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EX-32 - EXHIBIT 32 - Cincinnati Bancorpv472288_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Cincinnati Bancorpv472288_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Cincinnati Bancorpv472288_ex31-1.htm

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2017

 

OR

 

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

 

For the transition period from _______________ to _______________

 

Commission File No. 000-55529

 

Cincinnati Bancorp

(Exact name of registrant as specified in its charter)

 

Federal   47-4931771

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

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

 

(513) 574-3025

(Registrant’s telephone number)

 

N/A

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

 

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

YES x     NO ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x     NO ¨

 

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

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer ¨   Smaller reporting company x
(Do not check if smaller reporting company)   Emerging growth company x

 

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

 

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

YES ¨     NO x

 

As of August 7, 2017, 1,752,947 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding, of which 945,587 shares were owned by CF Mutual Holding Company.

 

 

 

 

 

 

Cincinnati Bancorp

Form 10-Q

 

Index

 

        Page
Part I. Financial Information
         
Item 1.   Condensed Consolidated Financial Statements    
         
    Condensed Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016   1
         
    Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)   2
         
    Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)   3
         
    Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30,  2017 and 2016 (Unaudited)   4
         
    Notes to Condensed Consolidated Financial Statements   6
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   32
         
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   42
         
Item 4.   Controls and Procedures   42
         
Part II. Other Information
         
Item 1.   Legal Proceedings   42
         
Item 1A.   Risk Factors   42
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   42
         
Item 3.   Defaults upon Senior Securities   42
         
Item 4.   Mine Safety Disclosures   42
         
Item 5.   Other Information   42
         
Item 6.   Exhibits   43
         
    Signature Page   44

 

 

 

 

Part I. – Financial Information

 

Item 1.Financial Statements

 

Cincinnati Bancorp

Condensed Consolidated Balance Sheets

June 30, 2017 (Unaudited) and December 31, 2016

 

   June 30,   December 31, 
   2017   2016 
   (Unaudited)     
         
Assets          
Cash and due from banks  $4,733,329   $6,298,796 
Interest-bearing demand deposits in banks   4,456,993    4,829,359 
           
Cash and cash equivalents   9,190,322    11,128,155 
           
Available-for-sale securities   1,434,442    1,779,199 
Loans held for sale   3,451,270    1,314,737 
Loans, net of allowance for loan losses of  $1,336,264          
and $1,326,264, respectively   136,891,744    131,103,482 
Premises and equipment, net   2,548,870    2,590,206 
Federal Home Loan Bank stock   1,021,100    908,000 
Interest receivable   419,287    383,238 
Mortgage servicing rights   916,348    730,164 
Federal Home Loan Bank lender risk account receivable   1,678,353    1,705,613 
Bank Owned Life Insurance   3,213,322    3,172,651 
Other assets   354,477    158,349 
           
Total assets  $161,119,535   $154,973,794 
           
Liabilities and Stockholders' Equity          
           
Liabilities          
Deposits          
Demand  $20,715,155   $18,954,832 
Savings   24,584,835    23,697,259 
Certificates of Deposits   63,976,621    65,439,535 
Total deposits   109,276,611    108,091,626 
           
Federal Home Loan Bank advances   30,732,236    25,559,370 
Advances from borrowers for taxes and insurance   744,407    1,421,899 
Interest payable   31,760    24,232 
Directors deferred compensation   430,277    419,922 
Other liabilities   1,015,428    982,030 
           
Total liabilities   142,230,719    136,499,079 
           
Commitments and Contingent Liabilities          
           
Temporary Equity          
ESOP Shares subject to mandatory redemption   104,146    82,242 
           
Stockholders' Equity          
Preferred stock - authorized 1,000,000 shares, $0.01 par value, none issued   -    - 
Common stock - authorized 9,000,000 shares, $0.01 par value   17,192    17,192 
1,752,947 and 1,719,250 issued and outstanding at June 30, 2017 and December 31, 2016, respectively          
Additional paid-in-capital   6,143,596    6,158,071 
Unearned ESOP Shares   (561,642)   (584,107)
Retained earnings - substantially restricted   13,384,178    13,002,585 
Accumulated other comprehensive loss   (198,654)   (201,268)
           
Total stockholders' equity   18,784,670    18,392,473 
           
Total liabilities and stockholders' equity  $161,119,535   $154,973,794 

 

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

 

 1 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Income

Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited) 
                 
Interest and Dividend Income                    
Loans, including fees  $1,390,826   $1,298,774   $2,739,261   $2,570,145 
Securities   3,878    5,083    3,922    9,291 
Dividends on Federal Home Loan Bank stock and other   16,399    10,243    30,601    20,238 
Total interest and dividend income   1,411,103    1,314,100    2,773,784    2,599,674 
                     
Interest Expense                    
Deposits   247,477    309,396    489,119    576,378 
Federal Home Loan Bank advances   93,910    68,355    178,536    133,581 
Total interest expense   341,387    377,751    667,655    709,959 
                     
Net Interest Income   1,069,716    936,349    2,106,129    1,889,715 
                     
Provision for Loan Losses   10,000    -    10,000    - 
                     
Net Interest Income After Provision for Loan Losses   1,059,716    936,349    2,096,129    1,889,715 
                     
Noninterest Income                    
Gain on sales of loans   555,422    505,031    851,021    746,444 
Mortgage servicing fees   48,681    39,508    95,248    75,855 
Other   150,601    122,247    350,307    230,827 
Total noninterest income   754,704    666,786    1,296,576    1,053,126 
                     
Noninterest Expense                    
Salaries and employee benefits   804,470    682,948    1,481,422    1,318,804 
Occupancy and equipment   118,602    111,744    217,324    201,921 
Directors compensation   38,500    62,500    120,500    135,000 
Data processing   135,468    140,667    274,203    267,935 
Professional fees   65,674    48,292    132,846    102,047 
Franchise tax   37,150    35,250    74,650    69,246 
Deposit insurance premiums   12,036    21,308    14,066    46,075 
Advertising   19,754    67,798    46,055    102,052 
Software Licenses   19,820    18,939    39,510    36,675 
Loan costs   92,438    66,490    145,356    128,617 
Net losses (gains) on sales of foreclosed assets   (873)   -    (873)   637 
Other   139,006    142,877    282,376    285,712 
Total noninterest expense   1,482,045    1,398,813    2,827,435    2,694,721 
                     
Income Before Income Tax   332,375    204,322    565,270    248,120 
                     
Provision for Income Taxes   109,226    64,407    183,676    71,971 
                     
Net Income  $223,149   $139,915   $381,594   $176,149 
                     
Earnings per common share - basic   0.13    0.08    0.23    0.11 
Earnings per common share - diluted   0.13    0.08    0.23    0.11 
Weighted-average shares outstanding - basic   1,673,070    1,657,469    1,666,954    1,656,908 
Weighted-average shares outstanding - diluted   1,673,070    1,657,469    1,666,954    1,656,908 

 

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

 

 2 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited) 
                 
Net Income  $223,149   $139,915   $381,594   $176,149 
                     
Other Comprehensive Income:                    
Net unrealized gains (losses) on available-for-sale securities   1,319    13,211    (3,111)   15,781 
Tax (expense) benefit   (448)   (4,492)   1,059    (5,366)
Changes in directors' retirement plan prior service costs   3,536    10,971    7,071    21,942 
Tax expense   (1,202)   (3,730)   (2,403)   (7,461)
Other comprehensive income   3,205    15,960    2,616    24,896 
                     
Comprehensive Income  $226,354   $155,875   $384,210   $201,045 

 

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

 

 3 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

   Six Months Ended June 30, 
   2017   2016 
   (Unaudited) 
         
Operating Activities          
Net income  $381,594   $176,149 
Items not requiring (providing) cash:          
Depreciation and amortization   68,407    68,526 
Provision for loan losses   10,000    - 
Amortization of premiums and discounts on securities   12,199    13,045 
Amortization of deferred prepayment penalty on Federal          
  Home Loan Bank advances   22,866    22,866 
Change in deferred income taxes   69,264    (44,692)
Gain on sale of loans   (851,021)   (746,444)
Proceeds from the sale of loans held for sale   29,363,078    24,209,302 
Origination of loans held for sale   (30,648,590)   (23,960,513)
Net loss on sale of foreclosed assets   (873)   637 
Income from Bank Owned Life insurance   (40,671)   (43,087)
Stock based compensation   7,990    - 
ESOP shares earned   21,904    20,095 
Changes in:          
Interest receivable   (36,049)   (25,046)
Mortgage servicing rights   (186,184)   (32,368)
Federal Home Loan Bank lender risk account receivable   27,260    (40,142)
Other assets   (196,128)   (49,021)
Interest payable   7,528    3,152 
Other liabilities   (19,787)   (292,573)
Net cash used in operating activities   (1,987,213)   (720,114)
           
Investing Activities          
Proceeds from maturities of available-for-sale securities   329,447    426,169 
Purchase of Federal Home Loan Bank stock   (113,100)   (19,900)
Net change in loans   (5,836,212)   (8,131,734)
Purchase of premises and equipment   (27,071)   (4,745)
Proceeds from sales of foreclosed assets   38,823    29,029 
Net cash used in investing activities   (5,608,113)   (7,701,181)

 

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

 

 4 

 

 

Cincinnati Bancorp

Condensed Consolidated Statements of Cash Flows (Continued)

Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

   Six Months Ended June 30, 
   2017   2016 
   (Unaudited) 
         
Financing Activities          
Net increase in deposits   1,184,985    1,416,820 
Proceeds from Federal Home Loan Bank advances   67,350,000    65,520,000 
Repayment of Federal Home Loan Bank advances   (62,200,000)   (56,070,000)
Net decrease in advances from borrowers for taxes and insurance   (677,492)   (655,377)
Net cash provided by financing activities   5,657,493    10,211,443 
           
(Decrease) Increase in Cash and Cash Equivalents   (1,937,833)   1,790,148 
Cash and Cash Equivalents, Beginning of Period   11,128,155    8,304,539 
Cash and Cash Equivalents, End of Period  $9,190,322   $10,094,687 
           
Supplemental Cash Flows Information          
Interest paid  $660,127   $706,807 
Income taxes paid   94,717    265,000 
Real estate acquired in settlement of loans   37,950    - 

 

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

 

 5 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

Nature of Operations

 

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

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements as of June 30, 2017 and December 31, 2016 and for the six months ended June 30, 2017 and 2016 include the accounts of Cincinnati Bancorp and the Bank. All significant intercompany items have been eliminated.

 

Interim Financial Statements

 

The interim financial statements as of June 30, 2017, and for the three months and six months ended June 30, 2017 and 2016 are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments contained in the interim financial statements. The results of operations for the three months and six months ended June 30, 2017, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2017, or any other period.

 

Use of Estimates

 

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

 

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

 

NOTE 2:Securities

 

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

 

 6 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

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

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
                 
Available-for-Sale Securities:                    
                     
June 30, 2017 (Unaudited):                    
Mortgage-backed securities of government sponsored entities  $1,418,233   $16,209   $-   $1,434,442 
                     
                     
December 31, 2016:                    
Mortgage-backed securities of government sponsored entities  $1,759,879   $19,320   $-   $1,779,199 

 

The Company had no sales of investment securities during the three and six month periods ended June 30, 2017 and 2016. The Company had not pledged any of its investment securities as of June 30, 2017 or December 31, 2016.

 

The amortized cost and fair value of available-for-sale securities at June 30, 2017 and December 31, 2016, by contractual maturity, if applicable, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties, as is the case with mortgage-backed securities included in the following table.

 

   June 30, 2017   December 31, 2016 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
   (Unaudited)         
                     
Mortgage-backed securities of government sponsored entities  $1,418,233   $1,434,442   $1,759,879   $1,779,199 

 

 

There were no investments in debt securities reported in the financial statements at an amount less than their historical cost as of June 30, 2017 or December 31, 2016.

 

 7 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 3:Loans and Allowance for Loan Losses

 

Categories of loans at June 30, 2017 and December 31, 2016 include:

 

   June 30,   December 31, 
   2017   2016 
   (Unaudited)     
         
One to four family mortgage loans -owner occupied  $72,523,409   $69,651,176 
One to four family - investment   11,016,921    11,818,901 
Multi-family mortgage loans   21,303,014    21,350,885 
Nonresidential mortgage loans   16,194,813    13,654,705 
Construction and land loans   5,278,469    3,886,915 
Real estate secured lines of credit   12,856,487    12,595,769 
Commercial loans   633,360    512,559 
Other consumer loans   12,511    16,875 
Total loans   139,818,984    133,487,785 
           
Less:          
Net deferred loan costs   (444,386)   (427,936)
Undisbursed portion of loans   2,035,362    1,485,975 
Allowance for loan losses   1,336,264    1,326,264 
           
Net loans  $136,891,744   $131,103,482 

 

 8 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three and six months ended June 30, 2017 and 2016 and year ended December 31, 2016:

 

   Six Months Ended June 30, 2017 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of period  $413,194   $129,628   $175,295   $167,431   $64,297   $364,191   $11,916   $312   $1,326,264 
Provision (credit) charged to expense   (26,452)   74,845    31,663    (23,353)   12,978    (60,516)   944    (109)   10,000 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    - 
Balance, end of period  $386,742   $204,473   $206,958   $144,078   $77,275   $303,675   $12,860   $203   $1,336,264 
                                              
Ending balance:  Individually evaluated for impairment  $-   $47,101   $9,055   $-   $-   $-   $-   $-   $56,156 
                                              
Ending balance:  Collectively evaluated for impairment  $386,742   $157,372   $197,903   $144,078   $77,275   $303,675   $12,860   $203   $1,280,108 
Loans:                                             
Ending balance  $72,523,409   $11,016,921   $21,303,014   $16,194,813   $5,278,469   $12,856,487   $633,360   $12,511   $139,818,984 
                                              
Ending balance:  Individually evaluated for impairment  $685,991   $1,233,766   $646,810   $186,787   $-   $32,802   $-   $-   $2,786,156 
                                              
Ending balance:  Collectively evaluated for impairment  $71,837,418   $9,783,155   $20,656,204   $16,008,026   $5,278,469   $12,823,685   $633,360   $12,511   $137,032,828 

 

   Three Months Ended June 30, 2017 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of period  $458,992   $142,906   $199,042   $139,216   $60,309   $314,888   $10,675   $236   $1,326,264 
Provision (credit) charged to expense   (72,250)   61,567    7,916    4,862    16,966    (11,213)   2,185    (33)   10,000 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    - 
Balance, end of period  $386,742   $204,473   $206,958   $144,078   $77,275   $303,675   $12,860   $203   $1,336,264 

 

 9 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

   Six Months Ended June 30, 2016 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of period  $382,596   $333,627   $111,876   $195,810   $43,540   $290,813   $8,390   $316   $1,366,968 
Provision (credit) charged to expense   (13,484)   (21,628)   14,726    5,113    (3,140)   15,046    3,414    (47)   - 
Losses charged off   (19,704)   -    -    -    -    -    -    -    (19,704)
Recoveries   -    -    -    -    -    -    -    -    - 
Balance, end of period  $349,408   $311,999   $126,602   $200,923   $40,400   $305,859   $11,804   $269   $1,347,264 

 

   Three Months Ended June 30, 2016 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of period  $362,892   $333,627   $111,876   $195,810   $43,540   $290,813   $8,390   $316   $1,347,264 
Provision (credit) charged to expense   (13,484)   (21,628)   14,726    5,113    (3,140)   15,046    3,414    (47)   - 
Losses charged off   -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    - 
Balance, end of period  $349,408   $311,999   $126,602   $200,923   $40,400   $305,859   $11,804   $269   $1,347,264 

 

   Year Ended June 30, 2016 (Unaudited) 
   One- to Four-
Family
Mortgage
Loans Owner
Occupied
   One- to Four-
Family
Mortgage
Loans
Investment
   Multi-Family
Mortgage
Loans
   Nonresidential
Mortgage
Loans
   Construction
& Land
Loans
   Real Estate
Secured
Lines of
Credit
   Commercial
Loans
   Other
Consumer
Loans
   Total 
                                     
Allowance for loan losses:                                             
Balance, beginning of year  $382,596   $333,627   $111,876   $195,810   $43,540   $290,813   $8,390   $316   $1,366,968 
Provision (credit) charged to expense   50,302    (203,999)   63,419    (128,379)   20,757    73,378    3,526    (4)   (121,000)
Losses charged off   (19,704)   -    -    -    -    -    -    -    (19,704)
Recoveries   -    -    -    100,000    -    -    -    -    100,000 
Balance, end of year  $413,194   $129,628   $175,295   $167,431   $64,297   $364,191   $11,916   $312   $1,326,264 
                                              
Ending balance:  Individually evaluated for impairment  $-   $47,101   $9,055   $-   $-   $-   $-   $-   $56,156 
                                              
Ending balance:  Collectively evaluated for impairment  $413,194   $82,527   $166,240   $167,431   $64,297   $364,191   $11,916   $312   $1,270,108 
Loans:                                             
Ending balance  $69,651,176   $11,818,901   $21,350,885   $13,654,705   $3,886,915   $12,595,769   $512,559   $16,875   $133,487,785 
                                              
Ending balance:  Individually evaluated for impairment  $661,329   $1,254,994   $651,629   $193,553   $-   $35,000   $-   $-   $2,796,505 
                                              
Ending balance:  Collectively evaluated for impairment  $68,989,847   $10,563,907   $20,699,256   $13,461,152   $3,886,915   $12,560,769   $512,559   $16,875   $130,691,280 

 

 10 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

Definitions are as follows:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 11 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017 
   (Unaudited) 
   One- to Four-
Family Mortgage
Loans - Owner
Occupied
   One- to Four-
Family Mortgage
Loans -
Investment
   Multi-Family
Mortgage Loans
   Nonresidential
Mortgage Loans
   Construction &
Land Loans
   Real Estate
Secured Lines of
Credit
   Commercial
Loans
   Other Consumer
Loans
   Total 
                                     
Pass  $72,357,969   $9,236,112   $20,656,204   $15,353,804   $5,278,469   $12,153,998   $633,360   $12,511   $135,682,427 
Special mention   -    397,266    -    654,222    -    495,141    -    -    1,546,629 
Substandard   165,440    1,383,543    646,810    186,787    -    207,348    -    -    2,589,928 
Doubtful   -    -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    -    -    - 
                                              
Total  $72,523,409   $11,016,921   $21,303,014   $16,194,813   $5,278,469   $12,856,487   $633,360   $12,511   $139,818,984 

 

   December 31, 2016 
   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  $69,445,763   $9,432,892   $20,820,522   $12,661,827   $3,886,915   $11,836,642   $512,559   $16,875   $128,613,995 
Special mention   -    740,564    -    678,059    -    548,343    -    -    1,966,966 
Substandard   205,413    1,645,445    530,363    314,819    -    210,784    -    -    2,906,824 
Doubtful   -    -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    -    -    - 
                                              
Total  $69,651,176   $11,818,901   $21,350,885   $13,654,705   $3,886,915   $12,595,769   $512,559   $16,875   $133,487,785 

 

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

 

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the three or six months ended June 30, 2017.

 

 12 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables present the loan portfolio aging analysis of the recorded investment in loans as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017 
   (Unaudied) 
   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  $84,925   $14,264   $-   $99,189   $72,424,220   $72,523,409   $- 
One to Four Family - Investment   -    -    8,755    8,755    11,008,166    11,016,921    - 
Multi-family mortgage loans   -    -    -    -    21,303,014    21,303,014    - 
Nonresidential mortgage loans   -    -    -    -    16,194,813    16,194,813    - 
Construction & Land Loans   -    -    -    -    5,278,469    5,278,469    - 
Real estate secured lines of credit   -    9,661    -    9,661    12,846,826    12,856,487    - 
Commercial Loans   -    -    -    -    633,360    633,360    - 
Other consumer loans   -    -    -    -    12,511    12,511    - 
                                    
Total  $84,925   $23,925   $8,755   $117,605   $139,701,379   $139,818,984   $- 

 

   December 31, 2016 
   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  $85,844   $10,416   $37,950   $134,210   $69,516,966   $69,651,176   $- 
One to Four Family - Investment   -    -    10,425    10,425    11,808,476    11,818,901    - 
Multi-family mortgage loans   -    -    -    -    21,350,885    21,350,885    - 
Nonresidential mortgage loans   -    -    -    -    13,654,705    13,654,705    - 
Construction & Land Loans   -    -    -    -    3,886,915    3,886,915    - 
Real estate secured lines of credit   80,000    -    9,861    89,861    12,505,908    12,595,769    - 
Commercial Loans   -    -    -    -    512,559    512,559    - 
Other consumer loans   4,072    -    -    4,072    12,803    16,875    - 
                                    
Total  $169,916   $10,416   $58,236   $238,568   $133,249,217   $133,487,785   $- 

 

 13 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

The following tables present impaired loans at June 30, 2017, June 30, 2016 and December 31, 2016:

 

               For the Three Months Ended   For the Six Months Ended 
   As of June 30, 2017   June 30, 2017   June 30, 2017 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest
Income
Recognized
   Average
Investment
in Impaired
Loans
   Interest
Income
Recognized
 
               (Unaudited)         
Loans without a specific valuation allowance                                   
One- to four-family mortgage loans  $685,991   $685,991   $-   $689,151    6,979   $689,151   $15,288 
One to Four family - Investment   578,694    578,694    -    581,625    8,071    585,670    16,290 
Multi-family mortgage loans   526,600    526,600    -    527,622    12,218    528,600    19,552 
Nonresidential mortgage loans   186,787    186,787    -    188,492    3,163    190,212    6,218 
Construction & Land loans   -    -    -    -    -    -    - 
Real estate secured lines of credit   32,802    32,802    -    33,358    430    33,894    855 
Commercial Loans   -    -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    -    - 
Loans with a specific valuation allowance                       -           
One- to four-family mortgage loans   -    -    -    -    -    -    - 
One to Four family - Investment   655,072    607,971    47,101    657,242    8,333    659,714    15,960 
Multi-family mortgage loans   120,210    111,155    9,055    120,465    2,004    120,759    3,619 
Nonresidential mortgage loans   -    -    -    -    -    -    - 
Construction & Land loans   -    -    -    -    -    -    - 
Real estate secured lines of credit   -    -    -    -    -    -    - 
Commercial Loans   -    -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    -    - 
                                    
   $2,786,156   $2,730,000   $56,156#  $2,797,955   $41,198   $2,808,000   $77,782 

 

               For the Three Months Ended   For the Six Months Ended 
   As of June 30, 2016   June 30, 2016   June 30, 2016 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest
Income
Recognized
   Average
Investment
in Impaired
Loans
   Interest
Income
Recognized
 
               (Unaudited)         
Loans without a specific valuation allowance                                   
One- to four-family mortgage loans  $667,620   $667,620   $-   $668,079    1,241   $668,725   $5,586 
One to Four family - Investment   602,218    602,218    -    605,629    5,930    610,909    19,361 
Multi-family mortgage loans   534,098    534,098    -    534,701    9,905    535,998    17,627 
Nonresidential mortgage loans   199,542    199,542    -    200,935    3,173    202,874    6,382 
Construction & Land loans   -    -    -    -    -    -    - 
Real estate secured lines of credit   39,000    39,000    -    39,891    507    40,653    1,022 
Commercial Loans   -    -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    -    - 
Loans with a specific valuation allowance                       -           
One- to four-family mortgage loans   -    -    -    -    -    -    - 
One to Four family - Investment   674,913    627,812    47,101    677,003    8,891    680,042    18,165 
Multi-family mortgage loans   234,794    219,061    15,733    235,353    4,184    236,337    8,727 
Nonresidential mortgage loans   -    -    -    -    -    -    - 
Construction & Land loans   -    -    -    -    -    -    - 
Real estate secured lines of credit   -    -    -    -    -    -    - 
Commercial Loans   -    -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    -    - 
                                    
   $2,952,185   $2,889,351   $62,834#  $2,961,591   $33,831   $2,975,538   $76,870 

 

 14 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

   As of December 31, 2016 
   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  $661,329   $661,329   $-   $490,944   $20,265 
One to Four family - Investment   590,649    590,649    -    601,128    31,977 
Multi-family mortgage loans   530,364    530,363    -    533,691    40,083 
Nonresidential mortgage loans   193,553    193,553    -    199,035    12,570 
Construction & Land loans   -    -    -    -    - 
Real estate secured lines of credit   35,000    35,000    -    38,647    1,972 
Commercial Loans   -    -    -    -    - 
Other consumer loans   -    -    -    -    - 
Loans with a specific valuation allowance                         
One- to four-family mortgage loans   -    -    -    -    - 
One to Four family - Investment   664,345    617,244    47,101    673,934    36,525 
Multi-family mortgage loans   121,265    112,210    9,055    122,577    9,183 
Nonresidential mortgage loans   -    -    -    -    - 
Construction & Land loans   -    -    -    -    - 
Real estate secured lines of credit   -    -    -    -    - 
Commercial Loans   -    -    -    -    - 
Other consumer loans   -    -    -    -    - 
                          
   $2,796,505   $2,740,348   $56,156   $2,659,956   $152,575 

 

Income recognized on a cash basis was not materially different than interest income recognized on an accrual basis. The following table presents the nonaccrual loans at June 30, 2017 and December 31, 2016. This table excludes performing TDRs.

 

   June 30,   December 31, 
   2017   2016 
   (Unaudited)     
         
One- to four-family mortgage loans  $-   $37,950 
One to four family - Investment   8,755    10,425 
Multi-family mortgage loans   -    - 
Nonresidential mortgage loans   -    - 
Land loans   -    - 
Real estate secured lines of credit   -    9,861 
Commercial Loans   -    - 
Other consumer loans   -    - 
           
Total  $8,755   $58,236 

 

 15 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

At June 30, 2017, the Company had no loans that were modified in TDRs and impaired.

 

At December 31, 2016, the Company had loans that were modified in TDRs and impaired. The modifications of terms included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

 

The following table presents information regarding TDRs by class for the year ended December 31, 2016.

 

Newly classified TDRs:

 

   December 31, 2016 
   Number of
Loans
   Pre-
Modification
Recorded
Balance
   Post-
Modification
Recorded
Balance
 
Mortgage loans on real estate:               
Residential 1-4 family - Owner Occupied   1   $499,562   $538,000 
Residential 1-4 family - Investment   -    -    - 
Multifamily   -    -    - 
Nonresidential mortgage loans   -    -    - 
Construction & Land loans   -    -    - 
Construction & Land loans   -    -    - 
Real estate secured lines of credit   -    -    - 
Commercial Loans   -    -    - 
Consumer loans   -    -    - 
                
    1   $499,562   $538,000 

 

There were no newly classified TDRs during the three and six months ended June 30, 2017 or June 30, 2016. The TDRs described above did not increase the allowance for loan losses or result in any charge-offs during the periods ended June 30, 2017, June 30, 2016 and December 31, 2016.

 

   December 31, 2016 
   Interest Only   Term   Combination   Total
Modification
 
Mortgage loans on real estate:                    
Residential 1-4 family - Owner Occupied  $-   $-   $538,000   $538,000 
Residential 1-4 family - Investment   -    -    -    - 
Multifamily   -    -    -    - 
Nonresidential mortgage loans   -    -    -    - 
Construction & Land loans   -    -    -    - 
Construction & Land loans   -    -    -    - 
Real estate secured lines of credit   -    -    -    - 
Commercial Loans   -    -    -    - 
Consumer loans   -    -    -    - 
                     
   $-   $-   $538,000   $538,000 

 

 16 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

There were no TDRs modified during the six months ended June 30, 2017 that subsequently defaulted. There was one TDR modified during the year ended December 31, 2016 that was not performing under the modified terms. The net balance of the TDR was $14,300.

 

As of June 30, 2017, borrowers with loans designated as TDRs totaling $983,000 of residential real estate loans and $647,000 of multifamily loans, met the criteria for placement back on accrual status. This criteria is a minimum of six consecutive months of payment performance under existing or modified terms. As of June 30, 2017, the Company had no TDRs that did not meet the criteria for placement back on accrual status.

 

There were no foreclosed real estate properties at June 30, 2017 or December 31, 2016. There was one consumer mortgage loan in process of foreclosure at June 30, 2017 with a loan balance of $9,000.

 

NOTE 4:Earnings Per Common Share

 

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

 

   Three months ended June 30,   Six months ended June 30, 
   2017   2016   2017   2016 
   (Unaudited) 
Net Income  $223,149   $139,915   $381,594   $176,149 
Less allocation of earnings to participating securities   1,492    -    1,276    - 
Net income allocated to common shareholders   221,657    139,915    380,318    176,149 
                     
Shares outstanding for basic earnings per share:                    
                     
Weighted Average shares outstanding:   1,730,359    1,719,250    1,724,804    1,719,250 
Less: Average Unearned ESOP shares:   57,289    61,781    57,850    62,342 
    1,673,070    1,657,469    1,666,954    1,656,908 
                     
Basic earnings per common share:  $0.13   $0.08   $0.23   $0.11 
                     
Effect of dilutive securities:                    
Stock Options   -    -    -    - 
Weighted average number of shares outstanding used in the calculation of basic earnings per common share   1,673,070    1,657,469    1,666,954    1,656,908 
Diluted earnings per share:  $0.13   $0.08   $0.23   $0.11 

 

The Company had no dilutive or potentially dilutive securities at June 30, 2016.

 

 17 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 5:Regulatory Matters

 

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

 

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), common equity Tier I capital (as defined) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). Management believes that, as of June 30, 2017 and December 31, 2016, the Company met all capital adequacy requirements to which it was subject at such dates.

 

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

 

The below minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer was 1.25% at June 30, 2017 and 0.625% at December 31, 2016.

 

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

 

 18 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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  June 30, 2017 (Unaudited)                              
                               
Total risk-based capital
(to risk-weighted assets)
  $20,127    17.0%  $9,484    8.0%  $11,850    10.0%
                               
Tier I capital
(to risk-weighted assets)
   18,791    15.9%   7,110    6.0%   9,484    8.0%
                               
Common Equity Tier I capital
(to risk-weighted assets)
   18,791    15.9%   5,333    4.5%   7,703    6.5%
                               
Tier I capital
(to adjusted total assets)
   18,791    12.0%   6,247    4.0%   7,809    5.0%
                               
As of  December 31, 2016                              
                               
Total risk-based capital
(to risk-weighted assets)
  $19,657    18.1%  $8,682    8.0%  $10,853    10.0%
                               
Tier I capital
(to risk-weighted assets)
   18,331    16.9%   6,512    6.0%   8,682    8.0%
                               
Common Equity Tier I capital
(to risk-weighted assets)
   18,331    16.9%   4,884    4.5%   7,054    6.5%
                               
Tier I capital
(to adjusted total assets)
   18,331    11.9%   6,164    4.0%   7,705    5.0%

 

NOTE 6:Disclosure About Fair Values of Assets and Liabilities

 

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

 

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

 

 19 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 June 30, 2017 and December 31, 2016:

 

       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) 
                 
June 30, 2017 (Unaudited)                    
Mortgage-backed securities of government sponsored entities  $1,434,442   $-   $1,434,442   $- 
Mortgage servicing rights   916,348    -    -    916,348 
                     
December 31, 2016                    
Mortgage-backed securities of government sponsored entities  $1,779,199   $-   $1,779,199   $- 
Mortgage servicing rights   730,164    -    -    730,164 

 

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

 

Available-for-sale Securities

 

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

 

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.

 

 20 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

   Three Months   Three Months   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
   June 30,   June 30,   June 30,   June 30, 
   2017   2016   2017   2016 
   (Unaudited) 
     
Fair value as of the beginning of the period  $848,754   $629,315   $730,164   $630,316 
Recognition of mortgage servicing rights on the sale of loans   81,580    71,786    121,033    101,615 
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model   (13,986)   (38,417)   65,151    (69,247)
                     
Fair value at the end of the period  $916,348   $662,684   $916,348   $662,684 

 

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.

 

Nonrecurring Measurements

 

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at June 30, 2017 and December 31, 2016.

 

       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) 
                     
June 30, 2017 (Unaudited)                    
                     
Foreclosed assets  $-   $-   $-   $- 
                     
December 31, 2016                    
                     
Collateral-dependent impaired loans  $37,950   $-   $-   $37,950 

 

 21 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

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

 

Foreclosed Assets Held for Sale

 

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

 

Appraisals of real estate are obtained when the real estate is acquired and an appraisal is subsequently deemed necessary by events in the environment by the Chief Financial Officer. Appraisals are reviewed internally for accuracy and consistency in accordance with regulatory requirements. Appraisers are selected from the list of approved appraisers maintained by management.

 

Unobservable (Level 3) Inputs

 

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at June 30, 2017 and December 31, 2016:

 

   Fair Value at
June 30, 2017
   Valuation
Technique
  Unobservable Inputs  Range
(Weighted
Average)
   (Unaudited)
Mortgage servicing rights  $916,348   Discounted cash flow  Discount rate PSA prepayment speeds  10%
115%-277%
               
Foreclosed assets  $-   Market comparable properties  Marketability discount  10%-15% (12%)

 

 22 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

   Fair Value at
December 31, 2016
   Valuation
Technique
  Unobservable Inputs  Range
(Weighted
Average)
Impaired loans (collateral dependent)  $37,950   Market comparable properties  Marketability discount   10%-15% (12%)
Mortgage servicing rights  $730,164   Discounted cash flow  Discount rate PSA prepayment speeds   10%
167%-407%

 

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 Bank’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.

 

Federal Home Loan Bank Lender Risk Account Receivable

 

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

 

Deposits

 

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

 

Federal Home Loan Bank Advances

 

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

 

 23 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 June 30, 2017 and December 31, 2016, the fair value of commitments was not material.

 

The following table presents estimated fair values of the Company’s financial instruments not previously presented at June 30, 2017 and December 31, 2016:

 

       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) 
                 
June 30, 2017 (unaudited)                    
Financial Assets:                    
Cash and cash equivalents  $9,190,322   $9,190,322   $-   $- 
Loans held for sale   3,451,270    -    3,476,962    - 
Loans, net of allowance for loan losses   136,891,744    -    -    140,863,000 
Federal Home Loan Bank stock   1,021,100    1,021,100    -    - 
Interest receivable   419,287    -    419,287    - 
Federal Home Loan Bank lender risk account receivable   1,678,353    -    -    1,742,365 
                     
Financial Liabilities:                    
Deposits   109,276,611    45,299,990    64,158,149    - 
Federal Home Loan Bank advances   30,732,236    -    30,795,272    - 
Advances from borrowers for taxes and insurance   744,407    -    744,407    - 
Interest payable   31,760    -    31,760    - 
                     
December 31, 2016                    
Financial Assets:                    
Cash and cash equivalents  $11,128,155   $11,128,155   $-   $- 
Loans held for sale   1,314,737    -    1,387,954    - 
Loans, net of allowance for loan losses   131,103,482    -    -    133,341,700 
Federal Home Loan Bank stock   908,000    908,000    -    - 
Interest receivable   383,238    -    383,238    - 
Federal Home Loan Bank lender risk account receivable   1,705,613    -    -    1,729,430 
                     
Financial Liabilities:                    
Deposits   108,091,626    37,090,482    65,707,476    - 
Federal Home Loan Bank advances   25,559,370    -    25,648,512    - 
Advances from borrowers for taxes and insurance   1,421,899    -    1,421,899    - 
Interest payable   24,232    -    24,232    - 

 

 24 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 7:Commitments and Credit Risk

 

Commitments to Originate Loans

 

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s 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 June 30, 2017 and December 31, 2016 follows:

 

   June 30,  December 31,
   2017  2016
   (Unaudited)    
       Interest Rate      Interest Rate
   Amount   Range  Amount   Range
                 
Commitments to fund fixed-rate loans  $7,520,704    3.25% - 5.375%  $1,718,522    3.75% - 4.875%

 

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.

 

 25 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Loan commitments outstanding at June 30, 2017 and December 31, 2016 were composed of the following:

 

   June 30,   December 31, 
   2017   2016 
   (Unaudited)     
         
Commitments to originate loans  $9,036,454   $5,743,092 
Forward sale commitments   10,978,876    3,275,626 
Lines of credit   12,156,933    9,876,931 

 

NOTE 8:Accumulated Other Comprehensive Loss

 

The components of other comprehensive loss by component, net of tax, included in stockholders’ equity at June 30, 2017 and December 31, 2016 are as follows:

 

   June 30,   December 31, 
   2017   2016 
   (Unaudited)     
         
Net unrealized gain on available for sale securities  $10,698   $12,751 
           
Directors' Retirement Plan   (317,333)   (324,404)
           
Tax benefit   107,981    110,385 
           
Net of tax amount  $(198,654)  $(201,268)

 

NOTE 9:Equity Incentive Plan

 

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

 

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

 

 26 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 $2.45 per share. The weighted-average grant date fair value of shares granted during 2017 was $9.55.

 

No options granted under the 2017 Plan were exercisable at June 30, 2017.

 

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.

 

Total compensation cost recognized in the income statement for share-based payment arrangements during the three and six months ended June 30, 2017 was $7,990.

 

As of June 30, 2017, there was $507,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 5 years.

 

NOTE 10:Recent Accounting Pronouncements

 

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 is not expected to have a material impact on the Company’s consolidated financial statements.

  

 27 

 

 

Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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. 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. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.

 

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. 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. 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 interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods 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 has begun collecting and retaining historical loan and credit data. Certain CECL models are currently being evaluated. The Audit Committee is informed of ongoing CECL developments. For additional information on the allowance for loan losses, see Note 3.

  

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

  

FASB ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718)

 

In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company does not anticipate a material change in the Company’s financial position or results of operations as a result of adopting ASU No. 2016-09. The Company is currently implementing the new processes and does not anticipate significant changes.

 

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.

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments.

 

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

 

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

 

For finance leases, a lessee shall recognize in the statement of income interest on the lease liability separately from the amortization of the right-of-use asset. Amortization of the right-to-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating lease and shall recognize a single lease cost on a straight line basis over the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The impact is not expected to have a material effect on the Company’s financial position or results of operations since the Company does not have a material amount of lease agreements. The Company is currently in the process of fully evaluating the amendments and will subsequently implement new processes to comply with the ASU. In addition, the Company will change its current accounting practice to comply with the amendments and such changes as mentioned above.

 

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

 

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

 

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Cincinnati Bancorp

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 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. An entity should apply the amendments to this update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of these amendments, but does not expect them to have a material effect on the Company’s 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. At this time the Company cannot quantify the change in the fair value of such disclosures since the Company is currently evaluating the full impact of the Update and is in the planning stages of developing appropriate procedures and processes to comply with the disclosure requirements of such amendments. The current accounting policies and procedures will be modified after the Company has fully evaluated the standard to comply with the accounting changes mentioned above. For additional information on fair value of assets and liabilities, see Note 6.

 

FASB ASU 2014-09, Revenue from Contracts with Customers

 

In May 2014, the FASB issued amended guidance on revenue recognition from contracts with customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within the reporting period, and should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. Early adoption is prohibited. The Company is in its preliminary stages of evaluating the impact of these amendments, although it does not expect the amendments to have a significant impact to the Company’s financial position or results of operations. The amendments could potentially impact accounting procedures and processes over the recognition of certain revenue sources, including, but not limited to, non-interest income. The Company is expecting to begin developing processes and procedures during 2017 to ensure it is fully compliant with these amendments at the date of adoption.

 

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

 

General

 

Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended June 30, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q and with the audited financial statements and notes thereto at and for the year ended December 31, 2016, appearing in Cincinnati Bancorp’s Form 10-K for the year ended December 31, 2016.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

·statements of our goals, intentions and expectations;

 

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

 

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

 

·estimates of our risks and future costs and benefits.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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·competition among depository and other financial institutions;

 

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

 

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

 

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

 

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

 

·changes in consumer spending, borrowing and savings habits;

 

·declines in the yield on our assets resulting from the current low interest rate environment;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in Cincinnati Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Comparison of Financial Condition at June 30, 2017 and December 31, 2016

 

Total Assets. Total assets were $161.1 million at June 30, 2017, an increase of $6.1 million, or 4.0%, from the $155.0 million at December 31, 2016. The increase resulted primarily from increase in loans, net of allowances of $5.8 million, and loans held for sale of $2.1 million, offset in part by an decrease of $1.9 million in cash and cash equivalents.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $1.9 million, or 17.4%, to $9.2 million at June 30, 2017 from $11.1 million at December 31, 2016. This decrease was primarily the result of increased loan originations.

 

Net Loans. Net loans increased $5.8 million, or 4.4%, to $136.9 million at June 30, 2017 from $131.1 million at December 31, 2016. During the six months ended June 30, 2017, we originated $20.0 million of loans for portfolio, $8.5 million of which were one-to-four family residential real estate loans, $987,000 million were multi-family construction loans, $2.6 million were multifamily loans, $3.6 million were nonresidential loans, $2.7 million were home equity lines of credit, $1.4 million were residential construction and land loans. During the six months ended June 30, 2017, we sold $28.5 million of one-to- four family residential loans, on both a servicing–retained and servicing–released basis. Subject to market conditions, management intends to continue this sales activity in future periods to generate gain on sale revenue and servicing fee income.

 

Our one-to-four owner-occupied loan portfolio increased $2.8 million or 4.1%. The nonresidential portfolio increased $2.5 million or 18.6% during the six months ended June 30, 2017. The one-to-four family – investment loan portfolio decreased $802,000, or 6.8%. The home equity lines of credit portfolio increased $261,000 or 2.1% to $12.9 million at June 30, 2017. Construction and land loans increased $1.4 million or 35.8% while the multifamily portfolio decreased $48,000, or 0.2%. We currently sell certain fixed-rate, 15 and 30-year term mortgage loans. We have sold loans on both a servicing-released and servicing-retained basis to: the FHLB-Cincinnati, through its mortgage purchase program; Freddie Mac; and certain private sector third-party buyers.

 

Loans Held for Sale. Loans held for sale increased $2.1 million, or 162.5%, to $3.5 million at June 30, 2017 from $1.3 million at December 31, 2016. The increase reflects higher secondary market activity as the Bank received Direct Endorsement authority from the FHA and favorable market conditions.

 

Available-for-Sale Securities. Available-for-sale securities, which consisted entirely of U.S. government-sponsored mortgage-backed securities, decreased $345,000, or 19.4%, to $1.4 million at June 30, 2017 from $1.8 million at December 31, 2016. There were no securities purchases during the six months ended June 30, 2017. There were $329,000 in maturities, the remaining difference was due to the change in market values within the portfolio during the six months ended June 30, 2017.

 

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Deposits. Deposits increased $1.2 million, or 1.1%, to $109.3 million at June 30, 2017 from $108.1 million at December 31, 2016. Core deposits, defined as demand, NOW and savings accounts, increased $2.6 million, or 6.2%, to $45.3 million at June 30, 2017 from $42.7 million at December 31, 2016. The increase was primarily the result of marketing efforts directed at increasing demand deposit accounts and savings accounts. Time deposits decreased $1.5 million, or 2.2%, to $63.9 million at June 30, 2017 from $65.4 million at December 31, 2016. Certificates originated through the National CD Rateline service declined $2.7 million to $16.1 million at June 30, 2017. During the six months ended June 30, 2017, management continued its strategy of pursuing growth in lower cost core deposits, and intends to continue its efforts to increase core deposits.

 

Federal Home Loan Bank Advances. Federal Home Loan Bank Advances increased $5.2 million, or 20.2%, to $30.7 million at June 30, 2017. The increase was primarily due to the increase in net loan growth.

 

Stockholders’ Equity. Stockholders’ equity increased $392,000, or 2.1%, to $18.8 million at June 30, 2017 from $18.4 million at December 31, 2016. The increase was primarily due to net income for the period of $382,000.

 

Comparison of Operating Results for the Three Months Ended June 30, 2017 and June 30, 2016

 

General. Net income for the quarter ended June 30, 2017 was $223,000, compared to net income of $140,000 for the quarter ended June 30, 2016, an increase of $83,000, or 59.5%. The increase was primarily due to an $88,000 increase in noninterest income and a $133,000 increase in net interest income, partially offset by an increase in noninterest expense of $83,000, an increase in the provision for loan losses of $10,000, and an increase in the provision for income taxes of $45,000.

 

Interest Income. Interest income increased $97,000, or 7.4%, to $1.4 million for the quarter ended June 30, 2017 compared to the comparable quarter in 2016. Interest income on loans increased $92,000, or 7.1%, to $1.4 million as of June 30, 2017. The average balance of loans during the three months ended June 30, 2017 increased $8.3 million to $136.6 million, compared to $128.3 million for the three months ended June 30, 2016. The average yield on loans increased 2 basis point to 4.07% for the three months ended June 30, 2017 from 4.05% for the three months ended June 30, 2016. Interest income on securities available-for-sale decreased $1,000 due to a $635,000 decrease in the balance of the average securities portfolio during the quarter ended June 30, 2017, partially offset by a 13 basis point increase in average yield on the securities portfolio. Interest income on other investments increased $6,000 for the three months ended June 30, 2017 due to an increase in short term interest rates.

 

Interest Expense. Total interest expense decreased $37,000, or 9.8%, to $341,000 for the quarter ended June 30, 2017 from $378,000 for the quarter ended June 30, 2016. Interest expense on deposit accounts decreased $62,000, or 20.0%, to $247,000 for the quarter ended June 30, 2017 from $309,000 for the quarter ended June 30, 2016. The decrease between comparable quarters in 2017 from 2016 was primarily due to a $47,000 decrease in interest expense on interest bearing demand accounts, reflecting the termination of the bonus incentives offered on new checking accounts during the three months ended June 30, 2016. The bonus promotion program ended at the end of June 2016. The average balances in demand interest bearing and non-interest bearing accounts during the three months ended June 30, 2017 increased $2.4 million to $19.9 million compared to $17.5 million for the three months ended June 30, 2016. Interest expense on certificates of deposit decreased $15,000 as a result of a $3.2 million, or 4.71%, decrease in the average balance of these certificates. The average cost of certificates decreased 2 basis points to 1.41%. Savings interest expense remained unchanged at $5,000 during the quarter ended June 30, 2017 compared to the quarter ended June 30, 2016.

 

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Interest expense on FHLB advances increased $25,000, or 36.2%, to $94,000 for the quarter ended June 30, 2017 from $69,000 for the quarter ended June 30, 2016. The average balance of advances increased $5.1 million, or 23.4%, for the quarter ended June 30, 2017. The average cost of FHLB borrowings increased 13 basis points. The increase in the cost of advances results from increases in short term interest rates.

 

Net Interest Income. Net interest income increased $133,000, or 14.2%, to $1.1 million for the quarter ended June 30, 2017. Average interest-earning assets increased $6.9 million primarily due to a $8.3 million increase in average outstanding loans for the quarter ended June 30, 2017. Interest on other interest earning assets increased $6,000 primarily due to an increase in average yields of 52 basis points due to the increase in the dividend rate on FHLB stock and increase in interest rates on balances held at other depository banks. Average interest-bearing liabilities increased $6.5 million from the same quarter in 2016 due to the funding needed for the increase in lending. The interest rate spread increased 28 basis points to 2.82% for the quarter ended June 30, 2017 compared to 2.54% at quarter ended June 30, 2016. The net interest margin increased 1 basis point to 2.98% for the first of 2017 from 2.97% for the quarter ended June 30, 2016.

 

Provision for Loan Losses. The provision for loan losses increased $10,000 for the quarter ended June 30, 2017. The provision was recorded based on managements’ evaluation of the quality of the loan portfolio and economic conditions. The growth in the loan portfolio during the three months ended June 30, 2017 indicated an upward qualitative adjustment.

 

The allowance for loan losses reflects the estimate we believe to be appropriate to cover probable losses which were inherent in the loan portfolio at June 30, 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 $88,000, or 13.2%, to $755,000 for the quarter ended June 30, 2017 from $667,000 for the comparable quarter in 2016. The gain on sale of loans increased $50,000, or 10.0%, to $555,000 for the quarter ended June 30, 2017 from $505,000 for the comparable quarter in 2016. Checking account fees including ATM/Debit card fees, service charges and overdraft fees increased $14,000 compared to the comparable quarter in 2016 due to the increase in average demand account balances of $2.4 million.

 

Non-Interest Expense. Non-interest expense increased $83,000, or 6.0%, to $1.5 million for the quarter ended June 30, 2017 compared to the comparable quarter in 2016. The increase was due primarily to a $122,000, or 17.8%, increase in salary and employee benefits to $805,000 in the first quarter of 2017 from $683,000 for the comparable quarter in 2016 caused by increased staffing demands, increased salaries and commissions paid to loan officers, and increased payroll expense. Data processing expense decreased $5,000, or 3.7%, to $135,000 during the quarter ended June 30, 2017 from $140,000 for the quarter ended June 30, 2016. Advertising expense decreased $48,000, or 70.9% from the termination of the checking promotional campaign in June 30, 2016 quarter. Loan cost expense increased $26,000 or 39.0% primarily due to increased lending volume. Deposit insurance premiums decreased $9,000 during the quarter ended June 30, 2017 due to a reduction in the FDIC insurance assessment rates.

 

Federal Income Taxes. Federal income taxes increased $45,000 due to an increase in pre-tax income of $128,000 for the quarter ended June 30, 2017 compared to pre-tax income for the quarter ended June 30, 2016.

 

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

 

  

For the Three Months Ended June 30,

 
  

2017

  

2016

 
  

Average
Outstanding
Balance

  

Interest

  

Average
Yield/Rate
(5)

  

Average
Outstanding
Balance

  

Interest

  

Average
Yield/Rate
(5)

 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans  $136,644   $1,391    4.07%  $128,357   $1,299    4.05%
Securities   1,492    4    1.07    2,127    5    0.94 
Other (1)   5,497    16    1.16    6,254    10    0.64 
Total interest-earning assets   143,633    1,411    3.93    136,738    1,314    3.84 
Non-interest-earning assets   14,235              13,428           
Total assets  $157,868             $150,166           
                               
Interest-bearing liabilities:                              
Savings  $24,747   $5    0.08   $22,293   $5    0.09 
Interest-bearing demand   6,558    14    0.85    3,826    61    6.38 
Certificates of deposit   64,872    228    1.41    68,076    243    1.43 
Total deposits   96,177    247    1.03    94,865    309    1.30 
Borrowings   27,049    94    1.39    21,912    69    1.26 
Total interest-bearing liabilities   123,226    341    1.11    116,737    378    1.30 
Non-interest-bearing Demand   13,323              13,701           
Other non-interest-bearing liabilities   2,887              2,334           
Total non- interest-bearing liabilities   16,210              16,035           
Total equity   18,432              17,394           
Total liabilities and total equity  $157,868             $150,166           
Net interest income       $1,070             $936      
Net interest rate spread (2)             2.82%             2.54%
Net interest-earning assets (3)  $20,407             $20,001           
Net interest margin (4)             2.98%             2.97%
Average interest-earning assets to interest-bearing liabilities             116.56%             117.13%

 

 

(1)Consists of FHLB-Cincinnati stock, FHLB DDA, 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 annualized net interest income divided by average total interest-earning assets.
(5)Annualized

 

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Comparison of Operating Results for the Six Months Ended June 30, 2017 and June 30, 2016

 

General. Net income for the six months ended June 30, 2017 was $382,000, compared to net income of $176,000 for the six months ended June 30, 2016, an increase of $205,000, or 116.6%. The increase was primarily due to a $243,000 increase in noninterest income and a $216,000 increase in net interest income, partially offset by an increase in noninterest expense of $133,000 and an increase in the provision of for income taxes of $112,000.

 

Interest Income. Interest income increased $174,000, or 6.7%, to $2.8 million for the six months ended June 30, 2017 from the comparable six months in 2016. Interest income on loans increased $169,000, or 6.6%, to $2.7 million as of June 30, 2017. The average balance of loans during the six months ended June 30, 2017 increased $9.1 million to $135.0 million, compared to $125.9 million for the six months ended June 30, 2016. The average yield on loans decreased 2 basis point to 4.06% for the six months ended June 30, 2017 from 4.08% for the six months ended June 30, 2016. Interest income on securities available-for-sale decreased $5,000 due to a 29 basis point decrease in average yield on the securities portfolio and a $669,000 decrease in the balance of the average securities portfolio during the six months ended June 30, 2017. Interest income on other investments increased $11,000 for the six months ended June 30, 2017 primarily due to an increase in average yields of 58 basis points compared to the six months ended June 30, 2016.

 

Interest Expense. Total interest expense decreased $42,000, or 6.0%, to $668,000 for the six months ended June 30, 2017 from $710,000 for the six months ended June 30, 2016. Interest expense on deposit accounts decreased $87,000, or 15.1%, to $489,000 for the six months ended June 30, 2017 from $576,000 for the six months ended June 30, 2016. The decrease between comparable six months in 2017 from 2016 was primarily due to a $26,000 decrease in interest expense on certificates of deposit resulting from a $2.9 million, or 4.2%, decrease in the average balance of these certificates. The average cost of certificates decreased 2 basis points to 1.39%. Interest expense on interest-bearing demand accounts decreased $61,000 from the comparable six months in 2016. The decrease in interest expense reflects the termination of the bonus incentives offered on new checking accounts during the six months ended June 30, 2016. The bonus promotion program ended at the end of June 2016. The average balances in demand interest bearing and non-interest bearing accounts during the six months ended June 30, 2017 increased $2.8 million to $19.1 million compared to $16.3 million for the six months ended June 30, 2016. Savings interest expense remained unchanged at $10,000 during the six months ended June 30, 2017 compared to June 30, 2016.

 

Interest expense on FHLB advances increased $45,000, or 33.6%, to $179,000 for the six months ended June 30, 2017 from $134,000 for the six months ended June 30, 2016. The average balance of advances increased $5.5 million, or 26.5%, for the six months ended June 30, 2017. The average cost of FHLB borrowing increased 7 basis points.

 

Net Interest Income. Net interest income increased $216,000, or 11.4%, to $2.1 million for the six months ended June 30, 2017. Average interest-earning assets increased $7.2 million primarily due to a $9.1 million increase in average outstanding loans for the six months ended June 30, 2017. Interest on other interest earning assets increased $11,000 primarily due to an increase in average yields of 58 basis points due to the increase in the dividend rate on FHLB stock and increase in interest rates on balances held at other depository banks. Average interest-bearing liabilities increased $6.8 million from the same six months in 2016 due to the funding needed for the increase in lending. The interest rate spread increased 19 basis points to 2.82% for the six months ended June 30, 2017 compared to 2.63% at six months ended June 30, 2016. The net interest margin increased 16 basis point to 2.97% for the first six months of 2017 from 2.81% for the six months ended June 30, 2016.

 

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Provision for Loan Losses. The provision for loan losses increased $10,000 for the six months ended June 30, 2017. The provision was recorded based on managements’ evaluation of the quality of the loan portfolio and economic conditions. The growth in the loan portfolio during the six months ended June 30, 2017 indicated an upward qualitative adjustment.

 

Non-Interest Income. Non-interest income increased $243,000, or 23.1%, to $1.3 million for the six months ended June 30, 2017 from $1.1 million for the comparable six months in 2016. The increase was primarily due to a $85,000 increase in fair market valuation of existing mortgage servicing rights in the six months ended June 30, 2017 for the comparable six months in 2016. The gain on sale of loans increased $105,000, or 14.0%, to $851,000 for the six months ended June 30, 2017 from $746,000 for the comparable six months in 2016. Servicing income on the sold loan portfolio increased $19,000 due to an increase in the total amount of loans serviced, primarily, for the FHLB – Cincinnati and Freddie Mac.

 

Non-Interest Expense. Non-interest expense increased $133,000, or 4.9%, to $2.8 million for the six months ended June 30, 2017. The increase was due primarily to a $163,000, or 12.3%, increase in salary and employee benefits to $1.5 million in the first six months of 2017 from $1.3 million for the comparable six months in 2016 caused by increased staffing demands, increased salaries and commissions paid to loan officers, and increased payroll expense. Data processing expense increased $6,000, or 2.3%, to $274,000 during the six months ended June 30, 2017 from $268,000 for the six months ended June 30, 2016. The increase was due to bank growth and additional products. Advertising expense decreased $56,000, or 54.9%. Loan cost expense increased $17,000 or 13.0% primarily due to increased loan originations. Deposit insurance premiums decreased $32,000 during the six months ended June 30, 2017 due to a reduction in the FDIC insurance assessment rates.

 

Federal Income Taxes. Federal income taxes increased $112,000 due to an increase in pre-tax income of $317,000 for the six months ended June 30, 2017 compared to pre-tax income for the six months ended June 30, 2016.

 

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

 

   For the Six Months Ended June 30, 
   2017   2016 
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
(5)
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
(5)
 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans  $134,996   $2,739    4.06%  $125,914   $2,571    4.08%
Securities   1,581    4    0.51    2,250    9    0.80 
Other (1)   5,118    31    1.21    6,348    20    0.63 
Total interest-earning assets   141,695    2,774    3.92    134,512    2,600    3.86 
Non-interest-earning assets   14,352              12,740           
Total assets  $156,047             $147,252           
                               
Interest-bearing liabilities:                              
Savings  $24,402   $10    0.08   $22,442   $10    0.09 
Interest-bearing demand   6,060    26    0.86    3,827    87    4.55 
Certificates of deposit   65,125    453    1.39    67,981    479    1.41 
Total deposits   95,587    489    1.02    94,250    576    1.22 
Borrowings   26,277    179    1.36    20,776    134    1.29 
Total interest-bearing liabilities   121,864    668    1.10    115,026    710    1.23 
Non-interest-bearing Demand   13,056              12,470           
Other non-interest-bearing liabilities   2,770              2,408           
Total non- interest-bearing liabilities   15,826              14,878           
Total equity   18,357              17,348           
Total liabilities and total equity  $156,047             $147,252           
Net interest income       $2,106             $1,890      
Net interest rate spread (2)             2.82%             2.63%
Net interest-earning assets (3)  $19,831             $19,486           
Net interest margin (4)             2.97%             2.81%
Average interest-earning assets to interest-bearing liabilities             116.27%             116.94%

 

 

(1)Consists of FHLB-Cincinnati stock, FHLB DDA, 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 annualized net interest income divided by average total interest-earning assets.
(5)Annualized

 

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Liquidity and Capital Resources. Liquidity is the ability to meet financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities proceeds from the sale of loans, and proceeds from the sale or maturities of securities. In addition, the Bank may borrow from the FHLB. At June 30, 2017, we had $30.7 million outstanding in advances from the FHLB. At June 30, 2017, we had collateral based capacity to borrow $43.1 million. The Bank had additional lines of credit with two commercial banks totaling $6.5 million. Additionally the Bank has contingent funding sources with CDARS and the StoneCastle’s Federally Insured Cash Account (FICA) program.

 

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

 

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $2.0 million for the six months ended June 30, 2017, and $720,000 for the six months ended June 30, 2016. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on mortgage-backed securities, was $5.6 million for the six months ended June 30, 2017, and $7.7 million for six months ended June 30, 2016. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $5.7 million for the six months ended June 30, 2017, and $10.2 million for the six months ended June 30, 2016.

 

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

 

Cincinnati Bancorp is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividend to its stockholders and for other corporate purposes. Cincinnati Bancorp’s primary source of liquidity is dividend payments, if any, received from the Bank. The Bank’s ability to pay dividends is subject to regulatory restrictions. At June 30, 2017, Cincinnati Bancorp (on an unconsolidated, stand-alone basis) had liquid assets of $243,000.

 

At June 30, 2017, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $18.8 million, or 12.0% of adjusted total assets, which is above the well-capitalized required level of $7.8 million, or 5.0%; total risk-based capital of $20.1 million, or 17.0% of risk-weighted assets, which is above the well-capitalized required level of $11.9 million, or 10.0% of risk-weighted assets; and common equity tier 1 risk based capital of $18.8 million, or 15.9%, of risk weighted assets, which is above the well-capitalized required level of $7.7 million, or 6.5%. At December 31, 2016, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $18.3 million, or 11.9% of adjusted total assets, which is above the well-capitalized required level of $7.7 million, or 5.0%; and total risk-based capital of $19.7 million, or 18.1% of risk-weighted assets, which is above the well-capitalized required level of $10.9 million, or 10.0% of risk-weighted assets. Accordingly, Cincinnati Federal was categorized as well capitalized at June 30, 2017, and December 31, 2016. Management is not aware of any conditions or events since the most recent notification that would change its category.

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4.Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2017. Based on that evaluation, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

 

During the quarter ended June 30, 2017, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1.Legal Proceedings

 

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

 

Item 1A.Risk Factors

 

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

 

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

 

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

 

(b)Not applicable.

 

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

 

Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

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Item 6.Exhibits

 

3.1 Cincinnati Bancorp Stock Holding Company Charter (1)
   
3.2 Cincinnati Bancorp Bylaws (1)
   
10.1 Cincinnati Bancorp 2017 Equity Incentive Plan (2)
   
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101 The following financial information from Cincinnati Bancorp Quarterly Report on Form 10-Q, for the quarter ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the consolidated balance sheets; (ii) the consolidated statements of operations; (iii) the consolidated statements of comprehensive income; (iv) the consolidated statements of cash flows; and (v) notes to consolidated financial statements.
   
  (1)  Incorporated by reference to the Company’s Registration Statement on Form S-1, as initially filed on March 11, 2015, as subsequently amended.
   
  (2)  Incorporated by reference to Appendix A to the Company’s definitive proxy statement for the 2017 Annual Meeting of Stockholders, filed on April 13, 2017.

 

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SIGNATURES

 

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

 

    CINCINNATI BANCORP
     
Date:  August 14, 2017   /s/ Joseph V. Bunke
    Joseph V. Bunke
    President
    (Principal Executive Officer)
     
Date:  August 14, 2017   /s/ Herbert C. Brinkman
    Herbert C. Brinkman
    Senior Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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