Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company.
See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule #12b-2 of the Exchange Act.
Indicate by check mark whether the registrant has filed
a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report. ¨
The aggregate market value of the registrant’s
shares held by nonaffiliates as of June 30, 2020 was $24,383,374.
The number of outstanding shares of the registrant’s common stock
as of March 25, 2021 was 2,972,822.
Portions of the Proxy Statement for the 2021 Annual Meeting of Stockholders
are incorporated by reference in Part III of this Annual Report on Form 10-K.
This Annual Report contains forward-looking statements,
which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,”
“anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking
statements include, but are not limited to:
These forward-looking statements are based on our
current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future
business strategies and decisions that are subject to change. Except as may be required by applicable law and regulation, we are under
no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.
The following factors, among others, could cause
actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
Because of these and other uncertainties, our actual
future results may be materially different from the results indicated by these forward-looking statements.
PART I
General
Cincinnati
Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in August 2019 to become the stock holding company
for Cincinnati Federal in connection with the conversion of the former CF Mutual Holding Company from a mutual holding company to a stock
holding company. Cincinnati Bancorp, Inc. is the successor to Cincinnati Bancorp (a Federal corporation) (“Old Cincinnati Bancorp”),
the former stock holding company of Cincinnati Federal and majority-owned subsidiary of the former CF Mutual Holding Company. The conversion
was completed effective January 22, 2020. In the conversion, Cincinnati Bancorp, Inc. sold 1,652,960 shares of common stock at $10.00
per share, for net proceeds of approximately $14.1 million, and issued 1,322,665 shares of common stock in exchange for the shares of
common stock of Old Cincinnati Bancorp owned by stockholders of Old Cincinnati Bancorp, other than CF Mutual Holding Company, as
of the effective date of the conversion. As a result of the conversion, CF Mutual
Holding Company and Old Cincinnati Bancorp have ceased to exist.
Cincinnati Bancorp, Inc. conducts its business
principally through its wholly-owned subsidiary, Cincinnati Federal. Because the conversion was effective in January 2020, the financial
information contained in this Annual Report for periods prior to that date is the consolidated financial information for Old Cincinnati
Bancorp, the predecessor of Cincinnati Bancorp, Inc.
The executive offices of Cincinnati Bancorp, Inc.
are located at 6581 Harrison Avenue, Cincinnati, Ohio 45247, and the telephone number at that address is (513) 574-3025. Our website address
is www.cincinnatifederal.com. Information on our website should not be considered a part of this annual report.
Cincinnati Bancorp, Inc. is subject to comprehensive
regulation and examination by the Board of Governors of the Federal Reserve System. At December 31, 2020, we had total assets of $237.1
million, total deposits of $152.2 million and total equity of $41.5 million. We recognized net income of $3.2 million for the year
ended December 31, 2020.
Cincinnati Federal is a federal savings bank headquartered
in Cincinnati, Ohio. Over the years, we have grown internally and we have also acquired a total of five mutual savings institutions, with
our most recent acquisition occurring in 2018 with the acquisition of Kentucky Federal Savings and Loan Association effective October
12, 2018.
Our business consists primarily of taking deposits
from the general public and investing those deposits, together with borrowings and funds generated from operations, in one- to four-family
residential real estate loans, nonresidential real estate and multi-family loans, home equity loans and lines of credit, and construction
and land loans. We also invest in securities, which consist primarily of mortgage-backed securities issued by U.S. government sponsored
entities and Federal Home Loan Bank stock. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate
of deposit accounts. We utilize advances from the Federal Home Loan Bank of Cincinnati (the “FHLB-Cincinnati”) for asset/liability
management purposes and for additional funding for our operations.
Cincinnati Federal also operates an active mortgage
banking unit with thirteen mortgage loan officers, which originates loans both for sale into the secondary market and for retention in
our portfolio. The revenue from gain on sales of loans was $9.5 million for the fiscal year ended December 31, 2020.
Cincinnati Federal is subject to comprehensive
regulation and examination by its primary federal regulator, the Office of the Comptroller of the Currency.
Market Area
We conduct our operations from our main
office and three branch offices in Cincinnati, Ohio (Cincinnati) and two branch offices in Northern Kentucky. We also operate a loan
production office in Clermont County, Ohio. Hamilton County, Ohio represents our primary geographic market area for loans and
deposits. Our business operations are conducted in the larger Greater Cincinnati/Northern Kentucky metropolitan area which includes
Warren, Butler and Clermont Counties in Ohio, Boone, Kenton and Campbell Counties in Kentucky, and Dearborn County, Indiana. We
will, on occasion, make loans secured by properties located outside of our primary market. The local economy is diversified with
services, trade and manufacturing employment being the most prominent employment sectors in Hamilton County. The employment base is
diversified and there is no dependence on one area of the economy for continued employment. Major employers in the market include
The Kroger Co., Catholic Healthcare Partners, The Procter & Gamble Company, the Greater Cincinnati/Northern Kentucky
International Airport, Cincinnati Children’s Hospital, St. Elizabeth Healthcare, city and county governments, the University
of Cincinnati and Northern Kentucky University. Our future growth opportunities will be influenced by the growth and stability of
the regional, state and national economies, other demographic trends and the competitive environment. Hamilton County and Cincinnati
have generally experienced a declining population since the 2000 census while the other counties in which we conduct business
experienced population growth. The population decline in both Hamilton County and the City of Cincinnati results from other counties
and northern Kentucky being more successful in attracting new and existing businesses to locate within their areas through economic
incentives, including less expensive real estate options for office facilities. Individuals are moving to these other areas to be
closer to their place of employment, for newer, less expensive housing and more suburban neighborhoods.
Competition
We
face intense competition within our market area both in making loans and attracting deposits. Our market area has a concentration of financial
institutions that include large money center and regional banks, community banks and credit unions. We also face competition from commercial
banks, savings institutions, mortgage banking firms, consumer and finance companies and, with respect to deposits, from money market funds,
brokerage firms, mutual funds and insurance companies. As of June 30, 2020, based on the most recent available FDIC data, our market share
of deposits represented 0.10% of FDIC-insured deposits in Hamilton County, ranking us 18th in deposit market share. This data does
not include deposits held by credit unions.
Lending Activities
General.
Our principal lending activity is originating one- to four-family residential real estate loans and nonresidential real
estate and multi-family loans, home equity loans and lines of credit, and construction and land loans. To a much lesser extent, we also
originate commercial business loans and consumer loans. Subject to market conditions and our asset-liability analysis, we expect to increase
our focus on nonresidential real estate and multi-family loans in an effort to diversify our overall loan portfolio and increase the overall
yield earned on our loans. We also originate for sale and sell the majority of the fixed-rate one- to four-family residential real estate
loans that we originate with terms of greater than 10 years, on both a servicing-retained and servicing-released, limited or no recourse
basis, while retaining shorter-term fixed-rate and generally all adjustable-rate one- to four-family residential real estate loans in
order to manage the duration and time to repricing of our loan portfolio. Loans are sold primarily to FHLB-Cincinnati, Freddie Mac or
to private sector third party buyers.
Loan
Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates
indicated.
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
72,698
|
|
|
|
42.05
|
%
|
|
$
|
91,919
|
|
|
|
50.63
|
%
|
|
$
|
93,659
|
|
|
|
53.87
|
%
|
|
$
|
77.533
|
|
|
|
51.82
|
%
|
|
$
|
69,651
|
|
|
|
52.18
|
%
|
Non-owner occupied
|
|
|
12,059
|
|
|
|
6.97
|
|
|
|
12,846
|
|
|
|
7.07
|
|
|
|
14,243
|
|
|
|
8.19
|
|
|
|
11,355
|
|
|
|
7.59
|
|
|
|
11,819
|
|
|
|
8.85
|
|
Nonresidential
|
|
|
29,532
|
|
|
|
17.08
|
|
|
|
23,378
|
|
|
|
12.88
|
|
|
|
18,930
|
|
|
|
10.89
|
|
|
|
18,139
|
|
|
|
12.12
|
|
|
|
13,655
|
|
|
|
10.23
|
|
Multi-family
|
|
|
41,749
|
|
|
|
24.15
|
|
|
|
36,628
|
|
|
|
20.17
|
|
|
|
27,140
|
|
|
|
15.61
|
|
|
|
23,895
|
|
|
|
15.97
|
|
|
|
21,351
|
|
|
|
16.00
|
|
Home equity lines of credit
|
|
|
9,934
|
|
|
|
5.75
|
|
|
|
10,030
|
|
|
|
5.52
|
|
|
|
11,374
|
|
|
|
6.54
|
|
|
|
11,714
|
|
|
|
7.83
|
|
|
|
12,596
|
|
|
|
9.44
|
|
Construction and land
|
|
|
5,841
|
|
|
|
3.38
|
|
|
|
5,329
|
|
|
|
2.94
|
|
|
|
7,294
|
|
|
|
4.20
|
|
|
|
6,173
|
|
|
|
4.13
|
|
|
|
3,887
|
|
|
|
2.91
|
|
Total real estate
|
|
|
171,813
|
|
|
|
99.38
|
|
|
|
180,130
|
|
|
|
99.21
|
|
|
|
172,640
|
|
|
|
99.30
|
|
|
|
148,809
|
|
|
|
99.46
|
|
|
|
132,959
|
|
|
|
99.61
|
|
Commercial loans
|
|
|
737
|
|
|
|
0.42
|
|
|
|
557
|
|
|
|
0.31
|
|
|
|
416
|
|
|
|
0.24
|
|
|
|
335
|
|
|
|
0.22
|
|
|
|
512
|
|
|
|
0.38
|
|
Consumer loans
|
|
|
339
|
|
|
|
0.20
|
|
|
|
864
|
|
|
|
0.48
|
|
|
|
796
|
|
|
|
0.49
|
|
|
|
471
|
|
|
|
0.32
|
|
|
|
17
|
|
|
|
0.01
|
|
Total loans
|
|
|
172,889
|
|
|
|
100.00
|
%
|
|
|
181,551
|
|
|
|
100.00
|
%
|
|
|
173,852
|
|
|
|
100.00
|
%
|
|
|
149,615
|
|
|
|
100.00
|
%
|
|
|
133,488
|
|
|
|
100.00
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees
|
|
|
(333
|
)
|
|
|
|
|
|
|
(483
|
)
|
|
|
|
|
|
|
(491
|
)
|
|
|
|
|
|
|
(480
|
)
|
|
|
|
|
|
|
(428
|
)
|
|
|
|
|
Allowance for losses
|
|
|
1,673
|
|
|
|
|
|
|
|
1,408
|
|
|
|
|
|
|
|
1,405
|
|
|
|
|
|
|
|
1,360
|
|
|
|
|
|
|
|
1,326
|
|
|
|
|
|
Undisbursed loan proceeds
|
|
|
4,881
|
|
|
|
|
|
|
|
1,294
|
|
|
|
|
|
|
|
2,573
|
|
|
|
|
|
|
|
1,715
|
|
|
|
|
|
|
|
1,486
|
|
|
|
|
|
Total loans, net
|
|
$
|
166,668
|
|
|
|
|
|
|
$
|
179,332
|
|
|
|
|
|
|
$
|
170,365
|
|
|
|
|
|
|
$
|
147,020
|
|
|
|
|
|
|
$
|
131,104
|
|
|
|
|
|
(1)
|
Includes
$2.2 million, $1.9 million, $1.6 million, $1.8 million and $2.2 million of home equity loans
at December 31, 2020, December 31, 2019, December 31, 2018, December 31, 2017 and December
31, 2016, respectively.
|
Contractual
Maturities. The following tables set forth the contractual maturities of our total loan portfolio at December 31, 2020.
Demand loans, which are loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year
or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may
differ.
December 31, 2020
|
|
One- to
Four-Family
Residential Real
Estate
|
|
|
Nonresidential
Real Estate
|
|
|
Multi-Family
Real Estate
|
|
|
Construction
and Land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
191
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
597
|
|
2022
|
|
|
559
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
2023
|
|
|
332
|
|
|
|
47
|
|
|
|
67
|
|
|
|
176
|
|
2024-2025
|
|
|
1,210
|
|
|
|
680
|
|
|
|
132
|
|
|
|
45
|
|
2026-2030
|
|
|
6,002
|
|
|
|
1,296
|
|
|
|
1,991
|
|
|
|
111
|
|
2031-2035
|
|
|
5,098
|
|
|
|
3.020
|
|
|
|
1,459
|
|
|
|
598
|
|
2036 and beyond
|
|
|
71,365
|
|
|
|
24,461
|
|
|
|
38,100
|
|
|
|
4,315
|
|
Total
|
|
$
|
84,757
|
|
|
$
|
29,532
|
|
|
$
|
41,749
|
|
|
$
|
5,842
|
|
December 31, 2020
|
|
Home Equity
Lines of Credit
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
1,175
|
|
|
$
|
-
|
|
|
$
|
229
|
|
|
$
|
2,192
|
|
2022
|
|
|
135
|
|
|
|
306
|
|
|
|
-
|
|
|
|
1,028
|
|
2023
|
|
|
85
|
|
|
|
-
|
|
|
|
12
|
|
|
|
719
|
|
2024-2025
|
|
|
1,799
|
|
|
|
191
|
|
|
|
16
|
|
|
|
4,073
|
|
2026-2030
|
|
|
6,732
|
|
|
|
-
|
|
|
|
81
|
|
|
|
16,213
|
|
2031-2035
|
|
|
8
|
|
|
|
31
|
|
|
|
-
|
|
|
|
10,214
|
|
2036 and beyond
|
|
|
-
|
|
|
|
209
|
|
|
|
-
|
|
|
|
138,450
|
|
Total
|
|
$
|
9,934
|
|
|
$
|
737
|
|
|
$
|
338
|
|
|
$
|
172,889
|
|
Fixed-
and Adjustable-Rate Loan Schedule. The following table sets forth our fixed- and adjustable-rate loans at December 31,
2020 that are contractually due after December 31, 2021.
|
|
Due After December 31, 2021
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
30,179
|
|
|
$
|
54,387
|
|
|
$
|
84,566
|
|
Nonresidential
|
|
|
1,003
|
|
|
|
28,529
|
|
|
|
29,532
|
|
Multi-family
|
|
|
1,416
|
|
|
|
40,333
|
|
|
|
41,749
|
|
Home equity lines of credit
|
|
|
-
|
|
|
|
8,759
|
|
|
|
8,759
|
|
Construction and land
|
|
|
427
|
|
|
|
4,818
|
|
|
|
5,245
|
|
Total real estate
|
|
|
33,025
|
|
|
|
136,826
|
|
|
|
169,851
|
|
Commercial loans
|
|
|
528
|
|
|
|
209
|
|
|
|
737
|
|
Consumer loans
|
|
|
-
|
|
|
|
109
|
|
|
|
109
|
|
Total loans
|
|
$
|
33,553
|
|
|
$
|
137,144
|
|
|
$
|
170,697
|
|
Loan
Approval Procedures and Authority. Pursuant to federal law, the aggregate amount of loans that Cincinnati Federal
is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Cincinnati Federal’s unimpaired
capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential
development loans). At December 31, 2020, based on the 15% limitation, Cincinnati Federal’s loans-to-one-borrower limit was approximately
$5.5 million. On the same date, Cincinnati Federal had no borrowers with outstanding balances in excess of this amount. At December 31,
2020, our largest loan relationship with one borrower was for approximately $3.3 million, secured by a multifamily property, and was performing
in accordance with its original terms on that date.
Our lending is subject to written
underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications
submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal
policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations,
where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the
requested loan, and the more significant items on the application are verified through use of credit reports, bank statements and
tax returns. We generally follow underwriting procedures that are consistent with Freddie Mac underwriting guidelines.
Under our loan policy, the loan underwriter of
an application is responsible for ensuring proposals and approval of any extensions of credit are in compliance with internal policies
and procedures and applicable laws and regulations, and for establishing and maintaining credit files and documentation sufficient to
support the loan and to perfect any collateral position. Loans originated for sale may be approved by any loan underwriter, if the loan
conforms to the underwriting guidelines established by the investor to whom the loan will be sold.
Loans to be held in our portfolio may not be approved
solely by an underwriter, and generally require review and approval by our Chief Lending Officer, members of the loan committee or the
board of directors. All loan approval amounts are based on the aggregate loans, including total balances of outstanding loans and the
proposed loan to the individual borrower and any related entity. For one- to four-family owner-occupied real estate loans, our Chief Lending
Officer, any two members of the loan committee or any one loan committee member and one underwriter are authorized to approve loans up
to $424,100 in the aggregate.
For one- to four-family owner-occupied real estate,
non-owner occupied one- to four-family owner-occupied real estate, commercial real estate, undeveloped lots or employee loans, any three
members of the loan committee are authorized to approve up to $750,000 in the aggregate. The entire loan committee may approve loans up
to $1,000,000 in the aggregate. For aggregate loans in excess of $1,000,000, approval of the board of directors is required.
For all other loans, our Chief Lending Officer
or any two members of the loan committee are authorized to approve aggregate loans up to $50,000, with three loan committee members able
to approve aggregate loans up to $250,000. As above, the approval of the full loan committee is required for loans up to $1,000,000 and
approval of the board of directors is required for loans in excess of $1,000,000.
Generally, we require title insurance or abstracts
on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the
loan or the value of improvements on the property, depending on the type of loan.
One-
to Four-Family Residential Real Estate Lending. The focus of our lending program has historically been the origination
of one- to four-family residential real estate loans. At December 31, 2020, we had $84.8 million of loans secured by one- to four-family
real estate, representing 49.0% of our total loan portfolio. We originate both fixed- and adjustable-rate residential mortgage loans.
At December 31, 2020, the one- to four-family residential mortgage loans held in our portfolio due after December 31, 2020 were comprised
of 35.7% fixed-rate loans, and 64.3% adjustable-rate loans.
Prior to 2010, we engaged in significant non-owner
occupied one- to four-family real estate lending. Many of these loans were made to investors who owned a number of rental properties,
and which did not provide sufficient rental cash flows to service the repayment of the loans. There is a greater credit risk inherent
in non-owner occupied properties, than in owner occupied properties since, like nonresidential real estate and multi-family loans, the
repayment of these loans may depend, in part, on the successful management of the property and/or the borrower’s ability to lease
the property. A downturn in the real estate market or the local economy could adversely affect the value of properties securing these
loans or the revenues derived from these properties which could affect the borrower’s ability to repay the loan. Beginning with
the economic downturn that began in 2008, we experienced higher levels of delinquencies and charge-offs in our non-owner occupied residential
loan portfolio. Our management took steps to reduce our delinquent and non-performing assets in this portfolio, and to reduce this type
of lending. See “—Delinquencies and Non-Performing Assets” below. At December 31, 2020, we had $12.1 million of non-owner
occupied residential loans.
We currently originate a small number of
non-owner occupied residential loans. Non-owner occupied loans as a percentage of total loans was 7.0%. We impose strict
underwriting guidelines in the origination of such loans, including a maximum number of loans to the same borrower, local residency,
and no prior bankruptcies and/or foreclosures. Properties securing non-owner occupied loans must be within 50 miles of a Cincinnati
Federal branch office. We also generally limit loans on non-owner occupied properties to borrowers with no more than ten total
rental properties as a way to mitigate the risks involved in lending to professional property investors.
Our one- to four-family residential real estate
loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines
as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum
conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae. We also originate loans above the lending
limit for conforming loans, which are referred to as “jumbo loans.” We also offer FHA, VA and Rural Housing Development loans,
all of which we originate for sale on a servicing-released, non-recourse basis in accordance with FHA, VA and USDA guidelines. We use
an underwriter with expertise in FHA/VA lending.
We generally limit the loan-to-value ratios of
our owner-occupied one- to four-family residential mortgage loans to 85% of the purchase price or appraised value, whichever is lower.
In addition, we may make one- to four-family residential mortgage loans with loan-to-value ratios up to 95% of the purchase price or appraised
value, whichever is less, if the borrower obtains private mortgage insurance. Non-owner occupied one- to four-family residential mortgage
loans are limited to an 80% loan-to-value ratio.
Our one- to four-family residential real estate
loans typically have terms of up to 30 years, with non-owner occupied loans limited to a maximum term of 25 years. Our adjustable-rate
one- to four-family residential real estate loans generally have fixed rates for initial terms of three, five or seven years, and adjust
annually thereafter at a margin. In recent years, this margin has been between 2.75% and 3.25% over the weekly average yield on U.S. treasury
securities adjusted to a constant maturity of one year. The maximum amount by which the interest rate may be increased or decreased is
generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.
Although adjustable-rate mortgage loans may reduce
to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase, the
required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At
the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected
by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate
adjustments permitted by our loan documents. Moreover, the interest rates on most of our adjustable-rate loans do not adjust for a period
ranging from three years up to seven years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating
for changes in general interest rates may be limited during periods of rapidly rising interest rates.
We also originate home equity lines of credit and
fixed-term home equity loans. See “—Home Equity Loans and Lines of Credit.”
We do not offer “interest only” mortgage
loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which
the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as
“Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal
balance during the life of the loan. We do not offer “subprime loans” on one- to four-family residential real estate loans
(i.e., generally loans with credit scores less than 660), except for loans originated for sale in the secondary market.
We currently offer a special residential mortgage
program with preferred loan terms to new and existing medical physicians. This program includes (i) preferred treatment of new physician
income with regard to positions offered or recently begun and (ii) mortgage loans with a loan-to-value ratio up to 95% to 100% without
the need to obtain mortgage insurance for loans up to $600,000. Doctors licensed for at least one year or self-employed for at least two
years may receive mortgage loans with loan-to-value ratios up to 90% to 100% without the need to obtain mortgage insurance for loans up
to $700,000 and 85% for loans greater than $700,000. The portfolio of loans originated under this program was $4.6 million as of December
31, 2020.
Nonresidential
Real Estate and Multi-Family Lending. In recent years, we have increased our nonresidential real estate and
multi-family loans. Our nonresidential real estate loans are secured primarily by office buildings, retail and mixed-use properties,
and light industrial properties located in our primary market area. Our multi-family loans are secured primarily by apartment
buildings. At December 31, 2020, we had $29.5 million in nonresidential real estate loans and $41.7 million in multi-family real
estate loans, representing 17.1% and 24.2% of our total loan portfolio, respectively.
Most
of our nonresidential and multi-family real estate loans have a maximum term of up to 25 years. The interest rates on nonresidential
real estate and multi-family loans are generally fixed for an initial period of three, five or seven years and adjust annually thereafter
based on the One Year Treasury Rate. The maximum loan-to-value ratio of our nonresidential real estate loans is generally 75% while multi-family
real estate loans have a maximum loan-to-value ratio of 80%. All loan-to-value ratios are subject to our underwriting procedures and guidelines.
At December 31, 2020, our largest nonresidential real estate loan totaled $3.2 million and was secured by an industrial use facility.
At that date, our largest multi-family real estate loan totaled $3.3 million and was secured by an apartment building. At December 31,
2020, both of these loans were performing in accordance with their original terms. Set forth below is information regarding our nonresidential
real estate loans at December 31, 2020.
Type of Collateral
|
|
Number of Loans
|
|
|
Balance
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
General commercial
|
|
|
21
|
|
|
$
|
7,241
|
|
Industrial/warehouse
|
|
|
9
|
|
|
|
7,660
|
|
Retail/wholesale
|
|
|
21
|
|
|
|
10,091
|
|
Mobile home park
|
|
|
1
|
|
|
|
262
|
|
Service/professional
|
|
|
7
|
|
|
|
4,278
|
|
Total
|
|
|
59
|
|
|
$
|
29,532
|
|
We consider a number of factors in originating
nonresidential and multi-family real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit
history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications
of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property
and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors
we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount
to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service).
All nonresidential real estate and multi-family loans are appraised by outside independent appraisers approved by the board of directors.
Personal guarantees are generally obtained from the principals of nonresidential and multi-family real estate borrowers.
Loans secured by nonresidential and multi-family
real estate generally are larger than one- to four-family residential loans and involve greater credit risk. Nonresidential real estate
loans often involve large loan balances to single borrowers or groups of related borrowers. This greater risk is due to several factors,
including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types of loans. Repayment of nonresidential real estate loans
depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted
on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Furthermore,
the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower’s
ability to repay the loan may be impaired. Accordingly, the nature of these loans makes them more difficult for management to monitor
and evaluate. At December 31, 2020, we had no non-performing nonresidential or multifamily real estate loans.
Construction
Lending and Land Loans. We make construction loans to individuals for the construction of their primary residences and,
to a limited extent, loans to builders and commercial borrowers. We also make a limited amount of land loans to complement our construction
lending activities, as such loans are generally secured by lots that will be used for residential development. Land loans also include
loans secured by land purchased for investment purposes. At December 31, 2020, our construction loans, including land loans, totaled $5.8
million, representing 3.4% of our total loan portfolio.
Loans to individuals for the construction of their
residences are typically originated as construction/permanent loans, with a construction phase for up to 18 months. Upon completion of
the construction phase, the loan automatically becomes a permanent loan. These construction loans have rates and terms comparable to one-
to four-family residential loans offered by us. During the construction phase, the borrower pays interest only. The maximum loan-to-value
ratio of owner-occupied single-family construction loans is generally 80%, or higher if mortgage insurance is obtained. Residential construction
loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. Land loans are generally
offered for terms of up to 5 years. The maximum loan-to-value ratio of land loans is 65% for developed lots and 50% for undeveloped land
loans.
At December 31, 2020, our largest outstanding residential
construction loan was for $804,000 of which $94,000 was outstanding. This loan was performing according to its original terms at December
31, 2020. At December 31, 2020, there were no residential construction loans that were 60 days or more delinquent.
Loans to builders for the construction of pre-sold
and market (not pre-sold) homes typically run for up to 24 months. These construction loans have rates and terms comparable to one- to
four-family residential loans offered by us. The maximum loan-to-value ratio of pre-sold builder construction loans is generally 80%,
and this ratio is reduced to 65% on market homes. Construction loans to builders require that financial statements and tax returns be
supplied and reviewed annually. Additionally, we limit construction loans to builders, to no more than two loans on market homes in one
development at a time, or no more than one loan per builder at a time.
Loans for the construction of nonresidential or
multi-family properties typically run for up to 18 months. These construction loans have rates and terms comparable to nonresidential
real estate loans offered by us. The maximum loan-to-value ratio of nonresidential or multi-family construction loans is generally 75%.
Nonresidential real estate construction loans also have a 50% pre-leasing requirement. No such requirement is placed on multi-family construction
loans.
At December 31, 2020, our largest outstanding nonresidential
or multi-family construction loan was $1.7 million. This loan was performing in accordance with its original terms at December 31, 2020.
The application process for a construction loan
includes a submission to Cincinnati Federal of accurate plans, specifications and costs of the project to be constructed or developed.
These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised
value and/or the cost of construction (land plus building). Our construction loan agreements generally provide that loan proceeds are
disbursed in increments as construction progresses.
Construction and land lending generally are made
for relatively short terms. However, to the extent our construction loans are not made to owner-occupants of single-family homes, they
are more vulnerable to changes in economic conditions and the concentration of credit with a limited number of borrowers. Further, the
nature of these loans is such that they are more difficult to evaluate and monitor. Our risk of loss on a construction or land loan is
dependent largely upon the accuracy of the initial estimate of the property’s value upon completion of the project and the estimated
cost (including interest) of the project. If the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity
of the loan, with a project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial
investments to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult
to identify problem loans at an early stage.
Home
Equity Loans and Lines of Credit. We offer home equity loans and lines of credit, which are generally made for
owner-occupied homes, and are secured by first or second mortgages on residences. We generally offer these loans with a maximum
loan-to-value ratio (including senior liens on the collateral property) of 90% if the first mortgage is originated by Cincinnati
Federal and 85% if the first mortgage is not originated by Cincinnati Federal. We currently offer home equity lines of credit for a
period of ten years, and generally at rates tied to the prevailing prime interest rate. We also offer home equity lines of credit on
non-owner occupied properties, where the first mortgage is also originated by us, with a maximum loan-to-value ratio of 50% for a
maximum term of two years. Our home equity loans and lines of credit are generally underwritten in the same manner as our one- to
four-family residential loans. At December 31, 2020, we had $9.9 million of home equity lines of credit and $2.2 million of
fixed-term home equity loans, representing 5.8% and 1.3% of our total loan portfolio, respectively. At December 31, 2020, we had no
home equity lines of credit that were 30 days or more delinquent.
Home equity lines of credit and fixed-term home
equity loans have greater risk than one- to four-family residential real estate loans secured by first mortgages. Our interest is generally
subordinated to the interest of the institution holding the first mortgage. Even where we hold the first mortgage, we face the risk that
the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and costs of foreclosure and we may
be unsuccessful in recovering the remaining balance from those customers.
Commercial
Business Loans. We have generally conducted very limited commercial business lending. We participated in the Paycheck Protection
Program (“PPP”) and originated $634,000 in such loans. The board of directors has also authorized management to purchase up
to $500,000 in commercial business loans from an unaffiliated commercial lender specializing in loans to physicians and other professionals
in the medical field. These are installment loans amortizing over seven years and carry higher interest rates than traditional residential
loans. These loans may be secured by liens on non-real estate business assets. These loans are often used for working capital, debt consolidation,
equipment and other general business purposes. The loans to be purchased must be reviewed and found to be consistent with our loan policy
and underwriting guidelines. As of December 31, 2020, we had acquired such loans in the aggregate amount of $158,000 or 0.1% of the loan
portfolio. At December 31, 2020, the loans were performing in accordance with their original terms.
Consumer
Lending. To date, our consumer lending apart from home equity loans and lines of credit has been limited. At December
31, 2020, we had $339,000 of consumer loans outstanding, representing approximately 0.2% of our total loan portfolio.
Originations, Purchases and Sales of Loans
Lending activities are conducted primarily by our
salaried loan personnel operating at our main and branch office locations and by our loan officers. All loans originated by us are underwritten
pursuant to our policies and procedures. We originate both fixed- and adjustable-rate loans. Our ability to originate fixed- or adjustable-rate
loans is dependent upon relative customer demand for such loans, which is affected by current and expected future levels of market interest
rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and
referrals from real estate brokers, builders and attorneys.
Consistent with our interest rate risk strategy,
we originate for sale and sell the majority of the fixed-rate, one- to four-family residential real estate loans that we originate with
terms of greater than 10 years, on a combination of servicing-retained and servicing-released, limited or no recourse basis, while generally
retaining shorter-term fixed-rate and all adjustable-rate one- to four-family residential real estate loans in order to manage the duration
and time to repricing of our loan portfolio. Additionally, we consider the current interest rate environment in making decisions
as to whether to hold the mortgage loans we originate for investment or to sell such loans to investors, choosing the strategy that is
most advantageous to us from a profitability and risk management standpoint. At December 31, 2020, we had $13.3 million in loans held
for sale.
From time to time, we may purchase or sell participation
interests in loans. We underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At
December 31, 2020 and December 31, 2019, we had $4.2 million and $5.7 million in loan participation interests that we purchased. At those
dates, we had $2.1 million and $4.2 million in loan participation interests sold.
Historically, we generally do not purchase whole
loans or loan participations from third parties to supplement our loan production. However, we have purchased loans from a commercial
lender specializing in loans to physicians and other professionals in the medical field. We may purchase additional loans from that lender
in the future. See “—Commercial Business Loans.”
We generally sell our loans without recourse,
except for customary representations and warranties provided in sales transactions. Loan servicing includes collecting and remitting
loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally
administering the loans. We retain a portion of the interest paid by the borrower on the loans
we service as consideration for our servicing activities. For the years ended December 31, 2020 and 2019, we sold $291.4 million and $93.8
million of residential loans, respectively, of mortgage loans. Some of the mortgage loans were sold on a servicing-released basis, and
we retained servicing on certain of these loans. At December 31, 2020, we serviced $230.2 million of fixed-rate and adjustable, one- to
four-family residential real estate loans that we originated and sold in the secondary market.
The following table sets forth our loan origination,
purchase, sale and principal repayment activity during the periods indicated.
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total loans at beginning of period
|
|
$
|
181,551
|
|
|
$
|
173,852
|
|
|
|
|
|
|
|
|
|
|
Loans originated:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
318,745
|
|
|
|
109,976
|
|
Non-owner occupied
|
|
|
4,260
|
|
|
|
3,730
|
|
Nonresidential
|
|
|
10,812
|
|
|
|
7,540
|
|
Multi-family
|
|
|
19,035
|
|
|
|
15,307
|
|
Home equity lines of credit
|
|
|
8,215
|
|
|
|
5,031
|
|
Construction and land
|
|
|
4,307
|
|
|
|
2,940
|
|
Total real estate
|
|
|
365,374
|
|
|
|
144,524
|
|
Commercial loans
|
|
|
634
|
|
|
|
224
|
|
Consumer loans
|
|
|
268
|
|
|
|
420
|
|
Total loans
|
|
|
366,276
|
|
|
|
145,168
|
|
|
|
|
|
|
|
|
|
|
Loans purchased:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
—
|
|
|
|
—
|
|
Non-owner occupied
|
|
|
—
|
|
|
|
—
|
|
Nonresidential
|
|
|
—
|
|
|
|
1,700
|
|
Multi-family
|
|
|
—
|
|
|
|
1,404
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
—
|
|
|
|
3,104
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
Total loans
|
|
|
—
|
|
|
|
3,104
|
|
|
|
|
|
|
|
|
|
|
Loans sold:
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
288,595
|
|
|
|
91,482
|
|
Non-owner occupied
|
|
|
2,766
|
|
|
|
2,309
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
1,749
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
291,361
|
|
|
|
95,540
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
Total loans
|
|
|
291,361
|
|
|
|
95,540
|
|
|
|
|
|
|
|
|
|
|
Principal repayments and other
|
|
|
83,577
|
|
|
|
45,033
|
|
|
|
|
|
|
|
|
|
|
Net loan activity
|
|
|
(8,662
|
)
|
|
|
7,699
|
|
Total loans at end of period
|
|
$
|
172,889
|
|
|
$
|
181,551
|
|
Delinquencies and Non-Performing Assets
Delinquency
Procedures. When a loan payment becomes 20 days past due, we contact the customer by mailing a late notice.
If a loan payment becomes 30 days past due, we mail a “right to cure” letter to the borrower and any co-makers and endorsers.
If a loan payment becomes 90 days past due (or a borrower misses three consecutive payments, whichever occurs first), we send a demand
letter and generally cease accruing interest. It is our policy to institute legal procedures for collection or foreclosure when a loan
becomes 120 days past due, unless management determines that it is in the best interest of Cincinnati Federal to work further with the
borrower to arrange a workout plan. From time to time we may accept deeds in lieu of foreclosure.
When we acquire real estate as a result of foreclosure,
the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value,
less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property.
Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan
losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in
maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized
to the extent of estimated fair value, less estimated costs to sell.
Delinquent
Loans. The following tables set forth our loan delinquencies, including nonaccrual loans, by type and amount at
the dates indicated.
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
30-59Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days or
More Past
Due
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days or
More Past
Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
97
|
|
|
$
|
128
|
|
|
$
|
174
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
111
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
98
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
97
|
|
|
|
128
|
|
|
|
174
|
|
|
|
98
|
|
|
|
—
|
|
|
|
111
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
97
|
|
|
$
|
128
|
|
|
$
|
174
|
|
|
$
|
98
|
|
|
$
|
—
|
|
|
$
|
111
|
|
Classified
Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities
considered by the Office of the Comptroller of the Currency to be of lesser quality, as “substandard,” “doubtful”
or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct
possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified
as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic
that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions,
and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible”
and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories
but possess weaknesses are designated as “special mention” by our management.
When an insured institution classifies
problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to
cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued
losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s
determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the
regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports
with the Office of the Comptroller of the Currency and in accordance with our classification of assets policy, we regularly review the
problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.
On the basis of this review of our assets, our
classified or special mention assets (presented gross of allowance) at the dates indicated were as follows:
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Special mention assets
|
|
$
|
1,101
|
|
|
$
|
1,113
|
|
Substandard assets
|
|
|
883
|
|
|
|
1,351
|
|
Doubtful assets
|
|
|
—
|
|
|
|
—
|
|
Loss assets
|
|
|
—
|
|
|
|
—
|
|
Total classified assets
|
|
$
|
1,984
|
|
|
$
|
2,464
|
|
Non-Performing
Assets. We generally cease accruing interest on our loans when contractual payments of principal or interest have become
90 days delinquent unless the loan is well-secured and in the process of collection. Loans are placed on non-accrual or charged off at
an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed
on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery
method, until the loan qualifies for return to accrual. Generally, loans are restored to accrual status when all the principal and interest
amounts contractually due are brought current, and future payments are reasonably assured. Loans are moved to non-accrual status in accordance
with our policy, which is typically after 90 days of non-payment.
The following table sets forth information regarding
our non-performing assets and troubled debt restructurings. Troubled debt restructurings include loans for which either a portion of interest
or principal has been forgiven, or loans modified at interest rates materially less than current market rates.
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
174
|
|
|
$
|
111
|
|
|
$
|
676
|
|
|
$
|
130
|
|
|
$
|
38
|
|
Non-owner occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
10
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
68
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
174
|
|
|
|
111
|
|
|
|
744
|
|
|
|
139
|
|
|
|
58
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
Total non-accrual loans
|
|
|
174
|
|
|
|
111
|
|
|
|
745
|
|
|
|
139
|
|
|
|
58
|
|
Non-accruing troubled debt restructured loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
Non-owner occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
|
|
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total non-accruing troubled debt restructured loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
174
|
|
|
|
111
|
|
|
|
745
|
|
|
|
153
|
|
|
|
58
|
|
Real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-owner occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
102
|
|
|
|
—
|
|
|
|
—
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total real estate owned
|
|
|
—
|
|
|
|
111
|
|
|
|
102
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
174
|
|
|
$
|
111
|
|
|
$
|
847
|
|
|
$
|
153
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-owner occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total accruing loans past due 90 days or more
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Accruing troubled debt restructured loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
854
|
|
|
$
|
786
|
|
|
$
|
514
|
|
|
$
|
524
|
|
|
$
|
565
|
|
Non-owner occupied
|
|
|
78
|
|
|
|
152
|
|
|
|
225
|
|
|
|
306
|
|
|
|
552
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
211
|
|
|
|
507
|
|
|
|
631
|
|
|
|
642
|
|
|
|
530
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
1,143
|
|
|
|
1,445
|
|
|
|
1,370
|
|
|
|
1,472
|
|
|
|
1,647
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total accruing troubled debt restructured loans
|
|
$
|
1,143
|
|
|
$
|
1,445
|
|
|
$
|
1,370
|
|
|
$
|
1,472
|
|
|
$
|
1,647
|
|
Total non-performing assets and accruing troubled debt restructured loans
|
|
$
|
1,317
|
|
|
$
|
1,556
|
|
|
$
|
2,217
|
|
|
$
|
1,635
|
|
|
$
|
1,705
|
|
Total non-performing loans to total loans
|
|
|
0.10
|
%
|
|
|
0.06
|
%
|
|
|
0.43
|
%
|
|
|
0.10
|
%
|
|
|
0.04
|
%
|
Total non-performing assets to total assets
|
|
|
0.07
|
%
|
|
|
0.05
|
%
|
|
|
0.43
|
%
|
|
|
0.09
|
%
|
|
|
0.04
|
%
|
Total non-performing assets and accruing troubled debt restructured loans to total assets
|
|
|
0.56
|
%
|
|
|
0.64
|
%
|
|
|
1.12
|
%
|
|
|
0.95
|
%
|
|
|
1.10
|
%
|
Except
as disclosed in the foregoing tables, other than $251,000 and $695,000 of loans designated as substandard, there were no other loans at
December 31, 2020 and December 31, 2019, respectively, that are not already disclosed where there is information about possible credit
problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms
and that may result in disclosure of such loans in the future.
Interest income that would have been recorded for
the years ended December 31, 2020 and 2019 had non-accruing loans been current according to their original terms amounted to $10,000 and
$5,000, respectively. We recognized interest income for these loans totaling $3,000 and $2,000 for the years ended December 31, 2020 and
2019, respectively. As of December 31, 2020 and 2019, all troubled debt restructurings were performing in accordance with their restructured
terms.
Troubled
Debt Restructurings. We occasionally modify loans to help a borrower stay current on his or her loan and to avoid foreclosure.
We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating the strength of any guarantors
based on documented current financial information, and assessing the current value of any collateral pledged. We generally do not forgive
principal or interest on loans, but may do so if it is in our best interest and increases the likelihood that we can collect the remaining
principal balance. We may modify the terms of loans to lower interest rates (which may be at below market rates), to provide for fixed
interest rates on loans where fixed rates are otherwise not available, or to provide for interest-only terms. These modifications are
made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests.
At December 31, 2020, we had ten loans totaling $1.1 million that were classified as troubled debt restructurings.
Allowance for Loan Losses
Analysis
and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to
reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly
basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness
of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general
valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately,
the entire allowance for loan losses is available for the entire portfolio.
We identify loans that may need to be charged
off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about
collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well
as the shortfall in collateral value could result in our charging off the loan or the portion of the
loan that was impaired.
Among other factors, we consider current general
economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan losses
for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing data on our
local markets from third party sources we believe to be reliable as a basis for assumptions about the impact of housing depreciation.
Substantially all of our loans are secured by collateral.
Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically
for a nonperforming real estate loan in the process of collection, the value of the underlying collateral is estimated using either the
original independent appraisal, adjusted for current economic conditions and other factors, or a new independent appraisal, or evaluation
and related general or specific allowances for loan losses are adjusted on a quarterly basis. If a nonperforming real estate loan is in
the process of foreclosure and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty
about the value of the underlying collateral, we will order a new independent appraisal or evaluation if it has not already been obtained.
Any shortfall would result in immediately charging off the portion of the loan that was impaired.
Specific
Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired. Loss
is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral
less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal
or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of
collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort
to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes
applicable to the property serving as collateral on the mortgage.
General
Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not classified
as impaired to recognize the probable incurred losses associated with lending activities, but which, unlike specific allowances, has not
been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category
and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the
collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect
the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures,
changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value,
loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration
of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their
relevance in the current real estate environment.
As an integral part of their examination process,
the Office of the Comptroller of the Currency will periodically review our allowance for loan losses. Such agencies may require that we
recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Allowance for Loan Losses. The following
table sets forth activity in our allowance for loan losses for the periods indicated.
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Allowance at beginning of period
|
|
$
|
1,408
|
|
|
$
|
1,405
|
|
|
$
|
1,360
|
|
|
$
|
1,326
|
|
|
$
|
1,367
|
|
Provision (credit) for loan losses
|
|
|
265
|
|
|
|
25
|
|
|
|
45
|
|
|
|
30
|
|
|
|
(121
|
)
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
—
|
|
|
|
22
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
—
|
|
|
|
22
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total charge-offs
|
|
|
—
|
|
|
|
22
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
Nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction and land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
100
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
1,673
|
|
|
$
|
1,408
|
|
|
$
|
1,405
|
|
|
$
|
1,360
|
|
|
$
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to non-performing loans
|
|
|
961.49
|
%
|
|
|
1,268.47
|
%
|
|
|
188.59
|
%
|
|
|
888.89
|
%
|
|
|
2,286.21
|
%
|
Allowance to total loans outstanding at the end of the period
|
|
|
0.97
|
%
|
|
|
0.78
|
%
|
|
|
0.81
|
%
|
|
|
0.91
|
%
|
|
|
0.99
|
%
|
Net (charge-offs) recoveries to average loans outstanding during the period
|
|
|
0.00
|
%
|
|
|
(0.01
|
)%
|
|
|
0.00
|
%
|
|
|
0.003
|
%
|
|
|
0.06
|
%
|
Allocation
of Allowance for Loan Losses. The following tables set forth the allowance for loan losses by loan category and the percent
of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily
indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Allowance
for Loan Losses
|
|
|
Percent of Loans in Each Category to Total Loans
|
|
|
Allowance for Loan Losses
|
|
|
Percent of Loans in Each Category to Total Loans
|
|
|
Allowance for Loan Losses
|
|
|
Percent of Loans in Each Category to Total Loans
|
|
|
Allowance for Loan Losses
|
|
|
Percent of Loans in Each Category to Total Loans
|
|
|
Allowance for Loan Losses
|
|
|
Percent of Loans in Each Category to Total Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
417
|
|
|
|
42.05
|
%
|
|
$
|
325
|
|
|
|
50.63
|
%
|
|
$
|
457
|
|
|
|
53.87
|
%
|
|
$
|
338
|
|
|
|
51.82
|
%
|
|
$
|
413
|
|
|
|
52.18
|
%
|
Non-owner occupied
|
|
|
100
|
|
|
|
6.97
|
|
|
|
82
|
|
|
|
7.07
|
|
|
|
123
|
|
|
|
8.19
|
|
|
|
172
|
|
|
|
7.59
|
|
|
|
130
|
|
|
|
8.85
|
|
Nonresidential
|
|
|
316
|
|
|
|
17.08
|
|
|
|
277
|
|
|
|
12.88
|
|
|
|
182
|
|
|
|
10.89
|
|
|
|
197
|
|
|
|
12.12
|
|
|
|
167
|
|
|
|
10.23
|
|
Multi-family
|
|
|
671
|
|
|
|
24.15
|
|
|
|
524
|
|
|
|
20.17
|
|
|
|
224
|
|
|
|
15.61
|
|
|
|
241
|
|
|
|
15.97
|
|
|
|
175
|
|
|
|
16.00
|
|
Home equity lines of credit
|
|
|
49
|
|
|
|
5.75
|
|
|
|
105
|
|
|
|
5.52
|
|
|
|
297
|
|
|
|
6.54
|
|
|
|
312
|
|
|
|
7.83
|
|
|
|
364
|
|
|
|
9.44
|
|
Construction and land
|
|
|
97
|
|
|
|
3.38
|
|
|
|
70
|
|
|
|
2.94
|
|
|
|
100
|
|
|
|
4.20
|
|
|
|
83
|
|
|
|
4.13
|
|
|
|
64
|
|
|
|
2.91
|
|
Total real estate
|
|
|
1,650
|
|
|
|
99.38
|
|
|
|
1,383
|
|
|
|
99.21
|
|
|
|
1,383
|
|
|
|
99.30
|
|
|
|
1,343
|
|
|
|
99.46
|
|
|
|
1,313
|
|
|
|
99.61
|
|
Commercial loans
|
|
|
17
|
|
|
|
0.42
|
|
|
|
12
|
|
|
|
0.31
|
|
|
|
9
|
|
|
|
0.24
|
|
|
|
7
|
|
|
|
0.22
|
|
|
|
12
|
|
|
|
0.38
|
|
Consumer loans
|
|
|
6
|
|
|
|
0.20
|
|
|
|
13
|
|
|
|
0.48
|
|
|
|
13
|
|
|
|
0.46
|
|
|
|
10
|
|
|
|
0.30
|
|
|
|
1
|
|
|
|
0.01
|
|
Total allocated allowance
|
|
|
1,673
|
|
|
|
100.00
|
%
|
|
|
1,408
|
|
|
|
100.00
|
%
|
|
|
1,405
|
|
|
|
100.00
|
%
|
|
|
1,360
|
|
|
|
100.00
|
%
|
|
|
1,367
|
|
|
|
100.00
|
%
|
Unallocated
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Total
|
|
$
|
1,673
|
|
|
|
|
|
|
$
|
1,408
|
|
|
|
|
|
|
$
|
1,405
|
|
|
|
|
|
|
$
|
1,360
|
|
|
|
|
|
|
$
|
1,367
|
|
|
|
|
|
At December 31, 2020, our allowance for loan losses
represented 0.97% of total loans and 961.49% of nonperforming loans. Nonperforming loans increased from $111,000 at December 31, 2019
to $174,000 at December 31, 2020. At December 31, 2019, our allowance for loan losses represented 0.78% of total loans and 1,268.47% of
nonperforming loans. The allowance for loan losses was $1.7 million at December 31, 2020 and $1.4 million at December 31, 2019. The Bank
had no loan charge-offs during the year ended December 31, 2020 and net loan charge-offs of $22,000 during the year ended December 31,
2019.
Although we believe that we use the best information
available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results
of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations.
Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally accepted
in the United States of America, regulators, in reviewing our loan portfolio, may request us to increase our allowance for loan losses.
In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan
losses may not be adequate and increases may be necessary should the quality of any loan deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Investment Activities
General.
The goals of our investment policy are to provide and maintain liquidity to meet day-to-day, cyclical and long-term liquidity needs, to
help mitigate interest rate and market risk within the parameters of our interest rate risk policy, and to generate a dependable flow
of earnings within the context of our interest rate and credit risk objectives. Subject to loan demand and our interest rate risk analysis,
we will increase the balance of our investment securities portfolio when we have excess liquidity.
Our investment policy was adopted, and is reviewed
annually, by the board of directors. All investment decisions require the approval of at least three senior management members, one of
which shall be the President or Chief Financial Officer. The Chief Financial Officer provides an investment schedule detailing the investment
portfolio which is reviewed at least monthly by the Bank’s asset-liability committee and the board of directors.
Our
current investment policy permits, with certain limitations, investments in United States Treasury securities; securities issued
by the United States Government and its agencies or government sponsored enterprises including mortgage-backed securities and collateralized
mortgage obligations (“CMO”) issued by Fannie Mae, Ginnie Mae and Freddie Mac; corporate bonds and obligations; debt securities
of state and municipalities; commercial paper; certificates of deposit in other financial institutions, and bank-owned life insurance.
At December 31, 2020, our investment portfolio
consisted of securities and obligations issued by U.S. government-sponsored enterprises or the Federal Home Loan Bank. At December 31,
2020, we owned $2,801,800 of FHLB-Cincinnati stock. As a member of FHLB-Cincinnati, we are required to purchase stock in the FHLB-Cincinnati,
which stock is carried at cost and classified as restricted equity securities.
Securities
Portfolio Composition. The following table sets forth the amortized cost and estimated fair value of our available-for-sale
securities portfolio at the dates indicated, all of which consisted of pass-through mortgage-backed securities.
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Amortized Cost
|
|
|
Estimated Fair Value
|
|
|
Amortized Cost
|
|
|
Estimated
Fair Value
|
|
|
Amortized Cost
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Freddie Mac
|
|
$
|
3,575
|
|
|
$
|
3,604
|
|
|
$
|
4,057
|
|
|
$
|
4,043
|
|
|
$
|
81
|
|
|
$
|
81
|
|
Fannie Mae
|
|
|
193
|
|
|
|
190
|
|
|
|
306
|
|
|
|
309
|
|
|
|
548
|
|
|
|
549
|
|
GNMA
|
|
|
1,403
|
|
|
|
1,420
|
|
|
|
2,378
|
|
|
|
2,381
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
5,171
|
|
|
$
|
5,214
|
|
|
$
|
6,741
|
|
|
$
|
6,733
|
|
|
$
|
629
|
|
|
$
|
630
|
|
Mortgage-Backed
Securities. At December 31, 2020, we had mortgage-backed securities with a carrying value of $5.2 million, which constituted
our entire securities portfolio. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools
of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because
the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing
and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages,
although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool
and resell the participation interests in the form of securities to investors such as Cincinnati Federal. The interest rate of the security
is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our mortgage-backed
securities are backed by either Freddie Mac, Fannie Mae or GNMA, which are government-sponsored enterprises.
Residential mortgage-backed securities issued by
United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is
an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings.
Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment
rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount
relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment
estimates require modification that could cause amortization or accretion adjustments.
Portfolio
Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2020 and 2019,
are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled
principal repayments, prepayments, or early redemptions that may occur. Adjustable-rate mortgage-backed securities are included in the
period in which interest rates are next scheduled to adjust.
|
|
One Year or Less
|
|
|
More than One Year
through Five Years
|
|
|
More than Five Years
through Ten Years
|
|
|
More than Ten Years
|
|
|
Total
|
|
December 31, 2020
|
|
Amortized Cost
|
|
|
Weighted Average Yield
|
|
|
Amortized Cost
|
|
|
Weighted Average
Yield
|
|
|
Amortized Cost
|
|
|
Weighted Average
Yield
|
|
|
Amortized Cost
|
|
|
Weighted Average
Yield
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Weighted Average Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Freddie Mac
|
|
$
|
3,575
|
|
|
|
0.59
|
%
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
3,575
|
|
|
$
|
3,604
|
|
|
|
0.59
|
%
|
Fannie Mae
|
|
|
193
|
|
|
|
2.21
|
%
|
|
|
—
|
|
|
|
—%
|
|
|
|
—
|
|
|
|
—%
|
|
|
|
—
|
|
|
|
—%
|
|
|
|
193
|
|
|
|
190
|
|
|
|
2.21
|
%
|
GNMA
|
|
|
1,403
|
|
|
|
2.06
|
%
|
|
|
—
|
|
|
|
—%
|
|
|
|
—
|
|
|
|
—%
|
|
|
|
—
|
|
|
|
—%
|
|
|
|
1,403
|
|
|
|
1,420
|
|
|
|
2.06
|
%
|
Total
|
|
$
|
5,171
|
|
|
|
1.05
|
%
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
5,171
|
|
|
$
|
5,214
|
|
|
|
1.05
|
%
|
|
|
One Year or Less
|
|
|
More than One Year
through Five Years
|
|
|
More than Five Years
through Ten Years
|
|
|
More than Ten Years
|
|
|
Total
|
|
December 31, 2019
|
|
Amortized Cost
|
|
|
Weighted Average Yield
|
|
|
Amortized Cost
|
|
|
Weighted Average
Yield
|
|
|
Amortized Cost
|
|
|
Weighted Average
Yield
|
|
|
Amortized Cost
|
|
|
Weighted Average
Yield
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Weighted Average Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Freddie Mac
|
|
$
|
4,057
|
|
|
|
2.19
|
%
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
4,057
|
|
|
$
|
4,043
|
|
|
|
2.19
|
%
|
Fannie Mae
|
|
|
306
|
|
|
|
3.69
|
%
|
|
|
—
|
|
|
|
—%
|
|
|
|
—
|
|
|
|
—%
|
|
|
|
—
|
|
|
|
—%
|
|
|
|
306
|
|
|
|
309
|
|
|
|
3.69
|
%
|
GNMA
|
|
|
2,378
|
|
|
|
2.25
|
%
|
|
|
—
|
|
|
|
—%
|
|
|
|
—
|
|
|
|
—%
|
|
|
|
—
|
|
|
|
—%
|
|
|
|
2,378
|
|
|
|
2,381
|
|
|
|
2.25
|
%
|
Total
|
|
$
|
6,741
|
|
|
|
2.28
|
%
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
—
|
|
|
|
—%
|
|
|
$
|
6,741
|
|
|
$
|
6,733
|
|
|
|
2.28
|
%
|
Sources
of Funds
General.
Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also may
use borrowings, primarily FHLB-Cincinnati advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest
rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities,
loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively
stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions
and levels of competition.
Deposits.
Our deposits are generated primarily from our primary market area. We offer a selection of deposit accounts, including demand accounts,
savings accounts, certificates of deposit and individual retirement accounts (IRAs). Deposit account terms vary, with the principal differences
being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We do not accept brokered
deposits, although we have the authority to do so.
We
participate in the National CD Rateline Program as a wholesale source for certificates of deposit to supplement deposits generated
through our retail banking operations. The Rateline Program provides an internet based listing service which connects financial institutions
such as Cincinnati Federal with other financial institutions for jumbo certificates of deposit. Deposits obtained through the Rateline
Program are not considered to be brokered deposits. At December 31, 2020, approximately $5.6 million of our certificates of deposit, representing
3.7% of our total deposits, had been obtained through the Rateline Program. At December 31, 2020, these certificates of deposit had an
average term to maturity of eight months. Early withdrawal of these deposits is not permitted, which makes these accounts a more stable
source of funds.
Interest rates paid, maturity terms, service fees
and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies
and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely upon personalized customer service, long-standing
relationships with customers, and the favorable image of Cincinnati Federal in the community to attract and retain deposits. We recently
implemented a fully functional electronic banking platform, including mobile app and on-line bill pay, as a service to our deposit customers.
The flow of deposits is influenced significantly
by general economic conditions, changes in interest rates and competition. Our ability to gather deposits is affected by the competitive
market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products.
The following table sets forth the distribution
of our average total deposit accounts, by account type, for the periods indicated.
|
|
For
the Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
Balance
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Average
Balance
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Average
Balance
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Deposit type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
42,179
|
|
|
|
27.33
|
%
|
|
|
0.28
|
%
|
|
$
|
35,040
|
|
|
|
24.63
|
%
|
|
|
0.53
|
%
|
|
$
|
26,390
|
|
|
|
21.47
|
%
|
|
|
0.25
|
%
|
Interest-bearing demand
|
|
|
28,061
|
|
|
|
18.18
|
|
|
|
0..22
|
|
|
|
19,552
|
|
|
|
13.75
|
|
|
|
0.76
|
|
|
|
9,098
|
|
|
|
7.40
|
|
|
|
1.47
|
|
Certificates of deposit
|
|
|
70,253
|
|
|
|
45.53
|
|
|
|
2.10
|
|
|
|
76,133
|
|
|
|
53.52
|
|
|
|
2.12
|
|
|
|
71,114
|
|
|
|
57.86
|
|
|
|
1.73
|
|
Interest-bearing deposits
|
|
|
140,493
|
|
|
|
91.04
|
|
|
|
1.18
|
|
|
|
130,725
|
|
|
|
91.90
|
|
|
|
1.49
|
|
|
|
106,602
|
|
|
|
86.73
|
|
|
|
1.35
|
|
Non-interest bearing demand
|
|
|
13,822
|
|
|
|
8.96
|
|
|
|
—
|
|
|
|
11,517
|
|
|
|
8.10
|
|
|
|
—
|
|
|
|
16,305
|
|
|
|
12.87
|
|
|
|
—
|
|
Total deposits
|
|
$
|
154,315
|
|
|
|
100.00
|
%
|
|
|
1.07
|
%
|
|
$
|
142,242
|
|
|
|
100.00
|
%
|
|
|
1.37
|
%
|
|
$
|
122,907
|
|
|
|
100.00
|
%
|
|
|
1.16
|
%
|
The
following table sets forth our deposit activities for the periods indicated.
|
|
At
or For the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Beginning balance
|
|
$
|
143,411
|
|
|
$
|
142,392
|
|
Net deposits (withdrawals) before interest credited
|
|
|
7,434
|
|
|
|
(21
|
)
|
Interest credited
|
|
|
1,362
|
|
|
|
1,040
|
|
Net increase in deposits
|
|
|
8,796
|
|
|
|
1,019
|
|
Ending balance
|
|
$
|
152,207
|
|
|
$
|
143,411
|
|
The following table sets forth certificates of
deposit classified by interest rate as of the dates indicated.
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Interest Rate:
|
|
|
|
|
|
|
|
|
Less than 1.00%
|
|
$
|
14,378
|
|
|
$
|
785
|
|
1.00% to 1.99%
|
|
|
10,628
|
|
|
|
17,087
|
|
2.00% to 2.99%
|
|
|
35,979
|
|
|
|
57,630
|
|
3.00% to 3.99%
|
|
|
1,220
|
|
|
|
1,736
|
|
Total
|
|
$
|
62,205
|
|
|
$
|
77,238
|
|
The
following table sets forth the amount and maturities of certificates of deposit accounts at the date indicated.
|
|
At December 31, 2020
|
|
|
|
Period to Maturity
|
|
|
|
Less
Than or
Equal to
One Year
|
|
|
More
Than
One to
Two Years
|
|
|
More Than
Two to
Three
Years
|
|
|
More Than
Three Years
|
|
|
Total
|
|
|
Percent of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Interest Rate Range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1.00%
|
|
$
|
8,890
|
|
|
$
|
3,281
|
|
|
$
|
351
|
|
|
$
|
1,856
|
|
|
$
|
14,378
|
|
|
|
23.11
|
%
|
1.00% to 1.99%
|
|
|
7,928
|
|
|
|
1,642
|
|
|
|
234
|
|
|
|
824
|
|
|
|
10,628
|
|
|
|
17.09
|
|
2.00% to 2.99%
|
|
|
17,181
|
|
|
|
9,356
|
|
|
|
4,915
|
|
|
|
4,527
|
|
|
|
35,979
|
|
|
|
57.84
|
|
3.00% to 3.99%
|
|
|
1,132
|
|
|
|
80
|
|
|
|
8
|
|
|
|
-
|
|
|
|
1,220
|
|
|
|
1.96
|
|
Total
|
|
$
|
35,131
|
|
|
$
|
14,359
|
|
|
$
|
5,508
|
|
|
$
|
7,207
|
|
|
$
|
62,205
|
|
|
|
100.00
|
%
|
The following table sets forth the maturity of
our jumbo certificates of deposit ($100,000 or greater) as of December 31, 2020.
|
|
At December 31, 2020
|
|
|
|
(In thousands)
|
|
Three months or less
|
|
$
|
4,031
|
|
Over three months through six months
|
|
|
4,031
|
|
Over six months through one year
|
|
|
7,538
|
|
Over one year to three years
|
|
|
10,763
|
|
Over three years
|
|
|
2,608
|
|
Total
|
|
$
|
28,971
|
|
Borrowings. We
may obtain advances from the FHLB-Cincinnati by pledging as security our capital stock in the FHLB-Cincinnati and certain of our
mortgage loans and mortgage-backed securities. Such advances may be made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our
deposits, they can change our interest rate risk profile. Recently, we have lengthened the maturities of our some of our FHLB
advance borrowings to reduce interest rate risk. At December 31, 2020, we had $38.4 million of FHLB-Cincinnati advances. These
advances had interest rates ranging from 1.59% to 2.90%. In addition to funding portfolio loans, we sometimes use FHLB-Cincinnati
advances for short-term funding needs arising from our mortgage-banking activities.
In addition to the availability of FHLB-Cincinnati
advances we also have a total of $11.5 million in lines of credit available from three commercial banks. No amount was outstanding on
these lines of credit at December 31, 2020.
The following table sets forth information concerning
balances and interest rates on borrowings at the dates and for the years indicated. All such borrowings consisted of FHLB-Cincinnati advances.
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At or For the Year
Ended December 31,
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2020
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|
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2019
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|
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2018
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|
|
|
|
|
|
|
|
|
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(Dollars in thousands)
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Balance outstanding at end of period
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$
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38,412
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|
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$
|
47,172
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|
|
$
|
28,580
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Weighted average interest rate at the end of period
|
|
|
2.19
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%
|
|
|
2.24
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%
|
|
|
2.20
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%
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Maximum amount of borrowings outstanding at any month end during the period
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|
$
|
53,675
|
|
|
$
|
55,750
|
|
|
$
|
40,144
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|
Average balance outstanding during the period
|
|
|
42,434
|
|
|
|
42,873
|
|
|
|
35,219
|
|
Weighted average interest rate during the period
|
|
|
2.22
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%
|
|
|
2.23
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%
|
|
|
1.86
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%
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Employees and Human Capital
We believe that the success of a business is largely
due to the quality of its employees, the development of each employee’s full potential, and the Company’s ability to provide
timely and satisfying rewards. We encourage and support development of our employees and, whenever possible, strive to fill vacancies
from within. We invest in learning and development including tuition reimbursement for courses, degree programs and fees for certifications.
As of December 31, 2020, we had 72 full-time employees and 8 part-time employees. Our employees are not represented by any collective
bargaining group. Management believes that we have a good working relationship with our employees.
Subsidiary Activities
Cincinnati Federal is the only subsidiary of Cincinnati
Bancorp, Inc. Cincinnati Federal Investment Services, LLC, is the sole subsidiary of Cincinnati Federal and is currently inactive.
REGULATION AND SUPERVISION
General
As a federal savings bank, Cincinnati Federal is
subject to examination and regulation by the Office of the Comptroller of the Currency, and is also subject to examination by the Federal
Deposit Insurance Corporation. The federal system of regulation and supervision establishes a comprehensive framework of activities in
which Cincinnati Federal may engage and is intended primarily for the protection of depositors and the Federal Deposit Insurance Corporation’s
Deposit Insurance Fund. This regulation and supervision establishes a comprehensive framework of activities in which an institution may
engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors,
and not for the protection of security holders. Cincinnati Federal also is a member of and owns stock in the Federal Home Loan Bank of
Cincinnati, which is one of the 11 regional banks in the Federal Home Loan Bank System.
Under
this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking
and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount
of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish
the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical
ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These
ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement
action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution,
such as Cincinnati Federal or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends,
acquire other financial institutions or establish new branches.
In addition, we must comply with significant anti-money
laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations.
Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these
laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions
or expand our branch network.
As a savings and loan holding company, Cincinnati
Bancorp, Inc. is required to comply with the rules and regulations of the Federal Reserve Board. It is required to file certain reports
with the Federal Reserve Board and is subject to examination by and the enforcement authority of the Federal Reserve Board. Cincinnati
Bancorp, Inc. is also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Any change in applicable laws or regulations, whether
by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Securities
and Exchange Commission or Congress, could have a material adverse impact on the operations and financial performance of Cincinnati Bancorp,
Inc. and Cincinnati Federal.
Set forth below is a brief description of material
regulatory requirements that are or will be applicable to Cincinnati Federal and Cincinnati Bancorp, Inc. The description is limited to
certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes
and regulations and their effects on Cincinnati Federal and Cincinnati Bancorp, Inc.
Federal Banking Regulation
Business
Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended,
and applicable federal regulations. Under these laws and regulations, Cincinnati Federal may invest in mortgage loans secured by residential
and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject
to applicable limits. Cincinnati Federal may also establish subsidiaries that may engage in certain activities not otherwise permissible
for Cincinnati Federal, including real estate investment and securities and insurance brokerage.
Capital
Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital
standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total
capital to risk-based assets ratio of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
In determining the amount of risk-weighted
assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse
obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based
on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present
greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings.
Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes
certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated
subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2
capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include
cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock
and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and, for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive
Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values.
Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing
an institution’s capital adequacy, the Office of the Comptroller of the Currency takes into consideration not only these
numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual
institutions where deemed necessary.
In addition to establishing the minimum regulatory
capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution
does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above
the amount necessary to meet its minimum risk-based capital requirements. As fully implemented on January 1, 2019, the capital conservation
buffer requirement is 2.5% of risk-weighted assets.
At December 31, 2020, Cincinnati Federal’s
capital exceeded all applicable requirements.
Loans-to-One
Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers
in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus,
if the loan is secured by readily marketable collateral, which generally does not include real estate. At December 31, 2020, Cincinnati
Federal was in compliance with the loans-to-one borrower limitations.
Qualified
Thrift Lender Test. As a federal savings bank, Cincinnati Federal must satisfy the qualified thrift lender, or “QTL,”
test. Under the QTL test, Cincinnati Federal must maintain at least 65% of its “portfolio assets” in “qualified thrift
investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months
of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings bank, less the sum of specified
liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings
bank’s business.
Cincinnati Federal also may satisfy the QTL test
by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended. This
test generally requires a savings bank to have at least 75% of its deposits held by the public and earn at least 25% of its income from
loans and U.S. government obligations. Alternatively, a savings bank can satisfy this test by maintaining at least 60% of its assets in
cash, real estate loans and U.S. Government or state obligations.
A savings bank that fails the qualified thrift
lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance
with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2020, Cincinnati Federal satisfied the
QTL test.
Capital
Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends,
stock repurchases and other transactions charged to the savings bank’s capital account. A federal savings bank must file an application
with the Office of the Comptroller of the Currency for approval of a capital distribution if:
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the total capital distributions for the applicable calendar year exceed the
sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two
years;
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the savings bank would not be at least adequately capitalized following the
distribution;
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the distribution would violate any applicable statute, regulation, agreement
or regulatory condition; or
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the savings bank is not eligible for expedited treatment of its filings,
generally due to an unsatisfactory CAMELS rating or being subject to a cease and desist order or formal written agreement that requires
action to improve the institution’s financial condition.
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Even if an application is not otherwise required,
every savings bank that is a subsidiary of a savings and loan holding company, such as Cincinnati Federal, must still file a notice with
the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.
A notice or application related to a capital distribution
may be disapproved if:
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the federal savings bank would be undercapitalized following the distribution;
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the proposed capital distribution raises safety and soundness concerns; or
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the capital distribution would violate a prohibition contained in any statute,
regulation or agreement.
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In addition, the Federal Deposit Insurance Act
provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution
would fail to meet any applicable regulatory capital requirement. A federal savings bank also may not make a capital distribution that
would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion
to stock form.
Community
Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment
Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection
with its examination of a federal savings bank, the Office of the Comptroller of the Currency is required to assess the federal savings
bank’s record of compliance with the Community Reinvestment Act. A savings bank’s failure to comply with the provisions of
the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or
in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating
in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity
Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as other federal
regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all institutions
insured by the Federal Deposit Insurance Corporation to publicly disclose their rating. Cincinnati Federal received a “satisfactory”
Community Reinvestment Act rating in its most recent federal examination.
Transactions
with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited
by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under
common control with, an insured depository institution such as Cincinnati Federal. Cincinnati Bancorp, Inc. is an affiliate of Cincinnati
Federal because of its control of Cincinnati Federal. In general, transactions between an insured depository institution and its affiliates
are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings bank from
lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing
the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound
banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable
transactions with non-affiliates.
Cincinnati Federal’s authority to extend
credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed
by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other
things, these provisions generally require that extensions of credit to insiders:
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be made on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve
more than the normal risk of repayment or present other unfavorable features; and
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|
·
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not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the amount of Cincinnati Federal’s capital.
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In addition, extensions of credit in excess of
certain limits must be approved by Cincinnati Federal’s board of directors. Extensions of credit to executive officers are subject
to additional limits based on the type of extension involved.
Enforcement.
The Office of the Comptroller of the Currency has primary enforcement responsibility over federal savings banks and has authority to bring
enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers
and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings bank.
Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties
cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which
case penalties may be as high as $1 million per day. The Federal Deposit Insurance Corporation also has the authority to terminate deposit
insurance or recommend to the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular
savings bank. If such action is not taken, the Federal Deposit Insurance Corporation has authority to take the action under specified
circumstances.
Standards
for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured
depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards
as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies
use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking
agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution
to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a
plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Interstate
Banking and Branching. Federal law permits well capitalized and well managed holding companies to acquire banks in any
state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks
are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, recent amendments
made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that branching is authorized by
the law of the host state for the banks chartered by that state.
Prompt
Corrective Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective
action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital
categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The applicable Office of the Comptroller of the Currency regulations were amended to incorporate the previously mentioned increased regulatory
capital standards that were effective January 1, 2015. Under the amended regulations, an institution is deemed to be “well capitalized”
if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio
of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has
a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or
greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based
capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity
Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based
capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity
Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible
equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
At each successive lower capital category, an
insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on
interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of
brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is
required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the
performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or
undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency,
after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants
such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any
company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total
assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an
“undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly
undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional
restrictions, including but not limited to a regulatory order to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets, ceasing receipt of deposits from correspondent banks, dismissal of directors or officers, and
restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding
company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow
exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
At December 31, 2020, Cincinnati Federal met the
criteria for being considered “well capitalized.”
Insurance
of Deposit Accounts. The Deposit Insurance Fund of the Federal Deposit Insurance Corporation insures deposits at Federal
Deposit Insurance Corporation insured financial institutions such as Cincinnati Federal. Deposit accounts in Cincinnati Federal are insured
by the Federal Deposit Insurance Corporation generally up to a maximum of $250,000 per separately insured depositor. The Federal Deposit
Insurance Corporation charges insured depository institutions premiums to maintain the Deposit Insurance Fund.
Under
the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk
categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s
risk category and certain specified risk adjustments. Institutions deemed to be less risky pay lower rates while institutions deemed riskier
pay higher rates. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to
45 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase
or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and
comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act,
from its prior practice of basing the assessment on an institution’s deposits.
The
Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated
insured deposits. The Federal Deposit Insurance Corporation was required to achieve the 1.35% ratio by September 30, 2020. Insured institutions
with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead
leaving it to the discretion of the Federal Deposit Insurance Corporation, which has exercised that discretion by establishing a long
range fund ratio of 2%. The Federal Deposit Insurance Corporation announced that the ratio had declined to 1.30% at September 30, 2020
due largely to consequences of the COVID-19 pandemic. The FDIC adopted a plan to restore the fund to the 1.35% ratio within eight
years but did not change its assessment schedule.
The Federal Deposit Insurance Corporation has authority
to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations
of Cincinnati Federal. We cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the
Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the Federal
Deposit Insurance Corporation. We do not know of any practice, condition or violation that may lead to termination of our deposit insurance.
Privacy
Regulations. Federal regulations generally require that Cincinnati Federal disclose its privacy policy, including
identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of
establishing the customer relationship and annually thereafter. In addition, Cincinnati Federal is required to provide its customers
with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to
disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Cincinnati Federal currently has a
privacy protection policy in place and believes that such policy is in compliance with the regulations.
USA
PATRIOT Act. Cincinnati Federal is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address
terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened
anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and
customer identification requirements.
Prohibitions
Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit
to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Other Regulations
Interest and other charges collected or contracted
for by Cincinnati Federal are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject
to state and federal laws applicable to credit transactions, such as the:
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; and
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Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
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The deposit operations of Cincinnati Federal also
are subject to, among others, the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records;
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Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such
as digital check images and copies made from that image, the same legal standing as the original paper check; and
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit
accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
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Federal Reserve System
The Federal Reserve Board regulations
require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and
regular checking accounts). For 2020, the Federal Reserve Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $127.5 million or less (which may be
adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $127.5 million require a 10.0%
reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $16.9 million of otherwise
reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. Cincinnati
Federal was in compliance with these requirements at December 31, 2020. However, effective March 26, 2020, the Federal Reserve Board
reduced reserve requirement ratios on all net transaction accounts to zero percent, eliminating reserve requirements for all
depository institutions, in response to the COVID-19 pandemic.
Federal Home Loan Bank System
Cincinnati Federal is a member of the Federal Home
Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility
primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the
Federal Home Loan Bank. Cincinnati Federal was in compliance with this requirement at December 31, 2020. Based on redemption provisions
of the Federal Home Loan Bank of Cincinnati, the stock has no quoted market value and is carried at cost. Cincinnati Federal reviews for
impairment, based on the ultimate recoverability, the cost basis of the Federal Home Loan Bank of Cincinnati stock. At December 31, 2020,
no impairment had been recognized.
Holding Company Regulation
Cincinnati Bancorp, Inc. is a unitary savings and
loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement authority
over Cincinnati Bancorp, Inc. and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve
Board to restrict or prohibit activities that are determined to be a risk to Cincinnati Federal.
As a savings and loan holding company, Cincinnati
Bancorp, Inc.’s activities are limited to those activities permissible by law for financial holding companies (if Cincinnati Bancorp,
Inc. makes an election to be treated as a financial holding company and meets the other requirements to be a financial holding company)
or multiple savings and loan holding companies. Cincinnati Bancorp, Inc. has no present intention to make an election to be treated as
a financial holding company. A financial holding company may engage in activities that are financial in nature, incidental to financial
activities or complementary to a financial activity. Such activities include lending and other activities permitted for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, insurance and underwriting equity securities. Multiple savings and loan holding
companies are authorized to engage in activities specified by federal regulation, including activities permitted for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act.
Federal law prohibits a savings and loan holding
company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings
and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of any depository
institution not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience
and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution in another
state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition or the law of the state in which
the target is located authorizes such acquisitions by out-of-state companies.
The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.
Savings
and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act requires
the Federal Reserve Board to establish minimum consolidated capital requirements for all depository institution holding companies that
are as stringent as those required for the insured depository subsidiaries. However, savings and loan holding companies of under
$3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve determines
otherwise in particular cases.
The Dodd-Frank Act extended the “source of
strength” doctrine to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing the
“source of strength” doctrine that require holding companies to act as a source of strength to their subsidiary depository
institutions by providing capital, liquidity and other support in times of financial stress.
The Federal Reserve Board has issued a policy statement
regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding
companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate
of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall
financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances
such as where the company’s net income for the past four quarters, net of capital distributions previously paid over that period,
is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s
capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank
becomes undercapitalized. The policy statement also states that a holding company should inform the Federal Reserve Board supervisory
staff before redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses
or if the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments
outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect
the ability of Cincinnati Bancorp, Inc. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Federal Securities Laws
Cincinnati Bancorp, Inc. common stock is registered
with the Securities and Exchange Commission after the conversion and stock offering. Cincinnati Bancorp, Inc. is subject to the information,
proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve
corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and
to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies,
procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to
ensure continued compliance with these regulations.
Change in Control Regulations
Under the Change in Bank Control Act, a federal
statute, no person may acquire control of a savings and loan holding company, such as Cincinnati Bancorp, Inc., unless the Federal Reserve
Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into
consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.
Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class
of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator
that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution.
Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination
of control under the regulations under certain circumstances including where, as is the case with Cincinnati Bancorp, Inc., the issuer
has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no
company may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board. Any company
that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation
by the Federal Reserve Board.
TAXATION
Federal Taxation
Method
of Accounting. For federal income tax purposes, Cincinnati Bancorp, Inc. and Cincinnati Federal report their
income and expenses on the cash method of accounting and use a tax year ending December 31 for filing their federal income tax returns.
Net
Operating Loss Carryovers. Generally, a financial institution may carry a net operating loss forward indefinitely for losses
generated in taxable years ending after December 31, 2017. Cincinnati Bancorp, Inc. had $610,000 of federal net loss carryforwards at
December 31, 2020 that expire between 2028 and 2037 and $240,000 with no expiration.
Capital
Loss Carryovers. A corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial
institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital
loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any
other capital losses for the year to which carried and is used to offset any capital gains. Any undeducted loss remaining after the five
year carryover period is not deductible. At December 31, 2020, the Company had no capital loss carryovers.
Corporate
Dividends. Cincinnati Bancorp, Inc. may generally exclude from its income 100% of dividends received from Cincinnati Federal
as a member of the same affiliated group of corporations.
State Taxation
Cincinnati Bancorp, Inc. and Cincinnati Federal
are subject to Ohio taxation in the same general manner as other financial institutions. In particular, Cincinnati Bancorp, Inc. and Cincinnati
Federal file a consolidated Ohio Financial Institutions Tax (“FIT”) return. The FIT is based upon the net worth of the consolidated
group. For Ohio FIT purposes, savings institutions are currently taxed at a rate equal to 0.8% of taxable net worth.
Maryland
State Taxation. As a Maryland business corporation, Cincinnati Bancorp, Inc. is required to file an annual report
with and pay franchise taxes to the State of Maryland.
The presentation of Risk Factors is not required
of smaller reporting companies like Cincinnati Bancorp, Inc.
|
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
None.
As of December 31, 2020, the net book value of
our office properties was $3.3 million, and the net book value of our furniture, fixtures and equipment was $156,000. The following table
sets forth information regarding our offices.
|
|
Leased or Owned
|
|
|
|
|
Net Book Value of Real
Property
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Main Office:
|
|
|
|
|
|
|
|
|
|
|
6581 Harrison Ave
Cincinnati, OH 45247
|
|
Owned
|
|
|
2010
|
|
|
$
|
1,127
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch Offices:
|
|
|
|
|
|
|
|
|
|
|
1270 Nagel Rd.
Cincinnati, OH 45255
|
|
Owned
|
|
|
1995
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
7553 Bridgetown Rd.
Cincinnati, OH 45248
|
|
Owned
|
|
|
1987
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
4310 Glenway Ave
Cincinnati, OH 45205
|
|
Owned
|
|
|
1957
|
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
1050 Scott Street
Covington, KY 41011
|
|
Owned
|
|
|
1957
|
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
6890 Dixie Highway
Florence, KY 41042
|
|
Owned
|
|
|
1957
|
|
|
|
389
|
|
We believe that current facilities are adequate
to meet our present and foreseeable needs, subject to possible future expansion.
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
At December 31, 2020, we were not involved in any
pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business or in any legal
proceedings the outcome of which would be material to our consolidated financial condition or results of operations.
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
PART II
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
(a) Market,
Holder and Dividend Information. The common stock of Cincinnati Bancorp, Inc. is listed on the Nasdaq Capital Market under the
symbol “CNNB.” The number of holders of record of Cincinnati Bancorp, Inc.’s common stock as of March 15, 2021, was
approximately 230. Certain shares of Cincinnati Bancorp, Inc. are held in “nominee” or “street” name and accordingly,
the number of beneficial owners of such shares is not known or included in the foregoing number.
Our board of directors has the authority to declare
dividends on our shares of common stock, subject to statutory and regulatory requirements. Specifically, the Federal Reserve Board has
issued a policy statement providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings
retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior
regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income
for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding
company’s overall rate or earnings retention is inconsistent with its capital needs and overall financial condition. See “Item
1. Business—Taxation—Federal Taxation” and “—Regulation and Supervision—Holding Company Regulation.”
The common stock of Old Cincinnati Bancorp was
traded on the OTC Pink Marketplace under the symbol “CNNB.” Effective January 22, 2020, Cincinnati Bancorp, Inc. has traded
on the NASDAQ exchange under the symbol “CNNB.” The following table sets forth the high and low closing bid prices per share
of the common stock of Old Cincinnati Bancorp for the quarters ended in 2019. The indicated prices do not include retail markups or markdowns
or any commissions and do not necessarily reflect prices in actual transactions.
Fiscal Year Ended December 31, 2019 (1)
Quarter Ended:
|
|
High
|
|
|
Low
|
|
|
Dividend
Paid
|
|
December 31, 2019
|
|
$
|
10.24
|
|
|
$
|
9.30
|
|
|
$
|
—
|
|
September 30, 2019
|
|
|
9.94
|
|
|
|
8.56
|
|
|
|
—
|
|
June 30, 2019
|
|
|
8.56
|
|
|
|
8.26
|
|
|
|
—
|
|
March 31, 2019
|
|
|
8.50
|
|
|
|
7.22
|
|
|
|
—
|
|
(1)
Per share prices related to periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive
recognition to the 1.6351 exchange ratio applied in the conversion offering.
(b) Sales
of Unregistered Securities. Not applicable.
(c) Use
of Proceeds. Not applicable.
(d) Securities
Authorized for Issuance Under Equity Compensation Plans. Subject to permitted adjustments for certain corporate transactions,
the 2017 Equity Incentive Plan, which was approved by stockholders, authorizes the issuance or delivery to participants of up to 192,844
shares of common stock pursuant to grants, of restricted stock awards, restricted stock unit awards, incentive stock options and non-qualified
stock options.
The following information is presented for the
2017 Equity Incentive Plan as of December 31, 2020 (1):
Plan Category
|
|
Number
of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
|
Number of securities
remaining available for
future issuance under plan
(excluding securities
reflected in column )
|
|
Equity compensation plans approved by stockholders
|
|
|
156,368
|
|
|
$
|
6.27
|
|
|
|
-0-
|
|
Equity compensation plans not approved by stockholders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total
|
|
|
156,368
|
|
|
$
|
6.27
|
|
|
|
-0-
|
|
(1)
Share amounts related to periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive
recognition to the 1.6351 exchange ratio applied in the conversion offering.
(e) Stock
Repurchases. None.
(f) Stock
Performance Graph. Not required for smaller reporting companies.
|
ITEM 6.
|
Selected Financial Data
|
Not
required for smaller reporting companies like Cincinnati Bancorp, Inc..
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
|
This section is intended to help potential investors
understand our financial performance through a discussion of the factors affecting our financial condition at December 31, 2020 and December
31, 2019 and our results of operations for the years ended December 31, 2020 and December 31, 2019. This section should be read in conjunction
with the consolidated financial statements and notes thereto that appear elsewhere in this Annual Report on Form 10-K.
Overview
Cincinnati Federal provides financial services
to individuals and businesses from our main office in Cincinnati, Ohio and our full service branch offices in Miami Heights, Anderson
and Price Hill and in Covington and Florence in Northern Kentucky. Our primary market area includes Hamilton County, Ohio, and, to a lesser
extent, Warren, Butler and Clermont Counties, Ohio. We also conduct business in the northern Kentucky region and make loans secured by
properties in Campbell, Kenton and Boone Counties, Kentucky, as well as in Dearborn County, in southeastern Indiana.
Our business consists primarily of taking deposits
from the general public and investing those deposits, together with borrowings and funds generated from operations, in one- to four-family
residential real estate loans, and, to a lesser extent, nonresidential real estate and multi-family loans, home equity loans and lines
of credit and construction and land loans. At December 31, 2020, $84.8 million, or 49.0% of our total loan portfolio, was comprised of
one- to four-family residential real estate loans; $29.5 million, or 17.1%, consisted of nonresidential real estate loans; $41.7 million,
or 24.1%, consisted of multi-family loans; $9.9 million, or 5.8%, consisted of home equity lines of credit; $1.1 million or 0.6% consisted
of commercial business loans and consumer loans; and $5.8 million, or 3.4%, consisted of construction and land loans. We also invest in
securities, which currently consist primarily of mortgage-backed securities issued by U.S. government sponsored entities and Federal Home
Loan Bank stock.
Cincinnati Federal also operates an active mortgage
banking unit with thirteen mortgage loan officers. This unit originates loans both for sale in the secondary market and for retention
in our portfolio. The revenue from gain on sales of loans was $9.5 million for year ended December 31, 2020 and $2.1 million for year
ended December 31, 2019.
We offer a variety of deposit accounts, including
checking accounts, savings accounts and certificate of deposit accounts. We utilize advances from the FHLB-Cincinnati for liquidity and
for asset/liability management purposes. At December 31, 2020, we had $38.4 million in advances outstanding with the FHLB-Cincinnati.
Our results of operations depend primarily on our
net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the
interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, non-interest
income and non-interest expense. Non-interest income currently consists primarily of gain (loss) on sale of mortgage loans, checking account
service fee income, interchange fees from debit card transactions and income from bank owned life insurance. Non-interest expense currently
consists primarily of expenses related to compensation and employee benefits, occupancy and equipment, data processing, franchise taxes,
federal deposit insurance premiums, impairment losses on foreclosed real estate and other operating expenses.
We invest in bank owned life insurance to provide
us with a funding source to offset some costs of our benefit plan obligations. Bank owned life insurance provides us with non-interest
income that is nontaxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital
plus our allowance for loan losses. At December 31, 2020, this limit was $9.1 million, and we had invested $4.2 million in bank owned
life insurance.
Cincinnati Federal Investment Services, LLC, a
wholly owned subsidiary of Cincinnati Federal under Ohio law, was formed in 2015 to offer nondeposit investment and insurance products
in partnership with Infinex Investments, Inc. Cincinnati Federal Investment Services, LLC is currently inactive.
Our results of operations also may be affected
significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions
of regulatory authorities.
Business Strategy
Our current business strategy is to operate as
a well-capitalized and profitable community bank dedicated to serving the needs of our consumer and business customers, and offering personalized
and efficient customer service. Our goals are to increase interest income through loan portfolio growth, expand fee income with the mortgage
banking unit, lower our cost of deposits by increasing non-maturity based accounts, achieve economies of scale through balance sheet growth
and diversify sources of income. Highlights of our current business strategy include:
|
·
|
Increasing our origination of nonresidential real estate and multi-family loans. We began originating a significant
amount of nonresidential real estate and multi-family loans in the early 2000s. As of December 31, 2020 and 2019, such loans, together
with construction and land loans, totaled $77.1 million and $65.3 million, or 211.4% and 258.8% of capital plus ALLL, respectively. Under
our current board approved loan concentration policy, such loans (including construction and land loans) shall not exceed 300% of our
capital plus ALLL. We intend to continue to increase our origination of nonresidential real estate and multi-family real estate loans,
with a focus on multi-family loans. Most nonresidential real estate and multi-family loans are originated with adjustable rates. Nonresidential
real estate and multi-family lending is expected to increase loan yields with shorter repricing terms than fixed-rate loans. Nonresidential
real estate and multi-family originations in 2020 increased $7.0 million or 30.6% over 2019 origination levels. See “Business of
Cincinnati Federal—Lending Activities—Commercial Real Estate and Multi-Family Lending.”
|
|
·
|
Continuing to focus on our residential mortgage banking operations. For the year ended December 31, 2020, we originated
$323.0 million of one-to four-family residential loans, and we sold $291.4 million of one-to four-family residential loans. For the year
ended December 31, 2019, we originated $113.7 million of one-to four family residential loans, and we sold $93.8 million of one- to four-family
residential loans. These loans are all sold on a non-recourse basis primarily to the FHLB-Cincinnati, Freddie Mac, and other private sector
third-party buyers. Loans are sold on both a servicing-retained and servicing-released basis. Subject to mortgage market conditions, we
intend to continue to increase the number of mortgage loan originators
in order to increase our volume of sold loans with the potential for increased servicing income.
|
|
·
|
Continuing to emphasize one- to four-family residential adjustable rate mortgage lending. We will continue to focus
on originating one- to four-family adjustable rate mortgages for retention in our portfolio. As of December 31, 2020, $54.4 million, or
64.3%, of our one- to four-family residential mortgage loans, with contractual maturities after December 31, 2020, were adjustable rate
loans. As of December 31, 2019, $83.0 million, or 46.1%, of our one- to four-family residential mortgage loans had adjustable rates. Adjustable
rate loans have shorter repricing terms to mitigate interest rate risk.
|
|
·
|
Increasing our “core” deposit base. We seek to increase our core deposit base, particularly checking accounts.
Core deposits include all deposit account types except certificates of deposit. Core deposits are our least costly source of funds, which
improves our interest rate spread, and represent our best opportunity to develop customer relationships that enable us to cross-sell our
full complement of products and services. Core deposits also contribute non-interest income from account-related fees and services and
are generally less sensitive to withdrawal when interest rates fluctuate. We have continued our marketing efforts for checking accounts
through digital, print and outdoor advertising channels. Core deposits as of December 31, 2020 grew $23.8 million or 36.0% over December
31, 2019 balances. The increase is partially attributable to the increase in cash of $6.0 million at Cincinnati Bancorp, Inc. which is
held in a deposit account at the Bank. We continue to significantly expand and improve the products and services we offer our retail and
business deposit customers who maintain core deposit accounts and have improved our infrastructure for electronic banking services, including
business online banking, mobile banking, bill pay, remote deposit capture, wire transfers and e-statements. The deposit infrastructure
we have established can accommodate significant increases in retail and business deposit accounts without additional capital expenditure.
We will also continue to use non-core deposits, including certificates of deposit from the National CD Rateline Program, as a source of
funds, in accordance with our asset/liability policies and funding strategies.
|
|
·
|
Implementing a managed growth strategy. We intend to pursue a growth strategy for the foreseeable future, with the goal
of improving the profitability of our business through increased net interest income and new sources of non-interest income. Subject to
market conditions, we intend to grow our one- to four-family residential adjustable rate, nonresidential real estate and multi-family
loan portfolios. To a lesser extent we intend to grow our construction and commercial business loan portfolio.
|
Summary of Critical Accounting Policies
The discussion and analysis of the financial condition
and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. generally accepted
accounting principles. The preparation of these financial statements requires management to make estimates and assumptions affecting the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses.
We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are
based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the
carrying value of our assets and liabilities and our results of operations.
The following represent our critical accounting
policies:
Allowance
for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the
uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for
loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability
of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the
borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation
is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes
available.
The allowance consists of allocated and general
components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired,
an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower
than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience
and expected loss given default derived from our internal risk rating process. Other adjustments may be made to the allowance for pools
of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss
or risk rating data.
A loan is considered impaired when, based on current
information and events, it is probable that we may not be able to collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral
value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation
to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash
flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral
if the loan is collateral dependent.
Groups of loans with similar risk characteristics
are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions
and other relevant factors that affect repayment of the loans.
In the course of working with borrowers, we may
choose to restructure the contractual terms of certain loans. In this scenario, we attempt to work-out an alternative payment schedule
with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by us to identify if a troubled
debt restructuring has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, we
grant a concession to the borrower that we would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay
in line with the borrower’s current financial status, and the restructuring of the loan may include the transfer of assets from
the borrower to satisfy the debt, a modification of loan terms or a combination of the two. If such efforts by us do not result in a satisfactory
arrangement, the loan is referred to legal counsel, at which time we commence foreclosure. We may terminate foreclosure proceedings if
the borrower is able to work-out a satisfactory payment plan. It is our policy that any restructured loans on nonaccrual, prior to being
restructured, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider
its return to accrual status. If a loan was accruing at the time of restructuring, we review the loan to determine if it is appropriate
to continue the accrual of interest on the restructured loan.
With regards to determination of the amount of
the allowance for credit losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the
amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.
Federal
Home Loan Bank of Cincinnati Lender Risk Account Receivable. Certain loan sale transactions with the Federal
Home Loan Bank of Cincinnati provide for establishment of a lender risk account receivable, which consists of amounts withheld from loan
sale proceeds by the Federal Home Loan Bank of Cincinnati for absorbing inherent losses that are probable on those sold loans. These withheld
funds are an asset as they are scheduled to be paid to us in future years, net of any credit losses on those loans sold. The receivables
are initially measured at fair value. The fair value is estimated by discounting the cash flows over the life of each master commitment
contract. The accretable yield is amortized over the life of the master commitment contract. Expected cash flows are re-evaluated at each
measurement date. If there is an adverse change in expected cash flows, the accretable yield would be adjusted on a prospective basis
and the asset would be evaluated for impairment.
Mortgage Servicing Rights. Mortgage
servicing assets are recognized separately when rights are acquired through sale of financial assets. Under the servicing assets and liabilities
accounting guidance (ASC 860-50), servicing rights resulting from the sale of loans originated by us are initially measured at fair value
at the date of transfer. Cincinnati Federal subsequently measures each class of servicing asset using the fair value method. Under the
fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in earnings
in the period in which the changes occur.
Fair value is based on a valuation model that calculates
the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would
use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation
rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions
and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing rights and may result in a
reduction or addition to noninterest income.
Servicing fee income is recorded for fees earned
for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded
as income when earned.
Coronavirus (COVID-19) Impact
As a result of the spread of the coronavirus (COVID-19) pandemic, economic
uncertainties have arisen which may negatively affect the financial position, results of operations and cash flows of the Company and,
in particular, the collectability of the loan portfolio. The duration of these uncertainties and the ultimate financial effects cannot
be reasonably estimated at this time.
Loan Modifications
Beginning
in March 2020, we began receiving requests from certain of our borrowers for loan payment deferrals. These modifications for our portfolio
loans are for the deferral of principal and interest payments up to 90 day terms. Loan deferral terms may be extended on a case-by-case
basis. Each request is evaluated individually and evidenced by a signed loan modification agreement. Interest on loan deferrals continues
to accrue during the deferral period. While interest and fees will still accrue to income, through normal GAAP accounting, should
eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such
a scenario, interest income in future periods could be negatively impacted. Collectability of accrued interest will be evaluated on a
case-by-case basis once the deferral period is ended. At this time, it is uncertain what the potential impact of loan deferrals will have
on the financial position, results of operations and the allowance for loan losses. The following table provides further information on
coronavirus payment deferral modifications for loans held in portfolio approved as of December 31, 2020:
|
|
As of December 31, 2020
|
|
COVID-19 Deferrals Update
|
|
|
Recorded
Balance
|
|
|
|
Number
of Accounts
|
|
One to four family mortgage loans - owner occupied
|
|
$
|
515,278
|
|
|
|
3
|
|
One to four family mortgage loans - investment
|
|
|
89,842
|
|
|
|
2
|
|
Multifamily
|
|
|
-
|
|
|
|
-
|
|
Nonresidential
|
|
|
418,784
|
|
|
|
1
|
|
Land
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan payment deferral modifications
|
|
$
|
1,023,904
|
|
|
|
6
|
|
|
|
As of December 31, 2020
|
|
|
|
Recorded
|
|
|
Number
|
|
Residential Payment Deferrals by Deferral Type
|
|
Balance
|
|
|
of Accounts
|
|
One to four family mortgage loans - owner occupied
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months or less principal and interest
|
|
$
|
-
|
|
|
|
-
|
|
More than three months principal and interest
|
|
|
515,278
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
One to four family mortgage loans - investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months or less principal and interest
|
|
|
-
|
|
|
|
-
|
|
More than three months principal and interest
|
|
|
89,842
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total residential payment deferrals
|
|
$
|
605,120
|
|
|
|
5
|
|
|
|
Recorded
|
|
|
Number
|
|
Commercial Payment Deferrals by Deferral Type
|
|
Balance
|
|
|
of Accounts
|
|
Multifamily:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months or less principal and interest
|
|
$
|
-
|
|
|
|
-
|
|
More than three months principal and interest
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonresidential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months or less principal and interest
|
|
|
-
|
|
|
|
-
|
|
More than three months principal and interest
|
|
|
418,784
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Construction and land loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months or less principal and interest
|
|
|
-
|
|
|
|
-
|
|
More than three months principal and interest
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total commercial payment deferrals
|
|
$
|
418,784
|
|
|
|
1
|
|
The Company services loans for various investors, including the FHLB-Cincinnati
and Freddie Mac. Under terms of our agreement with these entities we are required to remit principal and interest on a scheduled basis.
We have conformed our loan deferral program to meet the guidance issued by the FHLB-Cincinnati and Freddie Mac. At this time, it is uncertain
what potential impact the loan deferrals for sold loans will have on our financial position. The following table shows the coronavirus
payment deferral modifications approved for loans sold as of December 31, 2020:
|
|
As of December 31, 2020
|
|
|
|
Recorded
|
|
|
Number
|
|
COVID-19 Loans Serviced for Others Deferrals Update
|
|
Investor Balance
|
|
|
of Accounts
|
|
FHLB -Cincinnati
|
|
$
|
306,594
|
|
|
|
2
|
|
Freddie Mac
|
|
|
514,645
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
821,239
|
|
|
|
5
|
|
Paycheck Protection Program
As part of the Coronavirus Aid, Relief, and Economic Security Act
(“CARES Act”), the Small Business Administration (“SBA”) has been authorized to guarantee loans under the Paycheck
Protection Program (“PPP”) under the CARES Act through August 8, 2020. We began accepting applications on April 27, 2020.
As of December 31, 2020, we had originated 23 PPP loans totaling $633,800. PPP loans are fully guaranteed by the SBA and therefore do
not represent a credit risk. PPP loans are included within the commercial loans category.
Asset Impairment
Our mortgage servicing rights valuation has experienced a
decrease as of December 31, 2020 as a result of increased prepayment speed assumptions due to the decrease in market interest rates
in response to COVID-19. The fair value of our mortgage servicing rights, however, has increased due to the recording of mortgage
servicing rights on increased levels of new loan originations. It is uncertain whether prolonged effects of the COVID-19 pandemic
will result in future decreases in the fair value of our MSRs.
Financial position and results of operations
Pertaining to our December 31, 2020 financial condition and results
of operations, COVID-19 had an impact on our allowance for loan losses (“ALL”). While we have not yet experienced any charge-offs
related to COVID-19, our allowance for loan losses calculation and resulting provision for loan losses are impacted by changes in economic
conditions. Given the increase in economic uncertainty since the pandemic was declared in early March, our need for additional allowance
for loan losses has potentially increased. As of December 31, 2020, our significant credit quality indicators, such as levels of delinquent,
classified, impaired and nonperforming loans, have not materially deteriorated. Should economic conditions in our market area worsen,
we could experience a need for further increases in our allowance for loan losses and be required to record additional provisions for
loan loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19
are prolonged.
Capital and liquidity
As of December 31, 2020, all of our capital ratios were in excess of
all regulatory requirements to be considered a “well capitalized” institution. While we believe that we have sufficient
capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely
impacted by further losses.
We maintain access to multiple sources of liquidity. Wholesale
funding sources, particularly the FHLB and National CD Rateline, have remained open to us. If funding costs become elevated
for an extended period of time, it could have an adverse effect on our net interest margin. If an extended recession caused
large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of
funding.
Our processes, controls and business continuity plan
Following guidance from the Governors of Ohio and Kentucky, the Company
has deployed a successful remote working strategy, provided timely communication to our employees and customers, implemented protocols
for employee safety, and initiated strategies for monitoring and responding to local COVID-19 impacts – including customer relief
efforts. The Company’s preparedness efforts, coupled with timely plan implementation, resulted in minimal impacts to operations
as a result of COVID-19. Prior technology planning resulted in the successful deployment of the majority of our operational teams
to a remote environment. As the pandemic has progressed through the twelve months ended December 31, 2020, most of our employees
returned to their offices. In October 2020, management made the decision to close our branch lobbies for in-person transactions unless
by appointment due to the spike in COVID-19 cases in Ohio and Kentucky. As of December 31, our branch lobbies remained closed for in-person
customer transactions. Our employees are working from home where practicable. We do not anticipate incurring additional material costs
related to adhering to the State of Ohio or Kentucky’s mandated COVID-19 related business requirements. Our management team continues
to meet as needed to respond to any future COVID-19 interruptions or developments. We do not anticipate significant challenges to
our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The
Company does not currently face any material resource constraint through the implementation of our business continuity plans.
Lending
The Company’s loan exposure is predominately retail
residential, multifamily and nonresidential in nature. See Note 3 of the Notes to Condensed Consolidated Financial Statements. As of
December 31, 2020, the Company had no direct exposure to the hospitality, restaurant, travel, energy, aviation, healthcare or senior
living industries. Although the Company has no direct exposure to the aviation industry, General Electric operates a jet engine
plant in the Cincinnati area which has been adversely affected by the COVID-19 pandemic. Some of General Electric employees are
borrowers from the Company, and their ability to service their debt may be or may become impaired. The bank has one nonresidential
loan secured by property leased by a GE aviation subsidiary. The loan was current as of December 31, 2020.
Comparison of Financial Condition at December 31, 2020 and 2019
Total
Assets. Total assets were $237.1 million at December 31, 2020, a decrease of $4.7 million, or 1.9%, from the $241.8 million
at December 31, 2019. Cash and cash equivalents decreased $5.4 million, or 14.3%. Total loans, net of the allowance, decreased $12.7 million,
or 7.1% due to higher prepayments. Offsetting the decrease in total assets was an increase in loans held for sale of $10.2 million, or
328.6%, to $13.3 million from $3.1 million at December 31, 2019. Interest-bearing time deposits increased $3.0 million at December 31,
2020.
Cash
and Cash Equivalents. Cash and cash equivalents decreased $5.4 million, or 14.3%, to $32.3 million at December 31, 2020 from
$37.7 million at December 31, 2019. This decrease was primarily the result of the return of $9.8 million of stock over-subscription proceeds
and the increase in loans held for sale of $10.2 million, or 328.6%, partially offset by an increase of $8.8 million in deposits.
Available-for-Sale
Securities. Investment securities available-for-sale decreased $1.5 million to $5.2 million at December 31, 2020 compared to
$6.7 million at December 31, 2019 due to maturities. There were no purchases or sales of available-for-sale securities in 2020.
Loans
Held for Sale. We currently sell certain fixed-rate, 15- and 30-year term, one-to-four family mortgage loans. We have
sold loans on both a servicing-released and servicing-retained basis to: the FHLB-Cincinnati, through its mortgage purchase program; Freddie
Mac; and certain private sector third-party buyers. Loans held for sale increased $10.2 million, or 328.6%, to $13.3 million at December
31, 2020 from $3.1 million at December 31, 2019. In 2020, we originated $301.6 million of loans for sale, all of which were one- to four-family
residential real estate loans. Management intends to continue this sales activity in future periods to generate gain on sale revenue and
servicing fee income.
During the year ended December
31, 2020, we sold $291.4 million of one-to- four family residential loans, on both a servicing–retained and servicing–released
basis. Recent economic events, including a reduction in interest rates by the Federal Reserve Board, in its efforts to address the overall
economic slowdown brought about by the COVID-19 pandemic, have reduced mortgage interest rates and have had a favorable impact on our
originations of fixed-rate mortgage loans, which we have classified as held for sale to the secondary market. During the year ended December
31, 2020, in recognition of the increasing demand for mortgage lending related to the lower interest rate environment, and the opportunity
to pursue increased mortgage banking business, we hired an additional five mortgage loan officers and nine lending and loan servicing
support personnel. Management intends to continue this sales activity in future periods to generate gains on sale and servicing fee income,
particularly if the prevailing low interest rate environment persists.
Net
Loans. Net loans decreased $12.7 million, or 7.1%, to $166.7 million at December 31, 2020 from $179.3 million at December
31, 2019. During the year ended December 31, 2020, we originated $62.6 million of loans for the portfolio, $19.8 million of which were
one- to four- family residential real estate loans, $10.8 million were nonresidential real estate loans, $19.1 million were multi-family
loans, $7.7 million were home equity lines of credit, $4.3 million were construction and land loans, $634,000 were Paycheck Protection
Plan (PPP) commercial business loans and $268,000 were consumer loans. The residential loan portfolio declined by $19.2 million, as borrowers
elected to refinance their loans at lower mortgage rates, and the Bank elected to sell the preponderance of these new fixed rate residential
loans in the secondary market. This decline in the residential loan portfolio was partially offset by net increases in the nonresidential
loan portfolio of $6.2 million and $5.1 million in the multifamily loan portfolio. The growth in these segments reflects our strategy
to grow the commercial real estate portfolio to enhance loan yields.
Mortgage
Servicing Rights. Mortgage servicing rights increased to $2.0 million, or 66.9%, from $1.2 million at December 31, 2019. New
mortgage servicing rights of $1.4 million were recognized while the fair value of mortgage servicing rights declined $600,000.
Other
Assets. Other assets increased $366,000, or 29.6%, to $1.6 million at December 31, 2020 from $1.2 million at December 31, 2019.
The increase was primarily due to the right of use lease of $181,000 for a loan production office, COVID payment deferrals of $321,000
and a mortgage banking derivative net asset of $499,000, partially offset by a $584,000 decrease in prepaid stock offering expenses.
Deposits.
Deposits increased $8.8 million, or 6.1%, to $152.2 million at December 31, 2020 from $143.4 million at December 31, 2019. Our core deposits
increased $23.8 million, or 36.0%, to $90.0 million at December 31, 2020 compared to December 31, 2019. Demand deposit accounts increased
$13.3 million, or 46.4% as part of our strategy to increase lower cost funding sources. The Bank implemented a “free checking”
marketing program through a third-party during the year. Time deposits decreased $15.0 million, or 19.5%, to $62.2 million at December
31, 2020 from $77.2 million at December 31, 2019. The decrease in time deposits was primarily due to the decline in the Bank’s time
deposit offering rates, as a result of the decrease in market interest rates. In large part, maturing time deposits were moved to checking
and savings accounts offering comparable interest rates with increased liquidity. Deposits obtained through the National CD Rateline Program
decreased to $5.6 million at December 31, 2020 from $6.6 million at December 31, 2019. The decrease in retail and wholesale time deposits
was part of the Bank’s strategy to reduce the cost of deposits in 2020. Management intends to continue its strategy of pursuing
growth in lower cost core deposits in 2021.
Federal
Home Loan Bank Advances. Federal Home Loan Bank advances decreased $8.8 million, or 18.6%, to $38.4 million at December 31,
2020 from $47.2 million at December 31, 2019. The decrease in FHLB advances was part of our strategy to reduce our dependence on wholesale
funding sources.
Stock
Subscription Funds. Stock subscription funds were disbursed following the closing of the stock offering. The closing occurred
effective January 22, 2020. The subscription offering was over-subscribed and $9.8 million was refunded to prospective investors after
the closing date.
Stockholders’
Equity. Stockholders’ equity increased $17.7 million, or 74.1%, to $41.5 million at December 31, 2020 from $23.8 million
at December 31, 2019. The increase resulted primarily from the $14.3 million net proceeds of the stock offering and net income of $3.2
million for the year ended December 31, 2020.
Comparison of Operating Results for the Years Ended December
31, 2020 and December 31, 2019
General.
Net income for the year ended December 31, 2020 was $3.2 million, compared to a net income of $798,000 for the year ended December 31,
2019, an increase of $2.4 million or 295.2%. The increase was primarily due to a $7.7 million increase in noninterest income, partially
offset by a $4.2 million increase in noninterest expense, a decrease in net interest income of $199,000, a $240,000 increase in the provision
for loan losses and an increase of $732,000 increase in federal income tax expense. The increase in noninterest income was primarily attributable
to higher residential mortgage lending activity as a result of the decrease in interest rates from the Federal Reserve’s response
to the impact of COVID-19 on the economy. The decrease in long term interest rates had a positive impact on residential refinance and
home purchase activity as reflected in the increase on gain on sale of loans. Mortgage banking revenue, including gain on sale of loans
in 2020, is highly dependent on continued low mortgage rates.
Interest
and Dividend Income. Interest and dividend income decreased $508,000, or 5.9%, to $8.0 million for the year ended December
31, 2020 from $8.5 million for the year ended December 31, 2019. This decrease was primarily attributable to a $365,000, or 4.5%, decrease
in interest on loans receivable, primarily due to a 31 basis point decrease in the average yield on loans, as customers with higher yielding
loans elected to refinance to lower rates. This decrease in the yield on loans was partially offset by a $4.6 million increase in the
average balance outstanding year-to-year.
Interest income on securities increased
$36,000, or 127.4%, as the average balance of investment securities increased $4.5 million to $5.9 million for the year ended
December 31, 2020, from $1.4 million for the year ended December 31, 2019, reflecting higher levels of liquidity. The average yield
on investment securities decreased 91 basis points to 1.09% for the year ended December 31, 2020 from 2.00% for the year ended
December 31, 2019. The decrease in yield on available-for-sale securities was attributable to the purchase of lower yielding
adjustable and floating rate mortgage-backed securities. Dividends on Federal Home Loan Bank stock and other investments decreased
$179,000 primarily due to the decrease in the average yield on other interest-bearing deposits of 163 basis points. The average
balance of other interest-bearing deposits, including certificates of deposit in other financial institutions, and federal funds
sold increased $5.4 million to $19.0 million at December 31, 2020 compared to December 31, 2019.
Interest
Expense. Total interest expense decreased $309,000, or 10.6%, to $2.6 million for the year ended December 31, 2020. Interest
expense on deposit accounts decreased $295,000, or 15.1%, to $1.7 million for the year ended December 31, 2020 from $2.0 million for the
year ended December 31, 2019. The decrease was primarily due to a decrease of 31 basis points in the average cost of deposits, which was
partially offset by a $9.8 million increase in the average balance year-to-year. The average cost of interest-bearing demand accounts
decreased 125 basis points to 0.22%, while average interest-bearing demand account balances increased $8.5 million at December 31, 2020.
The average cost of savings accounts decreased 25 basis points to 0.28%, while average savings account balances increased $7.1 million
at December 31, 2020.The average balance of certificates of deposits decreased $5.9 million while the average cost of certificates of
deposits decreased 2 basis points to 2.10% at December 31, 2020.
Interest expense on FHLB advances decreased $14,000
to $941,000 for the year ended December 31, 2020 from $955,000 for the year ended December 31, 2019. The average balance of advances decreased
$439,000 to $42.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, while the average cost of
advances decreased one basis point to 2.22%.
Net
Interest Income. Net interest income decreased $199,000, or 3.5%, to $5.4 million for the year ended December 31,
2020 from $5.6 million for the year ended December 31, 2019. Average net interest-earning assets increased $14.4 million compared to year
end December 31, 2019. The interest rate spread decreased to 2.39% for the year ended December 31, 2020 from 2.69% for the year ended
December 31, 2019. The net interest margin decreased to 2.58% for the year ended December 31, 2020 from 2.87% for the year ended December
31, 2019.
Provision
for Loan Losses. Based on management’s analysis of the allowance for loan losses described in Note 1 of our financial
statements “Nature of Operations and Summary of Significant Accounting Policies,” we recorded a provision for loan losses
of $265,000 for the year ended December 31, 2020 compared to a provision for loan losses of $25,000 for the year ended December 31, 2019.
The allowance for loan losses was $1.7 million, or 0.97% of total loans, at December 31, 2020, compared to $1.4 million or 0.78% of total
loans, at December 31, 2019. The increase in the provision for loan losses in 2020 compared to 2019 was due primarily to the uncertainty
of impact of the COVID-19 pandemic on the economy as a whole and on our market area in particular. The resurgence of COVID cases nationally
in late 2020, and the prospect of continued economic weakness and continued high unemployment, indicated a qualitative factor adjustment
was warranted to increase the allowance for loan losses. Along with the possible effects of the pandemic, we included in our consideration
of the ALLL the continued low balances of our nonperforming loans and delinquent loans during 2020 and the decrease in historical charge-offs
for the six year look back period. Total nonperforming loans were $174,000 and $111,000 at December 31, 2020 and 2019, respectively. Classified
loans declined to $883,000 at December 31, 2020, from $1.4 million at December 31, 2019, and loans past due greater than 30 days totaled
$398,000 and $209,000 at December 31, 2020 and 2019, respectively. The Bank had no loan charge-offs during the year ended December 31,
2020 and loan charge-offs totaled $23,000 for the year ended December 31, 2019. As a percentage of nonperforming loans, the allowance
for loan losses was 962% and 1,268% at December 31, 2020 and 2019, respectively.
The allowance for loan losses reflects the estimate
we believe to be adequate to cover incurred probable losses which were inherent in the loan portfolio, and adjusted for uncertainty due
to COVID-19, at December 31, 2020. 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 $7.7 million, or 261.4%, to $10.7 million for the year ended December
31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to an increase of $7.4 million in gain on
sales of loans. We sold $291.4 million in residential loans for the year ended December 31, 2020 compared to $92.0 million in
residential loans for the year ended December 31, 2019. Other fee income increased $578,000, or 67.2%, due to an increase in the
fair value of loan commitments. Fee income recognized from the Paycheck Protection Program was $9,000 for the year ended 2020.
Non-Interest
Expense. Non-interest expense increased $4.2 million, or 54.5%, to $11.8 million for 2020 from $7.7 million for 2019. Salaries
and employee benefits increased $3.5 million, or 79.9%. The increase in salaries and employee benefit expense was due to additional loan
officers and loan origination and loan servicing support staff hired to accommodate the increased mortgage loan origination volume. During
the year ended 2020 we hired five mortgage loan officers, one commercial real estate loan officer and eleven loan origination and loan
servicing support staff. Loan costs increased $309,000, or 91.9% from the higher mortgage loan origination volume. Advertising expense
increased $179,000, primarily from the implementation of a “free checking” marketing program through a third-party vendor.
Occupancy costs increased $103,000, or 17.2% due in large part to leasing a loan production office to accommodate additional loan officers
and lending support staff.
Federal
Income Taxes. The provision for income taxes increased $732,000 to $820,000 in 2020. The increase was due primarily to
increased income before income taxes of $3.1 million. The effective rates were 20.6% and 9.9% for the years ended December 31, 2020 and
2019, respectively. The increase in the effective tax rate in 2020 was due to a tax credit adjustment for merger expenses related to the
Kentucky Federal acquisition taken in 2019.
Average
Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other
information at the dates and for the periods indicated. No tax-equivalent yield adjustments have been made. Any adjustments necessary
to present yields on a tax-equivalent basis are insignificant. All average balances are monthly average balances. Management does not
believe that the use of month-end balances instead of daily average balances has caused any material differences in the information presented.
Non-accrual loans were included in the computation of average balances only. The yields set forth below include the effect of deferred
fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
|
|
For
the Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
Outstanding Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
Average
Outstanding Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
Average
Outstanding Balance
|
|
|
Interest
|
|
|
Average
Yield/Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
185,453
|
|
|
$
|
7,806
|
|
|
|
4.21
|
%
|
|
$
|
180,885
|
|
|
$
|
8,171
|
|
|
|
4.52
|
%
|
|
$
|
157,708
|
|
|
$
|
6,733
|
|
|
|
4.27
|
%
|
Securities
|
|
|
5,948
|
|
|
|
65
|
|
|
|
1.09
|
|
|
|
1,397
|
|
|
|
28
|
|
|
|
2.00
|
|
|
|
763
|
|
|
|
19
|
|
|
|
2.62
|
|
Other
(1)
|
|
|
19,043
|
|
|
|
156
|
|
|
|
0.82
|
|
|
|
13,670
|
|
|
|
335
|
|
|
|
2.45
|
|
|
|
10,353
|
|
|
|
242
|
|
|
|
2.34
|
|
Total interest-earning assets
|
|
|
210,444
|
|
|
|
8,027
|
|
|
|
3.81
|
|
|
|
195,952
|
|
|
|
8,534
|
|
|
|
4.36
|
|
|
|
168,824
|
|
|
|
6,994
|
|
|
|
4.14
|
|
Non-interest-earning
assets
|
|
|
22,122
|
|
|
|
|
|
|
|
|
|
|
|
15,678
|
|
|
|
|
|
|
|
|
|
|
|
12,016
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
232,566
|
|
|
|
|
|
|
|
|
|
|
$
|
211,630
|
|
|
|
|
|
|
|
|
|
|
$
|
180,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
42,179
|
|
|
|
116
|
|
|
|
0.28
|
|
|
$
|
35,040
|
|
|
|
185
|
|
|
|
0.53
|
|
|
$
|
26,390
|
|
|
|
65
|
|
|
|
0.25
|
|
Interest-bearing demand
|
|
|
28,061
|
|
|
|
61
|
|
|
|
0.22
|
|
|
|
19,552
|
|
|
|
148
|
|
|
|
0.76
|
|
|
|
9,098
|
|
|
|
134
|
|
|
|
1.47
|
|
Certificates of deposit
|
|
|
70,253
|
|
|
|
1,477
|
|
|
|
2.10
|
|
|
|
76,133
|
|
|
|
1,615
|
|
|
|
2.12
|
|
|
|
71,114
|
|
|
|
1,230
|
|
|
|
1.73
|
|
Total deposits
|
|
|
140,493
|
|
|
|
1,654
|
|
|
|
1.18
|
|
|
|
130,725
|
|
|
|
1,948
|
|
|
|
1.49
|
|
|
|
1
06,602
|
|
|
|
1,429
|
|
|
|
1.35
|
|
FHLB borrowings
|
|
|
42,434
|
|
|
|
941
|
|
|
|
2.22
|
|
|
|
42,873
|
|
|
|
955
|
|
|
|
2.23
|
|
|
|
35,219
|
|
|
|
654
|
|
|
|
1.86
|
|
Total interest-bearing
liabilities
|
|
|
182,927
|
|
|
|
2,595
|
|
|
|
1.42
|
|
|
|
173,598
|
|
|
|
2,903
|
|
|
|
1.67
|
|
|
|
141,821
|
|
|
|
2,083
|
|
|
|
1.47
|
|
Non-interest-bearing Demand
|
|
|
13,822
|
|
|
|
|
|
|
|
|
|
|
|
11,517
|
|
|
|
|
|
|
|
|
|
|
|
16,305
|
|
|
|
|
|
|
|
|
|
Other non-interest-bearing
liabilities
|
|
|
4,264
|
|
|
|
|
|
|
|
|
|
|
|
3,590
|
|
|
|
|
|
|
|
|
|
|
|
3,292
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities
|
|
|
18,086
|
|
|
|
|
|
|
|
|
|
|
|
15,107
|
|
|
|
|
|
|
|
|
|
|
|
19,597
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
31,553
|
|
|
|
|
|
|
|
|
|
|
|
22,925
|
|
|
|
|
|
|
|
|
|
|
|
19,422
|
|
|
|
|
|
|
|
|
|
Total
liabilities and total equity
|
|
$
|
232,566
|
|
|
|
|
|
|
|
|
|
|
$
|
211,630
|
|
|
|
|
|
|
|
|
|
|
$
|
180,840
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
|
|
|
|
$
|
5,432
|
|
|
|
|
|
|
|
|
|
|
$
|
5,631
|
|
|
|
|
|
|
|
|
|
|
$
|
4,911
|
|
|
|
|
|
Net
interest rate spread (2)
|
|
|
|
|
|
|
|
|
|
|
2.39
|
%
|
|
|
|
|
|
|
|
|
|
|
2.69
|
%
|
|
|
|
|
|
|
|
|
|
|
2.67
|
%
|
Net
interest-earning assets (3)
|
|
$
|
27,517
|
|
|
|
|
|
|
|
|
|
|
$
|
22,354
|
|
|
|
|
|
|
|
|
|
|
$
|
27,003
|
|
|
|
|
|
|
|
|
|
Net
interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
2.58
|
%
|
|
|
|
|
|
|
|
|
|
|
2.87
|
%
|
|
|
|
|
|
|
|
|
|
|
2.91
|
%
|
Average
interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
115.04
|
%
|
|
|
|
|
|
|
|
|
|
|
112.88
|
%
|
|
|
|
|
|
|
|
|
|
|
119.04
|
%
|
(1)
|
Consists
of FHLB-Cincinnati stock, FHLB DDA, Fed Funds sold, certificates of deposit and cash reserves.
|
(2)
|
Net
interest rate spread represents the difference between the weighted average yield on interest-earning
assets and the weighted average rate of interest-bearing liabilities.
|
(3)
|
Net
interest-earning assets represent total interest-earning assets less total interest-bearing
liabilities.
|
(4)
|
Net
interest margin represents net interest income divided by average total interest-earning
assets.
|
Rate/Volume Analysis
The following table presents the effects of changing
rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate
(changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume
multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable
to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes
due to volume.
|
|
Year Ended December 31,
2020 vs. 2019
|
|
|
Year Ended December 31,
2019 vs. 2018
|
|
|
|
Increase (Decrease) Due to
|
|
|
Total Increase
|
|
|
Increase (Decrease) Due to
|
|
|
Total Increase
|
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
213
|
|
|
$
|
(578
|
)
|
|
$
|
(365
|
)
|
|
$
|
1,028
|
|
|
$
|
410
|
|
|
$
|
1,438
|
|
Securities
|
|
|
43
|
|
|
|
(6
|
)
|
|
|
37
|
|
|
|
13
|
|
|
|
(4
|
)
|
|
|
9
|
|
Other
|
|
|
258
|
|
|
|
(437
|
)
|
|
|
(179
|
)
|
|
|
81
|
|
|
|
12
|
|
|
|
93
|
|
Total interest-earning assets
|
|
|
514
|
|
|
|
(1,021
|
)
|
|
|
(507
|
)
|
|
|
1,122
|
|
|
|
418
|
|
|
|
1,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
20
|
|
|
|
(89
|
)
|
|
|
(69
|
)
|
|
|
27
|
|
|
|
93
|
|
|
|
120
|
|
Interest-bearing demand
|
|
|
31
|
|
|
|
(118
|
)
|
|
|
(87
|
)
|
|
|
24
|
|
|
|
(10
|
)
|
|
|
14
|
|
Certificates of deposit
|
|
|
(123
|
)
|
|
|
(15
|
)
|
|
|
(138
|
)
|
|
|
92
|
|
|
|
293
|
|
|
|
385
|
|
Total deposits
|
|
|
(72
|
)
|
|
|
(222
|
)
|
|
|
(294
|
)
|
|
|
143
|
|
|
|
376
|
|
|
|
519
|
|
FHLB borrowings
|
|
|
(10
|
)
|
|
|
(4
|
)
|
|
|
(14
|
)
|
|
|
157
|
|
|
|
144
|
|
|
|
301
|
|
Total interest-bearing liabilities
|
|
|
(82
|
)
|
|
|
(226
|
)
|
|
|
(308
|
)
|
|
|
300
|
|
|
|
520
|
|
|
|
820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
596
|
|
|
$
|
(795
|
)
|
|
$
|
(199
|
)
|
|
$
|
822
|
|
|
$
|
(102
|
)
|
|
$
|
720
|
|
Management of Market Risk
General.
Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities
are monetary in nature and sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest
rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability
Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk
that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing
this risk consistent with the policy and guidelines approved by our board of directors.
Our asset/liability management strategy attempts
to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we use
to manage interest rate risk are:
|
·
|
originating nonresidential real estate and multi-family loans, and, to a
lesser extent, construction, consumer and commercial business loans, all of which tend to have shorter terms and higher interest rates
than one- to four-family residential real estate loans, and which generate customer relationships that can result in larger non-interest
bearing checking accounts;
|
|
·
|
selling substantially all of our newly-originated longer-term fixed-rate
one- to four-family residential real estate loans and retaining the shorter-term fixed-rate and adjustable-rate one- to four-family residential
real estate loans that we originate, subject to market conditions and periodic review of our asset/liability management needs;
|
|
·
|
reducing our dependence on certificates of deposit to support lending and
investment activities and increasing our reliance on core deposits, including checking accounts and savings accounts, which are less interest
rate sensitive than certificates of deposit; and
|
|
·
|
purchasing adjustable and floating rate mortgage-back securities for the
investment portfolio.
|
Our Board of Directors is responsible for the review
and oversight of our Asset/Liability Committee, which is comprised of our executive management team and other essential operational staff.
This committee is charged with developing and implementing an asset/liability management plan, and meets at least quarterly to review
pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly
basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity
and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
Net
Portfolio Value. We compute amounts by which the net present value of our cash flow from assets, liabilities and
off-balance sheet items (net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest
rates. We measure our interest rate risk and potential change in our NPV through the use of a financial model. This model uses a discounted
cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. Historically,
the model estimated the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United
States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However,
given the current level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points has
not been prepared. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest
rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The table below sets forth, as of December 31,
2020, the calculation of the estimated changes in our net portfolio value that would result from the designated immediate changes in the
United States Treasury yield curve.
|
|
|
|
|
Estimated Increase (Decrease) in
NPV
|
|
|
NPV as a Percentage of Present
Value of Assets (3)
|
|
Change in Interest
Rates (basis
points) (1)
|
|
Estimated
NPV (2)
|
|
|
Amount
|
|
|
Percent
|
|
|
NPV Ratio (4)
|
|
|
Increase
(Decrease)
(basis points)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
+300
|
|
$
|
43,600
|
|
|
$
|
(10,903
|
)
|
|
|
(20.00
|
)%
|
|
|
18.65
|
%
|
|
|
(340
|
)
|
+200
|
|
|
48,197
|
|
|
|
(6,306
|
)
|
|
|
(11.57
|
)%
|
|
|
20.14
|
%
|
|
|
(191
|
)
|
+100
|
|
|
51,786
|
|
|
|
(2,717
|
)
|
|
|
(4.99
|
)%
|
|
|
21.25
|
%
|
|
|
(80
|
)
|
—
|
|
|
54,503
|
|
|
|
—
|
|
|
|
—
|
%
|
|
|
22.05
|
%
|
|
|
—
|
|
-100
|
|
|
49,377
|
|
|
|
(5,126
|
)
|
|
|
(9.40
|
)%
|
|
|
19.78
|
%
|
|
|
(227
|
)
|
|
(1)
|
Assumes an immediate uniform change in interest rates at all maturities.
|
|
(2)
|
NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
|
|
(3)
|
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
|
|
(4)
|
NPV Ratio represents NPV divided by the present value of assets.
|
The table above indicates that at December 31,
2020, in the event of an instantaneous parallel 100 basis point increase in interest rates, we would experience a 4.99% decrease in net
portfolio value. In the event of an instantaneous 100 basis point decrease in interest rates, we would experience an 9.40% decrease in
net portfolio value.
Rate Shift (1)
|
|
|
Net Interest Income
Year 1 Forecast
|
|
|
Year 1 Change
from Level
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
+400
|
|
|
$
|
5,820
|
|
|
|
(0.38
|
)%
|
+300
|
|
|
|
5,885
|
|
|
|
0.74
|
%
|
+200
|
|
|
|
5,930
|
|
|
|
1.51
|
%
|
+100
|
|
|
|
5,927
|
|
|
|
1.45
|
%
|
Level
|
|
|
|
5,842
|
|
|
|
—
|
|
-100
|
|
|
|
5,657
|
|
|
|
(3.17
|
)%
|
|
(1)
|
The calculated changes assume an immediate shock of the static yield curve.
|
Depending on the relationship between long-term
and short-term interest rates, market conditions and consumer preference, we may place greater emphasis on maximizing our net interest
margin than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe that the increased net income
which may result from an acceptable mismatch in the actual maturity or re-pricing of our assets and liabilities can, during periods of
declining or stable interest rates, provide sufficient returns to justify an increased exposure to sudden and unexpected increases in
interest rates.
We do not engage in hedging activities, such as
engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation
residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial
obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal
requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest
payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability
to borrow from the FHLB-Cincinnati. At December 31, 2020, we had $38.4 million outstanding in advances from the FHLB-Cincinnati, and had
the capacity to borrow approximately an additional $34.1 million from the FHLB-Cincinnati based on our collateral capacity. At December
31, 2020, we had an additional $11.5 million on lines of credit available with three commercial banks.
While maturities and scheduled amortization of
loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates,
economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits.
The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $6.7 million
for the year ended December 31, 2020 and net cash used in operating activities was $1.5 million for the year ended December 31, 2019.
Net cash provided by investing activities, which consists primarily of disbursements for loan originations and purchase of investment
securities, partially offset by proceeds from maturing securities, pay downs on mortgage-backed securities and proceeds from sale of foreclosed
assets was $10.4 million for the year ended December 31, 2020. Net cash used by investing activities was $14.9 million for the year ended
December 31, 2019. Net cash used in financing activities, consisting primarily of the repayment of Federal Home Loan Bank borrowings,
was $9.2 million for the year ended December 31, 2020. Net cash provided by financing activities, consisting mainly of the proceeds from
the stock subscriptions and proceeds from Federal Home Loan Bank borrowings, was $43.0 million for the year ended December 31, 2019.
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, Inc. is a separate corporate
entity from Cincinnati Federal and it must provide for its own liquidity to pay any dividends to its stockholders, to repurchase any shares
of its common stock, and for other corporate purposes. Cincinnati Bancorp Inc.’s primary source of liquidity is any dividend payments
it may receive from Cincinnati Federal. Cincinnati Bancorp, Inc. (on an unconsolidated basis) had $6.4 million in liquid assets at December
31, 2020. The increase in liquid assets was a primarily from stock offering proceeds. See “Regulation and Supervision – Federal
Banking Regulation – Capital Distributions” for a discussion of the regulations applicable to the ability of Cincinnati Federal
to pay dividends.
At December 31, 2020, Cincinnati Federal exceeded
all of its regulatory capital requirements with a Tier 1 leverage capital level of $34.8 million, or 14.8% of adjusted total assets, which
is above the well-capitalized required level of $11.8 million, or 5.0%; total risk-based capital of $36.5 million, or 22.0% of risk-weighted
assets, which is above the well-capitalized required level of $16.6 million, or 10.0%; and common equity tier 1 risk based capital of
$34.8 million, or 21.0%, of risk weighted assets, which is above the well-capitalized required level of $10.8 million, or 6.5%. At December
31, 2019, Cincinnati Federal exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $23.5 million,
or 10.2% of adjusted total assets, which is above the well-capitalized required level of $11.5 million, or 5.0%; and total risk-based
capital of $24.9 million, or 16.3% of risk-weighted assets, which is above the well-capitalized required level of $15.3 million, or 10.0%.
Accordingly, Cincinnati Federal was categorized as well capitalized at December 31, 2020 and 2019. Management is not aware of any conditions
or events since the most recent notification that would change our category.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments.
As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments
to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant
portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies
and approval process accorded to loans we make. At December 31, 2020, we had outstanding commitments to originate loans of $28.5 million,
unfunded lines of credit of $19.8 million and forward sale commitments of $41.8 million. We anticipate that we will have sufficient funds
available to meet our current lending commitments. Time deposits that are scheduled to mature in one year or less from December 31, 2020
totaled $35.1 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial
portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract
new accounts, which may result in higher levels of interest expense.
Contractual
Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations
include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
Please refer to Note 20 to the Consolidated Financial
Statements for the years ended December 31, 2020 and 2019 for a description of recent accounting pronouncements that may affect our financial
condition and results of operations.
Impact
of Inflation and Changing Price
The consolidated financial statements and related
data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America which
require the measurement of financial position and operating results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than
does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The information required by this item is incorporated
herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operation – Management of Market Risk.”
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The Company’s Consolidated Financial Statements,
including supplemental data begin on page F-1 of this Annual Report.
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures.
An evaluation was performed under the supervision
and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice
President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2020.
Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020.
Evaluation of Internal Control Over Financial Reporting.
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under
our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States
of America.
Management conducted an assessment of the effectiveness
of the Company’s internal control over financial reporting as of December 31, 2020, utilizing the framework established in the 2013
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2020
were effective.
Our internal control over financial reporting
includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail,
transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and
expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements
are prevented or timely detected.
All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
This Annual Report does not include an attestation
report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s
report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial
Reporting.
During the quarter ended December 31, 2020, there
were no changes in the Company’s internal control over financial reporting that materially affected, or were reasonably likely to
materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
|
OTHER INFORMATION
|
Not applicable.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Note 1:
|
Nature of Operations and Summary of Significant Accounting
Policies
|
Nature of Operations
Cincinnati Bancorp (“Bancorp”),
the predecessor to Cincinnati Bancorp, Inc. (“Company”), was the mid-tier holding company for Cincinnati Federal (the “Bank”),
a federally chartered stock savings and loan association that is primarily engaged in providing a full range of banking and financial
services to individual and corporate customers. Our business operations are conducted in the larger Greater Cincinnati/Northern Kentucky
metropolitan area which includes Hamilton, Warren, Butler and Clermont Counties in Ohio, Boone, Kenton and Campbell Counties in Kentucky,
and Dearborn County, Indiana.
On October 14, 2015, the Bank had reorganized
into the mutual holding company structure. As part of the reorganization, the Bancorp 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 Bancorp’s parent
mutual holding company.
On December 20, 2019, the Bancorp’s
shareholders approved a plan of conversion and reorganization, whereby CF Mutual Holding Company and Cincinnati Bancorp would convert
and reorganize from the mutual holding company structure to the stock holding company structure. The conversion and reorganization were
completed effective January 22, 2020, whereby the Company, a Maryland corporation and successor to the Bancorp, sold a total of 1,652,960
shares of common stock at a price of $10.00 per share in the subscription offering, which included 132,237 shares sold to Cincinnati Federal’s
Employee Stock Ownership Plan, and issued 1,322,665 shares of common stock in exchange for the outstanding shares of common stock of the
Bancorp owned by stockholders other than CF Mutual Holding Company. The exchange ratio for previously held shares of Cincinnati Bancorp
was 1.6351 as applied in the conversion offering. References herein to the “Company” include Cincinnati Bancorp, Inc. and
Cincinnati Bancorp before completion of the conversion.
The Company is subject to competition
from other financial institutions. The Company is subject to the regulation of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
Revenue Recognition
On January 1, 2019, the Company adopted
Accounting Standards Update (ASU) 2014-09 "Revenue from Contracts with Customers" (Accounting Standards Codification (ASC) 606)
and all subsequent ASUs that modified ASC 606. ASC 606 provides that an entity should recognize revenue to depict the transfer of promised
goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. Interest income, net securities gains (losses), gains from the sale of mortgage loans and bank-owned life insurance
are not included within the scope of ASC 606. For the revenue streams in the scope of ASC 606, service charges on deposits and electronic
banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All of the Company’s in
scope revenue from contracts with customers is recognized within other noninterest income.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Service
charges on deposit accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance
and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and other
fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's
request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month,
representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in
time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance. Service charges are
recorded in other noninterest income.
Interchange
income: The Company earns interchange income from cardholder transactions conducted through the various payment networks. Interchange
income from cardholder transactions represents a percentage of the underlying transaction value and is recognized daily, concurrently
with the transaction processing services provided to the cardholder. The gross amount of these fees is processed through noninterest income.
Interchange fees are recorded in other noninterest income.
Principles of Consolidation
The accompanying condensed consolidated financial statements
include Cincinnati Bancorp and its wholly-owned subsidiary, Cincinnati Federal, together referred to as “the Company.” All
significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly
susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection
with foreclosures or in satisfaction of loans, loan servicing rights and fair values of financial instruments.
Cash Equivalents
The Company considers all liquid investments
with original maturities of three months or less to be cash equivalents. At December 31, 2020 and 2019, cash equivalents consisted primarily
of due from accounts with the Federal Reserve, Federal Home Loan Bank of Cincinnati and other correspondent banks.
From time to time, the Company’s
interest-bearing cash accounts may exceed the FDIC’s insured limit of $250,000 per account. At December 31, 2020, the Company held
$2,829,000 in various correspondent banks. At December 31, 2020, the Company held $20,727,000 at the Federal Reserve Bank and Federal
Home Loan Bank which are not subject to FDIC limits. Management considers the risk of loss to be low based on the quality of the institutions
where the funds are maintained.
Interest-bearing Time Deposits in Banks
Interest-bearing deposits in banks are
carried at cost.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Securities
Available-for- sale debt securities
are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase
premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses
on the sale of securities are recorded on the trade date and are determined using the specific identification method.
For debt securities with fair value
below amortized cost, when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have
to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a
debt security in earnings and the remaining portion in other comprehensive income.
Loans Held for Sale
Mortgage loans originated and intended
for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized
through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income. Direct
loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.
Loans
Loans that management has the intent
and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding principal balances adjusted
for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
For loans amortized at cost, interest
income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums
and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on mortgage
and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.
Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date
if collection of principal or interest is considered doubtful.
All interest accrued but not collected
for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for
on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
When cash payments are received on
impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded
principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt
restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the
modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the
renegotiated terms for a period of at least six consecutive months.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Loans acquired at the effective date
of a merger are recorded at fair value with no carryover of the acquired entity’s previously established allowance for loan losses.
The excess of expected cash flows over the estimated fair value of the acquired loans is recognized as interest income over the remaining
contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the
allowance for loan losses. Subsequent improvements in expected cash flows result in the recognition of additional interest income over
the remaining contractual lives of the loans. Management estimates the cash flows expected to be collected at acquisition using a third-party
risk model, which incorporates the estimate of key assumptions, such as default rates and prepayment speeds.
Allowance for Loan Losses
The allowance for loan losses is established
as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance
when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated
on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated
and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified
as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired
loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off
experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made
to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected
in the historical loss or risk rating data.
A loan is considered impaired when,
based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount
of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present
value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or
the fair value of the collateral if the loan is collateral dependent.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Groups of loans with similar risk characteristics
are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions
and other relevant factors that affect repayment of the loans.
In the course of working with borrowers,
the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work-out an alternative
payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company
to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to
a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms
may be modified to fit the ability of the borrower to repay in line with the borrower’s current financial status, and the restructuring
of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms or a combination of
the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time
foreclosure proceedings commence. The Company may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory
payment plan.
It is the Company’s policy that
any restructured loans on nonaccrual prior to being restructured remain on nonaccrual status until six consecutive months of satisfactory
borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring,
the Company reviews the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan.
With regards to determination of the
amount of the allowance for credit losses, TDRs are considered to be impaired. As a result, the determination of the amount of impaired
loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.
On March 27, 2020, the president of
the United States signed the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”), which provides entities
with optional temporary relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES
Act allows financial institutions to suspend application of certain TDR accounting guidance for loan and lease modifications related to
the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national
emergency, provided certain criteria are met. Section 4013 of the CARES Act was amended on December 27, 2020, to extend this relief until
January 1, 2022. The relief can be applied to loan and lease modifications for borrowers that were not more than 30 days past due as of
December 31, 2019 and to loan and lease modifications that defer or delay the payment of principal or interest, or change the interest
rate on a loan. The Company chose to apply this relief to eligible loan and lease modifications.
Lender Reserve Account
Certain loan sale transactions
with the Federal Home Loan Bank of Cincinnati (FHLB) provide for the establishment of a Lender Reserve Account (LRA). The LRA
consists of amounts withheld from loan sale proceeds by the FHLB for absorbing inherent losses that are probable on those sold
loans. These withheld funds are an asset to the Company as they are scheduled to be paid to the Company in future years, net of any
credit losses on those loans sold. The receivables are initially measured at fair value. The fair value is estimated by discounting
the cash flows over the life of each master commitment contract. The accretable yield is amortized over the life of the master
commitment contract. Expected cash flows are re-evaluated at each measurement date. If there is an adverse change in expected cash
flows, the accretable yield would be adjusted on a prospective basis and the asset evaluated for impairment.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Premises and Equipment
Depreciable assets are stated at cost,
less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the
assets.
The estimated useful lives for each
major depreciable classification of premises and equipment are as follows:
Buildings and improvements
|
|
|
15-40 years
|
|
Equipment
|
|
|
3-5 years
|
|
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required
investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based
on a predetermined formula, carried at par and evaluated for impairment.
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu
of, loan foreclosure are held for sale and are initially recorded at fair value, less estimated costs to sell, at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or fair value, less estimated costs to sell. Net revenue and expenses from operations and changes in the
valuation allowance are included in noninterest expense from foreclosed assets. There were no valuation allowances established during
2020 or 2019.
Mortgage Servicing Rights
Mortgage servicing assets are recognized
separately when rights are acquired through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50
Transfers and Servicing), servicing rights resulting from the sale of loans originated by the Company are initially measured at
fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the fair value method. Under
the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported
in earnings in the period in which the changes occur.
Fair value is based on a valuation model
that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants
would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation
rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions
and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing rights and may result in a
reduction or addition to noninterest income.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Servicing fee income is recorded for
fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan
and are recorded as income when earned.
Derivatives
Derivatives are recognized as assets and liabilities on the
consolidated balance sheets and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For
nonexchange-traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques
for which the determination of fair value may require significant management judgment or estimation.
Derivative Loan Commitments
Mortgage loan commitments that relate to the origination
of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting
guidance (ASC 815, Derivatives and Hedging). Loan commitments that are derivatives are recognized at fair value on the consolidated
balance sheet in other assets and other liabilities with changes in their fair values recorded in noninterest income.
Forward Loan Sale Commitments
The Company carefully evaluates all loan sale agreements
to determine whether they meet the definition of a derivative under the derivatives and hedging accounting guidance (ASC 815), as facts
and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments,
the Company uses both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk
of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery
contracts are accounted for as derivative instruments. Accordingly, forward loan sale commitments are recognized at fair value on the
consolidated balance sheet in other assets and liabilities with changes in their fair values recorded in other noninterest income.
The Company estimates the fair value of its forward loan
sales commitments using a methodology similar to that used for derivative loan commitments.
Employee Stock Ownership Plan (“ESOP”)
The cost of unearned ESOP shares is
shown as a reduction of stockholders’ equity. Compensation expense is based on the average fair value of shares as they are committed
to be released to participant accounts and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares are used to reduce annual ESOP debt service. As of December 31, 2020,
36,733 shares have been released to eligible participants in the ESOP and 10,285 shares have been allocated to eligible participants in
the ESOP. (See Note 12 – Employee and Director Benefits).
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Income Taxes
The Company accounts for income
taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance
results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or
refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over
revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net
deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and
liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense
results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation
allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset
will not be realized.
Uncertain tax positions are recognized
if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The
term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution
of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially
and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement
with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met
the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and
is subject to management’s judgment.
If necessary, the Company recognizes
interest and penalties on income taxes as a component of income tax expense.
With a few exceptions, the Company is
no longer subject to examinations by tax authorities for years before 2017. As of December 31, 2020 and 2019, the Company had no uncertain
tax positions.
Comprehensive Income
Comprehensive income consists of net
income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized gains
(losses) on available-for-sale securities and changes in the funded status of the directors’ retirement plan.
Earnings Per Share
Basic earnings per share (“EPS”)
allocated to common shareholders is calculated using the two-class method and is computed by dividing net income allocated to common shareholders
by the weighted-average number of common shares outstanding during the period. The two-class method is an earnings allocation formula
that determines the EPS for each class of common stock and participating securities according to dividends distributed and participation
rights in undistributed earnings.
Diluted EPS is adjusted for
dilutive effects of stock-based compensation and is calculated using the two-class method or treasury method. The average number of
common shares outstanding is increased to include the number of shares that would have been outstanding if all potentially dilutive
common stock equivalents were issued during the period, as well as for any adjustment to income that would result from the assumed
issuance.
Unallocated common shares held by the Company’s ESOP are shown as a reduction in stockholders’ equity and are
excluded from weighted-average common shares outstanding for both basic and diluted earnings per share calculations until they are
committed to be released.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Subsidiary and Other Activities
The Bank had no active subsidiaries
at December 31, 2020 and 2019.
Reclassifications
Certain reclassifications have been
made to the 2019 consolidated financial statements to conform to the 2020 consolidated financial statement presentation. These reclassifications
had no effect on net 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 Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities of government sponsored entities
|
|
$
|
5,170,519
|
|
|
$
|
46,278
|
|
|
$
|
(2,967
|
)
|
|
$
|
5,213,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities of government
sponsored entities
|
|
$
|
6,740,450
|
|
|
$
|
7,335
|
|
|
$
|
(14,572
|
)
|
|
$
|
6,733,213
|
|
There were no sales of available-for-sale
securities in 2020 and 2019.
Expected maturities on mortgage-backed
securities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call
or prepayment penalties. At December 31, 2020 and 2019, the Company’s investments consisted entirely of mortgage-backed securities
which are not due at a single maturity date.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Total fair value of investments at December
31, 2020 reported at less than historical cost was $192,587 and was approximately 3.7% of the Company’s investment portfolio. The
decline in available-for-sale securities reported at less than historical cost primarily resulted from the decrease in market interest
rates during 2020. There was $5,814,388 or approximately 86% of the investment portfolio reported at less than historical cost at December
31, 2019.
The following tables show the gross
unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily
impaired, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position
at December 31, 2020 and 2019:
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities of government sponsored entities
|
|
$
|
51,122
|
|
|
$
|
(617
|
)
|
|
$
|
141,465
|
|
|
$
|
(2,350
|
)
|
|
$
|
192,587
|
|
|
$
|
(2,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
of government sponsored entities
|
|
$
|
5,582,540
|
|
|
$
|
(14,154
|
)
|
|
$
|
231,848
|
|
|
$
|
(418
|
)
|
|
$
|
5,814,388
|
|
|
$
|
(14,572
|
)
|
Note 3:
|
Loans and Allowance for Loan
Losses
|
Categories of loans at December 31, 2020 and 2019 include:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
One to four family mortgage loans - owner occupied
|
|
$
|
72,697,588
|
|
|
$
|
91,919,064
|
|
One to four family - investment
|
|
|
12,058,824
|
|
|
|
12,846,342
|
|
Multi-family mortgage loans
|
|
|
41,749,223
|
|
|
|
36,628,238
|
|
Nonresidential mortgage loans
|
|
|
29,531,917
|
|
|
|
23,377,598
|
|
Construction and land loans
|
|
|
5,841,415
|
|
|
|
5,329,188
|
|
Real estate secured lines of credit
|
|
|
9,934,387
|
|
|
|
10,029,917
|
|
Commercial loans
|
|
|
736,979
|
|
|
|
557,268
|
|
Other consumer loans
|
|
|
338,709
|
|
|
|
863,546
|
|
Total loans
|
|
|
172,889,042
|
|
|
|
181,551,161
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Net deferred loan costs
|
|
|
(332,908
|
)
|
|
|
(482,681
|
)
|
Undisbursed portion of loans
|
|
|
4,881,487
|
|
|
|
1,294,271
|
|
Allowance for loan losses
|
|
|
1,672,545
|
|
|
|
1,407,545
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
166,667,918
|
|
|
$
|
179,332,026
|
|
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Risk characteristics applicable to each
segment of the loan portfolio are described as follows:
One
to Four Family Mortgage Loans and Real Estate Secured Lines of Credit: The one to four family mortgage loans and real estate
secured lines of credit are secured by owner-occupied one to four family residences. Repayment of these loans is primarily dependent on
the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s
market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans
are of smaller individual amounts and spread over a large number of borrowers.
One
to Four Family Investment Property Loans: The one to four family investment property loans are secured by non-owner occupied
one to four family residences. Repayment of these loans is primarily dependent on the net rental income and personal income of the borrowers.
These loans are considered to be higher risk than owner occupied one to four family mortgage loans. Credit risk in these loans can be
impacted by economic conditions within the Company’s market areas that might impact investment property vacancies, property values
or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over
a large number of borrowers.
Multi-Family
and Nonresidential Mortgage Loans: These loans typically involve larger principal amounts, and repayment of these loans is
generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing
the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans
may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.
Construction
and Land Loans: These loans are usually based upon estimates of costs and estimated value of the completed project and include
independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may
include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained.
These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest
rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the
creditworthiness of a borrower, property values and the local economies in the Company’s market areas.
Commercial
Loans: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment
purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business
operation. Credit risk in these loans is impacted by creditworthiness of a borrower and the economic conditions that impact the cash
flow stability from business operations.
Other
Consumer Loans: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and
loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically
independent of the loan purpose. Credit risk is impacted by consumer economic factors (such as unemployment and general economic conditions
in the Company’s market area) and the creditworthiness of a borrower.
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
The following tables present the balance
in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December
31, 2020 and December 31, 2019:
|
|
At
or For the Year Ended December 31, 2020
|
|
|
|
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 loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
324,647
|
|
|
$
|
82,219
|
|
|
$
|
524,183
|
|
|
$
|
277,026
|
|
|
$
|
69,457
|
|
|
$
|
105,187
|
|
|
$
|
11,408
|
|
|
$
|
13,418
|
|
|
$
|
1,407,545
|
|
Provision
(credit) charged to expense
|
|
|
91,757
|
|
|
|
17,759
|
|
|
|
146,639
|
|
|
|
39,306
|
|
|
|
26,978
|
|
|
|
(55,851
|
)
|
|
|
5,703
|
|
|
|
(7,291
|
)
|
|
|
265,000
|
|
(Charge-offs)
recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance,
end of year
|
|
$
|
416,404
|
|
|
$
|
99,978
|
|
|
$
|
670,822
|
|
|
$
|
316,332
|
|
|
$
|
96,435
|
|
|
$
|
49,336
|
|
|
$
|
17,111
|
|
|
$
|
6,127
|
|
|
$
|
1,672,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Individually evaluated for impairment
|
|
$
|
20,722
|
|
|
$
|
40,075
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
60,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Collectively evaluated for impairment
|
|
$
|
395,682
|
|
|
$
|
59,903
|
|
|
$
|
670,822
|
|
|
$
|
316,332
|
|
|
$
|
96,435
|
|
|
$
|
49,336
|
|
|
$
|
17,111
|
|
|
$
|
6,127
|
|
|
$
|
1,611,748
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
72,697,588
|
|
|
$
|
12,058,824
|
|
|
$
|
41,749,223
|
|
|
$
|
29,531,917
|
|
|
$
|
5,841,415
|
|
|
$
|
9,934,387
|
|
|
$
|
736,979
|
|
|
$
|
338,709
|
|
|
$
|
172,889,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Individually evaluated for impairment
|
|
$
|
1,236,597
|
|
|
$
|
561,660
|
|
|
$
|
210,524
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
58,557
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,067,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Collectively evaluated for impairment
|
|
$
|
71,460,991
|
|
|
$
|
11,497,164
|
|
|
$
|
41,538,699
|
|
|
$
|
29,531,917
|
|
|
$
|
5,841,415
|
|
|
$
|
9,875,830
|
|
|
$
|
736,979
|
|
|
$
|
338,709
|
|
|
$
|
170,821,704
|
|
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
|
|
At
or For the Year Ended December 31, 2019
|
|
|
|
One-
to
Four-Family
Mortgage
Loans
Owner
Occupied
|
|
|
One-
to
Four-Family
Mortgage
Loans
Investment
|
|
|
Multi-Family
Mortgage
Loans
|
|
|
Nonresidential
Mortgage
Loans
|
|
|
Construction
& Land
Loans
|
|
|
Real
Estate
Secured
Lines of
Credit
|
|
|
Commercial
Loans
|
|
|
Other
Consumer
Loans
|
|
|
Total
|
|
Allowance for loan loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
456,630
|
|
|
$
|
123,017
|
|
|
$
|
224,384
|
|
|
$
|
182,338
|
|
|
$
|
100,187
|
|
|
$
|
296,873
|
|
|
$
|
9,001
|
|
|
$
|
12,642
|
|
|
$
|
1,405,072
|
|
Provision
(credit) charged to expense
|
|
|
(117,552
|
)
|
|
|
(32,786
|
)
|
|
|
299,799
|
|
|
|
94,688
|
|
|
|
(30,730
|
)
|
|
|
(191,686
|
)
|
|
|
2,407
|
|
|
|
860
|
|
|
|
25,000
|
|
(Charge-offs)
recoveries
|
|
|
(14,431
|
)
|
|
|
(8,012
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(84
|
)
|
|
|
(22,527
|
)
|
Balance,
end of year
|
|
$
|
324,647
|
|
|
$
|
82,219
|
|
|
$
|
524,183
|
|
|
$
|
277,026
|
|
|
$
|
69,457
|
|
|
$
|
105,187
|
|
|
$
|
11,408
|
|
|
$
|
13,418
|
|
|
$
|
1,407,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Individually evaluated for impairment
|
|
$
|
20,722
|
|
|
$
|
8,013
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Collectively evaluated for impairment
|
|
$
|
303,925
|
|
|
$
|
74,206
|
|
|
$
|
524,183
|
|
|
$
|
277,026
|
|
|
$
|
69,457
|
|
|
$
|
105,187
|
|
|
$
|
11,408
|
|
|
$
|
13,418
|
|
|
$
|
1,378,810
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
91,919,064
|
|
|
$
|
12,846,342
|
|
|
$
|
36,628,238
|
|
|
$
|
23,377,598
|
|
|
$
|
5,329,188
|
|
|
$
|
10,029,917
|
|
|
$
|
557,268
|
|
|
$
|
863,546
|
|
|
$
|
181,551,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Individually evaluated for impairment
|
|
$
|
1,115,573
|
|
|
$
|
760,733
|
|
|
$
|
507,066
|
|
|
$
|
56,190
|
|
|
$
|
-
|
|
|
$
|
81,505
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,521,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: Collectively evaluated for impairment
|
|
$
|
90,803,491
|
|
|
$
|
12,085,609
|
|
|
$
|
36,121,172
|
|
|
$
|
23,321,408
|
|
|
$
|
5,329,188
|
|
|
$
|
9,948,412
|
|
|
$
|
557,268
|
|
|
$
|
863,546
|
|
|
$
|
179,030,094
|
|
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
The Company has adopted a standard grading system
for all loans.
Definitions are as follows:
Prime
(1) loans are of superior quality with excellent credit strength and repayment ability proving a nominal credit risk.
Good
(2) loans are of above average credit strength and repayment ability proving only a minimal credit risk.
Satisfactory
(3) loans are of reasonable credit strength and repayment ability proving an average credit risk due to one or more underlying
weaknesses.
Acceptable
(4) loans are of the lowest acceptable credit strength and weakened repayment ability providing a cautionary credit risk due
to one or more underlying weaknesses. New borrowers are typically not underwritten within this classification.
Special
Mention (5) loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future
date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Ordinarily, special mention credits have characteristics which corrective management action would remedy.
Substandard
(6) loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged,
if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized
by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful
(7) loans have all the weaknesses inherent in those classified Substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.
Loss
(8) loans are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.
This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable
to defer writing off even though partial recovery may be affected in the future.
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
The following tables present the credit
risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of December 31, 2020 and
2019:
|
|
December
31, 2020
|
|
|
|
|
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
|
|
$
|
71,930,902
|
|
|
$
|
11,538,993
|
|
|
$
|
41,669,892
|
|
|
$
|
29,063,783
|
|
|
$
|
5,841,415
|
|
|
$
|
9,783,448
|
|
|
$
|
736,979
|
|
|
$
|
338,709
|
|
|
$
|
170,904,121
|
|
Special
mention
|
|
|
113,516
|
|
|
|
519,831
|
|
|
|
-
|
|
|
|
468,134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,101,481
|
|
Substandard
|
|
|
653,170
|
|
|
|
-
|
|
|
|
79,331
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,939
|
|
|
|
-
|
|
|
|
-
|
|
|
|
883,440
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,697,588
|
|
|
$
|
12,058,824
|
|
|
$
|
41,749,223
|
|
|
$
|
29,531,917
|
|
|
$
|
5,841,415
|
|
|
$
|
9,934,387
|
|
|
$
|
736,979
|
|
|
$
|
338,709
|
|
|
$
|
172,889,042
|
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to
Four- Family
Mortgage
Loans - Owner
Occupied
|
|
|
|
One-
to
Four- Family
Mortgage
Loans - Investment
|
|
|
|
Multi-Family
Mortgage
Loans
|
|
|
|
Nonresidential
Mortgage
Loans
|
|
|
|
Construction
& Land
Loans
|
|
|
|
Real
Estate
Secured
Lines of
Credit
|
|
|
|
Commercial
Loans
|
|
|
|
Other
Consumer
Loans
|
|
|
|
Total
|
|
Pass
|
|
$
|
91,281,765
|
|
|
$
|
12,115,427
|
|
|
$
|
36,256,469
|
|
|
$
|
22,813,758
|
|
|
$
|
5,329,188
|
|
|
$
|
9,870,477
|
|
|
$
|
557,268
|
|
|
$
|
863,546
|
|
|
$
|
179,087,898
|
|
Special
mention
|
|
|
-
|
|
|
|
548,876
|
|
|
|
-
|
|
|
|
563,840
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,112,716
|
|
Substandard
|
|
|
637,299
|
|
|
|
182,039
|
|
|
|
371,769
|
|
|
|
-
|
|
|
|
-
|
|
|
|
159,440
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,350,547
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,919,064
|
|
|
$
|
12,846,342
|
|
|
$
|
36,628,238
|
|
|
$
|
23,377,598
|
|
|
$
|
5,329,188
|
|
|
$
|
10,029,917
|
|
|
$
|
557,268
|
|
|
$
|
863,546
|
|
|
$
|
181,551,161
|
|
The pass portfolio within table above
consists of loans graded Prime (1) through Acceptable (4).
The Company evaluates the loan risk
grading system definitions and the allowance for loan losses methodology on an ongoing basis. No significant changes were made to either
during the year ended December 31, 2020
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
The following tables present the Company’s
loan portfolio aging analysis of the recorded investment in loans as of December 31, 2020 and 2019:
|
|
December
31, 2020
|
|
|
|
|
30-59
Days
Past Due
|
|
|
|
60-89
Days
Past Due
|
|
|
|
90
Days and
Greater
Past Due
|
|
|
|
Total
Past
Due
|
|
|
|
Current
|
|
|
|
Total
Loans
Receivable
|
|
|
|
Total
Loans > 90
Days Past
Due & Accruing
|
|
One
to four-family mortgage loans
|
|
$
|
96,826
|
|
|
$
|
127,616
|
|
|
$
|
173,877
|
|
|
$
|
398,319
|
|
|
$
|
72,299,269
|
|
|
$
|
72,697,588
|
|
|
$
|
-
|
|
One to four
family - investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,058,824
|
|
|
|
12,058,824
|
|
|
|
-
|
|
Multi-family
mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,749,223
|
|
|
|
41,749,223
|
|
|
|
-
|
|
Nonresidential
mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,531,917
|
|
|
|
29,531,917
|
|
|
|
-
|
|
Construction
& land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,841,415
|
|
|
|
5,841,415
|
|
|
|
-
|
|
Real estate
secured lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,934,387
|
|
|
|
9,934,387
|
|
|
|
-
|
|
Commercial
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
736,979
|
|
|
|
736,979
|
|
|
|
-
|
|
Other
consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
338,709
|
|
|
|
338,709
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
96,826
|
|
|
$
|
127,616
|
|
|
$
|
173,877
|
|
|
$
|
398,319
|
|
|
$
|
172,490,723
|
|
|
$
|
172,889,042
|
|
|
$
|
-
|
|
|
|
December
31, 2019
|
|
|
|
|
30-59
Days
Past Due
|
|
|
|
60-89
Days
Past Due
|
|
|
|
90
Days and
Greater
Past Due
|
|
|
|
Total
Past
Due
|
|
|
|
Current
|
|
|
|
Total
Loans
Receivable
|
|
|
|
Total
Loans > 90
Days Past
Due & Accruing
|
|
One
to four-family mortgage loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
110,934
|
|
|
$
|
110,934
|
|
|
$
|
91,808,130
|
|
|
$
|
91,919,064
|
|
|
$
|
-
|
|
One to four
family - investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,846,342
|
|
|
|
12,846,342
|
|
|
|
-
|
|
Multi-family
mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,628,238
|
|
|
|
36,628,238
|
|
|
|
-
|
|
Nonresidential
mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,377,598
|
|
|
|
23,377,598
|
|
|
|
-
|
|
Construction
& land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,329,188
|
|
|
|
5,329,188
|
|
|
|
-
|
|
Real estate
secured lines of credit
|
|
|
97,679
|
|
|
|
-
|
|
|
|
-
|
|
|
|
97,679
|
|
|
|
9,932,238
|
|
|
|
10,029,917
|
|
|
|
-
|
|
Commercial
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
557,268
|
|
|
|
557,268
|
|
|
|
-
|
|
Other
consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
863,546
|
|
|
|
863,546
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
97,679
|
|
|
$
|
-
|
|
|
$
|
110,934
|
|
|
$
|
208,613
|
|
|
$
|
181,342,548
|
|
|
$
|
181,551,161
|
|
|
$
|
-
|
|
A loan is considered impaired, in accordance
with the impairment accounting guidance (ASC 310, Receivables), when based on current information and events, it is probable the
Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans
include nonperforming commercial loans but also include loans modified in TDRs.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2020 and 2019
The following tables present impaired
loans at and for the years ended December 31, 2020 and 2019:
|
|
December 31, 2020
|
|
|
|
|
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
|
|
$
|
1,177,459
|
|
|
$
|
1,177,459
|
|
|
$
|
-
|
|
|
$
|
1,190,698
|
|
|
$
|
52,684
|
|
One- to four-family - investment
|
|
|
352,514
|
|
|
|
352,514
|
|
|
|
-
|
|
|
|
362,021
|
|
|
|
19,387
|
|
Multi-family mortgage loans
|
|
|
210,524
|
|
|
|
210,524
|
|
|
|
-
|
|
|
|
330,855
|
|
|
|
22,817
|
|
Nonresidential mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction & land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate secured lines of credit
|
|
|
58,557
|
|
|
|
58,557
|
|
|
|
-
|
|
|
|
60,115
|
|
|
|
4,087
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans with a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family mortgage loans
|
|
|
59,138
|
|
|
|
79,860
|
|
|
|
20,722
|
|
|
|
80,701
|
|
|
|
1,689
|
|
One- to four-family - investment
|
|
|
209,146
|
|
|
|
249,221
|
|
|
|
40,075
|
|
|
|
252,341
|
|
|
|
11,794
|
|
Multi-family mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Nonresidential mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction & land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate secured lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,067,338
|
|
|
$
|
2,128,135
|
|
|
$
|
60,797
|
|
|
$
|
2,276,731
|
|
|
$
|
112,458
|
|
|
|
December 31, 2019
|
|
|
|
|
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
|
|
$
|
1,054,515
|
|
|
$
|
1,054,515
|
|
|
$
|
-
|
|
|
$
|
1,077,076
|
|
|
$
|
52,394
|
|
One-
to four-family - investment
|
|
|
374,389
|
|
|
|
374,389
|
|
|
|
-
|
|
|
|
383,268
|
|
|
|
21,191
|
|
Multi-family
mortgage loans
|
|
|
507,066
|
|
|
|
507,066
|
|
|
|
-
|
|
|
|
510,866
|
|
|
|
43,647
|
|
Nonresidential
mortgage loans
|
|
|
56,190
|
|
|
|
56,190
|
|
|
|
-
|
|
|
|
75,260
|
|
|
|
4,583
|
|
Construction
& land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real
estate secured lines of credit
|
|
|
81,505
|
|
|
|
81,505
|
|
|
|
-
|
|
|
|
86,326
|
|
|
|
5,416
|
|
Commercial
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans
with a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family mortgage loans
|
|
|
61,058
|
|
|
|
81,780
|
|
|
|
20,722
|
|
|
|
79,941
|
|
|
|
1,170
|
|
One-
to four-family - investment
|
|
|
386,344
|
|
|
|
394,357
|
|
|
|
8,013
|
|
|
|
401,718
|
|
|
|
19,965
|
|
Multi-family
mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Nonresidential
mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction
& land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real
estate secured lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,521,067
|
|
|
$
|
2,549,802
|
|
|
$
|
28,735
|
|
|
$
|
2,614,455
|
|
|
$
|
148,366
|
|
Interest income recognized on a cash
basis was not materially different than interest income recognized.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2020 and 2019
The following table presents the Company’s
nonaccrual loans at December 31, 2020 and 2019. This table excludes accruing TDRs, which totaled $1,143,000 and $1,445,000 at December
31, 2020 and 2019, respectively.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
One- to four-family mortgage loans
|
|
$
|
173,877
|
|
|
$
|
110,934
|
|
One to four family - investment
|
|
|
-
|
|
|
|
-
|
|
Multi-family mortgage loans
|
|
|
-
|
|
|
|
-
|
|
Nonresidential mortgage loans
|
|
|
-
|
|
|
|
-
|
|
Construction and land loans
|
|
|
-
|
|
|
|
-
|
|
Real estate secured lines of credit
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
Other consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
173,877
|
|
|
$
|
110,934
|
|
The following tables present the new
classified TDRs at December 31, 2020 and 2019:
|
|
December 31, 2020
|
|
|
|
Number of
Loans
|
|
|
Pre-Modification
Recorded Balance
|
|
|
Post-Modification
Recorded Balance
|
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family - owner occupied
|
|
|
1
|
|
|
$
|
82,561
|
|
|
$
|
82,561
|
|
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
|
|
|
$
|
82,561
|
|
|
$
|
82,561
|
|
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2020 and 2019
|
|
December 31, 2019
|
|
|
|
Number of
Loans
|
|
|
Pre-
Modification
Recorded
Balance
|
|
|
Post-Modification
Recorded Balance
|
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family - owner occupied
|
|
|
3
|
|
|
$
|
266,418
|
|
|
$
|
240,926
|
|
Residential 1-4 family - investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Multifamily
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Nonresidential mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction & land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction & land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate secured lines of credit
|
|
|
1
|
|
|
|
-
|
|
|
|
40,627
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
$
|
266,418
|
|
|
$
|
281,553
|
|
Newly restructured loans by type of
modification are as follows at December 31, 2020 and 2019:
|
|
December 31, 2020
|
|
|
|
Interest Only
|
|
|
Term
|
|
|
Combination
|
|
|
Total
Modification
|
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family - owner occupied
|
|
$
|
82,561
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
82,561
|
|
Residential 1-4 family -investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Multifamily
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Nonresidential mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction & land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate secured lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,561
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
82,561
|
|
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2020 and 2019
|
|
December 31, 2019
|
|
|
|
Interest Only
|
|
|
Term
|
|
|
Combination
|
|
|
Total
Modification
|
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family - owner occupied
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
240,926
|
|
|
$
|
240,926
|
|
Residential 1-4 family -investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Multifamily
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Nonresidential mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction & land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate secured lines of credit
|
|
|
40,627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,627
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,627
|
|
|
$
|
-
|
|
|
$
|
240,926
|
|
|
$
|
281,553
|
|
The Company had no loans that were
modified as TDRs and that were impaired.
The Company had no TDRs modified during the years ended
December 31, 2020 and 2019 that subsequently defaulted.
As of December 31, 2020, borrowers
with loans designated as TDRs and totaling $932,000 of residential real estate loans and $211,000 of multifamily loans, met the criteria
for placement back on accrual status. This criteria includes a minimum of six consecutive months of payment performance under existing
or modified terms.
As of December 31, 2019, borrowers
with loans designated as TDRs and totaling $937,635 of residential real estate loans and $507,065 of multifamily loans, met the criteria
for placement back on accrual status. This criteria includes a minimum of six consecutive months of payment performance under existing
or modified terms.
There were no foreclosed real estate
properties at December 31, 2020 and 2019. There was one consumer mortgage loan in process of foreclosure at December 31, 2020 with a net
loan balance of $65,500.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2020 and 2019
Note 4:
|
Premises and Equipment
|
Major classifications of premises and
equipment, stated at cost, are as follows:
|
|
2020
|
|
|
2019
|
|
Land
|
|
$
|
720,971
|
|
|
$
|
720,971
|
|
Buildings and improvements
|
|
|
4,649,005
|
|
|
|
4,412,275
|
|
Furniture and equipment
|
|
|
1,131,050
|
|
|
|
1,013,645
|
|
|
|
|
6,501,026
|
|
|
|
6,146,891
|
|
Less accumulated depreciation
|
|
|
(3,013,200
|
)
|
|
|
(2,792,444
|
)
|
|
|
|
|
|
|
|
|
|
Net premises and equipment
|
|
$
|
3,487,826
|
|
|
$
|
3,354,447
|
|
Depreciation expense was $220,756
and $195,327 for the years ended December 31, 2020 and 2019, respectively.
Loans serviced for others are not included
in the accompanying balance sheets. The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result
from shifts in mortgage interest rates. The unpaid principal balance of residential mortgage loans serviced for others was $230,156,936
and $103,853,962 at December 31, 2020 and 2019, respectively.
The following summarizes the activity
in mortgage servicing rights measured using the fair value method for the years ended December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Fair value as of the beginning of the year
|
|
$
|
1,213,815
|
|
|
$
|
1,252,740
|
|
Recognition of mortgage servicing rights on the sale of loans
|
|
|
1,460,328
|
|
|
|
245,790
|
|
Change in fair value due to changes in valuation inputs or assumptions used in the valuation model
|
|
|
(648,820
|
)
|
|
|
(284,715
|
)
|
|
|
|
|
|
|
|
|
|
Fair value at the end of the year
|
|
$
|
2,025,323
|
|
|
$
|
1,213,815
|
|
Contractually specified servicing fees
were approximately $348,000 and $251,000 for the years ended December 31, 2020 and 2019, respectively.
Cincinnati
Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Certain loan sale transactions with
the FHLB provide for establishment of an LRA. The LRA consists of amounts withheld from the loan sale proceeds by the FHLB for absorbing
potential losses on those loans sold. These withheld funds are an asset to the Company as they are scheduled to be paid to the Company
in future years, net of any credit losses on those loans sold. The LRA funds withheld to settle these potential losses totaled approximately
$3,437,000 and $2,911,000 at December 31, 2020 and 2019, respectively; however, these receivables are recorded at fair value at the time
of sale, which includes consideration of potential credit losses, at the time of the establishment of the LRA. In the event that the credit
losses do not exceed the withheld funds, the LRA agreements provide for payment of these funds to the Company in seven annual installments
beginning five years after the sale date or in 26 annual installments, beginning five years after the sale date. The carrying value of
the LRA is equal to the initial fair value plus an interest component less any cash receipts, which totaled approximately $1,947,000 and
$1,713,000 at December 31, 2020 and 2019, respectively. The Company had mandatory delivery contracts outstanding as of December 31, 2020
of $19.6 million.
Time deposits in denominations of $250,000
or more were approximately $2,584,000 and $3,777,000 at December 31, 2020 and 2019, respectively. Deposit accounts in excess of $250,000
are not insured by the FDIC. At December 31, 2020, approximately $5.6 million of our certificates of deposit had been obtained through
the National CD Rateline program.
At December 31, 2020 and 2019, the scheduled
maturities of time deposits were as follows:
|
|
2020
|
|
|
2019
|
|
One year or less
|
|
$
|
35,131,024
|
|
|
$
|
32,896,686
|
|
Over one year to two years
|
|
|
14,359,679
|
|
|
|
25,095,507
|
|
Over two years to three years
|
|
|
5,507,330
|
|
|
|
10,338,194
|
|
Over three years to four years
|
|
|
4,077,670
|
|
|
|
4,837,993
|
|
Over four years to five years
|
|
|
2,922,656
|
|
|
|
3,861,470
|
|
Thereafter
|
|
|
206,427
|
|
|
|
208,082
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,204,786
|
|
|
$
|
77,237,932
|
|
Cincinnati
Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Interest expense during the years ended December 31, 2020
and 2019 for each major category of deposits was as follows:
|
|
2020
|
|
|
2019
|
|
Deposit Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
61,269
|
|
|
$
|
184,626
|
|
Interest Bearing Demand
|
|
|
115,409
|
|
|
|
148,163
|
|
Certificates of Deposit
|
|
|
1,477,240
|
|
|
|
1,615,806
|
|
|
|
|
|
|
|
|
|
|
Total Deposit Interest Expense
|
|
$
|
1,653,918
|
|
|
$
|
1,948,595
|
|
Note 7:
|
Federal
Home Loan Bank Advances
|
FHLB advances are secured by a blanket
pledge of qualifying mortgage loans totaling approximately $91,040,000 and $116,882,000 and the Company’s investment in FHLB stock
at December 31, 2020 and 2019, respectively. Advances, at effective interest rates ranging from 1.59% to 2.90%, are subject to restrictions
or penalties in the event of prepayment.
Aggregate annual maturities of FHLB
advances at December 31, 2020 and 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
One year or less
|
|
$
|
7,700,000
|
|
|
$
|
8,763,152
|
|
Over one year to two years
|
|
|
15,600,000
|
|
|
|
7,700,000
|
|
Over two years to three years
|
|
|
8,600,000
|
|
|
|
15,600,000
|
|
Over three years to four years
|
|
|
6,512,000
|
|
|
|
15,112,000
|
|
|
|
|
38,412,000
|
|
|
|
47,175,152
|
|
Deferred prepayment penalty, net of amortization
|
|
|
-
|
|
|
|
(3,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,412,000
|
|
|
$
|
47,172,066
|
|
At December 31, 2020, we had $38.4 million outstanding in
advances from the FHLB-Cincinnati, and had capacity to borrow approximately an additional $34.1 million from the FHLB-Cincinnati based
on our collateral capacity. We also had $11.5 million available on lines of credit with three commercial banks. No amount was outstanding
on these lines at December 31, 2020.
Cincinnati
Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
The provision for income taxes includes these components
for the years ended December 31, 2020 and 2019.
|
|
2020
|
|
|
2019
|
|
Taxes currently payable
|
|
$
|
768,496
|
|
|
$
|
68,865
|
|
Deferred income taxes
|
|
|
51,470
|
|
|
|
18,829
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
819,966
|
|
|
$
|
87,694
|
|
|
|
2020
|
|
|
2019
|
|
Computed at the statutory rate
|
|
$
|
834,894
|
|
|
$
|
186,095
|
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
Bank-owned life insurance
|
|
|
(18,027
|
)
|
|
|
(18,775
|
)
|
Acquired bank-owned life insurance
|
|
|
-
|
|
|
|
(36,329
|
)
|
Other
|
|
|
3,099
|
|
|
|
(43,297
|
)
|
|
|
|
|
|
|
|
|
|
Actual tax expense
|
|
$
|
819,966
|
|
|
$
|
87,694
|
|
A reconciliation between the statutory income tax and the
Company’s effective rate follows:
|
|
2020
|
|
|
2019
|
|
Computed at the statutory rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
Bank-owned life insurance
|
|
|
(0.45
|
)%
|
|
|
(2.12
|
)%
|
Merger expenses
|
|
|
-
|
|
|
|
(4.10
|
)%
|
Other
|
|
|
0.07
|
%
|
|
|
(4.88
|
)%
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
20.62
|
%
|
|
|
9.90
|
%
|
Cincinnati
Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
The tax effects of temporary differences related to deferred
taxes shown on the balance sheets at December 31, 2020 and 2019 were:
|
|
2020
|
|
|
2019
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
333,573
|
|
|
$
|
282,653
|
|
Loans held for sale
|
|
|
72,541
|
|
|
|
13,437
|
|
Operating lease right of use assets
|
|
|
37,879
|
|
|
|
-
|
|
Unrealized losses on
available-for-sale securities
|
|
|
-
|
|
|
|
1,520
|
|
Directors' Retirement Plan
|
|
|
126,323
|
|
|
|
117,452
|
|
Net operating loss
|
|
|
178,467
|
|
|
|
183,123
|
|
Other
|
|
|
43,562
|
|
|
|
24,939
|
|
|
|
|
792,345
|
|
|
|
623,124
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
|
(69,911
|
)
|
|
|
(101,363
|
)
|
Prepaid penalties on FHLB advances
|
|
|
-
|
|
|
|
(648
|
)
|
Dividends on FHLB stock
|
|
|
(332,211
|
)
|
|
|
(332,211
|
)
|
Mortgage servicing rights
|
|
|
(425,318
|
)
|
|
|
(254,901
|
)
|
FHLB lender risk account receivable
|
|
|
(408,927
|
)
|
|
|
(359,780
|
)
|
Depreciation
|
|
|
(248,975
|
)
|
|
|
(195,450
|
)
|
Operating lease right of use liabilities
|
|
|
(37,879
|
)
|
|
|
-
|
|
Unrealized gains on available-for-sale
securities
|
|
|
(9,095
|
)
|
|
|
-
|
|
Fair value mortgage banking derivative net assets
|
|
|
(74,266
|
)
|
|
|
-
|
|
Other
|
|
|
(72,416
|
)
|
|
|
(116,524
|
)
|
|
|
|
(1,678,998
|
)
|
|
|
(1,360,877
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(19,322
|
)
|
|
|
(19,322
|
)
|
Net deferred tax liability
|
|
$
|
(905,975
|
)
|
|
$
|
(757,075
|
)
|
Retained earnings at both December 31,
2020 and 2019, include approximately $766,000 for which no deferred federal income tax liability has been recognized. This amount represents
an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject
to the then-current corporate income tax rate. The deferred income tax liability on the preceding amount that would have been recorded
if it was expected to reverse into taxable income in the foreseeable future was approximately $160,900 at both December 31, 2020 and 2019.
Cincinnati
Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
As of December 31, 2020, the Company
has net operating loss carryforwards of approximately $610,000 which expire between 2028 and 2037 and $240,000 with no expiration. A valuation
allowance for deferred tax assets is provided for all or some portion of the deferred tax asset when it is more likely than not an amount
will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances is included in income
tax expense in the period they are identified. At December 31, 2020, the Company has a valuation allowance of $19,322 to reduce deferred
tax assets to the amount that is more likely than not to be realized under Code Section 382 limitations.
Note 9:
|
Accumulated
Other Comprehensive Loss
|
The
components of accumulated other comprehensive loss, included in stockholders’ equity, are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net unrealized gain (loss) on available for sale
securities
|
|
$
|
43,311
|
|
|
$
|
(7,237
|
)
|
|
|
|
|
|
|
|
|
|
Directors' retirement plan
|
|
|
(413,407
|
)
|
|
|
(361,104
|
)
|
|
|
|
(370,096
|
)
|
|
|
(368,341
|
)
|
|
|
|
|
|
|
|
|
|
Tax benefit
|
|
|
(78,082
|
)
|
|
|
(77,352
|
)
|
|
|
|
|
|
|
|
|
|
Net of tax amount
|
|
$
|
(292,014
|
)
|
|
$
|
(290,989
|
)
|
Note 10:
|
Regulatory
Matters
|
The Bank is subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and
possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company’s
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require
adjustments to regulatory capital not reflected in these financial statements.
Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier I capital (as defined) to risk-weighted assets (as defined), common equity Tier I capital (as defined) to risk-weighted assets
(as defined) and of Tier I capital to average assets (as defined). Management believes that, as of December 31, 2020 and 2019, the Bank
met all capital adequacy requirements to which it was subject at such dates.
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
Management opted out of the accumulated
comprehensive income treatment under the Basel III capital requirements, and as such, unrealized gains and losses from available-for-sale
securities will continue to be excluded from regulatory capital.
The below minimum capital requirements
exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain
discretionary bonus payments to executive officers. The capital conservation buffer was phased in under Basel III from 0.0% for 2015 to
2.50% by 2019. The capital conservation buffer was 2.50% at December 31, 2020.
As of December 31, 2020, the most recent
notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes
have changed the Bank’s category.
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
The Bank’s actual and required capital amounts and
ratios are presented in the following table:
|
|
Actual
|
|
|
Minimum Capital
Requirement
|
|
|
Minimum to
Be Well
Capitalized Under
Prompt Corrective Action
Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted
assets)
|
|
$
|
36,465
|
|
|
|
22.0
|
%
|
|
$
|
13,272
|
|
|
|
8.0
|
%
|
|
$
|
16,590
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets)
|
|
|
34,792
|
|
|
|
21.0
|
%
|
|
|
9,954
|
|
|
|
6.0
|
%
|
|
|
13,272
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier I capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets)
|
|
|
34,792
|
|
|
|
21.0
|
%
|
|
|
7,465
|
|
|
|
4.5
|
%
|
|
|
10,783
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to adjusted average total assets)
|
|
|
34,792
|
|
|
|
14.8
|
%
|
|
|
9,415
|
|
|
|
4.0
|
%
|
|
|
11,769
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets)
|
|
$
|
24,898
|
|
|
|
16.3
|
%
|
|
$
|
12,204
|
|
|
|
8.0
|
%
|
|
$
|
15,255
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets)
|
|
|
23,490
|
|
|
|
15.4
|
%
|
|
|
9,153
|
|
|
|
6.0
|
%
|
|
|
12,204
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier I capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets)
|
|
|
23,490
|
|
|
|
15.4
|
%
|
|
|
6,865
|
|
|
|
4.5
|
%
|
|
|
9,916
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to adjusted average total assets)
|
|
|
23,490
|
|
|
|
10.2
|
%
|
|
|
9,183
|
|
|
|
4.0
|
%
|
|
|
11,478
|
|
|
|
5.0
|
%
|
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
|
Note 11:
|
Related Party Transactions
|
At December 31, 2020 and 2019, the Company
had loans outstanding to executive officers, directors and their affiliates (related parties). Annual activity consisted of the following:
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
821,388
|
|
|
$
|
879,142
|
|
New loans
|
|
|
-
|
|
|
|
-
|
|
Repayments
|
|
|
60,108
|
|
|
|
57,754
|
|
Ending balances
|
|
$
|
761,280
|
|
|
$
|
821,388
|
|
In management’s opinion, such
loans and other extensions of credit are consistent with sound lending practices and are within applicable regulatory lending limitations.
In management’s opinion these loans did not involve more than normal risk of collectability or present other unfavorable features.
Deposits from related parties held by
the Bank at December 31, 2020 and 2019 totaled $3,102,000 and $2,321,000, respectively.
|
Note 12:
|
Employee and Director Benefits
|
The Company has a 401(k) profit-sharing
plan covering substantially all employees. The Company’s contributions to the plan are determined annually by the Board of Directors
of Cincinnati Federal. Contributions to the plan were approximately $197,000 and $124,100 for the years ended December 31, 2020 and 2019,
respectively.
In connection with the conversion to
the mutual holding company, Cincinnati Bancorp, established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible
employees. The ESOP borrowed funds from Cincinnati Bancorp in an amount sufficient to purchase 67,397 shares (approximately 3.92% of the
common stock sold in the initial stock offering). In the second-step stock offering completed January 22, 2020, the ESOP borrowed funds
from Cincinnati Bancorp, Inc. and purchased 132,937 shares (approximately 8.0% of the common stock sold in the second-step offering).
The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Company and dividends
received by the ESOP. Contributions will be applied to repay interest on the loan first, then the remainder will be applied to principal.
The loan is expected to be repaid over a period of up to 20 years. Shares purchased with the loan proceeds are held in a suspense account
for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated
among participants in proportion to their compensation, relative to total compensation of all active participants. Participants will vest
in their accrued benefits under the ESOP at the rate of 20 percent per year after two years of service. Vesting is accelerated upon retirement,
death or disability of the participant, or a change in control of the Company. Forfeitures will be reallocated to remaining plan participants.
Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP.
The debt of the ESOP is eliminated
in consolidation. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan
agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average
market price of the shares for the respective period, and the shares become outstanding for earnings per share computations.
Dividends on unallocated ESOP shares, if any, are recorded as a reduction of debt and accrued interest. ESOP compensation expense
was approximately $97,000 and $64,800 for the years ended December 31, 2020 and 2019, respectively.
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
A summary of the ESOP shares as of December
31, 2020 and 2019 are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Shares released to participants (1)
|
|
|
36,733
|
|
|
|
29,386
|
|
Shares allocated to participants
|
|
|
10,285
|
|
|
|
7,347
|
|
Unreleased shares
|
|
|
195,207
|
|
|
|
73,468
|
|
Total
|
|
|
242,225
|
|
|
|
110,201
|
|
|
|
|
|
|
|
|
|
|
Fair value of unreleased shares
|
|
$
|
2,252,689
|
|
|
$
|
745,871
|
|
|
(1)
|
Share
amounts related to the periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive
recognition to the 1.6351 exchange ratio applied in the conversion offering (see Note 1).
|
In addition, effective July 2014, the
Company provides post-retirement benefits to directors of the Company. The Company accounts for the policies in accordance with ASC 715-60
Defined Benefit Plans, which requires companies to recognize a liability and related compensation costs that provide a benefit
to a director extending to post-retirement periods. The liability is recognized based on the substantive agreement with the director.
The Company uses a December 31 measurement
date for the plan. Information about the plan’s funded status and pension cost follows:
|
|
2020
|
|
|
2019
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
559,295
|
|
|
$
|
487,077
|
|
Service cost
|
|
|
12,389
|
|
|
|
10,114
|
|
Interest cost
|
|
|
18,860
|
|
|
|
22,557
|
|
Loss/(gain)
|
|
|
97,340
|
|
|
|
69,547
|
|
Benefits paid
|
|
|
(75,000
|
)
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
612,884
|
|
|
$
|
559,295
|
|
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
Amounts recognized in accumulated other
comprehensive loss not yet recognized as components of net periodic benefit cost consist of:
|
|
2020
|
|
|
2019
|
|
Prior service cost
|
|
$
|
25,280
|
|
|
$
|
25,280
|
|
Net loss
|
|
$
|
13,522
|
|
|
$
|
7,676
|
|
The accumulated benefit obligation for
the benefit plan was $612,884 and $559,295 at December 31, 2020, and December 31, 2019, respectively.
The
estimated prior service credit for the plan that will be amortized from accumulated other comprehensive income into net periodic
benefit cost over the next fiscal year is approximately $25,280.
|
|
2020
|
|
|
2019
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
12,389
|
|
|
$
|
10,114
|
|
Interest Cost
|
|
|
18,860
|
|
|
|
22,557
|
|
(Gain)/loss recognized
|
|
|
8,866
|
|
|
|
3,622
|
|
Prior service cost
|
|
|
25,280
|
|
|
|
25,280
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,395
|
|
|
$
|
61,573
|
|
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
The retiree accrued liability expected to be reversed from
the plan as of December 31, 2020 and December 31, 2019 is as follows:
|
|
2020
|
|
|
2019
|
|
One year or less
|
|
$
|
15,000
|
|
|
$
|
30,000
|
|
Over one year to two years
|
|
|
15,000
|
|
|
|
30,000
|
|
Over two years to three years
|
|
|
15,000
|
|
|
|
30,000
|
|
Over three years to four years
|
|
|
15,000
|
|
|
|
30,000
|
|
Over four years to five years
|
|
|
15,000
|
|
|
|
15,000
|
|
Thereafter
|
|
|
165,000
|
|
|
|
135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
240,000
|
|
|
$
|
270,000
|
|
Significant
assumptions for the benefit plan liability include the following as of December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Weighted average assumptions used to determine benefit cost obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
3.08
|
%
|
|
|
4.14
|
%
|
Note 13:
|
Operating
Lease Income
|
The Company had one operating lease
where it acts as lessor of office space at December 31, 2020. The subject office space was a branch location for an unaffiliated bank.
The lessee notified the Company that the branch would be relocating within their banking system. The lease was set to expire in November
2021 with three additional renewal options for five years each. As the leased space is a bank branch facility with ATM and drive-thru
lane functionality, the Company intends to occupy the vacated bank branch and operate a full-service branch facility. Rental income from
leases was approximately $77,800 and $92,300 for the years ended December 31, 2020 and 2019, respectively.
Note 14:
|
Disclosures
About Fair Value of Assets and Liabilities
|
Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of
three levels of inputs that may be used to measure fair value:
|
Level
1
|
Quoted prices in active markets for identical assets or liabilities.
|
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
|
Level 2
|
Observable
inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable market data for substantially the full-term of the assets or
liabilities.
|
|
|
|
|
Level
3
|
Unobservable
inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities.
|
Recurring Measurements
The following tables present the fair
value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair
value measurements fall at December 31, 2020 and 2019:
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
of government sponsored entities
|
|
$
|
5,213,830
|
|
|
$
|
-
|
|
|
$
|
5,213,830
|
|
|
$
|
-
|
|
Mortgage servicing rights
|
|
|
2,025,323
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,025,323
|
|
Derivative assets (included in other assets)
|
|
|
498,644
|
|
|
|
-
|
|
|
|
|
|
|
|
498,644
|
|
Derivative liabilities (included in other liabilities)
|
|
|
144,995
|
|
|
|
-
|
|
|
|
144,995
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities of government
sponsored entities
|
|
$
|
6,733,213
|
|
|
$
|
-
|
|
|
$
|
6,733,213
|
|
|
$
|
-
|
|
Mortgage servicing rights
|
|
|
1,213,815
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,213,815
|
|
Following is a description of the valuation
methodologies and inputs used for assets measured at fair value on recurring basis and recognized in the accompanying consolidated balance
sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
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.
Derivative Financial Instruments
The fair value of the interest lock commitments is based
on the investor prices for the underlying loans or current secondary market prices for loans with similar characteristics less estimated
costs to originate the loans and adjusted for the anticipated funding probability (pull-through rate). The fair value of the interest
rate lock commitments is classified as Level 3 in the fair value 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.
The following is is reconciliation of
the beginning and ending balances of recurring fair value measurements related to mortgage servicing rights recognized in the accompanying
balance sheets using significant unobservable (Level 3) inputs:
|
|
2020
|
|
|
2019
|
|
Fair value as of the beginning of the year
|
|
$
|
1,213,815
|
|
|
$
|
1,252,740
|
|
Recognition of mortgage servicing rights on the sale of loans
|
|
|
1,460,328
|
|
|
|
245,790
|
|
Change in fair value due to changes in valuation inputs or assumptions used in the valuation model
|
|
|
(648,820
|
)
|
|
|
(284,715
|
)
|
|
|
|
|
|
|
|
|
|
Fair value at the end of the year
|
|
$
|
2,025,323
|
|
|
$
|
1,213,815
|
|
Mortgage servicing rights are
carried in the balance sheet at fair value and the changes in fair value are reported in other noninterest income in the period in which
the changes occur.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Loan Commitments
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 interest rate lock commitments was $498,600, partially offset by a negative
fair value on forward sale commitments of $145,000. The fair value of mortgage banking derivatives is estimated based on current market
prices for loans of similar terms and credit quality.
Nonrecurring Measurements
The following table presents the fair value of assets measured
at fair value on a nonrecurring basis and the level of hierarchy in which the fair value measurements fall at December 31, 2020 and 2019:
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Carrying
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
|
$
|
173,877
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
173,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
|
$
|
51,568
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
51,568
|
|
Collateral-dependent Impaired Loans
The Company considers the
appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the
environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the
loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for
accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The
appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction
of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to
historical results.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2020 and 2019
Unobservable (Level 3) Inputs
The following tables present quantitative information about
unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2020 and 2019:
|
|
Fair Value
|
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Range
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
$
|
2,025,323
|
|
|
Discounted
cash flow
|
|
Discount rate
PSA prepayment speeds
|
|
|
10%
177-565%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
|
$
|
498,644
|
|
|
Secondary market prices
|
|
Pull-through rate
|
|
|
85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
$
|
173,877
|
|
|
Market comparable properties
|
|
Marketability discount
|
|
|
10%-15%
12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
$
|
1,213,815
|
|
|
Discounted
cash flow
|
|
Discount rate
PSA prepayment speeds
|
|
|
10%
89%-173%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
$
|
51,568
|
|
|
Market comparable properties
|
|
Marketability discount
|
|
|
10%-15%
12%
|
|
Fair Value of Financial Instruments
The following methods were used to estimate
the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.
Cash and cash equivalents, Federal Home
Loan Bank Stock and Interest Receivable
The carrying amount approximates fair value.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2020 and 2019
Loans Held for Sale
Fair value of loans held for sale is
based on quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating
the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.
Loans
The
estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” in estimating and disclosing
the fair value of financial instruments. The fair value calculation discounted estimated cash flows using rates that incorporated discounts
for credit, liquidity and marketability factors.
Federal Home Loan Bank Lender Risk Account
Receivable
The fair value of the Federal Home Loan
Bank lender risk account receivable is estimated by discounting the estimated remaining cash flows of each strata of the receivable at
current rates applicable to each strata for the same remaining maturities.
Deposits
Deposits include demand deposits and
savings accounts. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted
cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank Advances
Rates currently available to the Company
for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt
is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market.
If a quoted market price is not available,
an expected present value technique is used to estimate fair value.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2020 and 2019
Stock Subscription Proceeds in Escrow,
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 values of letters of credit and lines of credit are based on fees currently
charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the
reporting date. At December 31, 2020 and 2019, the fair value of letters of credit and lines of credit was not material.
The following table presents estimated fair values of the
Company’s financial instruments carried at cost at December 31, 2020 and 2019:
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Carrying
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,347,806
|
|
|
$
|
32,347,806
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest-bearing time deposits
|
|
|
3,000,000
|
|
|
|
-
|
|
|
|
3,000,000
|
|
|
|
-
|
|
Loans held for sale
|
|
|
13,345,370
|
|
|
|
-
|
|
|
|
13,690,802
|
|
|
|
-
|
|
Loans, net of allowance for loan losses
|
|
|
166,667,918
|
|
|
|
-
|
|
|
|
-
|
|
|
|
165,251,240
|
|
Federal Home Loan Bank stock
|
|
|
2,801,800
|
|
|
|
-
|
|
|
|
2,801,800
|
|
|
|
-
|
|
Interest receivable
|
|
|
520,775
|
|
|
|
-
|
|
|
|
520,775
|
|
|
|
-
|
|
Federal Home Loan Bank lender risk account receivable
|
|
|
1,947,271
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,157,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
152,207,043
|
|
|
|
90,002,257
|
|
|
|
63,577,288
|
|
|
|
-
|
|
Federal Home Loan Bank advances
|
|
|
38,412,000
|
|
|
|
-
|
|
|
|
39,718,400
|
|
|
|
-
|
|
Advances from borrowers for taxes and insurance
|
|
|
1,946,340
|
|
|
|
-
|
|
|
|
1,946,340
|
|
|
|
-
|
|
Interest payable
|
|
|
73,585
|
|
|
|
-
|
|
|
|
73,585
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,735,266
|
|
|
$
|
37,735,266
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Loans held for sale
|
|
|
3,114,081
|
|
|
|
-
|
|
|
|
3,178,068
|
|
|
|
-
|
|
Loans, net of allowance for loan losses
|
|
|
179,332,026
|
|
|
|
-
|
|
|
|
-
|
|
|
|
175,117,724
|
|
Federal Home Loan Bank stock
|
|
|
2,657,400
|
|
|
|
-
|
|
|
|
2,657,400
|
|
|
|
-
|
|
Interest receivable
|
|
|
624,333
|
|
|
|
-
|
|
|
|
624,333
|
|
|
|
-
|
|
Federal Home Loan Bank lender risk account
receivable
|
|
|
1,713,240
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,820,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
143,410,707
|
|
|
|
66,172,775
|
|
|
|
78,065,313
|
|
|
|
-
|
|
Federal Home Loan Bank advances
|
|
|
47,172,066
|
|
|
|
-
|
|
|
|
47,707,920
|
|
|
|
-
|
|
Stock subscription proceeds in escrow
|
|
|
23,407,011
|
|
|
|
23,407,011
|
|
|
|
-
|
|
|
|
|
|
Advances from borrowers for taxes and insurance
|
|
|
1,806,638
|
|
|
|
-
|
|
|
|
1,806,638
|
|
|
|
-
|
|
Interest payable
|
|
|
91,636
|
|
|
|
-
|
|
|
|
91,636
|
|
|
|
-
|
|
Note 15:
|
Derivative
Financial Instruments
|
The Company enters into commitments to originate loans whereby
the interest rate on the loans is determined prior to funding (i.e. rate lock commitment). The Company also enters into forward mortgage
loan commitments to sell to various investors to protect itself against exposure to various factors and to reduce sensitivity to interest
rate movements.
Both the interest rate lock commitments and the related forward
mortgage loan sales contracts are considered derivatives and are recorded on the consolidated balance sheets at fair value in accordance
with FASB ASC 815, Derivatives and Hedging, with changes in fair value recorded in noninterest income in the accompanying consolidated
statements of income. All such derivatives are considered stand-alone derivatives and have not been formally designated as hedges by management.
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
The table below provides information on the Company’s
derivative financial instruments as of December 31, 2020. The Company’s derivative instruments at December 31, 2019 were not material.
Income related to derivative financial instruments included in noninterest income in the accompanying consolidated statements of income
for the year ended December 31, 2020 is as follows:
|
|
Notional
|
|
|
Asset
|
|
|
Liability
|
|
|
|
Amount
|
|
|
Derivatives
|
|
|
Derivatives
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
|
$
|
19,613,510
|
|
|
$
|
498,644
|
|
|
|
-
|
|
Forward sale commitments
|
|
|
32,953,442
|
|
|
|
-
|
|
|
|
144,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,566,952
|
|
|
$
|
498,644
|
|
|
|
144,995
|
|
Income (loss) related
to derivative financial instruments included in noninterest income in the accompanying consolidated statements of income for the year
ended December 31, 2020 is as follows:
|
|
|
2020
|
|
Interest rate lock commitments
|
|
$
|
498,644
|
|
Forward sale commitments
|
|
|
(144,995
|
)
|
|
|
|
|
|
|
|
|
353,649
|
|
Note 16:
|
Commitments
and Credit Risk
|
Commitments to Originate
Loans
Commitments to originate loans are agreements
to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation
of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial
real estate and residential real estate.
Cincinnati Bancorp, Inc.
Notes to the Consolidated
Financial Statements
December 31, 2020 and
2019
Forward sale commitments are commitments
to sell groups of residential mortgage loans that the Company originates or purchases as part of its mortgage banking activities. The
Company commits to sell the loans at specified prices in a future period. These commitments are acquired to reduce market risk on mortgage
loans in the process of origination and mortgage loans held for sale since the Company is exposed to interest rate risk during the period
between issuing a loan commitment and the sale of the loan into the secondary market.
The dollar amount of commitments to
fund fixed rate loans at December 31, 2020 and 2019 follows:
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
Interest Rate
|
|
|
|
Amount
|
|
|
Range
|
|
|
Amount
|
|
|
Range
|
Commitments to fund fixed-rate loans
|
|
$
|
28,451,835
|
|
|
2.25% - 3.25%
|
|
$
|
3,917,445
|
|
|
3.5% - 5.125%
|
Lines of Credit
Lines of credit are agreements to lend
to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration
dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash
requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies
in granting lines of credit as it does for on-balance-sheet instruments.
Loan commitments outstanding at December
31, 2020 and 2019 were composed of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Commitments to originate loans for portfolio
|
|
$
|
189,200
|
|
|
$
|
761,055
|
|
Forward sale commitments
|
|
|
41,791,767
|
|
|
|
7,031,526
|
|
Lines of credit
|
|
|
19,826,038
|
|
|
|
16,840,828
|
|
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2020 and 2019
Note 17:
|
Earnings
Per Share
|
Basic earnings per common share is computed
based upon the weighted-average number of common shares outstanding during the period, less shares in the Company’s ESOP that are
unallocated and not committed to be released. The computations are as follows for December 31, 2020 and 2019:
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,155,721
|
|
|
$
|
798,474
|
|
Less allocation of net income to participating securities
|
|
|
28,869
|
|
|
|
7,372
|
|
Net income allocated to common shareholders
|
|
|
3,126,852
|
|
|
|
791,102
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share (1):
|
|
|
|
|
|
|
|
|
Shares issued
|
|
|
2,970,211
|
|
|
|
2,944,383
|
|
Less: Average unearned ESOP shares and
unvested restricted stock
|
|
|
220,522
|
|
|
|
78,983
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
|
|
2,749,689
|
|
|
|
2,865,400
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
1.14
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
|
|
2,749,689
|
|
|
|
2,865,400
|
|
Stock options
|
|
|
39,657
|
|
|
|
42,411
|
|
Weighted-average shares outstanding - diluted
|
|
|
2,789,346
|
|
|
|
2,907,812
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.12
|
|
|
$
|
0.27
|
|
|
(1) Share
amounts related to the periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive
recognition to the 1.6351 exchange ratio applied in the conversion offering. (see Note 1)
|
Note 18:
|
Equity
Incentive Plan
|
In May 2017, the Company’s stockholders
approved the Cincinnati Bancorp 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan authorized the issuance or delivery
to participants of up to 192,844 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 137,476 (as adjusted) shares and the maximum
number of shares of Company common stock that may be issued as restricted stock awards or restricted stock units is 55,098 (as adjusted)
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.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
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).
Stock option awards and related information
is as follows for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Value
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
126,634
|
|
|
$
|
6.07
|
|
|
|
7.66
|
|
|
$
|
528,573
|
|
Granted
|
|
|
11,000
|
|
|
$
|
9.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,306
|
)
|
|
$
|
5.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
134,328
|
|
|
$
|
6.34
|
|
|
|
6.87
|
|
|
$
|
698,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
70,726
|
|
|
$
|
5.92
|
|
|
|
6.56
|
|
|
$
|
397,480
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Value
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
129,479
|
|
|
$
|
5.84
|
|
|
|
8.50
|
|
|
$
|
194,008
|
|
Granted
|
|
|
8,176
|
|
|
$
|
9.36
|
|
|
|
10.00
|
|
|
|
|
|
Exercised
|
|
|
(3,306
|
)
|
|
$
|
5.84
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(7,714
|
)
|
|
$
|
5.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
126,634
|
|
|
$
|
6.07
|
|
|
|
7.66
|
|
|
$
|
528,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
50,654
|
|
|
$
|
5.84
|
|
|
|
7.50
|
|
|
$
|
195,199
|
|
|
(1)
Share amounts related to periods prior to the January 22, 2020 closing of the conversion
offering have been restated to give retroactive recognition
to the 1.6351 exchange ratio applied in the conversion offering. (see Note 1).
|
In June 2017, the Company awarded 55,098
(as adjusted) restricted shares to members of the Board of Directors and certain members of management. The restricted stock awards have
a five year vesting period. Shares of restricted stock granted to employees under the 2017 Plan are subject to vesting based on continuous
employment for a specified time period following the date of grant. During the restricted period, the holder is entitled to full voting
rights and dividends, thus are considered participating securities.
Total compensation expense recognized
in the income statement for share-based payment arrangements was $110,416 and $103,152 for the years ended December 31, 2020 and 2019,
respectively.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
As of December 31, 2020, there was approximately
$200,800 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 2.2 years.
Note 19:
|
Multiemployer
Defined Benefit Plan
|
In connection with the acquisition of
Kentucky Federal Savings and Loan Association, Cincinnati Federal is now part of a multiple-employer pension plan that is considered a
multiemployer plan for accounting purposes. The Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB Plan) is a tax-qualified
defined benefit plan. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra
DB Plan operates as a multiemployer plan for accounting purposes and as a multiple –employer plan under the Employee Retirement
Income Security Act of 1974 and the IRC. There are no collective bargaining agreements in place that require contributions to the
Pentegra DB Plan.
The Pentegra DB Plan is a single plan
under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under
the Pentegra DB Plan contributions made by a participating employer may be used to provide benefits of other participating employers.
If Cincinnati Federal chooses to stop participating in this plan, it may be required to pay an amount based on the underfunded status
of the plan, referred to as the withdrawal liability. Effective June 30, 2016, participation in the plan was frozen.
The funded status (market value divided
by funding target) of the plan at June 30, 2020 and 2019 was 85.68% and 85.94%, respectively.
Total contributions made to the Pentegra
DB Plan, as reported on Form 5500, equal $138,321,604 and $164,570,408 for the plan years ended June 30, 2019 and June 30, 2018. Cincinnati
Federal’s contribution to the Pentegra DB Plan for the fiscal year ending December 31, 2020 are not more than 5% of the total contributions
to the Pentegra DB Plan for the plan year ended June 30, 2019.
Accounting Standards Update
2011-09 requires the use of the most recently available annual return (Form 5500) to determine if an employer’s contributions
represent more than 5% of total contributions to the Pentegra DB Plan. The 2018 Form 5500 is the most recently available annual
report. The Schedule SB contains the total contributions to the Pentegra DB Plan for the year ending June 30, 2019. Cincinnati
Federal’s contributions to the plan were $107,772 and $105,511 for the years ending December 31, 2020 and 2019,
respectively.
Plan
Name
|
|
Employer
Identification
Number
|
|
Company
Contributions
|
|
|
FIP/RP Status
Pending/Implemented
|
|
Expiration of
Collective Bargaining
Agreement
|
|
2020
|
|
|
|
2019
|
Pentegra Defined Benefit Plan for Financial Institutions
|
|
13-5645888/333
|
|
$
|
107,772
|
|
|
$
|
105,511
|
|
|
No
|
|
Not applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Note 20:
|
Recent
Accounting Pronouncements
|
FASB ASU 2016-13, Measurement
of Credit Losses on Financial Instruments (Topic 326)
In June 2016, the FASB issued ASU No.
2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will
measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income.
In issuing the standard, the FASB is
responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred
loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”)
model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet
credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees.
The
CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses,
entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances
rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit
losses immediately in earnings rather than as interest income over time, as they do today.
The ASU also simplifies the accounting
model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s
assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the
amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.
ASU No. 2016-13 is effective for
public business entities that are U.S. Securities and Exchange Commission (SEC) filers for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. For SEC filers that are Smaller Reporting Companies, all other public
business entities, and other non-public entities, the amendments are effective for fiscal years beginning after December 15, 2022,
including interim periods within those fiscal years. Early adoption is permitted for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified
retrospective approach).
The Company is currently evaluating
the impact of these amendments to the Company’s financial position and results of operations and currently does not know or cannot
reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from these amendments.
The Allowance for Loan Losses (ALL) estimate is material to the Company and given the change from an incurred loss model to a methodology
that considers the credit loss over the life of the loan, there is the potential for an increase in the ALL at adoption date. The Company
is anticipating a significant change in the processes and procedures to calculate the ALL, including changes in assumptions and estimates
to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model.
In addition, the current accounting policy and procedures for the other-than-temporary impairment on available-for-sale securities will
be replaced with an allowance approach. The Company continues to collect and retain historical loan and credit data. The Company is in
the process of identifying data gaps. Certain CECL models are currently being evaluated. The Audit Committee is informed of ongoing CECL
developments. For additional information on the allowance for loan losses, see Notes 1 and 3.
FASB
ASU 2016-02, Leases (Topic 842)
ASU No. 2016-02 Leases, was issued
in February 2016 and requires a lessee to recognize in the statement of financial position a liability to make lease payments (“the
lease liability”) and a right to use the underlying asset for the lease term, initially measured at the present value of the lease
payments. When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods
only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the
lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the
purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance
fixed payments.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
A lessee shall classify a lease as a
finance lease if it meets any of the five listed criteria:
|
a.
|
The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
|
|
b.
|
The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain
to exercise.
|
|
c.
|
The lease term is for the major part of the remaining economic life of the underlying asset.
|
|
d.
|
The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals
or exceeds substantially all of the fair value of the underlying asset.
|
|
e.
|
The underlying asset is of such a specialized nature that it is expected to have no alternative use to
the lessor at the end of the lease term.
|
For finance leases, a lessee shall recognize
in the statement of income interest on the lease liability separately from the amortization of the right-of-use asset. Amortization of
the right-to-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee
expects to consume the right-of-use asset’s future economic benefits. If the lease does not meet any of the five criteria, the lessee
shall classify it as an operating lease and shall recognize a single lease cost on a straight line basis over the lease term. For leases
with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize
lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a
straight-line basis over the lease term. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. On October 16, 2019, FASB approved a final ASU delaying
the effective date for nonpublic business entities. Nonpublic business entities should apply the amendments for fiscal years beginning
after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. Entities are required to use a modified
retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial
statements, with certain practical expedients available. The Company adopted ASU No. 2016-02 effective January 1, 2020, as required, without
material effect on the Company’s consolidated financial position or results of operations, since the Company does not have a material
amount of lease agreements. The right of use asset and lease obligation recorded as of December 31, 2020 was approximately $180,000 and
is reflected in other assets and liabilities, respectively on the balance sheet. The modified retrospective method was applied. Due to
immateriality of the impact, certain disclosures under ASU 842 have been omitted.
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Note 21:
|
Condensed
Financial Information (Parent Company Only)
|
Presented below
is condensed financial information as to the financial position, results of operations and cash flows of the Company:
|
|
Condensed Balance Sheet
|
|
|
|
2020
|
|
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
6,449,777
|
|
|
$
|
459,178
|
|
Investment in bank subsidiary
|
|
|
34,676,167
|
|
|
|
23,396,464
|
|
Other assets
|
|
|
378,027
|
|
|
|
225,523
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
41,503,971
|
|
|
$
|
24,081,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP shares subject to mandatory redemption
|
|
$
|
-
|
|
|
$
|
244,327
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
41,503,971
|
|
|
|
23,836,838
|
|
|
|
|
|
|
|
|
|
|
Total temporary equity and stockholders' equity
|
|
$
|
41,503,971
|
|
|
$
|
24,081,165
|
|
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Condensed Statements of Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Dividend Income
|
|
$
|
-
|
|
|
$
|
750,000
|
|
|
|
|
|
|
|
|
|
|
Merger-related expenses
|
|
|
-
|
|
|
|
18,000
|
|
Other noninterest expenses
|
|
|
316,466
|
|
|
|
262,666
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
316,466
|
|
|
$
|
280,666
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income tax benefits and equity in undistributed income of the subsidiary
|
|
|
(316,466
|
)
|
|
|
469,334
|
|
|
|
|
|
|
|
|
|
|
Federal income tax benefits
|
|
|
66,456
|
|
|
|
102,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed income of subsidiary
|
|
|
3,405,731
|
|
|
|
226,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,155,721
|
|
|
$
|
798,474
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
3,154,696
|
|
|
$
|
759,927
|
|
Cincinnati
Bancorp, Inc.
Notes
to the Consolidated Financial Statements
December 31, 2020 and 2019
Condensed Statement of Cash Flows
|
|
2020
|
|
|
2019
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,155,721
|
|
|
$
|
798,474
|
|
|
|
|
|
|
|
|
|
|
Items not requiring (providing) cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed income of subsidiary
|
|
|
(3,405,731
|
)
|
|
|
(226,233
|
)
|
Increase (decrease) in cash due to changes in:
|
|
|
|
|
|
|
|
|
Accrued expenses and other assets
|
|
|
(152,505
|
)
|
|
|
(398,607
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(402,515
|
)
|
|
|
173,634
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from second step stock issuance downstreamed to bank
|
|
|
(7,667,532
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(7,667,532
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
14,060,646
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
14,060,646
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and due from banks
|
|
|
5,990,599
|
|
|
|
173,634
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at beginning of year
|
|
|
459,178
|
|
|
|
285,544
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of year
|
|
$
|
6,449,777
|
|
|
$
|
459,178
|
|
Note 22:
|
Impact
of COVID-19 on Cincinnati Bancorp, Inc.
|
In March 2020, the
COVID-19 coronavirus was identified as a global pandemic and began affecting the health of large populations around the world. As
a result of the spread of COVID-19, economic uncertainties arose which can ultimately affect the financial position, results of operations
and cash flows of the Company as well as the Company’s customers. In response to economic concerns over COVID-19, in March
2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed into law by Congress. The CARES
Act included relief for individual Americans, health care workers, small businesses and certain industries hit hard by the COVID-19 pandemic.
The 2021 Consolidated Appropriations Act, passed by Congress in December 2020, extended certain provisions of the CARES Act
affecting the Company into 2021.
The CARES Act included
several provisions designed to help financial institutions like the Company in working with their customers. Section 4013 of the
CARES Act, as extended, allows a financial institution to elect to suspend generally accepted accounting principles and regulatory
determinations with respect to qualifying loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt
restructuring (TDR) until January 1, 2022. The Company has taken advantage of this provision to extend certain payment modifications
to loan customers in need. As of December 31, 2020, the Company has six loans totaling $1.0 million that were modified during 2020
under the CARES Act guidance, that remain on modified terms. The Company modified other loans during 2020 under the guidance that
have since returned to normal repayment status as of December 31, 2020.
(a)(3) Exhibits
3.1
|
Amended and Restated Articles of Incorporation of Cincinnati Bancorp, Inc. (1)
|
3.2
|
Bylaws of Cincinnati Bancorp, Inc. (1)
|
4.0
|
Form of Common Stock Certificate of Cincinnati Bancorp, Inc. (1)
|
4.1
|
Description of securities of Cincinnati Bancorp, Inc. Registered Under Section 12 of the Securities Exchange Act of 1934 (2)
|
10.1
|
Employment Agreement by and between Cincinnati Federal Savings and Loan Association and Gregory W. Meyers (3)
|
10.2
|
Split Dollar Life Insurance Plan (3)
|
10.3
|
Cincinnati Federal Savings and Loan Association Director Retirement Plan (3)
|
10.4
|
Form of Cincinnati Federal Employee Stock Ownership Plan (3)
|
10.5
|
Cincinnati Bancorp 2017 Equity Incentive Plan (4)
|
10.6
|
Change in Control Agreement by and between Robert A. Bedinghaus and Cincinnati Federal (5)
|
10.7
|
Change in Control Agreement by and between Joseph V. Bunke and Cincinnati Federal (5)
|
10.8
|
Change in Control Agreement by and between Herbert C. Brinkman and Cincinnati Federal (5)
|
21.0
|
Subsidiaries of the Registrant
|
23.0
|
Consent of Independent Registered Public Accounting Firm
|
31.1
|
Certification of Principal Executive Officer, Pursuant to Rule 15d-14(a)
|
31.2
|
Certification of Principal Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
|
32.0
|
Certification of Principal Executive Officer and Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
101
|
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements
|
(1)
|
Incorporated herein by reference to the Registration Statement on Form S-1, as amended (File No. 333-233708), of Cincinnati Bancorp,
Inc., initially filed September 11, 2019.
|
(2)
|
Incorporated herein by reference to Annual Report on Form 10-K of Cincinnati Bancorp, Inc., filed on March 30, 2020.
|
(3)
|
Incorporated herein by reference to the Registration Statement on Form S-1, as amended (File No. 333-202657), of Cincinnati Bancorp,
as initially filed on March 11, 2015.
|
(4)
|
Incorporated by reference to Appendix A to Definitive Proxy Statement of Cincinnati Bancorp, filed on April 13, 2017.
|
(5)
|
Incorporated by reference to Current Report on Form 8-K of Cincinnati Bancorp, Inc., filed on January 24, 2020.
|
ITEM 16.
|
FORM 10-K SUMMARY
|
Not Applicable.