassified its stranded tax effects totaling approximately $40,400 (credit) into retained earnings.

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

FASB ASU No. 2017-09, Compensation – Stock Compensation (Topic 718) – Scope Modification Accounting

 

In May 2017 the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting. The amendments in this update provide guidance about which the terms or conditions of share-based payment award require an entity to apply modifications accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in ASU 2017-09 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

FASB ASU 2017-07, Compensation – Retirement Benefits (Topic 715)

 

ASU No. 2017-07 was issued in March 2017 and applies to all employers that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715. The amendments in this update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost, as defined, are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in ASU No. 2017-07 are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. For other entities, the amendments in this update are effective for annual periods beginning after December 15, 2018, and interim periods beginning after December 15, 2019. The amendments in this update are to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

FASB ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments

 

On August 26, 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), ("ASU 2016-15"). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company has assessed ASU 2016-15 and does not expect a significant impact on its accounting and financial statement disclosures.

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

FASB ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326)

 

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income.

 

In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of these amendments to the Company’s financial position and results of operations and currently does not know or cannot reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from these amendments. The Allowance for Loan Losses (ALL) estimate is material to the Company and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the ALL at adoption date. The Company is anticipating a significant change in the processes and procedures to calculate the ALL, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for the other-than-temporary impairment on available-for-sale securities will be replaced with an allowance approach. The Company continues collecting and retaining historical loan and credit data. The Company is in the process of identifying data gaps. Certain CECL models are currently being evaluated. The Audit Committee is informed of ongoing CECL developments. For additional information on the allowance for loan losses, see Note 3.

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

FASB ASU 2016-02, Leases (Topic 842)

 

ASU No. 2016-02 was issued in February 2016 and requires a lessee to recognize in the statement of financial position a liability to make lease payments (“the lease liability”) and a right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments.

 

A lessee shall classify a lease as a finance lease if it meets any of the five listed criteria:

 

a.The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
b.The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
c.The lease term is for the major part of the remaining economic life of the underlying asset.
d.The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.
e.The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

 

For finance leases, a lessee shall recognize in the statement of income interest on the lease liability separately from the amortization of the right-of-use asset. Amortization of the right-to-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating lease and shall recognize a single lease cost on a straight line basis over the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. The impact is not expected to have a material effect on the Company’s financial position or results of operations since the Company does not have a material amount of lease agreements.

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

FASB ASU 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. For public business entities, the amendments in this update include the elimination of the requirement to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, the requirement to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, the requirement to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, the requirement for separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or accompanying notes to the financial statements, and the amendments clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.

 

ASU 2016-01 is effective for non-emerging growth public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For private companies the new guidance becomes effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption of the amendments in this update is not permitted, except that early application by public business entities to financial statements of fiscal years or interim periods that have not yet been issued or, by all other entities, that have not yet been made available for issuance are permitted as of the beginning of the fiscal year of adoption for the following amendment: An entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The Company is currently evaluating the impact of these amendments, but does not expect them to have a material effect on the Company’s consolidated financial position or results of operations since it does not have any equity securities or a valuation allowance. However, the amendments will have an impact on certain items that are disclosed at fair value that are not currently utilizing the exit price notion when measuring fair value. Adoption of the standard is not expected to have a significant impact on its fair value and other disclosure requirements. For additional information on fair value of assets and liabilities, see Note 6.

 

FASB ASU 2014-09, Revenue from Contracts with Customers

 

In May 2014, the FASB issued amended guidance on revenue recognition from contracts with customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Public entities should apply the amendments in ASU 2014-09 to interim reporting periods within annual reporting periods beginning after December 15, 2017 (that is, a public entity would be required to apply the new revenue standard beginning in the first interim period within the period of adoption). Nonpublic entities should apply the amendments in ASU 2014-09 for annual reporting periods beginning after December 31, 2018, and to interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company continues to assess the guidance from the FASB and the Transition Resource Group for Revenue Recognition in determining the impact of ASU 2014-09 on its accounting and disclosures. The amendments could potentially impact the accounting procedures and processes over the recognition of certain revenue sources, including, but not limited to, non-interest income. Management continues to evaluate those revenue streams that could be impacted by the amendments. The analysis includes identification of potential performance obligations and revenue principles. The adoption of ASU 2014-09 is not expected to have a material impact on the Company’s accounting and financial statement disclosures.

 

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

Management’s discussion and analysis of the financial condition and results of operations at September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q and with the audited financial statements and notes thereto at and for the year ended December 31, 2017, appearing in the Company’s Form 10-K for the year ended December 31, 2017.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

·statements of our goals, intentions and expectations;

 

·statements regarding our business plans, prospects, 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 based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-Q except as may be required by applicable law or regulation.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·our ability to manage our operations under the current economic conditions nationally and in our market area;

 

·our ability to integrate future acquisitions, including the merger with Kentucky Federal Savings and Loan Association that closed October 12, 2018, may be unsuccessful, or may be more difficult, time-consuming or costly than expected;

 

·we may incur increased charge-offs in the future;

 

·we may face competitive loss of customers;

 

·adverse changes in the financial industry, securities, credit and national local real estate markets (including real estate values), or in the secondary mortgage markets;

 

·significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses;

 

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·credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

 

·the use of estimates in determining fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuations;

 

·competition among depository and other financial institutions;

 

·our ability to successfully implement our business plan and to grow our franchise to improve profitability;

 

·our ability to attract and maintain deposits, and to obtain FHLB-Cincinnati advances;

 

·changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources, and our ability to originate loans for portfolio and for sale in the secondary market;

 

·fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by change in the value of real estate in our market area;

 

·changes in consumer spending, borrowing and savings habits;

 

· increases in the cost on our liabilities resulting from the current interest rate environment;

 

·risks related to a high concentration of loans secured by real estate located in our market area;

 

·the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

 

·changes in the level of government support of housing finance;

 

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

 

·changes in laws or government regulations or policies affecting financial institutions which could result in, among other things, increased deposit insurance premiums and assessments, increased capital requirements, and increased regulatory fees and compliance costs, and the resources we have available to address such changes;

 

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

 

·changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans;

 

·loan delinquencies and changes in the underlying cash flows of our borrowers;

 

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·our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;

 

·the failure or security breaches of computer systems on which we depend;

 

·the ability of key third-party service providers to perform their obligations to us;

 

·changes in the financial condition or future prospects of issuers of securities that we own; and

 

·other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this quarterly report.

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Comparison of Financial Condition at September 30, 2018 and December 31, 2017

 

Total Assets. Total assets were $176.7 million at September 30, 2018, an increase of $6.2 million, or 3.6%, from the $170.5 million at December 31, 2017. The increase resulted primarily from an increase in loans, net of allowances, of $6.3 million.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $484,000 or 4.7%, to $9.8 million at September 30, 2018 from $10.3 million at December 31, 2017. The decrease was primarily the result of funding loan growth.

 

Net Loans. Net loans increased $6.3 million, or 4.3%, to $153.3 million at September 30, 2018 from $147.0 million at December 31, 2017. During the nine months ended September 30, 2018, we originated $34.0 million of loans for portfolio, $16.0 million of which were one-to-four family residential real estate loans, $4.2 million were multifamily loans, $5.4 million were nonresidential loans, $4.6 million were home equity and home equity lines of credit and $1.9 million were residential construction and land loans and $1.9 million was a nonresidential construction loan. During the nine months ended September 30, 2018, we originated $42.5 million of one-to- four family residential loans for sale, on both a servicing–retained and servicing–released basis. Subject to market conditions, management intends to continue this sales activity in future periods to generate gains on sale and servicing fee income.

 

The one-to-four owner-occupied loan portfolio increased $4.6 million or 6.0%. The nonresidential portfolio increased $1.9 million or 10.5% during the nine months ended September 30, 2018. The one-to-four family investment loan portfolio decreased $408,000, or 3.6%. The home equity lines of credit portfolio increased $240,000 or 2.1% to $11.9 million at September 30, 2018. Construction and land loans decreased $223,000 or 3.6% and the multifamily portfolio increased $1.4 million, or 5.9%. We currently sell certain fixed-rate, 15- and 30-year term mortgage loans. We have sold loans on both a servicing-released and servicing-retained basis to: the FHLB-Cincinnati, through its mortgage purchase program; Freddie Mac; and certain private sector third-party buyers.

 

Loans Held for Sale. Loans held for sale increased $442,000, or 19.9%, to $2.7 million at September 30, 2018 from $2.2 million at December 31, 2017.

 

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Available-for-Sale Securities. Available-for-sale securities, which consisted entirely of U.S. government-sponsored mortgage-backed securities, decreased $201,000, or 22.0%, to $710,000 at September 30, 2018 from $910,000 at December 31, 2017. There were no securities purchases during the nine months ended September 30, 2018. There were $194,000 in maturities, the remaining difference was due to the change in market values within the portfolio during the nine months ended September 30, 2018.

 

Deposits. Deposits increased $1.9 million, or 1.7%, to $115.9 million at September 30, 2018 from $113.9 million at December 31, 2017. Core deposits, defined as demand, NOW and savings accounts, increased $3.4 million, or 7.3%, to $50.2 million at September 30, 2018 from $46.8 million at December 31, 2017. The increase was primarily the result of marketing efforts directed at increasing retail deposit accounts. Time deposits decreased $1.4 million, or 2.2%, to $65.7 million at September 30, 2018 from $67.2 million at December 31, 2017. Certificates originated through the National CD Rateline service decreased $2.3 million to $15.1 million at September 30, 2018. During the nine months ended September 30, 2018, management continued its strategy of pursuing growth in lower cost core deposits, and intends to continue its efforts to increase core deposits.

 

Federal Home Loan Bank Advances. Federal Home Loan Bank Advances increased $4.0 million, or 11.7%, to $38.3 million at September 30, 2018. The additional advances were used to fund loan originations.

 

Stockholders’ Equity. Stockholders’ equity increased $468,000, or 2.4%, to $19.8 million at September 30, 2018 from $19.3 million at December 31, 2017. The increase was primarily due to net income for the nine months ended September 30, 2018 of $391,000. Stockholder’s equity also increased $40,000 due to a reclassification of deferred tax liabilities in other accumulated comprehensive income during the first quarter of 2018 related to the enactment of the Tax Cuts and Job Act in December 2017.

 

Comparison of Operating Results for the Three Months Ended September 30, 2018 and September 30, 2017

 

General. Net income for the quarter ended September 30, 2018 was $26,000, compared to net income of $85,000 for the quarter ended September 30, 2017, a decrease of $59,000, or 70.0%. The decrease was primarily due to merger-related expenses of $149,000 related to the acquisition of Kentucky Federal Savings and Loan Association.

 

Interest and Dividend Income. Interest income increased $251,000, or 17.0%, to $1.7 million for the quarter ended September 30, 2018 compared to $1.5 million in the comparable quarter in 2017. Interest income on loans increased $217,000, or 14.9%, to $1.7 million as of September 30, 2018. The average balance of loans during the three months ended September 30, 2018 increased $11.9 million to $155.6 million, compared to $143.7 million for the three months ended September 30, 2017. The average yield on loans increased 24 basis points to 4.31% for the three months ended September 30, 2018 from 4.07% for the three months ended September 30, 2017. Interest income on securities available-for-sale increased $6,000 for the quarter. Interest income on other investments increased $28,000 for the three months ended September 30, 2018 due to an increase in the dividend received on FHLB Cincinnati stock and an increase in short-term interest rates.

 

Interest Expense. Total interest expense increased $165,000, or 44.5%, to $537,000 for the quarter ended September 30, 2018 from $371,000 for the quarter ended September 30, 2017. Interest expense on deposit accounts increased $89,000, or 35.1%, to $343,000 for the quarter ended September 30, 2018 from $254,000 for the quarter ended September 30, 2017. The increase in deposit expense between comparable quarters in 2018 from 2017 was primarily due to $5.0 million increase in average interest-bearing deposit accounts, and a 27 basis point increase in average cost, primarily due to the increase in interest rates.

 

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Interest expense on interest-bearing demand accounts increased $12,000 for the quarter ended September 30, 2018. The average balances in demand interest bearing accounts increased $606,000 during the three months ended September 30, 2018. The average cost of interest-bearing demand accounts increased 50 basis points. Interest expense on certificates of deposit increased $67,000 as a result of a $3.4 million, or 5.3%, increase in the average balance of these certificates. The average cost of certificates increased 33 basis points to 1.77%. Savings interest expense increased $11,000 during the quarter ended September 30, 2018 compared to the quarter ended September 30, 2017. The average cost of savings deposits increased 17 basis points to 0.25% primarily due to a high yield savings promotion.

 

Interest expense on FHLB advances increased $76,000, or 64.9%, to $193,000 for the quarter ended September 30, 2018 from $117,000 for the quarter ended September 30, 2017. The average balance of advances increased $6.7 million, or 20.7%, for the quarter ended September 30, 2018. The average cost of FHLB borrowings increased 53 basis points. The increase in the cost of advances resulted primarily from increases in short term interest rates.

 

Net Interest Income. Net interest income before the provision for loan losses increased $86,000, or 7.7%, to $1.2 million for the quarter ended September 30, 2018. Average interest-earning assets increased $15.5 million primarily due to an $11.9 million increase in average outstanding loans for the quarter ended September 30, 2018. Interest on other interest earning assets increased $28,000 primarily due to an increase in average yields of 52 basis points due to the increase in the dividend rate on FHLB stock and increase in interest rates on balances held at other depository banks and on fed funds sold. Average interest-bearing liabilities increased $11.8 million from the same quarter in 2017 due to the funding needed for the increase in lending. The interest rate spread decreased 14 basis points to 2.63% for the quarter ended September 30, 2018 compared to 2.77% at quarter ended September 30, 2017. The net interest margin decreased 6 basis points to 2.88% for the quarter ended September 30, 2018 compared to 2.94% for the quarter ended September 30, 2017.

 

Provision for Loan Losses. The provision for loan losses expense increased $15,000 for the quarter ended September 30, 2018 from the comparable quarter in 2017 primarily due to continued loan growth, particularly in the one-to-four owner-occupied loan, nonresidential and multifamily portfolio segments.

 

The allowance for loan losses reflects the estimate we believe to be adequate to cover probable losses which were inherent in the loan portfolio at September 30, 2018. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.

 

Non-Interest Income. Non-interest income increased $124,000, or 23.0%, to $662,000 for the quarter ended September 30, 2018 from $538,000 for the comparable quarter in 2017. The gain on sale of loans increased $99,000, or 26.0%, to $480,000 for the quarter ended September 30, 2018 from $381,000 for the comparable quarter in 2017.

 

Non-Interest Expense. Non-interest expense increased $220,000, or 14.4%, to $1.7 million for the quarter ended September 30, 2018 compared to the comparable quarter in 2017. The increase was due primarily to a $149,000 increase in merger-related expenses. Loan costs increased $20,000, or 25.8%. Data processing expense increased $10,000, or 6.6%, to $158,000 during the quarter ended September 30, 2018 from $148,000 for the quarter ended September 30, 2017. Advertising expense increased $22,000, or 101.1% due to increased print, billboard and social media spending to promote deposit accounts.

 

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Federal Income Taxes. Federal income taxes increased $34,000 for the quarter ended September 30, 2018 from the comparable quarter in 2017 primarily due to the non-deductible tax treatment of the merger-related expenses.

 

Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax-equivalent yield adjustments have been made. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. All average balances are monthly average balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material differences in the information presented. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

 

   For the Three Months Ended September 30, 
   2018   2017 
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
(5)
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
(5)
 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans  $155,635   $1,678    4.31%  $143,720   $1,461    4.07%
Securities   732    5    2.73    1,320    (1)   (0.30)
Other (1)   9,893    49    1.98    5,740    21    1.46 
Total interest-earning assets   166,260    1,732    4.17    150,780    1,481    3.93 
Non-interest-earning assets   10,455              13,144           
Total assets  $176,715             $163,924           
                               
Interest-bearing liabilities:                              
Savings  $25,169   $16    0.25   $24,099   $5    0.08 
Interest-bearing demand   8,133    33    1.62    7,527    21    1.12 
Certificates of deposit   66,621    295    1.77    63,257    228    1.44 
Total deposits   99,923    344    1.33    94,883    254    1.07 
Borrowings   39,364    193    1.96    32,622    117    1.43 
Total interest-bearing liabilities   139,287    537    1.54    127,505    371    1.16 
Non-interest-bearing Demand   15,587              15,253           
Other non-interest-bearing liabilities   2,601              2,501           
Total non- interest-bearing liabilities   18,188              17,754           
Total equity   19,240              18,665           
Total liabilities and total equity  $176,715             $163,924           
Net interest income       $1,195             $1,109      
Net interest rate spread (2)             2.63%             2.77%
Net interest-earning assets (3)  $26,973             $23,275           
Net interest margin (4)             2.88%             2.94%
Average interest-earning assets to interest-bearing liabilities             119.37%             118.25%

 

 

(1)Consists of FHLB-Cincinnati stock, FHLB DDA, certificates of deposit, fed funds sold, and cash reserves.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents annualized net interest income divided by average total interest-earning assets.
(5)Annualized

 

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Comparison of Operating Results for the Nine Months Ended September 30, 2018 and September 30, 2017

 

General. Net income for the nine months ended September 30, 2018 was $391,000, compared to net income of $467,000 for the nine months ended September 30, 2017, a decrease of $76,000, or 16.3%. The decrease was primarily due to a $609,000 increase in noninterest expense which included $231,000 in merger-related expenses, partially offset by an increase in net interest income before the provision for loan losses of $338,000 and an increase in noninterest income of $185,000.

 

Interest and Dividend Income. Interest income increased $765,000, or 18.0%, to $5.0 million for the nine months ended September 30, 2018 from the comparable nine months in 2017. Interest income on loans increased $675,000, or 16.1%, to $4.9 million as of September 30, 2018. The average balance of loans during the nine months ended September 30, 2018 increased $16.0 million to $153.9 million, compared to $137.9 million for the nine months ended September 30, 2017. The average yield on loans increased 16 basis points to 4.22% for the nine months ended September 30, 2018 from 4.06% for the nine months ended September 30, 2017. Interest income on securities available-for-sale increased $10,000 due to a 174 basis point increase in average yield on the securities portfolio, partially offset by a $694,000 decrease in the balance of the average securities portfolio during the nine months ended September 30, 2018. Interest income on other investments increased $81,000 for the nine months ended September 30, 2018 primarily due to an increase in average yields of 63 basis points compared to the nine months ended September 30, 2017.

 

Interest Expense. Total interest expense increased $427,000, or 41.1%, to $1.5 million for the nine months ended September 30, 2018 from $1.0 million for the nine months ended September 30, 2017. Interest expense on deposit accounts increased $241,000, or 32.4%, to $984,000 for the nine months ended September 30, 2018 from $743,000 for the nine months ended September 30, 2017. The increase between comparable nine months in 2018 from 2017 was primarily due to a $173,000 increase in interest expense on certificates of deposit resulting from a $3.6 million, or 5.6%, increase in the average balance of these certificates. The average cost of certificates increased 26 basis points to 1.67%. Interest expense on interest-bearing demand accounts increased $49,000 from the comparable nine months in 2017. The increase in interest expense reflects the promotion of a high yielding checking account product for large balance DDA accounts. The average balances in demand interest bearing and non-interest bearing accounts during the nine months ended September 30, 2018 increased $3.8 million to $24.1 million compared to $20.3 million for the nine months ended September 30, 2017. Savings interest expense increased $19,000 as average balances increased $319,000. The average cost of savings deposits increased 10 basis points during the nine months ended September 30, 2018 compared to September 30, 2017.

 

Interest expense on FHLB advances increased $185,000, or 62.5%, to $481,000 for the nine months ended September 30, 2018 from $296,000 for the nine months ended September 30, 2017. The average balance of advances increased $8.2 million, or 28.8%, for the nine months ended September 30, 2018. The average cost of FHLB borrowing increased 36 basis points during the nine months ended September 30, 2018.

 

Net Interest Income. Net interest income before the provision for loan losses increased $339,000, or 10.5%, to $3.6 million for the nine months ended September 30, 2018. Average interest-earning assets increased $19.2 million primarily due to a $16.0 million increase in average outstanding loans for the nine months ended September 30, 2018. Interest on other interest earning assets increased $81,000 primarily due to an increase in average yields of 63 basis points due to the increase in the dividend rate on FHLB stock and increase in interest rates on balances held at other depository banks. Average interest-bearing liabilities increased $13.4 million from the same nine months in 2017 due to the funding needed for the increase in lending. The interest rate spread decreased 14 basis points to 2.64% for the nine months ended September 30, 2018 compared to 2.78% at nine months ended September 30, 2017. The net interest margin decreased 7 basis point to 2.88% for the first nine months of 2018 from 2.95% for the nine months ended September 30, 2017.

 

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Provision for Loan Losses. The provision for loan losses increased $35,000 for the nine months ended September 30, 2018 from the comparable nine months in 2017. The provision was recorded based on managements’ evaluation of the quality of the loan portfolio and economic conditions. The growth in the loan portfolio during the nine months ended September 30, 2018 indicated an upward qualitative adjustment.

 

Non-Interest Income. Non-interest income increased $185,000, or 10.1%, to $2.0 million for the nine months ended September 30, 2018 from $1.8 million for the comparable nine months in 2017. The increase was primarily due to an $31,000 increase in mortgage servicing fees due to higher mortgage servicing rights valuations and a $53,000 increase in the gain on sale of loans. Checking account fee income increased $30,000 for the nine months ended September 30, 2018.

 

Non-Interest Expense. Non-interest expense increased $609,000, or 14.0%, to $5.0 million for the nine months ended September 30, 2018 from the comparable nine months in 2017. The increase was due primarily to a $231,000 increase in merger-related expenses. Salary and employee benefits increased $166,000, or 7.1%, to $2.5 million in the first nine months of 2018 from $2.3 million for the comparable nine months in 2017 caused by increased staffing demands, salaries, and incentive equity plan expense. Data processing expense increased $28,000, or 6.6%, to $451,000 during the nine months ended September 30, 2018 from $423,000 for the nine months ended September 30, 2017. The increase was due to bank growth. Advertising expense increased $49,000, or 71.8% due to increased print, billboard and social media marketing. Loan cost expense increased $91,000 or 41.2% primarily due to increased loan originations.

 

Federal Income Taxes. Federal income taxes decreased $44,000 primarily due to a decrease in the pre-tax income related to the nondeductible tax treatment of the merger-related expenses for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

 

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Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax-equivalent yield adjustments have been made. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. All average balances are monthly average balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material differences in the information presented. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

 

   For the Nine Months Ended September 30, 
   2018   2017 
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
(5)
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
(5)
 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans  $153,867   $4,875    4.22%  $137,909   $4,200    4.06%
Securities   798    12    2.01    1,492    3    0.27 
Other (1)   9,957    132    1.77    5,981    51    1.14 
Total interest-earning assets   164,622    5,019    4.07    145,382    4,254    3.90 
Non-interest-earning assets   10,390              13,285           
Total assets  $175,012             $158,667           
                               
Interest-bearing liabilities:                              
Savings  $24,581   $34    0.18   $24,262   $15    0.08 
Interest-bearing demand   7,804    97    1.66    6,543    48    0.98 
Certificates of deposit   68,097    853    1.67    64,493    680    1.41 
Total deposits   100,482    984    1.31    95,298    743    1.04 
Borrowings   36,550    481    1.75    28,370    296    1.39 
Total interest-bearing liabilities   137,032    1,465    1.43    123,668    1,039    1.12 
Non-interest-bearing Demand   16,301              13,806           
Other non-interest-bearing liabilities   2,700              2,764           
Total non- interest-bearing liabilities   19,001              16,570           
Total equity   18,979              18,429           
Total liabilities and total equity  $175,012             $158,667           
Net interest income       $3,554             $3,215      
Net interest rate spread (2)             2.64%             2.78%
Net interest-earning assets (3)  $27,590             $21,714           
Net interest margin (4)             2.88%             2.95%
Average interest-earning assets to interest-bearing liabilities             120.13%             117.56%

 

 

(1)Consists of FHLB-Cincinnati stock, FHLB DDA, certificates of deposit, fed funds sold, and cash reserves.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents annualized net interest income divided by average total interest-earning assets.
(5)Annualized

 

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Liquidity and Capital Resources. Liquidity is the ability to meet 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, principal and interest payments on loans and securities proceeds from the sale of loans, and proceeds from the sale or maturities of securities. In addition, the Bank may borrow from the FHLB. At September 30, 2018, the Bank had $38.3 million outstanding in advances from the FHLB. At September 30, 2018, the Bank had collateral based capacity to borrow $42.1 million. The Bank had additional lines of credit with three commercial banks totaling $11.5 million. Additionally, the Bank has contingent funding sources with CDARS and the StoneCastle’s Federally Insured Cash Account (FICA) program.

 

While maturities and scheduled amortization of loans and securities are probable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

 

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $4,000 for the nine months ended September 30, 2018. Net cash used in operating activities was $1.6 million for the nine months ended September 30, 2017. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on mortgage-backed securities, was $6.2 million for the nine months ended September 30, 2018 and $9.5 million for the nine months ended September 30, 2017. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $5.7 million and $10.5 million for the nine months ended September 30, 2018 and 2017, respectively.

 

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. We also anticipate continued participation in the National CD Rateline Program as a wholesale source of certificates of deposit, and continued use of FHLB-Cincinnati advances.

 

Cincinnati Bancorp is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividend to its stockholders and for other corporate purposes. Cincinnati Bancorp’s primary source of liquidity is dividend payments, if any, received from the Bank. The Bank’s ability to pay dividends is subject to regulatory restrictions. At September 30, 2018, Cincinnati Bancorp (on an unconsolidated, stand-alone basis) had liquid assets of $604,000.

 

At September 30, 2018, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $19.7 million, or 11.2% of adjusted total assets, which is above the well-capitalized required level of $8.8 million, or 5.0%; total risk-based capital of $21.1 million, or 16.5% of risk-weighted assets, which is above the well-capitalized required level of $12.8 million, or 10.0% of risk-weighted assets; and common equity tier 1 risk based capital of $19.7 million, or 15.4%, of risk weighted assets, which is above the well-capitalized required level of $8.3 million, or 6.5%. At December 31, 2017, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $18.8 million, or 11.3% of adjusted total assets, which is above the well-capitalized required level of $8.3 million, or 5.0%; and total risk-based capital of $20.2 million, or 16.5% of risk-weighted assets, which is above the well-capitalized required level of $12.2 million, or 10.0% of risk-weighted assets. Accordingly, Cincinnati Federal was categorized as well capitalized at September 30, 2018, and December 31, 2017. Management is not aware of any conditions or events since the most recent notification that would change its category.

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable, as the Company is a smaller reporting company.

 

Item 4.Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2018. Based on that evaluation, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

 

During the quarter ended September 30, 2018, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1.Legal Proceedings

 

The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.

 

Item 1A.Risk Factors

 

Not applicable, as the Company is a smaller reporting company.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)There were no sales of unregistered securities during the period covered by this Report.

 

(b)Not applicable.

 

(c)There were no issuer repurchases of securities during the period covered by this Report.

 

Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

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Item 6.Exhibits

 

3.1Cincinnati Bancorp Stock Holding Company Charter (1)