SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2019
OR
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _______________ to _______________
Commission File No. 000-55529
Cincinnati Bancorp
(Exact name of registrant as specified in its charter)
Federal | 47-4931771 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
6581 Harrison Avenue, Cincinnati, Ohio | 45247 | |
(Address of Principal Executive Offices) | (Zip Code) |
(513) 574-3025
(Registrant’s telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
YESx NO¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YESx NO¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ | Accelerated filer¨ | |
Non-accelerated filerx | Smaller reporting companyx | |
Emerging growth companyx |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES¨ NOx
As of November 12, 2019, 1,817,865 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding, of which 1,008,969 shares were owned by CF Mutual Holding Company.
Cincinnati Bancorp
Form 10-Q
Index
Part I. – Financial Information
Item 1. | Financial Statements |
Cincinnati Bancorp
Condensed Consolidated Balance Sheets
September 30, 2019 (Unaudited) and December 31, 2018
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 2,618,034 | $ | 2,620,309 | ||||
Interest-bearing demand deposits in banks | 5,148,907 | 4,107,880 | ||||||
Federal funds sold | 7,239,000 | 4,361,000 | ||||||
Cash and cash equivalents | 15,005,941 | 11,089,189 | ||||||
Interest-bearing time deposits | - | 200,000 | ||||||
Available-for-sale securities | 2,330,569 | 630,361 | ||||||
Loans held for sale | 5,995,619 | 1,282,000 | ||||||
Loans, net of allowance for loan losses of $1,407,545 and $1,405,072, respectively | 183,789,252 | 170,365,031 | ||||||
Premises and equipment, net | 3,376,574 | 3,407,185 | ||||||
Federal Home Loan Bank stock | 2,657,400 | 2,583,100 | ||||||
Foreclosed assets held for sale | - | 102,098 | ||||||
Interest receivable | 644,699 | 569,659 | ||||||
Mortgage servicing rights | 1,306,058 | 1,252,740 | ||||||
Federal Home Loan Bank lender risk account receivable | 1,570,805 | 1,703,276 | ||||||
Bank-owned life insurance | 4,064,617 | 3,997,242 | ||||||
Other assets | 732,731 | 512,180 | ||||||
Total assets | $ | 221,474,265 | $ | 197,694,061 | ||||
Liabilities and Stockholders' Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Demand | $ | 28,874,163 | $ | 29,308,448 | ||||
Savings | 36,356,603 | 32,534,398 | ||||||
Certificates of deposit | 73,043,628 | 80,548,910 | ||||||
Total deposits | 138,274,394 | 142,391,756 | ||||||
Federal Home Loan Bank advances | 55,745,909 | 28,580,438 | ||||||
Advances from borrowers for taxes and insurance | 1,583,844 | 1,799,419 | ||||||
Interest payable | 96,212 | 53,945 | ||||||
Directors deferred compensation | 630,166 | 571,186 | ||||||
Other liabilities | 1,435,770 | 1,155,894 | ||||||
Total liabilities | 197,766,295 | 174,552,638 | ||||||
Commitments and Contingent Liabilities | ||||||||
Temporary Equity | ||||||||
ESOP Shares subject to mandatory redemption | 226,411 | 180,563 | ||||||
Stockholders' Equity | ||||||||
Preferred stock - authorized 1,000,000 shares, $0.01 par value, none issued | - | - | ||||||
Common stock - authorized 9,000,000 shares, $0.01 par value, 1,817,865 and 1,816,329 issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 29,607 | 29,593 | ||||||
Additional paid-in capital | 7,515,291 | 7,458,745 | ||||||
Unearned ESOP shares | (460,546 | ) | (494,245 | ) | ||||
Retained earnings - substantially restricted | 16,677,406 | 16,219,209 | ||||||
Accumulated other comprehensive loss | (280,199 | ) | (252,442 | ) | ||||
Total stockholders' equity | 23,481,559 | 22,960,860 | ||||||
Total liabilities, temporary equity, and stockholders' equity | $ | 221,474,265 | $ | 197,694,061 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Cincinnati Bancorp
Condensed ConsolidatedStatements of Income
Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Interest and Dividend Income | ||||||||||||||||
Loans, including fees | $ | 2,090,641 | $ | 1,678,088 | $ | 6,113,727 | $ | 4,875,357 | ||||||||
Securities | 5,812 | 4,764 | 12,227 | 12,362 | ||||||||||||
Dividends on Federal Home Loan Bank stock and other | 73,123 | 48,738 | 236,381 | 131,505 | ||||||||||||
Total interest and dividend income | 2,169,576 | 1,731,590 | 6,362,335 | 5,019,224 | ||||||||||||
Interest Expense | ||||||||||||||||
Deposits | 488,044 | 343,449 | 1,420,147 | 984,254 | ||||||||||||
Federal Home Loan Bank advances | 274,770 | 193,208 | 673,009 | 481,392 | ||||||||||||
Total interest expense | 762,814 | 536,657 | 2,093,156 | 1,465,646 | ||||||||||||
Net Interest Income | 1,406,762 | 1,194,933 | 4,269,179 | 3,553,578 | ||||||||||||
Provision for Loan Losses | 25,000 | 15,000 | 25,000 | 45,000 | ||||||||||||
Net Interest Income After Provision for Loan Losses | 1,381,762 | 1,179,933 | 4,244,179 | 3,508,578 | ||||||||||||
Noninterest Income | ||||||||||||||||
Gain on sales of loans | 544,208 | 479,925 | 1,260,415 | 1,284,450 | ||||||||||||
Mortgage servicing fees (costs) | (88,342 | ) | 3,073 | 79,583 | 182,747 | |||||||||||
Other | 225,185 | 178,938 | 638,582 | 552,903 | ||||||||||||
Total noninterest income | 681,051 | 661,936 | 1,978,580 | 2,020,100 | ||||||||||||
Noninterest Expense | ||||||||||||||||
Salaries and employee benefits | 1,079,464 | 851,748 | 3,136,506 | 2,497,539 | ||||||||||||
Occupancy and equipment | 146,143 | 114,114 | 435,840 | 354,223 | ||||||||||||
Directors compensation | 43,773 | 42,250 | 148,333 | 126,750 | ||||||||||||
Data processing | 136,330 | 158,181 | 518,469 | 450,535 | ||||||||||||
Professional fees | 86,104 | 68,843 | 231,101 | 219,431 | ||||||||||||
Franchise tax | 54,081 | 38,570 | 154,379 | 116,427 | ||||||||||||
Deposit insurance premiums | 8,985 | 12,860 | 37,391 | 38,245 | ||||||||||||
Advertising | 14,936 | 43,871 | 75,759 | 116,583 | ||||||||||||
Software licenses | 31,885 | 21,677 | 88,842 | 65,234 | ||||||||||||
Loan costs | 117,376 | 97,147 | 277,237 | 314,299 | ||||||||||||
Net gains on sales of foreclosed assets | (35,944 | ) | - | (90,418 | ) | - | ||||||||||
Merger-related expenses | - | 148,836 | 18,000 | 231,029 | ||||||||||||
Other | 216,321 | 148,983 | 673,026 | 433,582 | ||||||||||||
Total noninterest expense | 1,899,454 | 1,747,080 | 5,704,465 | 4,963,877 | ||||||||||||
Income Before Income Taxes | 163,359 | 94,789 | 518,294 | 564,801 | ||||||||||||
Provision for Income Taxes | 17,217 | 68,951 | 60,097 | 174,086 | ||||||||||||
Net Income | $ | 146,142 | $ | 25,838 | $ | 458,197 | $ | 390,715 | ||||||||
Earnings per common share - basic | $ | 0.08 | $ | 0.01 | $ | 0.26 | $ | 0.23 | ||||||||
Earnings per common share - diluted | $ | 0.08 | $ | 0.01 | $ | 0.26 | $ | 0.23 | ||||||||
Weighted-average shares outstanding - basic | 1,749,116 | 1,681,504 | 1,747,915 | 1,678,234 | ||||||||||||
Weighted-average shares outstanding - diluted | 1,777,925 | 1,692,564 | 1,771,966 | 1,681,101 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Cincinnati Bancorp
Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Net Income | $ | 146,142 | $ | 25,838 | $ | 458,197 | $ | 390,715 | ||||||||
Other Comprehensive Income (Loss): | ||||||||||||||||
Net unrealized gains (losses) on available-for-sale securities | (6,688 | ) | (1,390 | ) | (4,654 | ) | 354 | |||||||||
Tax benefit (expense) | 1,404 | 292 | 977 | (74 | ) | |||||||||||
Changes in directors' retirement plan prior service costs | (10,161 | ) | (2,664 | ) | (30,481 | ) | (7,991 | ) | ||||||||
Tax benefit | 2,134 | 559 | 6,401 | 1,678 | ||||||||||||
Other comprehensive loss | (13,311 | ) | (3,203 | ) | (27,757 | ) | (6,033 | ) | ||||||||
Comprehensive Income | $ | 132,831 | $ | 22,635 | $ | 430,440 | $ | 384,682 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Cincinnati Bancorp
Condensed Consolidated Statements of Stockholders’ Equity
Three Months Ended September 30, 2019 and 2018 (Unaudited)
Accumulated | ||||||||||||||||||||||||
Additional | Unearned | Other | Total | |||||||||||||||||||||
Common | Paid-in | ESOP | Retained | Comprehensive | Stockholders' | |||||||||||||||||||
Stock | Capital | Shares | Earnings | Loss | Equity | |||||||||||||||||||
For the Three Ended September 30, 2019: | ||||||||||||||||||||||||
Balance, July 1, 2019 | $ | 29,593 | $ | 7,488,899 | $ | (471,779 | ) | $ | 16,531,264 | $ | (266,888 | ) | $ | 23,311,089 | ||||||||||
Issuance of common stock | 14 | 12,860 | - | - | - | 12,874 | ||||||||||||||||||
ESOP shares subject to mandatory redemption | - | (17,209 | ) | - | - | - | (17,209 | ) | ||||||||||||||||
ESOP shares earned | - | 4,951 | 11,233 | - | - | 16,184 | ||||||||||||||||||
Stock based compensation expense | - | 25,790 | - | - | - | 25,790 | ||||||||||||||||||
Net income | - | - | - | 146,142 | - | 146,142 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (13,311 | ) | (13,311 | ) | ||||||||||||||||
Balance, September 30, 2019 | $ | 29,607 | $ | 7,515,291 | $ | (460,546 | ) | $ | 16,677,406 | $ | (280,199 | ) | $ | 23,481,559 |
Accumulated | ||||||||||||||||||||||||
Additional | Unearned | Other | Total | |||||||||||||||||||||
Common | Paid-in | ESOP | Retained | Comprehensive | Stockholders' | |||||||||||||||||||
Stock | Capital | Shares | Earnings | Loss | Equity | |||||||||||||||||||
For the Three Ended September 30, 2018: | ||||||||||||||||||||||||
Balance, July 1, 2018 | $ | 17,192 | $ | 6,204,005 | $ | (516,710 | ) | $ | 14,282,765 | $ | (246,740 | ) | $ | 19,740,512 | ||||||||||
ESOP shares subject to mandatory redemption | - | (11,230 | ) | - | - | - | (11,230 | ) | ||||||||||||||||
ESOP shares earned | - | 3,646 | 11,233 | - | - | 14,879 | ||||||||||||||||||
Stock based compensation expense | - | 25,793 | - | - | - | 25,793 | ||||||||||||||||||
Net income | - | - | - | 25,838 | - | 25,838 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (3,202 | ) | (3,202 | ) | ||||||||||||||||
Balance, September 30, 2018 | $ | 17,192 | $ | 6,222,214 | $ | (505,477 | ) | $ | 14,308,603 | $ | (249,942 | ) | $ | 19,792,590 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Cincinnati Bancorp
Condensed Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2019 and 2018 (Unaudited)
Accumulated | ||||||||||||||||||||||||
Additional | Unearned | Other | Total | |||||||||||||||||||||
Common | Paid-in | ESOP | Retained | Comprehensive | Stockholders' | |||||||||||||||||||
Stock | Capital | Shares | Earnings | Loss | Equity | |||||||||||||||||||
For the Nine Months Ended September 30, 2019: | ||||||||||||||||||||||||
Balance, January 1, 2019 | $ | 29,593 | $ | 7,458,745 | $ | (494,245 | ) | $ | 16,219,209 | $ | (252,442 | ) | $ | 22,960,860 | ||||||||||
Issuance of common stock | 14 | 12,860 | - | - | - | 12,874 | ||||||||||||||||||
ESOP shares subject to mandatory redemption | - | (45,848 | ) | - | - | - | (45,848 | ) | ||||||||||||||||
ESOP shares earned | - | 12,162 | 33,699 | - | - | 45,861 | ||||||||||||||||||
Stock based compensation expense | - | 77,372 | - | - | - | 77,372 | ||||||||||||||||||
Net income | - | - | - | 458,197 | - | 458,197 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (27,757 | ) | (27,757 | ) | ||||||||||||||||
Balance, September 30, 2019 | $ | 29,607 | $ | 7,515,291 | $ | (460,546 | ) | $ | 16,677,406 | $ | (280,199 | ) | $ | 23,481,559 |
Unearned | Accumulated | |||||||||||||||||||||||
Additional | ESOP | Other | Total | |||||||||||||||||||||
Common | Paid-in | ESOP | Retained | Comprehensive | Stockholders' | |||||||||||||||||||
Stock | Capital | Shares | Earnings | Loss | Equity | |||||||||||||||||||
For the Nine Months Ended September 30, 2018: | ||||||||||||||||||||||||
Balance, January 1, 2018 | $ | 17,192 | $ | 6,172,924 | $ | (539,176 | ) | $ | 13,877,828 | $ | (203,985 | ) | $ | 19,324,783 | ||||||||||
Cumulative effect of adoption of ASU 2018-02 | - | - | - | 40,060 | (40,060 | ) | - | |||||||||||||||||
ESOP shares subject to mandatory redemption | - | (33,699 | ) | - | - | - | (33,699 | ) | ||||||||||||||||
ESOP shares earned | - | �� | 5,617 | 33,699 | - | - | 39,316 | |||||||||||||||||
Stock based compensation expense | - | 77,372 | - | - | - | 77,372 | ||||||||||||||||||
Net income | - | - | - | 390,715 | - | 390,715 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (5,897 | ) | (5,897 | ) | ||||||||||||||||
Balance, September 30, 2018 | $ | 17,192 | $ | 6,222,214 | $ | (505,477 | ) | $ | 14,308,603 | $ | (249,942 | ) | $ | 19,792,590 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Cincinnati Bancorp
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2019 and 2018 (Unaudited)
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
Operating Activities | ||||||||
Net income | $ | 458,197 | $ | 390,715 | ||||
Items not requiring (providing) cash: | ||||||||
Depreciation and amortization | 144,132 | 101,322 | ||||||
Provision for loan losses | 25,000 | 45,000 | ||||||
Amortization of premiums and discounts on securities, net | 9,445 | 7,128 | ||||||
Amortization of deferred prepayment penalty on Federal Home Loan Bank advances | 3,471 | 3,471 | ||||||
Change in deferred income taxes | 44,791 | 726 | ||||||
Gain on sale of loans | (1,260,415 | ) | (1,284,450 | ) | ||||
Proceeds from the sale of loans held for sale | 58,545,090 | 43,362,891 | ||||||
Origination of loans held for sale | (61,998,294 | ) | (42,520,706 | ) | ||||
Earnings on cash surrender value of bank-owned life insurance | (67,375 | ) | (55,659 | ) | ||||
Stock-based compensation expense | 77,372 | 77,372 | ||||||
ESOP shares earned | 45,861 | 39,316 | ||||||
Gain on sale of foreclosed assets | (90,418 | ) | - | |||||
Changes in: | ||||||||
Interest receivable | (75,040 | ) | (56,323 | ) | ||||
Mortgage servicing rights | (53,318 | ) | (194,256 | ) | ||||
Federal Home Loan Bank lender risk account receivable | 132,471 | 101,833 | ||||||
Other assets | (220,551 | ) | (23,058 | ) | ||||
Interest payable | 42,267 | 24,193 | ||||||
Other liabilities | 270,962 | (15,725 | ) | |||||
Net cash (used in) provided by operating activities | (3,966,352 | ) | 3,790 | |||||
Investing Activities | ||||||||
Proceeds from maturities of available-for-sale securities | 251,504 | 193,914 | ||||||
Purchase of available for sale securities | (1,965,811 | ) | - | |||||
Purchase of Federal Home Loan Bank stock | (74,300 | ) | (18,700 | ) | ||||
Net change in loans | (13,497,348 | ) | (6,331,961 | ) | ||||
Proceeds from the sale of interest-bearing time deposits | - | - | ||||||
Proceeds from the maturities of interest-bearing time deposits | 200,000 | - | ||||||
Purchase of premises and equipment | (113,521 | ) | (11,986 | ) | ||||
Proceeds from sale of foreclosed assets | 240,643 | - | ||||||
Net cash used in investing activities | (14,958,833 | ) | (6,168,733 | ) | ||||
Financing Activities | ||||||||
Net (decrease) increase in deposits | (4,117,362 | ) | 1,946,731 | |||||
Proceeds from stock issuance | 14 | - | ||||||
Proceeds from Federal Home Loan Bank advances | 106,486,000 | 109,248,924 | ||||||
Repayment of Federal Home Loan Bank advances | (79,324,000 | ) | (105,238,924 | ) | ||||
Proceeds from stock options exercised | 12,860 | - | ||||||
Net decrease in advances from borrowers for taxes and insurance | (215,575 | ) | (276,216 | ) | ||||
Net cash provided by financing activities | 22,841,937 | 5,680,515 | ||||||
Increase (Decrease) in Cash and Cash Equivalents | 3,916,752 | (484,428 | ) | |||||
Cash and Cash Equivalents, Beginning of Period | 11,089,189 | 10,266,824 | ||||||
Cash and Cash Equivalents, End of Period | $ | 15,005,941 | $ | 9,782,396 | ||||
Supplemental Cash Flows Information | ||||||||
Interest paid | $ | 2,050,889 | $ | 1,441,453 | ||||
Income taxes paid | - | 222,229 | ||||||
Real estate acquired in settlement of loans | 48,127 | - |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1: | Nature of Operations and Summary of Significant Account Policies |
Nature of Operations
Cincinnati Bancorp (“Company”) is the mid-tier holding company for Cincinnati Federal (the “Bank”), a federally chartered stock savings and loan association that is primarily engaged in providing a full range of banking and financial services to individual and corporate customers. Our business operations are conducted in the larger Greater Cincinnati/Northern Kentucky metropolitan area which includes 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 reorganized into the mutual holding company structure. As part of the reorganization, the Company sold 773,663 shares of common stock at a price of $10.00 per share in a public offering and issued 945,587 shares of common stock to CF Mutual Holding Company (the “MHC”), the Company’s parent mutual holding company. The Company is subject to competition from other financial institutions. The Company is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
Pursuant to a Plan of Conversion and Reorganization (the “Plan of Conversion”) adopted by the MHC’s Board of Directors on July 17, 2019, the MHC intends to convert from a mutual holding company to a stock holding company whereby a newly chartered Maryland corporation, Cincinnati Bancorp, Inc., will succeed to the Company and become the stock holding company of the Bank. In accordance with the Plan of Conversion, the shares of common stock of the Company owned by persons other than the MHC (the shares owned by CF MHC will be canceled) will be converted into shares of common stock of Cincinnati Bancorp, Inc. based on an exchange ratio and Cincinnati Bancorp, Inc. will offer for sale shares of common stock, representing the MHC’s ownership interest in the Company, in a subscription offering and, if necessary, in a community offering and a syndicated community offering. Consummation of the conversion is subject to final regulatory approval as well as approval by the MHC’s members (i.e., depositors and certain borrowers of the Bank) and by the Company’s stockholders (including approval by the holders of a majority of the outstanding shares of common stock of the Company owned by persons other than the MHC). For additional information, refer to Cincinnati Bancorp, Inc.’s Registration Statement on Form S-1, as amended (SEC File No. 333-233708), filed with the Securities and Exchange Commission.
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 ASC606. 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 arenot included within the scope of ASC606. For the revenue streams in the scope of ASC606, service charges on deposits and electronic banking fees, there areno significant judgments related to the amount and timing of revenue recognition. All of the Company’s revenue from contracts with customers is recognized within noninterest income.
Service charges on deposit accounts:The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and other fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance. Service charges are recorded in other noninterest income.
Interchange income:The Company earns interchange income from cardholder transactions conducted through the various payment networks. Interchange income from cardholder transactions 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 as of September 30, 2019 and December 31, 2018 and for the three months and nine months ended September 30, 2019 and 2018 include the accounts of Cincinnati Bancorp and the Bank. All significant intercompany items have been eliminated.
7
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
Interim Financial Statements
The interim unaudited condensed financial statements as of September 30, 2019, and for the three months and nine months ended September 30, 2019 and 2018 are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. These unaudited condensed consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted. The results of operations for the three months and nine months ended September 30, 2019, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2019, or any other period.
The accompanying condensed consolidated financial statements as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018 should be read in conjunction with the audited financial statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018 and 2017 contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, loan servicing rights, lender reserve account and fair values of financial instruments.
8
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 2: | Merger |
On April 18, 2018, Cincinnati Federal and Kentucky Federal Savings and Loan Association (“Kentucky Federal”) signed an Agreement and Plan of Merger, pursuant to which Kentucky Federal merged with and into Cincinnati Federal effective October 12, 2018.
On the effective date of the merger, the Company issued from its authorized but unissued shares of common stock, 63,382 shares of common stock to CF Mutual Holding Company. The number of shares issued was in consideration of Kentucky Federal’s appraised value. At closing, Kentucky Federal Director, Philip Wehrman, was added to the Boards of Directors of CF Mutual Holding Company, Cincinnati Bancorp and Cincinnati Federal.
The merger with Kentucky Federal was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the merger date. The following table summarizes the fair value recorded as of October 12, 2018:
Amount | Fair Value | Fair Value | ||||||||||
Recorded | Adjustments | Recorded | ||||||||||
Consideration Paid: | ||||||||||||
Fair value of total consideration transferred (common shares issued) | $ | 1,240,001 | $ | - | $ | 1,240,001 | ||||||
Identifiable Assets Acquired: | ||||||||||||
Cash and cash equivalents | 2,224,645 | - | 2,224,645 | |||||||||
Interest-bearing time deposits | 3,580,000 | - | 3,580,000 | |||||||||
Investment securities | 5,280,000 | (280,107 | ) | 4,999,893 | ||||||||
Federal Home Loan Bank Stock | 1,543,300 | - | 1,543,300 | |||||||||
Net loans receivable | 16,159,521 | 164,074 | 16,323,595 | |||||||||
Premises & Equipment, net | 194,202 | 772,700 | 966,902 | |||||||||
Core deposit and other intangibles | - | 221,193 | 221,193 | |||||||||
Other real estate owned | 132,590 | (33,000 | ) | 99,590 | ||||||||
Other assets | 895,044 | (35,718 | ) | 859,326 | ||||||||
Total identifiable assets acquired | 30,009,302 | 809,142 | 30,818,444 | |||||||||
Liabilities Assumed: | ||||||||||||
Deposits | 26,475,279 | 3,739 | 26,479,018 | |||||||||
Federal Home Loan Bank advances | 343,242 | - | 343,242 | |||||||||
Deferred taxes | 41,947 | 176,636 | 218,583 | |||||||||
Other Liabilities | 345,260 | - | 345,260 | |||||||||
Total liabilities assumed | 27,205,728 | 180,375 | 27,386,103 | |||||||||
Total identified net assets acquired | 2,803,574 | 628,767 | 3,432,341 | |||||||||
Gain on merger | $ | 1,563,573 | $ | 628,767 | $ | 2,192,340 |
As permitted by ASC No. 805-10-25, Business Combinations, the above estimates may be adjusted up to one year after closing date of the acquisition to reflect any new information obtained about facts and circumstances existing at the acquisition date. Any changes in the estimated fair values will be recognized in the period the adjustment is identified.
The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of October 12, 2018 based on management’s best estimate using the information available at acquisition date. The application of purchase accounting resulted in a bargain purchase gain of approximately $2.2 million. The primary reason for the bargain purchase gain is the mutual ownership structure of Kentucky Federal. The number of institutions that could merge with Kentucky Federal was limited and the mutual holding company structure of Cincinnati Bancorp allowed the merger to occur.
9
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
The fair values of loans acquired from Kentucky Federal were estimated using cash flow projections based on remaining maturity and repricing terms. Cash flows were adjusted by estimated future credit losses and the rate of prepayments. Projected monthly cash flows were discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of Kentucky Federal’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value on October 12, 2018. The Company acquired various loans in the acquisition for which none had evidence of deterioration of credit quality since origination. The fair value of assets includes loans with a fair value of $16,323,595. The gross principal and contractual interest due under the contracts is $16,419,786, of which $251,369 is expected to be uncollectible.
The core deposit intangible asset recognized of $221,193 is being amortized over its estimated life of approximately 10 years using the straight-line method and is included in other assets in the condensed consolidated balance sheets.
Direct acquisition and integration costs were expensed as incurred and totaled approximately $18,000 for the nine months ended September 30, 2019 and $231,000 for the nine months ended September 30, 2018. These items were recorded as merger-related expenses on the consolidated statements of income.
NOTE 3: | Securities |
Available-for-sale securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
For debt securities with fair value below amortized cost when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available-for-Sale Securities: | ||||||||||||||||
September 30, 2019 (unaudited): | ||||||||||||||||
Mortgage-backed securities of government sponsored entities | $ | 2,334,309 | $ | 3,840 | $ | (7,580 | ) | $ | 2,330,569 | |||||||
December 31, 2018: | ||||||||||||||||
Mortgage-backed securities of government sponsored entities | $ | 629,447 | $ | 3,806 | $ | (2,892 | ) | $ | 630,361 |
10
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company had no sales of investment securities during the three month and nine month periods ended September 30, 2019 and 2018. The Company had not pledged any of its investment securities as of September 30, 2019 or December 31, 2018.
The amortized cost and fair value of available-for-sale securities at September 30, 2019 and December 31, 2018, by contractual maturity, if applicable, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties, as is the case with mortgage-backed securities included in the following table:
September 30, 2019 | December 31, 2018 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Mortgage-backed securities of government sponsored entities | $ | 2,334,309 | $ | 2,330,569 | $ | 629,447 | $ | 630,361 |
Certain investments in debt securities have fair values at an amount less than their historical cost. The total fair value of these investments at September 30, 2019 and December 31, 2018 was $2,216,919 and $512,303, respectively, which was approximately 95% and 81%, respectively, of the Company’s investment portfolio at those respective dates.
The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that the individual securities have been in continuous unrealized loss position at September 30, 2019 and December 31, 2018:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
September 30, 2019: | ||||||||||||||||||||||||
Mortgage-backed securities of government sponsored entities | $ | 2,085,315 | $ | (7,016 | ) | $ | 131,604 | $ | (564 | ) | $ | 2,216,919 | $ | (7,580 | ) | |||||||||
December 31, 2018: | ||||||||||||||||||||||||
Mortgage-backed securities of government sponsored entities | $ | - | $ | - | $ | 512,303 | $ | (2,892 | ) | $ | 512,303 | $ | (2,892 | ) |
11
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 4: | Loans and Allowance for Loan Losses |
Categories of loans at September 30, 2019 and December 31, 2018 include:
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
One to four family mortgage loans - owner occupied | $ | 96,307,905 | $ | 93,659,520 | ||||
One to four family - investment | 13,812,809 | 14,242,563 | ||||||
Multi-family mortgage loans | 36,594,493 | 27,140,014 | ||||||
Nonresidential mortgage loans | 20,359,489 | 18,930,426 | ||||||
Construction and land loans | 6,835,406 | 7,293,737 | ||||||
Real estate secured lines of credit | 11,054,265 | 11,373,975 | ||||||
Commercial loans | 363,737 | 415,730 | ||||||
Other consumer loans | 937,256 | 796,051 | ||||||
Total loans | 186,265,360 | 173,852,016 | ||||||
Less: | ||||||||
Net deferred loan costs | (514,803 | ) | (491,331 | ) | ||||
Undisbursed portion of loans | 1,583,366 | 2,573,244 | ||||||
Allowance for loan losses | 1,407,545 | 1,405,072 | ||||||
Net loans | $ | 183,789,252 | $ | 170,365,031 |
12
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three and nine months ended September 30, 2019 and 2018 and the year ended December 31, 2018:
At or for Nine Months Ended September 30, 2019 (Unaudited) | ||||||||||||||||||||||||||||||||||||
One- to Four- Family Mortgage Loans Owner Occupied | One- to Four- Family Mortgage Loans Investment | Multi-Family Mortgage Loans | Nonresidential Mortgage Loans | Construction & Land Loans | Real Estate Secured Lines of Credit | Commercial Loans | Other Consumer Loans | Total | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 456,630 | $ | 123,017 | $ | 224,384 | $ | 182,338 | $ | 100,187 | $ | 296,873 | $ | 9,001 | $ | 12,642 | $ | 1,405,072 | ||||||||||||||||||
Provision (credit) charged to expense | (81,169 | ) | (27,962 | ) | 138,667 | 6,201 | (10,142 | ) | (1,320 | ) | (1,443 | ) | 2,168 | 25,000 | ||||||||||||||||||||||
Losses charged off | (14,431 | ) | (8,012 | ) | - | - | - | - | - | (84 | ) | (22,527 | ) | |||||||||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance, end of period | $ | 361,030 | $ | 87,043 | $ | 363,051 | $ | 188,539 | $ | 90,045 | $ | 295,553 | $ | 7,558 | $ | 14,726 | $ | 1,407,545 | ||||||||||||||||||
Ending balance: Individually evaluated for impairment | $ | 1,798 | $ | 35,802 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 37,600 | ||||||||||||||||||
Ending balance: Collectively evaluated for impairment | $ | 359,232 | $ | 51,241 | $ | 363,051 | $ | 188,539 | $ | 90,045 | $ | 295,553 | $ | 7,558 | $ | 14,726 | $ | 1,369,945 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||
Ending balance | $ | 96,307,905 | $ | 13,812,809 | $ | 36,594,493 | $ | 20,359,489 | $ | 6,835,406 | $ | 11,054,265 | $ | 363,737 | $ | 937,256 | $ | 186,265,360 | ||||||||||||||||||
Ending balance: Individually evaluated for impairment | $ | 1,081,053 | $ | 740,198 | $ | 508,621 | $ | 75,852 | $ | - | $ | 83,926 | $ | - | $ | - | $ | 2,489,650 | ||||||||||||||||||
Ending balance: Collectively evaluated for impairment | $ | 95,226,852 | $ | 13,072,611 | $ | 36,085,872 | $ | 20,283,637 | $ | 6,835,406 | $ | 10,970,339 | $ | 363,737 | $ | 937,256 | $ | 183,775,710 |
For the Three Months Ended September 30, 2019 (Unaudited) | ||||||||||||||||||||||||||||||||||||
One- to Four- Family Mortgage Loans Owner Occupied | One- to Four- Family Mortgage Loans Investment | Multi-Family Mortgage Loans | Nonresidential Mortgage Loans | Construction & Land Loans | Real Estate Secured Lines of Credit | Commercial Loans | Other Consumer Loans | Total | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 456,630 | $ | 123,017 | $ | 224,384 | $ | 182,338 | $ | 100,187 | $ | 296,873 | $ | 9,001 | $ | 12,558 | $ | 1,404,988 | ||||||||||||||||||
Provision (credit) charged to expense | (81,169 | ) | (27,962 | ) | 138,667 | 6,201 | (10,142 | ) | (1,320 | ) | (1,443 | ) | 2,168 | 25,000 | ||||||||||||||||||||||
Losses charged off | (14,431 | ) | (8,012 | ) | - | - | - | - | - | - | (22,443 | ) | ||||||||||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance, end of period | $ | 361,030 | $ | 87,043 | $ | 363,051 | $ | 188,539 | $ | 90,045 | $ | 295,553 | $ | 7,558 | $ | 14,726 | $ | 1,407,545 |
13
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Nine Months Ended September 30, 2018 (Unaudited) | ||||||||||||||||||||||||||||||||||||
One- to Four- Family Mortgage Loans Owner Occupied | One- to Four- Family Mortgage Loans Investment | Multi-Family Mortgage Loans | Nonresidential Mortgage Loans | Construction & Land Loans | Real Estate Secured Lines of Credit | Commercial Loans | Other Consumer Loans | Total | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 338,697 | $ | 171,674 | $ | 240,896 | $ | 196,811 | $ | 82,669 | $ | 312,638 | $ | 6,934 | $ | 9,753 | $ | 1,360,072 | ||||||||||||||||||
Provision (credit) charged to expense | 68,900 | (34,786 | ) | 5,139 | 6,874 | (1,388 | ) | (1,632 | ) | 1,918 | (25 | ) | 45,000 | |||||||||||||||||||||||
Losses charged off | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance, end of period | $ | 407,597 | $ | 136,888 | $ | 246,035 | $ | 203,685 | $ | 81,281 | $ | 311,006 | $ | 8,852 | $ | 9,728 | $ | 1,405,072 |
For the Three Months Ended September 30, 2018 (Unaudited) | ||||||||||||||||||||||||||||||||||||
One- to Four- Family Mortgage Loans Owner Occupied | One- to Four- Family Mortgage Loans Investment | Multi-Family Mortgage Loans | Nonresidential Mortgage Loans | Construction & Land Loans | Real Estate Secured Lines of Credit | Commercial Loans | Other Consumer Loans | Total | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 423,442 | $ | 102,086 | $ | 252,836 | $ | 208,247 | $ | 75,211 | $ | 312,283 | $ | 6,210 | $ | 9,757 | $ | 1,390,072 | ||||||||||||||||||
Provision (credit) charged to expense | (15,845 | ) | 34,802 | (6,801 | ) | (4,562 | ) | 6,070 | (1,277 | ) | 2,642 | (29 | ) | 15,000 | ||||||||||||||||||||||
Losses charged off | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance, end of period | $ | 407,597 | $ | 136,888 | $ | 246,035 | $ | 203,685 | $ | 81,281 | $ | 311,006 | $ | 8,852 | $ | 9,728 | $ | 1,405,072 |
14
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
At or For the Year Ended December 31, 2018 | ||||||||||||||||||||||||||||||||||||
One- to Four- Family Mortgage Loans Owner Occupied | One- to Four- Family Mortgage Loans Investment | Multi-Family Mortgage Loans | Nonresidential Mortgage Loans | Construction & Land Loans | Real Estate Secured Lines of Credit | Commercial Loans | Other Consumer Loans | Total | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
Balance, beginning of year | $ | 338,697 | $ | 171,674 | $ | 240,896 | $ | 196,811 | $ | 82,669 | $ | 312,638 | $ | 6,934 | $ | 9,753 | $ | 1,360,072 | ||||||||||||||||||
Provision (credit) charged to expense | 117,933 | (48,657 | ) | (16,512 | ) | (14,473 | ) | 17,518 | (15,765 | ) | 2,067 | 2,889 | 45,000 | |||||||||||||||||||||||
Losses charged off | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance, end of year | $ | 456,630 | $ | 123,017 | $ | 224,384 | $ | 182,338 | $ | 100,187 | $ | 296,873 | $ | 9,001 | $ | 12,642 | $ | 1,405,072 | ||||||||||||||||||
Ending balance: Individually evaluated for impairment | $ | - | $ | 33,683 | $ | 9,055 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 42,738 | ||||||||||||||||||
Ending balance: Collectively evaluated for impairment | $ | 456,630 | $ | 89,334 | $ | 215,329 | $ | 182,338 | $ | 100,187 | $ | 296,873 | $ | 9,001 | $ | 12,642 | $ | 1,362,334 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||
Ending balance | $ | 93,659,520 | $ | 14,242,563 | $ | 27,140,014 | $ | 18,930,426 | $ | 7,293,737 | $ | 11,373,975 | $ | 415,730 | $ | 796,051 | $ | 173,852,016 | ||||||||||||||||||
Ending balance: Individually evaluated for impairment | $ | 966,592 | $ | 699,630 | $ | 621,757 | $ | 151,096 | $ | - | $ | 48,467 | $ | - | $ | - | $ | 2,487,542 | ||||||||||||||||||
Ending balance: Collectively evaluated for impairment | $ | 92,692,928 | $ | 13,542,933 | $ | 26,518,257 | $ | 18,779,330 | $ | 7,293,737 | $ | 11,325,508 | $ | 415,730 | $ | 796,051 | $ | 171,364,474 |
15
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company has adopted a standard grading system for all loans.
Definitions are as follows:
Prime (1)loans are of superior quality with excellent credit strength and repayment ability proving a nominal credit risk.
Good (2)loans are of above average credit strength and repayment ability proving only a minimal credit risk.
Satisfactory (3)loans are of reasonable credit strength and repayment ability proving an average credit risk due to one or more underlying weaknesses.
Acceptable (4)loans are of the lowest acceptable credit strength and weakened repayment ability providing a cautionary credit risk due to one or more underlying weaknesses. New borrowers are typically not underwritten within this classification.
Special Mention (5)loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.
Substandard (6)loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful (7)loans have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.
Loss (8)loans are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off even though partial recovery may be realized in the future.
16
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of September 30, 2019 and December 31, 2018:
September 30, 2019 (Unaudited) | ||||||||||||||||||||||||||||||||||||
One- to Four- Family Mortgage Loans - Owner Occupied | One- to Four- Family Mortgage Loans - Investment | Multi-Family Mortgage Loans | Nonresidential Mortgage Loans | Construction & Land Loans | Real Estate Secured Lines of Credit | Commercial Loans | Other Consumer Loans | Total | ||||||||||||||||||||||||||||
Pass | $ | 95,666,547 | $ | 13,019,538 | $ | 36,085,872 | $ | 19,770,269 | $ | 6,835,406 | $ | 10,872,276 | $ | 363,737 | $ | 937,256 | $ | 183,550,901 | ||||||||||||||||||
Special mention | - | 609,916 | 136,170 | 589,220 | - | 21,500 | - | - | 1,356,806 | |||||||||||||||||||||||||||
Substandard | 641,358 | 183,355 | 372,451 | - | - | 160,489 | - | - | 1,357,653 | |||||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Total | $ | 96,307,905 | $ | 13,812,809 | $ | 36,594,493 | $ | 20,359,489 | $ | 6,835,406 | $ | 11,054,265 | $ | 363,737 | $ | 937,256 | $ | 186,265,360 |
December 31, 2018 | ||||||||||||||||||||||||||||||||||||
One- to Four- Family Mortgage Loans - Owner Occupied | One- to Four- Family Mortgage Loans - Investment | Multi-Family Mortgage Loans | Nonresidential Mortgage Loans | Construction & Land Loans | Real Estate Secured Lines of Credit | Commercial Loans | Other Consumer Loans | Total | ||||||||||||||||||||||||||||
Pass | $ | 92,776,661 | $ | 13,010,425 | $ | 26,509,203 | $ | 18,234,663 | $ | 7,293,737 | $ | 11,225,481 | $ | 415,730 | $ | 795,523 | $ | 170,261,423 | ||||||||||||||||||
Special mention | - | 1,101,684 | 138,723 | 627,934 | - | 26,000 | - | - | 1,894,341 | |||||||||||||||||||||||||||
Substandard | 882,859 | 130,454 | 492,088 | 67,829 | - | 122,494 | - | 528 | 1,696,252 | |||||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Total | $ | 93,659,520 | $ | 14,242,563 | $ | 27,140,014 | $ | 18,930,426 | $ | 7,293,737 | $ | 11,373,975 | $ | 415,730 | $ | 796,051 | $ | 173,852,016 |
Pass portfolio within the tables above consists of loans graded Prime (1) through Acceptable (4).
The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the three or nine months ended September 30, 2019.
17
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables present the loan portfolio aging analysis of the recorded investment in loans as of September 30, 2019 and December 31, 2018:
September 30, 2019 (Unaudited) | ||||||||||||||||||||||||||||
30-59 Past Due | 60-89 Days Past Due | 90 Days and Greater Past Due | Total Past Due | Current | Total Loans Receivable | Total Loans > 90 Days Past Due & Accruing | ||||||||||||||||||||||
One to four-family mortgage loans | $ | 220,003 | $ | - | $ | 51,568 | $ | 271,571 | $ | 96,036,334 | $ | 96,307,905 | $ | - | ||||||||||||||
One to four family - investment | - | - | - | - | 13,812,809 | 13,812,809 | - | |||||||||||||||||||||
Multi-family mortgage loans | - | - | - | - | 36,594,493 | 36,594,493 | - | |||||||||||||||||||||
Nonresidential mortgage loans | - | - | - | - | 20,359,489 | 20,359,489 | - | |||||||||||||||||||||
Construction & land loans | - | - | - | - | 6,835,406 | 6,835,406 | - | |||||||||||||||||||||
Real estate secured lines of credit | - | - | - | - | 11,054,265 | 11,054,265 | - | |||||||||||||||||||||
Commercial loans | - | - | - | - | 363,737 | 363,737 | - | |||||||||||||||||||||
Other consumer loans | - | - | - | - | 937,256 | 937,256 | - | |||||||||||||||||||||
Total | $ | 220,003 | $ | - | $ | 51,568 | $ | 271,571 | $ | 185,993,789 | $ | 186,265,360 | $ | - |
December 31, 2018 | ||||||||||||||||||||||||||||
30-59 Past Due | 60-89 Days Past Due | 90 Days and Greater Past Due | Total Past Due | Current | Total Loans Receivable | Total Loans > 90 Days Past Due & Accruing | ||||||||||||||||||||||
One to four-family mortgage loans | $ | 158,932 | $ | 86,900 | $ | 676,024 | $ | 921,856 | $ | 92,737,664 | $ | 93,659,520 | $ | - | ||||||||||||||
One to four family - investment | - | - | - | - | 14,242,563 | 14,242,563 | - | |||||||||||||||||||||
Multi-family mortgage loans | - | - | - | - | 27,140,014 | 27,140,014 | - | |||||||||||||||||||||
Nonresidential mortgage loans | - | - | 67,829 | 67,829 | 18,862,597 | 18,930,426 | - | |||||||||||||||||||||
Construction & land loans | - | - | - | - | 7,293,737 | 7,293,737 | - | |||||||||||||||||||||
Real estate secured lines of credit | 9,634 | - | - | 9,634 | 11,364,341 | 11,373,975 | - | |||||||||||||||||||||
Commercial loans | - | - | - | - | 415,730 | 415,730 | - | |||||||||||||||||||||
Other consumer loans | - | - | 528 | 528 | 795,523 | 796,051 | - | |||||||||||||||||||||
Total | $ | 168,566 | $ | 86,900 | $ | 744,381 | $ | 999,847 | $ | 172,852,169 | $ | 173,852,016 | $ | - |
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310,Receivables), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans and also include loans modified in troubled debt restructurings (“TDRs”).
18
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables present impaired loans at September 30, 2019, September 30, 2018 and December 31, 2018:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||
At September 30, 2019 (Unaudited) | September 30, 2019 | September 30, 2019 | ||||||||||||||||||||||||||
Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans | Interest Income Recognized | Average Investment in Impaired Loans | Interest Income Recognized | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
Loans without a specific valuation allowance | ||||||||||||||||||||||||||||
One- to four-family mortgage loans | $ | 1,014,485 | $ | 1,014,485 | $ | - | $ | 1,017,137 | 11,815 | $ | 1,037,293 | $ | 38,717 | |||||||||||||||
One to four family - investment | 378,530 | 378,530 | - | 381,591 | 5,949 | 385,557 | 16,101 | |||||||||||||||||||||
Multi-family mortgage loans | 508,621 | 508,621 | - | 509,764 | 12,797 | 511,849 | 29,566 | |||||||||||||||||||||
Nonresidential mortgage loans | 75,852 | 75,852 | - | 77,662 | 1,182 | 79,530 | 2,415 | |||||||||||||||||||||
Construction & land loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Real estate secured lines of credit | 83,926 | 83,926 | - | 85,497 | 1,380 | 87,490 | 3,943 | |||||||||||||||||||||
Commercial Loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Other consumer loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Loans with a specific valuation allowance | - | |||||||||||||||||||||||||||
One- to four-family mortgage loans | 66,568 | 68,366 | 1,798 | 68,366 | - | 68,366 | - | |||||||||||||||||||||
One to four family - investment | 361,668 | 397,470 | 35,802 | 399,117 | 4,807 | 403,613 | 15,593 | |||||||||||||||||||||
Multi-family mortgage loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Nonresidential mortgage loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Construction & land loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Real estate secured lines of credit | - | - | - | - | - | - | - | |||||||||||||||||||||
Commercial Loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Other consumer loans | - | - | - | - | - | - | - | |||||||||||||||||||||
$ | 2,489,650 | $ | 2,527,250 | $ | 37,600 | $ | 2,539,134 | $ | 37,930 | $ | 2,573,698 | $ | 106,335 |
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||
At September 30, 2018 | September 30, 2018 | September 30, 2018 | ||||||||||||||||||||||||||
Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans | Interest Income Recognized | Average Investment in Impaired Loans | Interest Income Recognized | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
Loans without a specific valuation allowance | ||||||||||||||||||||||||||||
One- to four-family mortgage loans | $ | 1,009,709 | $ | 1,009,709 | $ | - | $ | 1,012,936 | 10,539 | $ | 1,017,445 | $ | 26,434 | |||||||||||||||
One to four family - investment | 319,210 | 319,211 | - | 320,767 | 4,296 | 324,377 | 12,333 | |||||||||||||||||||||
Multi-family mortgage loans | 517,814 | 517,814 | - | 518,490 | 7,216 | 520,339 | 24,455 | |||||||||||||||||||||
Nonresidential mortgage loans | 154,674 | 154,674 | - | 166,650 | 1,218 | 170,216 | 4,660 | |||||||||||||||||||||
Construction & land loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Real estate secured lines of credit | 49,729 | 49,729 | - | 50,470 | 838 | 51,331 | 2,255 | |||||||||||||||||||||
Commercial Loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Other consumer loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Loans with a specific valuation allowance | - | |||||||||||||||||||||||||||
One- to four-family mortgage loans | - | - | - | - | - | - | - | |||||||||||||||||||||
One to four family - investment | 434,395 | 472,509 | 38,113 | 474,478 | 4,531 | 479,303 | 16,286 | |||||||||||||||||||||
Multi-family mortgage loans | 108,503 | 117,100 | 9,055 | 117,285 | 1,277 | 117,928 | 4,730 | |||||||||||||||||||||
Nonresidential mortgage loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Construction & land loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Real estate secured lines of credit | - | - | - | - | - | - | - | |||||||||||||||||||||
Commercial Loans | - | - | - | - | - | - | - | |||||||||||||||||||||
Other consumer loans | - | - | - | - | - | - | - | |||||||||||||||||||||
$ | 2,594,034 | $ | 2,640,746 | $ | 47,168 | $ | 2,661,076 | $ | 29,915 | $ | 2,680,939 | $ | 91,153 |
19
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2018 | ||||||||||||||||||||
Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans | Interest Income Recognized | ||||||||||||||||
Loans without a specific valuation allowance | ||||||||||||||||||||
One- to four-family mortgage loans | $ | 966,592 | $ | 966,592 | $ | - | $ | 975,511 | $ | 33,914 | ||||||||||
One to four family - investment | 315,393 | 315,393 | - | 322,564 | 39,833 | |||||||||||||||
Multi-family mortgage loans | 514,993 | 514,993 | - | 519,339 | 47,559 | |||||||||||||||
Nonresidential mortgage loans | 151,096 | 151,096 | - | 165,871 | 5,996 | |||||||||||||||
Construction & land loans | - | - | - | - | - | |||||||||||||||
Real estate secured lines of credit | 48,467 | 48,467 | - | 50,820 | 3,114 | |||||||||||||||
Commercial loans | - | - | - | - | - | |||||||||||||||
Other consumer loans | - | - | - | - | - | |||||||||||||||
Loans with a specific valuation allowance | ||||||||||||||||||||
One- to four-family mortgage loans | - | - | - | - | - | |||||||||||||||
One to four family - investment | 384,237 | 417,920 | 33,683 | 427,874 | 22,775 | |||||||||||||||
Multi-family mortgage loans | 106,764 | 115,819 | 9,055 | 117,578 | 8,499 | |||||||||||||||
Nonresidential mortgage loans | - | - | - | - | - | |||||||||||||||
Construction & land loans | - | - | - | - | - | |||||||||||||||
Real estate secured lines of credit | - | - | - | - | - | |||||||||||||||
Commercial loans | - | - | - | - | - | |||||||||||||||
Other consumer loans | - | - | - | - | - | |||||||||||||||
$ | 2,487,542 | $ | 2,530,280 | $ | 42,738 | $ | 2,579,557 | $ | 161,690 |
Income recognized on a cash basis was not materially different than interest income recognized on an accrual basis. The following table presents the nonaccrual loans at September 30, 2019 and December 31, 2018. This table excludes performing TDRs.
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
One- to four-family mortgage loans | $ | 174,442 | $ | 676,024 | ||||
One to four family - Investment | 125,826 | - | ||||||
Multi-family mortgage loans | - | - | ||||||
Nonresidential mortgage loans | - | 67,829 | ||||||
Construction and land loans | - | - | ||||||
Real estate secured lines of credit | - | - | ||||||
Commercial loans | - | - | ||||||
Other consumer loans | - | 528 | ||||||
Total | $ | 300,268 | $ | 744,381 |
At December 31, 2018, the Company had no loans that were modified in TDRs and impaired and there were no troubled debt restructurings during the year then ended.
20
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables present the new classified TDRs at September 30, 2019:
Nine Months Ended September 30, 2019 (Unaudited) | Three Months Ended September 30, 2019 (Unaudited) | |||||||||||||||||||||||
Number of Loans | Pre- Modification Recorded Balance | Post-Modification Recorded Balance | Number of Loans | Pre- Modification Recorded Balance | Post- Modification Recorded Balance | |||||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||||||||||
Residential 1-4 family - owner occupied | 3 | $ | 129,018 | $ | 157,789 | 1 | $ | 15,000 | $ | 15,000 | ||||||||||||||
Residential 1-4 family - investment | - | - | - | - | - | - | ||||||||||||||||||
Multifamily | - | - | - | - | - | - | ||||||||||||||||||
Nonresidential mortgage loans | - | - | - | - | - | - | ||||||||||||||||||
Construction & land loans | - | - | - | - | - | - | ||||||||||||||||||
Construction & land loans | - | - | - | - | - | - | ||||||||||||||||||
Real estate secured lines of credit | - | - | - | - | - | - | ||||||||||||||||||
Commercial loans | - | - | - | - | - | - | ||||||||||||||||||
Consumer loans | - | - | - | - | - | - | ||||||||||||||||||
3 | $ | 129,018 | $ | 157,789 | 1 | $ | 15,000 | $ | 15,000 |
Newly restructured loans by type of modification are as follows for the nine months ended September 30, 2019:
September 30, 2019 (Unaudited) | ||||||||||||||||
Interest Only | Term | Combination | Total Modification | |||||||||||||
Mortgage loans on real estate: | ||||||||||||||||
Residential 1-4 family - owner occupied | $ | - | $ | - | $ | 117,054 | $ | 117,054 | ||||||||
Residential 1-4 family -investment | - | - | - | - | ||||||||||||
Multifamily | - | - | - | - | ||||||||||||
Nonresidential mortgage loans | - | - | - | - | ||||||||||||
Construction & land loans | - | - | - | - | ||||||||||||
Real estate secured lines of credit | 40,735 | - | - | 40,735 | ||||||||||||
Commercial loans | - | - | - | - | ||||||||||||
Consumer loans | - | - | - | - | ||||||||||||
$ | 40,735 | $ | - | $ | 117,054 | $ | 157,789 |
There were no TDRs modified during the three months ended September 30, 2019 that subsequently defaulted. As of September 30, 2019, borrowers with loans designated as TDRs totaling $956,000 of residential real estate loans and $509,000 of multifamily loans, met the criteria for placement back on accrual status. This criteria is a minimum of six consecutive months of payment performance under existing or modified terms. As of September 30, 2019, the Company had no performing TDRs that did not meet the criteria for placement back on accrual status.
There were no foreclosed real estate properties at September 30, 2019. There were three foreclosed real estate properties at December 31, 2018 totaling $102,100, net of valuation allowances. There was one consumer mortgage loan in process of foreclosure at September 30, 2019 with a total net loan balance of $53,000.
21
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 5: | Earnings Per Common Share |
Basic earnings per common share (“EPS”) excludes dilution and is calculated by dividing net income applicable to common stock by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Unallocated common shares held by the Company’s Employee Stock Ownership Plan (“ ESOP”) are shown as a reduction in stockholders’ equity and are excluded from weighted-average common shares outstanding for both basic and diluted EPS calculations until they are committed to be released. The computations for the three and nine month periods ended September 30, 2019 and 2018 are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Unaudited) | ||||||||||||||||
Net income | $ | 146,142 | $ | 25,838 | $ | 458,197 | $ | 390,715 | ||||||||
Less allocation of earnings to participating securities | 1,118 | 705 | 4,473 | 9,184 | ||||||||||||
Net income allocated to common shareholders | $ | 145,024 | 25,133 | $ | 453,724 | 381,531 | ||||||||||
Shares outstanding for basic earnings per share: | ||||||||||||||||
Shares issued | 1,796,298 | 1,733,178 | 1,796,782 | 1,730,155 | ||||||||||||
Less: Average unearned ESOP and unvested restricted stock: | 47,182 | 51,674 | 48,867 | 51,921 | ||||||||||||
Weighted-average shares outstanding - basic | 1,749,116 | 1,681,504 | 1,747,915 | 1,678,234 | ||||||||||||
Basic earnings per common share | $ | 0.08 | $ | 0.01 | $ | 0.26 | $ | 0.23 | ||||||||
Effect of dilutive securities: | ||||||||||||||||
Weighted-average shares outstanding - basic | 1,749,116 | 1,681,504 | 1,747,915 | 1,678,234 | ||||||||||||
Stock options | 28,809 | 11,060 | 24,051 | 2,867 | ||||||||||||
Weighted-average shares outstanding - diluted | 1,777,925 | 1,692,564 | 1,771,966 | 1,681,101 | ||||||||||||
Diluted earnings per share | $ | 0.08 | $ | 0.01 | $ | 0.26 | $ | 0.23 |
22
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE6: | 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 consolidated 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 September 30, 2019 and December 31, 2018, the Bank met all capital adequacy requirements to which it was subject at such dates.
Effective January 1, 2015, new regulatory capital requirements commonly referred to as ‘Basel III” were implemented and are reflected below. Management opted out of the accumulated comprehensive income treatment under the new requirements, and as such unrealized gains and losses from available-for-sale securities will continue to be excluded from regulatory capital.
The below minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer was 2.50% at September 30, 2019 and 1.875% at December 31, 2018.
As of the most recent notification from the Office of the Comptroller of the Currency, the Bank was categorized as "well-capitalized" under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table.Management believes that no conditions or events have occurred since the last notification that would change the Bank's category.
The Bank paid a dividend of $750,000 to the Company during the nine months ended September 30, 2019.
23
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Bank’s actual capital amounts and ratios are also presented in the following table:
Actual | Minimum Capital Requirement | Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
As of September 30, 2019 (Unaudited) | ||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | $ | 24,475 | 15.5 | % | $ | 12,628 | 8.0 | % | $ | 15,785 | 10.0 | % | ||||||||||||
Tier I capital (to risk-weighted assets) | 23,067 | 14.6 | % | 9,471 | 6.0 | % | 12,628 | 8.0 | % | |||||||||||||||
Common Equity Tier I capital (to risk-weighted assets) | 23,067 | 14.6 | % | 7,103 | 4.5 | % | 10,260 | 6.5 | % | |||||||||||||||
Tier I capital (to adjusted total assets) | 23,067 | 11.0 | % | 8,406 | 4.0 | % | 10,508 | 5.0 | % | |||||||||||||||
As of December 31, 2018 | ||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | $ | 24,480 | 17.5 | % | $ | 11,176 | 8.0 | % | $ | 13,970 | 10.0 | % | ||||||||||||
Tier I capital (to risk-weighted assets) | 23,075 | 16.5 | % | 8,382 | 6.0 | % | 11,176 | 8.0 | % | |||||||||||||||
Common Equity Tier I capital (to risk-weighted assets) | 23,075 | 16.5 | % | 6,287 | 4.5 | % | 9,081 | 6.5 | % | |||||||||||||||
Tier I capital (to adjusted total assets) | 23,075 | 11.5 | % | 8,014 | 4.0 | % | 10,017 | 5.0 | % |
24
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 7: | Disclosure About Fair Values of Assets and Liabilities |
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or liabilities. |
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full-term of the assets or liabilities. |
Level 3 | Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities. |
Recurring Measurements
The following table presents 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 September 30, 2019 and December 31, 2018:
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) | |||||||||||||
September 30, 2019 (Unaudited) | ||||||||||||||||
Mortgage-backed securities of government sponsored entities | $ | 2,330,569 | $ | - | $ | 2,330,569 | $ | - | ||||||||
Mortgage servicing rights | 1,306,058 | - | - | 1,306,058 | ||||||||||||
December 31, 2018 | ||||||||||||||||
Mortgage-backed securities of government sponsored entities | $ | 630,361 | $ | - | $ | 630,361 | $ | - | ||||||||
Mortgage servicing rights | 1,252,740 | - | - | 1,252,740 |
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 and Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
25
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of loan balance, weighted average coupon, weighted average maturity, escrow payments, servicing fees, prepayment speeds, float, cost to service, ancillary income, and discount rate. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.
Mortgage servicing rights are tested for impairment. Management measures mortgage servicing rights through use of a third-party independent valuation. Inputs to the model are reviewed by management.
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements related to mortgage servicing rights recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs:
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Unaudited) | ||||||||||||||||
Fair value as of the beginning of the period | $ | 1,398,293 | $ | 1,084,654 | $ | 1,252,740 | $ | 909,821 | ||||||||
Recognition of mortgage servicing rights on the sale of loans | 60,088 | 64,282 | 146,766 | 169,465 | ||||||||||||
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model | (152,323 | ) | (44,859 | ) | (93,448 | ) | 24,791 | |||||||||
Fair value at the end of the period | $ | 1,306,058 | $ | 1,104,077 | $ | 1,306,058 | $ | 1,104,077 |
Mortgage servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in other noninterest income in the period in which the changes occur.
Nonrecurring Measurements
The Company had four collateral-dependent loans measured at fair value on a nonrecurring basis at September 30, 2019 with a balance of $169,382. There was no fair value measurements of assets measured at fair value on a nonrecurring basis at December 31, 2018.
26
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
Unobservable (Level 3) Inputs
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at September 30, 2019 and December 31, 2018:
Fair Value | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | |||||||
September 30, 2019 (Unaudited) | ||||||||||
Mortgage servicing rights | $ | 1,306,058 | Discounted cash flow | Discount rate PSA prepayment speeds | 10% 78%-138% | |||||
December 31, 2018 | ||||||||||
Mortgage servicing rights | $ | 1,252,740 | Discounted cash flow | Discount rate PSA prepayment speeds | 10% 113%-218% |
Fair Value of Financial Instruments
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.
Cash and cash equivalents, Federal Home Loan Bank Stock and Interest Receivable
The carrying amount approximates fair value.
Loans Held for Sale
Fair value of loans held for sale is based on quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.
Loans
The estimated fair value of loans as of September 30, 2019 follows the guidance in ASU 2016-01, which prescribes an “exit price” in estimating and disclosing the fair value of financial instruments. The fair value calculation at that date discounted estimated cash flows using rates that incorporated discounts for credit, liquidity and marketability factors. The fair value at December 31, 2018 used an “entry price.” The fair value calculation for that date discounted estimated cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same maturities. As a result, the fair value disclosures for September 30, 2019 and December 31, 2018 are not directly comparable.
Federal Home Loan Bank Lender Risk Account Receivable
The fair value of the Federal Home Loan Bank lender risk account receivable is estimated by discounting the estimated remaining cash flows of each strata of the receivable at current rates applicable to each strata for the same remaining maturities.
27
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
Deposits
Deposits include demand deposits and savings accounts. The fair value is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of a similar structure. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank Advances
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market.
If a quoted market price is not available, an expected present value technique is used to estimate fair value.
Advances from Borrowers for Taxes and Insurance and Interest Payable
The carrying amount approximates fair value.
Commitments to Originate Loans, Forward Sale Commitments, Letters of Credit and Lines of Credit
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. At September 30, 2019 and December 31, 2018, the fair value of commitments was not material.
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Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents estimated fair values of the Company’s financial instruments not previously presented at September 30, 2019 and December 31, 2018:
Fair Value Measurements Using | ||||||||||||||||
Carrying | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
Amount | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
September 30, 2019 (Unaudited) | ||||||||||||||||
Financial Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 15,005,941 | $ | 15,005,941 | $ | - | $ | - | ||||||||
Loans held for sale | 5,995,619 | - | 6,128,444 | - | ||||||||||||
Loans, net of allowance for loan | ||||||||||||||||
losses | 183,789,252 | - | - | 179,470,205 | ||||||||||||
Federal Home Loan Bank stock | 2,657,400 | - | 2,657,400 | - | ||||||||||||
Interest receivable | 644,699 | - | 644,699 | - | ||||||||||||
Federal Home Loan Bank lender risk | ||||||||||||||||
account receivable | 1,570,805 | - | - | 1,731,473 | ||||||||||||
Financial Liabilities: | ||||||||||||||||
Deposits | 138,274,394 | 65,230,766 | 73,721,187 | - | ||||||||||||
Federal Home Loan Bank advances | 55,745,909 | - | 56,371,812 | - | ||||||||||||
Advances from borrowers for taxes | ||||||||||||||||
and insurance | 1,583,844 | - | 1,583,844 | - | ||||||||||||
Interest payable | 96,212 | - | 96,212 | - | ||||||||||||
December 31, 2018 | ||||||||||||||||
Financial Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 11,089,189 | $ | 11,089,189 | $ | - | $ | - | ||||||||
Loans held for sale | 1,282,000 | - | 1,307,890 | - | ||||||||||||
Loans, net of allowance for loan | ||||||||||||||||
losses | 170,365,031 | - | - | 174,545,610 | ||||||||||||
Federal Home Loan Bank stock | 2,583,100 | - | 2,583,100 | - | ||||||||||||
Interest receivable | 569,659 | - | 569,659 | - | ||||||||||||
Federal Home Loan Bank lender risk | ||||||||||||||||
account receivable | 1,703,276 | - | - | 1,677,187 | ||||||||||||
Financial Liabilities: | ||||||||||||||||
Deposits | 142,391,756 | 61,842,846 | 80,152,017 | - | ||||||||||||
Federal Home Loan Bank advances | 28,580,438 | - | 28,460,471 | - | ||||||||||||
Advances from borrowers for taxes | ||||||||||||||||
and insurance | 1,799,419 | - | 1,799,419 | - | ||||||||||||
Interest payable | 53,945 | - | 53,945 | - |
NOTE 8: Commitments and Credit Risk
Commitments to Originate Loans
Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
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Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
Forward sale commitments are commitments to sell groups of residential mortgage loans that the Company originates or purchases as part of its mortgage banking activities. The Company commits to sell the loans at specified prices in a future period. These commitments are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale since the Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market.
Commitments to fund fixed rate loans at September 30, 2019 and December 31, 2018, were as follows:
September 30, 2019 | December 31, 2018 | |||||||||||
(Unaudited) | ||||||||||||
Interest Rate | Interest Rate | |||||||||||
Amount | Range | Amount | Range | |||||||||
Commitments to fund | ||||||||||||
fixed-rate loans | $ | 15,110,000 | 3.125% - 4.875% | $ | 2,566,950 | 4.625% - 6.00% |
Lines of Credit
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
Loan commitments outstanding at September 30, 2019 and December 31, 2018, including commitments for fixed-rate loans shown above, were composed of the following:
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
Commitments to originate loans | $ | 16,550,000 | $ | 2,845,450 | ||||
Forward sale commitments | 15,110,000 | 3,848,950 | ||||||
Lines of credit | 17,039,191 | 16,119,038 |
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Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 9: Accumulated Other Comprehensive Loss
The components of other comprehensive loss, net of tax, included in stockholders’ equity at September 30, 2019 and December 31, 2018 are as follows:
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
Net unrealized gain on | ||||||||
available for sale securities | $ | (2,954 | ) | $ | 721 | |||
Directors' retirement plan | (351,400 | ) | (320,917 | ) | ||||
Tax benefit | 74,155 | 67,754 | ||||||
Net of tax amount | $ | (280,199 | ) | $ | (252,442 | ) |
NOTE 10: Equity Incentive Plan
In May 2017, the Company’s stockholders approved the Cincinnati Bancorp 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan authorizes the issuance or delivery to participants of up to 117,940 shares of the Company’s common stock pursuant to the grants of restricted stock awards, restricted stock unit awards, incentive stock options, and non-qualified stock options. Of this number, the maximum number of shares of Company common stock that may be issued under the 2017 Plan pursuant to the exercise of stock options is 84,243 shares and the maximum number of shares of Company common stock that may be issued as restricted stock awards or restricted stock units is 33,697 shares. Stock options awarded to employees may be incentive stock options or non-qualified stock options. Shares subject to award under the 2017 Plan may be authorized but unissued shares or treasury shares. The 2017 Plan contains annual and lifetime limits on certain types of awards to individual participants.
Awards may vest or become exercisable only upon the achievement of performance measures or based solely on the passage of time after award. Stock options and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the 2017 Plan).
In June 2017, the Company granted stock options for 79,187 shares to members of the Board of Directors and certain members of management. Options granted in June 2017 have an exercise price of $9.55, as determined on the grant date and expire ten years from the grant date.
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Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
Activity in the stock option plan was as follows for the nine months ended September 30, 2019 and 2018:
Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
(Unaudited) | ||||||||||||||||
September 30, 2019 | ||||||||||||||||
Outstanding, beginning of period | 79,187 | $ | 9.55 | 8.50 | $ | 194,008 | ||||||||||
Granted | - | - | ||||||||||||||
Exercised | (2,022 | ) | $ | 9.55 | ||||||||||||
Forfeited | (4,718 | ) | $ | 9.55 | ||||||||||||
Outstanding, end of period | 72,447 | $ | 9.55 | 7.75 | $ | 456,416 | ||||||||||
Exercisable, end of period | 28,979 | $ | 9.55 | 7.75 | $ | 182,566 | ||||||||||
September 30, 2018 | ||||||||||||||||
Outstanding, beginning of period | 79,187 | $ | 9.55 | 9.50 | $ | 69,685 | ||||||||||
Granted | - | - | ||||||||||||||
Exercised | - | - | ||||||||||||||
Forfeited | - | - | ||||||||||||||
Outstanding, end of period | 79,187 | $ | 9.55 | 8.75 | $ | 351,590 | ||||||||||
Exercisable, end of period | 15,837 | $ | 9.55 | 8.75 | $ | 70,318 |
In June 2017, the Company awarded 33,697 restricted shares to members of the Board of Directors and certain members of management. The restricted stock awards have a five year vesting period. Shares of restricted stock granted to employees under the 2017 Plan are subject to vesting based on continuous employment for a specified time period following the date of grant. During the restricted period, the holder is entitled to full voting rights and dividends, thus are considered participating securities.
Total compensation cost recognized in the income statement for share-based payment arrangements during the three months ended September 30, 2019 and 2018, was $25,793 and $25,790, respectively. The total compensation cost was $77,372 for the nine months ended September 30, 2019 and 2018.
As of September 30, 2019, there was approximately $283,117 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 three years.
32
Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 11: Recent Accounting Pronouncements
Cincinnati Bancorp is an “emerging growth company.” As an “emerging growth company”, we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to the financial statements of public companies that comply with such new or revised accounting standards.
FASB ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326)
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.
On October 16, 2019, FASB approved a final ASU delaying the effective date of ASU No. 2016-13 for certain companies. No. 2016-13 is effective for public business entities that are U.S. Securities and Exchange Commission (“SEC”) filers that are not small reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other 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 collecting and retaining historical loan and credit data. The Company is in the process of identifying data gaps. Certain CECL models are currently being evaluated. The Audit Committee is informed of ongoing CECL developments. For additional information on the allowance for loan losses, see Note 4.
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Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
FASB ASU 2016-02, Leases (Topic 842)
ASU No. 2016-02 was issued in February 2016 and requires a lessee to recognize in the statement of financial position a liability to make lease payments (“the lease liability”) and a right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments.
A lessee shall classify a lease as a finance lease if it meets any of the five listed criteria:
a. | The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. |
b. | The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. |
c. | The lease term is for the major part of the remaining economic life of the underlying asset. |
d. | The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset. |
e. | The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. |
For finance leases, a lessee shall recognize in the statement of income interest on the lease liability separately from the amortization of the right-of-use asset. Amortization of the right-to-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating lease and shall recognize a single lease cost on a straight line basis over the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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 impact is not expected to have a material effect on the Company’s consolidated financial position or results of operations since the Company does not have a material amount of lease agreements.
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Cincinnati Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
FASB ASU 2016-01Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. For public business entities, the amendments in this update include the elimination of the requirement to disclose the method(s) and
significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, the requirement to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, the requirement to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, the requirement for separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or accompanying notes to the financial statements, and the amendments clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.
ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For private companies the new guidance becomes effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption of the amendments in this update is not permitted, except that early application by public business entities to financial statements of fiscal years or interim periods that have not yet been issued or, by all other entities, that have not yet been made available for issuance are permitted as of the beginning of the fiscal year of adoption for the following amendment: An entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Adoption of ASU 2016-01 did not have a significant impact on the Company’s fair value and other disclosure requirements. For additional information on fair value of assets and liabilities, see Note 7.
FASB ASU 2014-09, Revenue from Contracts with Customers
In May 2014, the FASB issued amended guidance on revenue recognition from contracts with customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Public entities should apply the amendments in ASU 2014-09 to interim reporting periods within annual reporting periods beginning after December 15, 2017 (that is, a public entity would be required to apply the new revenue standard beginning in the first interim period within the period of adoption). Nonpublic entities should apply the amendments in ASU 2014-09 for annual reporting periods beginning after December 31, 2018, and to interim reporting periods within annual reporting periods beginning after December 15, 2019. Management adopted ASU 2014-09 effective January 1, 2019, without material impact on the Company’s consolidated financial condition or results of operations. For additional information, see Note 1.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
General
Management’s discussion and analysis of the financial condition and results of operations at and for the three and nine months ended September 30, 2019 and 2018 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q and with the audited financial statements and notes thereto at and for the year ended December 31, 2018, appearing in Cincinnati Bancorp’s Form 10-K for the year ended December 31, 2018.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
· | statements of our goals, intentions and expectations; |
· | statements regarding our business plans, prospects, growth and operating strategies; |
· | statements regarding the asset quality of our loan and investment portfolios; and |
· | estimates of our risks and future costs and benefits. |
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-Q except as may be required by applicable law or regulation.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
· | our ability to manage our operations under the current economic conditions nationally and in our market area; |
· | our ability to integrate acquisitions may be unsuccessful, or may be more difficult, time-consuming or costly than expected; |
· | we may incur increased charge-offs in the future; |
· | we may face competitive loss of customers; |
· | adverse changes in the financial industry, securities, credit and national or local real estate markets (including real estate values), or in the secondary mortgage markets; |
· | significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses; |
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· | credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses; |
· | the use of estimates in determining fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuations; |
· | risks related to the valuation of mortgage servicing rights, particularly changes in prepayment speeds due to changes in interest rates; |
· | competition among depository and other financial institutions; |
· | our ability to successfully implement our business plan and to grow our franchise to improve profitability; |
· | our ability to attract and maintain deposits, and to obtain FHLB-Cincinnati advances; |
· | changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources, and our ability to originate loans for portfolio and for sale in the secondary market; |
· | fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area; |
· | changes in consumer spending, borrowing and savings habits; |
· | risks related to a high concentration of loans secured by real estate located in our market area; |
· | the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings; |
· | changes in the level of government support of housing finance; |
· | our ability to enter new markets successfully and capitalize on growth opportunities; |
· | changes in laws or government regulations or policies affecting financial institutions which could result in, among other things, increased deposit insurance premiums and assessments, increased capital requirements, and increased regulatory fees and compliance costs, and the resources we have available to address such changes; |
· | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; |
· | changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans; |
· | loan delinquencies and changes in the underlying cash flows of our borrowers; |
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· | our ability to control costs and expenses, particularly those associated with operating as a publicly traded company; |
· | the failure or security breaches of computer systems on which we depend; |
· | the ability of key third-party service providers to perform their obligations to us; |
· | changes in the financial condition or future prospects of issuers of securities that we own; |
· | acquisition integration risks, including potential deposit attrition, higher than expected costs, customer loss, business disruption and the inability to realize benefits and cost savings from, and limit any unexpected liabilities associated with, business combinations; and |
· | other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2018. |
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in Cincinnati Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018.
Comparison of Financial Condition at September 30, 2019 and December 31, 2018
Total Assets. Total assets were $221.5 million at September 30, 2019, an increase of $23.8 million, or 12.0%, from the $197.7 million at December 31, 2018. The increase resulted primarily from an increase in loans, net of allowances, of $13.4 million, an increase of $4.7 million in loans held for sale and an increase of $3.9 million in cash and cash equivalents.
Cash and Cash Equivalents. Cash and cash equivalents increased $3.9 million, or 35.3%, to $15.0 million at September 30, 2019.
Available-for-Sale Securities. Available-for-sale securities, which consisted entirely of U.S. government-sponsored mortgage-backed securities, increased $1.7 million, or 269.7%, to $2.3 million at September 30, 2019 from $630,000 at December 31, 2018. Securities purchased during the nine months ended September 30, 2019 totaled $2.0 million, which were partially offset by $252,000 in maturities.
The increases in cash and cash equivalents and available for sale securities during the nine months ended September 30, 2019, represent a strategic determination by the Company’s management to increase and maintain a higher level of liquidity, primarily in view of current and anticipated economic conditions.
Net Loans.Net loans increased $13.4 million, or 7.9%, to $183.8 million at September 30, 2019 from $170.4 million at December 31, 2018. During the nine months ended September 30, 2019, we originated $41.8 million of loans for portfolio, primarily comprised of $16.7 million of one-to-four family residential real estate loans, $14.5 million of multifamily loans, $4.5 million of home equity lines of credit, $3.5 million of construction and land loans and $2.1 million of nonresidential loans. During the nine months ended September 30, 2019, we sold $58.5 million of one-to- four family residential loans, on both a servicing–retained and servicing–released basis, and $1.8 million in multifamily loans on a servicing-retained basis. Subject to market conditions, management intends to continue this sales activity in future periods to generate gains on sale and servicing fee income.
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The increase in net loans was comprised primarily of an increase in one-to-four family owner-occupied loans of $2.6 million, or 2.8%; an increase in multi-family loans of $9.5 million, or 34.8%; and an increase in nonresidential loans of $1.4 million, or 7.5%. We intend to continue to emphasize growth primarily in our commercial real estate and multi-family loan segments.
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 $4.7 million, or 367.7%, to $6.0 million at September 30, 2019 from $1.3 million at December 31, 2018 as a result of increased origination of loans to be sold, due primarily to declining mortgage interest rates. Additionally, we sell participation interests on multi-family and nonresidential loans to manage our loans to one borrower exposures.
Deposits. Deposits decreased $4.1 million, or 2.9%, to $138.3 million at September 30, 2019 from $142.4 million at December 31, 2018. Core deposits, defined as demand, NOW and savings accounts, increased $3.4 million, or 5.5%, to $65.2 million at September 30, 2019 from $61.8 million at December 31, 2018. The increase was primarily the result of marketing efforts directed at increasing retail deposit accounts and an increase in interest paid on larger balance savings accounts. Time deposits decreased $7.5 million, or 9.3%, to $73.0 million at September 30, 2019 from $80.5 million at December 31, 2018. Certificates originated through the National CD Rateline service decreased $7.1 million to $6.0 million at September 30, 2019, and are included in the decrease in time deposits noted above. During the nine months ended September 30, 2019, management continued its strategy of pursuing growth in lower cost core deposits, and intends to continue its efforts to increase core deposits.
Federal Home Loan Bank Advances.Federal Home Loan Bank advances increased $27.2 million, or 95.1%, to $55.7 million at September 30, 2019. The additional advances were used to fund loan originations and net deposit outflows, as well as the increases in cash and cash equivalents and investment securities during the period.
Stockholders’ Equity. Stockholders’ equity increased $521,000, or 2.3%, to $23.5 million at September 30, 2019. The increase was primarily due to net income for the nine month period ended September 30, 2019.
Comparison of Operating Results for the Three Months Ended September 30, 2019 and September 30, 2018
General. The Company recorded net income of $146,000 the quarter ended September 30, 2019, an increase of $120,000, or 465.6%, compared to the quarter ended September 30, 2018. The increase was primarily due to a $212,000 increase in net interest income, a $19,000 increase in noninterest income, and a $52,000 decrease in federal income taxes, which were partially offset by a $152,000 increase in noninterest expense. The Company completed the merger of Kentucky Federal in October 2018. As a result, the results of operations for the three months ended September 30, 2019 include the effects of the merger, while the results of operations for the three months ended September 30, 2018 have not been adjusted to reflect any effect of the merger. Accordingly, the income and expense items in the income statement for the three months ended September 30, 2019, can be expected to show overall increases in comparison to the three months ended September 30, 2018. See footnote No. 2 to the financial statements for additional information regarding the merger.
Interest and Dividend Income. Interest income increased $438,000, or 25.3%, to $2.2 million for the quarter ended September 30, 2019 compared to the comparable quarter in 2018. Interest income on loans increased $413,000, or 24.6%, to $2.1 million as of September 30, 2019. The average balance of loans during the three months ended September 30, 2019 increased $30.5 million to $186.2 million, compared to the three months ended September 30, 2018. The increase in average loans outstanding was primarily due to the merger. The average yield on loans increased 18 basis points to 4.49% for the three months ended September 30, 2019 from 4.31% for the three months ended September 30, 2018 primarily due to the increase in market interest rates. Interest income on other investments increased $24,000, or 50.0%, for the three months ended September 30, 2019 due to an increase in dividends on FHLB-Cincinnati stock from the merger with Kentucky Federal and an increase in average balances of $2.5 million. The yield on other interest-earning assets increased 38 basis points due to higher short term market interest rates.
39
Interest Expense. Total interest expense increased $226,000, or 42.1%, to $763,000 for the quarter ended September 30, 2019 from $537,000 for the quarter ended September 30, 2018. Interest expense on deposit accounts increased $145,000, or 42.1%, to $488,000 for the quarter ended September 30, 2019 from $343,000 for the quarter ended September 30, 2018. The increase in deposit expense between comparable quarters in 2019 from 2018 was primarily due to a $27.2 million increase in average interest-bearing deposit accounts, and a 15 basis point increase in average cost primarily due to the increase in deposit rates in the local market. The increase in average interest-bearing deposit accounts was primarily due to the merger with Kentucky Federal.
Interest expense on savings increased $36,000 during the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018 due to the offering of a higher yielding savings account to attract retail deposits. These higher yielding savings accounts grew by $10.2 million. Interest expense on interest-bearing demand accounts increased $5,000, or 15.2%, to $38,000 for the quarter ended September 30, 2019. The average balances in interest-bearing demand accounts increased $11.0 million during the three months ended September 30, 2019 compared to September 30, 2018. Interest expense on certificates of deposit increased $103,000, or 34.9%, as a result of a $6.1 million, or 9.1%, increase in the average balance of these certificates. The average cost of certificates increased 42 basis points to 2.19% primarily due to the increase in certificate of deposit rates in the local market.
Interest expense on FHLB advances increased $82,000, or 42.2%, to $275,000 for the quarter ended September 30, 2019 from $193,000 for the quarter ended September 30, 2018. The average balance of advances increased $10.5 million, or 26.8%, for the quarter ended September 30, 2019. The average cost of FHLB borrowings increased 24 basis points due primarily to an increase in market interest rates.
Net Interest Income. Net interest income increased $212,000, or 17.7%, to $1.4 million for the quarter ended September 30, 2019 compared to the same quarter in 2018. The interest rate spread was unchanged at 2.63% for the quarters ended September 30, 2019 and 2018. The net interest margin decreased six basis points to 2.82% for the quarter ended September 30, 2019 compared to 2.88% for the quarter ended September 30, 2018.
Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” we recorded a $25,000 provision for loan losses for the three months ended September 30, 2019, an increase of $10,000 from the quarter ended September 30, 2018. The allowance for loan losses was $1.4 million, or 0.76% of total loans, at September 30, 2019, compared to $1.4 million, or 0.89% of total loans, at September 30, 2018. The Company had $23,000, or 0.01% in net charge-offs during the three month period ended September 30, 2019 and had no net charge-offs during the period ended September 30, 2018. As a percentage of nonperforming loans, the allowance for loan losses was 468.8% at September 30, 2019, compared to 368.8% at September 30, 2018.
The allowance for loan losses reflects the estimate we believe to be adequate to cover probable losses which were inherent in the loan portfolio at September 30, 2019. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.
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Non-Interest Income.Non-interest income increased $19,000, or 2.9%, to $681,000 for the quarter ended September 30, 2019 from $662,000 for the comparable quarter in 2018. The gain on sale of loans increased $64,000, or 13.4%, to $544,000 for the quarter ended September 30, 2019 from $480,000 for the comparable quarter in 2018. Mortgage servicing fees decreased $91,000, due primarily to a decrease in the fair value of mortgage servicing rights, which was partially offset by the recognition of new mortgage servicing rights on loans sales of $60,000 for the quarter ended September 30, 2019. The change in fair value of mortgage servicing rights is highly dependent on estimated changes in mortgage prepayment speeds. Generally, estimated mortgage prepayment speeds increase when market rates decrease resulting in a decrease in the fair value of mortgage servicing rights. Increasing mortgage prepayment speeds had an adverse impact on the value of our mortgage servicing rights. Other income increased $46,000, or 25.8%, to $225,000 for the quarter ended September 30, 2019, compared to the same quarter in 2018, due primarily to an increase in fees collected on loans and deposit accounts.
Non-Interest Expense. Non-interest expense increased $152,000, or 8.7%, to $1.9 million for the quarter ended September 30, 2019 compared to the comparable quarter in 2018. The increase in noninterest expense was primarily attributable to the merger of Kentucky Federal. Salaries and employee benefits increased $228,000, or 26.7%, to $1.1 million for the quarter ended September 30, 2019 from $852,000 for the comparable quarter in 2018, due to increased loan officer commission expense, increased healthcare costs, and increased payroll expense. Loan costs increased $20,000, or 20.8% due to increased loan origination activity. Offsetting the overall increase in non-interest expenses were a $36,000 gain on sale of foreclosed assets in the 2019 quarter, and the absence of $149,000 of merger-related expenses recorded in the 2018 quarter. In addition, data processing expense decreased $22,000, or 13.8%, to $136,000 during the quarter ended September 30, 2019 from $158,000 for the quarter ended September 30, 2018, due to cost savings from the integration of accounts acquired in the merger of Kentucky Federal. The migration of Kentucky Federal accounts to the Company’s data processing system was completed during the second quarter of 2019, and resulted in the elimination of the overlap of maintaining dual data processing systems. Advertising expense decreased $29,000, or 66.0%, due to a pause in advertising while newer marketing strategies were being formulated and implemented.
Federal Income Taxes.Federal income taxes decreased $52,000, or 75.0%, to $17,000 for the quarter ended September 30, 2019 compared to the same quarter in 2018. The decrease was due primarily due to the effects of nondeductible merger-related expenses included in the 2018 quarter results, which was partially offset by a $69,000, or 72.3%, increase in pre-tax income. The effective tax rates were 10.5% and 72.7% for the three months ended September 30, 2019 and 2018, respectively.
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Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax-equivalent yield adjustments have been made. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. All average balances are monthly average balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material differences in the information presented. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
For the Three Months Ended September 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Outstanding | Yield/Rate | Outstanding | Yield/Rate | |||||||||||||||||||||
Balance | Interest | (5) | Balance | Interest | (5) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 186,159 | $ | 2,091 | 4.49 | % | $ | 155,635 | $ | 1,678 | 4.31 | % | ||||||||||||
Securities | 883 | 6 | 2.72 | 732 | 5 | 2.73 | ||||||||||||||||||
Other (1) | 12,350 | 73 | 2.36 | 9,893 | 49 | 1.98 | ||||||||||||||||||
Total interest-earning assets | 199,392 | 2,170 | 4.35 | 166,260 | 1,732 | 4.17 | ||||||||||||||||||
Non-interest-earning assets | 13,431 | 10,455 | ||||||||||||||||||||||
Total assets | $ | 212,823 | $ | 176,715 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings | $ | 35,381 | $ | 52 | 0.59 | $ | 25,169 | $ | 16 | 0.25 | ||||||||||||||
Interest-bearing demand | 19,114 | 38 | 0.80 | 8,133 | 33 | 1.62 | ||||||||||||||||||
Certificates of deposit | 72,676 | 398 | 2.19 | 66,621 | 295 | 1.77 | ||||||||||||||||||
Total deposits | 127,171 | 488 | 1.53 | 99,923 | 344 | 1.38 | ||||||||||||||||||
Borrowings | 49,901 | 275 | 2.20 | 39,364 | 193 | 1.96 | ||||||||||||||||||
Total interest-bearing liabilities | 177,072 | 763 | 1.72 | 139,287 | 537 | 1.54 | ||||||||||||||||||
Non-interest-bearing Demand | 9,233 | 15,587 | ||||||||||||||||||||||
Other non-interest-bearing liabilities | 3,632 | 2,601 | ||||||||||||||||||||||
Total non- interest-bearing liabilities | 12,865 | 18,188 | ||||||||||||||||||||||
Total equity | 22,886 | 19,240 | ||||||||||||||||||||||
Total liabilities and total equity | $ | 212,823 | $ | 176,715 | ||||||||||||||||||||
Net interest income | $ | 1,407 | $ | 1,195 | ||||||||||||||||||||
Net interest rate spread (2) | 2.63 | % | 2.63 | % | ||||||||||||||||||||
Net interest-earning assets (3) | $ | 22,320 | $ | 26,973 | ||||||||||||||||||||
Net interest margin (4) | 2.82 | % | 2.88 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 112.61 | % | 119.37 | % |
(1) | Consists of FHLB-Cincinnati stock, FHLB DDA, certificates of deposit, fed funds sold, and cash reserves. |
(2) | Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities. |
(3) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(4) | Net interest margin represents annualized net interest income divided by average total interest-earning assets. |
(5) | Annualized |
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Comparison of Operating Results for the Nine Months Ended September 30, 2019 and September 30, 2018
General. Net income for the nine months ended September 30, 2019 was $458,000, compared to net income of $391,000 for the nine months ended September 30, 2018, an increase of $67,000, or 17.1%. The increase was primarily due to a $715,000 increase in net interest income and a decrease in the provision for income tax of $114,000, partially offset by an increase in noninterest expense of $741,000 and a decrease in noninterest income of $41,000. The Company completed the merger of Kentucky Federal in October 2018. As a result, the results of operations for the nine months ended September 30, 2019 include the effects of the merger, while the results of operations for the nine months ended September 30, 2018 have not been adjusted to reflect any effect of the merger. Accordingly, the income and expense items in the income statement for the nine months ended September 30, 2019, can be expected to show overall increases in comparison to the nine months ended September 30, 2018. See footnote No. 2 to the financial statements for additional information regarding the merger.
Interest and Dividend Income. Interest income increased $1.3 million, or 26.8%, to $6.4 million for the nine months ended September 30, 2019 from the comparable nine months in 2018. Interest income on loans increased $1.2 million, or 25.4%, to $6.1 million as of September 30, 2019. The average balance of loans during the nine months ended September 30, 2019 increased $27.0 million to $180.9 million, compared to $153.9 million for the nine months ended September 30, 2018. The average yield on loans increased 29 basis points to 4.51% for the nine months ended September 30, 2019 from 4.22% for the nine months ended September 30, 2018. Interest income on other investments increased $105,000 for the nine months ended September 30, 2019 primarily due to an increase in the average yield of 107 basis points and an increase of $1.1 million in the average balance of other interest earning assets compared to the nine months ended September 30, 2018.
Interest Expense. Total interest expense increased $628,000, or 42.8%, to $2.1 million for the nine months ended September 30, 2019 from $1.5 million for the nine months ended September 30, 2018. Interest expense on deposit accounts increased $436,000, or 44.3%, to $1.4 million for the nine months ended September 30, 2019 from $984,000 for the nine months ended September 30, 2018. The increase between comparable nine month periods in 2019 from 2018 was primarily due to a $329,000 increase in interest expense on certificates of deposit resulting from a $7.7 million, or 11.3%, increase in the average balance of these certificates. The average cost of certificates increased 41 basis points to 2.08%. Savings interest expense increased $93,000 as average balances increased $9.9 million. The average cost of savings deposits increased 31 basis points during the nine months ended September 30, 2019 compared to September 30, 2018. Interest expense on interest-bearing demand accounts increased $14,000 from the comparable nine months in 2018. The increase reflects the promotion of a high-yielding checking account product for large balance DDA accounts. The average balances in interest-bearing demand accounts during the nine months ended September 30, 2019 increased $11.8 million to $19.6 million compared to $7.8 million for the nine months ended September 30, 2018.
Interest expense on FHLB advances increased $192,000, or 39.8%, to $673,000 for the nine months ended September 30, 2019 from $481,000 for the nine months ended September 30, 2018. The average balance of advances increased $4.4 million, or 12.1%, for the nine months ended September 30, 2019. The average cost of FHLB borrowings increased 45 basis points during the nine months ended September 30, 2019, due primarily to increases in market interest rates.
Net Interest Income. Net interest income increased $716,000, or 20.1%, to $4.3 million for the nine months ended September 30, 2019. The interest rate spread increased 12 basis points to 2.76% for the nine months ended September 30, 2019 compared to 2.64% for the nine months ended September 30, 2018. The net interest margin increased seven basis points to 2.95% for the nine months ended September 30, 2019 from 2.88% for the nine months ended September 30, 2018.
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Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” we recorded a provision for loan losses of $25,000 for the nine months ended September 30, 2019, a decrease of $20,000 from the nine months ended September 30, 2018. The allowance for loan losses was $1.4 million, or 0.76% of total loans, at September 30, 2019, compared to $1.4 million, or 0.89% of total loans, at September 30, 2018. The determination to record a provision for loan losses in the nine months ended September 30, 2019, was due primarily to the increase in outstanding loans. Total nonperforming loans were $300,000 at September 30, 2019, compared to $381,000 at September 30, 2018. The Company had $23,000, or 0.01% in net charge-offs during the nine month period ended September 30, 2019 and had no charge-offs during the nine month period ending September 30, 2018. As a percentage of nonperforming loans, the allowance for loan losses was 468.8% at September 30, 2019, compared to 368.8% at September 30, 2018.
Non-Interest Income.Non-interest income decreased $42,000, or 2.1%, to $2.0 million for the nine months ended September 30, 2019 from the comparable nine months in 2018. The decrease was primarily due to a $24,000 decrease in gain on sales of loans and a $103,000 decrease in mortgage servicing fees, partially offset by an increase of $86,000 in other income. The decrease in gain on sale of loans was due primarily to competitive pricing pressures in the local market. The decrease in mortgage servicing fees was due primarily to a decline in the appraised fair value of mortgage servicing rights during the nine months ended September 30, 2019. The change in fair value of mortgage servicing rights is highly dependent on estimated changes in mortgage prepayment speeds. Generally, estimated mortgage prepayment speeds increase when market rates decrease resulting in a decrease in the fair value of mortgage servicing rights. Increasing mortgage prepayment speeds had an adverse impact on the value of our mortgage servicing rights. The increase in other income was due primarily to an increase in loan fees and service fees on deposits.
Non-Interest Expense. Non-interest expense increased $741,000, or 14.9%, to $5.7 million for the nine months ended September 30, 2019, compared to the same period in 2018. The increase was due primarily to a $639,000, or 25.6%, increase in salary and employee benefits to $3.1 million in the first nine months of 2019 from $2.5 million for the comparable nine months in 2018, attributable to increased staffing levels as well as termination and retention bonuses for certain Kentucky Federal employees. Merger related expenses decreased $213,000 with the completion of the merger. Data processing expense increased $68,000, or 15.1%, to $518,000 during the nine months ended September 30, 2019 from $450,000 for the nine months ended September 30, 2018, due primarily to overall growth including the addition of Kentucky Federal’s accounts. Efficiencies in data processing costs following the merger were not realized until the final integration of Kentucky Federal’s data processing was completed on April 26, 2019. Franchise tax expense increased $38,000, or 32.6% due to the increase in equity from the Kentucky Federal merger. Advertising expense decreased $41,000, or 35.0% due to a reduction in billboard, print and social media marketing while newer marketing strategies were being formulated and implemented. The increases in non-interest expenses were partially offset by an increase in gains on sales of foreclosed real estate of $90,000 during the nine months ended September 30, 2019.
Federal Income Taxes.The provision for federal income taxes decreased $114,000, or 65.5%, to $60,000 for the nine months ended September 30, 2019, compared to the same period in 2018. The decrease was due primarily due to the effects of nondeductible merger-related expenses included in the 2018 period results, and a $47,000, or 8.2%, decrease in pre-tax income. The effective tax rates were 11.6% and 30.8% for the nine months ended September 30, 2019 and 2018, respectively.
44
Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax-equivalent yield adjustments have been made. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. All average balances are monthly average balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material differences in the information presented. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
For the Nine Months Ended September 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Outstanding | Yield/Rate | Outstanding | Yield/Rate | |||||||||||||||||||||
Balance | Interest | (5) | Balance | Interest | (5) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 180,875 | $ | 6,114 | 4.51 | % | $ | 153,867 | $ | 4,875 | 4.22 | % | ||||||||||||
Securities | 685 | 12 | 2.34 | 798 | 12 | 2.01 | ||||||||||||||||||
Other (1) | 11,072 | 236 | 2.84 | 9,957 | 132 | 1.77 | ||||||||||||||||||
Total interest-earning assets | 192,632 | 6,362 | 4.40 | 164,622 | 5,019 | 4.07 | ||||||||||||||||||
Non-interest-earning assets | 13,639 | 10,390 | ||||||||||||||||||||||
Total assets | $ | 206,271 | $ | 175,012 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings | $ | 34,446 | $ | 127 | 0.49 | $ | 24,581 | $ | 34 | 0.18 | ||||||||||||||
Interest-bearing demand | 19,593 | 111 | 0.76 | 7,804 | 97 | 1.66 | ||||||||||||||||||
Certificates of deposit | 75,782 | 1,182 | 2.08 | 68,097 | 853 | 1.67 | ||||||||||||||||||
Total deposits | 129,821 | 1,420 | 1.46 | 100,482 | 984 | 1.31 | ||||||||||||||||||
Borrowings | 40,768 | 673 | 2.20 | 36,550 | 481 | 1.75 | ||||||||||||||||||
Total interest-bearing liabilities | 170,589 | 2,093 | 1.64 | 137,032 | 1,465 | 1.43 | ||||||||||||||||||
Non-interest-bearing Demand | 9,434 | 16,301 | ||||||||||||||||||||||
Other non-interest-bearing liabilities | 3,511 | 2,700 | ||||||||||||||||||||||
Total non- interest-bearing liabilities | 12,945 | 19,001 | ||||||||||||||||||||||
Total equity | 22,737 | 18,979 | ||||||||||||||||||||||
Total liabilities and total equity | $ | 206,271 | $ | 175,012 | ||||||||||||||||||||
Net interest income | $ | 4,269 | $ | 3,554 | ||||||||||||||||||||
Net interest rate spread (2) | 2.76 | % | 2.64 | % | ||||||||||||||||||||
Net interest-earning assets (3) | $ | 22,043 | $ | 27,590 | ||||||||||||||||||||
Net interest margin (4) | 2.95 | % | 2.88 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 112.92 | % | 120.13 | % |
(1) | Consists of FHLB-Cincinnati stock, FHLB DDA, certificates of deposit, fed funds sold, and cash reserves. |
(2) | Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities. |
(3) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(4) | Net interest margin represents annualized net interest income divided by average total interest-earning assets. |
(5) | Annualized |
45
Liquidity and Capital Resources. Liquidity is the ability to meet financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. The Bank’s primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from the sale or maturities of securities. In addition, the Bank may borrow from the FHLB. At September 30, 2019, the Bank had $55.7 million outstanding in advances from the FHLB. At September 30, 2019, the Bank had collateral based capacity to borrow an additional $35.3 million. The Bank had additional lines of credit with three commercial banks totaling $11.5 million. Additionally, the Bank has contingent funding sources with CDARS and the StoneCastle’s Federally Insured Cash Account (FICA) program.
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 $4.0 million and net cash provided by operating activities was $3,790 for the nine months ended September 30, 2019 and 2018, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from maturing securities and pay downs on mortgage-backed securities, was $15.0 million and $6.2 million for the nine months ended September 30, 2019 and 2018, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $22.8 million and $5.7 million for the nine months ended September 30, 2019 and 2018, respectively.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. We also anticipate continued participation in the National CD Rateline Program as a wholesale source of certificates of deposit, and continued use of FHLB-Cincinnati advances.
Cincinnati Bancorp is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividend to its stockholders and for other corporate purposes. Cincinnati Bancorp’s primary source of liquidity is dividend payments, if any, received from the Bank. The Bank’s ability to pay dividends is subject to regulatory restrictions. At September 30, 2019, Cincinnati Bancorp (on an unconsolidated, stand-alone basis) had liquid assets of $522,000.
At September 30, 2019, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $23.1 million, or 11.0% of adjusted total assets, which is above the well-capitalized required level of $10.5 million, or 5.0%; total risk-based capital of $24.5 million, or 15.5% of risk-weighted assets, which is above the well-capitalized required level of $15.8 million, or 10.0% of risk-weighted assets; and common equity tier 1 risk based capital of $23.1 million, or 14.6%, of risk weighted assets, which is above the well-capitalized required level of $10.3 million, or 6.5%. At December 31, 2018, the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $23.1 million, or 11.5% of adjusted total assets, which is above the well-capitalized required level of $10.0 million, or 5.0%; and total risk-based capital of $24.5 million, or 17.5% of risk-weighted assets, which is above the well-capitalized required level of $14.0 million, or 10.0% of risk-weighted assets. Accordingly, Cincinnati Federal was categorized as well capitalized at September 30, 2019, and December 31, 2018. Management is not aware of any conditions or events since the most recent notification that would change its category.
46
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable, as the Company is a smaller reporting company.
Item 4. | Controls and Procedures |
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2019. Based on that evaluation, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2019, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. | Legal Proceedings |
The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Item 1A. | Risk Factors |
Not applicable, as the Company is a smaller reporting company.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) | There were no sales of unregistered securities during the period covered by this Report. |
(b) | Not applicable. |
(c) | There were no issuer repurchases of securities during the period covered by this Report. |
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
47
Item 6. | Exhibits |
3.1 | Cincinnati Bancorp Stock Holding Company Charter(1) | |
3.2 | Cincinnati Bancorp Amended and Restated Bylaws(2) |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following financial information from Cincinnati Bancorp Quarterly Report on Form 10-Q, for the quarter ended September 30, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the consolidated balance sheets; (ii) the consolidated statements of operations; (iii) the consolidated statements of comprehensive income; (iv) the consolidated statements of cash flows; and (v) notes to consolidated financial statements. |
(1) Incorporated by reference to the Company’s Registration Statement on Form S-1, as initially filed on March 11, 2015, as subsequently amended.
(2) Incorporated by reference to the Exhibit 3.2 to the Current Report on Form 8-K, filed October 18, 2018.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CINCINNATI BANCORP | ||
Date: November 14, 2019 | /s/ Joseph V. Bunke | |
Joseph V. Bunke | ||
President | ||
(Principal Executive Officer) | ||
Date: November 14, 2019 | /s/ Herbert C. Brinkman | |
Herbert C. Brinkman | ||
Senior Vice President and Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
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