Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes
x
No
¨
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
x
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company.
See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule #12b-2 of the Exchange Act.
If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the
registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes
¨
No
x
The aggregate market value of the registrant’s
shares held by nonaffiliates as of June 30, 2018 was $7,729,737, based on the closing sales price of $12.85 per share reported
by the OTC Markets Group, Inc. on June 30, 2018. For this purpose, shares held by nonaffiliates are all outstanding shares except
those held by CF Mutual Holding Company, by the directors and executive officers of the registrant and by the Cincinnati Federal
Employee Stock Ownership Plan.
The number of outstanding shares of the registrant’s
common stock as of March 19, 2019 was 1,816,329, of which 1,008,969 shares were owned by CF Mutual Holding Company.
Portions of the Proxy Statement for the 2019 Annual Meeting of Stockholders
are incorporated by reference in Part III of this Annual Report on Form 10-K.
This Annual Report contains forward-looking
statements, which can be identified by the use of words such as “estimate,” “project,” “believe,”
“intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar
meaning. These forward-looking statements include, but are not limited to:
These forward-looking statements are based on
our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties
and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions
with respect to future business strategies and decisions that are subject to change. Except as may be required by applicable law
and regulation, we are under no duty to and do not take any obligation to update any forward-looking statements after the date
of this annual report.
The following factors, among others, could cause
actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
Because of these and other uncertainties, our
actual future results may be materially different from the results indicated by these forward-looking statements.
PART I
General
Cincinnati Bancorp (the “Company”)
is a federally-chartered corporation that was incorporated in October 2015 to be the mid-tier stock holding company for Cincinnati
Federal in connection with the mutual holding company reorganization of Cincinnati Federal.
The
reorganization was completed on October 14, 2015. Net proceeds from the offering were approximately $6.3 million.
CF Mutual
Holding Company is a federally chartered mutual holding company formed in October 2015 to become the mutual holding company of
Cincinnati Bancorp in connection with the mutual holding company reorganization of Cincinnati Federal. As a mutual holding company,
CF Mutual Holding Company is required by law to own a majority of the voting stock of Cincinnati Bancorp. CF Mutual Holding Company
is not currently, and at no time has been, an operating company.
The executive offices of Cincinnati Bancorp
are located at 6581 Harrison Avenue, Cincinnati, Ohio 45247, and the telephone number is (513) 574-3025. Our website address is
www.cincinnatifederal.com. Information on our website should not be considered a part of this annual report.
Cincinnati Bancorp is subject to comprehensive
regulation and examination by the Board of Governors of the Federal Reserve System. At December 31, 2018, we had total assets of $197.7
million, total deposits of $142.4 million and total equity of $23.0 million. We recorded net income of $2.3 million for
the year ended December 31, 2018.
Cincinnati Federal is a federal savings bank
headquartered in Cincinnati, Ohio. Over the years, we have grown internally and we have also acquired a total of five mutual savings
institutions, with our most recent acquisition occurring in 2018 with the acquisition of Kentucky Federal Savings and Loan Association
effective October 12, 2018.
Our business consists primarily of taking deposits
from the general public and investing those deposits, together with borrowings and funds generated from operations, in one- to
four-family residential real estate loans, and, to a lesser extent, nonresidential real estate and multi-family loans, home equity
loans and lines of credit, and construction and land loans. We also invest in securities, which consist primarily of mortgage-backed
securities issued by U.S. government sponsored entities and Federal Home Loan Bank stock. We offer a variety of deposit accounts,
including checking accounts, savings accounts and certificate of deposit accounts. We utilize advances from the Federal Home Loan
Bank of Cincinnati (the “FHLB-Cincinnati”) for asset/liability management purposes and for additional funding for our
operations.
Cincinnati Federal also operates an active mortgage
banking unit with nine mortgage loan officers, which originates loans both for sale into the secondary market and for retention
in our portfolio. The revenue from gain on sales of loans was $1.7 million for the fiscal year ended December 31, 2018.
Cincinnati Federal is subject to comprehensive
regulation and examination by its primary federal regulator, the Office of the Comptroller of the Currency.
Market Area
We conduct our operations from our main office
and three branch offices in Cincinnati, Ohio (Cincinnati) and two branch offices in Northern Kentucky. Hamilton County, Ohio represents
our primary geographic market area for loans and deposits. Our business operations are conducted in the larger Greater Cincinnati/Northern
Kentucky metropolitan area which includes Warren, Butler and Clermont Counties in Ohio, Boone, Kenton and Campbell Counties in
Kentucky, and Dearborn County, Indiana. We will, on occasion, make loans secured by properties located outside of our primary market.
The local economy is diversified with services, trade and manufacturing employment being the most prominent employment sectors
in Hamilton County. The employment base is diversified and there is no dependence on one area of the economy for continued employment.
Major employers in the market include The Kroger Co., Catholic Healthcare Partners, The Procter & Gamble Company, the Greater
Cincinnati/Northern Kentucky International Airport, Cincinnati Children’s Hospital, St. Elizabeth Healthcare, city and county
governments, the University of Cincinnati and Northern Kentucky University. Our future growth opportunities will be influenced
by the growth and stability of the regional, state and national economies, other demographic trends and the competitive environment.
Hamilton County and Cincinnati have generally experienced a declining population since the 2000 census while the other counties
in which we conduct business experienced population growth. The population decline in both Hamilton County and the City of Cincinnati
results from other counties and northern Kentucky being more successful in attracting new and existing businesses to locate within
their areas through economic incentives, including less expensive real estate options for office facilities. Individuals are moving
to these other areas to be closer to their place of employment, for newer, less expensive housing and more suburban neighborhoods.
Competition
We face intense competition within our market
area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large
money center and regional banks, community banks and credit unions. We also face competition from commercial banks, savings institutions,
mortgage banking firms, consumer and finance companies and, with respect to deposits, from money market funds, brokerage firms,
mutual funds and insurance companies. As of June 30, 2018, based on the most recent available FDIC data, our market share of deposits
represented 0.13% of FDIC-insured deposits in Hamilton County, ranking us 15th in deposit market share. This data does not include
deposits held by credit unions.
Lending Activities
General.
Our principal lending activity is originating one- to four-family residential real estate loans and, to a lesser
extent, nonresidential real estate and multi-family loans, home equity loans and lines of credit, and construction and land loans.
To a much lesser extent, we also originate commercial business loans and consumer loans. Subject to market conditions and our asset-liability
analysis, we expect to increase our focus on nonresidential real estate and multi-family loans in an effort to diversify our overall
loan portfolio and increase the overall yield earned on our loans. We also originate for sale and sell the majority of the fixed-rate
one- to four-family residential real estate loans that we originate with terms of greater than 10 years, on both a servicing-retained
and servicing-released, limited or no recourse basis, while retaining shorter-term fixed-rate and generally all adjustable-rate
one- to four-family residential real estate loans in order to manage the duration and time to repricing of our loan portfolio.
Loans are sold primarily to FHLB-Cincinnati, Freddie Mac or to private sector third party buyers.
Loan Portfolio Composition.
The
following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
93,659
|
|
|
|
53.87
|
%
|
|
$
|
77,533
|
|
|
|
51.82
|
%
|
Non-owner occupied
|
|
|
14,243
|
|
|
|
8.19
|
|
|
|
11,355
|
|
|
|
7.59
|
|
Nonresidential
|
|
|
18,930
|
|
|
|
10.89
|
|
|
|
18,139
|
|
|
|
12.12
|
|
Multi-family
|
|
|
27,140
|
|
|
|
15.61
|
|
|
|
23,895
|
|
|
|
15.97
|
|
Home equity lines of credit
|
|
|
11,374
|
|
|
|
6.54
|
|
|
|
11,714
|
|
|
|
7.83
|
|
Construction and land
|
|
|
7,294
|
|
|
|
4.20
|
|
|
|
6,137
|
|
|
|
4.13
|
|
Total real estate
|
|
|
172,640
|
|
|
|
99.30
|
|
|
|
148,809
|
|
|
|
99.46
|
|
Commercial loans
|
|
|
416
|
|
|
|
0.24
|
|
|
|
335
|
|
|
|
0.22
|
|
Consumer loans
|
|
|
796
|
|
|
|
0.46
|
|
|
|
471
|
|
|
|
0.32
|
|
Total loans
|
|
|
173,852
|
|
|
|
100.00
|
%
|
|
|
149,615
|
|
|
|
100.00
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees
|
|
|
(491
|
)
|
|
|
|
|
|
|
(480
|
)
|
|
|
|
|
Allowance for losses
|
|
|
1,405
|
|
|
|
|
|
|
|
1,360
|
|
|
|
|
|
Undisbursed loan proceeds
|
|
|
2,573
|
|
|
|
|
|
|
|
1,715
|
|
|
|
|
|
Total loans, net
|
|
$
|
170,365
|
|
|
|
|
|
|
$
|
147,020
|
|
|
|
|
|
|
(1)
|
Includes $1.6 million and $1.8 million of home equity loans
at December 31, 2018 and December 31, 2017, respectively.
|
Contractual Maturities.
The following
tables set forth the contractual maturities of our total loan portfolio at December 31, 2018. Demand loans, which are loans having
no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents
contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.
December 31, 2018
|
|
One- to Four-
Family
Residential Real
Estate
|
|
|
Nonresidential
Real Estate
|
|
|
Multi-Family
Real Estate
|
|
|
Construction
and Land
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
835
|
|
|
$
|
62
|
|
|
$
|
215
|
|
|
$
|
-
|
|
2020
|
|
|
231
|
|
|
|
447
|
|
|
|
139
|
|
|
|
-
|
|
2021
|
|
|
533
|
|
|
|
80
|
|
|
|
-
|
|
|
|
1,090
|
|
2022-2023
|
|
|
2,985
|
|
|
|
271
|
|
|
|
115
|
|
|
|
249
|
|
2024-2028
|
|
|
6,818
|
|
|
|
1,418
|
|
|
|
1,609
|
|
|
|
-
|
|
2029-2033
|
|
|
9,177
|
|
|
|
4.790
|
|
|
|
2,230
|
|
|
|
261
|
|
2034 and beyond
|
|
|
87,323
|
|
|
|
11,862
|
|
|
|
22,832
|
|
|
|
5,694
|
|
Total
|
|
$
|
107,902
|
|
|
$
|
18,930
|
|
|
$
|
27,140
|
|
|
$
|
7,294
|
|
December 31, 2018
|
|
Home Equity
Lines of Credit
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
1,957
|
|
|
$
|
-
|
|
|
$
|
670
|
|
|
$
|
3,739
|
|
2020
|
|
|
527
|
|
|
|
24
|
|
|
|
2
|
|
|
|
1,370
|
|
2021
|
|
|
240
|
|
|
|
-
|
|
|
|
7
|
|
|
|
1,950
|
|
2022-2023
|
|
|
572
|
|
|
|
78
|
|
|
|
15
|
|
|
|
4,285
|
|
2024-2028
|
|
|
6,604
|
|
|
|
277
|
|
|
|
90
|
|
|
|
16,816
|
|
2029-2033
|
|
|
1,474
|
|
|
|
37
|
|
|
|
-
|
|
|
|
17,969
|
|
2034 and beyond
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
127,723
|
|
Total
|
|
$
|
11,374
|
|
|
$
|
416
|
|
|
$
|
796
|
|
|
$
|
173,852
|
|
Fixed- and Adjustable-Rate Loan Schedule.
The following table sets forth our fixed- and adjustable-rate loans at December 31, 2018 that are contractually due after December
31, 2019.
|
|
Due After December 31, 2019
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
22,449
|
|
|
$
|
84,618
|
|
|
$
|
107,067
|
|
Nonresidential
|
|
|
1,511
|
|
|
|
17,357
|
|
|
|
18,868
|
|
Multi-family
|
|
|
2,132
|
|
|
|
24,793
|
|
|
|
26,925
|
|
Home equity lines of credit
|
|
|
-
|
|
|
|
9,417
|
|
|
|
9,417
|
|
Construction and land
|
|
|
249
|
|
|
|
7,045
|
|
|
|
7,294
|
|
Total real estate
|
|
|
26,341
|
|
|
|
143,230
|
|
|
|
169,571
|
|
Commercial loans
|
|
|
416
|
|
|
|
-
|
|
|
|
416
|
|
Consumer loans
|
|
|
5
|
|
|
|
121
|
|
|
|
126
|
|
Total loans
|
|
$
|
26,762
|
|
|
$
|
143,351
|
|
|
$
|
170,113
|
|
Loan Approval Procedures and Authority
.
Pursuant to federal law, the aggregate amount of loans that Cincinnati Federal is permitted to make to any one borrower or a group
of related borrowers is generally limited to 15% of Cincinnati Federal’s unimpaired capital and surplus (25% if the amount
in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At
December 31, 2018, based on the 15% limitation, Cincinnati Federal’s loans-to-one-borrower limit was approximately $3.7 million.
On the same date, Cincinnati Federal had no borrowers with outstanding balances in excess of this amount. At December 31, 2018,
our largest loan relationship with one borrower was for approximately $2.0 million, secured by a nonresidential property, and was
performing in accordance with its original terms on that date.
Our lending is subject to written underwriting
standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by
the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared
by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted
by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan,
and the more significant items on the application are verified through use of credit reports, bank statements and tax returns.
We generally follow underwriting procedures that are consistent with Freddie Mac underwriting guidelines.
Under our loan policy, the loan underwriter
of an application is responsible for ensuring proposals and approval of any extensions of credit are in compliance with internal
policies and procedures and applicable laws and regulations, and for establishing and maintaining credit files and documentation
sufficient to support the loan and to perfect any collateral position. Loans originated for sale may be approved by any loan underwriter,
if the loan conforms to the underwriting guidelines established by the investor to whom the loan will be sold.
Loans to be held in our portfolio may not be
approved solely by an underwriter, and generally require review and approval by our Chief Lending Officer, members of the loan
committee or the board of directors. All loan approval amounts are based on the aggregate loans, including total balances of outstanding
loans and the proposed loan to the individual borrower and any related entity. For one- to four-family owner-occupied real estate
loans, our Chief Lending Officer, any two members of the loan committee or any one loan committee member and one underwriter are
authorized to approve loans up to $424,100 in the aggregate.
For one- to four-family owner-occupied real
estate, non-owner occupied one- to four-family owner-occupied real estate, commercial real estate, undeveloped lots or employee
loans, any three members of the loan committee are authorized to approve up to $750,000 in the aggregate. The entire loan committee
may approve loans up to $1,000,000 in the aggregate. For aggregate loans in excess of $1,000,000, approval of the board of directors
is required.
For all other loans, our Chief Lending Officer
or any two members of the loan committee are authorized to approve aggregate loans up to $50,000, with three loan committee members
able to approve aggregate loans up to $250,000. As above, the approval of the full loan committee is required for loans up to $1,000,000
and approval of the board of directors is required for loans in excess of $1,000,000.
Generally, we require title insurance or abstracts
on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount
of the loan or the value of improvements on the property, depending on the type of loan.
One- to Four-Family Residential Real Estate
Lending
.
The focus of our lending program has historically been the origination of one- to four-family residential real
estate loans. At December 31, 2018, we had $107.9 million of loans secured by one- to four-family real estate, representing 62.1%
of our total loan portfolio. We originate both fixed- and adjustable-rate residential mortgage loans. At December 31, 2018, the
one- to four-family residential mortgage loans held in our portfolio due after December 31, 2019 were comprised of 20.97% fixed-rate
loans, and 79.03% adjustable-rate loans.
Prior to 2010, we engaged in significant non-owner
occupied one- to four-family real estate lending. Many of these loans were made to investors who owned a number of rental properties,
and which did not provide sufficient rental cash flows to service the repayment of the loans. There is a greater credit risk inherent
in non-owner occupied properties, than in owner occupied properties since, like nonresidential real estate and multi-family loans,
the repayment of these loans may depend, in part, on the successful management of the property and/or the borrower’s ability
to lease the property. A downturn in the real estate market or the local economy could adversely affect the value of properties
securing these loans or the revenues derived from these properties which could affect the borrower’s ability to repay the
loan. Beginning with the economic downturn that began in 2008, we experienced higher levels of delinquencies and charge-offs in
our non-owner occupied residential loan portfolio. Our management took steps to reduce our delinquent and non-performing assets
in this portfolio, and to reduce this type of lending. See “—Delinquencies and Non-Performing Assets” below.
At December 31, 2018, we had $14.2 million of non-owner occupied residential loans.
We currently originate a small number of non-owner
occupied residential loans. Non-owner occupied loans as a percentage of total loans have increased to 8.2% at December 31, 2018
from 7.6% at December 31, 2017. We impose strict underwriting guidelines in the origination of such loans, including a maximum
number of loans to the same borrower, local residency, and no prior bankruptcies and/or foreclosures. Properties securing non-owner
occupied loans must be within 50 miles of a Cincinnati Federal branch office. We also generally limit loans on non-owner occupied
properties to borrowers with no more than ten total rental properties as a way to mitigate the risks involved in lending to professional
property investors.
Our one- to four-family residential real estate
loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such
guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts
up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae. We also originate
loans above the lending limit for conforming loans, which are referred to as “jumbo loans.” We also offer FHA, VA and
Rural Housing Development loans, all of which we originate for sale on a servicing-released, non-recourse basis in accordance with
FHA, VA and USDA guidelines. We use an underwriter with expertise in FHA/VA lending. With the exception of three residential loans
totaling $1.0 million at December 31, 2018, all of our one- to four-family residential real estate loans at that date are secured
by properties located in our market area.
We generally limit the loan-to-value ratios
of our owner-occupied one- to four-family residential mortgage loans to 85% of the purchase price or appraised value, whichever
is lower. In addition, we may make one- to four-family residential mortgage loans with loan-to-value ratios up to 95% of the purchase
price or appraised value, whichever is less, if the borrower obtains private mortgage insurance. Non-owner occupied one- to four-family
residential mortgage loans are limited to an 80% loan-to-value ratio.
Our one- to four-family residential real estate
loans typically have terms of up to 30 years, with non-owner occupied loans limited to a maximum term of 25 years. Our adjustable-rate
one- to four-family residential real estate loans generally have fixed rates for initial terms of three, five or seven years, and
adjust annually thereafter at a margin. In recent years, this margin has been between 2.75% and 3.25% over the weekly average yield
on U.S. treasury securities adjusted to a constant maturity of one year. The maximum amount by which the interest rate may be increased
or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest
rate of the loan.
Although adjustable-rate mortgage loans may
reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates
increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default
by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral
may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the
maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on most of our adjustable-rate
loans do not adjust for up to seven years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in
compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.
We also originate home equity lines of credit
and fixed-term home equity loans. See “—Home Equity Loans and Lines of Credit.”
We do not offer “interest only”
mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial
period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization
of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting
in an increased principal balance during the life of the loan. We do not offer “subprime loans” on one- to four-family
residential real estate loans (
i.e.
, generally loans with credit scores less than 660), except for loans originated for
sale in the secondary market.
We currently offer a special residential mortgage
program with preferred loan terms to new and existing medical physicians. This program includes (i) preferred treatment of new
physician income with regard to positions offered or recently begun and (ii) mortgage loans with a loan-to-value ratio up to 95%
to 100% without the need to obtain mortgage insurance for loans up to $600,000. Doctors licensed for at least one year or self-employed
for at least two years may receive mortgage loans with loan-to-value ratios up to 90% to 100% without the need to obtain mortgage
insurance for loans up to $700,000 and 85% for loans greater than $700,000. The portfolio of loans originated under this program
was $6.7 million as of December 31, 2018.
Nonresidential Real Estate and Multi-Family
Lending
.
In recent years, we have increased our nonresidential real estate and multi-family loans. Our nonresidential real
estate loans are secured primarily by office buildings, retail and mixed-use properties, and light industrial properties located
in our primary market area. Our multi-family loans are secured primarily by apartment buildings. At December 31, 2018, we had $18.9
million in nonresidential real estate loans and $27.1 million in multi-family real estate loans, representing 10.9% and 15.6% of
our total loan portfolio, respectively.
Most of our nonresidential and multi-family
real estate loans have a maximum term of up to 25 years. The interest rates on nonresidential real estate and multi-family loans
are generally fixed for an initial period of three, five or seven years and adjust annually thereafter based on the One Year Treasury
Rate. The maximum loan-to-value ratio of our nonresidential real estate loans is generally 75% while multi-family real estate loans
have a maximum loan-to-value ratio of 80%. All loan-to-value ratios are subject to our underwriting procedures and guidelines.
At December 31, 2018, our largest nonresidential real estate loan totaled $2.0 million and was secured by retail property. At that
date, our largest multi-family real estate loan totaled $2.0 million and was secured by an apartment building. At December 31,
2018, both of these loans were performing in accordance with their original terms. Set forth below is information regarding our
nonresidential real estate loans at December 31, 2018.
Type of Collateral
|
|
Number of Loans
|
|
|
Balance
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
General commercial
|
|
|
19
|
|
|
$
|
5,394
|
|
Industrial/warehouse
|
|
|
9
|
|
|
|
3,761
|
|
Retail/wholesale
|
|
|
17
|
|
|
|
6,330
|
|
Mobile home park
|
|
|
2
|
|
|
|
319
|
|
Service/professional
|
|
|
13
|
|
|
|
3,126
|
|
Total
|
|
|
60
|
|
|
$
|
18,930
|
|
We consider a number of factors in originating
nonresidential and multi-family real estate loans. We evaluate the qualifications and financial condition of the borrower, including
credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating
the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning
or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the
property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service
and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio
(the ratio of net operating income to debt service). All nonresidential real estate and multi-family loans are appraised by outside
independent appraisers approved by the board of directors. Personal guarantees are generally obtained from the principals of nonresidential
and multi-family real estate borrowers.
Loans secured by nonresidential and multi-family
real estate generally are larger than one- to four-family residential loans and involve greater credit risk. Nonresidential real
estate loans often involve large loan balances to single borrowers or groups of related borrowers. This greater risk is due to
several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic
conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Repayment
of nonresidential real estate loans depends to a large degree on the results of operations and management of the properties securing
the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real
estate market or the economy in general, including today’s economic recession. Furthermore, the repayment of loans secured
by multi-family residential real estate is typically dependent upon the successful operation of the related real estate project.
If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower’s ability
to repay the loan may be impaired. Accordingly, the nature of these loans makes them more difficult for management to monitor and
evaluate. At December 31, 2018, we had one non-performing nonresidential real estate loan for $68,000. There were no non-performing
multi-family loans.
Construction Lending and Land Loans
.
We make construction loans to individuals for the construction of their primary residences and, to a limited extent, loans to builders
and commercial borrowers. We also make a limited amount of land loans to complement our construction lending activities, as such
loans are generally secured by lots that will be used for residential development. Land loans also include loans secured by land
purchased for investment purposes. At December 31, 2018, our construction loans, including land loans, totaled $7.3 million, representing
4.2% of our total loan portfolio.
Loans to individuals for the construction of
their residences are typically originated as construction/permanent loans, with a construction phase for up to 18 months. Upon
completion of the construction phase, the loan automatically becomes a permanent loan. These construction loans have rates and
terms comparable to one- to four-family residential loans offered by us. During the construction phase, the borrower pays interest
only. The maximum loan-to-value ratio of owner-occupied single-family construction loans is generally 80%, or higher if mortgage
insurance is obtained. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating
permanent residential loans. Land loans are generally offered for terms of up to 5 years. The maximum loan-to-value ratio of land
loans is 65% for developed lots and 50% for undeveloped land loans.
At December 31, 2018, our largest outstanding
residential construction loan was for $396,000 of which $314,000 was outstanding. This loan was performing according to its original
terms at December 31, 2018. At December 31, 2018, there were no residential construction loans that were 60 days or more delinquent.
Loans to builders for the construction of pre-sold
and market (not pre-sold) homes typically run for up to 24 months. These construction loans have rates and terms comparable to
one- to four-family residential loans offered by us. The maximum loan-to-value ratio of pre-sold builder construction loans is
generally 80%, and this ratio is reduced to 65% on market homes. Construction loans to builders require that financial statements
and tax returns be supplied and reviewed annually. Additionally, we limit construction loans to builders to no more than two loans
on market homes in one development at a time or more than one loan per builder at a time.
Loans for the construction of nonresidential
or multi-family properties typically run for up to 18 months. These construction loans have rates and terms comparable to nonresidential
real estate loans offered by us. The maximum loan-to-value ratio of nonresidential or multi-family construction loans is generally
75%. Nonresidential real estate construction loans also have a 50% pre-leasing requirement. No such requirement is placed on multi-family
construction loans.
At December 31, 2018, our largest outstanding
nonresidential or multi-family construction loan was $2.0 million on a veterinary center. This loan was performing in accordance
with its original terms at December 31, 2018.
The application process for a construction loan
includes a submission to Cincinnati Federal of accurate plans, specifications and costs of the project to be constructed or developed.
These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current
appraised value and/or the cost of construction (land plus building). Our construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. Outside independent licensed appraisers inspect the progress of
the construction of the dwelling before disbursements are made.
Construction and land lending generally are
made for relatively short terms. However, to the extent our construction loans are not made to owner-occupants of single-family
homes, they are more vulnerable to changes in economic conditions and the concentration of credit with a limited number of borrowers.
Further, the nature of these loans is such that they are more difficult to evaluate and monitor. Our risk of loss on a construction
or land loan is dependent largely upon the accuracy of the initial estimate of the property’s value upon completion of the
project and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, we may be
confronted, at or prior to the maturity of the loan, with a project with a value which is insufficient to assure full repayment
and/or the possibility of having to make substantial investments to complete and sell the project. Because defaults in repayment
may not occur during the construction period, it may be difficult to identify problem loans at an early stage.
Home Equity Loans and Lines of Credit.
We offer home equity loans and lines of credit, which are generally made for owner-occupied homes, and are secured by first or
second mortgages on residences. We generally offer these loans with a maximum loan-to-value ratio (including senior liens on the
collateral property) of 90% if the first mortgage is originated by Cincinnati Federal and 85% if the first mortgage is not originated
by Cincinnati Federal. We currently offer home equity lines of credit for a period of ten years, and generally at rates tied to
the prevailing prime interest rate. We also offer home equity lines of credit on non-owner occupied properties, where the first
mortgage is also originated by us, with a maximum loan-to-value ratio of 50% for a maximum term of two years. Our home equity loans
and lines of credit are generally underwritten in the same manner as our one- to four-family residential loans. At December 31,
2018, we had $11.4 million of home equity lines of credit and $1.6 million of fixed-term home equity loans, representing 6.5 %
and 0.9% of our total loan portfolio, respectively. At December 31, 2018, we had one home equity line of credit that was 30 days
or more delinquent totaling $10,000.
Home equity lines of credit and fixed-term home
equity loans have greater risk than one- to four-family residential real estate loans secured by first mortgages. Our interest
is generally subordinated to the interest of the institution holding the first mortgage. Even where we hold the first mortgage,
we face the risk that the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and
costs of foreclosure and we may be unsuccessful in recovering the remaining balance from those customers.
Commercial Business Loans.
We
have generally conducted very limited commercial business lending. The board of directors has authorized management to purchase
up to $500,000 in commercial business loans from an unaffiliated commercial lender specializing in loans to physicians and other
professionals in the medical field. These are installment loans amortizing over seven years and carry higher interest rates than
traditional residential loans. These loans may be secured by liens on non-real estate business assets. These loans are often used
for working capital, debt consolidation, equipment and other general business purposes. The loans to be purchased must be reviewed
and found to be consistent with our loan policy and underwriting guidelines. As of December 31, 2018, we had acquired such loans
in the aggregate amount of $416,000 or 0.2% of the loan portfolio. At December 31, 2018, the loans were performing in accordance
with their original terms.
Consumer Lending
.
To date, our
consumer lending apart from home equity loans and lines of credit has been limited. At December 31, 2018, we had $796,000 of consumer
loans outstanding, representing approximately 0.5% of our total loan portfolio. Of these loans, $681,000 was secured by investment
securities.
Originations, Purchases and Sales of Loans
Lending activities are conducted primarily by
our salaried loan personnel operating at our main and branch office locations and by our loan officers. All loans originated by
us are underwritten pursuant to our policies and procedures. We originate both fixed- and adjustable-rate loans. Our ability to
originate fixed- or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected by current
and expected future levels of market interest rates. We originate real estate and other loans through our loan officers, marketing
efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.
Consistent with our interest rate risk strategy,
we originate for sale and sell the majority of the fixed-rate, one- to four-family residential real estate loans that we originate
with terms of greater than 10 years, on a combination of servicing-retained and servicing-released, limited or no recourse basis,
while generally retaining shorter-term fixed-rate and all adjustable-rate one- to four-family residential real estate loans in
order to manage the duration and time to repricing of our loan portfolio. Additionally, we consider the current interest
rate environment in making decisions as to whether to hold the mortgage loans we originate for investment or to sell such loans
to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. At December
31, 2018, we had $1.3 million in loans held for sale.
From time to time, we may purchase or sell participation
interests in loans. We underwrite our participation portion of the loan according to our own underwriting criteria and procedures.
At December 31, 2018 and December 31, 2017, we had $2.7 million and $2.8 million in loan participation interests that we purchased.
At those dates, we had $2.6 million and $1.9 million in loan participation interests sold.
Historically, we generally do not purchase whole
loans or loan participations from third parties to supplement our loan production. However, we have purchased loans from a commercial
lender specializing in loans to physicians and other professional in the medical field. We may purchase additional loans from that
lender in the future. See “—Commercial Business Loans.”
We generally sell our loans without recourse,
except for customary representations and warranties provided in sales transactions. Loan servicing includes collecting and remitting
loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions
in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering
the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing
activities. For the years ended December 31, 2018 and 2017, we sold $54.4 million and $58.1 million, respectively, of mortgage
loans. Some of the mortgage loans were sold on a servicing-released basis, and we retained servicing on certain of these loans.
At December 31, 2018, we serviced $97.5 million of fixed-rate, one- to four-family residential real estate loans that we originated
and sold in the secondary market.
The following table sets forth our loan origination,
purchase, sale and principal repayment activity during the periods indicated.
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Total loans at beginning of period
|
|
$
|
149,615
|
|
|
$
|
133,488
|
|
|
|
|
|
|
|
|
|
|
Loans originated:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
71,331
|
|
|
|
78,524
|
|
Non-owner occupied
|
|
|
1,805
|
|
|
|
1,527
|
|
Nonresidential
|
|
|
5,556
|
|
|
|
5,670
|
|
Multi-family
|
|
|
9,193
|
|
|
|
6,646
|
|
Home equity lines of credit
|
|
|
4,997
|
|
|
|
4,325
|
|
Construction and land
|
|
|
4,710
|
|
|
|
4,380
|
|
Total real estate
|
|
|
97,592
|
|
|
|
101,072
|
|
Commercial loans
|
|
|
153
|
|
|
|
133
|
|
Consumer loans
|
|
|
111
|
|
|
|
600
|
|
Total loans
|
|
|
97,856
|
|
|
|
101,805
|
|
|
|
|
|
|
|
|
|
|
Loans purchased:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
10,177
|
|
|
|
—
|
|
Non-owner occupied
|
|
|
4,319
|
|
|
|
—
|
|
Nonresidential
|
|
|
17
|
|
|
|
478
|
|
Multi-family
|
|
|
1,309
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
589
|
|
|
|
1,500
|
|
Total real estate
|
|
|
16,411
|
|
|
|
1,978
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
225
|
|
|
|
—
|
|
Total loans
|
|
|
16,636
|
|
|
|
1,978
|
|
|
|
|
|
|
|
|
|
|
Loans sold:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
51,935
|
|
|
|
57,362
|
|
Non-owner occupied
|
|
|
897
|
|
|
|
724
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
1,598
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
54,430
|
|
|
|
58,086
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
Total loans
|
|
|
54,430
|
|
|
|
58,086
|
|
|
|
|
|
|
|
|
|
|
Principal repayments and other
|
|
|
35,825
|
|
|
|
29,570
|
|
|
|
|
|
|
|
|
|
|
Net loan activity
|
|
|
24,237
|
|
|
|
16,127
|
|
Total loans at end of period
|
|
$
|
173,852
|
|
|
$
|
149,615
|
|
Delinquencies and Non-Performing Assets
Delinquency Procedures.
When a
loan payment becomes 20 days past due, we contact the customer by mailing a late notice. If a loan payment becomes 30 days past
due, we mail a “right to cure” letter to the borrower and any co-makers and endorsers. If a loan payment becomes 90
days past due (or a borrower misses three consecutive payments, whichever occurs first), we send a demand letter and generally
cease accruing interest. It is our policy to institute legal procedures for collection or foreclosure when a loan becomes 120 days
past due, unless management determines that it is in the best interest of Cincinnati Federal to work further with the borrower
to arrange a workout plan. From time to time we may accept deeds in lieu of foreclosure.
When we acquire real estate as a result of foreclosure,
the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or
fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value
of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against
the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition,
all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property,
however, are capitalized to the extent of estimated fair value less estimated costs to sell.
Delinquent Loans
.
The following
tables set forth our loan delinquencies, including nonaccrual loans, by type and amount at the dates indicated.
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
159
|
|
|
$
|
87
|
|
|
$
|
676
|
|
|
$
|
92
|
|
|
$
|
—
|
|
|
$
|
153
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
68
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
169
|
|
|
|
87
|
|
|
|
744
|
|
|
|
172
|
|
|
|
—
|
|
|
|
153
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
169
|
|
|
$
|
87
|
|
|
$
|
745
|
|
|
$
|
172
|
|
|
$
|
—
|
|
|
$
|
153
|
|
Classified Assets
.
Federal regulations
provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller
of the Currency to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is
considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor
or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility”
that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful”
have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses
present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values,
“highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible”
and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted.
Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated as “special mention” by our management.
When an insured institution classifies problem
assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover
probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses
associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.
When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination
as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities,
which may require the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic
reports with the Office of the Comptroller of the Currency and in accordance with our classification of assets policy, we regularly
review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.
On the basis of this review of our assets, our
classified or special mention assets (presented gross of allowance) at the dates indicated were as follows:
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Special mention assets
|
|
$
|
1,894
|
|
|
$
|
1,492
|
|
Substandard assets
|
|
|
1,696
|
|
|
|
2,564
|
|
Doubtful assets
|
|
|
—
|
|
|
|
—
|
|
Loss assets
|
|
|
—
|
|
|
|
—
|
|
Total classified assets
|
|
$
|
3,590
|
|
|
$
|
4,056
|
|
Non-Performing Assets.
We generally
cease accruing interest on our loans when contractual payments of principal or interest have become 90 days delinquent unless
the loan is well-secured and in the process of collection. Loans are placed on non-accrual or charged off at an earlier date if
collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on non-accrual
is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method,
until the loans qualifies for return to accrual. Generally, loans are restored to accrual status when all the principal and interest
amounts contractually due are brought current, and future payments are reasonably assured. Loans are moved to non-accrual status
in accordance with our policy, which is typically after 90 days of non-payment.
The following table sets forth information regarding
our non-performing assets and troubled debt restructurings. Troubled debt restructurings include loans for which either a portion
of interest or principal has been forgiven, or loans modified at interest rates materially less than current market rates.
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
676
|
|
|
$
|
130
|
|
Non-owner occupied
|
|
|
0
|
|
|
|
9
|
|
Nonresidential
|
|
|
68
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
744
|
|
|
|
139
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
1
|
|
|
|
—
|
|
Total non-accrual loans
|
|
|
745
|
|
|
|
139
|
|
Non-accruing troubled debt restructured loans:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
—
|
|
|
|
14
|
|
Non-owner occupied
|
|
|
—
|
|
|
|
—
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
—
|
|
|
|
14
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
Total non-accruing troubled debt restructured loans
|
|
|
—
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
745
|
|
|
|
153
|
|
Real estate owned:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
—
|
|
|
|
—
|
|
Non-owner occupied
|
|
|
102
|
|
|
|
—
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
Total real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
847
|
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past due 90 days or more:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-owner occupied
|
|
|
—
|
|
|
|
—
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
—
|
|
|
|
—
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
Total accruing loans past due 90 days or more
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Accruing troubled debt restructured loans:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
514
|
|
|
$
|
524
|
|
Non-owner occupied
|
|
|
225
|
|
|
|
306
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
631
|
|
|
|
642
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
1,370
|
|
|
|
1,472
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
Total accruing troubled debt restructured loans
|
|
$
|
1,370
|
|
|
$
|
1,472
|
|
Total non-performing assets and accruing troubled debt restructured loans
|
|
$
|
2,217
|
|
|
$
|
1,625
|
|
Total non-performing loans to total loans
|
|
|
0.43
|
%
|
|
|
0.10
|
%
|
Total non-performing assets to total assets
|
|
|
0.38
|
%
|
|
|
0.09
|
%
|
Total non-performing assets and accruing troubled debt restructured loans to total assets
|
|
|
1.12
|
%
|
|
|
0.95
|
%
|
Other than $561,000 and $939,000 of loans designated
as substandard, there were no other loans at December 31, 2018 and December 31, 2017, respectively, that are not already disclosed
where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers
to comply with present loan repayment terms and that may result in disclosure of such loans in the future.
Interest income that would have been recorded
for the years ended December 31, 2018 and 2017 had nonaccruing loans been current according to their original terms amounted to
$19,000 and $5,400, respectively. We recognized $3,500 for these loans in the year ended December 31, 2018 and we recognized no
interest income for these loans for the year December 31, 2017. As of December 31, 2018, all troubled debt restructurings were
performing in accordance with their restructured terms. At December 31, 2017 one troubled debt restructuring totaling $14,000 was
not performing in accordance with their restructured terms.
Troubled Debt Restructurings.
We
occasionally modify loans to help a borrower stay current on his or her loan and to avoid foreclosure. We consider modifications
only after analyzing the borrower’s current repayment capacity, evaluating the strength of any guarantors based on documented
current financial information, and assessing the current value of any collateral pledged. We generally do not forgive principal
or interest on loans, but may do so if it is in our best interest and increases the likelihood that we can collect the remaining
principal balance. We may modify the terms of loans to lower interest rates (which may be at below market rates), to provide for
fixed interest rates on loans where fixed rates are otherwise not available, or to provide for interest-only terms. These modifications
are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our
best interests. At December 31, 2018, we had nine loans totaling $1.4 million that were classified as troubled debt restructurings.
Allowance for Loan Losses
Analysis and Determination of the Allowance
for Loan Losses
. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in
our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional
allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness
of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a
general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance
separately, the entire allowance for loan losses is available for the entire portfolio.
We identify loans that may need to be charged
off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about
collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as
well as the shortfall in collateral value could result in our charging off the loan or the portion of the loan that was impaired.
Among other factors, we consider current general
economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan
losses for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing
data on our local markets from third party sources we believe to be reliable as a basis for assumptions about the impact of housing
depreciation.
Substantially all of our loans are secured by
collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are
established. Typically for a nonperforming real estate loan in the process of collection, the value of the underlying collateral
is estimated using either the original independent appraisal, adjusted for current economic conditions and other factors, or a
new independent appraisal, or evaluation and related general or specific allowances for loan losses are adjusted on a quarterly
basis. If a nonperforming real estate loan is in the process of foreclosure and/or there are serious doubts about further collectability
of principal or interest, and there is uncertainty about the value of the underlying collateral, we will order a new independent
appraisal or evaluation if it has not already been obtained. Any shortfall would result in immediately charging off the portion
of the loan that was impaired.
Specific Allowances for Identified Problem
Loans
. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the
present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated
selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or
business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value
of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s
effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid
property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on the Remainder
of the Loan Portfolio.
We establish a general allowance for loans that are not classified as impaired to recognize the
probable incurred losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular
problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance
percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability
of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability
of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes
in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value,
loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio,
duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly
to ensure their relevance in the current real estate environment.
As an integral part of their examination process,
the Office of the Comptroller of the Currency will periodically review our allowance for loan losses. Such agencies may require
that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Allowance for Loan Losses
.
The
following table sets forth activity in our allowance for loan losses for the periods indicated.
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Allowance at beginning of period
|
|
$
|
1,360
|
|
|
$
|
1,326
|
|
Provision (credit) for loan losses
|
|
|
45
|
|
|
|
30
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
—
|
|
|
|
—
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
—
|
|
|
|
—
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
Total charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
—
|
|
|
|
4
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
—
|
|
|
|
4
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
Total recoveries
|
|
|
—
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
—
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
1,405
|
|
|
$
|
1,360
|
|
|
|
|
|
|
|
|
|
|
Allowance to non-performing loans
|
|
|
188.59
|
%
|
|
|
888.89
|
%
|
Allowance to total loans outstanding at the end of the period
|
|
|
0.81
|
%
|
|
|
0.91
|
%
|
Net (charge-offs) recoveries to average loans outstanding during the period
|
|
|
0.00
|
%
|
|
|
0.003
|
%
|
Allocation of Allowance for Loan Losses.
The following tables set forth the allowance for loan losses by loan category and the percent of loans in each category
to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of
future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Allowance
for Loan
Losses
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
Allowance
for Loan
Losses
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
|
(Dollars in thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
457
|
|
|
|
53.87
|
%
|
|
$
|
338
|
|
|
|
51.82
|
%
|
Non-owner occupied
|
|
|
123
|
|
|
|
8.19
|
|
|
|
172
|
|
|
|
7.59
|
|
Nonresidential
|
|
|
182
|
|
|
|
10.89
|
|
|
|
197
|
|
|
|
12.12
|
|
Multi-family
|
|
|
224
|
|
|
|
15.61
|
|
|
|
241
|
|
|
|
15.97
|
|
Home equity lines of credit
|
|
|
297
|
|
|
|
6.54
|
|
|
|
312
|
|
|
|
7.83
|
|
Construction and land
|
|
|
100
|
|
|
|
4.20
|
|
|
|
83
|
|
|
|
4.13
|
|
Total real estate
|
|
|
1,383
|
|
|
|
99.30
|
|
|
|
1,343
|
|
|
|
99.46
|
|
Commercial loans
|
|
|
9
|
|
|
|
0.24
|
|
|
|
7
|
|
|
|
0.22
|
|
Consumer loans
|
|
|
13
|
|
|
|
0.46
|
|
|
|
10
|
|
|
|
0.32
|
|
Total allocated allowance
|
|
|
1,405
|
|
|
|
100.00
|
%
|
|
|
1,360
|
|
|
|
100.00
|
%
|
Unallocated
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Total
|
|
$
|
1,405
|
|
|
|
|
|
|
$
|
1,360
|
|
|
|
|
|
At December 31, 2018, our allowance for loan
losses represented 0.81% of total loans and 188.59% of nonperforming loans. Nonperforming loans increased from $153,000 at December
31, 2017 to $745,000 at December 31, 2018 primarily due to the addition of $396,000 in loans classified as nonaccrual by Kentucky
Federal. At December 31, 2017, our allowance for loan losses represented 0.91% of total loans and 888.89% of nonperforming loans.
The allowance for loan losses was $1.4 million at December 31, 2018 and December 31, 2017. There were no net loan recoveries during
the year ended December 31, 2018 and $4,000 in net loan recoveries during the year ended December 31, 2017.
Although we believe that we use the best information
available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and
results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the
determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles
generally accepted in the United States of America, regulators, in reviewing our loan portfolio, may request us to increase our
allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty,
the existing allowance for loan losses may not be adequate and increases may be necessary should the quality of any loan deteriorate
as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial
condition and results of operations.
Investment Activities
General
.
The goals of our investment
policy are to provide and maintain liquidity to meet day-to-day, cyclical and long-term liquidity needs, to help mitigate interest
rate and market risk within the parameters of our interest rate risk policy, and to generate a dependable flow of earnings within
the context of our interest rate and credit risk objectives. Subject to loan demand and our interest rate risk analysis, we will
increase the balance of our investment securities portfolio when we have excess liquidity. We expect to initially invest a substantial
portion of the proceeds of the offering in short-term and other investments, including U.S. government securities.
Our investment policy was adopted by the board
of directors. The investment policy is reviewed annually by the board of directors. All investment decisions shall require the
approval of at least three senior management members, one of which shall be the President or Chief Financial Officer. The Chairman
of the Board is included in the senior management group for this purpose. The Chief Financial Officer provides an investment schedule
detailing the investment portfolio which is reviewed at least monthly by the Bank’s asset-liability committee and the board
of directors.
Our current investment policy permits, with
certain limitations, investments in United States Treasury securities; securities issued by the United States Government and its
agencies or government sponsored enterprises including mortgage-backed securities and collateralized mortgage obligations (“CMO”)
issued by Fannie Mae, Ginnie Mae and Freddie Mac; corporate bonds and obligations; debt securities of state and municipalities;
commercial paper; certificates of deposits in other financial institutions, and bank-owned life insurance.
At December 31, 2018, our investment portfolio
consisted of securities and obligations issued by U.S. government-sponsored enterprises or the Federal Home Loan Bank. At December
31, 2018, we owned $2,583,100 of FHLB-Cincinnati stock. As a member of FHLB-Cincinnati, we are required to purchase stock in the
FHLB-Cincinnati, which stock is carried at cost and classified as restricted equity securities.
Securities Portfolio Composition
.
The following table sets forth the amortized cost and estimated fair value of our available-for-sale securities portfolio at the
dates indicated, all of which consisted of pass-through mortgage-backed securities.
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
81
|
|
|
$
|
81
|
|
|
$
|
173
|
|
|
$
|
172
|
|
Fannie Mae
|
|
|
548
|
|
|
|
549
|
|
|
|
736
|
|
|
|
738
|
|
Total
|
|
$
|
629
|
|
|
$
|
630
|
|
|
$
|
909
|
|
|
$
|
910
|
|
Mortgage-Backed Securities
. At
December 31, 2018, we had mortgage-backed securities with a carrying value of $629,000, which constituted our entire securities
portfolio. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages.
Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal
and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and
guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages,
although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities
pool and resell the participation interests in the form of securities to investors such as Cincinnati Federal. The interest rate
of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All
of our mortgage-backed securities are backed by either Freddie Mac or Fannie Mae, which are government-sponsored enterprises.
Residential mortgage-backed securities issued
by United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because
there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize
our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less
than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds
determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Portfolio Maturities and Yields.
The
composition and maturities of the investment securities portfolio at December 31, 2018 and 2017, are summarized in the following
table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments,
prepayments, or early redemptions that may occur. Adjustable-rate mortgage-backed securities are included in the period in which
interest rates are next scheduled to adjust.
December 31, 2018
|
|
One
Year or Less
|
|
|
More
than One Year
through Five Years
|
|
|
More
than Five Years
through Ten Years
|
|
|
More
than Ten Years
|
|
|
Total
|
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Weighted
Average
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie
Mac
|
|
$
|
81
|
|
|
|
3.63
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
81
|
|
|
$
|
81
|
|
|
|
3.63
|
%
|
Fannie
Mae
|
|
|
479
|
|
|
|
4.15
|
%
|
|
|
69
|
|
|
|
3.45
|
%
|
|
|
—
|
|
|
|
—%
|
|
|
|
—
|
|
|
|
—%
|
|
|
|
548
|
|
|
|
549
|
|
|
|
4.06
|
%
|
Total
|
|
$
|
560
|
|
|
|
4.07
|
%
|
|
$
|
69
|
|
|
|
3.45
|
%
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
629
|
|
|
$
|
630
|
|
|
|
4.00
|
%
|
December 31, 2017
|
|
One
Year or Less
|
|
|
More
than One Year
through Five Years
|
|
|
More
than Five Years
through Ten Years
|
|
|
More
than Ten Years
|
|
|
Total
|
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Weighted
Average
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
173
|
|
|
|
2.33
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
173
|
|
|
$
|
172
|
|
|
|
2.33
|
%
|
Fannie
Mae
|
|
|
599
|
|
|
|
3.18
|
%
|
|
|
137
|
|
|
|
3.38
|
%
|
|
|
—
|
|
|
|
—%
|
|
|
|
—
|
|
|
|
—%
|
|
|
|
736
|
|
|
|
738
|
|
|
|
3.22
|
%
|
Total
|
|
$
|
772
|
|
|
|
2.99
|
%
|
|
$
|
137
|
|
|
|
3.38
|
%
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
909
|
|
|
$
|
910
|
|
|
|
3.05
|
%
|
Sources of Funds
General.
Deposits have traditionally
been our primary source of funds for use in lending and investment activities. We also may use borrowings, primarily FHLB-Cincinnati
advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the
cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings
and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds,
deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits.
Our deposits are generated
primarily from our primary market area. We offer a selection of deposit accounts, including demand accounts, savings accounts,
certificates of deposit and individual retirement accounts (IRAs). Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We do not accept brokered
deposits, although we have the authority to do so.
We participate in the National CD Rateline Program
as a wholesale source for certificates of deposit to supplement deposits generated through our retail banking operations. The Rateline
Program provides an internet based listing service which connects financial institutions such as Cincinnati Federal with other
financial institutions for jumbo certificates of deposit. Deposits obtained through the Rateline Program are not considered to
be brokered deposits. At December 31, 2018, approximately $13.1 million of our certificates of deposit, representing 9.2% of our
total deposits, had been obtained through the Rateline Program. At December 31, 2018, these certificates of deposit had an average
term to maturity of 14 months. Early withdrawal of these deposits is not permitted, which makes these accounts a more stable source
of funds.
Interest rates paid, maturity terms, service
fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating
strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely upon personalized customer
service, long-standing relationships with customers, and the favorable image of Cincinnati Federal in the community to attract
and retain deposits. We recently implemented a fully functional electronic banking platform, including mobile app and on-line bill
pay, as a service to our deposit customers.
The flow of deposits is influenced significantly
by general economic conditions, changes in interest rates and competition. Our ability to gather deposits is affected by the competitive
market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products.
The following
table sets forth the distribution of our average total deposit accounts, by account type, for the periods indicated.
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Average
Balance
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Average
Balance
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
26,390
|
|
|
|
21.47
|
%
|
|
|
0.25
|
%
|
|
$
|
24,179
|
|
|
|
22.02
|
%
|
|
|
0.08
|
%
|
Interest-bearing demand
|
|
|
9,098
|
|
|
|
7.40
|
|
|
|
1.47
|
|
|
|
6,912
|
|
|
|
6.29
|
|
|
|
1.04
|
|
Certificates of deposit
|
|
|
71,114
|
|
|
|
57.86
|
|
|
|
1.73
|
|
|
|
64,615
|
|
|
|
58.82
|
|
|
|
1.42
|
|
Interest-bearing deposits
|
|
|
106,602
|
|
|
|
86.73
|
|
|
|
1.35
|
|
|
|
95,706
|
|
|
|
87.13
|
|
|
|
1.06
|
|
Non-interest bearing
demand
|
|
|
16,305
|
|
|
|
13.27
|
|
|
|
—
|
|
|
|
14,141
|
|
|
|
12.87
|
|
|
|
—
|
|
Total deposits
|
|
$
|
122,907
|
|
|
|
100.00
|
%
|
|
|
1.16
|
|
|
$
|
109,847
|
|
|
|
100.00
|
%
|
|
|
0.92
|
|
The following table sets forth our deposit activities
for the periods indicated.
|
|
At or For the Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
113,948
|
|
|
$
|
108,092
|
|
Net deposits (withdrawals) before interest credited
|
|
|
27,301
|
|
|
|
5,158
|
|
Interest credited
|
|
|
1,143
|
|
|
|
698
|
|
Net increase (decrease) in deposits
|
|
|
28,444
|
|
|
|
5,856
|
|
Ending balance
|
|
$
|
142,392
|
|
|
$
|
113,948
|
|
The following table sets forth certificates
of deposit classified by interest rate as of the dates indicated.
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Interest Rate:
|
|
|
|
|
|
|
|
|
Less than 1.00%
|
|
$
|
3,607
|
|
|
$
|
6,564
|
|
1.00% to 1.99%
|
|
|
39,328
|
|
|
|
55,074
|
|
2.00% to 2.99%
|
|
|
36,208
|
|
|
|
5,513
|
|
3.00% to 3.99%
|
|
|
1,406
|
|
|
|
-
|
|
4.00% to 4.99%
|
|
|
-
|
|
|
|
-
|
|
5.00% to 5.99%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80,549
|
|
|
$
|
67,151
|
|
The following
table sets forth the amount and maturities of
certificates of
deposit accounts at the
date indicated.
|
|
At December 31, 2018
|
|
|
|
Period to Maturity
|
|
|
|
Less
Than or
Equal to
One Year
|
|
|
More
Than
One to
Two Years
|
|
|
More Than
Two to
Three Years
|
|
|
More Than
Three Years
|
|
|
Total
|
|
|
Percent of
Total
|
|
|
|
(Dollars in thousands)
|
|
Interest Rate Range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1.00%
|
|
$
|
3,480
|
|
|
$
|
127
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,607
|
|
|
|
4.48
|
%
|
1.00% to 1.99%
|
|
|
28,738
|
|
|
|
9,297
|
|
|
|
1,222
|
|
|
|
71
|
|
|
|
39,328
|
|
|
|
48.83
|
|
2.00% to 2.99%
|
|
|
17,556
|
|
|
|
11,515
|
|
|
|
5,971
|
|
|
|
1,166
|
|
|
|
36,208
|
|
|
|
44.95
|
|
3.00% to 3.99%
|
|
|
25
|
|
|
|
420
|
|
|
|
956
|
|
|
|
5
|
|
|
|
1,406
|
|
|
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,799
|
|
|
$
|
21,359
|
|
|
$
|
8,149
|
|
|
$
|
1,242
|
|
|
$
|
80,549
|
|
|
|
100.00
|
%
|
The following table sets forth the maturity
of our jumbo certificates of deposits ($100,000 or greater) as of December 31, 2018.
|
|
At December 31, 2018
|
|
|
|
(In thousands)
|
|
|
|
|
|
Three months or less
|
|
$
|
6,811
|
|
Over three months through six months
|
|
|
6,550
|
|
Over six months through one year
|
|
|
12,171
|
|
Over one year to three years
|
|
|
11,083
|
|
Over three years
|
|
|
3,693
|
|
|
|
|
|
|
Total
|
|
$
|
40,308
|
|
Borrowings
.
We may obtain advances
from the FHLB-Cincinnati by pledging as security our capital stock in the FHLB-Cincinnati and certain of our mortgage loans and
mortgage-backed securities. Such advances may be made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they
can change our interest rate risk profile. Recently, we have lengthened the maturities of our some of our FHLB advance borrowings
to reduce interest rate risk. At December 31, 2018, we had $28.6 million of FHLB-Cincinnati advances (net of deferred prepayment
penalties). Most of these advances had interest rates ranging from 1.01% to 3.12%. In addition to funding portfolio loans, we sometimes
use FHLB-Cincinnati advances for short-term funding needs arising from our mortgage-banking activities.
In addition to the availability of FHLB-Cincinnati
advances we also have a total of $11.5 million in lines of credit available from three commercial banks. No amount was outstanding
on these lines of credit at December 31, 2018.
The following table sets forth information concerning
balances and interest rates on borrowings at the dates and for the years indicated. All such borrowings consisted of FHLB-Cincinnati
advances.
|
|
At
or For the Year
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Balance outstanding at end of period
|
|
$
|
28,580
|
|
|
$
|
34,310
|
|
Weighted average interest rate at the end of period
|
|
|
2.20
|
%
|
|
|
1.42
|
%
|
Maximum amount of borrowings outstanding at any month end during the period
|
|
$
|
40,144
|
|
|
$
|
34,514
|
|
Average balance outstanding during the period
|
|
|
35,219
|
|
|
|
29,254
|
|
Weighted average interest rate during the period
|
|
|
1.86
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%
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1.39
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%
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Employees
As of December 31, 2018, we had 50 full-time
employees and 8 part-time employees. Our employees are not represented by any collective bargaining group. Management believes
that we have a good working relationship with our employees.
Subsidiary Activities
Cincinnati Federal is the only subsidiary of
Cincinnati Bancorp. Cincinnati Federal Investment Services, LLC, the subsidiary of Cincinnati Federal, is currently inactive.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, Cincinnati
Bancorp is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board.
The Office of Thrift Supervision’s functions relating to savings and loan holding companies were transferred to the Federal
Reserve Board on July 21, 2011 pursuant to the Dodd-Frank Act regulatory restructuring. Cincinnati Bancorp is also subject to the
rules and regulations of the Securities and Exchange Commission under the federal securities laws.
As a federal savings association, Cincinnati
Federal is subject to examination and regulation by the Office of the Comptroller of the Currency, and is also subject to examination
by the Federal Deposit Insurance Corporation (“FDIC”) as its deposit insurer. The federal system of regulation and
supervision establishes a comprehensive framework of activities in which Cincinnati Federal may engage and is intended primarily
for the protection of depositors and the FDIC’s Deposit Insurance Fund.
Cincinnati Federal also is regulated to a lesser
extent by the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board,” which governs the reserves
to be maintained against deposits and other matters. In addition, Cincinnati Federal is a member of and owns stock in the FHLB-
Cincinnati, which is one of the eleven regional banks in the Federal Home Loan Bank System. Cincinnati Federal’s relationship
with its depositors and borrowers also is regulated to a great extent by federal law and, to a lesser extent, state law, including
in matters concerning the ownership of deposit accounts and the form and content of Cincinnati Federal’s loan documents.
Set forth below are certain material regulatory
requirements that are applicable to Cincinnati Bancorp and Cincinnati Federal. This description of statutes and regulations is
not intended to be a complete description of such statutes and regulations and their effects on Cincinnati Bancorp and Cincinnati
Federal. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material
adverse impact on Cincinnati Bancorp, Cincinnati Federal and their operations.
Dodd-Frank Act
The Dodd-Frank/Wall Street Reform and Consumer
Protection Act, (the Dodd-Frank Act”) made significant changes to the regulatory structure for depository institutions and
their holding companies. However, the Dodd-Frank Act’s changes go well beyond that and affect the lending, investments and
other operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels
for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured
depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that
were then currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor
for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the
federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities
and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act created a new Consumer Financial
Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau
has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such
as Cincinnati Federal, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer
Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10
billion in assets. Banks and savings institutions with $10 billion or less in assets are still examined for compliance by their
applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings
associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.
The Dodd-Frank Act broadened the base for FDIC
insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial
institution. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions
and credit unions to $250,000 per depositor. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring
companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments.
The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding
company executives, regardless of whether the company is publicly traded or not. Further, the legislation requires that originators
of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing
of certain debit card interchange fees and contains a number of reforms related to mortgage origination.
Federal Banking Regulation
Business Activities.
A federal
savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable
federal regulations. Under these laws and regulations, Cincinnati Federal may invest in mortgage loans secured by residential and
nonresidential real estate, commercial business and consumer loans, certain types of debt securities and certain other assets,
subject to applicable limits. The Dodd-Frank Act authorized, for the first time, the payment of interest on commercial checking
accounts. Cincinnati Federal may also establish subsidiaries that may engage in certain activities not otherwise permissible for
Cincinnati Federal, including real estate investment and securities and insurance brokerage.
Capital Requirements.
The FDIC
and the other federal bank regulatory agencies have issued a final rule that revised their risk-based capital requirements and
the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee
on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier
bank holding companies with total consolidated assets of $3.0 billion or more and all top-tier savings and loan holding companies
with total consolidated assets of $3.0 billion or more.
The rule establishes a new common equity Tier
1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement
(from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past
due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction
of real property.
The rule also includes changes in what constitutes
regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain
instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in
total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated
percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, Tier
1 capital will include accumulated other comprehensive income (which includes all unrealized gains and losses on available for
sale debt and equity securities), subject to a two-year transition period. Cincinnati Federal had the one-time option in the first
quarter of 2015 to permanently opt out of the inclusion of accumulated other comprehensive income in its capital calculation. Cincinnati
Federal elected to opt out of the inclusion of accumulated other comprehensive income in its capital calculation.
The new capital requirements also include changes
in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from
100%) for certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage
loans that are 90 day past due or otherwise on non-accrual status; a 20% (up from 0%) credit conversion factor for the unused portion
of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from
100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-weights (from 0% to
up to 600%) for equity exposures.
Finally, the rule limits capital distributions
and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer”
consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum
risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625%
of risk-weighted assets increasing each year until fully implemented at 2.5% on January 1, 2019.
At December 31, 2018, Cincinnati Federal’s
capital exceeded all applicable requirements.
Loans-to-One Borrower.
Generally,
a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of
unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan
is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2018, Cincinnati
Federal was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test.
As a federal savings association, Cincinnati Federal must satisfy the qualified thrift lender, or “QTL,” test. Under
the QTL test, Cincinnati Federal must maintain at least 65% of its “portfolio assets” in “qualified thrift investments”
(primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the
most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum
of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the
conduct of the savings association’s business.
Cincinnati Federal also may satisfy the QTL
test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.
A savings association that fails the qualified
thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made
noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2018, Cincinnati Federal
satisfied the QTL test.
Capital Distributions.
Federal
regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and
other transactions charged to the savings association’s capital account. A federal savings association must file an application
for approval of a capital distribution if:
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the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income
for that year to date plus the savings association’s retained net income for the preceding two years;
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the savings association would not be at least adequately capitalized following the distribution;
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the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
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the savings association is not eligible for expedited treatment of its filings.
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Even if an application is not otherwise required,
every savings association that is a subsidiary of a savings and loan holding company, such as Cincinnati Federal, must still file
a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital
distribution.
A notice or application related to a capital
distribution may be disapproved if:
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the federal savings association would be undercapitalized following the distribution;
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the proposed capital distribution raises safety and soundness concerns; or
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the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
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In addition, the Federal Deposit Insurance Act
provides that an insured depository institution shall not make any capital distribution if, after making such distribution, the
institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a
capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established
in connection with its conversion to stock form.
Community Reinvestment Act and Fair Lending
Laws.
All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations
to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination
of a federal savings association, the Office of the Comptroller of the Currency is required to assess the federal savings association’s
record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of
the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers,
or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with
the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller
of the Currency, as well as other federal regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all
institutions insured by the FDIC to publicly disclose their rating. Cincinnati Federal received a “satisfactory” Community
Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties.
A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B
of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control
with an insured depository institution such as Cincinnati Federal. Cincinnati Bancorp is an affiliate of Cincinnati Federal because
of its control of Cincinnati Federal. In general, transactions between an insured depository institution and its affiliates are
subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association
from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent
with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to
the institution as comparable transactions with non-affiliates. Federal regulations require savings associations to maintain detailed
records of all transactions with affiliates.
Cincinnati Federal’s authority to
extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve
Board. Among other things, these provisions generally require that extensions of credit to insiders:
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be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent
than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk
of repayment or present other unfavorable features; and
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not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of Cincinnati Federal’s capital.
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In addition, extensions of credit in excess
of certain limits must be approved by Cincinnati Federal’s board of directors. Extensions of credit to executive officers
are subject to additional limits based on the type of extension involved.
Enforcement.
The Office of
the Comptroller of the Currency has primary enforcement responsibility over federal savings associations and has authority to bring
enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal
savings association. Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of
a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of
a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless
a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. The FDIC also has the
authority to terminate deposit insurance or recommend to the Office of the Comptroller of the Currency that enforcement action
be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action
under specified circumstances.
Standards for Safety and Soundness.
Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These
standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate.
Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines
that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate
federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan
can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action Regulations
.
The OCC is required by law to take supervisory actions against undercapitalized savings institutions under its jurisdiction, the
severity of which depends upon the institution’s level of capital.
Under the OCC’s prompt corrective
action regulations, undercapitalized institutions become subject to mandatory regulatory scrutiny and limitations, which increase
as capital decreases. Generally, the OCC is required to appoint a receiver or conservator for a savings bank that is “critically
undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed
with the OCC within 45 days of the date that a federal savings association is deemed to have received notice that it is “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized.” Any holding company of a federal savings
association that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up
to the lesser of 5% of the savings association’s assets at the time it was deemed to be undercapitalized by the OCC or the
amount necessary to restore the savings bank to adequately capitalized status. This guarantee remains in place until the OCC notifies
the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions
that are undercapitalized become subject to certain mandatory measures such as a restrictions on capital distributions and asset
growth. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings
association, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At December 31, 2018, the Bank met the capital
requirements to be considered “well capitalized” under the prompt corrective action rules.
The OCC’s prompt corrective action
standards changed with the new capital ratios. Under the new standards, in order to be considered well-capitalized, the Bank must
have to have a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio
of 10.0%, and a Tier 1 leverage ratio of 5.0%. We have determined that the Bank is well-capitalized under these standards as of
December 31, 2018.
Insurance of Deposit
Accounts.
The Deposit Insurance Fund of the FDIC insures deposits at FDIC insured financial institutions such as Cincinnati
Federal. Deposit accounts in Cincinnati Federal are insured by the FDIC generally up to a maximum of $250,000 per separately insured
depositor and up to a maximum of $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions
premiums to maintain the Deposit Insurance Fund.
Under the FDIC’s
risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations,
regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain
specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates.
The FDIC has authority
to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results
of operations of Cincinnati Federal. Management cannot predict what assessment rates will be in the future.
In addition to the FDIC
assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC,
assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize
the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019.
For the quarter ended December 31, 2018, the annualized FICO assessment was equal to 0.14 basis points of total assets less tangible
capital.
Insurance of deposits
may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the
FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
Prohibitions Against
Tying Arrangements
.
Federal savings associations are prohibited, subject to some exceptions, from extending credit to or
offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the
institution.
Federal Home Loan Bank System.
Cincinnati Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The
Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved
in home mortgage lending. As a member of the FHLB-Cincinnati, Cincinnati Federal is required to acquire and hold shares of capital
stock in the Federal Home Loan Bank. As of December 31, 2018, Cincinnati Federal was in compliance with this requirement.
Federal Reserve System.
Federal
Reserve Board regulations require banks to maintain reserves against their transaction accounts (primarily Negotiable Order of
Withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate
transaction accounts. For 2019, a 3% reserve ratio for aggregate transaction accounts up to $124.2 million, a 10% ratio above $124.2
million, and an exemption of $16.3 million was established.
Other Regulations
Interest and other charges collected or
contracted for by Cincinnati Federal are subject to state usury laws and federal laws concerning interest rates. Cincinnati Federal’s
operations are also subject to federal laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials
to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending
credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Truth in Savings Act; and
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rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
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The operations of Cincinnati Federal also
are subject to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial records;
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from
deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic
banking services;
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Check Clearing for the 21
st
Century Act (also known as “Check 21”), which gives “substitute checks,”
such as digital check images and copies made from that image, the same legal standing as the original paper check;
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The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-money laundering
compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required
compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under
the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
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The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions
with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial
products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide
such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated
third parties.
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Holding Company Regulation
General
.
Cincinnati Bancorp
and CF Mutual Holding Company are non-diversified savings and loan holding companies within the meaning of the Home Owners’
Loan Act. As such, Cincinnati Bancorp and CF Mutual Holding Company are registered with the Federal Reserve Board and are subject
to regulations, examinations, supervision and reporting requirements applicable to savings and loan holding companies. In addition,
the Federal Reserve Board has enforcement authority over Cincinnati Bancorp, CF Mutual Holding Company and its non-savings institution
subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings institution.
Permissible Activities.
Under
present law, the business activities of Cincinnati Bancorp and CF Mutual Holding Company are generally limited to those activities
permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain
conditions are met, or for multiple savings and loan holding companies. A financial holding company may engage in activities that
are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial
activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and
certain additional activities authorized by federal regulations.
Federal law prohibits a savings and loan
holding company, including Cincinnati Bancorp and CF Mutual Holding Company, directly or indirectly, or through one or more subsidiaries,
from acquiring more than 5.0% of another savings institution or holding company thereof, without prior regulatory approval. It
also prohibits the acquisition or retention of, with certain exceptions, more than 5.0% of a non-subsidiary company engaged in
activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution
that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve
Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive
factors.
The Federal Reserve Board is prohibited
from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions:
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the approval of interstate supervisory acquisitions by savings and loan holding companies; and
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the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically
permit such acquisition.
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The states vary in the extent to which they
permit interstate savings and loan holding company acquisitions.
Capital.
Savings and loan
holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires
the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are
no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves.
Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital, which
is currently permitted for bank holding companies. Instruments that were issued by May 19, 2010 are grandfathered in for companies
with consolidated assets of $15 billion or less. The Dodd-Frank Act contains an exception for bank holding companies of less than
$500 million in assets, and the Federal Reserve Board has adopted final rules that impose a capital requirement on bank holding
companies and savings and loan holding companies with total consolidated assets of $1.0 billion or more.
Source of Strength.
The Dodd-Frank
Act extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must
issue regulations requiring that all Association and savings and loan holding companies serve as a source of strength to their
subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Dividends.
Cincinnati Federal
is required to notify the Federal Reserve Board thirty days before declaring any dividend to Cincinnati Bancorp. The financial
impact of a holding company on its subsidiary institution is a matter that is evaluated by the regulator and the agency has authority
to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.
Waivers of Dividends by CF Mutual
Holding Company.
If Cincinnati Bancorp pays any dividends on its common stock, it would be required to pay dividends to
CF Mutual Holding Company unless CF Mutual Holding Company receives the approval of the Federal Reserve Board to waive the receipt
of any dividends from Cincinnati Bancorp. The Federal Reserve Board has issued an interim final rule providing that it will not
object to dividend waivers under certain circumstances, including circumstances where the waiver is not detrimental to the safe
and sound operation of the subsidiary savings association and a majority of the mutual holding company’s members have approved
the waiver of dividends by the mutual holding company within the previous six months. There can be no assurance that a dividend
waiver request by CF Mutual Holding Company would be approved by the Federal Reserve Board. In addition, any dividends waived by
CF Mutual Holding Company would have to be considered in determining an appropriate exchange ratio in the event of a conversion
of CF Mutual Holding Company to stock form.
Acquisition.
Under the Federal
Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group
acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain
circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s
outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company.
A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under
the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking
into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects
of the acquisition.
Federal Securities Laws
Cincinnati Bancorp’s common stock
is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Cincinnati Bancorp
is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange
Act of 1934.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act
(the “JOBS Act”) has made numerous changes to the federal securities laws to facilitate access to capital markets.
Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal
year qualifies as an “emerging growth company.” Cincinnati Bancorp qualifies as an emerging growth company under the
JOBS Act.
An “emerging growth company”
may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay”
votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute”
votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the
company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation;
however, Cincinnati Bancorp will also not be subject to the auditor attestation requirement or additional executive compensation
disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations
(generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may
elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election
when the company is first required to file a registration statement. Such an election is irrevocable during the period a company
is an emerging growth company. Cincinnati Bancorp has elected to comply with new or amended accounting pronouncements in the same
manner as a private company.
A company loses emerging growth company
status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of
$1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first
sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933;
(iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible
debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange
Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
TAXATION
Federal Taxation
General.
Cincinnati Bancorp
and Cincinnati Federal are subject to federal income taxation in the same general manner as other corporations, with some exceptions
discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters
and is not a comprehensive description of the tax rules applicable to Cincinnati Bancorp and Cincinnati Federal.
Method of Accounting.
For
federal income tax purposes, Cincinnati Bancorp and its subsidiary uses a tax year ending December 31
st
and files a
consolidated federal tax return. The Company reports its income and expenses on the accrual method of accounting. Cincinnati Federal
is not currently under audit with respect to its federal income tax return from prior years.
Net Operating Loss Carryovers.
Generally, a financial institution may carry a net operating loss forward indefinitely for losses generated in taxable years ending
after December 31, 2017. Cincinnati Bancorp had $666,155 of federal net loss carryforwards at December 31, 2018 that expire between
2028 and 2037 and $467,657 with no expiration.
Capital Loss Carryovers.
A
corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial institution may carry
back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback
or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other
capital losses for the year to which carried and is used to offset any capital gains. Any undeducted loss remaining after the five
year carryover period is not deductible. At December 31, 2018, Cincinnati Bancorp had no capital loss carryovers.
Corporate Dividends.
We may
generally exclude from our income 100% of dividends received from Cincinnati Federal as a member of the same affiliated group of
corporations.
State Taxation
Cincinnati Bancorp and Cincinnati Federal
are subject to Ohio taxation in the same general manner as other financial institutions. In particular, Cincinnati Bancorp and
Cincinnati Federal file a consolidated Ohio Financial Institutions Tax (“FIT”) return. The FIT is based upon the net
worth of the consolidated group. For Ohio FIT purposes, savings institutions are currently taxed at a rate equal to 0.8% of taxable
net worth. Cincinnati Bancorp is not currently under audit with respect to its Ohio FIT returns.
The presentation of Risk Factors is not
required of smaller reporting companies like Cincinnati Bancorp.
|
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
None.
As of December 31, 2018, the net book value
of our office properties was $3.3 million, and the net book value of our furniture, fixtures and equipment was $93,000. The following
table sets forth information regarding our offices.
Location
|
|
Leased or
Owned
|
|
Year Acquired
or Leased
|
|
Net Book Value of
Real Property
|
|
|
|
|
|
|
|
(In thousands)
|
|
Main Office:
|
|
|
|
|
|
|
|
|
6581 Harrison Ave
Cincinnati, OH 45247
|
|
Owned
|
|
2010
|
|
$
|
1,137
|
|
|
|
|
|
|
|
|
|
|
Branch Offices:
|
|
|
|
|
|
|
|
|
1270 Nagel Rd.
Cincinnati, OH 45255
|
|
Owned
|
|
1995
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
7553 Bridgetown Rd.
Cincinnati, OH 45248
|
|
Owned
|
|
1987
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
4310 Glenway Ave
Cincinnati, OH 45205
|
|
Owned
|
|
1957
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
1050 Scott Street
Covington, KY 41011
|
|
Owned
|
|
1957
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
6890 Dixie Highway
Florence, KY 41042
|
|
Owned
|
|
1957
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
Loan Production Office:
|
|
|
|
|
|
|
|
|
4680 Parkway Drive
|
|
|
|
|
|
|
|
|
Mason, OH 45040
|
|
Leased
|
|
2016
|
|
|
5
|
|
We believe that current facilities are adequate
to meet our present and foreseeable needs, subject to possible future expansion.
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
At December 31, 2018, we were not involved
in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business
or in any legal proceedings the outcome of which would be material to our consolidated financial condition or results of operations.
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
PART II
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
(a)
Market,
Holder and Dividend Information.
Our common stock is traded on the OTC Pink Marketplace under the symbol “CNNB.”
The number of holders of record of Cincinnati Bancorp’s common stock as of December 31, 2017, was approximately 188. Certain
shares of Cincinnati Bancorp are held in “nominee” or “street” name and accordingly, the number of beneficial
owners of such shares is not known or included in the foregoing number.
The following table
sets forth the high and low closing bid prices per share of common stock for the periods indicated. The indicated prices do not
include retail markups or markdowns or any commissions and do not necessarily reflect prices in actual transactions.
Fiscal Year Ended December 31, 2018
|
|
|
|
|
|
|
|
Dividend
|
|
Quarter Ended:
|
|
High
|
|
|
Low
|
|
|
Paid
|
|
December 31, 2018
|
|
$
|
13.99
|
|
|
$
|
11.96
|
|
|
$
|
—
|
|
September 30, 2018
|
|
|
14.40
|
|
|
|
12.90
|
|
|
|
—
|
|
June 30, 2018
|
|
|
12.85
|
|
|
|
10.07
|
|
|
|
—
|
|
March 31, 2018
|
|
|
11.00
|
|
|
|
10.40
|
|
|
|
—
|
|
Fiscal Year Ended December 31, 2017
|
|
|
|
|
|
|
|
Dividend
|
|
Quarter Ended:
|
|
High
|
|
|
Low
|
|
|
Paid
|
|
December 31, 2017
|
|
$
|
10.43
|
|
|
$
|
9.75
|
|
|
$
|
—
|
|
September 30, 2017
|
|
|
10.49
|
|
|
|
9.46
|
|
|
|
—
|
|
June 30, 2017
|
|
|
10.15
|
|
|
|
9.40
|
|
|
|
—
|
|
March 31, 2017
|
|
|
9.80
|
|
|
|
9.50
|
|
|
|
—
|
|
Our board of directors has the authority
to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. Specifically, the Federal
Reserve Board has issued a policy statement providing that dividends should be paid only out of current earnings and only if our
prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory
guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as
where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is
insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with
its capital needs and overall financial condition.
If Cincinnati Bancorp pays dividends to
its stockholders, it will be required to pay dividends to CF Mutual Holding Company. The Federal Reserve Board’s current
policy generally prohibits the waiver of dividends by mutual holding companies. Accordingly, we do not currently anticipate that
CF Mutual Holding Company will be permitted to waive dividends paid by Cincinnati Bancorp. See “Item 1. Business—Taxation—Federal
Taxation” and “—Regulation and Supervision—Holding Company Regulation—Dividends.”
(b)
Sales
of Unregistered Securities.
Not applicable.
(c)
Use
of Proceeds.
Not applicable.
(d)
Securities
Authorized for Issuance Under Equity Compensation Plans.
Subject to permitted adjustments for certain corporate transactions,
the 2017 Equity Incentive Plan, which was approved by stockholders, authorizes the issuance or delivery to participants of up to
117,940 shares of the Company’s common stock pursuant to grants, of restricted stock awards, restricted stock unit awards,
incentive stock options and non-qualified stock options.
The following information is presented for the 2017 Equity Incentive
Plan as of December 31, 2018:
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
|
Number of securities
remaining available for
future issuance under plan
(excluding securities
reflected in column (a))
|
|
Equity compensation plans approved by stockholders
|
|
|
117,940
|
|
|
$
|
9.55
|
|
|
|
5,056
|
|
Equity compensation plans not approved by stockholders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total
|
|
|
117,940
|
|
|
$
|
9.55
|
|
|
|
5,056
|
|
(e)
Stock
Repurchases.
None.
(f)
Stock
Performance Graph.
Not required for smaller reporting companies.
|
ITEM 6.
|
SELECTED FINANCIAL DATA
|
Not
required for smaller reporting companies.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
|
This section is intended to help potential
investors understand the financial performance of Cincinnati Bancorp and its subsidiary through a discussion of the factors affecting
our financial condition at December 31, 2018 and December 31, 2017 and our results of operations for the years ended December 31,
2018 and December 31, 2017. This section should be read in conjunction with the consolidated financial statements and notes thereto
that appear elsewhere in this Annual Report on Form 10-K.
Overview
Cincinnati Federal provides financial services
to individuals and businesses from our main office in Cincinnati, Ohio and our full service branch offices in Miami Heights, Anderson
and Price Hill. With the acquisition of Kentucky Federal Savings and Loan Association we operate full service branch offices in
Covington and Florence in Northern Kentucky. In addition we operate a loan production office in Mason, Ohio. Our primary market
area includes Hamilton County, Ohio, and, to a lesser extent, Warren, Butler and Clermont Counties, Ohio. We also conduct business
in the northern Kentucky region and make loans secured by properties in Campbell, Kenton and Boone Counties, Kentucky, as well
as in Dearborn County, in southeastern Indiana.
Our business consists primarily of taking
deposits from the general public and investing those deposits, together with borrowings and funds generated from operations, in
one- to four-family residential real estate loans, and, to a lesser extent, nonresidential real estate and multi-family loans,
home equity loans and lines of credit and construction and land loans. At December 31, 2018, $107.9 million, or 62.1% of our total
loan portfolio, was comprised of one- to four-family residential real estate loans; $18.9 million, or 10.9%, consisted of nonresidential
real estate loans; $27.1 million, or 15.6%, consisted of multi-family loans; $11.4 million, or 6.5%, consisted of home equity lines
of credit; $1.2 million or 0.70% consisted of commercial business loans and consumer loans; and $7.3 million, or 4.2%, consisted
of construction and land loans. We also invest in securities, which currently consist primarily of mortgage-backed securities issued
by U.S. government sponsored entities and Federal Home Loan Bank stock.
Cincinnati Federal also operates an active
mortgage banking unit with nine mortgage loan officers. This unit originates loans both for sale in the secondary market and for
retention in our portfolio. The revenue from gain on sales of loans was $1.7 million for year ended December 31, 2018 and $1.6
million for year ended December 31, 2017.
We offer a variety of deposit accounts,
including checking accounts, savings accounts and certificate of deposit accounts. We utilize advances from the FHLB-Cincinnati
for liquidity and for asset/liability management purposes. At December 31, 2018, we had $28.6 million in advances (net of deferred
prepayment penalties) outstanding with the FHLB-Cincinnati.
Our results of operations depend primarily
on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets
and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for
loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of gain (loss) on sale
of mortgage loans, checking account service fee income, interchange fees from debit card transactions and income from bank owned
life insurance. Non-interest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy
and equipment, data processing, franchise taxes, federal deposit insurance premiums, prepayment penalties on FHLB-Cincinnati advances,
impairment losses on foreclosed real estate and other operating expenses.
We invest in bank owned life insurance to
provide us with a funding source to offset some costs of our benefit plan obligations. Bank owned life insurance provides us with
non-interest income that is nontaxable. Federal regulations generally limit our investment in bank owned life insurance to 25%
of our Tier 1 capital plus our allowance for loan losses. At December 31, 2018, this limit was $6.1 million, and we had invested
$4.0 million in bank owned life insurance.
Cincinnati Federal Investment Services,
LLC, a wholly owned subsidiary under Ohio law, was formed in 2015 to offer nondeposit investment and insurance products in partnership
with Infinex Investments, Inc. As of December 31, 2016, Cincinnati Federal had a $100 investment in the subsidiary. In June 2016,
Cincinnati Federal Investment Services, LLC ceased operations and the agreement with Infinex Investments, Inc. was terminated.
There were no costs associated with the termination of the Infinex agreement. Cincinnati Federal Investment Services, LLC is currently
inactive.
Our results of operations also may be affected
significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies
and actions of regulatory authorities.
Business Strategy
Our current business strategy is to operate
as a well-capitalized and profitable community bank dedicated to serving the needs of our consumer and business customers, and
offering personalized and efficient customer service. Our goals are to increase interest income through loan portfolio growth,
expand fee income with the mortgage banking unit, lower our cost of deposits by increasing non-maturity based accounts, achieve
economies of scale through balance sheet growth and diversify sources of income. Highlights of our current business strategy include:
|
·
|
Increasing our origination of nonresidential real estate and multi-family loans.
We began originating a significant
amount of nonresidential real estate and multi-family loans in the early 2000s. As of December 31, 2018 and December 31, 2017,
such loans, together with construction and land loans, totaled $53.4 million and $48.2 million, or 218.9% and 233.1% of capital
plus ALLL, respectively. Under our current board approved loan concentration policy, such loans (including construction and land
loans) shall not exceed 300% of our capital plus ALLL. We intend to continue to increase our origination of nonresidential real
estate and multi-family real estate loans, with a focus on multi-family loans. Most nonresidential real estate and multi-family
loans are originated with adjustable rates. Nonresidential real estate and multi-family lending is expected to increase loan yields
with shorter repricing terms than fixed-rate loans. Nonresidential real estate and multi-family originations in 2018 increased
$2.4 million or 19.75% over 2017 origination levels. See “Business of Cincinnati Federal—Lending Activities—Commercial
Real Estate and Multi-Family Lending.”
|
|
·
|
Continuing to focus on our residential mortgage banking operations.
In 2018, we originated $73.1 million of one-to
four-family residential loans, and we sold $52.8 million of one-to four-family residential loans. In 2017, we originated $80.0
million of one-to four family residential loans, and we sold $58.1 million of one- to four-family residential loans. These loans
are all sold on a non-recourse basis primarily to the FHLB-Cincinnati, Freddie Mac, and other private sector third-party buyers.
Loans are sold on both a servicing-retained and servicing-released basis. Subject to mortgage market conditions, we intend to continue
to increase the number of mortgage loan originators in order to increase our volume of sold loans with the potential for increased
servicing income.
|
|
·
|
Continuing to emphasize one- to four-family residential adjustable rate mortgage lending.
We will continue to
focus on originating one- to four-family adjustable rate mortgages for retention in our portfolio. As of December 31, 2018, $84.6
million, or 49.7%, of our total loans consisted of one- to four-family residential adjustable rate mortgage loans with contractual
maturities after December 31, 2019. As of December 31, 2017, $64.8 million, or 43.6%, of our total loans consisted of one- to four-family
residential adjustable rate mortgage loans. Adjustable rate loans have shorter repricing terms to mitigate interest rate risk.
|
|
·
|
Increasing our “core” deposit base.
We are seeking to increase our core deposit base, particularly
checking accounts. Core deposits include all deposit account types except certificates of deposit. Core deposits are our least
costly source of funds, which improves our interest rate spread, and represent our best opportunity to develop customer relationships
that enable us to cross-sell our full complement of products and services. Core deposits also contribute non-interest income from
account-related fees and services and are generally less sensitive to withdrawal when interest rates fluctuate. For 2018, we continued
our marketing efforts for checking accounts through digital, print and outdoor advertising channels. Core deposits as of December
31, 2018 grew $15.0 million or 32.2% over December 31, 2017 balances with the addition of core deposits acquired from Kentucky
Federal. In recent years, we have significantly expanded and improved the products and services we offer our retail and business
deposit customers who maintain core deposit accounts and have improved our infrastructure for electronic banking services, including
online banking, mobile banking, bill pay, and e-statements. The deposit infrastructure we have established can accommodate significant
increases in retail and business deposit accounts without additional capital expenditure. We will also continue to use non-core
deposits, including certificates of deposit from the National CD Rateline Program, as a source of funds, in accordance with our
asset/liability policies and funding strategies.
|
|
·
|
Implementing a managed growth strategy.
We intend to pursue a growth strategy for the foreseeable future, with
the goal of improving the profitability of our business through increased net interest income and new sources of non-interest income.
Subject to market conditions, we intend to grow our one- to four-family residential adjustable rate, nonresidential real estate
and multi-family loan portfolios. To a lesser extent we intend to grow our construction and commercial business loan portfolio.
|
Summary of Critical Accounting Policies
The discussion and analysis of the financial
condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S.
generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and
assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the
reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies.
The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in
a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The JOBS Act contains provisions that, among
other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company”
we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are
made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly,
our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represent our critical accounting
policies:
Allowance for Loan Losses.
The
allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to
income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by
management and is based upon management’s periodic review of the collectability of the loans in light of historical experience,
the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and
general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified
as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical
charge-off experience and expected loss given default derived from our internal risk rating process. Other adjustments may be made
to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully
reflected in the historical loss or risk rating data.
A loan is considered impaired when, based
on current information and events, it is probable that we may not be able to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior
payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan
basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s
obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Groups of loans with similar risk characteristics
are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends,
conditions and other relevant factors that affect repayment of the loans.
In the course of working with borrowers,
we may choose to restructure the contractual terms of certain loans. In this scenario, we attempt to work-out an alternative payment
schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by us to identify
if a troubled debt restructuring has occurred, which is when, for economic or legal reasons related to a borrower’s financial
difficulties, we grant a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability
of the borrower to repay in line with the borrower’s current financial status, and the restructuring of the loan may include
the transfer of assets from the borrower to satisfy the debt, a modification of loan terms or a combination of the two. If such
efforts by us do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time we commence foreclosure.
We may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan. It is our policy that
any restructured loans on nonaccrual, prior to being restructured, remain on nonaccrual status until six months of satisfactory
borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time
of restructuring, we review the loan to determine if it is appropriate to continue the accrual of interest on the restructured
loan.
With regards to determination of the amount
of the allowance for credit losses, troubled debt restructured loans are considered to be impaired. As a result, the determination
of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.
Mortgage Servicing Rights.
Mortgage
servicing assets are recognized separately when rights are acquired through sale of financial assets. Under the servicing assets
and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale of loans originated by us are initially
measured at fair value at the date of transfer. Cincinnati Federal subsequently measures each class of servicing asset using the
fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes
in fair value are reported in earnings in the period in which the changes occur.
Fair value is based on a valuation model
that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial
earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from
quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the
mortgage servicing rights and may result in a reduction or addition to noninterest income.
Servicing fee income is recorded for fees
earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan
and are recorded as income when earned.
Income Taxes.
The
Company accounts for income taxes on a consolidated basis in accordance with income tax accounting guidance (ASC 740, Income
Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income
tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the
taxable income or excess of deductions over revenues. Cincinnati Federal determines deferred income taxes using the liability (or
balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences
between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period
in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred
tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that
some portion or all of a deferred tax asset will not be realized.
Uncertain tax positions are recognized if
it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.
The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include
resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition
threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood
of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination
of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and
information available at the reporting date and is subject to management’s judgment.
If necessary, we recognize interest and
penalties on income taxes as a component of income tax expense.
With a few exceptions, we are no longer
subject to examinations by tax authorities for years before 2015. As of December 31, 2018 and 2017, we had no uncertain tax positions.
Comparison of Financial Condition at December 31, 2018 and
2017
Total Assets.
Total assets were $197.7
million at December 31, 2018, an increase of $27.2 million, or 16.0%, from the $170.5 million at December 31, 2017. The increase
resulted primarily from increases in cash and cash equivalents of $822,000, net loans of $23.3 million, premises and equipment
of $882,000, Federal Home Loan Bank stock of $1.6 million and bank owned life insurance of $743,000 offset in part by a decrease
of $939,000 in loans held for sale.
Cash and Cash Equivalents.
Cash and
cash equivalents increased $822,000, or 8.0%, to $11.1 million at December 31, 2018 from $10.3 million at December 31, 2017. This
increase was primarily the result of an increase in Federal funds sold of $956,000 as the Company accumulated liquidity due to
its merger with Kentucky Federal during 2018.
Loans Held for Sale
.
Loans
held for sale decreased $939,000, or 42.3%, to $1.3 million at December 31, 2018 from $2.2 million at December 31, 2017. The decrease
was due to lower mortgage activity at December 31, 2018.
Net Loans
.
Net loans increased
$23.3 million, or 15.9%, to $170.3 million at December 31, 2018 from $147.0 million at December 31, 2017. Of this increase, the
fair value of the loan portfolio assumed in the merger with Kentucky Federal was $16.3 million. During the year ended December
31, 2018, we originated $97.9 million of loans, $73.1 million of which were one- to four- family residential real estate loans,
$5.5 million were nonresidential real estate loans, $9.2 million were multi-family loans, $5.0 million were home equity lines of
credit, $4.7 million were construction and land loans and the remaining $264,000 were commercial business loans and consumer loans.
In 2018, we sold $54.4 million of loans, of which $52.8 million were one- to four-family residential real estate loans and $1.6
million were multifamily loans. We sell loans on both a servicing–retained and servicing–released basis. Management
intends to continue this sales activity in future periods to generate gain on sale revenue and servicing fee income.
The largest increases in our loan portfolio
were in the one- to four-family owner occupied residential real estate loan portfolio, $16.1 million, in the one- to four-family-investment
loan portfolio of $2.9 million the multi-family loan portfolio of $3.2 million and a $1.1 million increase in the construction
and land loan portfolio. This growth reflects our strategy to grow the portfolio through loan originations and acquisitions primarily
with adjustable-rate loans and mitigate interest rate risk on the balance sheet. We currently sell certain fixed-rate, 15- and
30-year term mortgage loans. We have sold loans on both a servicing-released and servicing-retained basis to: the FHLB-Cincinnati,
through its mortgage purchase program; Freddie Mac; and other private sector third-party buyers.
Premises and Equipment.
Premises
and equipment increased $882,000, or 34.9%, to $3.4 million at December 31, 2018 from $2.5 million at December 31, 2017. The increase
was primarily due to the merger with Kentucky Federal. The fair value of the premises and equipment acquired in the merger was
$967,000.
Deposits.
Deposits increased $28.5
million, or 25.0%, to $142.4 million at December 31, 2018 from $113.9 million at December 31, 2017. Of this increase, $26.5 million
was added from the merger with Kentucky Federal during 2018. Our core deposits increased $15.0 million, or 32.2%, to $61.8 million
at December 31, 2018 from $46.8 million at December 31, 2017. Time deposits increased $13.4 million, or 20.0%, to $80.5 million
at December 31, 2018 from $67.2 million at December 31, 2017. The increase in time deposits was primarily due to an increase in
retail certificates of deposit. The amount of certificates of deposit obtained through the National CD Rateline Program at December
31, 2018 was $13.1 million. During the year ended December 31, 2018, management continued its strategy of pursuing growth in lower
cost core deposits, and intends to continue its efforts to increase core deposits.
Federal Home Loan Bank Advances.
Federal Home Loan Bank advances decreased $5.7 million, or 16.7%, to $28.6 million at December 31, 20018 from $34.3 million at
December 31, 2017. The liquidity received in the merger with Kentucky Federal was partially used to pay down Federal Home Loan
Bank advances and thereby manage the Company’s interest rate risk.
Stockholders’ Equity.
Stockholders’
equity increased $3.7 million, or 18.9%, to $23.0 million at December 31, 2018 from $19.3 million at December 31, 2017. The increase
resulted from net income for the year of $2.3 million, and an increase in paid-in-capital of $1.3 million.
Comparison of Operating Results for the Years Ended December
31, 2018 and December 31, 2017
General.
Net income for the year
ended December 31, 2018 was $2.3 million, compared to a net income of $875,000 for the year ended December 31, 2017, an increase
of $1.4 million or 162.9%. The increase was primarily due to a $540,000 increase in net interest income, and a $2.4 million increase
in noninterest income, partially offset by a $15,000 increase in provision for loan losses, a $1.3 million increase in noninterest
expense and a $158,000 increase in provision for income taxes.
Interest and Dividend Income.
Interest and dividend income increased $1.2 million, or 20.8%, to $7.0 million for the year ended December 31, 2018 from $5.8 million
for the year ended December 31, 2017. This increase was primarily attributable to a $1.0 million increase in interest on loans
receivable. Dividends on Federal Home Loan Bank stock and other investments increased $160,000 due to the increase in the FHLB
Cincinnati dividend rate and the increase in yields on Fed Funds sold. The average balance of loans increased $18.1 million, or
13.0%, to $157.7 million for the year ended December 31, 2018 from $139.6 million for the year ended December 31, 2017, while the
average yield on loans increased 18 basis points to 4.27% for the year ended December 31, 2018 from 4.09% for the year ended December
31, 2017, reflecting the shift in the loan origination mix to higher yielding multifamily and commercial loans, as well, as higher
market interest rates.
The average balance of investment securities
decreased $609,000 to $763,000 for the year ended December 31, 2018 from $1.4 million for the year ended December 31, 2017 attributable
to higher securities prepayments. The average yield on investment securities increased 255 basis points to 2.62% at December 31,
2018 from 0.07% at December 31, 2017attributable to the increase in amortization expense of premiums paid on the securities. The
average balance of other dividend and interest-bearing deposits, including certificates of deposit in other financial institutions,
and fed funds sold increased $4.2 million to $10.3 million at December 31, 2018 from $6.1 million at December 31, 2017. The average
yield for other interest-earning assets increased 100 basis points to 2.34% at December 31, 2018 from 1.34% at December 31, 2017.
The increase in the average yield is due to the increase in short term interest rates experienced during 2018.
Interest Expense.
Total interest
expense increased $665,000, or 46.9%, to $2.1 million for the year ended December 31, 2018. Interest expense on deposit accounts
increased $418,000, or 41.4%, to $1.4 million for the year ended December 31, 2018 from $1.0 million for the year ended December
31, 2017. The increase was primarily due to an increase of $2.2 million, or 9.1%, in the average balance of savings accounts to
$26.4 million for the year ended December 31, 2018 from $24.2 million for the year ended December 31, 2017. The increase in the
average cost of savings accounts was 17 basis points. The average balance of interest-bearing demand accounts increased $2.2 million
and the average cost of interest-bearing demand accounts increased 43 basis points to 1.47% at December 31, 2018. The average balance
of certificates of deposits increased $6.5 million while the average cost of certificates of deposits increased 31 basis points
to 1.73% at December 31, 2018.
Interest expense on FHLB advances increased
$247,000 to $654,000 for the year ended December 31, 2018 from $407,000 for the year ended December 31, 2017. The average balance
of advances increased $5.9 million to $35.2 million for the year ended December 31, 2018 compared to $29.3 million for the year
ended December 31, 2017, while the average cost of these advances increased 47 basis points to 1.86% from 1.39%. The increase in
the average balance of advances is due to management utilizing advances as a funding source for loan originations.
Net Interest Income
.
Net interest
income increased $540,000, or 12.4%, to $4.9 million for the year ended December 31, 2018 from $4.4 million for the year ended
December 31, 2017. Average net interest-earning assets increased $4.9 million compared to year end December 31, 2017
.
The
interest rate spread decreased to 2.67% for the year ended December 31, 2018 from 2.81% for the year ended December 31, 2017. The
net interest margin decreased to 2.91% for the year ended December 31, 2018 from 2.97% for the year ended December 31, 2017. The
interest rate spread and net interest margin were impacted by the increase in interest rates during 2018.
Provision for Loan Losses.
Based on management’s analysis of the allowance for loan losses described in Note 1 of our financial statements “Nature
of Operations and Summary of Significant Accounting Policies,” we recorded a provision for loan losses of $45,000 for the
year ended December 31, 2018 and a provision for loan losses of $30,000 for the year ended December 31, 2017. The allowance for
loan losses was $1.4 million, or 0.81% of total loans, at December 31, 2018, compared to $1.4 million or 0.91% of total loans,
at December 31, 2017. The increase in the provision for loan losses in 2018 compared to 2017 was due primarily to loan growth.
The allowance for loan and lease losses methodology establishes a range of historic loss factors based on a look- back periods
including five years, six years and seven years to mirror actual portfolio loss experience.
The allowance for loan losses reflects the
estimate we believe to be adequate to cover incurred probable losses which were inherent in the loan portfolio at December 31,
2018 and 2017. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable,
such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the
amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition
and results of operations. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require
an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different
than those of management.
Non-Interest Income
.
Non-interest
income increased $2.4 million, or 96.8%, to $4.9 million for the year ended December 31, 2018 from $2.5 million for the year ended
December 31, 2017. The increase was primarily due to a $2.2 million gain related to the Kentucky Federal merger in 2018.
Non-Interest Expense.
Non-interest
expense increased $1.3 million, or 22.7%, to $7.2 million for 2018 from $5.9 million for 2017. Salary and employee benefits expense
increased $384,000 to $3.6 million in 2018 from $3.2 million in 2017 due to normal salary increases, an increase in the cost of
medical insurance, and incentive stock plan expense. Advertising expense increased $72,000, or 71.0% due to a marketing campaign
during the year to attract checking accounts. Merger-related expense increased $577,000, with no related expense in 2017, due to
the costs associated with the Kentucky Federal merger.
Federal Income Taxes.
The
provision for income taxes increased $158,000 to a tax expense of $191,000 in 2018. The increase in income tax expense was primarily
due to net income for 2018 and the credit to income tax expense recorded in 2017 without a similar credit in 2018.
Average Balances and Yields
.
The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and
for the periods indicated. No tax-equivalent yield adjustments have been made. Any adjustments necessary to present yields on a
tax-equivalent basis are insignificant. All average balances are monthly average balances. Management does not believe that the
use of month-end balances instead of daily average balances has caused any material differences in the information presented. Non-accrual
loans were included in the computation of average balances only. The yields set forth below include the effect of deferred fees,
discounts, and premiums that are amortized or accreted to interest income or interest expense.
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
157,708
|
|
|
$
|
6,733
|
|
|
|
4.27
|
%
|
|
$
|
139,587
|
|
|
$
|
5,706
|
|
|
|
4.09
|
%
|
Securities
|
|
|
763
|
|
|
|
20
|
|
|
|
2.62
|
|
|
|
1,372
|
|
|
|
1
|
|
|
|
0.07
|
|
Other
(1)
|
|
|
10,353
|
|
|
|
242
|
|
|
|
2.34
|
|
|
|
6,116
|
|
|
|
82
|
|
|
|
1.34
|
|
Total interest-earning assets
|
|
|
168,824
|
|
|
|
6,995
|
|
|
|
4.14
|
|
|
|
147,075
|
|
|
|
5,789
|
|
|
|
3.94
|
|
Non-interest-earning assets
|
|
|
12,016
|
|
|
|
|
|
|
|
|
|
|
|
12,572
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
180,840
|
|
|
|
|
|
|
|
|
|
|
$
|
159,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
26,390
|
|
|
|
65
|
|
|
|
0.25
|
|
|
$
|
24,179
|
|
|
|
20
|
|
|
|
0.08
|
|
Interest-bearing demand
|
|
|
9,098
|
|
|
|
134
|
|
|
|
1.47
|
|
|
|
6,912
|
|
|
|
72
|
|
|
|
1.04
|
|
Certificates of deposit
|
|
|
71,114
|
|
|
|
1,230
|
|
|
|
1.73
|
|
|
|
64,615
|
|
|
|
919
|
|
|
|
1.42
|
|
Total deposits
|
|
|
106,602
|
|
|
|
1,429
|
|
|
|
1.35
|
|
|
|
95,706
|
|
|
|
1,011
|
|
|
|
1.06
|
|
FHLB borrowings
|
|
|
35,219
|
|
|
|
654
|
|
|
|
1.86
|
|
|
|
29,254
|
|
|
|
407
|
|
|
|
1.39
|
|
Total interest-bearing liabilities
|
|
|
141,821
|
|
|
|
2,083
|
|
|
|
1.47
|
|
|
|
124,960
|
|
|
|
1,418
|
|
|
|
1.13
|
|
Non-interest-bearing Demand
|
|
|
16,305
|
|
|
|
|
|
|
|
|
|
|
|
14,141
|
|
|
|
|
|
|
|
|
|
Other non-interest-bearing liabilities
|
|
|
3,292
|
|
|
|
|
|
|
|
|
|
|
|
2,084
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities
|
|
|
19,597
|
|
|
|
|
|
|
|
|
|
|
|
16,225
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
19,422
|
|
|
|
|
|
|
|
|
|
|
|
18,462
|
|
|
|
|
|
|
|
|
|
Total liabilities and total equity
|
|
$
|
180,840
|
|
|
|
|
|
|
|
|
|
|
$
|
159,647
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
4,912
|
|
|
|
|
|
|
|
|
|
|
$
|
4,371
|
|
|
|
|
|
Net interest rate spread
(2)
|
|
|
|
|
|
|
|
|
|
|
2.67
|
|
|
|
|
|
|
|
|
|
|
|
2.81
|
|
Net interest-earning assets
(3)
|
|
$
|
27,003
|
|
|
|
|
|
|
|
|
|
|
$
|
22,115
|
|
|
|
|
|
|
|
|
|
Net interest margin
(4)
|
|
|
|
|
|
|
|
|
|
|
2.91
|
|
|
|
|
|
|
|
|
|
|
|
2.97
|
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
119.04
|
|
|
|
|
|
|
|
|
|
|
|
117.70
|
|
|
(1)
|
Consists of FHLB-Cincinnati stock, FHLB DDA, Fed Funds
sold, certificates of deposit and cash reserves.
|
|
(2)
|
Net interest rate spread represents the difference
between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
|
|
(3)
|
Net interest-earning assets represent total interest-earning
assets less total interest-bearing liabilities.
|
|
(4)
|
Net interest margin represents net interest income
divided by average total interest-earning assets.
|
Rate/Volume Analysis
The following table presents the effects
of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable
to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in
volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of
this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based
on the changes due to rate and the changes due to volume.
|
|
Year Ended December 31,
2018 vs. 2017
|
|
|
|
Increase (Decrease) Due to
|
|
|
Total Increase
|
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
|
(In thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
767
|
|
|
$
|
260
|
|
|
$
|
1,027
|
|
Securities
|
|
|
1
|
|
|
|
18
|
|
|
|
19
|
|
Other
|
|
|
77
|
|
|
|
83
|
|
|
|
160
|
|
Total interest-earning assets
|
|
|
845
|
|
|
|
361
|
|
|
|
1,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
2
|
|
|
|
43
|
|
|
|
45
|
|
Interest-bearing demand
|
|
|
27
|
|
|
|
35
|
|
|
|
62
|
|
Certificates of deposit
|
|
|
417
|
|
|
|
(106
|
)
|
|
|
311
|
|
Total deposits
|
|
|
446
|
|
|
|
(28
|
)
|
|
|
418
|
|
FHLB borrowings
|
|
|
9
|
|
|
|
238
|
|
|
|
247
|
|
Total interest-bearing liabilities
|
|
|
455
|
|
|
|
210
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
390
|
|
|
$
|
151
|
|
|
$
|
541
|
|
Management of Market Risk
General
.
Our most significant
form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are monetary
in nature and sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate
risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability
Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level
of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives,
and for managing this risk consistent with the policy and guidelines approved by our board of directors.
Our asset/liability management strategy
attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques
we use to manage interest rate risk are:
|
·
|
originating nonresidential real estate and multi-family loans, and,
to a lesser extent, construction, consumer and commercial business loans, all of which tend to have shorter terms and higher interest
rates than one- to four-family residential real estate loans, and which generate customer relationships that can result in larger
non-interest bearing checking accounts;
|
|
·
|
selling substantially all of our newly-originated longer-term fixed-rate
one- to four-family residential real estate loans and retaining the shorter-term fixed-rate and adjustable-rate one- to four-family
residential real estate loans that we originate, subject to market conditions and periodic review of our asset/liability management
needs;
|
|
·
|
reducing our dependence on certificates of deposit to support lending
and investment activities and increasing our reliance on core deposits, including checking accounts and savings accounts, which
are less interest rate sensitive than certificates of deposit; and
|
Our Board of Directors is responsible for
the review and oversight of our Asset/Liability Committee, which is comprised of our executive management team and other essential
operational staff. This committee is charged with developing and implementing an asset/liability management plan, and meets at
least quarterly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling
program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating
environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved
by the Board of Directors.
Net Portfolio Value
.
We compute
amounts by which the net present value of our cash flow from assets, liabilities and off-balance sheet items (net portfolio value
or “NPV”) would change in the event of a range of assumed changes in market interest rates. We measure our interest
rate risk and potential change in our NPV through the use of a financial model. This model uses a discounted cash flow analysis
and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. Historically, the model estimated
the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States
Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However,
given the current level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points
has not been prepared. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase
in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates”
column below.
The table below sets forth, as of December
31, 2018, the calculation of the estimated changes in our net portfolio value that would result from the designated immediate changes
in the United States Treasury yield curve.
|
|
|
|
|
|
|
|
|
|
|
NPV as a Percentage of Present
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Assets
(3)
|
|
Change in Interest
|
|
|
|
|
Estimated Increase (Decrease) in
|
|
|
|
|
|
Increase
|
|
Rates (basis
|
|
Estimated
|
|
|
NPV
|
|
|
NPV
|
|
|
(Decrease)
|
|
points)
(1)
|
|
NPV
(2)
|
|
|
Amount
|
|
|
Percent
|
|
|
Ratio
(4)
|
|
|
(basis points)
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
$
|
28,574
|
|
|
$
|
(15,409
|
)
|
|
|
(35.03
|
)%
|
|
|
15.45
|
%
|
|
|
(633
|
)
|
+200
|
|
|
34,221
|
|
|
|
(9,762
|
)
|
|
|
(22.20
|
)%
|
|
|
17.90
|
%
|
|
|
(388
|
)
|
+100
|
|
|
39,556
|
|
|
|
(4,427
|
)
|
|
|
(10.07
|
)%
|
|
|
20.08
|
%
|
|
|
(170
|
)
|
—
|
|
|
43,983
|
|
|
|
—
|
|
|
|
—
|
%
|
|
|
21.78
|
%
|
|
|
—
|
|
-100
|
|
|
43,430
|
|
|
|
(553
|
)
|
|
|
(1.26
|
)%
|
|
|
21.05
|
%
|
|
|
(73
|
)
|
|
(1)
|
Assumes an immediate uniform change in interest rates at all maturities.
|
|
(2)
|
NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
|
|
(3)
|
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
|
|
(4)
|
NPV Ratio represents NPV divided by the present value of assets.
|
The table above indicates that at December
31, 2018, in the event of an instantaneous parallel 100 basis point increase in interest rates, we would experience a 10.07% decrease
in net portfolio value. In the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 1.26%
decrease in net portfolio value.
Rate Shift
(1)
|
|
Net Interest Income
Year 1 Forecast
|
|
|
Year 1 Change
from Level
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
+400
|
|
$
|
5,671
|
|
|
|
(3.80
|
)%
|
+300
|
|
|
5,756
|
|
|
|
(2.36
|
)%
|
+200
|
|
|
5,825
|
|
|
|
(1.19
|
)%
|
+100
|
|
|
5,883
|
|
|
|
(0.20
|
)%
|
Level
|
|
|
5,895
|
|
|
|
—
|
|
-100
|
|
|
5,943
|
|
|
|
0.81
|
%
|
|
(1)
|
The calculated changes assume an immediate shock of the
static yield curve.
|
Depending on the relationship between long-term
and short-term interest rates, market conditions and consumer preference, we may place greater emphasis on maximizing our net interest
margin than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe that the increased net
income which may result from an acceptable mismatch in the actual maturity or re-pricing of our assets and liabilities can, during
periods of declining or stable interest rates, provide sufficient returns to justify an increased exposure to sudden and unexpected
increases in interest rates.
We do not engage in hedging activities,
such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized
mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed
securities.
Liquidity and Capital Resources
Liquidity describes our ability to meet
the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and
deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are
deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities
of securities. We also have the ability to borrow from the FHLB-Cincinnati. At December 31, 2018, we had $28.6 million outstanding
in advances from the FHLB-Cincinnati, and had the capacity to borrow approximately an additional $133.9 million from the FHLB-Cincinnati
based on our collateral capacity. We had an additional $11.5 million on lines of credit available with three commercial banks.
While maturities and scheduled amortization
of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing
demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during
any given period.
Our cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating
activities was $882,000 for the year ended December 31, 2018 and net cash used in operating activities was $185,000 for the year
ended December 31, 2017. Net cash provided by investing activities, which consists primarily of disbursements for loan originations,
offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs
on mortgage-backed securities, proceeds from sale of available-for-sale securities and interest-bearing deposits, and cash received
in the merger with Kentucky Federal was $3.7 million for the year ended December 31, 2018. Net cash used in investing activities
was $15.3 million for the year ended December 31, 2017. Net cash used in financing activities, consisting primarily of the activity
in deposit accounts and FHLB advances, was $3.8 million for the year ended December 31, 2018, resulting from our strategy of reducing
our borrowing from the Federal Home Loan Bank of Cincinnati. Net cash provided by financing activities was $14.6 million for the
year ended December 31, 2017.
We are committed to maintaining a strong
liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet
our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant
portion of maturing time deposits will be retained. We also anticipate continued participation in the National CD Rateline Program
as a wholesale source of certificates of deposit, and continued use of FHLB-Cincinnati advances.
Cincinnati Bancorp is a separate corporate
entity from Cincinnati Federal and it must provide for its own liquidity to pay any dividends to its stockholders, to repurchase
any shares of its common stock, and for other corporate purposes. Cincinnati Bancorp’s primary source of liquidity is any
dividend payments it may receive from Cincinnati Federal. Cincinnati Federal paid no dividends to Cincinnati Bancorp in 2018. In
2017, Cincinnati Federal paid $600,000 in dividends to Cincinnati Bancorp. See “Regulation and Supervision – Federal
Banking Regulation – Capital Distributions” for a discussion of the regulations applicable to the ability of Cincinnati
Federal to pay dividends. At December 31, 2018, Cincinnati Bancorp (on an unconsolidated basis) had liquid assets totaling $286,000.
At December 31, 2018, we exceeded all of
our regulatory capital requirements with a Tier 1 leverage capital level of $23.1 million, or 11.5% of adjusted total assets, which
is above the well-capitalized required level of $10.0 million, or 5.0%; total risk-based capital of $24.5 million, or 17.5% of
risk-weighted assets, which is above the well-capitalized required level of $14.0 million, or 10.0%; and common equity tier 1 risk
based capital of $23.1 million, or 16.5%, of risk weighted assets, which is above the well-capitalized required level of $9.1 million,
or 6.5%. At December 31, 2017, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $18.8
million, or 11.3% of adjusted total assets, which is above the well-capitalized required level of $8.3 million, or 5.0%; and total
risk-based capital of $20.2 million, or 16.5% of risk-weighted assets, which is above the well-capitalized required level of $12.2
million, or 10.0%. Accordingly, Cincinnati Federal was categorized as well capitalized at December 31, 2018 and 2017. Management
is not aware of any conditions or events since the most recent notification that would change our category.
Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations
Commitments.
As a financial
services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments
to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant
portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies
and approval process accorded to loans we make. At December 31, 2018, we had outstanding commitments to originate loans of $2.8
million, unfunded lines of credit of $16.1 million and forward sale commitments of $3.8 million. We anticipate that we will have
sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in one year or less
from December 31, 2018 totaled $49.8 million. Management expects that a substantial portion of the maturing time deposits will
be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances
or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations.
In
the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing
services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
Please refer to Note 18 to the Consolidated
Financial Statements for the years ended December 31, 2018 and 2017 beginning on page F-51 for a description of recent accounting
pronouncements that may affect our financial condition and results of operations.
Impact of Inflation and Changing Price
The consolidated financial statements and
related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States
of America which require the measurement of financial position and operating results in terms of historical dollars without considering
changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations
is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s
performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices
of goods and services.
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The information required by this item is
incorporated herein by reference to Part II, Item 7, “
Management’s Discussion and Analysis of Financial Condition
and Results of Operation – Management of Market Risk
.”
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The Consolidated Financial Statements,
including supplemental data, of Cincinnati Bancorp begin on page F-1 of this Annual Report.
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
|
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures.
An evaluation was performed under the supervision
and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive
Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as
of December 31, 2018. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer
and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December
31, 2018.
Evaluation and Changes in Internal Controls Over Financial
Reporting
.
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed
under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the
Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted
in the United States of America.
Management conducted an assessment of the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, utilizing the framework
established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over
financial reporting as of December 31, 2018 were effective.
Our internal control over financial reporting
includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail,
transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2)
receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company;
and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s
financial statements are prevented or timely detected.
All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
This Annual Report does not include an
attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules
of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
During the year ended December 31, 2018,
there were no changes in the Company’s internal control over financial reporting that materially affected, or were reasonably
likely to materially affect, the Company’s internal control over financial reporting.
|
ITEM 9B.
|
OTHER INFORMATION
|
Not applicable.
Kentucky Federal Savings and Loan Association merged with Cincinnati
Federal effective October 12, 2018.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Note 1: Nature of Operations
and Summary of Significant Accounting Policies
Nature of Operations
Cincinnati Bancorp (“Company”)
is the mid-tier holding company for Cincinnati Federal (the “Bank”), a federally chartered stock savings and loan association
that is primarily engaged in providing a full range of banking and financial services to individual and corporate customers. Our
business operations are conducted in the larger Greater Cincinnati/Northern Kentucky metropolitan area which includes Warren, Butler
and Clermont Counties in Ohio, Boone, Kenton and Campbell Counties in Kentucky, and Dearborn County, Indiana. On October 14, 2015,
the Bank reorganized into the mutual holding company structure. As part of the reorganization, the Company sold 773,663 shares
of common stock at a price of $10.00 per share in a public offering and issued 945,587 shares of common stock to CF Mutual Holding
Company, the Company’s parent mutual holding company. The Company is subject to competition from other financial institutions.
The Company is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory
authorities.
Principles of Consolidation
The accompanying consolidated financial statements
include Cincinnati Bancorp and its wholly subsidiary, Cincinnati Federal, together referred to as “the Company.” Intercompany
transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Material estimates that are particularly
susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired
in connection with foreclosures or in satisfaction of loans, loan servicing rights and fair values of financial instruments.
Cash Equivalents
The Company considers all liquid
investments with original maturities of three months or less to be cash equivalents.
From time to time, the Company’s
interest-bearing cash accounts may exceed the FDIC’s insured limit of $250,000 per account. Management considers the risk
of loss to be low based on the quality of the institutions where the funds are maintained.
Interest-bearing Time Deposits in Banks
Interest-bearing deposits in
banks are carried at cost.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Securities
Available-for- sale securities
are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains
and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
For debt securities with fair
value below amortized cost when the Company does not intend to sell a debt security, and it is more likely than not the Company
will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary
impairment of a debt security in earnings and the remaining portion in other comprehensive income.
Loans Held for Sale
Mortgage loans originated and
intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses,
if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded
in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in
noninterest income upon sale of the loan.
Loans
Loans that management has the
intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances
adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans.
For loans amortized at cost,
interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs,
as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on mortgage
and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process
of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged
off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not
collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to
accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably
assured.
When cash payments are received
on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded
principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured
loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms,
no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated
terms for a period of at least six consecutive months.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Loans acquired at merger are
recorded at fair value with no carryover of the acquired entity’s previously established allowance for loan losses. The excess
of expected cash flows over the estimated fair value of the acquired loans is recognized as interest income over the remaining
contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions
to the allowance for loan losses. Subsequent improvements in expected cash flows result in the recognition of additional interest
income over the remaining contractual lives of the loans. Management estimates the cash flows expected to be collected at acquisition
using a third-party risk model, which incorporates the estimate of key assumptions, such as default rates and prepayment speeds.
Allowance for Loan Losses
The allowance for loan losses
is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are
charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries,
if any, are credited to the allowance.
The allowance for loan losses
is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the
loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s
ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated
and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified
as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical
charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments
may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are
not fully reflected in the historical loss or risk rating data.
A loan is considered impaired
when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration
all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment
is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective
interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Groups of loans with similar
risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for
changes in trends, conditions and other relevant factors that affect repayment of the loans.
In the course of working with
borrowers, the Company many choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts
to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are
modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when,
for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower
that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower’s
current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the
debt, a modification of loan terms or a combination of the two. If such efforts by the Company do not results in a satisfactory
arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings commence, the Company may terminate foreclosure
proceedings if the borrower is able to work-out a satisfactory payment plan.
It is the Company’s policy
that any restructured loans on nonaccrual prior to being restructured remain on nonaccrual status until six consecutive months
of satisfactory borrower performance, at which time management would consider its return to accrual status. If a loan was accruing
at the time of restructuring, the Company reviews the loan to determine if it is appropriate to continue the accrual of interest
on the restructured loan.
With regards to determination
of the amount of the allowance for credit losses, TDRs are considered to be impaired. As a result, the determination of the amount
of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.
Lender Reserve Account
Certain loan sale transactions
with the Federal Home Loan Bank of Cincinnati (FHLB) provide for the establishment of a Lender Reserve Account (LRA). The LRA consists
of amounts withheld from loan sale proceeds by the FHLB for absorbing inherent losses that are probable on those sold loans. These
withheld funds are an asset to the Company as they are scheduled to be paid the Company in future years, net of any credit losses
on those loans sold. The receivables are initially measured at fair value. The fair value is estimated by discounting the cash
flows over the life of each master commitment contract. The accretable yield is amortized over the life of the master commitment
contract. Expected cash flows are re-evaluated at each measurement date. If there is an adverse change in expected cash flows,
the accretable yield would be adjusted on a prospective basis and the asset evaluated for impairment.
Premises and Equipment
Depreciable assets are stated
at cost, less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful
lives of the assets.
The estimated useful lives for
each major depreciable classification of premises and equipment are as follows:
Buildings and improvements
|
15-40 years
|
Equipment
|
3-5 years
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Federal Home Loan Bank Stock
Federal Home Loan Bank stock
is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the
common stock is based on a predetermined formula, carried at par and evaluated for impairment.
Foreclosed Assets Held for Sale
Assets acquired through, or in
lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less estimated costs to sell at the date
of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and
the assets are carried at the lower of carrying amount or fair value, less estimated costs to sell. Revenue and expenses from operations
and changes in the valuation allowance are included in net noninterest expense from foreclosed assets. There was no valuation allowances
established during 2018 or 2017.
Mortgage Servicing Rights
Mortgage servicing assets are
recognized separately when rights are acquired through sale of financial assets. Under the servicing assets and liabilities accounting
guidance (ASC 860-50
Transfers and Servicing
), servicing rights resulting from the sale of loans originated by the
Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing
asset using the fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at fair value
and the changes in fair value are reported in earnings in the period in which the changes occur.
Fair value is based on a valuation
model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions
that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the
custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change
from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of
the mortgage servicing rights and may result in a reduction or addition to noninterest income.
Servicing fee income is recorded
for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount
per loan and are recorded as income when earned.
Employee Stock Ownership Plan (“ESOP”)
The cost of the ESOP, but not
yet earned, is shown as a reduction of stockholders’ equity. Compensation expense is based on the market price of shares
as they are committed to be released to participant accounts and the shares become outstanding for earnings per share computations.
Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares are used to reduce annual ESOP debt
service. As of December 31, 2018, 17,972 shares have been allocated to eligible participants in the ESOP. (See Note 13 –
Employee and Director Benefits
).
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Income Taxes
The Company accounts for income
taxes in accordance with income tax accounting guidance (ASC 740,
Income Taxes
). The income tax accounting guidance
results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or
refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions
over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the
net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and
liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense
results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance
if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will
not be realized.
Uncertain tax positions are recognized
if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.
The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include
resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition
threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood
of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination
of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and
information available at the reporting date and is subject to management’s judgment.
If necessary, the Company recognizes
interest and penalties on income taxes as a component of income tax expense.
With a few exceptions, the Company
is no longer subject to examinations by tax authorities for years before 2015. As of December 31, 2018 and December 31, 2017, the
Company had no uncertain tax positions.
Comprehensive Income
Comprehensive
income consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive
income (loss) includes unrealized gains (losses) on available-for-sale securities and changes in the funded status of
the directors’ retirement plan.
Earnings Per Share
Basic earnings per share (“EPS”)
allocated to common shareholders is calculated using the two-class method and is computed by dividing net income allocated to common
shareholders by the weighted average number of common shares outstanding during the period. The two-class method is an earnings
allocation formula the determines the EPS for each class of common stock and participating securities according to dividends distributed
and participation rights in ther undistributed earnings. Diluted EPS is adjusted for dilutive effects on stock-based compensation
and is calculated using the two-class method or treasury method. The average number of common shares outstanding is increased to
include the number of shares that would have been outstanding if all potentially dilutive common stock equivalents were issued
during the period, as well as for any adjustment to income that would result from the assumed issuance.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Unallocated common shares held
by the Company’s ESOP are shown as a reduction in stockholders’ equity and are excluded from weighted-average common
shares outstanding for both basic and diluted earnings per share calculations until they are committed to be released.
Subsidiary and Other Activities
The Bank had no subsidiaries
at December 31, 2018 and 2017.
Note 2: Merger
On April 18, 2018, Cincinnati
Federal and Kentucky Federal Savings and Loan Association (“Kentucky Federal”) signed an Agreement and Plan of Merger
pursuant to which Kentucky Federal merged with and into Cincinnati Federal effective October 12, 2018.
On the effective date of the
merger, the Company issued from its authorized but unissued shares of common stock, 63,382 shares of common stock to CF Mutual
Holding Company. The number of shares issued was in consideration of Kentucky Federal’s appraised value. At closing, Kentucky
Federal Board of Director, Philip Wehrman, was added to the Boards of Director of CF Mutual Holding Company, Cincinnati Bancorp
and Cincinnati Federal. The reason for the merger was to achieve scale and efficiency in operations, as well as, expanding market
share.
The merger with Kentucky Federal
was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration
paid were recorded at their estimated fair values as of the merger date. The following table summarizes the fair value recorded
as of October 12, 2018:
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
|
|
Amount
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
Recorded
|
|
|
Adjustments
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
Consideration Paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of total consideration transferred (common shares issued)
|
|
$
|
1,240,001
|
|
|
$
|
-
|
|
|
$
|
1,240,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets Acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,224,645
|
|
|
|
-
|
|
|
|
2,224,645
|
|
Interest-bearing time deposits
|
|
|
3,580,000
|
|
|
|
-
|
|
|
|
3,580,000
|
|
Investment securities
|
|
|
5,280,000
|
|
|
|
(280,107
|
)
|
|
|
4,999,893
|
|
Federal Home Loan Bank Stock
|
|
|
1,543,300
|
|
|
|
-
|
|
|
|
1,543,300
|
|
Net loans receivable
|
|
|
16,159,521
|
|
|
|
164,074
|
|
|
|
16,323,595
|
|
Premises & Equipment, net
|
|
|
194,202
|
|
|
|
772,700
|
|
|
|
966,902
|
|
Core deposit and other intangibles
|
|
|
-
|
|
|
|
221,193
|
|
|
|
221,193
|
|
Other real estate owned
|
|
|
132,590
|
|
|
|
(33,000
|
)
|
|
|
99,590
|
|
Other assets
|
|
|
895,044
|
|
|
|
(35,718
|
)
|
|
|
859,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets acquired
|
|
|
30,009,302
|
|
|
|
809,142
|
|
|
|
30,818,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities Assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
26,475,279
|
|
|
|
3,739
|
|
|
|
26,479,018
|
|
Federal Home Loan Bank advances
|
|
|
343,242
|
|
|
|
-
|
|
|
|
343,242
|
|
Deferred taxes
|
|
|
41,947
|
|
|
|
176,636
|
|
|
|
218,583
|
|
Other Liabilities
|
|
|
345,260
|
|
|
|
-
|
|
|
|
345,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
27,205,728
|
|
|
|
180,375
|
|
|
|
27,386,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identified net assets acquired
|
|
|
2,803,574
|
|
|
|
628,767
|
|
|
|
3,432,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on merger
|
|
$
|
1,563,573
|
|
|
$
|
628,767
|
|
|
$
|
2,192,340
|
|
As permitted by ASC No. 805-10-25,
Business Combinations, the above estimates may be adjusted up to one year after closing date of the acquisition to reflect any
new information obtained about facts and circumstances existing at the acquisition date. Any changes in the estimated fair values
will be recognized in the period the adjustment is identified.
The assets acquired and liabilities
assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible,
were recorded at their fair values as of October 12, 2018 based on management’s best estimate using the information available
at acquisition date. The application of purchase accounting resulted in a bargain purchase gain of approximately $2.2 million.
The driver of the gain on merger gain is the mutual savings structure of Kentucky Federal. The number of institutions that could
merge with Kentucky Federal was limited and the mutual holding company structure of Cincinnati Bancorp allowed the merger to occur.
The fair value for loans acquired
from Kentucky Federal were estimated using cash flow projections based on remaining maturity and repricing terms. Cash flows were
adjusted by estimated future credit losses and the rate of prepayments. Projected monthly cash flows were discounted to present
value using a risk-adjusted market rate for similar loans. There was no carryover of Kentucky Federal’s allowance for loan
losses associated with the loans that were acquired, as the loans were initially recorded at fair value on October 12, 2018. The
Company acquired various loans in the acquisition for which none had evidence of deterioration of credit quality since origination.
The fair value of assets includes loans with a fair value of $16,323,595. The gross principal and contractual interest due under
the contracts is $16,419,786, of which $251,369 is expected to be uncollectible.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The core deposit intangible asset
recognized is being amortized over its estimated life of approximately 10 years using the straight-line method.
Direct acquisition and
integration costs were expensed as incurred and totaled approximately $577,000 for the twelve months ended December 31, 2018.
These items were recorded as merger-related expenses on the consolidated statements of income.
The Company has determined
that it is impractical to report amounts of revenue and earnings of Kentucky Federal since the acquisition date, October 12, 2018.
The back-office systems conversion of the combined entity took place October 12, 2018. Accordingly, reliable and separate complete
revenue and earnings information are no longer available. The following table presents unaudited pro forma information as if the
acquisition of Kentucky Federal had occurred on January 1, 2017. The table below does not include merger-related expenses, including
data conversion costs. The pro forma information does not necessarily reflect the results of operations that would have occurred
had the merger with Kentucky Federal been completed at the beginning of the periods presented. Furthermore, the unaudited pro forma
information does not reflect management’s estimate of any revenue enhancement opportunities or anticipated operational cost
savings.
The following table presents
selected unaudited pro forma financial information reflecting the merger assuming it was completed as of January 1, 2017. The unaudited
pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial
results of the combined companies had the merger actually been completed at the beginning of the period presented, nor does it
indicate future results for any other interim or full fiscal year period. Pro forma basic and fully diluted earnings per share
were calculated using the Company’s actual weighted average shares outstanding for the periods presented, plus the incremental
shares issued, assuming the merger occurred at the beginning of the periods presented. The unaudited pro forma information is based
on the actual financial statements of the Company for the period presented.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
|
|
Pro Forma (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
(in Thousands, except
|
|
|
(in Thousands, except
|
|
|
|
per Share Data)
|
|
|
per Share Data)
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
5,586
|
|
|
$
|
5,230
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
5,036
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
7,798
|
|
|
|
7,028
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
454
|
|
|
$
|
875
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.27
|
|
|
|
0.50
|
|
Diluted
|
|
|
0.27
|
|
|
|
0.50
|
|
Note 3: Securities
The amortized cost and approximate
fair values, together with gross unrealized gains and losses, of securities are as follows:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities of government sponsored entities
|
|
$
|
629,447
|
|
|
$
|
3,806
|
|
|
$
|
(2,892
|
)
|
|
$
|
630,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities of government sponsored entities
|
|
$
|
909,161
|
|
|
$
|
4,470
|
|
|
$
|
(3,409
|
)
|
|
$
|
910,222
|
|
Proceeds from the sale of available-for-sale
securities were $4,999,893 for the year ended December 31, 2018. No gains or losses were realized. There were no sales of available-for-sale
for the year ended December 31, 2017.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Total fair value of investments
at December 31, 2018 reported at less than historical cost was $512,303 and was approximately 81% of the Company’s investment
portfolio. The decline primarily resulted from changes in market interest rates. There was $785,539 or approximately 86% of the
investment portfolio reported at less than historical cost at December 31, 2017.
Expected maturities on mortgage-backed
securities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties. At December 31, 2018 and 2017, the Company’s investments consisted entirely of mortgage-backed
securities which are not due at a single maturity date.
The following tables show the
gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily
impaired, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss
position at December 31, 2018:
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities of government sponsored entities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
512,303
|
|
|
$
|
(2,892
|
)
|
|
$
|
512,303
|
|
|
$
|
(2,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities of government sponsored entities
|
|
$
|
785,539
|
|
|
$
|
(3,409
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
785,539
|
|
|
$
|
(3,409
|
)
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Note 4: Loans and Allowance for Loan
Losses
Categories of loans at December 31, 2018 and December
31, 2017 include:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
One to four family mortgage loans -owner occupied
|
|
$
|
93,659,520
|
|
|
$
|
77,532,809
|
|
One to four family - investment
|
|
|
14,242,563
|
|
|
|
11,354,976
|
|
Multi-family mortgage loans
|
|
|
27,140,014
|
|
|
|
23,895,594
|
|
Nonresidential mortgage loans
|
|
|
18,930,426
|
|
|
|
18,138,584
|
|
Construction and land loans
|
|
|
7,293,737
|
|
|
|
6,173,341
|
|
Real estate secured lines of credit
|
|
|
11,373,975
|
|
|
|
11,713,943
|
|
Commercial loans
|
|
|
415,730
|
|
|
|
334,628
|
|
Other consumer loans
|
|
|
796,051
|
|
|
|
471,386
|
|
Total loans
|
|
|
173,852,016
|
|
|
|
149,615,261
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Net deferred loan costs
|
|
|
(491,331
|
)
|
|
|
(479,795
|
)
|
Undisbursed portion of loans
|
|
|
2,573,244
|
|
|
|
1,714,766
|
|
Allowance for loan losses
|
|
|
1,405,072
|
|
|
|
1,360,072
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
170,365,031
|
|
|
$
|
147,020,218
|
|
Risk characteristics applicable
to each segment of the loan portfolio are described as follows:
One to Four Family Mortgage
Loans and Real Estate Secured Lines of Credit:
The one to four family mortgage loans and real estate secured lines of credit
are secured by owner-occupied one to four family residences. Repayment of these loans is primarily dependent on the personal income
and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s
market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that
the loans are of smaller individual amounts and spread over a large number of borrowers.
One to Four Family Investment
Property Loans:
The one to four family investment property loans are secured by non-owner occupied one to four family residences.
Repayment of these loans is primarily dependent on the net rental income and personal income of the borrowers. These loans are
considered to be higher risk than owner occupied one to four family mortgage loans. Credit risk in these loans can be impacted
by economic conditions within the Company’s market areas that might impact investment property vacancies, property values
or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread
over a large number of borrowers.
Multi-Family and Nonresidential
Mortgage Loans:
These loans typically involve larger principal amounts, and repayment of these loans is generally dependent
on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These
loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be
impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Construction and Land Loans:
Land loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal
reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent
loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These
loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest
rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted
by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.
Commercial Loans:
The
commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and
expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit
risk in these loans is impacted by creditworthiness of a borrower and the economic conditions that impact the cash flow stability
from business operations.
Other Consumer Loans:
The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal
purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of
the loan purpose. Credit risk is impacted by consumer economic factors (such as unemployment and general economic conditions in
the Company’s market area) and the creditworthiness of a borrower.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The following tables present
the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method
as of December 31, 2018 and December 31, 2017:
|
|
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
|
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
|
|
Year
Ended December 31, 2017
|
|
|
|
One-
to Four-
Family Mortgage
Loans Owner
Occupied
|
|
|
One-
to Four-
Family Mortgage
Loans Investment
|
|
|
Multi-Family
Mortgage Loans
|
|
|
Nonresidential
Mortgage Loans
|
|
|
Construction
&
Land
Loans
|
|
|
Real
Estate
Secured Lines of
Credit
|
|
|
Commercial
Loans
|
|
|
Other
Consumer
Loans
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
413,194
|
|
|
$
|
129,628
|
|
|
$
|
175,295
|
|
|
$
|
167,431
|
|
|
$
|
64,297
|
|
|
$
|
364,191
|
|
|
$
|
11,916
|
|
|
$
|
312
|
|
|
$
|
1,326,264
|
|
Provision (credit)
charged to expense
|
|
|
(78,305
|
)
|
|
|
42,046
|
|
|
|
65,601
|
|
|
|
29,380
|
|
|
|
18,372
|
|
|
|
(51,553
|
)
|
|
|
(4,982
|
)
|
|
|
9,441
|
|
|
|
30,000
|
|
Losses charged off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
3,808
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,808
|
|
Balance,
end of year
|
|
$
|
338,697
|
|
|
$
|
171,674
|
|
|
$
|
240,896
|
|
|
$
|
196,811
|
|
|
$
|
82,669
|
|
|
$
|
312,638
|
|
|
$
|
6,934
|
|
|
$
|
9,753
|
|
|
$
|
1,360,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
42,396
|
|
|
$
|
9,055
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
51,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Collectively evaluated for impairment
|
|
$
|
338,697
|
|
|
$
|
129,278
|
|
|
$
|
231,841
|
|
|
$
|
196,811
|
|
|
$
|
82,669
|
|
|
$
|
312,638
|
|
|
$
|
6,934
|
|
|
$
|
9,753
|
|
|
$
|
1,308,621
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
77,532,809
|
|
|
$
|
11,354,976
|
|
|
$
|
23,895,594
|
|
|
$
|
18,138,584
|
|
|
$
|
6,173,341
|
|
|
$
|
11,713,943
|
|
|
$
|
334,628
|
|
|
$
|
471,386
|
|
|
$
|
149,615,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Individually evaluated for impairment
|
|
$
|
747,022
|
|
|
$
|
1,068,714
|
|
|
$
|
632,447
|
|
|
$
|
179,558
|
|
|
$
|
-
|
|
|
$
|
39,687
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,667,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Collectively evaluated for impairment
|
|
$
|
76,785,787
|
|
|
$
|
10,286,262
|
|
|
$
|
23,263,147
|
|
|
$
|
17,959,026
|
|
|
$
|
6,173,341
|
|
|
$
|
11,674,256
|
|
|
$
|
334,628
|
|
|
$
|
471,386
|
|
|
$
|
146,947,833
|
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
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 affected in the future.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The following tables present
the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of December
31, 2018 and 2017:
|
|
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
|
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to Four-
Family Mortgage
Loans – Owner
Occupied
|
|
|
One-
to Four-
Family Mortgage
Loans -
Investment
|
|
|
Multi-Family
Mortgage Loans
|
|
|
Nonresidential
Mortgage Loans
|
|
|
Construction
&
Land Loans
|
|
|
Real
Estate
Secured Lines of
Credit
|
|
|
Commercial
Loans
|
|
|
Other
Consumer
Loans
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
77,239,158
|
|
|
$
|
9,723,639
|
|
|
$
|
23,254,092
|
|
|
$
|
17,341,292
|
|
|
$
|
6,173,341
|
|
|
$
|
11,021,251
|
|
|
$
|
334,628
|
|
|
$
|
471,386
|
|
|
$
|
145,558,787
|
|
Special mention
|
|
|
-
|
|
|
|
384,819
|
|
|
|
-
|
|
|
|
617,734
|
|
|
|
-
|
|
|
|
489,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,492,253
|
|
Substandard
|
|
|
293,651
|
|
|
|
1,246,518
|
|
|
|
641,502
|
|
|
|
179,558
|
|
|
|
-
|
|
|
|
202,992
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,564,221
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77,532,809
|
|
|
$
|
11,354,976
|
|
|
$
|
23,895,594
|
|
|
$
|
18,138,584
|
|
|
$
|
6,173,341
|
|
|
$
|
11,713,943
|
|
|
$
|
334,628
|
|
|
$
|
471,386
|
|
|
$
|
149,615,261
|
|
Pass portfolio within table above
consists of loans graded Prime (1) through Acceptable (4).
The Company evaluates the loan
risk grading system definitions and the allowance for loan losses methodology on an ongoing basis. No significant changes were
made to either during the year ended December 31, 2018.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The following tables present
the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2018 and December 31,
2017:
|
|
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
|
|
|
$
|
-
|
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59
Past Due
|
|
|
60-89
Days Past
Due
|
|
|
90
Days and
Greater
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans
Receivable
|
|
|
Total
Loans > 90
Days &
Accruing
|
|
One to Four-family
mortgage loans
|
|
$
|
92,143
|
|
|
$
|
-
|
|
|
$
|
144,357
|
|
|
$
|
236,500
|
|
|
$
|
77,296,309
|
|
|
$
|
77,532,809
|
|
|
$
|
-
|
|
One to Four Family -
Investment
|
|
|
-
|
|
|
|
-
|
|
|
|
8,755
|
|
|
|
8,755
|
|
|
|
11,346,221
|
|
|
|
11,354,976
|
|
|
|
-
|
|
Multi-family mortgage
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,895,594
|
|
|
|
23,895,594
|
|
|
|
-
|
|
Nonresidential mortgage
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,138,584
|
|
|
|
18,138,584
|
|
|
|
-
|
|
Construction & land
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,173,341
|
|
|
|
6,173,341
|
|
|
|
-
|
|
Real estate secured
lines of credit
|
|
|
80,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
11,633,943
|
|
|
|
11,713,943
|
|
|
|
-
|
|
Commercial Loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
334,628
|
|
|
|
334,628
|
|
|
|
-
|
|
Other
consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
471,386
|
|
|
|
471,386
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
172,143
|
|
|
$
|
-
|
|
|
$
|
153,112
|
|
|
$
|
325,255
|
|
|
$
|
149,290,006
|
|
|
$
|
149,615,261
|
|
|
$
|
-
|
|
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 but also include loans modified in TDRs.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The following tables present
impaired loans at and for the years ended December 31, 2018 and 2017:
|
|
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
|
|
|
|
December
31, 2017
|
|
|
|
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
|
|
$
|
747,022
|
|
|
$
|
747,022
|
|
|
$
|
-
|
|
|
$
|
753,098
|
|
|
$
|
28,104
|
|
One
to Four family - Investment
|
|
|
574,375
|
|
|
|
574,375
|
|
|
|
-
|
|
|
|
587,247
|
|
|
|
34,059
|
|
Multi-family
mortgage loans
|
|
|
522,818
|
|
|
|
522,818
|
|
|
|
-
|
|
|
|
522,817
|
|
|
|
38,940
|
|
Nonresidential
mortgage loans
|
|
|
179,558
|
|
|
|
179,558
|
|
|
|
-
|
|
|
|
186,670
|
|
|
|
12,352
|
|
Construction
& land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real
estate secured lines of credit
|
|
|
39,687
|
|
|
|
39,687
|
|
|
|
-
|
|
|
|
42,229
|
|
|
|
3,540
|
|
Commercial
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans
with a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
One
to Four family - Investment
|
|
|
494,339
|
|
|
|
536,735
|
|
|
|
42,396
|
|
|
|
546,369
|
|
|
|
25,911
|
|
Multi-family
mortgage loans
|
|
|
109,629
|
|
|
|
118,684
|
|
|
|
9,055
|
|
|
|
120,196
|
|
|
|
8,153
|
|
Nonresidential
mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction
& land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real
estate secured lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,667,428
|
|
|
$
|
2,718,879
|
|
|
$
|
51,451
|
|
|
$
|
2,758,626
|
|
|
$
|
151,059
|
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Interest income recognized on
a cash basis was not materially different than interest income recognized.
The following table presents
the Company’s nonaccrual loans at December 31, 2018 and 2017. This table excludes accruing TDRs.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
One- to four-family mortgage loans
|
|
$
|
676,024
|
|
|
$
|
144,357
|
|
One to four family - Investment
|
|
|
-
|
|
|
|
8,755
|
|
Multi-family mortgage loans
|
|
|
-
|
|
|
|
-
|
|
Nonresidential mortgage loans
|
|
|
67,829
|
|
|
|
-
|
|
Construction and land loans
|
|
|
-
|
|
|
|
-
|
|
Real estate secured lines of credit
|
|
|
-
|
|
|
|
-
|
|
Commercial Loans
|
|
|
-
|
|
|
|
-
|
|
Other consumer loans
|
|
|
528
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
744,381
|
|
|
$
|
153,112
|
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
At December 31, 2018 and
2017, the Company had no loans that were modified as TDRs and that were impaired and there were no troubled debt
restructurings during either year.
The Company had no TDRs modified
during the year ended December 31, 2018 that subsequently defaulted.
As of December 31, 2018, borrowers
with loans designated as TDRs and totaling $845,400 of residential real estate loans and $641,500 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.
There were three foreclosed residential real estate
properties at December 31, 2018 totaling $102,100 net of valuation allowances. There were three consumer mortgage loans in the
process of foreclosure at December 31, 2018 totaling $301,000.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
|
Note 5:
|
Premises and Equipment
|
Major classifications of premises
and equipment, stated at cost, are as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
720,971
|
|
|
$
|
596,762
|
|
Buildings and improvements
|
|
|
4,344,614
|
|
|
|
3,508,083
|
|
Furniture and equipment
|
|
|
938,717
|
|
|
|
870,964
|
|
|
|
|
6,004,302
|
|
|
|
4,975,809
|
|
Less accumulated depreciation
|
|
|
(2,597,117
|
)
|
|
|
(2,450,325
|
)
|
|
|
|
|
|
|
|
|
|
Net premises and equipment
|
|
$
|
3,407,185
|
|
|
$
|
2,525,484
|
|
Depreciation expense
was $146,190 and $136,873 for the years ended December 31, 2018 and 2017, respectively.
Loans serviced for others are
not included in the accompanying balance sheets. The risks inherent in mortgage servicing assets relate primarily to changes in
prepayments that result from shifts in mortgage interest rates. The unpaid principal balance of residential mortgage loans serviced
for others was $99,414,705 and $82,923,341 at December 31, 2018 and 2017, respectively.
The following summarizes the
activity in mortgage servicing rights measured using the fair value method for the years ended December 31, 2018 and December 31,
2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Fair value as of the beginning of the period
|
|
$
|
909,821
|
|
|
$
|
730,164
|
|
Recognition of mortgage servicing rights on the sale of loans
|
|
|
309,712
|
|
|
|
193,792
|
|
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model
|
|
|
33,207
|
|
|
|
(14,135
|
)
|
|
|
|
|
|
|
|
|
|
Fair value at the end of the period
|
|
$
|
1,252,740
|
|
|
$
|
909,821
|
|
Contractually specified servicing
fees were approximately $256,000 and $194,000 for the years ended December 31, 2018 and December 31, 2017, respectively.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Certain loan sale transactions
with the FHLB provide for establishment of a LRA. The LRA consists of amounts withheld from the loan sale proceeds by the FHLB
for absorbing potential losses on those loans sold. These withheld funds are an asset to the Company as they are scheduled to be
paid to the Company in future years, net of any credit losses on those loans sold. The LRA funds withheld to settle these potential
losses totaled approximately $2,722,000 and $2,660,800 at December 31, 2018 and December 31, 2017, respectively; however, these
receivables are recorded at fair value at the time of sale, which includes consideration of potential credit losses, at the time
of the establishment of the LRA. In the event that the credit losses do not exceed the withheld funds, the LRA agreements provide
for payment of these funds to the Company in seven annual installments beginning five years after the sale date or in 26 annual
installments, beginning five years after the sale date. The carrying value of the LRA is equal to the initial fair value plus an
interest component less any cash receipts, which totaled approximately $1,703,300 and $1,708,600 at December 31, 2018 and December
31, 2017, respectively. The Company had mandatory delivery contracts outstanding as of December 31, 2018 of $2.6 million.
Time deposits in denominations
of $250,000 or more were approximately $5,333,000 and $6,849,700 at December 31, 2018 and December 31, 2017, respectively. Deposit
accounts in excess of $250,000 are not insured by the FDIC.
At December 31, 2018 and December
31, 2017, the scheduled maturities of time deposits were as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
49,799,669
|
|
|
$
|
33,273,570
|
|
Over one year to two years
|
|
|
13,936,624
|
|
|
|
22,444,847
|
|
Over two years to three years
|
|
|
10,332,065
|
|
|
|
6,120,937
|
|
Over three years to four years
|
|
|
3,488,891
|
|
|
|
4,364,522
|
|
Over four years to five years
|
|
|
2,989,892
|
|
|
|
929,422
|
|
Thereafter
|
|
|
1,769
|
|
|
|
17,972
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80,548,910
|
|
|
$
|
67,151,270
|
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Interest expense during the years
ended December 31, 2018 and 2017 for each major category of deposits was as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deposit Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
65,297
|
|
|
$
|
20,453
|
|
Interest Bearing Demand
|
|
|
134,405
|
|
|
|
71,454
|
|
Certificates of Depostits
|
|
|
1,229,600
|
|
|
|
919,250
|
|
|
|
|
|
|
|
|
|
|
Total Deposit Interest Expense
|
|
$
|
1,429,302
|
|
|
$
|
1,011,157
|
|
|
Note 8:
|
Federal Home Loan Bank Advances
|
FHLB advances are secured by
a blanket pledge of qualifying mortgage loans totaling approximately $116,337,520 and $101,932,900 and the Company’s investment
in FHLB stock at December 31, 2018 and December 31, 2017, respectively. Advances, at interest rates ranging from 1.01% to 3.12%,
are subject to restrictions or penalties in the event of prepayment.
Aggregate annual maturities of
FHLB advances at December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
15,450,000
|
|
|
$
|
21,634,000
|
|
Over one year to two years
|
|
|
8,538,152
|
|
|
|
10,650,000
|
|
Over two years to three years
|
|
|
2,600,000
|
|
|
|
2,038,152
|
|
Over three years to four years
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
|
28,588,152
|
|
|
|
34,322,152
|
|
Deferred prepayment penalty, net of amortization
|
|
|
(7,714
|
)
|
|
|
(12,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,580,438
|
|
|
$
|
34,309,810
|
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
During 2014 and previous years, the Company prepaid
certain FHLB advances which resulted in prepayment penalties. There were prepayments that resulted in prepayment penalties in 2014
totaling $713,579. There were no prepayments that resulted in prepayment penalties since 2014.
At December 31, 2018, we had $28.6 million outstanding
in advances from the FHLB-Cincinnati, and had capacity to borrow approximately an additional $133.9 million from the FHLB-Cincinnati
based on our collateral capacity. We had an additional $11.5 million on lines of credit with three commercial banks. No amount
was outstanding on these lines at December 31, 2018.
The provision for income taxes includes these components
for the years ended December 31, 2018 and December 31, 2017. A reconciliation of income tax expense at the statutory rate to the
Company’s actual income tax expense is shown below:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Taxes currently payable
|
|
$
|
46,232
|
|
|
$
|
215,770
|
|
Deferred income taxes
|
|
|
145,046
|
|
|
|
(182,175
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
191,278
|
|
|
$
|
33,595
|
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Computed at the statutory rate
|
|
$
|
523,447
|
|
|
$
|
309,004
|
|
Increase (decrease) resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of gain on merger with Kentucky Federal
|
|
|
(460,391
|
)
|
|
|
-
|
|
Deferred tax re-valuation
|
|
|
-
|
|
|
|
(229,969
|
)
|
Bank-owned life insurance
|
|
|
(15,598
|
)
|
|
|
(27,771
|
)
|
Merger expenses
|
|
|
59,681
|
|
|
|
|
|
Other
|
|
|
84,139
|
|
|
|
(17,669
|
)
|
|
|
|
|
|
|
|
|
|
Actual tax expense
|
|
$
|
191,278
|
|
|
$
|
33,595
|
|
A reconciliation between the statutory income tax and the Company's
effective tax rate follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Computed at the statutory rate
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
Increase (decrease) resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of gain on merger with Kentucky Federal
|
|
|
(18.47
|
)%
|
|
|
-
|
|
Change in effective tax rate
|
|
|
-
|
|
|
|
(25.30
|
)%
|
Bank-owned life insurance
|
|
|
(0.63
|
)%
|
|
|
(3.06
|
)%
|
Merger expenses
|
|
|
2.39
|
%
|
|
|
|
|
Other
|
|
|
3.38
|
%
|
|
|
(1.94
|
)%
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
7.67
|
%
|
|
|
3.70
|
%
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The tax effects of temporary differences related
to deferred taxes shown on the balance sheets at December 31, 2018 and December 31, 2017 were:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
277,403
|
|
|
$
|
267,953
|
|
Loans held for sale
|
|
|
5,437
|
|
|
|
12,000
|
|
Directors' Retirement Plan
|
|
|
102,287
|
|
|
|
92,533
|
|
Net operating loss
|
|
|
244,401
|
|
|
|
|
|
Other
|
|
|
19,161
|
|
|
|
36,914
|
|
|
|
|
648,689
|
|
|
|
409,400
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
|
(105,737
|
)
|
|
|
(100,757
|
)
|
Prepaid penalties on FHLB advances
|
|
|
(1,620
|
)
|
|
|
(2,592
|
)
|
Dividends on FHLB stock
|
|
|
(332,211
|
)
|
|
|
(103,227
|
)
|
Mortgage servicing rights
|
|
|
(263,075
|
)
|
|
|
(191,062
|
)
|
FHLB lender risk account receivable
|
|
|
(357,688
|
)
|
|
|
(358,805
|
)
|
Depreciation
|
|
|
(183,604
|
)
|
|
|
(15,116
|
)
|
Unrealized gains on available-for-sale securities
|
|
|
(192
|
)
|
|
|
(223
|
)
|
Valuation allowance
|
|
|
(19,322
|
)
|
|
|
-
|
|
Other
|
|
|
(135,971
|
)
|
|
|
-
|
|
|
|
|
(1,399,420
|
)
|
|
|
(771,782
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(750,731
|
)
|
|
$
|
(362,382
|
)
|
On December 22, 2017, federal
tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, resulting
in significant modifications to existing federal tax law. As a result of the changes under the Tax Act, the Company recorded an
incremental income tax benefit of $229,969 during the year ended December 31, 2017, which consisted primarily of the re-measurement
of deferred tax assets and liabilities at the new federal statutory rate of 21%. Prior to the enactment of the Tax Act, deferred
tax assets and liabilities were measured at the previous federal statutory rate of 34%.
Retained earnings at both December
31, 2018 and December 31, 2017, include approximately $766,000 for which no deferred federal income tax liability has been recognized.
This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated
for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for
tax purposes only, which would be subject to the then-current corporate income tax rate. The deferred income tax liability on the
preceding amount that would have been recorded if it was expected to reverse into taxable income in the foreseeable future was
approximately $160,900 and $160,900 at December 31, 2018 and December 31, 2017, respectively.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
As of December 31, 2018, the
Company has net operating loss carryforwards of approximately $666,155 which expire between 2028 and 2037 and $467,657 with no
expiration. A valuation allowance for deferred tax assets is provided for all or some portion of the deferred tax asset when it
is more likely than not an amount will not be realized. An increase or decrease in the valuation allowance that results from a
change in circumstances is included in income tax expense in the period they are identified. At December 31, 2018, the Company
has a valuation allowance of $19,322 to reduce deferred tax assets to the amount that is more likely than not to be realized under
Code Section 382 limitations.
|
Note 10:
|
Accumulated Other Comprehensive Loss
|
The
components of accumulated other comprehensive loss, included in equity, are as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net unrealized gain on available for sale securities
|
|
$
|
721
|
|
|
$
|
700
|
|
|
|
|
|
|
|
|
|
|
Directors' Retirement Plan
|
|
|
(320,917
|
)
|
|
|
(310,262
|
)
|
|
|
|
|
|
|
|
|
|
Tax benefit
|
|
|
67,754
|
|
|
|
105,577
|
|
|
|
|
|
|
|
|
|
|
Net of tax amount
|
|
$
|
(252,442
|
)
|
|
$
|
(203,985
|
)
|
|
Note 11:
|
Regulatory Matters
|
The Bank 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s
assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other
factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial
statements.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Quantitative measures established
by regulation to ensure capital adequacy require the Bank 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 December 31, 2018 and
December 31, 2017, the Bank met all capital adequacy requirements to which it was subject at such dates.
Effective January 1, 2015, new
regulatory capital requirements commonly referred to as ‘Basel III” were implemented and are reflected below. Management
opted out of the accumulated comprehensive income treatment under the new requirements, and as such unrealized gains and losses
from available-for-sale securities will continue to be excluded from regulatory capital.
The below minimum capital requirements
exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and
certain discretionary bonus payments to executive officers. The capital conservation buffer is being phased in from 0.0% for 2015
to 2.50% by 2019. The capital conservation buffer was 1.875% at December 31, 2018.
As of December 31, 2018, the
most recent notification from the Office of the Comptroller of the Currency categorized the Bank 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. There are no conditions or events since that
notification that management believes have changed 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 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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (to risk-weighted assets)
|
|
$
|
20,158
|
|
|
|
16.5
|
%
|
|
$
|
9,789
|
|
|
|
8.0
|
%
|
|
$
|
12,236
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk-weighted assets)
|
|
|
18,798
|
|
|
|
15.4
|
%
|
|
|
7,342
|
|
|
|
6.0
|
%
|
|
|
9,789
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier I capital (to risk-weighted assets)
|
|
|
18,798
|
|
|
|
15.4
|
%
|
|
|
5,506
|
|
|
|
4.5
|
%
|
|
|
7,953
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to adjusted total assets)
|
|
|
18,798
|
|
|
|
11.3
|
%
|
|
|
6,633
|
|
|
|
4.0
|
%
|
|
|
8,291
|
|
|
|
5.0
|
%
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The following is a reconciliation of the Bank’s
equity capital under accounting principles generally accepted in the United States of America to Tier 1 and Total risk-based capital:
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Regulatory Capital:
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
$
|
23,041
|
|
|
$
|
18,594
|
|
Disallowed servicing and other
|
|
|
(219
|
)
|
|
|
-
|
|
Accumulated other comprehensive loss
|
|
|
253
|
|
|
|
204
|
|
Tier 1 risk -based capital
|
|
|
23,075
|
|
|
|
18,798
|
|
Eligible Allowance for loan losses (1)
|
|
|
1,405
|
|
|
|
1,360
|
|
Total risk-based capital
|
|
$
|
24,480
|
|
|
$
|
20,158
|
|
(1) Limited to 1.25% of risk-weighted assets
|
Note 12:
|
Related Party Transactions
|
At December 31, 2018 and December
31, 2017, the Company had loans outstanding to executive officers, directors and their affiliates (related parties). Annual activity
consisted of the following:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
930,096
|
|
|
$
|
987,958
|
|
New Loans
|
|
|
-
|
|
|
|
-
|
|
Repayments
|
|
|
50,954
|
|
|
|
57,862
|
|
Ending balances
|
|
$
|
879,142
|
|
|
$
|
930,096
|
|
In management’s opinion,
such loans and other extensions of credit are consistent with sound lending practices and are within applicable regulatory lending
limitations. In management’s opinion these loans did not involve more than normal risk of collectability or present other
unfavorable features.
Deposits from related parties
held by the Bank at December 31, 2018 and December 31, 2017 totaled $1,403,200 and $1,083,300, respectively.
|
Note 13:
|
Employee and Director Benefits
|
The Company has a 401(k) profit-sharing
plan covering substantially all employees. The Company’s contributions to the plan are determined annually by the Board of
Directors of Cincinnati Federal. Contributions to the plan were approximately $88,700 and $77,000 for the years ended December
31, 2018 and December 31, 2017, respectively.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
In connection with the conversion
to an entity owned by stockholders, the Company established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of
eligible employees. The ESOP borrowed funds from the Company in an amount sufficient to purchase 67,397 shares (approximately 3.92%
of the common stock sold in the stock offering). The loan is secured by the shares purchased and will be repaid by the ESOP with
funds from contributions made by the Company and dividends received by the ESOP. Contributions will be applied to repay interest
on the loan first, then the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 15
years. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is
repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion
to their compensation, relative to total compensation of all active participants. Participants will vest in their accrued benefits
under the ESOP at the rate of 20 percent per year after two years of service. Vesting is accelerated upon retirement, death or
disability of the participant, or a change in control of the Company. Forfeitures will be reallocated to remaining plan participants.
Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP.
The debt of the ESOP is eliminated
in consolidation. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement.
As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price
of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends on unallocated
ESOP shares, if any, are recorded as a reduction of debt and accrued interest. ESOP compensation expense was approximately $54,000
and $44,900 for the years ended December 31, 2018 and December 31, 2017, respectively.
A summary of the ESOP shares
as of December 31, 2018 and 2017 are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Shares released to participants
|
|
|
13,479
|
|
|
|
8,986
|
|
Share allocated to participants
|
|
|
4,493
|
|
|
|
4,493
|
|
Unreleased shares
|
|
|
49,425
|
|
|
|
53,918
|
|
Total
|
|
|
67,397
|
|
|
|
67,397
|
|
|
|
|
|
|
|
|
|
|
Fair Value of unreleased shares
|
|
$
|
605,456
|
|
|
$
|
593,098
|
|
If the ESOP is unable to satisfy
the obligation to repurchase the shares held by each beneficiary upon the beneficiary’s termination or retirement, the Company
is obligated to repurchase the shares. At December 31, 2018, the fair value of these shares is $220,157. In addition, there are
no outstanding shares held by former employees that are subject to an ESOP related repurchase option.
In addition, effective July 2014,
the Company provides post-retirement benefits to directors of the Company
.
The Company accounts
for the policies in accordance with ASC 715-60
Defined Benefit Plans
, which requires companies to recognize a liability
and related compensation costs that provide a benefit to a director extending to post-retirement periods. The liability is recognized
based on the substantive agreement with the director.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The Company uses a December 31
measurement date for the plan. Information about the plan’s funded status and pension cost follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
440,630
|
|
|
$
|
419,921
|
|
Service cost
|
|
|
11,965
|
|
|
|
10,633
|
|
Interest cost
|
|
|
12,687
|
|
|
|
13,863
|
|
Loss/(gain)
|
|
|
36,795
|
|
|
|
11,213
|
|
Benefits paid
|
|
|
(15,000
|
)
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
487,077
|
|
|
$
|
440,630
|
|
Amounts recognized in accumulated
other comprehensive income not yet recognized as components of net periodic benefit cost consist of:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
25,280
|
|
|
$
|
25,280
|
|
Net loss
|
|
$
|
3,622
|
|
|
$
|
860
|
|
The accumulated benefit obligation
for the benefit plan was $473,884 and $440,630 at December 31, 2018, and December 31, 2017, respectively.
The estimated prior service credit
for the plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal
year is approximately $25,280.
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
11,965
|
|
|
$
|
10,633
|
|
Interest Cost
|
|
|
12,687
|
|
|
|
13,863
|
|
(Gain)/loss recognized
|
|
|
860
|
|
|
|
77
|
|
Prior service cost
|
|
|
25,280
|
|
|
|
25,280
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,792
|
|
|
$
|
49,853
|
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The retiree accrued liability expected to be reversed
from the plan as of December 31, 2018 and December 31, 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
30,000
|
|
|
$
|
15,000
|
|
Over one year to two years
|
|
|
30,000
|
|
|
|
30,000
|
|
Over two years to three years
|
|
|
30,000
|
|
|
|
30,000
|
|
Over three years to four years
|
|
|
30,000
|
|
|
|
30,000
|
|
Over four years to five years
|
|
|
30,000
|
|
|
|
30,000
|
|
Thereafter
|
|
|
126,000
|
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
276,000
|
|
|
$
|
240,000
|
|
Significant
assumptions for the benefit plan liability include the following as of December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine benefit cost obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
3.47
|
%
|
|
|
4.05
|
%
|
|
Note 14:
|
Operating Lease Income
|
The Company has two operating
leases where it acts as lessor to two different tenants for office space. One lease expires in November 2021 and has three additional
renewal options for five years each. The other lease expires in July 2020. Rental income for these leases was approximately $92,000
and $91,800 for the years ended December 31, 2018 and December 31, 2017, respectively.
Future minimum lease receipts
under the operating lease are:
|
|
December 31, 2018
|
|
|
|
|
|
One year or less
|
|
$
|
92,352
|
|
Over one year to two years
|
|
|
92,352
|
|
Over two years to three years
|
|
|
79,902
|
|
Over three years to four years
|
|
|
67,452
|
|
Over four years to five years
|
|
|
67,452
|
|
Thereafter
|
|
|
67,452
|
|
|
|
|
|
|
Total minimum lease receipts
|
|
$
|
466,962
|
|
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
|
Note 15:
|
Disclosures About Fair Value of Assets and Liabilities
|
Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs.
There is a hierarchy of three levels of inputs that may be used to measure fair value:
|
Level 1
|
Quoted prices in active markets for identical assets or
liabilities.
|
|
Level 2
|
Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full-term of the assets or liabilities.
|
|
Level 3
|
Unobservable inputs supported by little or no market activity
and are significant to the fair value of the assets or liabilities.
|
Recurring Measurements
The following tables present
the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy
in which the fair value measurements fall at December 31, 2018 and December 31, 2017:
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Prices in
Active
Markets
for Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities of government sponsored entities
|
|
$
|
630,361
|
|
|
$
|
-
|
|
|
$
|
630,361
|
|
|
$
|
-
|
|
Mortgage servicing rights
|
|
|
1,252,740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,252,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities of government sponsored entities
|
|
$
|
910,222
|
|
|
$
|
-
|
|
|
$
|
910,222
|
|
|
$
|
-
|
|
Mortgage servicing rights
|
|
|
909,821
|
|
|
|
-
|
|
|
|
-
|
|
|
|
909,821
|
|
Following is a description of
the valuation methodologies and inputs used for assets measured at fair value on recurring basis and recognized in the accompanying
consolidated 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.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
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 balance sheets using significant unobservable (Level 3) inputs:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Fair value as of the beginning of the period
|
|
$
|
909,821
|
|
|
$
|
730,164
|
|
Recognition of mortgage servicing rights on the sale of loans
|
|
|
309,712
|
|
|
|
193,792
|
|
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model
|
|
|
33,207
|
|
|
|
(14,135
|
)
|
|
|
|
|
|
|
|
|
|
Fair value at the end of the period
|
|
$
|
1,252,740
|
|
|
$
|
909,821
|
|
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.
Cincinnati
Bancorp
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Nonrecurring Measurements
The following table presents the fair value measurement
of assets measured at fair value on a nonrecurring basis and the level of hierarchy in which the fair value measurements fall at
December 31, 2018 and 2017.
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Carrying
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
|
$
|
744,381
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
744,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
|
$
|
153,112
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
153,112
|
|
Collateral-dependent Impaired Loans
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 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.
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
Unobservable (Level 3) Inputs
The following tables present quantitative information
about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2018 and 2017:
|
|
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 at
December 31, 2017
|
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Range
(Weighted
Average)
|
Mortgage servicing rights
|
|
$
|
909,821
|
|
|
Discounted
cash flow
|
|
Discount rate
PSA prepayment speeds
|
|
10%
130%-272%
|
Impaired loans (collateral dependent)
|
|
$
|
153,112
|
|
|
Market comparable properties
|
|
Marketability
discount
|
|
10%-15% (12%)
|
Fair Value of Financial Instruments
The following methods were used to
estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than
fair value.
Cash and cash equivalents, Federal Home Loan
Bank Stock and Interest Receivable
The carrying amount approximates fair value.
Loans Held for Sale
Fair value of loans held for sale
is based on quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating
the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.
Loans
The fair value of loans is estimated
by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
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 carrying amount approximates fair value. 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 December 31, 2018 and 2017, the fair value of commitments
were not material.
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
The following table presents estimated fair values of
the Company’s financial instruments carried at cost at December 31, 2018 and 2017:
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Carrying
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,266,824
|
|
|
$
|
10,266,824
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Loans held for sale
|
|
|
2,221,084
|
|
|
|
-
|
|
|
|
2,278,225
|
|
|
|
-
|
|
Loans, net of allowance for loan losses
|
|
|
147,020,218
|
|
|
|
-
|
|
|
|
-
|
|
|
|
149,839,913
|
|
Federal Home Loan Bank stock
|
|
|
1,021,000
|
|
|
|
-
|
|
|
|
1,021,000
|
|
|
|
-
|
|
Interest receivable
|
|
|
448,727
|
|
|
|
-
|
|
|
|
448,727
|
|
|
|
-
|
|
Federal Home Loan Bank lender risk account receivable
|
|
|
1,708,593
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,762,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
113,947,726
|
|
|
|
46,796,456
|
|
|
|
66,965,227
|
|
|
|
-
|
|
Federal Home Loan Bank advances
|
|
|
34,309,810
|
|
|
|
-
|
|
|
|
34,222,713
|
|
|
|
-
|
|
Advances from borrowers for taxes and insurance
|
|
|
1,480,777
|
|
|
|
-
|
|
|
|
1,480,777
|
|
|
|
-
|
|
Interest payable
|
|
|
38,626
|
|
|
|
-
|
|
|
|
38,626
|
|
|
|
-
|
|
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
Note 16: 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.
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 December 31, 2018 and 2017 follows:
|
|
December 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
Interest Rate
|
|
|
|
Amount
|
|
|
Range
|
|
|
Amount
|
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to fund fixed-rate loans
|
|
$
|
2,566,950
|
|
|
4.625% - 6.00%
|
|
$
|
3,247,703
|
|
|
3.75% - 4.50%
|
Lines of Credit
Lines of credit are agreements to
lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have
fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily
represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real
estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
Loan commitments outstanding at December
31, 2018 and December 31, 2017 were composed of the following:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Commitments to originate loans
|
|
$
|
2,845,450
|
|
|
$
|
6,360,251
|
|
Forward sale commitments
|
|
|
3,848,950
|
|
|
|
5,468,787
|
|
Lines of credit
|
|
|
16,119,038
|
|
|
|
12,637,670
|
|
Note 17: Earnings Per Share
Basic earnings per common share is
computed based upon the weighted-average number of common shares outstanding during the period, less shares in the Company’s
ESOP that are unallocated and not committed to be released. The computations are as follows for December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
2,301,322
|
|
|
$
|
875,241
|
|
Less allocation of earnings to participating securities
|
|
|
27,184
|
|
|
|
10,846
|
|
Net income allocated to common shareholders
|
|
|
2,274,138
|
|
|
|
864,395
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average shares outstanding:
|
|
|
1,741,985
|
|
|
|
1,725,989
|
|
Less: Average Unearned ESOP and unvested restricted stock:
|
|
|
50,551
|
|
|
|
55,043
|
|
|
|
|
1,691,434
|
|
|
|
1,670,946
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
$
|
1.34
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
3,825
|
|
|
|
-
|
|
Weighted average number of shares outstanding used in the calculation of basic earnings per common share
|
|
|
1,695,259
|
|
|
|
1,670,946
|
|
Diluted earnings per share:
|
|
$
|
1.34
|
|
|
$
|
0.52
|
|
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
Note 18: Equity Incentive Plan
In May 2017, the Company’s
stockholders approved the Cincinnati Bancorp 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan authorizes
the issuance or delivery to participants of up to 117,940 shares of the Company’s common stock pursuant to the grants of
restricted stock awards, restricted stock unit awards, incentive stock options, and non-qualified stock options. Of this number,
the maximum number of shares of Company common stock that may be issued under the 2017 Plan pursuant to the exercise of stock options
is 84,243 shares and the maximum number of shares of Company common stock that may be issued as restricted stock awards or restricted
stock units is 33,697 shares. Stock options awarded to employees may be incentive stock options or non-qualified stock options.
Shares subject to award under the 2017 Plan may be authorized but unissued shares or treasury shares. The 2017 Plan contains annual
and lifetime limits on certain types of awards to individual participants.
Awards may vest or become exercisable
only upon the achievement of performance measures or based solely on the passage of time after award. Stock options and restricted
stock awards provide for accelerated vesting if there is a change in control (as defined in the 2017 Plan).
In June 2017, the Company granted
stock options for 79,187 shares to members of the Board of Directors and certain members of management. Options granted in June
2017 have an exercise price of $9.55, as determined on the grant date and expire ten years from the grant date.
The fair value was calculated for
stock options granted in June 2017 using the following assumptions: expected volatility of 11.45%, a risk-free interest rate of
2.31%, and an expected term of ten years.
The weighted-average grant-date fair
value of options granted during the year 2017 was $2.86 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 December 31, 2018.
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 twelve months ended December 31, 2018 was $103,152.
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
As of December 31, 2018, there
was approximately $353,400 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 19: Multiemployer Defined
Benefit Plan
In connection with the acquisition
of Kentucky Federal Savings and Loan Association, Cincinnati Federal is now part of a multiple-employer pension plan that is considered
a multiemployer plan for accounting purposes. The Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB Plan) is
a tax-qualified defined benefit plan. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number
is 333. The Pentegra DB Plan operates as a multiemployer plan for accounting purposes and as a multiple –employer plan under
the
Employee Retirement Income Security Act of 1974
and the IRC. There are no collective bargaining agreements in place
that require contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single
plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly,
under the Pentegra DB Plan contributions made by a participating employer may be used to provide benefits of other participating
employers. If Cincinnati Federal chooses to stop participating in this plan, it may be required to pay an amount based on the underfunded
status of the plan, referred to as the withdrawal liability. Effective June 30, 2016, participation in the plan was frozen.
The funded status (market value divided
by funding target) of the plan at June 30, 2018 and 2017 was 88.12% and 94%, respectively.
Total contributions made to the Pentegra
DB Plan, as reported on Form 5500, equal $367,119,418 and $153,185,807 for the plan years ended June 30, 2017 and June 30, 2016.
Cincinnati Federal’s contribution to the Pentegra DB Plan for the fiscal year ending December 31, 2018 are not more than
5% of the total contributions to the Pentegra DB Plan for the plan year ended June 30, 2017.
Accounting Standards Update 2011-09
requires the use of the most recently available annual return (Form 5500) to determine if an employer’s contributions represent
more than 5% of total contributions to the Pentegra DB Plan. The 2016 Form 5500 is the most recently available annual report. The
Schedule SB contains the total contributions to the Pentegra DB Plan for the year ending June 30, 2017. Cincinnati Federal’s
contributions to the plan were $145,930 and $8,895 for the years ending December 31, 2018 and 2017, respectively.
Plan
|
|
Employer
Identification
|
|
Company
Contributions
|
|
|
FIP/RP Status
Pending/
|
|
Expiration of Collective
|
Name
|
|
Number
|
|
2018
|
|
|
2017
|
|
|
Implemented
|
|
Bargaining
Agreement
|
Pentegra
Defined Benefit Plan for Financial Institutions
|
|
13-5645888/333
|
|
$
|
145,930
|
|
|
$
|
8,895
|
|
|
No
|
|
None
|
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
Note 20: Recent Accounting Pronouncements
Cincinnati
Bancorp is an “emerging growth company,” as defined under the federal securities laws. 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 No. 2018-02, Income
Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income
ASU No. 2018-02 was issued in February
2018 and addresses a narrow-scope financial reporting issue that arose as a consequence of the passage of H.R. 1, originally known
as the “Tax Cuts and Jobs Act.” GAAP requires adjustment of deferred tax assets and liabilities for the effect of a
change in tax laws or rates with the effect to be included in income from continuing operations in the reporting period that includes
the enactment date. This guidance is applicable even in situations in which the related income tax effects of items in accumulated
other comprehensive income were originally recognized in other comprehensive income rather than in income from continuing operations.
As a consequence, the tax effects of items within accumulated other comprehensive income, referred to as stranded tax effects in
the update, do not reflect the appropriate tax rate. The amendments in ASU No. 2018-02 allow a reclassification from accumulated
other comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act. Because
the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance
that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected.
ASU No. 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted, including adoption in any interim period. Cincinnati Bancorp early adopted ASU No. 2018-02
January 1, 2018 and reclassified its stranded tax effects totaling approximately $40,061 (credit) into retained earnings.
FASB ASU No. 2017-09, Compensation
– Stock Compensation (Topic 718) – Scope Modification Accounting
In May 2017 the FASB issued ASU No.
2017-09, Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting. The amendments in this update
provide guidance about which the terms or conditions of share-based payment award require an entity to apply modifications accounting.
The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments
in ASU 2017-09 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2017.
Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
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.
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.
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
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, 2021, and interim periods
within fiscal years beginning after December 15, 2022. 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 Notes 1 and 4.
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.
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
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.
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
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 15.
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.
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
Note 21: Condensed Financial Information
(Parent Company Only)
Presented below
is condensed financial information as to the financial position, results of operations and cash flows of the Company:
|
|
Condensed Balance Sheet
|
|
|
|
2018
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
285,544
|
|
|
$
|
784,883
|
|
Investment in bank subsidiary
|
|
|
23,040,821
|
|
|
|
18,594,877
|
|
Other assets
|
|
|
-
|
|
|
|
71,633
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
23,326,365
|
|
|
$
|
19,451,393
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
184,942
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Temporary Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP shares subject to mandatory redemption
|
|
$
|
180,563
|
|
|
$
|
126,612
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
22,960,860
|
|
|
|
19,324,781
|
|
|
|
|
|
|
|
|
|
|
Total temporary equity and stockholders' equity
|
|
$
|
23,326,365
|
|
|
$
|
19,451,393
|
|
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
Condensed Statement of Operations and Comprehensive Income
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Dividend Income
|
|
$
|
-
|
|
|
$
|
600,000
|
|
Gain on merger
|
|
|
2,192,340
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Merger-related expenses
|
|
|
576,960
|
|
|
|
-
|
|
Other noninterest expenses
|
|
|
229,924
|
|
|
|
135,726
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
806,884
|
|
|
$
|
135,726
|
|
|
|
|
|
|
|
|
|
|
Income before federal income tax benefits and equity in undistributed income of the subsidiary
|
|
|
1,385,456
|
|
|
|
464,274
|
|
|
|
|
|
|
|
|
|
|
Federal income tax benefits
|
|
|
50,980
|
|
|
|
47,508
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed income of subsidiary
|
|
|
864,886
|
|
|
|
363,459
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
2,301,322
|
|
|
$
|
875,241
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
2,292,926
|
|
|
$
|
872,524
|
|
Cincinnati Bancorp
Notes to the Consolidated Financial Statements
December 31, 2018 and 2017
Condensed Statement of Cash Flows
|
|
2018
|
|
|
2017
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
2,301,322
|
|
|
$
|
875,241
|
|
|
|
|
|
|
|
|
|
|
Items not requiring (providing) cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed income of subsidiary
|
|
|
(864,886
|
)
|
|
|
(363,459
|
)
|
Gain on merger
|
|
|
(2,192,340
|
)
|
|
|
-
|
|
Increase (decrease) in cash due to changes in:
|
|
|
|
|
|
|
|
|
Accrued expenses and other assets
|
|
|
256,565
|
|
|
|
(47,507
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(499,339
|
)
|
|
|
464,275
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and due from banks
|
|
|
(499,339
|
)
|
|
|
464,275
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at beginning of year
|
|
|
784,883
|
|
|
|
320,608
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of year
|
|
$
|
285,544
|
|
|
$
|
784,883
|
|