Company Quick10K Filing
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Cincinnati Bancorp
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
8-K 2018-10-12 Other Events, Exhibits
8-K 2018-10-12 Officers, Amend Bylaw, Exhibits
8-K 2018-09-26 Other Events, Exhibits
8-K 2018-08-20 Other Events, Exhibits
8-K 2018-05-24 Shareholder Vote
8-K 2018-04-18 Enter Agreement, Regulation FD, Other Events, Exhibits
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KEYS Keysight Technologies 17,020
HPT Hospitality Properties Trust 4,340
OFIX Orthofix Medical 1,010
STXB Spirit of Texas Bancshares 300
OBAS Optibase 54
FMHI Fah Mai Holdings 49
DFFN Diffusion Pharmaceuticals 11
PFHO Pacific Health Care Organization 0
EQFN Equitable Financial 0
CNNB 2018-12-31
Part I
Item 1.Business
Item 1A.Risk Factors
Item 1B.Unresolved Staff Comments
Item 2.Properties
Item 3.Legal Proceedings
Item 4.Mine Safety Disclosures
Part II
Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.Selected Financial Data
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 8.Financial Statements and Supplementary Data
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B.Other Information
Part III
Item 10.Directors, Executive Officers and Corporate Governance
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 14.Principal Accounting Fees and Services
Part IV
Item 15.Exhibits and Financial Statement Schedules
Item 16.Form 10-K Summary
Note 1:	Nature of Operations and Summary of Significant Accounting Policies
Note 2: Merger
Note 3:	Securities
Note 4: 	Loans and Allowance for Loan Losses
Note 5:Premises and Equipment
Note 6:Loan Servicing
Note 7:Time Deposits
Note 8:Federal Home Loan Bank Advances
Note 9:Income Taxes
Note 10:Accumulated Other Comprehensive Loss
Note 11:Regulatory Matters
Note 12:Related Party Transactions
Note 13:Employee and Director Benefits
Note 14:Operating Lease Income
Note 15:Disclosures About Fair Value of Assets and Liabilities
Note 16: Commitments and Credit Risk
Note 17: Earnings per Share
Note 18: Equity Incentive Plan
Note 19: Multiemployer Defined Benefit Plan
Note 20: 	Recent Accounting Pronouncements
Note 21: Condensed Financial Information (Parent Company Only)
EX-21.0 tv516542_ex21-0.htm
EX-23.0 tv516542_ex23-0.htm
EX-31.1 tv516542_ex31-1.htm
EX-31.2 tv516542_ex31-2.htm
EX-32 tv516542_ex32.htm

Cincinnati Bancorp Earnings 2018-12-31

CNNB 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 tv516542_10k.htm FORM 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 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 Number: 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 No.)

   
6581 Harrison Avenue, Cincinnati, Ohio 45247
(Address of principal executive offices) (Zip Code)

 

(513) 574-3025

(Registrant’s telephone number, including area code)

 

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

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definition 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 by Rule 12b-2 of the Act).  Yes  ¨    No  x

 

The aggregate market value of the registrant’s shares held by nonaffiliates as of June 30, 2018 was $7,729,737, based on the closing sales price of $12.85 per share reported by the OTC Markets Group, Inc. on June 30, 2018. For this purpose, shares held by nonaffiliates are all outstanding shares except those held by CF Mutual Holding Company, by the directors and executive officers of the registrant and by the Cincinnati Federal Employee Stock Ownership Plan.

 

The number of outstanding shares of the registrant’s common stock as of March 19, 2019 was 1,816,329, of which 1,008,969 shares were owned by CF Mutual Holding Company.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.

 

 

 

 

 

 

INDEX

 

    Part I    
         
Item 1.   Business   2
Item 1A.   Risk Factors   34
Item 1B.   Unresolved Staff Comments   34
Item 2.   Properties   34
Item 3.   Legal Proceedings   34
Item 4.   Mine Safety Disclosures   34
         
    Part II    
         
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   35
Item 6.   Selected Financial Data   36
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   36
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   49
Item 8.   Financial Statements and Supplementary Data   49
Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   49
Item 9A.   Controls and Procedures   50
Item 9B.   Other Information   50
         
    Part III    
         
Item 10.   Directors, Executive Officers and Corporate Governance   51
Item 11.   Executive Compensation   51
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   50
Item 13.   Certain Relationships and Related Transactions, and Director Independence   51
Item 14.   Principal Accounting Fees and Services   51
         
    Part IV    
         
Item 15.   Exhibits and Financial Statement Schedules   52
Item 16.   Form 10-K Summary   52
SIGNATURES        

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” 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. Except as may be required by applicable law and regulation, we are under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.

 

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;

 

·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;

 

·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 declines in the value of real estate in our market area;

 

·changes in consumer spending, borrowing and savings habits;

 

1

 

 

·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, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, particularly the new capital regulations, 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;

 

·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;

 

·acquisition integration risks, including potential deposit attrition, higher than expected costs, customer loss, business disruption and the inability to realize benefits and cost savings from, and limit any unexpected liabilities associated with, business combinations; and

 

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

 

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

 

PART I

 

ITEM  1.BUSINESS

 

General

 

Cincinnati Bancorp (the “Company”) is a federally-chartered corporation that was incorporated in October 2015 to be the mid-tier stock holding company for Cincinnati Federal in connection with the mutual holding company reorganization of Cincinnati Federal. The reorganization was completed on October 14, 2015. Net proceeds from the offering were approximately $6.3 million. CF Mutual Holding Company is a federally chartered mutual holding company formed in October 2015 to become the mutual holding company of Cincinnati Bancorp in connection with the mutual holding company reorganization of Cincinnati Federal. As a mutual holding company, CF Mutual Holding Company is required by law to own a majority of the voting stock of Cincinnati Bancorp. CF Mutual Holding Company is not currently, and at no time has been, an operating company.

 

2

 

 

The executive offices of Cincinnati Bancorp are located at 6581 Harrison Avenue, Cincinnati, Ohio 45247, and the telephone number is (513) 574-3025. Our website address is www.cincinnatifederal.com. Information on our website should not be considered a part of this annual report.

 

Cincinnati Bancorp is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System. At December 31, 2018, we had total assets of $197.7 million, total deposits of $142.4 million and total equity of $23.0 million. We recorded net income of $2.3 million for the year ended December 31, 2018.

 

 

Cincinnati Federal is a federal savings bank headquartered in Cincinnati, Ohio. Over the years, we have grown internally and we have also acquired a total of five mutual savings institutions, with our most recent acquisition occurring in 2018 with the acquisition of Kentucky Federal Savings and Loan Association effective October 12, 2018.

 

Our business consists primarily of taking deposits from the general public and investing those deposits, together with borrowings and funds generated from operations, in one- to four-family residential real estate loans, and, to a lesser extent, nonresidential real estate and multi-family loans, home equity loans and lines of credit, and construction and land loans. We also invest in securities, which consist primarily of mortgage-backed securities issued by U.S. government sponsored entities and Federal Home Loan Bank stock. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. We utilize advances from the Federal Home Loan Bank of Cincinnati (the “FHLB-Cincinnati”) for asset/liability management purposes and for additional funding for our operations.

 

Cincinnati Federal also operates an active mortgage banking unit with nine mortgage loan officers, which originates loans both for sale into the secondary market and for retention in our portfolio. The revenue from gain on sales of loans was $1.7 million for the fiscal year ended December 31, 2018.

 

Cincinnati Federal is subject to comprehensive regulation and examination by its primary federal regulator, the Office of the Comptroller of the Currency.

 

Market Area

 

We conduct our operations from our main office and three branch offices in Cincinnati, Ohio (Cincinnati) and two branch offices in Northern Kentucky. Hamilton County, Ohio represents our primary geographic market area for loans and deposits. Our business operations are conducted in the larger Greater Cincinnati/Northern Kentucky metropolitan area which includes Warren, Butler and Clermont Counties in Ohio, Boone, Kenton and Campbell Counties in Kentucky, and Dearborn County, Indiana. We will, on occasion, make loans secured by properties located outside of our primary market. The local economy is diversified with services, trade and manufacturing employment being the most prominent employment sectors in Hamilton County. The employment base is diversified and there is no dependence on one area of the economy for continued employment. Major employers in the market include The Kroger Co., Catholic Healthcare Partners, The Procter & Gamble Company, the Greater Cincinnati/Northern Kentucky International Airport, Cincinnati Children’s Hospital, St. Elizabeth Healthcare, city and county governments, the University of Cincinnati and Northern Kentucky University. Our future growth opportunities will be influenced by the growth and stability of the regional, state and national economies, other demographic trends and the competitive environment. Hamilton County and Cincinnati have generally experienced a declining population since the 2000 census while the other counties in which we conduct business experienced population growth. The population decline in both Hamilton County and the City of Cincinnati results from other counties and northern Kentucky being more successful in attracting new and existing businesses to locate within their areas through economic incentives, including less expensive real estate options for office facilities. Individuals are moving to these other areas to be closer to their place of employment, for newer, less expensive housing and more suburban neighborhoods.

 

3

 

 

Competition  

 

We face intense competition within our market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions. We also face competition from commercial banks, savings institutions, mortgage banking firms, consumer and finance companies and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2018, based on the most recent available FDIC data, our market share of deposits represented 0.13% of FDIC-insured deposits in Hamilton County, ranking us 15th in deposit market share. This data does not include deposits held by credit unions.

 

Lending Activities

 

General. Our principal lending activity is originating one- to four-family residential real estate loans and, to a lesser extent, nonresidential real estate and multi-family loans, home equity loans and lines of credit, and construction and land loans. To a much lesser extent, we also originate commercial business loans and consumer loans. Subject to market conditions and our asset-liability analysis, we expect to increase our focus on nonresidential real estate and multi-family loans in an effort to diversify our overall loan portfolio and increase the overall yield earned on our loans. We also originate for sale and sell the majority of the fixed-rate one- to four-family residential real estate loans that we originate with terms of greater than 10 years, on both a servicing-retained and servicing-released, limited or no recourse basis, while retaining shorter-term fixed-rate and generally all adjustable-rate one- to four-family residential real estate loans in order to manage the duration and time to repricing of our loan portfolio. Loans are sold primarily to FHLB-Cincinnati, Freddie Mac or to private sector third party buyers.

 

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.

 

   At December 31, 
   2018   2017 
   Amount   Percent   Amount   Percent 
   (Dollars in thousands)   (Dollars in thousands) 
                 
Real estate loans:                    
One- to four-family residential: (1)                    
Owner occupied  $93,659    53.87%  $77,533    51.82%
Non-owner occupied   14,243    8.19    11,355    7.59 
Nonresidential   18,930    10.89    18,139    12.12 
Multi-family   27,140    15.61    23,895    15.97 
Home equity lines of credit   11,374    6.54    11,714    7.83 
Construction and land   7,294    4.20    6,137    4.13 
Total real estate   172,640    99.30    148,809    99.46 
Commercial loans   416    0.24    335    0.22 
Consumer loans   796    0.46    471    0.32 
Total loans   173,852    100.00%   149,615    100.00%
Less:                    
Deferred loan fees   (491)        (480)     
Allowance for losses   1,405         1,360      
Undisbursed loan proceeds   2,573         1,715      
Total loans, net  $170,365        $147,020      

 

 

(1)Includes $1.6 million and $1.8 million of home equity loans at December 31, 2018 and December 31, 2017, respectively.

 

4

 

 

Contractual Maturities. The following tables set forth the contractual maturities of our total loan portfolio at December 31, 2018. Demand loans, which are loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.

 

December 31, 2018  One- to Four-
Family
Residential Real
Estate
   Nonresidential
Real Estate
   Multi-Family
Real Estate
   Construction
and Land
 
   (In thousands) 
                 
Amounts due in:                    
2019  $835   $62   $215   $- 
2020   231    447    139    - 
2021   533    80    -    1,090 
2022-2023    2,985    271    115    249 
2024-2028    6,818    1,418    1,609    - 
2029-2033    9,177    4.790    2,230    261 
2034 and beyond    87,323    11,862    22,832    5,694 
Total   $107,902   $18,930   $27,140   $7,294 

 

December 31, 2018  Home Equity
Lines of Credit
   Commercial   Consumer   Total 
   (In thousands) 
                 
Amounts due in:                    
2019  $1,957   $-   $670   $3,739 
2020   527    24    2    1,370 
2021   240    -    7    1,950 
2022-2023   572    78    15    4,285 
2024-2028   6,604    277    90    16,816 
2029-2033   1,474    37    -    17,969 
2034 and beyond   -    -    12    127,723 
Total  $11,374   $416   $796   $173,852 

 

Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth our fixed- and adjustable-rate loans at December 31, 2018 that are contractually due after December 31, 2019.

 

   Due After December 31, 2019 
   Fixed   Adjustable   Total 
   (In thousands) 
             
Real estate loans:               
One- to four-family residential  $22,449   $84,618   $107,067 
Nonresidential   1,511    17,357    18,868 
Multi-family   2,132    24,793    26,925 
Home equity lines of credit   -    9,417    9,417 
Construction and land   249    7,045    7,294 
Total real estate   26,341    143,230    169,571 
Commercial loans   416    -    416 
Consumer loans   5    121    126 
Total loans  $26,762   $143,351   $170,113 

 

Loan Approval Procedures and Authority. Pursuant to federal law, the aggregate amount of loans that Cincinnati Federal is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Cincinnati Federal’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2018, based on the 15% limitation, Cincinnati Federal’s loans-to-one-borrower limit was approximately $3.7 million. On the same date, Cincinnati Federal had no borrowers with outstanding balances in excess of this amount. At December 31, 2018, our largest loan relationship with one borrower was for approximately $2.0 million, secured by a nonresidential property, and was performing in accordance with its original terms on that date.

 

5

 

 

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, bank statements and tax returns. We generally follow underwriting procedures that are consistent with Freddie Mac underwriting guidelines.

 

Under our loan policy, the loan underwriter of an application is responsible for ensuring proposals and approval of any extensions of credit are in compliance with internal policies and procedures and applicable laws and regulations, and for establishing and maintaining credit files and documentation sufficient to support the loan and to perfect any collateral position. Loans originated for sale may be approved by any loan underwriter, if the loan conforms to the underwriting guidelines established by the investor to whom the loan will be sold.

 

Loans to be held in our portfolio may not be approved solely by an underwriter, and generally require review and approval by our Chief Lending Officer, members of the loan committee or the board of directors. All loan approval amounts are based on the aggregate loans, including total balances of outstanding loans and the proposed loan to the individual borrower and any related entity. For one- to four-family owner-occupied real estate loans, our Chief Lending Officer, any two members of the loan committee or any one loan committee member and one underwriter are authorized to approve loans up to $424,100 in the aggregate.

 

For one- to four-family owner-occupied real estate, non-owner occupied one- to four-family owner-occupied real estate, commercial real estate, undeveloped lots or employee loans, any three members of the loan committee are authorized to approve up to $750,000 in the aggregate. The entire loan committee may approve loans up to $1,000,000 in the aggregate. For aggregate loans in excess of $1,000,000, approval of the board of directors is required.

 

For all other loans, our Chief Lending Officer or any two members of the loan committee are authorized to approve aggregate loans up to $50,000, with three loan committee members able to approve aggregate loans up to $250,000. As above, the approval of the full loan committee is required for loans up to $1,000,000 and approval of the board of directors is required for loans in excess of $1,000,000.

 

Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.

 

One- to Four-Family Residential Real Estate Lending. The focus of our lending program has historically been the origination of one- to four-family residential real estate loans. At December 31, 2018, we had $107.9 million of loans secured by one- to four-family real estate, representing 62.1% of our total loan portfolio. We originate both fixed- and adjustable-rate residential mortgage loans. At December 31, 2018, the one- to four-family residential mortgage loans held in our portfolio due after December 31, 2019 were comprised of 20.97% fixed-rate loans, and 79.03% adjustable-rate loans.

 

Prior to 2010, we engaged in significant non-owner occupied one- to four-family real estate lending. Many of these loans were made to investors who owned a number of rental properties, and which did not provide sufficient rental cash flows to service the repayment of the loans. There is a greater credit risk inherent in non-owner occupied properties, than in owner occupied properties since, like nonresidential real estate and multi-family loans, the repayment of these loans may depend, in part, on the successful management of the property and/or the borrower’s ability to lease the property. A downturn in the real estate market or the local economy could adversely affect the value of properties securing these loans or the revenues derived from these properties which could affect the borrower’s ability to repay the loan. Beginning with the economic downturn that began in 2008, we experienced higher levels of delinquencies and charge-offs in our non-owner occupied residential loan portfolio. Our management took steps to reduce our delinquent and non-performing assets in this portfolio, and to reduce this type of lending. See “—Delinquencies and Non-Performing Assets” below. At December 31, 2018, we had $14.2 million of non-owner occupied residential loans.

 

6

 

 

We currently originate a small number of non-owner occupied residential loans. Non-owner occupied loans as a percentage of total loans have increased to 8.2% at December 31, 2018 from 7.6% at December 31, 2017. We impose strict underwriting guidelines in the origination of such loans, including a maximum number of loans to the same borrower, local residency, and no prior bankruptcies and/or foreclosures. Properties securing non-owner occupied loans must be within 50 miles of a Cincinnati Federal branch office. We also generally limit loans on non-owner occupied properties to borrowers with no more than ten total rental properties as a way to mitigate the risks involved in lending to professional property investors.

 

Our one- to four-family residential real estate loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae. We also originate loans above the lending limit for conforming loans, which are referred to as “jumbo loans.” We also offer FHA, VA and Rural Housing Development loans, all of which we originate for sale on a servicing-released, non-recourse basis in accordance with FHA, VA and USDA guidelines. We use an underwriter with expertise in FHA/VA lending. With the exception of three residential loans totaling $1.0 million at December 31, 2018, all of our one- to four-family residential real estate loans at that date are secured by properties located in our market area.

 

We generally limit the loan-to-value ratios of our owner-occupied one- to four-family residential mortgage loans to 85% of the purchase price or appraised value, whichever is lower. In addition, we may make one- to four-family residential mortgage loans with loan-to-value ratios up to 95% of the purchase price or appraised value, whichever is less, if the borrower obtains private mortgage insurance. Non-owner occupied one- to four-family residential mortgage loans are limited to an 80% loan-to-value ratio.

 

Our one- to four-family residential real estate loans typically have terms of up to 30 years, with non-owner occupied loans limited to a maximum term of 25 years. Our adjustable-rate one- to four-family residential real estate loans generally have fixed rates for initial terms of three, five or seven years, and adjust annually thereafter at a margin. In recent years, this margin has been between 2.75% and 3.25% over the weekly average yield on U.S. treasury securities adjusted to a constant maturity of one year. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.

 

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on most of our adjustable-rate loans do not adjust for up to seven years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.

 

We also originate home equity lines of credit and fixed-term home equity loans. See “—Home Equity Loans and Lines of Credit.”

 

We do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” on one- to four-family residential real estate loans (i.e., generally loans with credit scores less than 660), except for loans originated for sale in the secondary market.

 

We currently offer a special residential mortgage program with preferred loan terms to new and existing medical physicians. This program includes (i) preferred treatment of new physician income with regard to positions offered or recently begun and (ii) mortgage loans with a loan-to-value ratio up to 95% to 100% without the need to obtain mortgage insurance for loans up to $600,000. Doctors licensed for at least one year or self-employed for at least two years may receive mortgage loans with loan-to-value ratios up to 90% to 100% without the need to obtain mortgage insurance for loans up to $700,000 and 85% for loans greater than $700,000. The portfolio of loans originated under this program was $6.7 million as of December 31, 2018.

 

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Nonresidential Real Estate and Multi-Family Lending. In recent years, we have increased our nonresidential real estate and multi-family loans. Our nonresidential real estate loans are secured primarily by office buildings, retail and mixed-use properties, and light industrial properties located in our primary market area. Our multi-family loans are secured primarily by apartment buildings. At December 31, 2018, we had $18.9 million in nonresidential real estate loans and $27.1 million in multi-family real estate loans, representing 10.9% and 15.6% of our total loan portfolio, respectively.

 

Most of our nonresidential and multi-family real estate loans have a maximum term of up to 25 years. The interest rates on nonresidential real estate and multi-family loans are generally fixed for an initial period of three, five or seven years and adjust annually thereafter based on the One Year Treasury Rate. The maximum loan-to-value ratio of our nonresidential real estate loans is generally 75% while multi-family real estate loans have a maximum loan-to-value ratio of 80%. All loan-to-value ratios are subject to our underwriting procedures and guidelines. At December 31, 2018, our largest nonresidential real estate loan totaled $2.0 million and was secured by retail property. At that date, our largest multi-family real estate loan totaled $2.0 million and was secured by an apartment building. At December 31, 2018, both of these loans were performing in accordance with their original terms. Set forth below is information regarding our nonresidential real estate loans at December 31, 2018.

 

Type of Collateral  Number of Loans  Balance 
       (In thousands) 
         
General commercial   19   $5,394 
Industrial/warehouse   9    3,761 
Retail/wholesale   17    6,330 
Mobile home park   2    319 
Service/professional   13    3,126 
Total   60   $18,930 

 

We consider a number of factors in originating nonresidential and multi-family real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All nonresidential real estate and multi-family loans are appraised by outside independent appraisers approved by the board of directors. Personal guarantees are generally obtained from the principals of nonresidential and multi-family real estate borrowers.

 

Loans secured by nonresidential and multi-family real estate generally are larger than one- to four-family residential loans and involve greater credit risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Repayment of nonresidential real estate loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including today’s economic recession. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower’s ability to repay the loan may be impaired. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate. At December 31, 2018, we had one non-performing nonresidential real estate loan for $68,000. There were no non-performing multi-family loans.

 

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Construction Lending and Land Loans. We make construction loans to individuals for the construction of their primary residences and, to a limited extent, loans to builders and commercial borrowers. We also make a limited amount of land loans to complement our construction lending activities, as such loans are generally secured by lots that will be used for residential development. Land loans also include loans secured by land purchased for investment purposes. At December 31, 2018, our construction loans, including land loans, totaled $7.3 million, representing 4.2% of our total loan portfolio.

 

Loans to individuals for the construction of their residences are typically originated as construction/permanent loans, with a construction phase for up to 18 months. Upon completion of the construction phase, the loan automatically becomes a permanent loan. These construction loans have rates and terms comparable to one- to four-family residential loans offered by us. During the construction phase, the borrower pays interest only. The maximum loan-to-value ratio of owner-occupied single-family construction loans is generally 80%, or higher if mortgage insurance is obtained. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. Land loans are generally offered for terms of up to 5 years. The maximum loan-to-value ratio of land loans is 65% for developed lots and 50% for undeveloped land loans.

 

At December 31, 2018, our largest outstanding residential construction loan was for $396,000 of which $314,000 was outstanding. This loan was performing according to its original terms at December 31, 2018. At December 31, 2018, there were no residential construction loans that were 60 days or more delinquent.

 

Loans to builders for the construction of pre-sold and market (not pre-sold) homes typically run for up to 24 months. These construction loans have rates and terms comparable to one- to four-family residential loans offered by us. The maximum loan-to-value ratio of pre-sold builder construction loans is generally 80%, and this ratio is reduced to 65% on market homes. Construction loans to builders require that financial statements and tax returns be supplied and reviewed annually. Additionally, we limit construction loans to builders to no more than two loans on market homes in one development at a time or more than one loan per builder at a time.

 

Loans for the construction of nonresidential or multi-family properties typically run for up to 18 months. These construction loans have rates and terms comparable to nonresidential real estate loans offered by us. The maximum loan-to-value ratio of nonresidential or multi-family construction loans is generally 75%. Nonresidential real estate construction loans also have a 50% pre-leasing requirement. No such requirement is placed on multi-family construction loans.

 

At December 31, 2018, our largest outstanding nonresidential or multi-family construction loan was $2.0 million on a veterinary center. This loan was performing in accordance with its original terms at December 31, 2018.

 

The application process for a construction loan includes a submission to Cincinnati Federal of accurate plans, specifications and costs of the project to be constructed or developed. These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction (land plus building). Our construction loan agreements generally provide that loan proceeds are disbursed in increments as construction progresses. Outside independent licensed appraisers inspect the progress of the construction of the dwelling before disbursements are made.

 

Construction and land lending generally are made for relatively short terms. However, to the extent our construction loans are not made to owner-occupants of single-family homes, they are more vulnerable to changes in economic conditions and the concentration of credit with a limited number of borrowers. Further, the nature of these loans is such that they are more difficult to evaluate and monitor. Our risk of loss on a construction or land loan is dependent largely upon the accuracy of the initial estimate of the property’s value upon completion of the project and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial investments to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage.

 

9

 

 

Home Equity Loans and Lines of Credit. We offer home equity loans and lines of credit, which are generally made for owner-occupied homes, and are secured by first or second mortgages on residences. We generally offer these loans with a maximum loan-to-value ratio (including senior liens on the collateral property) of 90% if the first mortgage is originated by Cincinnati Federal and 85% if the first mortgage is not originated by Cincinnati Federal. We currently offer home equity lines of credit for a period of ten years, and generally at rates tied to the prevailing prime interest rate. We also offer home equity lines of credit on non-owner occupied properties, where the first mortgage is also originated by us, with a maximum loan-to-value ratio of 50% for a maximum term of two years. Our home equity loans and lines of credit are generally underwritten in the same manner as our one- to four-family residential loans. At December 31, 2018, we had $11.4 million of home equity lines of credit and $1.6 million of fixed-term home equity loans, representing 6.5 % and 0.9% of our total loan portfolio, respectively. At December 31, 2018, we had one home equity line of credit that was 30 days or more delinquent totaling $10,000.

 

Home equity lines of credit and fixed-term home equity loans have greater risk than one- to four-family residential real estate loans secured by first mortgages. Our interest is generally subordinated to the interest of the institution holding the first mortgage. Even where we hold the first mortgage, we face the risk that the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and costs of foreclosure and we may be unsuccessful in recovering the remaining balance from those customers.

 

Commercial Business Loans. We have generally conducted very limited commercial business lending. The board of directors has authorized management to purchase up to $500,000 in commercial business loans from an unaffiliated commercial lender specializing in loans to physicians and other professionals in the medical field. These are installment loans amortizing over seven years and carry higher interest rates than traditional residential loans. These loans may be secured by liens on non-real estate business assets. These loans are often used for working capital, debt consolidation, equipment and other general business purposes. The loans to be purchased must be reviewed and found to be consistent with our loan policy and underwriting guidelines. As of December 31, 2018, we had acquired such loans in the aggregate amount of $416,000 or 0.2% of the loan portfolio. At December 31, 2018, the loans were performing in accordance with their original terms.

 

Consumer Lending. To date, our consumer lending apart from home equity loans and lines of credit has been limited. At December 31, 2018, we had $796,000 of consumer loans outstanding, representing approximately 0.5% of our total loan portfolio. Of these loans, $681,000 was secured by investment securities.

 

Originations, Purchases and Sales of Loans

 

Lending activities are conducted primarily by our salaried loan personnel operating at our main and branch office locations and by our loan officers. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both fixed- and adjustable-rate loans. Our ability to originate fixed- or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected by current and expected future levels of market interest rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.

 

Consistent with our interest rate risk strategy, we originate for sale and sell the majority of the fixed-rate, one- to four-family residential real estate loans that we originate with terms of greater than 10 years, on a combination of servicing-retained and servicing-released, limited or no recourse basis, while generally retaining shorter-term fixed-rate and all adjustable-rate one- to four-family residential real estate loans in order to manage the duration and time to repricing of our loan portfolio.  Additionally, we consider the current interest rate environment in making decisions as to whether to hold the mortgage loans we originate for investment or to sell such loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. At December 31, 2018, we had $1.3 million in loans held for sale.

 

From time to time, we may purchase or sell participation interests in loans. We underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At December 31, 2018 and December 31, 2017, we had $2.7 million and $2.8 million in loan participation interests that we purchased. At those dates, we had $2.6 million and $1.9 million in loan participation interests sold.

 

Historically, we generally do not purchase whole loans or loan participations from third parties to supplement our loan production. However, we have purchased loans from a commercial lender specializing in loans to physicians and other professional in the medical field. We may purchase additional loans from that lender in the future. See “—Commercial Business Loans.”

 

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We generally sell our loans without recourse, except for customary representations and warranties provided in sales transactions. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities. For the years ended December 31, 2018 and 2017, we sold $54.4 million and $58.1 million, respectively, of mortgage loans. Some of the mortgage loans were sold on a servicing-released basis, and we retained servicing on certain of these loans. At December 31, 2018, we serviced $97.5 million of fixed-rate, one- to four-family residential real estate loans that we originated and sold in the secondary market.

 

The following table sets forth our loan origination, purchase, sale and principal repayment activity during the periods indicated.

 

   Years Ended December 31, 
   2018   2017 
   (In thousands) 
         
Total loans at beginning of period  $149,615   $133,488 
           
Loans originated:          
Real estate loans:          
One- to four-family residential:          
Owner occupied   71,331    78,524 
Non-owner occupied   1,805    1,527 
Nonresidential   5,556    5,670 
Multi-family   9,193    6,646 
Home equity lines of credit   4,997    4,325 
Construction and land   4,710    4,380 
Total real estate   97,592    101,072 
Commercial loans   153    133 
Consumer loans   111    600 
Total loans   97,856    101,805 
           
Loans purchased:          
Real estate loans:          
One- to four-family residential:          
Owner occupied   10,177     
Non-owner occupied   4,319     
Nonresidential   17    478 
Multi-family   1,309     
Home equity lines of credit        
Construction and land   589    1,500 
Total real estate   16,411    1,978 
Commercial loans        
Consumer loans   225     
Total loans   16,636    1,978 
           
Loans sold:          
Real estate loans:          
One- to four-family residential:          
Owner occupied   51,935    57,362 
Non-owner occupied   897    724 
Nonresidential        
Multi-family   1,598     
Home equity lines of credit        
Construction and land        
Total real estate   54,430    58,086 
Commercial loans        
Consumer loans        
Total loans   54,430    58,086 
           
Principal repayments and other   35,825    29,570 
           
Net loan activity   24,237    16,127 
Total loans at end of period  $173,852   $149,615 

 

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Delinquencies and Non-Performing Assets

 

Delinquency Procedures. When a loan payment becomes 20 days past due, we contact the customer by mailing a late notice. If a loan payment becomes 30 days past due, we mail a “right to cure” letter to the borrower and any co-makers and endorsers. If a loan payment becomes 90 days past due (or a borrower misses three consecutive payments, whichever occurs first), we send a demand letter and generally cease accruing interest. It is our policy to institute legal procedures for collection or foreclosure when a loan becomes 120 days past due, unless management determines that it is in the best interest of Cincinnati Federal to work further with the borrower to arrange a workout plan. From time to time we may accept deeds in lieu of foreclosure.

When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned.  The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed.  Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

 

Delinquent Loans. The following tables set forth our loan delinquencies, including nonaccrual loans, by type and amount at the dates indicated.

 

   At December 31, 
   2018   2017 
  

30-59
Days
Past Due

  

60-89
Days
Past Due

  

90 Days
or More
Past Due

  

30-59
Days
Past Due

  

60-89
Days
Past Due

  

90 Days
or More Past

Due

 
   (In thousands) 
                         
Real estate loans:                              
One- to four-family residential  $159   $87   $676   $92   $   $153 
Nonresidential           68             
Multi-family                        
Home equity lines of credit   10            80         
Construction and land                        
Total real estate   169    87    744    172        153 
Commercial loans                        
Consumer loans           1             
Total  $169   $87   $745   $172   $   $153 

 

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

 

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.

 

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In connection with the filing of our periodic reports with the Office of the Comptroller of the Currency and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.

 

On the basis of this review of our assets, our classified or special mention assets (presented gross of allowance) at the dates indicated were as follows:

 

   At December 31, 
   2018   2017 
   (In thousands) 
Special mention assets  $1,894   $1,492 
Substandard assets   1,696    2,564 
Doubtful assets        
Loss assets        
Total classified assets  $3,590   $4,056 

 

Non-Performing Assets. We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days delinquent unless the loan is well-secured and in the process of collection. Loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until the loans qualifies for return to accrual. Generally, loans are restored to accrual status when all the principal and interest amounts contractually due are brought current, and future payments are reasonably assured. Loans are moved to non-accrual status in accordance with our policy, which is typically after 90 days of non-payment. 

 

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The following table sets forth information regarding our non-performing assets and troubled debt restructurings. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or loans modified at interest rates materially less than current market rates.

 

   At December 31, 
   2018   2017 
   (Dollars in thousands) 
         
Non-accrual loans:          
Real estate loans:          
One- to four-family residential:          
Owner occupied  $676   $130 
Non-owner occupied   0    9 
Nonresidential   68     
Multi-family        
Home equity lines of credit        
Construction and land        
Total real estate   744    139 
Commercial loans        
Consumer loans   1     
Total non-accrual loans   745    139 
Non-accruing troubled debt restructured loans:          
Real estate loans:          
One- to four-family residential:          
Owner occupied       14 
Non-owner occupied        
Nonresidential        
Multi-family        
Home equity lines of credit        
Construction and land        
Total real estate       14 
Commercial loans        
Consumer loans        
Total non-accruing troubled debt restructured loans       14 
           
Total non-accrual loans   745    153 
Real estate owned:          
One- to four-family residential:          
Owner occupied        
Non-owner occupied   102     
Nonresidential        
Multi-family        
Home equity lines of credit        
Construction and land        
Other        
Total real estate owned        
           
Total non-performing assets  $847   $153 
           
Accruing loans past due 90 days or more:          
Real estate loans:          
One- to four-family residential:          
Owner occupied  $   $ 
Non-owner occupied        
Nonresidential        
Multi-family        
Home equity lines of credit        
Construction and land        
Total real estate        
Commercial loans        
Consumer loans        
Total accruing loans past due 90 days or more  $   $ 

 

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   At December 31, 
   2018   2017 
   (Dollars in thousands) 
         
Accruing troubled debt restructured loans:          
Real estate loans:          
One- to four-family residential:          
Owner occupied  $514   $524 
Non-owner occupied   225    306 
Nonresidential        
Multi-family   631    642 
Home equity lines of credit        
Construction and land        
Total real estate   1,370    1,472 
Commercial loans        
Consumer loans        
Total accruing troubled debt restructured loans  $1,370   $1,472 
Total non-performing assets and accruing troubled debt restructured loans  $2,217   $1,625 
Total non-performing loans to total loans   0.43%   0.10%
Total non-performing assets to total assets   0.38%   0.09%
Total non-performing assets and accruing troubled debt restructured loans to total assets   1.12%   0.95%

 

Other than $561,000 and $939,000 of loans designated as substandard, there were no other loans at December 31, 2018 and December 31, 2017, respectively, that are not already disclosed where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.

 

Interest income that would have been recorded for the years ended December 31, 2018 and 2017 had nonaccruing loans been current according to their original terms amounted to $19,000 and $5,400, respectively. We recognized $3,500 for these loans in the year ended December 31, 2018 and we recognized no interest income for these loans for the year December 31, 2017. As of December 31, 2018, all troubled debt restructurings were performing in accordance with their restructured terms. At December 31, 2017 one troubled debt restructuring totaling $14,000 was not performing in accordance with their restructured terms.

 

Troubled Debt Restructurings. We occasionally modify loans to help a borrower stay current on his or her loan and to avoid foreclosure.  We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating the strength of any guarantors based on documented current financial information, and assessing the current value of any collateral pledged. We generally do not forgive principal or interest on loans, but may do so if it is in our best interest and increases the likelihood that we can collect the remaining principal balance. We may modify the terms of loans to lower interest rates (which may be at below market rates), to provide for fixed interest rates on loans where fixed rates are otherwise not available, or to provide for interest-only terms. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests. At December 31, 2018, we had nine loans totaling $1.4 million that were classified as troubled debt restructurings.

 

Allowance for Loan Losses

 

Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

 

Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.

 

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We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well as the shortfall in collateral value could result in our charging off the loan or the portion of the loan that was impaired.

 

Among other factors, we consider current general economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan losses for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing data on our local markets from third party sources we believe to be reliable as a basis for assumptions about the impact of housing depreciation.

 

Substantially all of our loans are secured by collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically for a nonperforming real estate loan in the process of collection, the value of the underlying collateral is estimated using either the original independent appraisal, adjusted for current economic conditions and other factors, or a new independent appraisal, or evaluation and related general or specific allowances for loan losses are adjusted on a quarterly basis. If a nonperforming real estate loan is in the process of foreclosure and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, we will order a new independent appraisal or evaluation if it has not already been obtained. Any shortfall would result in immediately charging off the portion of the loan that was impaired.

 

Specific Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

 

General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not classified as impaired to recognize the probable incurred losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.

 

As an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review our allowance for loan losses. Such agencies may require that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

 

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Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

   Years Ended December 31, 
   2018   2017 
   (Dollars in thousands) 
         
Allowance at beginning of period  $1,360   $1,326 
Provision (credit) for loan losses   45    30 
Charge offs:          
Real estate loans:          
One- to four-family residential        
Nonresidential        
Multi-family        
Home equity lines of credit        
Construction and land        
Total real estate        
Commercial loans        
Consumer loans        
Total charge-offs        
           
Recoveries:          
Real estate loans:          
One- to four-family residential       4 
Nonresidential        
Multi-family        
Home equity lines of credit        
Construction and land        
Total real estate       4 
Commercial loans        
Consumer loans        
Total recoveries       4 
           
Net (charge-offs) recoveries       4 
           
Allowance at end of period  $1,405   $1,360 
           
Allowance to non-performing loans   188.59%   888.89%
Allowance to total loans outstanding at the end of the period   0.81%   0.91%
Net (charge-offs) recoveries to average loans outstanding during the period   0.00%   0.003%

 

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Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

   At December 31, 
   2018   2017 
   Allowance
for Loan
Losses
   Percent of
Loans in
Each
Category
to Total
Loans
   Allowance
for Loan
Losses
   Percent of
Loans in
Each
Category
to Total
Loans
 
   (Dollars in thousands) 
Real estate loans:                    
One- to four-family residential:                    
Owner occupied  $457    53.87%  $338    51.82%
Non-owner occupied   123    8.19    172    7.59 
Nonresidential   182    10.89    197    12.12 
Multi-family   224    15.61    241    15.97 
Home equity lines of credit   297    6.54    312    7.83 
Construction and land   100    4.20    83    4.13 
Total real estate   1,383    99.30    1,343    99.46 
Commercial loans   9    0.24    7    0.22 
Consumer loans   13    0.46    10    0.32 
Total allocated allowance   1,405    100.00%   1,360    100.00%
Unallocated                  
Total  $1,405        $1,360      

 

At December 31, 2018, our allowance for loan losses represented 0.81% of total loans and 188.59% of nonperforming loans. Nonperforming loans increased from $153,000 at December 31, 2017 to $745,000 at December 31, 2018 primarily due to the addition of $396,000 in loans classified as nonaccrual by Kentucky Federal. At December 31, 2017, our allowance for loan losses represented 0.91% of total loans and 888.89% of nonperforming loans. The allowance for loan losses was $1.4 million at December 31, 2018 and December 31, 2017. There were no net loan recoveries during the year ended December 31, 2018 and $4,000 in net loan recoveries during the year ended December 31, 2017.

 

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, regulators, in reviewing our loan portfolio, may request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and increases may be necessary should the quality of any loan deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

 

Investment Activities

 

General. The goals of our investment policy are to provide and maintain liquidity to meet day-to-day, cyclical and long-term liquidity needs, to help mitigate interest rate and market risk within the parameters of our interest rate risk policy, and to generate a dependable flow of earnings within the context of our interest rate and credit risk objectives. Subject to loan demand and our interest rate risk analysis, we will increase the balance of our investment securities portfolio when we have excess liquidity. We expect to initially invest a substantial portion of the proceeds of the offering in short-term and other investments, including U.S. government securities.

 

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Our investment policy was adopted by the board of directors. The investment policy is reviewed annually by the board of directors. All investment decisions shall require the approval of at least three senior management members, one of which shall be the President or Chief Financial Officer. The Chairman of the Board is included in the senior management group for this purpose. The Chief Financial Officer provides an investment schedule detailing the investment portfolio which is reviewed at least monthly by the Bank’s asset-liability committee and the board of directors.

 

Our current investment policy permits, with certain limitations, investments in United States Treasury securities; securities issued by the United States Government and its agencies or government sponsored enterprises including mortgage-backed securities and collateralized mortgage obligations (“CMO”) issued by Fannie Mae, Ginnie Mae and Freddie Mac; corporate bonds and obligations; debt securities of state and municipalities; commercial paper; certificates of deposits in other financial institutions, and bank-owned life insurance.

 

At December 31, 2018, our investment portfolio consisted of securities and obligations issued by U.S. government-sponsored enterprises or the Federal Home Loan Bank. At December 31, 2018, we owned $2,583,100 of FHLB-Cincinnati stock. As a member of FHLB-Cincinnati, we are required to purchase stock in the FHLB-Cincinnati, which stock is carried at cost and classified as restricted equity securities.

 

Securities Portfolio Composition. The following table sets forth the amortized cost and estimated fair value of our available-for-sale securities portfolio at the dates indicated, all of which consisted of pass-through mortgage-backed securities.

 

   At December 31, 
   2018   2017 
   Amortized
Cost
   Estimated
Fair Value
   Amortized
Cost
   Estimated
Fair Value
 
   (In thousands) 
         
Freddie Mac  $81   $81   $173   $172 
Fannie Mae   548    549    736    738 
Total  $629   $630   $909   $910 

 

Mortgage-Backed Securities. At December 31, 2018, we had mortgage-backed securities with a carrying value of $629,000, which constituted our entire securities portfolio. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Cincinnati Federal. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our mortgage-backed securities are backed by either Freddie Mac or Fannie Mae, which are government-sponsored enterprises.

 

Residential mortgage-backed securities issued by United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.

 

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Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2018 and 2017, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. Adjustable-rate mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust.

 

December 31, 2018  One Year or Less   More than One Year
through Five Years
   More than Five Years
through Ten Years
   More than Ten Years   Total 
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Fair Value   Weighted
Average
Yield
 
   (Dollars in thousands) 
                                             
Freddie Mac  $81    3.63%  $    %   $    —%   $    —%   $81   $81    3.63%
Fannie Mae   479    4.15%   69    3.45%       —%        —%    548    549    4.06%
Total  $560    4.07%  $69    3.45%  $    —%   $    —%   $629   $630    4.00%

 

December 31, 2017  One Year or Less   More than One Year
through Five Years
   More than Five Years
through Ten Years
   More than Ten Years   Total 
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Weighted
Average
Yield
   Amortized
Cost
   Fair Value   Weighted
Average
Yield
 
   (Dollars in thousands) 
                                                        
Freddie Mac  $173    2.33%  $       $    —%   $    —%   $173   $172    2.33%
Fannie Mae   599    3.18%   137    3.38%       —%        —%    736    738    3.22%
Total  $772    2.99%  $137    3.38%  $    —%   $    —%   $909   $910    3.05%

 

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 Sources of Funds

 

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also may use borrowings, primarily FHLB-Cincinnati advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

 

Deposits. Our deposits are generated primarily from our primary market area. We offer a selection of deposit accounts, including demand accounts, savings accounts, certificates of deposit and individual retirement accounts (IRAs). Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We do not accept brokered deposits, although we have the authority to do so.

 

We participate in the National CD Rateline Program as a wholesale source for certificates of deposit to supplement deposits generated through our retail banking operations. The Rateline Program provides an internet based listing service which connects financial institutions such as Cincinnati Federal with other financial institutions for jumbo certificates of deposit. Deposits obtained through the Rateline Program are not considered to be brokered deposits. At December 31, 2018, approximately $13.1 million of our certificates of deposit, representing 9.2% of our total deposits, had been obtained through the Rateline Program. At December 31, 2018, these certificates of deposit had an average term to maturity of 14 months. Early withdrawal of these deposits is not permitted, which makes these accounts a more stable source of funds.

 

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely upon personalized customer service, long-standing relationships with customers, and the favorable image of Cincinnati Federal in the community to attract and retain deposits. We recently implemented a fully functional electronic banking platform, including mobile app and on-line bill pay, as a service to our deposit customers.

 

The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Our ability to gather deposits is affected by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products.

 

21

 

 

The following table sets forth the distribution of our average total deposit accounts, by account type, for the periods indicated.

 

   For the Years Ended December 31, 
   2018   2017 
   Average
Balance
   Percent   Weighted
Average
Rate
   Average
Balance
   Percent   Weighted
Average
Rate
 
   (Dollars in thousands) 
                         
Deposit type:                              
Savings  $26,390    21.47%   0.25%  $24,179    22.02%   0.08%
Interest-bearing demand   9,098    7.40    1.47    6,912    6.29    1.04 
Certificates of deposit   71,114    57.86    1.73    64,615    58.82    1.42 
Interest-bearing deposits   106,602    86.73    1.35    95,706    87.13    1.06 
Non-interest bearing
demand
   16,305    13.27        14,141    12.87     
Total deposits  $122,907    100.00%   1.16   $109,847    100.00%   0.92 

 

The following table sets forth our deposit activities for the periods indicated.

 

  

At or For the Years Ended

December 31,

 
   2018   2017 
   (In thousands) 
         
Beginning balance  $113,948   $108,092 
Net deposits (withdrawals) before interest credited   27,301    5,158 
Interest credited   1,143    698 
Net increase (decrease) in deposits   28,444    5,856 
Ending balance  $142,392   $113,948 

 

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.

 

   At December 31, 
   2018   2017 
   (In thousands) 
Interest Rate:          
Less than 1.00%  $3,607   $6,564 
1.00% to 1.99%   39,328    55,074 
2.00% to 2.99%   36,208    5,513 
3.00% to 3.99%   1,406    - 
4.00% to 4.99%   -    - 
5.00% to 5.99%   -    - 
           
Total  $80,549   $67,151 

 

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The following table sets forth the amount and maturities of certificates of deposit accounts at the date indicated.

 

   At December 31, 2018 
   Period to Maturity 
  

Less Than or
Equal to
One Year

  

More Than
One to
Two Years

   More Than
Two to
Three Years
   More Than
Three Years
   Total   Percent of
Total
 
   (Dollars in thousands) 
Interest Rate Range:                              
Less than 1.00%  $3,480   $127   $   $   $3,607    4.48%
1.00% to 1.99%   28,738    9,297    1,222    71    39,328    48.83 
2.00% to 2.99%   17,556    11,515    5,971    1,166    36,208    44.95 
3.00% to 3.99%   25    420    956    5    1,406    1.74 
                               
Total  $49,799   $21,359   $8,149   $1,242   $80,549    100.00%

 

The following table sets forth the maturity of our jumbo certificates of deposits ($100,000 or greater) as of December 31, 2018.

 

   At December 31, 2018 
   (In thousands) 
     
Three months or less  $6,811 
Over three months through six months   6,550 
Over six months through one year   12,171 
Over one year to three years   11,083 
Over three years   3,693 
      
Total  $40,308 

 

Borrowings. We may obtain advances from the FHLB-Cincinnati by pledging as security our capital stock in the FHLB-Cincinnati and certain of our mortgage loans and mortgage-backed securities. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile. Recently, we have lengthened the maturities of our some of our FHLB advance borrowings to reduce interest rate risk. At December 31, 2018, we had $28.6 million of FHLB-Cincinnati advances (net of deferred prepayment penalties). Most of these advances had interest rates ranging from 1.01% to 3.12%. In addition to funding portfolio loans, we sometimes use FHLB-Cincinnati advances for short-term funding needs arising from our mortgage-banking activities.

 

In addition to the availability of FHLB-Cincinnati advances we also have a total of $11.5 million in lines of credit available from three commercial banks. No amount was outstanding on these lines of credit at December 31, 2018.

 

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The following table sets forth information concerning balances and interest rates on borrowings at the dates and for the years indicated. All such borrowings consisted of FHLB-Cincinnati advances.

 

  

At or For the Year
Ended December 31,

 
   2018   2017 
  

(Dollars in thousands)

 
         
Balance outstanding at end of period  $28,580   $34,310 
Weighted average interest rate at the end of period   2.20%   1.42%
Maximum amount of borrowings outstanding at any month end during the period  $40,144   $34,514 
Average balance outstanding during the period   35,219    29,254 
Weighted average interest rate during the period   1.86%   1.39%

 

Employees

 

As of December 31, 2018, we had 50 full-time employees and 8 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.

 

 Subsidiary Activities

 

Cincinnati Federal is the only subsidiary of Cincinnati Bancorp. Cincinnati Federal Investment Services, LLC, the subsidiary of Cincinnati Federal, is currently inactive.

 

REGULATION AND SUPERVISION

 

General

 

 

As a savings and loan holding company, Cincinnati Bancorp is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board. The Office of Thrift Supervision’s functions relating to savings and loan holding companies were transferred to the Federal Reserve Board on July 21, 2011 pursuant to the Dodd-Frank Act regulatory restructuring. Cincinnati Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

 

As a federal savings association, Cincinnati Federal is subject to examination and regulation by the Office of the Comptroller of the Currency, and is also subject to examination by the Federal Deposit Insurance Corporation (“FDIC”) as its deposit insurer. The federal system of regulation and supervision establishes a comprehensive framework of activities in which Cincinnati Federal may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund.

 

Cincinnati Federal also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board,” which governs the reserves to be maintained against deposits and other matters. In addition, Cincinnati Federal is a member of and owns stock in the FHLB- Cincinnati, which is one of the eleven regional banks in the Federal Home Loan Bank System. Cincinnati Federal’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a lesser extent, state law, including in matters concerning the ownership of deposit accounts and the form and content of Cincinnati Federal’s loan documents.

 

Set forth below are certain material regulatory requirements that are applicable to Cincinnati Bancorp and Cincinnati Federal. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Cincinnati Bancorp and Cincinnati Federal. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on Cincinnati Bancorp, Cincinnati Federal and their operations.

 

24

 

 

Dodd-Frank Act

 

The Dodd-Frank/Wall Street Reform and Consumer Protection Act, (the Dodd-Frank Act”) made significant changes to the regulatory structure for depository institutions and their holding companies. However, the Dodd-Frank Act’s changes go well beyond that and affect the lending, investments and other operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

 

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Cincinnati Federal, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are still examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.

 

The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage origination. 

 

Federal Banking Regulation

 

Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Cincinnati Federal may invest in mortgage loans secured by residential and nonresidential real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Dodd-Frank Act authorized, for the first time, the payment of interest on commercial checking accounts. Cincinnati Federal may also establish subsidiaries that may engage in certain activities not otherwise permissible for Cincinnati Federal, including real estate investment and securities and insurance brokerage.

 

Capital Requirements. The FDIC and the other federal bank regulatory agencies have issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $3.0 billion or more and all top-tier savings and loan holding companies with total consolidated assets of $3.0 billion or more.

 

25

 

 

The rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.

 

The rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, Tier 1 capital will include accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a two-year transition period. Cincinnati Federal had the one-time option in the first quarter of 2015 to permanently opt out of the inclusion of accumulated other comprehensive income in its capital calculation. Cincinnati Federal elected to opt out of the inclusion of accumulated other comprehensive income in its capital calculation.

 

The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 day past due or otherwise on non-accrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-weights (from 0% to up to 600%) for equity exposures.

 

Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets increasing each year until fully implemented at 2.5% on January 1, 2019.

 

At December 31, 2018, Cincinnati Federal’s capital exceeded all applicable requirements.

 

Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2018, Cincinnati Federal was in compliance with the loans-to-one borrower limitations.

 

Qualified Thrift Lender Test. As a federal savings association, Cincinnati Federal must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Cincinnati Federal must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.

 

Cincinnati Federal also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.

 

A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2018, Cincinnati Federal satisfied the QTL test.

 

Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association must file an application for approval of a capital distribution if:

 

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·the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;

 

·the savings association would not be at least adequately capitalized following the distribution;

 

·the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or

 

·the savings association is not eligible for expedited treatment of its filings.

 

Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as Cincinnati Federal, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.

 

A notice or application related to a capital distribution may be disapproved if:

 

·the federal savings association would be undercapitalized following the distribution;

 

·the proposed capital distribution raises safety and soundness concerns; or

 

·the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

 

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form.

 

Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the Office of the Comptroller of the Currency is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as other federal regulatory agencies and the Department of Justice.

 

The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. Cincinnati Federal received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

 

Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with an insured depository institution such as Cincinnati Federal. Cincinnati Bancorp is an affiliate of Cincinnati Federal because of its control of Cincinnati Federal. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Federal regulations require savings associations to maintain detailed records of all transactions with affiliates.

 

27

 

 

Cincinnati Federal’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:

 

·be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

 

·not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Cincinnati Federal’s capital.

 

In addition, extensions of credit in excess of certain limits must be approved by Cincinnati Federal’s board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.

 

Enforcement. The Office of the Comptroller of the Currency has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings association. Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.

 

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

 

Prompt Corrective Action Regulations. The OCC is required by law to take supervisory actions against undercapitalized savings institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital.

 

Under the OCC’s prompt corrective action regulations, undercapitalized institutions become subject to mandatory regulatory scrutiny and limitations, which increase as capital decreases. Generally, the OCC is required to appoint a receiver or conservator for a savings bank that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date that a federal savings association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company of a federal savings association that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5% of the savings association’s assets at the time it was deemed to be undercapitalized by the OCC or the amount necessary to restore the savings bank to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions that are undercapitalized become subject to certain mandatory measures such as a restrictions on capital distributions and asset growth. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings association, including the issuance of a capital directive and the replacement of senior executive officers and directors.

 

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At December 31, 2018, the Bank met the capital requirements to be considered “well capitalized” under the prompt corrective action rules.

 

The OCC’s prompt corrective action standards changed with the new capital ratios. Under the new standards, in order to be considered well-capitalized, the Bank must have to have a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0%, and a Tier 1 leverage ratio of 5.0%. We have determined that the Bank is well-capitalized under these standards as of December 31, 2018.

 

Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC insured financial institutions such as Cincinnati Federal. Deposit accounts in Cincinnati Federal are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund.

 

Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates.

 

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

 

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2018, the annualized FICO assessment was equal to 0.14 basis points of total assets less tangible capital.

 

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

 

Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

 

Federal Home Loan Bank System. Cincinnati Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the FHLB-Cincinnati, Cincinnati Federal is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2018, Cincinnati Federal was in compliance with this requirement.

 

Federal Reserve System. Federal Reserve Board regulations require banks to maintain reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts. For 2019, a 3% reserve ratio for aggregate transaction accounts up to $124.2 million, a 10% ratio above $124.2 million, and an exemption of $16.3 million was established.

 

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Other Regulations

 

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

 

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

 

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

 

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

 

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

 

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

 

·Truth in Savings Act; and

 

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

 

The operations of Cincinnati Federal also are subject to the:

 

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

 

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

 

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

 

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

 

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

 

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Holding Company Regulation

 

General. Cincinnati Bancorp and CF Mutual Holding Company are non-diversified savings and loan holding companies within the meaning of the Home Owners’ Loan Act. As such, Cincinnati Bancorp and CF Mutual Holding Company are registered with the Federal Reserve Board and are subject to regulations, examinations, supervision and reporting requirements applicable to savings and loan holding companies. In addition, the Federal Reserve Board has enforcement authority over Cincinnati Bancorp, CF Mutual Holding Company and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

 

Permissible Activities. Under present law, the business activities of Cincinnati Bancorp and CF Mutual Holding Company are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain conditions are met, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal regulations.

 

Federal law prohibits a savings and loan holding company, including Cincinnati Bancorp and CF Mutual Holding Company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5.0% of another savings institution or holding company thereof, without prior regulatory approval. It also prohibits the acquisition or retention of, with certain exceptions, more than 5.0% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.

 

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

 

·the approval of interstate supervisory acquisitions by savings and loan holding companies; and

 

·the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

 

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

 

Capital. Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital, which is currently permitted for bank holding companies. Instruments that were issued by May 19, 2010 are grandfathered in for companies with consolidated assets of $15 billion or less. The Dodd-Frank Act contains an exception for bank holding companies of less than $500 million in assets, and the Federal Reserve Board has adopted final rules that impose a capital requirement on bank holding companies and savings and loan holding companies with total consolidated assets of $1.0 billion or more.

 

Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all Association and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

 

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Dividends. Cincinnati Federal is required to notify the Federal Reserve Board thirty days before declaring any dividend to Cincinnati Bancorp. The financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the regulator and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

 

Waivers of Dividends by CF Mutual Holding Company. If Cincinnati Bancorp pays any dividends on its common stock, it would be required to pay dividends to CF Mutual Holding Company unless CF Mutual Holding Company receives the approval of the Federal Reserve Board to waive the receipt of any dividends from Cincinnati Bancorp. The Federal Reserve Board has issued an interim final rule providing that it will not object to dividend waivers under certain circumstances, including circumstances where the waiver is not detrimental to the safe and sound operation of the subsidiary savings association and a majority of the mutual holding company’s members have approved the waiver of dividends by the mutual holding company within the previous six months. There can be no assurance that a dividend waiver request by CF Mutual Holding Company would be approved by the Federal Reserve Board. In addition, any dividends waived by CF Mutual Holding Company would have to be considered in determining an appropriate exchange ratio in the event of a conversion of CF Mutual Holding Company to stock form.

 

Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.

 

Federal Securities Laws

 

Cincinnati Bancorp’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Cincinnati Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

 

Emerging Growth Company Status

 

The Jumpstart Our Business Startups Act (the “JOBS Act”) has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” Cincinnati Bancorp qualifies as an emerging growth company under the JOBS Act.

 

An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, Cincinnati Bancorp will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. Cincinnati Bancorp has elected to comply with new or amended accounting pronouncements in the same manner as a private company.

 

A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).

 

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TAXATION

Federal Taxation

 

General. Cincinnati Bancorp and Cincinnati Federal are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Cincinnati Bancorp and Cincinnati Federal.

 

Method of Accounting. For federal income tax purposes, Cincinnati Bancorp and its subsidiary uses a tax year ending December 31st and files a consolidated federal tax return. The Company reports its income and expenses on the accrual method of accounting. Cincinnati Federal is not currently under audit with respect to its federal income tax return from prior years.

  

Net Operating Loss Carryovers. Generally, a financial institution may carry a net operating loss forward indefinitely for losses generated in taxable years ending after December 31, 2017. Cincinnati Bancorp had $666,155 of federal net loss carryforwards at December 31, 2018 that expire between 2028 and 2037 and $467,657 with no expiration.

 

Capital Loss Carryovers. A corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any undeducted loss remaining after the five year carryover period is not deductible. At December 31, 2018, Cincinnati Bancorp had no capital loss carryovers.

 

Corporate Dividends. We may generally exclude from our income 100% of dividends received from Cincinnati Federal as a member of the same affiliated group of corporations.

 

State Taxation

 

Cincinnati Bancorp and Cincinnati Federal are subject to Ohio taxation in the same general manner as other financial institutions. In particular, Cincinnati Bancorp and Cincinnati Federal file a consolidated Ohio Financial Institutions Tax (“FIT”) return. The FIT is based upon the net worth of the consolidated group. For Ohio FIT purposes, savings institutions are currently taxed at a rate equal to 0.8% of taxable net worth. Cincinnati Bancorp is not currently under audit with respect to its Ohio FIT returns.

 

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ITEM 1A.RISK FACTORS

 

The presentation of Risk Factors is not required of smaller reporting companies like Cincinnati Bancorp.

 

ITEM  1B.UNRESOLVED STAFF COMMENTS

 

None.  

 

ITEM 2.PROPERTIES

 

As of December 31, 2018, the net book value of our office properties was $3.3 million, and the net book value of our furniture, fixtures and equipment was $93,000. The following table sets forth information regarding our offices.

 

Location  Leased or
Owned
  Year Acquired
or Leased
  Net Book Value of
Real Property
 
         (In thousands) 
Main Office:           
6581 Harrison Ave
Cincinnati, OH 45247
  Owned  2010  $1,137 
            
Branch Offices:           
1270 Nagel Rd.
Cincinnati, OH 45255
  Owned  1995   444 
            
7553 Bridgetown Rd.
Cincinnati, OH 45248
  Owned  1987   268 
            
4310 Glenway Ave
Cincinnati, OH 45205
  Owned  1957   516 
            
1050 Scott Street
Covington, KY 41011
  Owned  1957   576 
            
6890 Dixie Highway
Florence, KY 41042
  Owned  1957   372 
            
Loan Production Office:           
4680 Parkway Drive           
Mason, OH 45040  Leased  2016   5 

 

We believe that current facilities are adequate to meet our present and foreseeable needs, subject to possible future expansion.

 

ITEM  3.LEGAL PROCEEDINGS

 

At December 31, 2018, we were not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business or in any legal proceedings the outcome of which would be material to our consolidated financial condition or results of operations.

 

ITEM  4.MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

(a)       Market, Holder and Dividend Information. Our common stock is traded on the OTC Pink Marketplace under the symbol “CNNB.” The number of holders of record of Cincinnati Bancorp’s common stock as of December 31, 2017, was approximately 188. Certain shares of Cincinnati Bancorp are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.

 

The following table sets forth the high and low closing bid prices per share of common stock for the periods indicated. The indicated prices do not include retail markups or markdowns or any commissions and do not necessarily reflect prices in actual transactions.

 

Fiscal Year Ended December 31, 2018          Dividend 
Quarter Ended:  High   Low   Paid 
December 31, 2018  $13.99   $11.96   $ 
September 30, 2018   14.40    12.90     
June 30, 2018   12.85    10.07     
March 31, 2018   11.00    10.40     

 

Fiscal Year Ended December 31, 2017          Dividend 
Quarter Ended:  High   Low   Paid 
December 31, 2017  $10.43   $9.75   $ 
September 30, 2017   10.49    9.46     
June 30, 2017   10.15    9.40     
March 31, 2017   9.80    9.50     

 

Our board of directors has the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. Specifically, the Federal Reserve Board has issued a policy statement providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with its capital needs and overall financial condition.

 

If Cincinnati Bancorp pays dividends to its stockholders, it will be required to pay dividends to CF Mutual Holding Company. The Federal Reserve Board’s current policy generally prohibits the waiver of dividends by mutual holding companies. Accordingly, we do not currently anticipate that CF Mutual Holding Company will be permitted to waive dividends paid by Cincinnati Bancorp. See “Item 1. Business—Taxation—Federal Taxation” and “—Regulation and Supervision—Holding Company Regulation—Dividends.”

 

(b)       Sales of Unregistered Securities. Not applicable.

 

(c)       Use of Proceeds. Not applicable.

 

(d)       Securities Authorized for Issuance Under Equity Compensation Plans. Subject to permitted adjustments for certain corporate transactions, the 2017 Equity Incentive Plan, which was approved by stockholders, authorizes the issuance or delivery to participants of up to 117,940 shares of the Company’s common stock pursuant to grants, of restricted stock awards, restricted stock unit awards, incentive stock options and non-qualified stock options.

 

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The following information is presented for the 2017 Equity Incentive Plan as of December 31, 2018:

 

Plan Category  Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
   Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
   Number of securities 
remaining available for 
future issuance under plan 
(excluding securities 
reflected in column (a))
 
Equity compensation plans approved by stockholders   117,940   $9.55    5,056 
Equity compensation plans not approved by stockholders   N/A    N/A    N/A 
Total   117,940   $9.55    5,056 

 

(e)       Stock Repurchases. None.

 

(f)       Stock Performance Graph. Not required for smaller reporting companies.

 

ITEM 6.SELECTED FINANCIAL DATA

 

Not required for smaller reporting companies.

 

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

This section is intended to help potential investors understand the financial performance of Cincinnati Bancorp and its subsidiary through a discussion of the factors affecting our financial condition at December 31, 2018 and December 31, 2017 and our results of operations for the years ended December 31, 2018 and December 31, 2017. This section should be read in conjunction with the consolidated financial statements and notes thereto that appear elsewhere in this Annual Report on Form 10-K.

 

Overview

 

Cincinnati Federal provides financial services to individuals and businesses from our main office in Cincinnati, Ohio and our full service branch offices in Miami Heights, Anderson and Price Hill. With the acquisition of Kentucky Federal Savings and Loan Association we operate full service branch offices in Covington and Florence in Northern Kentucky. In addition we operate a loan production office in Mason, Ohio. Our primary market area includes Hamilton County, Ohio, and, to a lesser extent, Warren, Butler and Clermont Counties, Ohio. We also conduct business in the northern Kentucky region and make loans secured by properties in Campbell, Kenton and Boone Counties, Kentucky, as well as in Dearborn County, in southeastern Indiana.

 

Our business consists primarily of taking deposits from the general public and investing those deposits, together with borrowings and funds generated from operations, in one- to four-family residential real estate loans, and, to a lesser extent, nonresidential real estate and multi-family loans, home equity loans and lines of credit and construction and land loans. At December 31, 2018, $107.9 million, or 62.1% of our total loan portfolio, was comprised of one- to four-family residential real estate loans; $18.9 million, or 10.9%, consisted of nonresidential real estate loans; $27.1 million, or 15.6%, consisted of multi-family loans; $11.4 million, or 6.5%, consisted of home equity lines of credit; $1.2 million or 0.70% consisted of commercial business loans and consumer loans; and $7.3 million, or 4.2%, consisted of construction and land loans. We also invest in securities, which currently consist primarily of mortgage-backed securities issued by U.S. government sponsored entities and Federal Home Loan Bank stock.

 

Cincinnati Federal also operates an active mortgage banking unit with nine mortgage loan officers. This unit originates loans both for sale in the secondary market and for retention in our portfolio. The revenue from gain on sales of loans was $1.7 million for year ended December 31, 2018 and $1.6 million for year ended December 31, 2017.

 

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We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. We utilize advances from the FHLB-Cincinnati for liquidity and for asset/liability management purposes. At December 31, 2018, we had $28.6 million in advances (net of deferred prepayment penalties) outstanding with the FHLB-Cincinnati.

 

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of gain (loss) on sale of mortgage loans, checking account service fee income, interchange fees from debit card transactions and income from bank owned life insurance. Non-interest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy and equipment, data processing, franchise taxes, federal deposit insurance premiums, prepayment penalties on FHLB-Cincinnati advances, impairment losses on foreclosed real estate and other operating expenses.

 

We invest in bank owned life insurance to provide us with a funding source to offset some costs of our benefit plan obligations. Bank owned life insurance provides us with non-interest income that is nontaxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. At December 31, 2018, this limit was $6.1 million, and we had invested $4.0 million in bank owned life insurance.

 

Cincinnati Federal Investment Services, LLC, a wholly owned subsidiary under Ohio law, was formed in 2015 to offer nondeposit investment and insurance products in partnership with Infinex Investments, Inc. As of December 31, 2016, Cincinnati Federal had a $100 investment in the subsidiary. In June 2016, Cincinnati Federal Investment Services, LLC ceased operations and the agreement with Infinex Investments, Inc. was terminated. There were no costs associated with the termination of the Infinex agreement. Cincinnati Federal Investment Services, LLC is currently inactive.

 

Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

 

Business Strategy

 

Our current business strategy is to operate as a well-capitalized and profitable community bank dedicated to serving the needs of our consumer and business customers, and offering personalized and efficient customer service. Our goals are to increase interest income through loan portfolio growth, expand fee income with the mortgage banking unit, lower our cost of deposits by increasing non-maturity based accounts, achieve economies of scale through balance sheet growth and diversify sources of income. Highlights of our current business strategy include:

 

·Increasing our origination of nonresidential real estate and multi-family loans. We began originating a significant amount of nonresidential real estate and multi-family loans in the early 2000s. As of December 31, 2018 and December 31, 2017, such loans, together with construction and land loans, totaled $53.4 million and $48.2 million, or 218.9% and 233.1% of capital plus ALLL, respectively. Under our current board approved loan concentration policy, such loans (including construction and land loans) shall not exceed 300% of our capital plus ALLL. We intend to continue to increase our origination of nonresidential real estate and multi-family real estate loans, with a focus on multi-family loans. Most nonresidential real estate and multi-family loans are originated with adjustable rates. Nonresidential real estate and multi-family lending is expected to increase loan yields with shorter repricing terms than fixed-rate loans. Nonresidential real estate and multi-family originations in 2018 increased $2.4 million or 19.75% over 2017 origination levels. See “Business of Cincinnati Federal—Lending Activities—Commercial Real Estate and Multi-Family Lending.”

 

·Continuing to focus on our residential mortgage banking operations. In 2018, we originated $73.1 million of one-to four-family residential loans, and we sold $52.8 million of one-to four-family residential loans. In 2017, we originated $80.0 million of one-to four family residential loans, and we sold $58.1 million of one- to four-family residential loans. These loans are all sold on a non-recourse basis primarily to the FHLB-Cincinnati, Freddie Mac, and other private sector third-party buyers. Loans are sold on both a servicing-retained and servicing-released basis. Subject to mortgage market conditions, we intend to continue to increase the number of mortgage loan originators in order to increase our volume of sold loans with the potential for increased servicing income.

 

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·Continuing to emphasize one- to four-family residential adjustable rate mortgage lending. We will continue to focus on originating one- to four-family adjustable rate mortgages for retention in our portfolio. As of December 31, 2018, $84.6 million, or 49.7%, of our total loans consisted of one- to four-family residential adjustable rate mortgage loans with contractual maturities after December 31, 2019. As of December 31, 2017, $64.8 million, or 43.6%, of our total loans consisted of one- to four-family residential adjustable rate mortgage loans. Adjustable rate loans have shorter repricing terms to mitigate interest rate risk.

 

·Increasing our “core” deposit base. We are seeking to increase our core deposit base, particularly checking accounts. Core deposits include all deposit account types except certificates of deposit. Core deposits are our least costly source of funds, which improves our interest rate spread, and represent our best opportunity to develop customer relationships that enable us to cross-sell our full complement of products and services. Core deposits also contribute non-interest income from account-related fees and services and are generally less sensitive to withdrawal when interest rates fluctuate. For 2018, we continued our marketing efforts for checking accounts through digital, print and outdoor advertising channels. Core deposits as of December 31, 2018 grew $15.0 million or 32.2% over December 31, 2017 balances with the addition of core deposits acquired from Kentucky Federal. In recent years, we have significantly expanded and improved the products and services we offer our retail and business deposit customers who maintain core deposit accounts and have improved our infrastructure for electronic banking services, including online banking, mobile banking, bill pay, and e-statements. The deposit infrastructure we have established can accommodate significant increases in retail and business deposit accounts without additional capital expenditure. We will also continue to use non-core deposits, including certificates of deposit from the National CD Rateline Program, as a source of funds, in accordance with our asset/liability policies and funding strategies.

 

·Implementing a managed growth strategy. We intend to pursue a growth strategy for the foreseeable future, with the goal of improving the profitability of our business through increased net interest income and new sources of non-interest income. Subject to market conditions, we intend to grow our one- to four-family residential adjustable rate, nonresidential real estate and multi-family loan portfolios. To a lesser extent we intend to grow our construction and commercial business loan portfolio.

 

Summary of Critical Accounting Policies

 

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

 

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

 

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The following represent our critical accounting policies:

 

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from our internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

 

A loan is considered impaired when, based on current information and events, it is probable that we may not be able to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

 

In the course of working with borrowers, we may choose to restructure the contractual terms of certain loans. In this scenario, we attempt to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by us to identify if a troubled debt restructuring has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower’s current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms or a combination of the two. If such efforts by us do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time we commence foreclosure. We may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan. It is our policy that any restructured loans on nonaccrual, prior to being restructured, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, we review the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan.

 

With regards to determination of the amount of the allowance for credit losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.

 

Mortgage Servicing Rights. Mortgage servicing assets are recognized separately when rights are acquired through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale of loans originated by us are initially measured at fair value at the date of transfer. Cincinnati Federal subsequently measures each class of servicing asset using the fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in earnings in the period in which the changes occur.

 

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Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing rights and may result in a reduction or addition to noninterest income.

 

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.

 

Income Taxes. The Company accounts for income taxes on a consolidated basis in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. Cincinnati Federal determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

 

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

 

If necessary, we recognize interest and penalties on income taxes as a component of income tax expense.

 

With a few exceptions, we are no longer subject to examinations by tax authorities for years before 2015. As of December 31, 2018 and 2017, we had no uncertain tax positions.

 

Comparison of Financial Condition at December 31, 2018 and 2017

 

Total Assets. Total assets were $197.7 million at December 31, 2018, an increase of $27.2 million, or 16.0%, from the $170.5 million at December 31, 2017. The increase resulted primarily from increases in cash and cash equivalents of $822,000, net loans of $23.3 million, premises and equipment of $882,000, Federal Home Loan Bank stock of $1.6 million and bank owned life insurance of $743,000 offset in part by a decrease of $939,000 in loans held for sale.

 

Cash and Cash Equivalents. Cash and cash equivalents increased $822,000, or 8.0%, to $11.1 million at December 31, 2018 from $10.3 million at December 31, 2017. This increase was primarily the result of an increase in Federal funds sold of $956,000 as the Company accumulated liquidity due to its merger with Kentucky Federal during 2018.

 

Loans Held for Sale. Loans held for sale decreased $939,000, or 42.3%, to $1.3 million at December 31, 2018 from $2.2 million at December 31, 2017. The decrease was due to lower mortgage activity at December 31, 2018.

 

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Net Loans. Net loans increased $23.3 million, or 15.9%, to $170.3 million at December 31, 2018 from $147.0 million at December 31, 2017. Of this increase, the fair value of the loan portfolio assumed in the merger with Kentucky Federal was $16.3 million. During the year ended December 31, 2018, we originated $97.9 million of loans, $73.1 million of which were one- to four- family residential real estate loans, $5.5 million were nonresidential real estate loans, $9.2 million were multi-family loans, $5.0 million were home equity lines of credit, $4.7 million were construction and land loans and the remaining $264,000 were commercial business loans and consumer loans. In 2018, we sold $54.4 million of loans, of which $52.8 million were one- to four-family residential real estate loans and $1.6 million were multifamily loans. We sell loans on both a servicing–retained and servicing–released basis. Management intends to continue this sales activity in future periods to generate gain on sale revenue and servicing fee income.

 

The largest increases in our loan portfolio were in the one- to four-family owner occupied residential real estate loan portfolio, $16.1 million, in the one- to four-family-investment loan portfolio of $2.9 million the multi-family loan portfolio of $3.2 million and a $1.1 million increase in the construction and land loan portfolio. This growth reflects our strategy to grow the portfolio through loan originations and acquisitions primarily with adjustable-rate loans and mitigate interest rate risk on the balance sheet. 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 other private sector third-party buyers.

 

Premises and Equipment. Premises and equipment increased $882,000, or 34.9%, to $3.4 million at December 31, 2018 from $2.5 million at December 31, 2017. The increase was primarily due to the merger with Kentucky Federal. The fair value of the premises and equipment acquired in the merger was $967,000.

 

Deposits. Deposits increased $28.5 million, or 25.0%, to $142.4 million at December 31, 2018 from $113.9 million at December 31, 2017. Of this increase, $26.5 million was added from the merger with Kentucky Federal during 2018. Our core deposits increased $15.0 million, or 32.2%, to $61.8 million at December 31, 2018 from $46.8 million at December 31, 2017. Time deposits increased $13.4 million, or 20.0%, to $80.5 million at December 31, 2018 from $67.2 million at December 31, 2017. The increase in time deposits was primarily due to an increase in retail certificates of deposit. The amount of certificates of deposit obtained through the National CD Rateline Program at December 31, 2018 was $13.1 million. During the year ended December 31, 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 decreased $5.7 million, or 16.7%, to $28.6 million at December 31, 20018 from $34.3 million at December 31, 2017. The liquidity received in the merger with Kentucky Federal was partially used to pay down Federal Home Loan Bank advances and thereby manage the Company’s interest rate risk.

 

Stockholders’ Equity. Stockholders’ equity increased $3.7 million, or 18.9%, to $23.0 million at December 31, 2018 from $19.3 million at December 31, 2017. The increase resulted from net income for the year of $2.3 million, and an increase in paid-in-capital of $1.3 million.

 

Comparison of Operating Results for the Years Ended December 31, 2018 and December 31, 2017

 

General. Net income for the year ended December 31, 2018 was $2.3 million, compared to a net income of $875,000 for the year ended December 31, 2017, an increase of $1.4 million or 162.9%. The increase was primarily due to a $540,000 increase in net interest income, and a $2.4 million increase in noninterest income, partially offset by a $15,000 increase in provision for loan losses, a $1.3 million increase in noninterest expense and a $158,000 increase in provision for income taxes.

 

Interest and Dividend Income. Interest and dividend income increased $1.2 million, or 20.8%, to $7.0 million for the year ended December 31, 2018 from $5.8 million for the year ended December 31, 2017. This increase was primarily attributable to a $1.0 million increase in interest on loans receivable. Dividends on Federal Home Loan Bank stock and other investments increased $160,000 due to the increase in the FHLB Cincinnati dividend rate and the increase in yields on Fed Funds sold. The average balance of loans increased $18.1 million, or 13.0%, to $157.7 million for the year ended December 31, 2018 from $139.6 million for the year ended December 31, 2017, while the average yield on loans increased 18 basis points to 4.27% for the year ended December 31, 2018 from 4.09% for the year ended December 31, 2017, reflecting the shift in the loan origination mix to higher yielding multifamily and commercial loans, as well, as higher market interest rates.

 

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The average balance of investment securities decreased $609,000 to $763,000 for the year ended December 31, 2018 from $1.4 million for the year ended December 31, 2017 attributable to higher securities prepayments. The average yield on investment securities increased 255 basis points to 2.62% at December 31, 2018 from 0.07% at December 31, 2017attributable to the increase in amortization expense of premiums paid on the securities. The average balance of other dividend and interest-bearing deposits, including certificates of deposit in other financial institutions, and fed funds sold increased $4.2 million to $10.3 million at December 31, 2018 from $6.1 million at December 31, 2017. The average yield for other interest-earning assets increased 100 basis points to 2.34% at December 31, 2018 from 1.34% at December 31, 2017. The increase in the average yield is due to the increase in short term interest rates experienced during 2018.

 

Interest Expense. Total interest expense increased $665,000, or 46.9%, to $2.1 million for the year ended December 31, 2018. Interest expense on deposit accounts increased $418,000, or 41.4%, to $1.4 million for the year ended December 31, 2018 from $1.0 million for the year ended December 31, 2017. The increase was primarily due to an increase of $2.2 million, or 9.1%, in the average balance of savings accounts to $26.4 million for the year ended December 31, 2018 from $24.2 million for the year ended December 31, 2017. The increase in the average cost of savings accounts was 17 basis points. The average balance of interest-bearing demand accounts increased $2.2 million and the average cost of interest-bearing demand accounts increased 43 basis points to 1.47% at December 31, 2018. The average balance of certificates of deposits increased $6.5 million while the average cost of certificates of deposits increased 31 basis points to 1.73% at December 31, 2018.

 

Interest expense on FHLB advances increased $247,000 to $654,000 for the year ended December 31, 2018 from $407,000 for the year ended December 31, 2017. The average balance of advances increased $5.9 million to $35.2 million for the year ended December 31, 2018 compared to $29.3 million for the year ended December 31, 2017, while the average cost of these advances increased 47 basis points to 1.86% from 1.39%. The increase in the average balance of advances is due to management utilizing advances as a funding source for loan originations.

 

Net Interest Income. Net interest income increased $540,000, or 12.4%, to $4.9 million for the year ended December 31, 2018 from $4.4 million for the year ended December 31, 2017. Average net interest-earning assets increased $4.9 million compared to year end December 31, 2017. The interest rate spread decreased to 2.67% for the year ended December 31, 2018 from 2.81% for the year ended December 31, 2017. The net interest margin decreased to 2.91% for the year ended December 31, 2018 from 2.97% for the year ended December 31, 2017. The interest rate spread and net interest margin were impacted by the increase in interest rates during 2018.

 

Provision for Loan Losses. Based on management’s analysis of the allowance for loan losses described in Note 1 of our financial statements “Nature of Operations and Summary of Significant Accounting Policies,” we recorded a provision for loan losses of $45,000 for the year ended December 31, 2018 and a provision for loan losses of $30,000 for the year ended December 31, 2017. The allowance for loan losses was $1.4 million, or 0.81% of total loans, at December 31, 2018, compared to $1.4 million or 0.91% of total loans, at December 31, 2017. The increase in the provision for loan losses in 2018 compared to 2017 was due primarily to loan growth. The allowance for loan and lease losses methodology establishes a range of historic loss factors based on a look- back periods including five years, six years and seven years to mirror actual portfolio loss experience.

 

The allowance for loan losses reflects the estimate we believe to be adequate to cover incurred probable losses which were inherent in the loan portfolio at December 31, 2018 and 2017. 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.

 

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Non-Interest Income. Non-interest income increased $2.4 million, or 96.8%, to $4.9 million for the year ended December 31, 2018 from $2.5 million for the year ended December 31, 2017. The increase was primarily due to a $2.2 million gain related to the Kentucky Federal merger in 2018.

 

Non-Interest Expense. Non-interest expense increased $1.3 million, or 22.7%, to $7.2 million for 2018 from $5.9 million for 2017. Salary and employee benefits expense increased $384,000 to $3.6 million in 2018 from $3.2 million in 2017 due to normal salary increases, an increase in the cost of medical insurance, and incentive stock plan expense. Advertising expense increased $72,000, or 71.0% due to a marketing campaign during the year to attract checking accounts. Merger-related expense increased $577,000, with no related expense in 2017, due to the costs associated with the Kentucky Federal merger.

 

Federal Income Taxes. The provision for income taxes increased $158,000 to a tax expense of $191,000 in 2018. The increase in income tax expense was primarily due to net income for 2018 and the credit to income tax expense recorded in 2017 without a similar credit in 2018.

 

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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 were 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 Years Ended December 31, 
   2018   2017 
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans  $157,708   $6,733    4.27%  $139,587   $5,706    4.09%
Securities   763    20    2.62    1,372    1    0.07 
Other (1)   10,353    242    2.34    6,116    82    1.34 
Total interest-earning assets   168,824    6,995    4.14    147,075    5,789    3.94 
Non-interest-earning assets   12,016              12,572           
Total assets  $180,840             $159,647           
                               
Interest-bearing liabilities:                              
Savings  $26,390    65    0.25   $24,179    20    0.08 
Interest-bearing demand   9,098    134    1.47    6,912    72    1.04 
Certificates of deposit   71,114    1,230    1.73    64,615    919    1.42 
Total deposits   106,602    1,429    1.35    95,706    1,011    1.06 
FHLB borrowings   35,219    654    1.86    29,254    407    1.39 
Total interest-bearing liabilities   141,821    2,083    1.47    124,960    1,418    1.13 
Non-interest-bearing Demand   16,305              14,141           
Other non-interest-bearing liabilities   3,292              2,084           
Total non-interest-bearing liabilities   19,597              16,225           
Total equity   19,422              18,462           
Total liabilities and total equity  $180,840             $159,647           
Net interest income       $4,912             $4,371      
Net interest rate spread (2)             2.67              2.81 
Net interest-earning assets (3)  $27,003             $22,115           
Net interest margin (4)             2.91              2.97 
Average interest-earning assets to interest-bearing liabilities             119.04              117.70 

 

 

(1)Consists of FHLB-Cincinnati stock, FHLB DDA, Fed Funds sold, certificates of deposit 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 net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis

 

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

  

Year Ended December 31,

2018 vs. 2017

 
   Increase (Decrease) Due to   Total Increase 
   Volume   Rate   (Decrease) 
   (In thousands) 
Interest-earning assets:               
Loans  $767   $260   $1,027 
Securities   1    18    19 
Other   77    83    160 
Total interest-earning assets   845    361    1,206 
                
Interest-bearing liabilities:               
Savings   2    43    45 
Interest-bearing demand   27    35    62 
Certificates of deposit   417    (106)   311 
Total deposits   446    (28)   418 
FHLB borrowings   9    238    247 
Total interest-bearing liabilities   455    210    665 
                
Change in net interest income  $390   $151   $541 

 

Management of Market Risk

 

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are monetary in nature and sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.

 

Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we use to manage interest rate risk are:

 

·originating nonresidential real estate and multi-family loans, and, to a lesser extent, construction, consumer and commercial business loans, all of which tend to have shorter terms and higher interest rates than one- to four-family residential real estate loans, and which generate customer relationships that can result in larger non-interest bearing checking accounts;

 

45

 

 

·selling substantially all of our newly-originated longer-term fixed-rate one- to four-family residential real estate loans and retaining the shorter-term fixed-rate and adjustable-rate one- to four-family residential real estate loans that we originate, subject to market conditions and periodic review of our asset/liability management needs;

 

·reducing our dependence on certificates of deposit to support lending and investment activities and increasing our reliance on core deposits, including checking accounts and savings accounts, which are less interest rate sensitive than certificates of deposit; and

 

Our Board of Directors is responsible for the review and oversight of our Asset/Liability Committee, which is comprised of our executive management team and other essential operational staff. This committee is charged with developing and implementing an asset/liability management plan, and meets at least quarterly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

 

Net Portfolio Value. We compute amounts by which the net present value of our cash flow from assets, liabilities and off-balance sheet items (net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. We measure our interest rate risk and potential change in our NPV through the use of a financial model. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. Historically, the model estimated the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However, given the current level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

 

The table below sets forth, as of December 31, 2018, the calculation of the estimated changes in our net portfolio value that would result from the designated immediate changes in the United States Treasury yield curve.

 

               NPV as a Percentage of Present 
               Value of Assets (3) 
Change in Interest      Estimated Increase (Decrease) in       Increase 
Rates (basis  Estimated   NPV   NPV   (Decrease) 
points) (1)  NPV (2)   Amount   Percent   Ratio (4)   (basis points) 
(Dollars in thousands)
                     
+300  $28,574   $(15,409)   (35.03)%   15.45%   (633)
+200   34,221    (9,762)   (22.20)%   17.90%   (388)
+100   39,556    (4,427)   (10.07)%   20.08%   (170)
   43,983        %   21.78%    
-100   43,430    (553)   (1.26)%   21.05%   (73)

 

 

(1)Assumes an immediate uniform change in interest rates at all maturities.
(2)NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)NPV Ratio represents NPV divided by the present value of assets.

 

The table above indicates that at December 31, 2018, in the event of an instantaneous parallel 100 basis point increase in interest rates, we would experience a 10.07% decrease in net portfolio value. In the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 1.26% decrease in net portfolio value.

 

46

 

 

Rate Shift (1)

  Net Interest Income
Year 1 Forecast
   Year 1 Change
from Level
 
   (Dollars in thousands)     
         
+400  $5,671    (3.80)%
+300   5,756    (2.36)%
+200   5,825    (1.19)%
+100   5,883    (0.20)%
Level   5,895     
-100   5,943    0.81%

 

 

(1)The calculated changes assume an immediate shock of the static yield curve.

 

Depending on the relationship between long-term and short-term interest rates, market conditions and consumer preference, we may place greater emphasis on maximizing our net interest margin than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe that the increased net income which may result from an acceptable mismatch in the actual maturity or re-pricing of our assets and liabilities can, during periods of declining or stable interest rates, provide sufficient returns to justify an increased exposure to sudden and unexpected increases in interest rates.

 

We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.

 

Liquidity and Capital Resources

 

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB-Cincinnati. At December 31, 2018, we had $28.6 million outstanding in advances from the FHLB-Cincinnati, and had the capacity to borrow approximately an additional $133.9 million from the FHLB-Cincinnati based on our collateral capacity. We had an additional $11.5 million on lines of credit available with three commercial banks.

 

While maturities and scheduled amortization of loans and securities are predictable 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 $882,000 for the year ended December 31, 2018 and net cash used in operating activities was $185,000 for the year ended December 31, 2017. Net cash provided by investing activities, which consists primarily of disbursements for loan originations, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on mortgage-backed securities, proceeds from sale of available-for-sale securities and interest-bearing deposits, and cash received in the merger with Kentucky Federal was $3.7 million for the year ended December 31, 2018. Net cash used in investing activities was $15.3 million for the year ended December 31, 2017. Net cash used in financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $3.8 million for the year ended December 31, 2018, resulting from our strategy of reducing our borrowing from the Federal Home Loan Bank of Cincinnati. Net cash provided by financing activities was $14.6 million for the year ended December 31, 2017.

 

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.

 

47

 

 

Cincinnati Bancorp is a separate corporate entity from Cincinnati Federal and it must provide for its own liquidity to pay any dividends to its stockholders, to repurchase any shares of its common stock, and for other corporate purposes. Cincinnati Bancorp’s primary source of liquidity is any dividend payments it may receive from Cincinnati Federal. Cincinnati Federal paid no dividends to Cincinnati Bancorp in 2018. In 2017, Cincinnati Federal paid $600,000 in dividends to Cincinnati Bancorp. See “Regulation and Supervision – Federal Banking Regulation – Capital Distributions” for a discussion of the regulations applicable to the ability of Cincinnati Federal to pay dividends. At December 31, 2018, Cincinnati Bancorp (on an unconsolidated basis) had liquid assets totaling $286,000.

 

At December 31, 2018, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $23.1 million, or 11.5% of adjusted total assets, which is above the well-capitalized required level of $10.0 million, or 5.0%; total risk-based capital of $24.5 million, or 17.5% of risk-weighted assets, which is above the well-capitalized required level of $14.0 million, or 10.0%; and common equity tier 1 risk based capital of $23.1 million, or 16.5%, of risk weighted assets, which is above the well-capitalized required level of $9.1 million, or 6.5%. At December 31, 2017, we exceeded all of our 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%. Accordingly, Cincinnati Federal was categorized as well capitalized at December 31, 2018 and 2017. Management is not aware of any conditions or events since the most recent notification that would change our category.

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2018, we had outstanding commitments to originate loans of $2.8 million, unfunded lines of credit of $16.1 million and forward sale commitments of $3.8 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in one year or less from December 31, 2018 totaled $49.8 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

 

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

 

Recent Accounting Pronouncements

 

Please refer to Note 18 to the Consolidated Financial Statements for the years ended December 31, 2018 and 2017 beginning on page F-51 for a description of recent accounting pronouncements that may affect our financial condition and results of operations.

 

Impact of Inflation and Changing Price

 

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

 

48

 

 

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information required by this item is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Management of Market Risk.”

 

ITEM  8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The Consolidated Financial Statements, including supplemental data, of Cincinnati Bancorp begin on page F-1 of this Annual Report.

 

ITEM  9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

49

 

 

ITEM 9A.CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures.

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief 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 December 31, 2018. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2018.

 

Evaluation and Changes in Internal Controls Over Financial Reporting.

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

 

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, utilizing the framework established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2018 were effective.

 

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected.

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

 

During the year ended December 31, 2018, there were no changes in the Company’s internal control over financial reporting that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM  9B.OTHER INFORMATION

 

Not applicable.

 

50

 

 

PART III

 

ITEM  10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information in the Company’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders under the captions “Corporate Governance”, “Items to be voted on by Stockholders’ – Item 1 Election of Directors” and “Other Information Relating to Directors and Executive Officers – Section 16(a) Beneficial Ownership of Reporting Company” is incorporated herein by reference.

 

ITEM 11.EXECUTIVE COMPENSATION

 

The information in the Company’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders under the caption “Directors’ Compensation” and “Executive Compensation” is incorporated herein by reference.

 

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

 

(a)Security Ownership of Certain Beneficial Owners

 

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership—Stock Ownership of Certain Beneficial Owners” in the definitive Proxy Statement for the 2019 Annual Meeting of Stockholders’.

 

(b)Security Ownership of Management

 

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership—Stock Ownership of Management” in the definitive Proxy Statement for the 2019 Annual Meeting of Stockholders’.

 

(c)Changes in Control

 

Management of the Company knows of no arrangements, including any pledge by any person or securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

 

(d)Equity Compensation Plan Information

 

None.

 

 

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information in the Company’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders under the captions “Corporate Governance – Director Independence” and “Other Information Relating to Directors and Executive Officers – Transactions with Related Persons” is incorporated herein by reference.

 

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information in the Company’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders under the caption “Items to be voted by Stockholders’ – Item 2 “Ratification of Appointment of Independent Registered Public Accounting Firm” is incorporated herein by reference.

 

51

 

 

PART IV

 

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)(1)Financial Statements

 

The documents filed as a part of this Form 10-K are:

 

(A) Report of Independent Registered Public Accounting Firm;
(B) Consolidated Balance Sheets at December 31, 2018 and 2017;
(C) Consolidated Statements of Operations for the years ended December 31, 2018 and 2017;
(D) Consolidated Statements of Comprehensive Income for the years ended December 31, 2018 and 2017;
(E) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018 and 2017;
(F) Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017; and
(G) Notes to Consolidated Financial Statements at and for the years ended December 31, 2018 and 2017.

 

(a)(2)Financial Statement Schedules

 

All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.

 

(a)(3)Exhibits

 

3.1 Charter of Cincinnati Bancorp (1)
3.2 Amended and Restated Bylaws of Cincinnati Bancorp (2)
4 Form of Common Stock Certificate of Cincinnati Bancorp (1)
10.1 Employment Agreement by and between Cincinnati Federal Savings and Loan Association and Greg Myers (1)
10.2 Split Dollar Life Insurance Plan (1)
10.3 Cincinnati Federal Savings and Loan Association Director Retirement Plan (1)
10.4 Form of Cincinnati Federal Employee Stock Ownership Plan (1)
10.5 Cincinnati Bancorp 2017 Equity Incentive Plan (3)

21.0 Subsidiaries of the Registrant
23.0 Consent of Independent Registered Accounting Firm
31.1 Certification of Principal Executive Officer, Pursuant to Rule 15d-14(a)
31.2 Certification of Principal Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
32 Certification of Principal Executive Officer and Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements

 

 

(1)Incorporated herein by reference to the Registration Statement on Form S-1, as amended (File No. 333-202657), initially filed March 11, 2015.
(2)Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, filed October 18, 2018.
(3)Incorporated herein by reference to Appendix A to Definitive proxy Statement filed on April 13, 2017.

 

ITEM 16.FORM 10-K SUMMARY

 

Not Applicable.

 

52

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CINCINNATI BANCORP
   
Date: March 29, 2019 /s/ Joseph V. Bunke 
  Joseph V. Bunke
  President

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signatures    Title    Date 
         
/s/ Joseph V. Bunke    President   March 29, 2019
Joseph V. Bunke   (Principal Executive Officer)    
         
/s/ Herbert C. Brinkman    Senior Vice President and Chief Financial Officer   March 29, 2019
Herbert C. Brinkman   (Principal Accounting and Financial Officer)    
         
/s/ Robert A. Bedinghaus    Executive Chairman of the Board   March 29, 2019
Robert A. Bedinghaus        
         
/s/ Henry C. Dolive, Ph.D.    Vice Chairman of the Board   March 29, 2019
Henry C. Dolive, Ph.D.        
         
/s/ Harold L. Anness    Director   March 29, 2019
Harold L. Anness        
         
/s/ Stuart H. Anness, M.D.     Director   March 29, 2019
Stuart H. Anness, M.D.        
         
/s/ Andrew J. Nurre    Director   March 29, 2019
Andrew J. Nurre        
         
/s/ Charles G. Skidmore    Director   March 29, 2019
Charles G. Skidmore        
         
/s/ Philip E. Wehrman    Director   March 29, 2019
Philip E. Wehrman        

 

 

 

 

Cincinnati Bancorp

December 31, 2018 and 2017

 

Contents  
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Financial Statements  
   
Consolidated Balance Sheets F-3
   
Consolidated Statements of Income F-4
   
Consolidated Statements of Comprehensive Income F-5
   
Consolidated Statements of Stockholders’ Equity F-6
   
Consolidated Statements of Cash Flows F-7
   
Notes to the Consolidated Financial Statements F-9

 

 F-1 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders, Board of Directors and Audit Committee

Cincinnati Bancorp

Cincinnati, Ohio

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Cincinnati Bancorp (Company) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ BKD, LLP  
BKD, LLP  

 

We have served as the Company's auditor since 2011.

 

Cincinnati, Ohio

March 29, 2019

 

 F-2 

 

 

Cincinnati Bancorp

Consolidated Balance Sheets

December 31, 2018 and 2017 

 

   December 31,   December 31, 
   2018   2017 
         
Assets          
Cash and due from banks  $2,620,309   $2,567,495 
Interest-bearing demand deposits in banks   4,107,880    4,294,461 
Federal funds sold   4,361,000    3,404,868 
           
Cash and cash equivalents   11,089,189    10,266,824 
           
Interest-bearing time deposits   200,000    - 
Available-for-sale securities   630,361    910,222 
Loans held for sale   1,282,000    2,221,084 
Loans, net of allowance for loan losses of  $1,405,072 and $1,360,072, respectively   170,365,031    147,020,218 
Premises and equipment, net   3,407,185    2,525,484 
Federal Home Loan Bank stock   2,583,100    1,021,100 
Foreclosed assets held for sale   102,098    - 
Interest receivable   569,659    448,727 
Mortgage servicing rights   1,252,740    909,821 
Federal Home Loan Bank lender risk account receivable   1,703,276    1,708,593 
Bank-owned life insurance   3,997,242    3,254,330 
Other assets   512,180    166,523 
           
Total assets  $197,694,061   $170,452,926 
           
Liabilities and Stockholders' Equity          
           
Liabilities          
Deposits          
Demand  $29,308,448   $22,957,095 
Savings   32,534,398    23,839,361 
Certificates of Deposits   80,548,910    67,151,270 
Total deposits   142,391,756    113,947,726 
           
Federal Home Loan Bank advances   28,580,438    34,309,810 
Advances from borrowers for taxes and insurance   1,799,419    1,480,777 
Interest payable   53,945    38,626 
Directors deferred compensation   571,186    440,632 
Other liabilities   1,155,894    783,962 
           
Total liabilities   174,552,638    151,001,533 
           
Commitments and Contingent Liabilities          
           
Temporary Equity          
ESOP Shares subject to mandatory redemption   180,563    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 1,816,329 and 1,752,947 issued and outstanding at December 31, 2018 and December 31, 2017, respectively   29,593    17,192 
Additional paid-in-capital   7,458,745    6,172,924 
Unearned ESOP Shares   (494,245)   (539,176)
Retained earnings - substantially restricted   16,219,209    13,877,826 
Accumulated other comprehensive loss   (252,442)   (203,985)
           
Total stockholders' equity   22,960,860    19,324,781 
           
Total liabilities, temporary equity, and stockholders' equity  $197,694,061   $170,452,926 

 

See Notes to Consolidated Financial Statements

 

 F-3 

 

 

Cincinnati Bancorp

Consolidated Statements of Income

Years Ended December 31, 2018 and 2017

 

   2018   2017 
         
Interest and Dividend Income          
Loans, including fees  $6,733,291   $5,706,079 
Securities   19,574    1,626 
Dividends on Federal Home Loan Bank stock and other   241,690    81,937 
Total interest and dividend income   6,994,555    5,789,642 
           
Interest Expense          
Deposits   1,429,302    1,011,157 
Federal Home Loan Bank advances   653,968    407,269 
Total interest expense   2,083,270    1,418,426 
           
Net Interest Income   4,911,285    4,371,216 
           
Provision for Loan Losses   45,000    30,000 
           
Net Interest Income After Provision for Loan Losses   4,866,285    4,341,216 
           
Noninterest Income          
Gain on sales of loans   1,669,731    1,607,898 
Mortgage servicing fees   255,855    193,951 
Gain on merger with Kentucky Federal   2,192,340    - 
Net gain on sales of foreclosed assets   1,262    873 
Other   757,177    675,014 
Total noninterest income   4,876,365    2,477,736 
           
Noninterest Expense          
Salaries and employee benefits   3,580,817    3,196,892 
Occupancy and equipment   504,010    440,919 
Directors compensation   177,250    197,500 
Data processing   621,774    563,293 
Professional fees   299,992    262,300 
Franchise tax   156,528    148,868 
Deposit insurance premiums   53,152    38,600 
Advertising   174,574    102,097 
Software Licenses   91,607    84,655 
Loan costs   397,674    337,316 
Merger-related expenses   576,960    - 
Other   615,712    537,676 
Total noninterest expense   7,250,050    5,910,116 
           
Income Before Income Tax   2,492,600    908,836 
           
Provision for Income Taxes   191,278    33,595 
           
Net Income  $2,301,322   $875,241 
           
Earnings per common share - basic  $1.34   $0.52 
Earnings per common share - diluted  $1.34   $0.52 
Weighted-average shares outstanding - basic   1,691,434    1,670,946 
Weighted-average shares outstanding - diluted   1,695,259    1,670,946 

 

See Notes to Consolidated Financial Statements

 

 F-4 

 

 

Cincinnati Bancorp

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2018 and 2017

 

   2018   2017 
         
Net Income  $2,301,322   $875,241 
           
Other Comprehensive Loss:          
Net unrealized losses on available-for-sale securities   (147)   (18,259)
Tax benefit   31    6,208 
Changes in directors' retirement plan prior service costs   (10,655)   14,143 
Tax benefit (expense)   2,375    (4,809)
Other comprehensive loss   (8,396)   (2,717)
           
Comprehensive Income  $2,292,926   $872,524 

 

See Notes to Consolidated Financial Statements

 

 F-5 

 

 

Cincinnati Bancorp

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2018 and 2017

 

                   Accumulated     
       Additional           Other   Total 
   Common   Paid-in   Unearned ESOP   Retained   Comprehensive   Stockholders' 
   Stock   Capital   Shares   Earnings   Loss   Equity 
                         
Balance, January 1, 2017  $17,192   $6,158,071   $(584,107)  $13,002,585   $(201,268)  $18,392,473 
                               
ESOP shares subject to mandatory redemption   -    (44,370)   -    -    -    (44,370)
                               
ESOP shares earned   -    -    44,931    -    -    44,931 
                               
Stock based compensation expense   -    59,223    -    -    -    59,223 
                               
Net income   -    -    -    875,241    -    875,241 
                               
Other comprehensive loss   -    -    -    -    (2,717)   (2,717)
                               
Balance, December 31, 2017  $17,192   $6,172,924   $(539,176)  $13,877,826   $(203,985)  $19,324,781 
                               
Cumulative effect of adoption of ASU 2018-02   -    -    -    40,061    (40,061)   - 
                               
Issuance of common stock   12,401    1,227,600    -    -    -    1,240,001 
                               
ESOP shares subject to mandatory redemption   -    (53,951)   -    -    -    (53,951)
                               
ESOP shares earned   -    9,020    44,931    -    -    53,951 
                               
Stock based compensation expense   -    103,152    -    -    -    103,152 
                               
Net income   -    -    -    2,301,322    -    2,301,322 
                               
Other comprehensive loss   -    -    -    -    (8,396)   (8,396)
                               
Balance, December 31, 2018  $29,593   $7,458,745   $(494,245)  $16,219,209   $(252,442)  $22,960,860 

 

See Notes to Consolidated Financial Statements

 

 F-6 

 

 

Cincinnati Bancorp

Consolidated Statements of Cash Flows

Years Ended December 31, 2018 and 2017

 

   2018   2017 
         
Operating Activities          
Net income  $2,301,322   $875,241 
Items not requiring (providing) cash:          
Depreciation and amortization   146,190    136,873 
Provision for loan losses   45,000    30,000 
Amortization of premiums and discounts on securities   10,122    29,622 
Amortization of deferred prepayment penalty on Federal Home Loan Bank advances   4,628    32,030 
Change in deferred income taxes   145,046    182,175 
Gain on sale of loans   (1,669,731)   (1,607,898)
Proceeds from the sale of loans held for sale   57,038,358    58,086,318 
Origination of loans held for sale   (54,429,543)   (57,384,767)
Net gain on sale of foreclosed assets   (5,959)   (873)
Earnings on cash surrender value of bank-owned life insurance   (77,173)   (81,679)
Stock based compensation expense   103,152    59,223 
ESOP shares earned   53,951    44,931 
Gain on merger with Kentucky Federal   (2,192,340)   - 
Changes in:          
Interest receivable   (25,822)   (65,489)
Mortgage servicing rights   (342,919)   (179,657)
Federal Home Loan Bank lender risk account receivable   5,317    (2,980)
Other assets   (27,831)   (8,174)
Interest payable   15,319    14,394 
Other liabilities   (214,820)   (343,991)
Net cash provided by (used in) operating activities   882,267    (184,701)
           
Investing Activities          
Proceeds from maturities of available-for-sale securities   269,760    821,096 
Proceeds from the sale of available-for-sale securities   4,999,893    - 
Purchase of Federal Home Loan Bank stock   (18,700)   (113,100)
Net change in loans   (7,094,115)   (15,984,686)
Proceeds from the sale of interest-bearing time deposits   3,180,000    - 
Proceeds from the maturities of interest-bearing time deposits   200,000    - 
Purchase of premises and equipment   (59,146)   (72,151)
Proceeds from sales of foreclosed assets   31,348    38,823 
Cash received in merger with Kentucky Federal   2,224,645    - 
Net cash provided by (used in) investing activities   3,733,685    (15,310,018)

 

See Notes to Consolidated Financial Statements

 

 F-7 

 

 

Cincinnati Bancorp

Consolidated Statements of Cash Flows

Years Ended December 31, 2018 and 2017

 

 

   2018   2017 
     
Financing Activities          
Net increase in deposits   1,965,012    5,856,100 
Proceeds from Federal Home Loan Bank advances   115,119,682    155,906,000 
Repayment of Federal Home Loan Bank advances   (121,196,924)   (147,187,590)
Net decrease in advances from borrowers for taxes and insurance   318,643    58,878 
Net cash (used in) provided by financing activities   (3,793,587)   14,633,388 
           
Increase (Decrease) in Cash and Cash Equivalents   822,365    (861,331)
Cash and Cash Equivalents, Beginning of Period   10,266,824    11,128,155 
Cash and Cash Equivalents, End of Period  $11,089,189   $10,266,824 
           
Supplemental Cash Flows Information          
Interest paid  $2,067,951   $1,404,032 
Income taxes paid   257,229    174,717 
Real estate acquired in settlement of loans   27,869    37,950 

 

Kentucky Federal Savings and Loan Association merged with Cincinnati Federal effective October 12, 2018.

In conjunction with the merger, liabilities were assumed as follows:

 

Fair value of assets acquired  $30,818,444 
Less common stock issued   1,240,001 
Less gain on merger recognized   2,192,340 
Liabilities assumed  $27,386,103 

 

See Notes to Consolidated Financial Statements

 

 F-8 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

Note 1: Nature of Operations and Summary of Significant Accounting 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. Our business operations are conducted in the larger Greater Cincinnati/Northern Kentucky metropolitan area which includes Warren, Butler and Clermont Counties in Ohio, Boone, Kenton and Campbell Counties in Kentucky, and Dearborn County, Indiana. 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 consolidated financial statements include Cincinnati Bancorp and its wholly subsidiary, Cincinnati Federal, together referred to as “the Company.” Intercompany transactions and balances have been eliminated in consolidation.

 

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 and fair values of financial instruments.

 

Cash Equivalents

 

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents.

 

From time to time, the Company’s interest-bearing cash accounts may exceed the FDIC’s insured limit of $250,000 per account. Management considers the risk of loss to be low based on the quality of the institutions where the funds are maintained.

 

Interest-bearing Time Deposits in Banks

 

Interest-bearing deposits in banks are carried at cost.

 

 F-9 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

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.

 

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.

 

Loans Held for Sale

 

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

 

Loans

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

 

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

 

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six consecutive months.

 

 F-10 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

Loans acquired at merger are recorded at fair value with no carryover of the acquired entity’s previously established allowance for loan losses. The excess of expected cash flows over the estimated fair value of the acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows result in the recognition of additional interest income over the remaining contractual lives of the loans. Management estimates the cash flows expected to be collected at acquisition using a third-party risk model, which incorporates the estimate of key assumptions, such as default rates and prepayment speeds.

 

Allowance for Loan Losses

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

 F-11 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

 

In the course of working with borrowers, the Company many choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower’s current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms or a combination of the two. If such efforts by the Company do not results in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings commence, the Company may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan.

 

It is the Company’s policy that any restructured loans on nonaccrual prior to being restructured remain on nonaccrual status until six consecutive months of satisfactory borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, the Company reviews the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan.

 

With regards to determination of the amount of the allowance for credit losses, TDRs are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.

 

Lender Reserve Account

 

Certain loan sale transactions with the Federal Home Loan Bank of Cincinnati (FHLB) provide for the establishment of a Lender Reserve Account (LRA). The LRA consists of amounts withheld from loan sale proceeds by the FHLB for absorbing inherent losses that are probable on those sold loans. These withheld funds are an asset to the Company as they are scheduled to be paid the Company in future years, net of any credit losses on those loans sold. The receivables are initially measured at fair value. The fair value is estimated by discounting the cash flows over the life of each master commitment contract. The accretable yield is amortized over the life of the master commitment contract. Expected cash flows are re-evaluated at each measurement date. If there is an adverse change in expected cash flows, the accretable yield would be adjusted on a prospective basis and the asset evaluated for impairment.

 

Premises and Equipment

 

Depreciable assets are stated at cost, less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets.

 

The estimated useful lives for each major depreciable classification of premises and equipment are as follows:

 

Buildings and improvements

15-40 years
Equipment 3-5 years

 

 F-12 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

Federal Home Loan Bank Stock

 

Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula, carried at par and evaluated for impairment.

 

Foreclosed Assets Held for Sale

 

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less estimated costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net noninterest expense from foreclosed assets. There was no valuation allowances established during 2018 or 2017.

 

Mortgage Servicing Rights

 

Mortgage servicing assets are recognized separately when rights are acquired through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50 Transfers and Servicing), servicing rights resulting from the sale of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in earnings in the period in which the changes occur.

 

Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing rights and may result in a reduction or addition to noninterest income.

 

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.

 

Employee Stock Ownership Plan (“ESOP”)

 

The cost of the ESOP, but not yet earned, is shown as a reduction of stockholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares are used to reduce annual ESOP debt service. As of December 31, 2018, 17,972 shares have been allocated to eligible participants in the ESOP. (See Note 13 – Employee and Director Benefits).

 

 F-13 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

Income Taxes

 

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

 

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

 

If necessary, the Company recognizes interest and penalties on income taxes as a component of income tax expense.

 

With a few exceptions, the Company is no longer subject to examinations by tax authorities for years before 2015. As of December 31, 2018 and December 31, 2017, the Company had no uncertain tax positions.

 

Comprehensive Income

 

Comprehensive income consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized gains (losses) on available-for-sale securities and changes in the funded status of the directors’ retirement plan.

 

Earnings Per Share

 

Basic earnings per share (“EPS”) allocated to common shareholders is calculated using the two-class method and is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period. The two-class method is an earnings allocation formula the determines the EPS for each class of common stock and participating securities according to dividends distributed and participation rights in ther undistributed earnings. Diluted EPS is adjusted for dilutive effects on stock-based compensation and is calculated using the two-class method or treasury method. The average number of common shares outstanding is increased to include the number of shares that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period, as well as for any adjustment to income that would result from the assumed issuance.

 

 F-14 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

Unallocated common shares held by the Company’s ESOP are shown as a reduction in stockholders’ equity and are excluded from weighted-average common shares outstanding for both basic and diluted earnings per share calculations until they are committed to be released.

 

Subsidiary and Other Activities

 

The Bank had no subsidiaries at December 31, 2018 and 2017.

 

Note 2: Merger

 

On April 18, 2018, Cincinnati Federal and Kentucky Federal Savings and Loan Association (“Kentucky Federal”) signed an Agreement and Plan of Merger pursuant to which Kentucky Federal merged with and into Cincinnati Federal effective October 12, 2018.

 

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. At closing, Kentucky Federal Board of Director, Philip Wehrman, was added to the Boards of Director of CF Mutual Holding Company, Cincinnati Bancorp and Cincinnati Federal. The reason for the merger was to achieve scale and efficiency in operations, as well as, expanding market share.

 

The merger with Kentucky Federal was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the merger date. The following table summarizes the fair value recorded as of October 12, 2018:

 

 F-15 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

   Amount   Fair Value   Fair Value 
   Recorded   Adjustments   Recorded 
             
Consideration Paid:               
                
Fair value of total consideration transferred (common shares issued)  $1,240,001   $-   $1,240,001 
                
Identifiable Assets Acquired:               
                
Cash and cash equivalents   2,224,645    -    2,224,645 
Interest-bearing time deposits   3,580,000    -    3,580,000 
Investment securities   5,280,000    (280,107)   4,999,893 
Federal Home Loan Bank Stock   1,543,300    -    1,543,300 
Net loans receivable   16,159,521    164,074    16,323,595 
Premises & Equipment, net   194,202    772,700    966,902 
Core deposit and other intangibles   -    221,193    221,193 
Other real estate owned   132,590    (33,000)   99,590 
Other assets   895,044    (35,718)   859,326 
                
Total identifiable assets acquired   30,009,302    809,142    30,818,444 
                
Liabilities Assumed:               
                
     Deposits   26,475,279    3,739    26,479,018 
     Federal Home Loan Bank advances   343,242    -    343,242 
     Deferred taxes   41,947    176,636    218,583 
     Other Liabilities   345,260    -    345,260 
                
Total liabilities assumed   27,205,728    180,375    27,386,103 
                
Total identified net assets acquired   2,803,574    628,767    3,432,341 
                
Gain on merger  $1,563,573   $628,767   $2,192,340 

 

As permitted by ASC No. 805-10-25, Business Combinations, the above estimates may be adjusted up to one year after closing date of the acquisition to reflect any new information obtained about facts and circumstances existing at the acquisition date. Any changes in the estimated fair values will be recognized in the period the adjustment is identified.

 

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of October 12, 2018 based on management’s best estimate using the information available at acquisition date. The application of purchase accounting resulted in a bargain purchase gain of approximately $2.2 million. The driver of the gain on merger gain is the mutual savings structure of Kentucky Federal. The number of institutions that could merge with Kentucky Federal was limited and the mutual holding company structure of Cincinnati Bancorp allowed the merger to occur.

 

The fair value for loans acquired from Kentucky Federal were estimated using cash flow projections based on remaining maturity and repricing terms. Cash flows were adjusted by estimated future credit losses and the rate of prepayments. Projected monthly cash flows were discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of Kentucky Federal’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value on October 12, 2018. The Company acquired various loans in the acquisition for which none had evidence of deterioration of credit quality since origination. The fair value of assets includes loans with a fair value of $16,323,595. The gross principal and contractual interest due under the contracts is $16,419,786, of which $251,369 is expected to be uncollectible.

 

 F-16 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

The core deposit intangible asset recognized is being amortized over its estimated life of approximately 10 years using the straight-line method.

 

Direct acquisition and integration costs were expensed as incurred and totaled approximately $577,000 for the twelve months ended December 31, 2018. These items were recorded as merger-related expenses on the consolidated statements of income.

 

 The Company has determined that it is impractical to report amounts of revenue and earnings of Kentucky Federal since the acquisition date, October 12, 2018. The back-office systems conversion of the combined entity took place October 12, 2018. Accordingly, reliable and separate complete revenue and earnings information are no longer available. The following table presents unaudited pro forma information as if the acquisition of Kentucky Federal had occurred on January 1, 2017. The table below does not include merger-related expenses, including data conversion costs. The pro forma information does not necessarily reflect the results of operations that would have occurred had the merger with Kentucky Federal been completed at the beginning of the periods presented. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue enhancement opportunities or anticipated operational cost savings.

 

The following table presents selected unaudited pro forma financial information reflecting the merger assuming it was completed as of January 1, 2017. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the merger actually been completed at the beginning of the period presented, nor does it indicate future results for any other interim or full fiscal year period. Pro forma basic and fully diluted earnings per share were calculated using the Company’s actual weighted average shares outstanding for the periods presented, plus the incremental shares issued, assuming the merger occurred at the beginning of the periods presented. The unaudited pro forma information is based on the actual financial statements of the Company for the period presented.

 

 F-17 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

   Pro Forma (Unaudited) 
         
   December 31, 2018   December 31, 2017 
   (in Thousands, except   (in Thousands, except 
   per Share Data)   per Share Data) 
         
Net interest income  $5,586   $5,230 
           
Non-interest income   5,036    2,700 
           
Non-interest expense   7,798    7,028 
           
Net income  $454   $875 
           
Pro forma earnings per share:          
Basic   0.27    0.50 
Diluted   0.27    0.50 

  

Note 3: Securities

 

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:                    
                     
December 31, 2018:                    
Mortgage-backed securities of government sponsored entities  $629,447   $3,806   $(2,892)  $630,361 
                     
December 31, 2017:                    
Mortgage-backed securities of government sponsored entities  $909,161   $4,470   $(3,409)  $910,222 

 

Proceeds from the sale of available-for-sale securities were $4,999,893 for the year ended December 31, 2018. No gains or losses were realized. There were no sales of available-for-sale for the year ended December 31, 2017.

 

 F-18 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

Total fair value of investments at December 31, 2018 reported at less than historical cost was $512,303 and was approximately 81% of the Company’s investment portfolio. The decline primarily resulted from changes in market interest rates. There was $785,539 or approximately 86% of the investment portfolio reported at less than historical cost at December 31, 2017.

 

Expected maturities on mortgage-backed securities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2018 and 2017, the Company’s investments consisted entirely of mortgage-backed securities which are not due at a single maturity date.

 

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-temporarily impaired, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2018:

 

   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
                         
December 31, 2018:                              
Mortgage-backed   securities of government sponsored entities  $-   $-   $512,303   $(2,892)  $512,303   $(2,892)
                               
December 31, 2017:                              
Mortgage-backed   securities of government sponsored entities  $785,539   $(3,409)  $-   $-   $785,539   $(3,409)

 

 F-19 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

Note 4: Loans and Allowance for Loan Losses

 

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

  

   December 31,   December 31, 
   2018   2017 
         
One to four family mortgage loans -owner occupied  $93,659,520   $77,532,809 
One to four family - investment   14,242,563    11,354,976 
Multi-family mortgage loans   27,140,014    23,895,594 
Nonresidential mortgage loans   18,930,426    18,138,584 
Construction and land loans   7,293,737    6,173,341 
Real estate secured lines of credit   11,373,975    11,713,943 
Commercial loans   415,730    334,628 
Other consumer loans   796,051    471,386 
Total loans   173,852,016    149,615,261 
           
Less:          
Net deferred loan costs   (491,331)   (479,795)
Undisbursed portion of loans   2,573,244    1,714,766 
Allowance for loan losses   1,405,072    1,360,072 
           
Net loans  $170,365,031   $147,020,218 

 

Risk characteristics applicable to each segment of the loan portfolio are described as follows:

 

One to Four Family Mortgage Loans and Real Estate Secured Lines of Credit: The one to four family mortgage loans and real estate secured lines of credit are secured by owner-occupied one to four family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

One to Four Family Investment Property Loans: The one to four family investment property loans are secured by non-owner occupied one to four family residences. Repayment of these loans is primarily dependent on the net rental income and personal income of the borrowers. These loans are considered to be higher risk than owner occupied one to four family mortgage loans. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact investment property vacancies, property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

Multi-Family and Nonresidential Mortgage Loans: These loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

 

 F-20 

 

 

Cincinnati Bancorp

Notes to the Consolidated Financial Statements

December 31, 2018 and 2017

 

Construction and Land Loans: Land loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

 

Commercial Loans: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is impacted by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

 

Other Consumer Loans: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is impacted by consumer economic factors (such as unemployment and general economic conditions in the Company’s market area) and the creditworthiness of a borrower.

 

 F-21