Company Quick10K Filing
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Cincinnati Bancorp
10-Q 2019-03-31 Quarter: 2019-03-31
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 2019-07-17 Officers, Other Events, Exhibits
8-K 2019-05-23 Shareholder Vote
8-K 2018-10-12 Officers, Amend Bylaw, Exhibits
8-K 2018-10-12 Other Events, 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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CNNB 2019-03-31
Part I. - Financial Information
Item 1.Financial Statements
Note 1:Nature of Operations and Summary of Significant Account Policies
Note 2:Merger
Note 3:Securities
Note 4:Loans and Allowance for Loan Losses
Note 5:Earnings per Common Share
Note 6:Regulatory Matters
Note 7:Disclosure About Fair Values of Assets and Liabilities
Note 8:Commitments and Credit Risk
Note 9:Accumulated Other Comprehensive Loss
Note 10:Equity Incentive Plan
Note 11:Recent Accounting Pronouncements
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
Part II - Other Information
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
EX-31.1 tv520980_ex31-1.htm
EX-31.2 tv520980_ex31-2.htm
EX-32 tv520980_ex32.htm

Cincinnati Bancorp Earnings 2019-03-31

CNNB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv520980_10q.htm FORM 10-Q

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2019

 

OR

 

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

 

For the transition period from _______________ to _______________

 

Commission File No. 000-55529

 

Cincinnati Bancorp

(Exact name of registrant as specified in its charter)

 

Federal   47-4931771

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

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

 

(513) 574-3025

(Registrant’s telephone number)

 

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES x     NO ¨

 

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

YES x     NO ¨

 

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

 

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

 

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

 

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

YES ¨     NO x

 

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

 

As of May 13, 2019, 1,816,517 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding, of which 1,008,969 shares were owned by CF Mutual Holding Company.

 

 

 

 

 

 

Cincinnati Bancorp

Form 10-Q

 

Index

 

    Page
Part I. Financial Information
     
Item 1. Condensed Consolidated Financial Statements  
     
  Condensed Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018 1
     
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 2
     
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 3
     
  Condensed Consolidated Statement of Stockholders’ Equity for the Three months Ended March 31, 2019 and 2018 (Unaudited) 4
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 5
     
  Notes to Condensed Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
     
Item 4. Controls and Procedures 42
     
Part II. Other Information
     
Item 1. Legal Proceedings 42
     
Item 1A. Risk Factors 42
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
     
Item 3. Defaults upon Senior Securities 42
     
Item 4. Mine Safety Disclosures 42
     
Item 5. Other Information 42
     
Item 6. Exhibits 43
     
  Signature Page 44

 

 

 

 

Part I. – Financial Information

 

Item 1.Financial Statements

 

Cincinnati Bancorp

Condensed Consolidated Balance Sheets

March 31, 2019 (Unaudited) and December 31, 2018

 

   March 31,   December 31, 
   2019   2018 
   (Unaudited)     
         
Assets          
Cash and due from banks  $2,276,498   $2,620,309 
Interest-bearing demand deposits in banks   6,034,034    4,107,880 
Federal funds sold   2,516,000    4,361,000 
           
Cash and cash equivalents   10,826,532    11,089,189 
           
Interest-bearing time deposits   200,000    200,000 
Available-for-sale securities   565,471    630,361 
Loans held for sale   3,918,132    1,282,000 
Loans, net of allowance for loan losses of  $1,405,072 and $1,405,072, respectively   175,433,755    170,365,031 
Premises and equipment, net   3,421,779    3,407,185 
Federal Home Loan Bank stock   2,583,100    2,583,100 
Foreclosed assets held for sale   150,225    102,098 
Interest receivable   582,347    569,659 
Mortgage servicing rights   1,306,527    1,252,740 
Federal Home Loan Bank lender risk account receivable   1,615,286    1,703,276 
Bank-owned life insurance   4,020,155    3,997,242 
Other assets   650,309    512,180 
           
Total assets  $205,273,618   $197,694,061 
           
Liabilities and Stockholders' Equity          
           
Liabilities          
Deposits          
Demand  $29,426,085   $29,308,448 
Savings   34,413,663    32,534,398 
Certificates of Deposits   77,542,283    80,548,910 
Total deposits   141,382,031    142,391,756 
           
Federal Home Loan Bank advances   37,780,595    28,580,438 
Advances from borrowers for taxes and insurance   1,268,442    1,799,419 
Interest payable   70,166    53,945 
Directors deferred compensation   590,846    571,186 
Other liabilities   1,015,517    1,155,894 
           
Total liabilities   182,107,597    174,552,638 
           
Commitments and Contingent Liabilities          
           
Temporary Equity          
ESOP Shares subject to mandatory redemption   193,869    180,563 
           
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 1,816,329 issued and outstanding at March 31, 2019 and December 31, 2018, respectively   29,593    29,593 
Additional paid-in-capital   7,474,341    7,458,745 
Unearned ESOP Shares   (483,012)   (494,245)
Retained earnings - substantially restricted   16,211,108    16,219,209 
Accumulated other comprehensive loss   (259,878)   (252,442)
           
Total stockholders' equity   22,972,152    22,960,860 
           
Total liabilities, temporary equity, and stockholders' equity  $205,273,618   $197,694,061 

 

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

 

 1 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Operations

Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

   Three Months Ended March 31, 
   2019   2018 
   (Unaudited) 
         
Interest and Dividend Income          
Loans, including fees  $1,949,112   $1,557,947 
Securities   3,730    3,584 
Dividends on Federal Home Loan Bank stock and other   79,716    40,039 
Total interest and dividend income   2,032,558    1,601,570 
           
Interest Expense          
Deposits   447,595    304,510 
Federal Home Loan Bank advances   174,486    135,539 
Total interest expense   622,081    440,049 
           
Net Interest Income   1,410,477    1,161,521 
           
Provision for Loan Losses   -    15,000 
           
Net Interest Income After Provision for Loan Losses   1,410,477    1,146,521 
           
Noninterest Income          
Gain on sales of loans   177,951    339,760 
Mortgage servicing fees   89,711    136,035 
Other   185,359    197,582 
Total noninterest income   453,021    673,377 
           
Noninterest Expense          
Salaries and employee benefits   989,831    817,889 
Occupancy and equipment   156,869    131,865 
Directors compensation   54,060    42,250 
Data processing   175,028    150,458 
Professional fees   73,765    91,430 
Franchise tax   48,771    39,000 
Deposit insurance premiums   14,799    12,577 
Advertising   40,281    35,549 
Software Licenses   28,831    22,205 
Loan costs   79,596    95,937 
Merger-related expenses   18,000    22,320 
Other   211,683    132,102 
Total noninterest expense   1,891,514    1,593,582 
           
Income (Loss) Before Income Tax   (28,016)   226,316 
           
Provision (Benefit) for Income Taxes   (19,915)   46,996 
           
Net Income  (Loss)  $(8,101)  $179,320 
           
Earnings (Loss) per common share - basic  $-   $0.11 
Earnings (Loss) per common share - diluted  $-   $0.11 
Weighted-average shares outstanding - basic   1,746,682    1,672,069 
Weighted-average shares outstanding - diluted   1,755,887    1,672,069 

 

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

 

 2 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

   Three Months Ended March 31, 
   2019   2018 
   (Unaudited) 
         
Net Income (Loss)  $(8,101)  $179,320 
           
Other Comprehensive Loss:          
Net unrealized gains (losses) losses on available-for-sale securities   759    (1,909)
Tax (expense) benefit   (159)   401 
Changes in directors' retirement plan prior service costs   (10,161)   (2,664)
Tax benefit   2,125    559 
Other comprehensive loss   (7,436)   (3,613)
           
Comprehensive Income (Loss)  $(15,537)  $175,707 

 

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

 

 3 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

                   Accumulated     
       Additional           Other   Total 
   Common   Paid-in   Unearned ESOP   Retained   Comprehensive   Stockholders' 
   Stock   Capital   Shares   Earnings   Loss   Equity 
                         
Balance, January 1, 2018  $17,192   $6,172,924   $(539,176)  $13,877,826   $(203,985)  $19,324,781 
                               
Cumulative effect of adoption of ASU 2018-02   -    -    -    40,062    (40,061)   1 
                               
Issuance of common stock   -    -    -    -    -    - 
                               
ESOP shares subject to mandatory redemption   -    (11,233)   -    -    -    (11,233)
                               
ESOP shares earned   -    856    11,233    -    -    12,089 
                               
Stock based compensation expense   -    25,788    -    -    -    25,788 
                               
Net income   -    -    -    179,320    -    179,320 
                               
Other comprehensive loss   -    -    -    -    (3,364)   (3,364)
                               
For the Three Months ended March 31, 2018  $17,192   $6,188,335   $(527,943)  $14,097,208   $(247,410)  $19,527,382 
                               
For the Three Months Ended March 31, 2019                              
                               
Balance, January 1, 2019  $29,593   $7,458,745   $(494,245)  $16,219,209   $(252,442)  $22,960,860 
                               
ESOP shares subject to mandatory redemption   -    (13,306)   -    -    -    (13,306)
                               
ESOP shares earned   -    3,111    11,233    -    -    14,344 
                               
Stock based compensation expense   -    25,791    -    -    -    25,791 
                               
Net loss   -    -    -    (8,101)   -    (8,101)
                               
Other comprehensive loss   -    -    -    -    (7,436)   (7,436)
                               
For the Three Months ended March 31, 2019  $29,593   $7,474,341   $(483,012)  $16,211,108   $(259,878  $22,972,152 

 

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

 

 4 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

   Three Months Ended March 31, 
   2019   2018 
   (Unaudited) 
         
Operating Activities          
Net income (loss)  $(8,101)  $179,320 
Items not requiring (providing) cash:          
Depreciation and amortization   47,226    33,898 
Provision for loan losses   -    15,000 
Amortization of premiums and discounts on securities, net   2,281    2,924 
Amortization of deferred prepayment penalty on Federal Home Loan Bank advances   1,157    1,157 
Change in deferred income taxes   5,941    (24,343)
Gain on sale of loans   (177,951)   (339,760)
Proceeds from the sale of loans held for sale   9,924,329    12,234,610 
Origination of loans held for sale   (12,382,510)   (12,392,781)
Earnings on cash surrender value of bank-owned life insurance   (22,913)   (18,336)
Stock based compensation expense   25,791    25,788 
ESOP shares earned   14,344    12,089 
Changes in:          
Interest receivable   (12,688)   92,858 
Mortgage servicing rights   (53,787)   (127,401)
Federal Home Loan Bank lender risk account receivable   87,990    116,279 
Other assets   (138,129)   (163,032)
Interest payable   16,221    9,891 
Other liabilities   (134,852)   128,638 
Net cash used in operating activities   (2,805,651)   (213,201)
           
Investing Activities          
Proceeds from maturities of available-for-sale securities   63,367    82,134 
Purchase of Federal Home Loan Bank stock   -    (18,700)
Net change in loans   (5,116,851)   (2,551,635)
Purchase of premises and equipment   (61,820)   (6,688)
Net cash used in investing activities   (5,115,304)   (2,494,889)

 

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

 

 5 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Cash Flows (Continued)

Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

   Three Months Ended March 31, 
   2019   2018 
         
Financing Activities          
Net increase in deposits   (1,009,725)   3,948,525 
Proceeds from Federal Home Loan Bank advances   24,342,000    32,127,000 
Repayment of Federal Home Loan Bank advances   (15,143,000)   (31,578,000)
Net decrease in advances from borrowers for taxes and insurance   (530,977)   (311,822)
Net cash provided by financing activities   7,658,298    4,185,703 
           
Increase (Decrease) in Cash and Cash Equivalents   (262,657)   1,477,613 
Cash and Cash Equivalents, Beginning of Period   11,089,189    10,266,824 
Cash and Cash Equivalents, End of Period  $10,826,532   $11,744,437 
           
Supplemental Cash Flows Information          
Interest paid  $605,860   $430,158 
Real estate acquired in settlement of loans   48,125    - 

 

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

 

 6 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

Nature of Operations

 

Cincinnati Bancorp (“Company”) is the mid-tier holding company for Cincinnati Federal (the “Bank”), a federally chartered stock savings and loan association that is primarily engaged in providing a full range of banking and financial services to individual and corporate customers. 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.

 

Revenue Recognition

 

On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2014-09 "Revenue from Contracts with Customers" (Accounting Standards Codification (ASC) 606) and all subsequent ASUs that modified ASC 606. ASC 606 provides that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Interest income, net securities gains (losses), gains from the sale of mortgage loans and bank-owned life insurance are not included within the scope of ASC 606. For the revenue streams in the scope of ASC 606, service charges on deposits and electronic banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All of the Company’s revenue from contracts with customers is recognized within noninterest income.

 

Service charges on deposit accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and other fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance. Service charges are recorded in other noninterest income.

 

Interchange income: The Company earns interchange income from cardholder transactions conducted through the various payment networks. Interchange income from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The gross amount of these fees is processed through noninterest income. Interchange fees are recorded in other noninterest income.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018 include the accounts of Cincinnati Bancorp and the Bank. All significant intercompany items have been eliminated.

 

 7 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Interim Financial Statements

 

The interim financial statements as of March 31, 2019, and for the three months ended March 31, 2019 and 2018 are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments contained in the interim financial statements. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2019, or any other period.

 

Use of Estimates

 

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

 

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

 

 8 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 Director, Philip Wehrman, was added to the Boards of Director of CF Mutual Holding Company, Cincinnati Bancorp and Cincinnati Federal.

 

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:

 

   Amount
Recorded
   Fair Value
Adjustments
   Fair Value
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 primary reason for the gain on merger gain is the mutual ownership 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.

 

 9 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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.

 

The core deposit intangible asset recognized of $221,193 is being amortized over its estimated life of approximately 10 years using the straight-line method and is included in other assets in the condensed consolidated balance sheets.

 

Direct acquisition and integration costs were expensed as incurred and totaled approximately $18,000 for the quarter ended March 31, 2019 and $577,000 for the year ended December 31, 2018. These items were recorded as merger-related expenses on the consolidated statements of income.

 

NOTE 3: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.

 

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 
   (Unaudited)         
Available-for-Sale Securities:                    
                     
March 31, 2019:                    
Mortgage-backed securities of government sponsored entities  $563,798   $3,856   $(2,183)  $565,471 
                     
December 31, 2018:                    
Mortgage-backed securities of government sponsored entities  $629,447   $3,806   $(2,892)  $630,361 

 

 10 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The Company had no sales of investment securities during the three month periods ended March 31, 2019 and 2018. The Company had not pledged any of its investment securities as of March 31, 2019 or December 31, 2018.

 

The amortized cost and fair value of available-for-sale securities at March 31, 2019 and December 31, 2018, by contractual maturity, if applicable, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties, as is the case with mortgage-backed securities included in the following table:

 

   March 31, 2019   December 31, 2018 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
                     
Mortgage-backed securities of government sponsored entities  $563,798   $565,471   $629,447   $630,361 

 

Certain investments in debt securities have fair values at an amount less than their historical cost. The total fair value of these investments at March 31, 2019 and December 31, 2018 was $448,860 and $512,303, respectively, which was approximately 79% and 81%, respectively, of the Company’s investment portfolio at those respective dates.

 

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporary impaired, aggregated by investment class and length of time that the individual securities have been in continuous unrealized loss position at March 31, 2019 and December 31, 2018:

 

   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
                         
March 31, 2019:                              
Mortgage-backed   securities of government sponsored entities  $-   $-   $448,860   $(2,183)  $448,860   $(2,183)
                               
December 31, 2018:                              
Mortgage-backed   securities of government sponsored entities  $-   $-   $512,303   $(2,892)  $512,303   $(2,892)

 

 11 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 4:Loans and Allowance for Loan Losses

 

Categories of loans at March 31, 2019 and December 31, 2018 include:

 

   March 31,   December 31, 
   2019   2018 
   (Unaudited)     
         
One to four family mortgage loans -owner occupied  $94,786,003   $93,659,520 
One to four family - investment   15,301,846    14,242,563 
Multi-family mortgage loans   29,348,160    27,140,014 
Nonresidential mortgage loans   18,725,035    18,930,426 
Construction and land loans   8,221,642    7,293,737 
Real estate secured lines of credit   11,068,202    11,373,975 
Commercial loans   395,317    415,730 
Other consumer loans   832,298    796,051 
Total loans   178,678,503    173,852,016 
           
Less:          
Net deferred loan costs   (498,190)   (491,331)
Undisbursed portion of loans   2,337,866    2,573,244 
Allowance for loan losses   1,405,072    1,405,072 
           
Net loans  $175,433,755   $170,365,031 

 

 12 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three months ended March 31, 2019 and 2018 and the year ended December 31, 2018:

 

   Three Months Ended March 31, 2019 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of year  $456,630   $123,017   $224,384   $182,338   $100,187   $296,873   $9,001   $12,642   $1,405,072 
Provision (credit) charged to expense   -    -    -    -    -    -    -    -    - 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    - 
Balance, end of year  $456,630   $123,017   $224,384   $182,338   $100,187   $296,873   $9,001   $12,642   $1,405,072 
                                              
Ending balance:  Individually evaluated for impairment  $-   $33,683   $9,055   $-   $-   $-   $-   $-   $42,738 
                                              
Ending balance:  Collectively evaluated for impairment  $456,630   $89,334   $215,329   $182,338   $100,187   $296,873   $9,001   $12,642   $1,362,334 
Loans:                                             
Ending balance  $94,786,003   $15,301,846   $29,348,160   $18,725,035   $8,221,642   $11,068,202   $395,317   $832,298   $178,678,503 
                                              
Ending balance:  Individually evaluated for impairment  $915,699   $690,856   $619,321   $147,414   $-   $47,160   $-   $-   $2,420,450 
                                              
Ending balance:  Collectively evaluated for impairment  $93,870,304   $14,610,990   $28,728,839   $18,577,621   $8,221,642   $11,021,042   $395,317   $832,298   $176,258,053 

 

   Three Months Ended March 31, 2018 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of period  $338,697   $171,674   $240,896   $196,811   $82,669   $312,638   $6,934   $9,753   $1,360,072 
Provision (credit) charged to expense   50,697    (57,722)   29,569    11,196    (16,220)   (4,505)   1,915    70    15,000 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    - 
Balance, end of period  $389,394   $113,952   $270,465   $208,007   $66,449   $308,133   $8,849   $9,823   $1,375,072 

 

 13 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

   Year Ended December 31, 2018 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of year  $338,697   $171,674   $240,896   $196,811   $82,669   $312,638   $6,934   $9,753   $1,360,072 
Provision (credit) charged to expense   117,933    (48,657)   (16,512)   (14,473)   17,518    (15,765)   2,067    2,889    45,000 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    - 
Balance, end of year  $456,630   $123,017   $224,384   $182,338   $100,187   $296,873   $9,001   $12,642   $1,405,072 
                                              
Ending balance:  Individually evaluated for impairment  $-   $33,683   $9,055   $-   $-   $-   $-   $-   $42,738 
                                              
Ending balance:  Collectively evaluated for impairment  $456,630   $89,334   $215,329   $182,338   $100,187   $296,873   $9,001   $12,642   $1,362,334 
Loans:                                             
Ending balance  $93,659,520   $14,242,563   $27,140,014   $18,930,426   $7,293,737   $11,373,975   $415,730   $796,051   $173,852,016 
                                              
Ending balance:  Individually evaluated for impairment  $966,592   $699,630   $621,757   $151,096   $-   $48,467   $-   $-   $2,487,542 
                                              
Ending balance:  Collectively evaluated for impairment  $92,692,928   $13,542,933   $26,518,257   $18,779,330   $7,293,737   $11,325,508   $415,730   $796,051   $171,364,474 

 

 14 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

Definitions are as follows:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 15 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of March 31, 2019 and December 31, 2018:

 

   March 31, 2019 
                                     
   One- to Four-
Family Mortgage
Loans - Owner
Occupied
   One- to Four-
Family Mortgage
Loans -
Investment
   Multi-Family
Mortgage Loans
   Nonresidential
Mortgage Loans
   Construction &
Land Loans
   Real Estate
Secured Lines of
Credit
   Commercial
Loans
   Other Consumer
Loans
   Total 
                                     
Pass  $93,853,958   $14,623,131   $28,719,784   $18,041,982   $8,221,642   $10,880,664   $395,317   $832,082   $175,568,560 
Special mention   -    550,831    137,901    615,224    -    25,000    -    -    1,328,956 
Substandard   932,045    127,884    490,475    67,829    -    162,538    -    216    1,780,987 
Doubtful   -    -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    -    -    - 
                                              
Total  $94,786,003   $15,301,846   $29,348,160   $18,725,035   $8,221,642   $11,068,202   $395,317   $832,298   $178,678,503 

 

   December 31, 2018 
                                     
   One- to Four-
Family Mortgage
Loans - Owner
Occupied
   One- to Four-
Family Mortgage
Loans -
Investment
   Multi-Family
Mortgage Loans
   Nonresidential
Mortgage Loans
   Construction &
Land Loans
   Real Estate
Secured Lines of
Credit
   Commercial
Loans
   Other Consumer
Loans
   Total 
                                     
Pass  $92,776,661   $13,010,425   $26,509,203   $18,234,663   $7,293,737   $11,225,481   $415,730   $795,523   $170,261,423 
Special mention   -    1,101,684    138,723    627,934    -    26,000    -    -    1,894,341 
Substandard   882,859    130,454    492,088    67,829    -    122,494    -    528    1,696,252 
Doubtful   -    -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    -    -    - 
                                              
Total  $93,659,520   $14,242,563   $27,140,014   $18,930,426   $7,293,737   $11,373,975   $415,730   $796,051   $173,852,016 

 

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

 

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the three months ended March 31, 2019.

 

 16 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables present the loan portfolio aging analysis of the recorded investment in loans as of March 31, 2019 and December 31, 2018:

 

   March 31, 2019 (Unaudited) 
                             
   30-59 Past
Due
   60-89 Days
Past Due
   90 Days and
Greater
Past Due
   Total Past
Due
   Current   Total Loans
Receivable
   Total Loans >
 90 Days &
Accruing
 
                             
One to Four-family mortgage loans  $135,718   $-   $624,834   $760,552   $94,025,451   $94,786,003   $- 
One to Four Family - Investment   -    -    -    -    15,301,846    15,301,846    - 
Multi-family mortgage loans   -    -    -    -    29,348,160    29,348,160    - 
Nonresidential mortgage loans   -    -    67,829    67,829    18,657,206    18,725,035    - 
Construction & land loans   -    -    -    -    8,221,642    8,221,642    - 
Real estate secured lines of credit   12,689    -    -    12,689    11,055,513    11,068,202    - 
Commercial Loans   -    -    -    -    395,317    395,317    - 
Other consumer loans   -    -    216    216    832,082    832,298    - 
                                    
Total  $148,407   $-   $692,879   $841,286   $177,837,217   $178,678,503   $- 

 

   December 31, 2018 
                             
   30-59 Past
Due
   60-89 Days
Past Due
   90 Days and
Greater
Past Due
   Total Past
Due
   Current   Total Loans
Receivable
   Total Loans >
90 Days &
Accruing
 
                             
One to Four-family mortgage loans  $158,932   $86,900   $676,024   $921,856   $92,737,664   $93,659,520   $- 
One to Four Family - Investment   -    -    -    -    14,242,563    14,242,563    - 
Multi-family mortgage loans   -    -    -    -    27,140,014    27,140,014    - 
Nonresidential mortgage loans   -    -    67,829    67,829    18,862,597    18,930,426    - 
Construction & land loans   -    -    -    -    7,293,737    7,293,737    - 
Real estate secured lines of credit   9,634    -    -    9,634    11,364,341    11,373,975    - 
Commercial Loans   -    -    -    -    415,730    415,730    - 
Other consumer loans   -    -    528    528    795,523    796,051    - 
                                    
Total  $168,566   $86,900   $744,381   $999,847   $172,852,169   $173,852,016   $- 

 

 17 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

The following tables present impaired loans at March 31, 2019, March 31, 2018 and December 31, 2018:

 

   March 31, 2019 (Unaudited) 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest Income
Recognized
 
Loans without a specific valuation allowance                         
One- to four-family mortgage loans  $915,699   $915,699   $-   $917,488   $8,043 
One to Four family - Investment   311,555    311,555    -    313,561    4,713 
Multi-family mortgage loans   513,276    513,276    -    513,940    7,027 
Nonresidential mortgage loans   147,414    147,414    -    149,226    1,233 
Construction & land loans   -    -    -    -    - 
Real estate secured lines of credit   47,160    47,160    -    48,036    709 
Commercial loans   -    -    -    -    - 
Other consumer loans   -    -    -    -    - 
Loans with a specific valuation allowance                         
One- to four-family mortgage loans   -    -    -    -    - 
One to Four family - Investment   379,301    412,985    33,683    415,757    5,497 
Multi-family mortgage loans   106,045    115,100    9,055    115,632    1,878 
Nonresidential mortgage loans   -    -    -    -    - 
Construction & land loans   -    -    -    -    - 
Real estate secured lines of credit   -    -    -    -    - 
Commercial loans   -    -    -    -    - 
Other consumer loans   -    -    -    -    - 
                          
   $2,420,450   $2,463,189   $42,738   $2,473,640   $29,100 

 

   March 31, 2018 (Unaudited) 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest Income
Recognized
 
Loans without a specific valuation allowance                         
One- to four-family mortgage loans  $743,610   $743,610   $-   $745,200   $7,014 
One to Four family - Investment   559,994    559,994    -    562,777    7,300 
Multi-family mortgage loans   521,303    521,303    -    522,145    7,337 
Nonresidential mortgage loans   175,840    175,840    -    177,684    2,963 
Construction & Land loans   -    -    -    -    - 
Real estate secured lines of credit   38,619    38,619    -    39,232    497 
Commercial Loans   -    -    -    -    - 
Other consumer loans   -    -    -    -    - 
Loans with a specific valuation allowance                         
One- to four-family mortgage loans   -    -    -    -    - 
One to Four family - Investment   489,882    532,278    42,396    534,887    5,737 
Multi-family mortgage loans   109,183    118,238    9,055    118,539    1,718 
Nonresidential mortgage loans   -    -    -    -    - 
Construction & Land loans   -    -    -    -    - 
Real estate secured lines of credit   -    -    -    -    - 
Commercial Loans   -    -    -    -    - 
Other consumer loans   -    -    -    -    - 
                          
   $2,638,431   $2,689,882   $51,451   $2,700,464   $32,566 

 

 18 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

   December 31, 2018 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest Income
Recognized
 
Loans without a specific valuation allowance                         
One- to four-family mortgage loans  $966,592   $966,592   $-   $975,511   $33,914 
One to Four family - Investment   315,393    315,393    -    322,564    39,833 
Multi-family mortgage loans   514,993    514,993    -    519,339    47,559 
Nonresidential mortgage loans   151,096    151,096    -    165,871    5,996 
Construction & land loans   -    -    -    -    - 
Real estate secured lines of credit   48,467    48,467    -    50,820    3,114 
Commercial loans   -    -    -    -    - 
Other consumer loans   -    -    -    -    - 
Loans with a specific valuation allowance                         
One- to four-family mortgage loans   -    -    -    -    - 
One to Four family - Investment   384,237    417,920    33,683    427,874    22,775 
Multi-family mortgage loans   106,764    115,819    9,055    117,578    8,499 
Nonresidential mortgage loans   -    -    -    -    - 
Construction & land loans   -    -    -    -    - 
Real estate secured lines of credit   -    -    -    -    - 
Commercial loans   -    -    -    -    - 
Other consumer loans   -    -    -    -    - 
                          
   $2,487,542   $2,530,280   $42,738   $2,579,557   $161,690 

 

Income recognized on a cash basis was not materially different than interest income recognized on an accrual basis. The following table presents the nonaccrual loans at March 31, 2019 and December 31, 2018. This table excludes performing TDRs.

 

   March 31,   December 31, 
   2019   2018 
         
One- to four-family mortgage loans  $624,834   $676,024 
One to four family - Investment   -    - 
Multi-family mortgage loans   -    - 
Nonresidential mortgage loans   67,829    67,829 
Construction and land loans   -    - 
Real estate secured lines of credit   -    - 
Commercial Loans   -    - 
Other consumer loans   216    528 
           
Total  $692,879   $744,381 

 

 19 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

At March 31, 2018, the Company had no loans that were modified in TDRs and impaired.

 

At December 31, 2018, the Company had no loans that were modified in TDRs and impaired and there were no troubled debt restructurings during the year.

 

There were two newly classified TDRs during the three months ended March 31, 2019. The following tables present the new classified TDRs at March 31, 2019:

 

   March 31, 2019 
   Number of
Loans
   Pre-
Modification
Recorded
Balance
   Post-Modification
Recorded Balance
 
Mortgage loans on real estate:               
Residential 1-4 family - Owner Occupied   2   $114,018   $143,548 
Residential 1-4 family - Investment   -    -    - 
Multifamily   -    -    - 
Nonresidential mortgage loans   -    -    - 
Construction & land loans   -    -    - 
Real estate secured lines of credit   -    -    - 
Commercial Loans   -    -    - 
Consumer loans   -    -    - 
                
    2   $114,018   $143,548 

 

   March 31, 2019 
   Interest Only   Term   Combination   Total
Modification
 
Mortgage loans on real estate:                    
Residential 1-4 family - Owner Occupied  $-   $-   $102,620   $102,620 
Residential 1-4 family - Investment   -    -    -    - 
Multifamily   -    -    -    - 
Nonresidential mortgage loans   -    -    -    - 
Construction & land loans   -    -    -    - 
Real estate secured lines of credit   40,928    -    -    40,928 
Commercial Loans   -    -    -    - 
Consumer loans   -    -    -    - 
                     
   $40,928   $-   $102,620   $143,548 

 

There were no TDRs modified during the three months ended March 31, 2019 that subsequently defaulted. As of March 31, 2019, borrowers with loans designated as TDRs totaling $877,000 of residential real estate loans and $638,000 of multifamily loans, met the criteria for placement back on accrual status. This criteria is a minimum of six consecutive months of payment performance under existing or modified terms. As of March 31, 2019, the Company had no performing TDRs that did not meet the criteria for placement back on accrual status.

 

There were four foreclosed real estate properties at March 31, 2019 totaling $150,225 net of valuation allowances. There were three foreclosed real estate properties at December 31, 2018 totaling $102,100, net of valuation allowances. There were three consumer mortgage loans in process of foreclosure at March 31, 2019 with a total net loan balance of $307,000.

 

 20 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 5:Earnings Per Common Share

 

Basic earnings per common share (“EPS”) excludes dilution and is calculated by dividing net income applicable to common stock by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Unallocated common shares held by the Company’s Employee Stock Ownership Plan (“the ESOP”) are shown as a reduction in stockholders’ equity and are excluded from weighted-average common shares outstanding for both basic and diluted EPS calculations until they are committed to be released. The computations for the three month periods ended March 31 are as follows:

 

   Three Months Ended March 31, 
   2019   2018 
         
Net Income (Loss)  $(8,101)  $179,320 
Less allocation of earnings to participating securities   -    2,845 
Net income (loss) allocated to common shareholders  $(8,101)   176,475 
           
Shares outstanding for basic earnings per share:          
           
Weighted Average shares outstanding:   1,796,110    1,725,989 
Less: Average Unearned ESOP and unvested restricted stock:   49,428    53,920 
    1,746,682    1,672,069 
           
Basic earnings (loss) per common share:  $-   $0.11 
           
Effect of dilutive securities:          
Stock Options   9,205    - 
Weighted average number of shares outstanding used in the calculation of basic earnings per common share   1,755,887    1,672,069 
Diluted earnings (loss) per share:  $-   $0.11 

 

The Company had no dilutive or potentially dilutive securities outstanding at March 31, 2018.

 

NOTE 6:Regulatory Matters

 

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

 

 21 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), common equity Tier I capital (as defined) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). Management believes that, as of March 31, 2019 and December 31, 2018, the Company met all capital adequacy requirements to which it was subject at such dates.

 

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

 

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

 

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

 

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

 

   Actual   Minimum Capital
Requirement
   Minimum to Be Well
Capitalized Under Prompt
Corrective Action
Provisions
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in thousands) 
                         
As of  March 31, 2019 (Unaudited)                              
                               
Total risk-based capital                              
(to risk-weighted assets)  $23,812    16.4%  $11,638    8.0%  $14,548    10.0%
                               
Tier I capital                              
(to risk-weighted assets)   22,407    15.4%   8,729    6.0%   11,638    8.0%
                               
Common Equity Tier I capital                              
(to risk-weighted assets)   22,407    15.4%   6,547    4.5%   9,456    6.5%
                               
Tier I capital                              
(to adjusted total assets)   22,407    11.3%   7,950    4.0%   9,937    5.0%
                               
As of  December 31, 2018                              
                               
Total risk-based capital                              
(to risk-weighted assets)  $24,480    17.5%  $11,176    8.0%  $13,970    10.0%
                               
Tier I capital                              
(to risk-weighted assets)   23,075    16.5%   8,382    6.0%   11,176    8.0%
                               
Common Equity Tier I capital                              
(to risk-weighted assets)   23,075    16.5%   6,287    4.5%   9,081    6.5%
                               
Tier I capital                              
(to adjusted total assets)   23,075    11.5%   8,014    4.0%   10,017    5.0%

 

 22 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 7:Disclosure About Fair Values of Assets and Liabilities

 

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

 

Level 1Quoted prices in active markets for identical assets or liabilities.

 

Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full-term of the assets or liabilities.

 

Level 3Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities.

 

Recurring Measurements

 

The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2019 and December 31, 2018:

 

       Fair Value Measurements Using 
   Fair Value   Quoted Prices in
Active Markets
for Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
 
       (Level 1)   (Level 2)   (Level 3) 
                 
March 31, 2019                    
Mortgage-backed securities of government sponsored entities  $565,471   $-   $565,471   $- 
Mortgage servicing rights   1,306,527    -    -    1,306,527 
                     
December 31, 2018                    
Mortgage-backed securities of government sponsored entities  $630,361   $-   $630,361   $- 
Mortgage servicing rights   1,252,740    -    -    1,252,740 

 

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

 

Available-for-sale Securities

 

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

 

 23 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Mortgage Servicing Rights

 

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

 

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

 

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

 

   Three Months Ended March 31, 
   2019   2018 
   (Unaudited) 
         
Fair value as of the beginning of the period  $1,252,740   $909,821 
Recognition of mortgage servicing rights on the sale of loans   19,154    48,927 
Changes in fair value due to changes in valuation inputs    or assumptions used in the valuation model   34,633    78,474 
           
Fair value at the end of the period  $1,306,527   $1,037,222 

 

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

 

 24 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Nonrecurring Measurements

 

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at March 31, 2019 and December 31, 2018.

 

       Fair Value Measurements Using 
   Carrying  

Quoted

Prices in

Active

Markets for

Identical

Assets

  

Significant

Other

Observable

Inputs

  

Significant

Unobservable

Inputs

 
   Amount   (Level 1)   (Level 2)   (Level 3) 
                 
March 31, 2019 (Unaudited)                    
                     
Collateral-dependent impaired loans  $692,879   $-   $-   $692,879 
                     
December 31, 2018                    
                     
Collateral-dependent impaired loans  $744,381   $-   $-   $744,381 

 

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

 

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

 

 25 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Unobservable (Level 3) Inputs

 

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at March 31, 2019 and December 31, 2018:

 

   Fair Value at
March 31, 2019
   Valuation
Technique
  Unobservable Inputs  Range
(Weighted
Average)
Mortgage servicing rights  $1,306,527   Discounted
cash flow
  Discount rate
PSA prepayment speeds
  10%
107%-228%
               
Impaired loans (collateral dependent)  $692,879   Market comparable properties  Marketability discount  10%-15% (12%)

 

   Fair Value at
December 31, 2018
   Valuation
Technique
  Unobservable Inputs  Range
(Weighted
Average)
Mortgage servicing rights  $1,252,740   Discounted
cash flow
  Discount rate
PSA prepayment speeds
  10%
113%-218%
               
Impaired loans (collateral dependent)  $744,381   Market comparable properties  Marketability discount  10%-15% (12%)

 

Fair Value of Financial Instruments

 

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

 

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

 

The carrying amount approximates fair value.

 

Loans Held for Sale

 

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

 

 26 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Loans

 

The estimated fair value of loans as of March 31, 2019 follows the guidance in ASU 2016-01, which prescribes an “exit price” in estimating and disclosing the fair value of financial instruments. The fair value calculation at that date discounted estimated cash flows using rates that incorporated discounts for credit, liquidity and marketability factors. The fair value at December 31, 2018 used an “entry price.” The fair value calculation for that date discounted estimated cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same maturities. As a result, the fair value disclosures for March 31, 2019 and December 31, 2018 are not directly comparable.

 

Federal Home Loan Bank Lender Risk Account Receivable

 

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

 

Deposits

 

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

 

Federal Home Loan Bank Advances

 

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

 

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

 

Advances from Borrowers for Taxes and Insurance and Interest Payable

 

The carrying amount approximates fair value.

 

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

 

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. At March 31, 2019 and December 31, 2018, the fair value of commitments was not material.

 

 27 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following table presents estimated fair values of the Company’s financial instruments not previously presented at March 31, 2019 and December 31, 2018:

 

       Fair Value Measurements Using 
   Carrying  

Quoted

Prices in

Active

Markets for

Identical

Assets

  

Significant

Other

Observable

Inputs

  

Significant

Unobservable

Inputs

 
   Amount   (Level 1)   (Level 2)   (Level 3) 
                 
March 31, 2019                    
Financial Assets:                    
Cash and cash equivalents  $10,826,532   $10,826,532   $-   $- 
Loans held for sale   3,918,132    -    4,006,332    - 
Loans, net of allowance for loan losses   175,433,755    -    -    174,784,650 
Federal Home Loan Bank stock   2,583,100    -    2,583,100    - 
Interest receivable   582,347    -    582,347    - 
Federal Home Loan Bank lender risk   account receivable   1,615,286    -    -    1,580,143 
                     
Financial Liabilities:                    
Deposits   141,382,031    63,839,748    77,885,018    - 
Federal Home Loan Bank advances   37,780,595    -    37,849,968    - 
Advances from borrowers for taxes   and insurance   1,268,442    -    1,268,442    - 
Interest payable   70,166    -    70,166    - 
                     
December 31, 2018                    
Financial Assets:                    
Cash and cash equivalents  $11,089,189   $11,089,189   $-   $- 
Loans held for sale   1,282,000    -    1,307,890    - 
Loans, net of allowance for loan    losses   170,365,031    -    -    174,545,610 
Federal Home Loan Bank stock   2,583,100    -    2,583,100    - 
Interest receivable   569,659    -    569,659    - 
Federal Home Loan Bank lender risk   account receivable   1,703,276    -    -    1,677,187 
                     
Financial Liabilities:                    
Deposits   142,391,756    61,842,846    80,152,017    - 
Federal Home Loan Bank advances   28,580,438    -    28,460,471    - 
Advances from borrowers for taxes   and insurance   1,799,419    -    1,799,419    - 
Interest payable   53,945    -    53,945    - 

 

NOTE 8:Commitments and Credit Risk

 

Commitments to Originate Loans

 

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

 

 28 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

The dollar amount of commitments to fund fixed rate loans at March 31, 2019 and December 31, 2018 follows:

 

    March 31,     December 31,  
    2019     2018  
    (Unaudited)        
          Interest Rate           Interest Rate  
    Amount     Range     Amount     Range  
                         
Commitments to fund fixed-rate loans   $ 8,177,925       3.375% - 5.875 %   $ 2,566,950       4.625% - 6.00 %

 

 

Lines of Credit

 

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

 

Loan commitments outstanding at March 31, 2019 and December 31, 2018 were composed of the following:

 

   March 31,   December 31, 
   2019   2018 
   (Unaudited)     
         
Commitments to originate loans  $9,936,180   $2,845,450 
Forward sale commitments   12,096,057    3,848,950 
Lines of credit   14,510,189    16,119,038 

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 9:Accumulated Other Comprehensive Loss

 

The components of other comprehensive loss, net of tax, included in stockholders’ equity at March 31, 2019 and December 31, 2018 are as follows:

 

   March 31,   December 31, 
   2019   2018 
   (Unaudited)     
         
Net unrealized gain on available for sale securities  $1,321   $721 
           
Directors' Retirement Plan   (331,078)   (320,917)
           
Tax benefit   69,879    67,754 
           
Net of tax amount  $(259,878)  $(252,442)

 

NOTE 10:Equity Incentive Plan

 

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

 

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

 

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

 

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

 

The weighted-average grant-date fair value of options granted during the year 2018 was $3.64 per share. The weighted-average grant date fair value of shares granted during 2017 was $9.55.

 

There were 15,837 options granted under the 2017 Plan exercisable at March 31, 2019.

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

Total compensation cost recognized in the income statement for share-based payment arrangements during the three months ended March 31, 2019 and 2018 was $25,791 and $25,788, respectively.

 

As of March 31, 2019, there was approximately $335,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 5 years.

 

NOTE 11:Recent Accounting Pronouncements

 

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

 

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

 

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

 

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

 

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

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

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

 

In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the impact of these amendments to the Company’s financial position and results of operations and currently does not know or cannot reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from these amendments. The Allowance for Loan Losses (ALL) estimate is material to the Company and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the ALL at adoption date. The Company is anticipating a significant change in the processes and procedures to calculate the ALL, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for the other-than-temporary impairment on available-for-sale securities will be replaced with an allowance approach. The Company continues collecting and retaining historical loan and credit data. The Company is in the process of identifying data gaps. Certain CECL models are currently being evaluated. The Audit Committee is informed of ongoing CECL developments. For additional information on the allowance for loan losses, see Note 4.

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

FASB ASU 2016-02, Leases (Topic 842)

 

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

 

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

 

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

 

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

 

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

 

In January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. For public business entities, the amendments in this update include the elimination of the requirement to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, the requirement to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, the requirement to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, the requirement for separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or accompanying notes to the financial statements, and the amendments clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For private companies the new guidance becomes effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption of the amendments in this update is not permitted, except that early application by public business entities to financial statements of fiscal years or interim periods that have not yet been issued or, by all other entities, that have not yet been made available for issuance are permitted as of the beginning of the fiscal year of adoption for the following amendment: An entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The Company is currently evaluating the impact of these amendments, but does not expect them to have a material effect on the Company’s consolidated financial position or results of operations since it does not have any equity securities or a valuation allowance. However, the amendments will have an impact on certain items that are disclosed at fair value that are not currently utilizing the exit price notion when measuring fair value. Adoption of the standard did not have a significant impact on its fair value and other disclosure requirements. For additional information on fair value of assets and liabilities, see Note 7.

 

FASB ASU 2014-09, Revenue from Contracts with Customers

 

In May 2014, the FASB issued amended guidance on revenue recognition from contracts with customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Public entities should apply the amendments in ASU 2014-09 to interim reporting periods within annual reporting periods beginning after December 15, 2017 (that is, a public entity would be required to apply the new revenue standard beginning in the first interim period within the period of adoption). Nonpublic entities should apply the amendments in ASU 2014-09 for annual reporting periods beginning after December 31, 2018, and to interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company continues to assess the guidance from the FASB and the Transition Resource Group for Revenue Recognition in determining the impact of ASU 2014-09 on its accounting and disclosures. The amendments could potentially impact the accounting procedures and processes over the recognition of certain revenue sources, including, but not limited to, non-interest income. Management continues to evaluate those revenue streams that could be impacted by the amendments. The analysis includes identification of potential performance obligations and revenue principles. The adoption of ASU 2014-09 on January 1, 2019 did not have a material impact on the Company’s accounting and disclosures. For additional information, see Note 1.

 

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

 

General

 

Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended March 31, 2019 and 2018 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q and with the audited financial statements and notes thereto at and for the year ended December 31, 2018, appearing in Cincinnati Bancorp’s Form 10-K for the year ended December 31, 2018.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

·statements of our goals, intentions and expectations;

 

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

 

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

 

·estimates of our risks and future costs and benefits.

 

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

 

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

 

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

 

·our ability to integrate acquisitions may be unsuccessful, or may be more difficult, time-consuming or costly than expected;

 

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

 

·we may face competitive loss of customers;

 

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

 

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

 

·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;

 

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·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;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·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

 

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·other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

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

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in Cincinnati Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

Comparison of Financial Condition at March 31, 2019 and December 31, 2018

 

Total Assets. Total assets were $205.3 million at March 31, 2019, an increase of $7.6 million, or 3.8%, from the $197.7 million at December 31, 2018. The increase resulted primarily from an increase in loans, net of allowances, of $5.1 million, and an increase of $2.6 million in loans held for sale.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $263,000 or 2.4%, to $10.8 million at March 31, 2019 from $11.1 million at December 31, 2018. The decrease was primarily the result of increased loan growth.

 

Net Loans. Net loans increased $5.1 million, or 3.0%, to $175.4 million at March 31, 2019 from $170.4 million at December 31, 2018. During the three months ended March 31, 2019, we originated $13.3 million of loans for portfolio, $5.2 million of which were one-to-four family residential real estate loans, $5.0 million were multifamily loans, $52,000 were nonresidential loans, $1.4 million were home equity lines of credit, and $1.7 million were construction and land loans. During the three months ended March 31, 2019, we sold $8.9 million of one-to- four family residential loans, on both a servicing–retained and servicing–released basis, and $1.0 million in multifamily loans. Subject to market conditions, management intends to continue this sales activity in future periods to generate gains on sale and servicing fee income.

 

Our one-to-four owner-occupied loan portfolio increased $1.1 million or 1.2%. The nonresidential portfolio decreased $205,000 or 1.1% during the three months ended March 31, 2019. The one-to-four family investment loan portfolio increased $1.1 million, or 7.4%. The home equity lines of credit portfolio decreased $306,000 or 2.7% to $11.1 million at March 31, 2019. Construction and land loans increased $928,000 or 12.7% and the multifamily portfolio increased $2.2 million, or 8.1%. We currently sell certain fixed-rate, 15- and 30-year term one-to-four family mortgage loans. We have sold loans on both a servicing-released and servicing-retained basis to: the FHLB-Cincinnati, through its mortgage purchase program; Freddie Mac; and certain private sector third-party buyers.

 

Loans Held for Sale. Loans held for sale increased $2.6 million, or 205.6%, to $3.9 million at March 31, 2019 from $1.3 million at December 31, 2018 as a result of increased origination of loans to be sold.

 

Available-for-Sale Securities. Available-for-sale securities, which consisted entirely of U.S. government-sponsored mortgage-backed securities, decreased $65,000, or 10.3%, to $565,000 at March 31, 2019 from $630,000 at December 31, 2018. There were no securities purchases during the three months ended March 31, 2019. There were $63,000 in maturities, with the remaining difference was due to the change in market values within the portfolio during the three months ended March 31, 2019.

 

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Deposits. Deposits decreased $1.0 million, or 0.7%, to $141.4 million at March 31, 2019 from $142.4 million at December 31, 2018. Core deposits, defined as demand, NOW and savings accounts, increased $2.0 million, or 3.2%, to $63.8 million at March 31, 2019 from $61.8 million at December 31, 2018. The increase was primarily the result of marketing efforts directed at increasing retail deposit accounts. Time deposits decreased $3.0 million, or 3.7%, to $77.5 million at March 31, 2019 from $80.5 million at December 31, 2018. Certificates originated through the National CD Rateline service decreased $3.1 million to $10.0 million at March 31, 2019, and are included in the decrease in time deposits noted above. During the three months ended March 31, 2019, management continued its strategy of pursuing growth in lower cost core deposits, and intends to continue its efforts to increase core deposits.

 

Federal Home Loan Bank Advances. Federal Home Loan Bank Advances increased $9.2 million, or 32.2%, to $37.8 million at March 31, 2019. The additional advances were used to fund loan originations.

 

Stockholders’ Equity. Stockholders’ equity increased $11,000, or 0.05%, to $23.0 million at March 31, 2019. The increase was primarily due to increases in additional paid in capital from equity incentive plans, partially offset by a net loss for the period of $8,100.

 

Comparison of Operating Results for the Three Months Ended March 31, 2019 and March 31, 2018

 

General. The Company recorded a net loss of $8,100 the quarter ended March 31, 2019, compared to net income of $179,000 for the quarter ended March 31, 2018, a decrease of $188,000, or 104.5%. The decrease was primarily due to a $220,000 decrease in noninterest income and a $292,000 increase in noninterest expense, partially offset by a $243,000 increase in net interest income before the provision for loan losses.

 

Interest Income. Interest income increased $431,000, or 26.9%, to $2.0 million for the quarter ended March 31, 2019 compared to the comparable quarter in 2018. Interest income on loans increased $391,000, or 25.1%, to $1.9 million as of March 31, 2019. The average balance of loans during the three months ended March 31, 2019 increased $22.3 million to $172.9 million, compared to $150.6 million for the three months ended March 31, 2018. The increase in average loans outstanding was primarily due to the acquisition of Kentucky Federal Savings and Loan Association (“Kentucky Federal”). The average yield on loans increased 37 basis points to 4.51% for the three months ended March 31, 2019 from 4.14% for the three months ended March 31, 2018 primarily due to the increase in mortgage rates. Interest income on securities available-for-sale was unchanged at $4,000. Interest income on other investments increased $40,000 for the three months ended March 31, 2019 due to an increase in the outstanding balance of FHLB Cincinnati stock from the acquisition of Kentucky Federal. The yield on other interest-earning assets increased 155 basis points due to an increase in the dividend rate on FHLB Cincinnati stock and an increase in short term interest rates.

 

Interest Expense. Total interest expense increased $182,000, or 41.4%, to $622,000 for the quarter ended March 31, 2019 from $440,000 for the quarter ended March 31, 2018. Interest expense on deposit accounts increased $143,000, or 47.0%, to $448,000 for the quarter ended March 31, 2019 from $305,000 for the quarter ended March 31, 2018. The increase in deposit expense between comparable quarters in 2019 from 2018 was primarily due to $25.2 million increase in average interest-bearing deposit accounts, and a 21 basis point increase in average cost primarily due to the increase in deposit rates in the local market. The increase in average interest-bearing deposit accounts was primarily due to the acquisition of Kentucky Federal.

 

Interest expense on interest-bearing demand accounts was unchanged for the quarter ended March 31, 2019 compared to the quarter ended March 31, 2018. The average balances in demand interest bearing accounts increased $3.8 million during the three months ended March 31, 2019 compared to March 31, 2018. The average cost of interest-bearing demand accounts decreased 59 basis points. The decrease in costs is primarily attributable to the addition of lower cost NOW accounts from the merger with Kentucky Federal. Interest expense on certificates of deposit increased $111,000 as a result of a $10.0 million, or 14.6%, increase in the average balance of these certificates. The average cost of certificates increased 37 basis points to 1.92% primarily due to the increase in certificate of deposit rates in the local market. Savings interest expense increased $32,000 during the quarter ended March 31, 2019 compared to the quarter ended March 31, 2018 due to the offering of a higher yielding savings account to attract retail deposits.

 

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Interest expense on FHLB advances increased $38,000, or 27.9%, to $174,000 for the quarter ended March 31, 2019 from $135,000 for the quarter ended March 31, 2018. The average balance of advances decreased $1.4 million, or 4.1%, for the quarter ended March 31, 2019. The average cost of FHLB borrowings increased 55 basis points. The increase in the cost of advances resulted from increases in short term interest rates.

 

Net Interest Income. Net interest income before the provision for loan losses increased $243,000, or 21.0%, to $1.4 million for the quarter ended March 31, 2019. Average interest-earning assets increased $22.2 million primarily due to a $22.3 million increase in average outstanding loans for the quarter ended March 31, 2019. Interest on other interest earning assets increased $40,000 primarily due to an increase in average yields of 155 basis points due to the increase in the dividend rate on FHLB stock and increase in interest rates on balances held at other depository banks and fed funds sold. Average interest-bearing liabilities increased $23.8 million from the same quarter in 2018 due to the funding needed for the increase in lending. The interest rate spread increased 18 basis points to 2.84% for the quarter ended March 31, 2019 compared to 2.66% at quarter ended March 31, 2018. The net interest margin increased 18 basis points to 3.06% for the quarter ended March 31, 2019 compared to 2.88% for the quarter ended March 31, 2018.

 

Provision for Loan Losses. The provision for loan losses expense decreased $15,000 for the quarter ended March 31, 2019. The quarter ended March 31, 2019 had no loan loss provision.

 

The allowance for loan losses reflects the estimate we believe to be adequate to cover probable losses which were inherent in the loan portfolio at March 31, 2019. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.

 

Non-Interest Income. Non-interest income decreased $220,000, or 32.7%, to $453,000 for the quarter ended March 31, 2019 from $673,000 for the comparable quarter in 2018. The gain on sale of loans decreased $162,000, or 47.6%, to $178,000 for the quarter ended March 31, 2019 from $340,000 for the comparable quarter in 2018. The fair value of mortgage servicing rights and mortgage servicing fees decreased $46,000 for the quarter ended March 31, 2019. The fair value of mortgage servicing rights increased at a slower pace for the quarter ended March 31, 2019 compared to the comparable quarter in 2018 primarily due to a smaller increase in the value of mortgage servicing rights for the comparable quarters.

 

Non-Interest Expense. Non-interest expense increased $292,000, or 18.4%, to $1.9 million for the quarter ended March 31, 2019 compared to the comparable quarter in 2018. The increase in noninterest expense was primarily attributable to the acquisition of Kentucky Federal. Salary and employee benefits increased $172,000, or 21.0%, to $990,000 for the quarter ended March 31, 2019 from $818,000 for the comparable quarter in 2018 due to increased personnel expense, increased healthcare costs, and increased payroll expense. Data processing expense increased $25,000, or 16.3%, to $175,000 during the quarter ended March 31, 2019 from $150,000 for the quarter ended March 31, 2018 due to the additional data processing fees for accounts acquired in the acquisition of Kentucky Federal. Professional fees decreased $18,000, or 19.3% for the quarter ended March 31, 2019 due to reduced strategic planning and legal costs. Advertising expense increased $5,000, or 13.3%. Loan costs decreased $16,000, or 17.0% on lower loan volume compared to the comparable quarter in 2018.

 

Federal Income Taxes. Federal income taxes decreased $67,000 from the first quarter of 2019 primarily due to a $254,000 decrease in pre-tax income.

 

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

 

   For the Three Months Ended March 31, 
   2019   2018 
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
(5)
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
(5)
 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans  $172,910   $1,949    4.51%  $150,606   $1,558    4.14%
Securities   591    4    2.71    864    4    1.85 
Other (1)   10,066    80    3.18    9,834    40    1.63 
Total interest-earning assets   183,567    2,033    4.43    161,304    1,602    3.97 
Non-interest-earning assets   16,283              11,533           
Total assets  $199,850             $172,837           
                               
Interest-bearing liabilities:                              
Savings  $35,233   $38    0.43   $23,884   $6    0.10 
Interest-bearing demand   11,193    32    1.14    7,416    32    1.73 
Certificates of deposit   78,751    378    1.92    68,724    267    1.55 
Total deposits   125,177    448    1.43    100,024    305    1.22 
Borrowings   32,993    175    2.11    34,385    135    1.57 
Total interest-bearing liabilities   158,170    623    1.57    134,409    440    1.31 
Non-interest-bearing Demand   15,811              16,980           
Other non-interest-bearing liabilities   3,183              2,726           
Total non- interest-bearing liabilities   18,994              19,706           
Total equity   22,686              18,722           
Total liabilities and total equity  $199,850             $172,837           
Net interest income       $1,410             $1,162      
Net interest rate spread (2)             2.86%             2.66%
Net interest-earning assets (3)  $25,397             $26,895           
Net interest margin (4)             3.07%             2.88%
Average interest-earning assets to interest-bearing liabilities             116.06%             120.01%

 

 

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

 

Liquidity and Capital Resources. Liquidity is the ability to meet financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities proceeds from the sale of loans, and proceeds from the sale or maturities of securities. In addition, the Bank may borrow from the FHLB. At March 31, 2019, the Bank had $37.8 million outstanding in advances from the FHLB. At March 31, 2019, the Bank had collateral based capacity to borrow $53.1 million. The Bank had additional lines of credit with three commercial banks totaling $11.5 million. Additionally, the Bank has contingent funding sources with CDARS and the StoneCastle’s Federally Insured Cash Account (FICA) program.

 

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

 

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $2.8 million and $213,000 for the three months ended March 31, 2019, and March 31, 2018, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from maturing securities and pay downs on mortgage-backed securities, was $5.1 million for the three months ended March 31, 2019. Net cash used in investing activities was $2.5 million for three months ended March 31, 2018. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $7.7 million for the three months ended March 31, 2019. Net cash provided by financing activities was $4.2 million for the three months ended March 31, 2018.

 

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. We also anticipate continued participation in the National CD Rateline Program as a wholesale source of certificates of deposit, and continued use of FHLB-Cincinnati advances.

 

Cincinnati Bancorp is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividend to its stockholders and for other corporate purposes. Cincinnati Bancorp’s primary source of liquidity is dividend payments, if any, received from the Bank. The Bank’s ability to pay dividends is subject to regulatory restrictions. At March 31, 2019, Cincinnati Bancorp (on an unconsolidated, stand-alone basis) had liquid assets of $659,000.

 

At March 31, 2019, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $22.4 million, or 11.3% of adjusted total assets, which is above the well-capitalized required level of $9.9 million, or 5.0%; total risk-based capital of $23.8 million, or 16.4% of risk-weighted assets, which is above the well-capitalized required level of $14.5 million, or 10.0% of risk-weighted assets; and common equity tier 1 risk based capital of $22.4 million, or 15.4%, of risk weighted assets, which is above the well-capitalized required level of $9.5 million, or 6.5%. At December 31, 2018, the Bank exceeded all of its 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%; and 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% of risk-weighted assets. Accordingly, Cincinnati Federal was categorized as well capitalized at March 31, 2019, and December 31, 2018. Management is not aware of any conditions or events since the most recent notification that would change its category.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

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

 

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Item 4.Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2019. Based on that evaluation, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

 

During the quarter ended March 31, 2019, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1.Legal Proceedings

 

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

 

Item 1A.Risk Factors

 

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

 

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

 

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

 

(b)Not applicable.

 

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

 

Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

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Item 6.Exhibits

 

3.1 Cincinnati Bancorp Stock Holding Company Charter (1)
   
3.2 Cincinnati Bancorp Amended and Restated Bylaws (2)
   
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101 The following financial information from Cincinnati Bancorp Quarterly Report on Form 10-Q, for the quarter ended March 31, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the consolidated balance sheets; (ii) the consolidated statements of operations; (iii) the consolidated statements of comprehensive income; (iv) the consolidated statements of cash flows; and (v) notes to consolidated financial statements.

 

(1) Incorporated by reference to the Company’s Registration Statement on Form S-1, as initially filed on March 11, 2015, as subsequently amended.

 

(2) Incorporated by reference to the Exhibit 3.2 to the Current Report on Form 8-K, filed October 18, 2018.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    CINCINNATI BANCORP
     
Date:  May 14, 2019   /s/ Joseph V. Bunke
    Joseph V. Bunke
    President
    (Principal Executive Officer)
     
Date:  May 14, 2019   /s/ Herbert C. Brinkman
    Herbert C. Brinkman
    Senior Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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