EDGAR 10-K Filing

Company CIK: 1787005
Filing Year: 2022
Filename: 1787005_10-K_2022_0001410578-22-000769.json

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ITEM 1. BUSINESS
ITEM 1.BUSINESS
General
Cincinnati Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in August 2019 to become the stock holding company for Cincinnati Federal in connection with the conversion of the former CF Mutual Holding Company from a mutual holding company to a stock holding company. Cincinnati Bancorp, Inc. is the successor to Cincinnati Bancorp (a Federal corporation) (“Old Cincinnati Bancorp”), the former stock holding company of Cincinnati Federal and majority-owned subsidiary of the former CF Mutual Holding Company. The conversion was completed effective January 22, 2020. In the conversion, Cincinnati Bancorp, Inc. sold 1,652,960 shares of common stock at $10.00 per share, for net proceeds of approximately $14.3 million, and issued 1,322,665 shares of common stock in exchange for the shares of common stock of Old Cincinnati Bancorp owned by stockholders of Old Cincinnati Bancorp, other than CF Mutual Holding Company, as of the effective date of the conversion. As a result of the conversion, CF Mutual Holding Company and Old Cincinnati Bancorp have ceased to exist.
Cincinnati Bancorp, Inc. conducts its business principally through its wholly-owned subsidiary, Cincinnati Federal.
The executive offices of Cincinnati Bancorp, Inc. are located at 6581 Harrison Avenue, Cincinnati, Ohio 45247, and the telephone number at that address is (513) 574-3025. Our website address is www.cincinnatifederal.com. Information on our website should not be considered a part of this annual report.
Cincinnati Bancorp, Inc. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System. At December 31, 2021, we had total assets of $251.5 million, total deposits of $204.5 million and total equity of $42.9 million. We recognized net income of $1.6 million for the year ended December 31, 2021.
Cincinnati Federal is a federal savings bank headquartered in Cincinnati, Ohio. Over the years, we have grown internally and we have also acquired a total of five mutual savings institutions, with our most recent acquisition occurring in 2018 with the acquisition of Kentucky Federal Savings and Loan Association effective October 12, 2018.
Our business consists primarily of taking deposits from the general public and investing those deposits, together with borrowings and funds generated from operations, in one- to four-family residential real estate loans, nonresidential real estate and multi-family loans, home equity loans and lines of credit, and construction and land loans. We also invest in securities, which consist primarily of mortgage-backed securities issued by U.S. government sponsored entities and Federal Home Loan Bank stock. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. We utilize advances from the Federal Home Loan Bank of Cincinnati (the “FHLB-Cincinnati”) for asset/liability management purposes and for additional funding for our operations.
Cincinnati Federal also operates an active mortgage banking unit with thirteen mortgage loan officers, which originates loans both for sale into the secondary market and for retention in our portfolio. The revenue from gain on sales of loans was $8.8 million for the fiscal year ended December 31, 2021.
Cincinnati Federal is subject to comprehensive regulation and examination by its primary federal regulator, the Office of the Comptroller of the Currency.
Market Area
We conduct our operations from our main office and three branch offices in Cincinnati, Ohio (Cincinnati) and two branch offices in Northern Kentucky. We also operate a loan production office in Clermont County, Ohio. Hamilton County, Ohio represents our primary geographic market area for loans and deposits. Our business operations are conducted in the larger Greater Cincinnati/Northern Kentucky metropolitan area which includes Warren, Butler and Clermont Counties in Ohio, Boone, Kenton and Campbell Counties in Kentucky, and Dearborn County, Indiana. We will, on occasion, make loans secured by properties located outside of our primary market. The local economy is diversified with services, trade and manufacturing employment being the most prominent employment sectors in Hamilton County. The employment base is diversified and there is no dependence on one area of the economy for continued employment. Major employers in the market include The Kroger Co., Catholic Healthcare Partners, The Procter & Gamble Company, the Greater Cincinnati/Northern Kentucky International Airport, Cincinnati Children’s Hospital, St. Elizabeth Healthcare, city and county governments, the University of Cincinnati and Northern Kentucky University. Our future growth opportunities will be influenced by the growth and stability of the regional, state and national economies, other demographic trends and the competitive environment. Hamilton County and Cincinnati have generally experienced an increasing population since the 2010 census with the other counties in which we conduct business also experiencing population growth.
Competition
We face intense competition within our market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions. We also face competition from commercial banks, savings institutions, mortgage banking firms, consumer and finance companies and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2021, based on the most recent available FDIC data, our market share of deposits represented 0.11% of FDIC-insured deposits in Hamilton County, ranking us 17th in deposit market share. This data does not include deposits held by credit unions.
Lending Activities
General. Our principal lending activity is originating one- to four-family residential real estate loans and nonresidential real estate and multi-family loans, home equity loans and lines of credit, and construction and land loans. To a much lesser extent, we also originate commercial business loans and consumer loans. Subject to market conditions and our asset-liability analysis, we expect to increase our focus on nonresidential real estate and multi-family loans in an effort to diversify our overall loan portfolio and increase the overall yield earned on our loans. We also originate for sale and sell the majority of the fixed-rate one- to four-family residential real estate loans that we originate with terms of greater than 10 years, on both a servicing-retained and servicing-released, limited or no recourse basis, while retaining shorter-term fixed-rate and generally all adjustable-rate one- to four-family residential real estate loans in order to manage the duration and time to repricing of our loan portfolio. Loans are sold primarily to FHLB-Cincinnati, Freddie Mac or to private sector third party buyers.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
Amount
Percent
Amount
Percent
(In Thousands)
Real estate loans:
One- to four-family residential: (1)
Owner occupied
$
70,337
33.66
%
$
72,698
42.05
%
Non-owner occupied
10,361
4.96
12,059
6.97
Nonresidential
41,762
19.99
29,532
17.08
Multi-family
55,029
26.33
41,749
24.15
Home equity lines of credit
11,403
5.46
9,934
5.75
Construction and land
19,425
9.30
5,841
3.38
Total real estate
208,317
99.70
171,813
99.38
Commercial loans
0.14
0.42
Consumer loans
0.16
0.20
Total loans
208,966
100.00
%
172,889
100.00
%
Less:
Net deferred loan costs
(405)
(333)
Allowance for losses
1,673
1,673
Undisbursed loan proceeds
12,156
4,881
Total loans, net
$
195,542
$
166,668
(1) Includes $1.9 million and $2.2 million of home equity loans at December 31, 2021 and December 31, 2020, respectively.
Contractual Maturities. The following tables set forth the contractual maturities of our total loan portfolio at December 31, 2021. Demand loans, which are loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.
One- to Four-
Family
Residential Real
Nonresidential
Multi-Family
Construction
December 31, 2021
Estate
Real Estate
Real Estate
and Land
(In thousands)
Amounts due in:
One year or less
$
$
$
-
$
-
Over one through five years
1,837
1,020
3,094
Over five through fifteen years
15,436
6,612
2,675
More than fifteen years
62,931
34,120
52,208
15,567
Total
$
80,698
$
41,762
$
55,029
$
19,425
Home
Equity
Lines of
December 31, 2021
Credit
Commercial
Consumer
Total
(In thousands)
Amounts due in:
One year or less
$
1,586
$
$
$
2,144
Over one through five years
1,646
8,028
Over five through fifteen years
8,171
33,763
More than fifteen years
-
-
165,031
Total
$
11,403
$
$
$
208,966
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth our fixed- and adjustable-rate loans at December 31, 2021 that are contractually due after December 31, 2022.
Due After December 31, 2022
Fixed
Adjustable
Total
(In thousands)
Real estate loans:
One- to four-family residential
$
39,298
$
40,907
$
80,205
Nonresidential
1,231
40,521
41,752
Multi-family
1,198
53,831
55,029
Home equity lines of credit
-
9,817
9,817
Construction and land
12,278
7,147
19,425
Total real estate
54,005
152,223
206,228
Commercial loans
Consumer loans
-
Total loans
$
54,091
$
152,731
$
206,822
Loan Approval Procedures and Authority. Pursuant to federal law, the aggregate amount of loans that Cincinnati Federal is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Cincinnati Federal’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2021, based on the 15% limitation, Cincinnati Federal’s loans-to-one-borrower limit was approximately $5.8 million. On the same date, Cincinnati Federal had no borrowers with outstanding balances in excess of this amount. At December 31, 2021, our largest loan relationship with one borrower was for approximately $4.6 million, secured by a nonresidential property, and was performing in accordance with its original terms on that date.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports bank statements and tax returns. We generally follow underwriting procedures that are consistent with Freddie Mac underwriting guidelines.
Under our loan policy, the loan underwriter of an application is responsible for ensuring proposals and approval of any extensions of credit are in compliance with internal policies and procedures and applicable laws and regulations, and for establishing and maintaining credit files and documentation sufficient to support the loan and to perfect any collateral position. Loans originated for sale may be approved by any loan underwriter, if the loan conforms to the underwriting guidelines established by the investor to whom the loan will be sold.
Loans to be held in our portfolio may not be approved solely by an underwriter, and generally require review and approval by our Chief Lending Officer, members of the loan committee or the board of directors. All loan approval amounts are based on the aggregate loans, including total balances of outstanding loans and the proposed loan to the individual borrower and any related entity. For one- to four-family owner-occupied real estate loans, our Chief Lending Officer, any two members of the loan committee or any one loan committee member and one underwriter are authorized to approve loans up to $647,200 in the aggregate.
For one- to four-family owner-occupied real estate, non-owner occupied one- to four-family owner-occupied real estate, commercial real estate, undeveloped lots or employee loans, any three members of the loan committee are authorized to approve up to $750,000 in the aggregate. The entire loan committee may approve loans up to $1,000,000 in the aggregate. For aggregate loans in excess of $1,000,000, approval of the board of directors is required.
For all other loans, our Chief Lending Officer or any two members of the loan committee are authorized to approve aggregate loans up to $50,000, with three loan committee members able to approve aggregate loans up to $250,000. As above, the approval of the full loan committee is required for loans up to $1,000,000 and approval of the board of directors is required for loans in excess of $1,000,000.
Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.
One- to Four-Family Residential Real Estate Lending. The focus of our lending program has historically been the origination of one- to four-family residential real estate loans. At December 31, 2021, we had $80.7 million of loans secured by one- to four-family real estate, representing 38.6% of our total loan portfolio. We originate both fixed- and adjustable-rate residential mortgage loans. At December 31, 2021, the one- to four-family residential mortgage loans held in our portfolio due after December 31, 2022 were comprised of 49.7% fixed-rate loans, and 51.0% adjustable-rate loans.
Prior to 2010, we engaged in significant non-owner occupied one- to four-family real estate lending. Many of these loans were made to investors who owned a number of rental properties, and which did not provide sufficient rental cash flows to service the repayment of the loans. There is a greater credit risk inherent in non-owner occupied properties, than in owner occupied properties since, like nonresidential real estate and multi-family loans, the repayment of these loans may depend, in part, on the successful management of the property and/or the borrower’s ability to lease the property. A downturn in the real estate market or the local economy could adversely affect the value of properties securing these loans or the revenues derived from these properties which could affect the borrower’s ability to repay the loan. Beginning with the economic downturn that began in 2008, we experienced higher levels of delinquencies and charge-offs in our non-owner occupied residential loan portfolio. Our management took steps to reduce our delinquent and non-performing assets in this portfolio, and to reduce this type of lending. See “-Delinquencies and Non-Performing Assets” below. At December 31, 2021, we had $10.4 million of non-owner occupied residential loans.
We currently originate a small number of non-owner occupied residential loans. Non-owner occupied loans as a percentage of total loans was 5.0%. We impose strict underwriting guidelines in the origination of such loans, including a maximum number of loans to the same borrower, local residency, and no prior bankruptcies and/or foreclosures. Properties securing non-owner occupied loans must be within 50 miles of a Cincinnati Federal branch office. We also generally limit loans on non-owner occupied properties to borrowers with no more than ten total rental properties as a way to mitigate the risks involved in lending to professional property investors.
Our one- to four-family residential real estate loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae. We also originate loans above the lending limit for conforming loans, which are referred to as “jumbo loans.” We also offer FHA, VA and Rural Housing Development loans, all of which we originate for sale on a servicing-released, non-recourse basis in accordance with FHA, VA and USDA guidelines. We use an underwriter with expertise in FHA/VA lending.
We generally limit the loan-to-value ratios of our owner-occupied one- to four-family residential mortgage loans to 85% of the purchase price or appraised value, whichever is lower. In addition, we may make one- to four-family residential mortgage loans with loan-to-value ratios up to 95% of the purchase price or appraised value, whichever is less, if the borrower obtains private mortgage insurance. Non-owner occupied one- to four-family residential mortgage loans are limited to an 80% loan-to-value ratio.
Our one- to four-family residential real estate loans typically have terms of up to 30 years, with non-owner occupied loans limited to a maximum term of 25 years. Our adjustable-rate one- to four-family residential real estate loans generally have fixed rates for initial terms of three, five or seven years, and adjust annually thereafter at a margin. In recent years, this margin has been between 2.75% and 3.25% over the weekly average yield on U.S. treasury securities adjusted to a constant maturity of one year. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.
Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on most of our adjustable-rate loans do not adjust for a period ranging from three years up to ten years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.
We also originate home equity lines of credit and fixed-term home equity loans. See “-Home Equity Loans and Lines of Credit.”
We do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” on one- to four-family residential real estate loans (i.e., generally loans with credit scores less than 660), except for loans originated for sale in the secondary market.
We currently offer a special residential mortgage program with preferred loan terms to new and existing medical physicians. This program includes (i) preferred treatment of new physician income with regard to positions offered or recently begun and (ii) mortgage loans with a loan-to-value ratio up to 95% to 100% without the need to obtain mortgage insurance for loans up to $600,000. Doctors licensed for at least one year or self-employed for at least two years may receive mortgage loans with loan-to-value ratios up to 90% to 100% without the need to obtain mortgage insurance for loans up to $700,000 and 85% for loans greater than $700,000. The portfolio of loans originated under this program was $4.8 million as of December 31, 2021.
Nonresidential Real Estate and Multi-Family Lending. In recent years, we have increased our nonresidential real estate and multi-family loans. Our nonresidential real estate loans are secured primarily by office buildings, retail and mixed-use properties, and light industrial properties located in our primary market area. Our multi-family loans are secured primarily by apartment buildings. At December 31, 2021, we had $41.8 million in nonresidential real estate loans and $55.0 million in multi-family real estate loans, representing 20.0% and 26.3% of our total loan portfolio, respectively.
Most of our nonresidential and multi-family real estate loans have a maximum term of up to 25 years. The interest rates on nonresidential real estate and multi-family loans are generally fixed for an initial period of three, five or seven years and adjust annually thereafter based on the One Year Treasury Rate. The maximum loan-to-value ratio of our nonresidential real estate loans is generally 75% while multi-family real estate loans have a maximum loan-to-value ratio of 80%. All loan-to-value ratios are subject to our underwriting procedures and guidelines. At December 31, 2021, our largest nonresidential real estate loan totaled $3.8 million and was secured by an industrial use facility. At that date, our largest multi-family real estate loan totaled $3.4 million and was secured by an apartment building. At December 31, 2021, both of these loans were performing in accordance with their original terms. Set forth below is information regarding our nonresidential real estate loans at December 31, 2021.
Type of Collateral
Number of Loans
Balance
(In thousands)
General commercial
$
9,773
Industrial/warehouse
10,466
Retail/wholesale
11,488
Mobile home park
Self-storage facilities
4,993
Gas stations and convenience stores
3,364
Religious facilities
Service/professional
1,434
Total
$
41,762
We consider a number of factors in originating nonresidential and multi-family real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All nonresidential real estate and multi-family loans are appraised by outside independent appraisers. Personal guarantees are generally obtained from the principals of nonresidential and multi-family real estate borrowers.
Loans secured by nonresidential and multi-family real estate generally are larger than one- to four-family residential loans and involve greater credit risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Repayment of nonresidential real estate loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower’s ability to repay the loan may be impaired. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate. At December 31, 2021, we had no non-performing nonresidential or multifamily real estate loans.
Construction Lending and Land Loans. We make construction loans to individuals for the construction of their primary residences and, to a limited extent, loans to builders and commercial borrowers. We also make a limited amount of land loans to complement our construction lending activities, as such loans are generally secured by lots that will be used for residential development. Land loans also include loans secured by land purchased for investment purposes. At December 31, 2021, our construction loans, including land loans, totaled $19.4 million, representing 9.3% of our total loan portfolio.
Loans to individuals for the construction of their residences are typically originated as construction/permanent loans, with a construction phase for up to 18 months. Upon completion of the construction phase, the loan automatically becomes a permanent loan. These construction loans have rates and terms comparable to one- to four-family residential loans offered by us. During the construction phase, the borrower pays interest only. The maximum loan-to-value ratio of owner-occupied single-family construction loans is generally 80%, or higher if mortgage insurance is obtained. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. Land loans are generally offered for terms of up to 5 years. The maximum loan-to-value ratio of land loans is 65% for developed lots and 50% for undeveloped land loans.
At December 31, 2021, our largest outstanding residential construction loan was for $1.2 million of which $142,000 was outstanding. This loan was performing according to its original terms at December 31, 2021. At December 31, 2021, there were no residential construction loans that were 60 days or more delinquent.
Loans to builders for the construction of pre-sold and market (not pre-sold) homes typically run for up to 24 months. These construction loans have rates and terms comparable to one- to four-family residential loans offered by us. The maximum loan-to-value ratio of pre-sold builder construction loans is generally 80%, and this ratio is reduced to 65% on market homes. Construction loans to builders require that financial statements and tax returns be supplied and reviewed annually. Additionally, we limit construction loans to builders, to no more than two loans on market homes in one development at a time, or no more than one loan per builder at a time.
Loans for the construction of nonresidential or multi-family properties typically run for up to 18 months. These construction loans have rates and terms comparable to nonresidential real estate loans offered by us. The maximum loan-to-value ratio of nonresidential or multi-family construction loans is generally 75%. Nonresidential real estate construction loans also have a 50% pre-leasing requirement. No such requirement is placed on multi-family construction loans.
At December 31, 2021, our largest outstanding nonresidential or multi-family construction loan was $2.1 million of which $721,000 was outstanding. This loan was performing in accordance with its original terms at December 31, 2021.
The application process for a construction loan includes a submission to Cincinnati Federal of accurate plans, specifications and costs of the project to be constructed or developed. These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction (land plus building). Our construction loan agreements generally provide that loan proceeds are disbursed in increments as construction progresses.
Construction and land lending generally are made for relatively short terms. However, to the extent our construction loans are not made to owner-occupants of single-family homes, they are more vulnerable to changes in economic conditions and the concentration of credit with a limited number of borrowers. Further, the nature of these loans is such that they are more difficult to evaluate and monitor. Our risk of loss on a construction or land loan is dependent largely upon the accuracy of the initial estimate of the property’s value upon completion of the project and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial investments to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage.
Home Equity Loans and Lines of Credit. We offer home equity loans and lines of credit, which are generally made for owner-occupied homes, and are secured by first or second mortgages on residences. We generally offer these loans with a maximum loan-to-value ratio (including senior liens on the collateral property) of 90% if the first mortgage is originated by Cincinnati Federal and 85% if the first mortgage is not originated by Cincinnati Federal. We currently offer home equity lines of credit for a period of ten years, and generally at rates tied to the prevailing prime interest rate. We also offer home equity lines of credit on non-owner occupied properties, where the first mortgage is also originated by us, with a maximum loan-to-value ratio of 50% for a maximum term of two years. Our home equity loans and lines of credit are generally underwritten in the same manner as our one- to four-family residential loans. At December 31, 2021, we had $11.4 million of home equity lines of credit and $1.9 million of fixed-term home equity loans, representing 5.5% and 0.9% of our total loan portfolio, respectively. At December 31, 2021, we had no home equity loans and lines of credit that were 30 days or more delinquent.
Home equity lines of credit and fixed-term home equity loans have greater risk than one- to four-family residential real estate loans secured by first mortgages. Our interest is generally subordinated to the interest of the institution holding the first mortgage. Even where we hold the first mortgage, we face the risk that the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and costs of foreclosure and we may be unsuccessful in recovering the remaining balance from those customers.
Commercial Business Loans. We have generally conducted very limited commercial business lending. We participated in the Paycheck Protection Program (“PPP”) and originated $634,000 in such loans. All PPP loans have been repaid in full. The board of directors has also authorized management to purchase up to $500,000 in commercial business loans from an unaffiliated commercial lender specializing in loans to physicians and other professionals in the medical field. These are installment loans amortizing over seven years and carry higher interest rates than traditional residential loans. These loans may be secured by liens on non-real estate business assets. These loans are often used for working capital, debt consolidation, equipment and other general business purposes. The loans to be purchased must be reviewed and found to be consistent with our loan policy and underwriting guidelines. As of December 31, 2020, we had acquired such loans in the aggregate amount of $22,700. At December 31, 2021, the loans were performing in accordance with their original terms.
Consumer Lending. Our consumer lending apart from home equity loans and lines of credit has been limited. At December 31, 2021, we had $349,000 of consumer loans outstanding, representing approximately 0.2% of our total loan portfolio.
Originations, Purchases and Sales of Loans
Lending activities are conducted primarily by our salaried loan personnel operating at our main and branch office locations and by our loan officers. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both fixed- and adjustable-rate loans. Our ability to originate fixed- or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected by current and expected future levels of market interest rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.
Consistent with our interest rate risk strategy, we originate for sale and sell the majority of the fixed-rate, one- to four-family residential real estate loans that we originate with terms of greater than 10 years, on a combination of servicing-retained and servicing-released, limited or no recourse basis, while generally retaining shorter-term fixed-rate and all adjustable-rate one- to four-family residential real estate loans in order to manage the duration and time to repricing of our loan portfolio. Additionally, we consider the current interest rate environment in making decisions as to whether to hold the mortgage loans we originate for investment or to sell such loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. At December 31, 2021, we had $8.1 million in loans held for sale.
From time to time, we may purchase or sell participation interests in loans. We underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At December 31, 2021 and December 31, 2020, we had $3.6 million and $4.2 million in loan participation interests that we purchased. At those dates, we had $2.4 million and $2.1 million in loan participation interests sold.
Historically, we generally do not purchase whole loans or loan participations from third parties to supplement our loan production. However, we have purchased loans from a commercial lender specializing in loans to physicians and other professionals in the medical field. We may purchase additional loans from that lender in the future. See “-Commercial Business Loans.”
We generally sell our loans without recourse, except for customary representations and warranties provided in sales transactions. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities. For the years ended December 31, 2021 and 2020, we sold $272.9 million and $291.4 million of residential loans, respectively, of mortgage loans. Some of the mortgage loans were sold on a servicing-released basis, and we retained servicing on certain of these loans. At December 31, 2021, we serviced $281.9 million of fixed-rate and adjustable, one- to four-family residential real estate loans that we originated and sold in the secondary market.
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a loan payment becomes 20 days past due, we contact the customer by mailing a late notice. If a loan payment becomes 30 days past due, we mail a “right to cure” letter to the borrower and any co-makers and endorsers. If a loan payment becomes 90 days past due (or a borrower misses three consecutive payments, whichever occurs first), we send a demand letter and generally cease accruing interest. It is our policy to institute legal procedures for collection or foreclosure when a loan becomes 120 days past due, unless management determines that it is in the best interest of Cincinnati Federal to work further with the borrower to arrange a workout plan. From time to time we may accept deeds in lieu of foreclosure.
When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value, less estimated costs to sell.
Delinquent Loans. The following tables set forth our loan delinquencies, including nonaccrual loans, by type and amount at the dates indicated.
At December 31,
90 Days or
90 Days or
30-59 Days
60-89 Days
More Past
30-59 Days
60-89 Days
More Past
Past Due
Past Due
Due
Past Due
Past Due
Due
(In thousands)
Real estate loans:
One- to four-family residential
$
$
$
$
$
$
Nonresidential
-
-
-
-
-
-
Multi-family
-
-
-
-
-
-
Home equity lines of credit
-
-
-
-
-
-
Construction and land
-
-
-
-
-
-
Total real estate
Commercial loans
-
-
-
-
-
-
Consumer loans
-
-
-
-
-
-
Total
$
$
$
$
$
$
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports with the Office of the Comptroller of the Currency and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.
On the basis of this review of our assets, our classified or special mention assets (presented gross of allowance) at the dates indicated were as follows:
At December 31,
(In thousands)
Special mention assets
$
$
1,101
Substandard assets
Doubtful assets
-
-
Loss assets
-
-
Total classified assets
$
$
1,984
Non-Performing Assets. We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days delinquent unless the loan is well-secured and in the process of collection. Loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until the loan qualifies for return to accrual. Generally, loans are restored to accrual status when all the principal and interest amounts contractually due are brought current, and future payments are reasonably assured. Loans are moved to non-accrual status in accordance with our policy, which is typically after 90 days of non-payment.
The following table sets forth information regarding our non-performing assets and troubled debt restructurings at December 31, 2021 and 2020. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or loans modified at interest rates materially less than current market rates.
Non-accrual loans:
Real estate loans:
One- to four-family residential:
Owner occupied
$
$
Non-owner occupied
-
-
Nonresidential
-
-
Multi-family
-
-
Home equity lines of credit
-
-
Construction and land
-
-
Total real estate
Commercial loans
-
-
Consumer loans
-
-
Total non-accrual loans
Non-accruing troubled debt restructured loans:
Real estate loans:
One- to four-family residential:
Owner occupied
-
-
Non-owner occupied
-
-
Nonresidential
-
-
Multi-family
-
-
Home equity lines of credit
-
-
Construction and land
-
-
Total real estate
-
-
Commercial loans
-
-
Consumer loans
-
-
Total non-accruing troubled debt restructured loans
-
-
Total non-accrual loans
Real estate owned:
One- to four-family residential:
Owner occupied
-
-
Non-owner occupied
-
-
Nonresidential
-
-
Multi-family
-
-
Home equity lines of credit
-
-
Construction and land
-
-
Other
-
-
Total real estate owned
-
-
Total non-performing assets
$
$
Accruing loans past due 90 days or more:
Real estate loans:
One- to four-family residential:
Owner occupied
$
-
$
-
Non-owner occupied
-
-
Nonresidential
-
-
Multi-family
-
-
Home equity lines of credit
-
-
Construction and land
-
-
Total real estate
-
-
Commercial loans
-
-
Consumer loans
-
-
Total accruing loans past due 90 days or more
$
-
$
-
At December 31,
Accruing troubled debt restructured loans:
Real estate loans:
One- to four-family residential:
Owner occupied
$
$
Non-owner occupied
Nonresidential
-
-
Multi-family
Home equity lines of credit
-
-
Construction and land
-
-
Total real estate
1,143
Commercial loans
-
-
Consumer loans
-
-
Total accruing troubled debt restructured loans
$
$
1,143
Total non-performing assets and accruing troubled debt restructured loans
$
1,110
$
1,317
Total non-performing loans to total loans
0.06
%
0.10
%
Total non-performing assets to total assets
0.05
%
0.07
%
Total non-performing assets and accruing troubled debt restructured loans to total assets
0.44
%
0.56
%
Except as disclosed in the foregoing tables, other than $165,000 and $251,000 of loans designated as substandard, there were no other loans at December 31, 2021 and December 31, 2020, respectively, that are not already disclosed where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.
Troubled Debt Restructurings. We occasionally modify loans to help a borrower stay current on his or her loan and to avoid foreclosure. We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating the strength of any guarantors based on documented current financial information, and assessing the current value of any collateral pledged. We generally do not forgive principal or interest on loans, but may do so if it is in our best interest and increases the likelihood that we can collect the remaining principal balance. We may modify the terms of loans to lower interest rates (which may be at below market rates), to provide for fixed interest rates on loans where fixed rates are otherwise not available, or to provide for interest-only terms. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests. At December 31, 2021, we had loans totaling $990,000 that were classified as troubled debt restructurings.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well as the shortfall in collateral value could result in our charging off the loan or the portion of the loan that was impaired.
Among other factors, we consider current general economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan losses for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing data on our local markets from third party sources we believe to be reliable as a basis for assumptions about the impact of housing depreciation.
Substantially all of our loans are secured by collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically for a nonperforming real estate loan in the process of collection, the value of the underlying collateral is estimated using either the original independent appraisal, adjusted for current economic conditions and other factors, or a new independent appraisal, or evaluation and related general or specific allowances for loan losses are adjusted on a quarterly basis. If a nonperforming real estate loan is in the process of foreclosure and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, we will order a new independent appraisal or evaluation if it has not already been obtained. Any shortfall would result in immediately charging off the portion of the loan that was impaired.
Specific Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not classified as impaired to recognize the probable incurred losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.
As an integral part of their examination process, the Office of the Comptroller of the Currency (OCC) will periodically review our allowance for loan losses. The OCC may require that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.
Allowance at beginning of period
$
1,673
$
1,408
Provision (credit) for loan losses
-
Charge offs:
Real estate loans:
One- to four-family residential
-
-
Nonresidential
-
-
Multi-family
-
-
Home equity lines of credit
-
-
Construction and land
-
-
Total real estate
-
-
Commercial loans
-
-
Consumer loans
-
-
Total charge-offs
-
-
Recoveries:
Real estate loans:
One- to four-family residential
-
-
Nonresidential
-
-
Multi-family
-
-
Home equity lines of credit
-
-
Construction and land
-
-
Total real estate
-
-
Commercial loans
-
-
Consumer loans
-
-
Total recoveries
-
-
Net (charge-offs) recoveries
-
-
Allowance at end of period
$
1,673
$
1,673
Allowance to non-accrual loans
1,394.17
%
961.49
%
Non-accrual loans to total loans
0.06
%
0.10
%
Allowance to total loans outstanding at the end of the period
0.80
%
0.97
%
Net (charge-offs) recoveries to average loans outstanding during the period
0.00
%
0.00
%
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
Percent of
Percent of
Loans in
Loans in
Each
Allowance
Each
Allowance
Category to
for Loan
Category to
for Loan Losses
Total Loans
Losses
Total Loans
Real estate loans:
One- to four-family residential:
Owner occupied
$
33.66
%
$
42.05
%
Non-owner occupied
4.96
6.97
Nonresidential
19.99
17.08
Multi-family
26.33
24.15
Home equity lines of credit
5.46
5.75
Construction and land
9.30
3.38
Total real estate
1,673
99.70
1,650
99.38
Commercial loans
0.14
0.42
Consumer loans
0.16
0.20
Total allocated allowance
1,673
100.00
%
1,673
100.00
%
Unallocated
-
-
Total
$
1,673
$
1,673
At December 31, 2021, our allowance for loan losses represented 0.80% of total loans and 1,394.17% of nonperforming loans. Nonperforming loans decreased from $174,000 at December 31, 2020 to $120,000 at December 31, 2021. At December 31, 2020, our allowance for loan losses represented 0.97% of total loans and 961.49% of nonperforming loans. The allowance for loan losses was $1.7 million at December 31, 2021 and December 31, 2020. The Bank had no loan charge-offs during the years ended December 31, 2021 and December 31, 2020.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, regulators, in reviewing our loan portfolio, may request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and increases may be necessary should the quality of any loan deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Investment Activities
General. The goals of our investment policy are to provide and maintain liquidity to meet day-to-day, cyclical and long-term liquidity needs, to help mitigate interest rate and market risk within the parameters of our interest rate risk policy, and to generate a dependable flow of earnings within the context of our interest rate and credit risk objectives. Subject to loan demand and our interest rate risk analysis, we will increase the balance of our investment securities portfolio when we have excess liquidity.
Our investment policy was adopted, and is reviewed annually, by the board of directors. All investment decisions require the approval of at least three senior management members, one of which shall be the President or Chief Financial Officer. The Chief Financial Officer provides an investment schedule detailing the investment portfolio which is reviewed at least monthly by the Bank’s asset-liability committee and the board of directors.
Our current investment policy permits, with certain limitations, investments in United States Treasury securities; securities issued by the United States Government and its agencies or government sponsored enterprises including mortgage-backed securities and collateralized mortgage obligations (“CMO”) issued by Fannie Mae, Ginnie Mae and Freddie Mac; corporate bonds and obligations; debt securities of state and municipalities; commercial paper; certificates of deposit in other financial institutions, and bank-owned life insurance.
At December 31, 2021, our investment portfolio consisted of securities and obligations issued by U.S. government-sponsored enterprises or the Federal Home Loan Bank. At December 31, 2021, we owned $4,149,300 of FHLB-Cincinnati stock. As a member of FHLB-Cincinnati, we are required to purchase stock in the FHLB-Cincinnati, which stock is carried at cost and classified as restricted equity securities.
Mortgage-Backed Securities. At December 31, 2021, we had mortgage-backed securities with a carrying value of $7.9 million, which constituted our entire securities portfolio. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Cincinnati Federal. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our mortgage-backed securities are backed by either Freddie Mac, Fannie Mae or GNMA, which are government-sponsored enterprises.
Residential mortgage-backed securities issued by United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2021 and 2020, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. Adjustable-rate mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust.
More than One Year
More than Five Years
One Year or Less
through Five Years
through Ten Years
More than Ten Years
Total
Weighted
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Fair
Average
December 31, 2021
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Value
Yield
(Dollars in thousands)
Freddie Mac
$
6,814
0.71
%
$
-
-
%
$
-
-
%
$
-
-
%
$
6,814
$
6,851
0.71
%
Fannie Mae
1.78
%
-
-
%
-
-
%
-
-
%
1.78
%
GNMA
1.53
%
-
-
%
-
-
%
-
-
%
1.53
%
Total
$
7,844
0.82
%
$
-
-
%
$
-
-
%
$
-
-
%
$
7,844
$
7,891
0.82
%
More than One Year
More than Five Years
One Year or Less
through Five Years
through Ten Years
More than Ten Years
Total
Weighted
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Fair
Average
December 31, 2020
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Value
Yield
(Dollars in thousands)
Freddie Mac
$
3,575
0.59
%
$
-
-
%
$
-
-
%
$
-
-
%
$
3,575
$
3,604
0.59
%
Fannie Mae
2.21
%
-
-
%
-
-
%
-
-
%
2.21
%
GNMA
1,403
2.06
%
-
-
%
-
-
%
-
-
%
1,403
1,420
2.06
%
Total
$
5,171
1.05
%
$
-
-
%
$
-
-
%
$
-
-
%
$
5,171
$
5,214
1.05
%
The weighted average yield is based on the coupon rate of the security adjusted for any premium or discount when acquired. There are no tax- exempt securities in the investment portfolio.
Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also may use borrowings, primarily FHLB-Cincinnati advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits. Our deposits are generated primarily from our primary market area. We offer a selection of deposit accounts, including demand accounts, savings accounts, certificates of deposit and individual retirement accounts (IRAs). Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We do not accept brokered deposits, although we have the authority to do so.
We participate in the National CD Rateline Program as a wholesale source for certificates of deposit to supplement deposits generated through our retail banking operations. The Rateline Program provides an internet based listing service which connects financial institutions such as Cincinnati Federal with other financial institutions for jumbo certificates of deposit. Deposits obtained through the Rateline Program are not considered to be brokered deposits. At December 31, 2021, approximately $40.9 million of our certificates of deposit, representing 20.0% of our total deposits, had been obtained through the Rateline Program. At December 31, 2021, these certificates of deposit had an average term to maturity of eighteen months. Early withdrawal of these deposits is not permitted, which makes these accounts a more stable source of funds.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely upon personalized customer service, long-standing relationships with customers, and the favorable image of Cincinnati Federal in the community to attract and retain deposits. We recently implemented a fully functional electronic banking platform, including mobile app and on-line bill pay, as a service to our deposit customers.
The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Our ability to gather deposits is affected by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products.
The following table sets forth the distribution of our average total deposit accounts, by account type, for the periods indicated.
Weighted
Weighted
Average
Average
Average
Average
Balance
Percent
Rate
Balance
Percent
Rate
Deposit type:
Savings
$
57,685
32.50
%
0.19
%
$
42,179
27.33
%
0.28
%
Interest-bearing demand
31,192
17.57
0.15
28,061
18.18
0.22
Certificates of deposit
70,617
39.79
1.23
70,253
45.53
2.10
Interest-bearing deposits
159,494
89.86
0.65
140,493
91.04
1.18
Non-interest bearing demand
18,002
10.14
-
13,822
8.96
-
Total deposits
$
177,496
100.00
%
0.58
%
$
154,315
100.00
%
1.07
%
The total amount of uninsured deposits (deposit accounts exceeding the $250,000 FDIC insurance limit) was $1,083,000 and $1,834,000 million at December 31, 2021 and December 31, 2020, respectively. The following table sets forth the maturity of our certificates of deposit exceeding $250,000 for the periods indicated.
At December 31, 2021
At December 31, 2020
(In thousands)
(In thousands)
Three months or less
$
-
$
-
Over three months through six months
-
-
Over six months through one year
Over one year
1,063
Total
$
1,083
$
1,834
Borrowings. We may obtain advances from the FHLB-Cincinnati by pledging as security our capital stock in the FHLB-Cincinnati and certain of our mortgage loans and mortgage-backed securities. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile. At December 31, 2021, we had no FHLB-Cincinnati advances. In addition to funding portfolio loans, we sometimes use FHLB-Cincinnati advances for short-term funding needs arising from our mortgage-banking activities.
In addition to the availability of FHLB-Cincinnati advances we also have a total of $11.5 million in lines of credit available from three commercial banks. No amount was outstanding on these lines of credit at December 31, 2021.
Employees and Human Capital
We believe that the success of a business is largely due to the quality of its employees, the development of each employee’s full potential, and the Company’s ability to provide timely and satisfying rewards. We encourage and support development of our employees and, whenever possible, strive to fill vacancies from within. We invest in learning and development including tuition reimbursement for courses, degree programs and fees for certifications. As of December 31, 2021, we had 73 full-time employees and 7 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.
Subsidiary Activities
Cincinnati Federal is the only subsidiary of Cincinnati Bancorp, Inc. Cincinnati Federal Investment Services, LLC, is the sole subsidiary of Cincinnati Federal and is currently inactive.
REGULATION AND SUPERVISION
General
As a federal savings bank, Cincinnati Federal is subject to examination and regulation by the Office of the Comptroller of the Currency, and is also subject to examination by the Federal Deposit Insurance Corporation. The federal system of regulation and supervision establishes a comprehensive framework of activities in which Cincinnati Federal may engage and is intended primarily for the protection of depositors and the Federal Deposit Insurance Corporation’s Deposit Insurance Fund. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors, and not for the protection of security holders. Cincinnati Federal also is a member of and owns stock in the Federal Home Loan Bank of Cincinnati, which is one of the 11 regional banks in the Federal Home Loan Bank System.
Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as Cincinnati Federal or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.
In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.
As a savings and loan holding company, Cincinnati Bancorp, Inc. is required to comply with the rules and regulations of the Federal Reserve Board. It is required to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement authority of the Federal Reserve Board. Cincinnati Bancorp, Inc. is also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Any change in applicable laws or regulations, whether by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Securities and Exchange Commission or Congress, could have a material adverse impact on the operations and financial performance of Cincinnati Bancorp, Inc. and Cincinnati Federal.
Set forth below is a brief description of material regulatory requirements that are or will be applicable to Cincinnati Federal and Cincinnati Bancorp, Inc. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Cincinnati Federal and Cincinnati Bancorp, Inc.
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Cincinnati Federal may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Cincinnati Federal may also establish subsidiaries that may engage in certain activities not otherwise permissible for Cincinnati Federal, including real estate investment and securities and insurance brokerage.
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the Office of the Comptroller of the Currency takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. As fully implemented on January 1, 2019, the capital conservation buffer requirement is 2.5% of risk-weighted assets.
At December 31, 2021, Cincinnati Federal’s capital exceeded all applicable requirements.
Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. At December 31, 2021, Cincinnati Federal was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings bank, Cincinnati Federal must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Cincinnati Federal must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings bank’s business.
Cincinnati Federal also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended. This test generally requires a savings bank to have at least 75% of its deposits held by the public and earn at least 25% of its income from loans and U.S. government obligations. Alternatively, a savings bank can satisfy this test by maintaining at least 60% of its assets in cash, real estate loans and U.S. Government or state obligations.
A savings bank that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2021, Cincinnati Federal satisfied the QTL test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the savings bank’s capital account. A federal savings bank must file an application with the Office of the Comptroller of the Currency for approval of a capital distribution if:
● the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two years;
● the savings bank would not be at least adequately capitalized following the distribution;
● the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
● the savings bank is not eligible for expedited treatment of its filings, generally due to an unsatisfactory CAMELS rating or being subject to a cease and desist order or formal written agreement that requires action to improve the institution’s financial condition.
Even if an application is not otherwise required, every savings bank that is a subsidiary of a savings and loan holding company, such as Cincinnati Federal, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.
A notice or application related to a capital distribution may be disapproved if:
● the federal savings bank would be undercapitalized following the distribution;
● the proposed capital distribution raises safety and soundness concerns; or
● the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings bank also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form.
Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings bank, the Office of the Comptroller of the Currency is required to assess the federal savings bank’s record of compliance with the Community Reinvestment Act. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as other federal regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all institutions insured by the Federal Deposit Insurance Corporation to publicly disclose their rating. Cincinnati Federal received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with, an insured depository institution such as Cincinnati Federal. Cincinnati Bancorp, Inc. is an affiliate of Cincinnati Federal because of its control of Cincinnati Federal. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.
Cincinnati Federal’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
● be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
● not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Cincinnati Federal’s capital.
In addition, extensions of credit in excess of certain limits must be approved by Cincinnati Federal’s board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The Office of the Comptroller of the Currency has primary enforcement responsibility over federal savings banks and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings bank. Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or recommend to the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings bank. If such action is not taken, the Federal Deposit Insurance Corporation has authority to take the action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Interstate Banking and Branching. Federal law permits well capitalized and well managed holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, recent amendments made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.
Prompt Corrective Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The applicable Office of the Comptroller of the Currency regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. Under the amended regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to a regulatory order to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, ceasing receipt of deposits from correspondent banks, dismissal of directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
At December 31, 2021, Cincinnati Federal met the criteria for being considered “well capitalized.”
Insurance of Deposit Accounts. The Deposit Insurance Fund of the Federal Deposit Insurance Corporation insures deposits at Federal Deposit Insurance Corporation insured financial institutions such as Cincinnati Federal. Deposit accounts in Cincinnati Federal are insured by the Federal Deposit Insurance Corporation generally up to a maximum of $250,000 per separately insured depositor. The Federal Deposit Insurance Corporation charges insured depository institutions premiums to maintain the Deposit Insurance Fund.
Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Institutions deemed to be less risky pay lower rates while institutions deemed riskier pay higher rates. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s deposits.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation was required to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation, which has exercised that discretion by establishing a long range fund ratio of 2%. The Federal Deposit Insurance Corporation announced that the ratio had declined to 1.30% at September 30, 2020 due largely to consequences of the COVID-19 pandemic. The FDIC adopted a plan to restore the fund to the 1.35% ratio within eight years but did not change its assessment schedule.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Cincinnati Federal. We cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not know of any practice, condition or violation that may lead to termination of our deposit insurance.
Privacy Regulations. Federal regulations generally require that Cincinnati Federal disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Cincinnati Federal is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Cincinnati Federal currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.
USA PATRIOT Act. Cincinnati Federal is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and customer identification requirements.
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Other Regulations
Interest and other charges collected or contracted for by Cincinnati Federal are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:
● Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
● Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; and
● Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The deposit operations of Cincinnati Federal also are subject to, among others, the:
● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
● Check Clearing for the 21st Century Act (also known as Check 21), which gives substitute checks, such as digital check images and copies made from that image, the same legal standing as the original paper check; and
● Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2022, the Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $32.4 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 0.0% and the amounts greater than $32.4 million and up to $640.6 million require a 10% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $32.4 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. Cincinnati Federal was in compliance with these requirements at December 31, 2021. However, effective March 26, 2020, the Federal Reserve Board reduced reserve requirement ratios on all net transaction accounts to zero percent, eliminating reserve requirements for all depository institutions, in response to the COVID-19 pandemic.
Federal Home Loan Bank System
Cincinnati Federal is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. Cincinnati Federal was in compliance with this requirement at December 31, 2020. Based on redemption provisions of the Federal Home Loan Bank of Cincinnati, the stock has no quoted market value and is carried at cost. Cincinnati Federal reviews for impairment, based on the ultimate recoverability, the cost basis of the Federal Home Loan Bank of Cincinnati stock. At December 31, 2021, no impairment had been recognized.
Holding Company Regulation
Cincinnati Bancorp, Inc. is a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement authority over Cincinnati Bancorp, Inc. and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Cincinnati Federal.
As a savings and loan holding company, Cincinnati Bancorp, Inc.’s activities are limited to those activities permissible by law for financial holding companies (if Cincinnati Bancorp, Inc. makes an election to be treated as a financial holding company and meets the other requirements to be a financial holding company) or multiple savings and loan holding companies. Cincinnati Bancorp, Inc. has no present intention to make an election to be treated as a financial holding company. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending and other activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, insurance and underwriting equity securities. Multiple savings and loan holding companies are authorized to engage in activities specified by federal regulation, including activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act.
Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of any depository institution not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act requires the Federal Reserve Board to establish minimum consolidated capital requirements for all depository institution holding companies that are as stringent as those required for the insured depository subsidiaries. However, savings and loan holding companies of under $3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve determines otherwise in particular cases.
The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing the “source of strength” doctrine that require holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of capital distributions previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding company should inform the Federal Reserve Board supervisory staff before redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Cincinnati Bancorp, Inc. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Federal Securities Laws
Cincinnati Bancorp, Inc. common stock is registered with the Securities and Exchange Commission after the conversion and stock offering. Cincinnati Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.
Change in Control Regulations
Under the Change in Bank Control Act, a federal statute, no person may acquire control of a savings and loan holding company, such as Cincinnati Bancorp, Inc., unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with Cincinnati Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Federal Reserve Board.
TAXATION
Federal Taxation
Method of Accounting. For federal income tax purposes, Cincinnati Bancorp, Inc. and Cincinnati Federal report their income and expenses on the cash method of accounting and use a tax year ending December 31 for filing their federal income tax returns.
Net Operating Loss Carryovers. Generally, a financial institution may carry a net operating loss forward indefinitely for losses generated in taxable years ending after December 31, 2017. Cincinnati Bancorp, Inc. had $575,000 of federal net loss carryforwards at December 31, 2021 that expire between 2028 and 2036 and $240,000 with no expiration.
Capital Loss Carryovers. A corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any undeducted loss remaining after the five year carryover period is not deductible. At December 31, 2021, the Company had no capital loss carryovers.
Corporate Dividends. Cincinnati Bancorp, Inc. may generally exclude from its income 100% of dividends received from Cincinnati Federal as a member of the same affiliated group of corporations.
State Taxation
Cincinnati Bancorp, Inc. and Cincinnati Federal are subject to Ohio taxation in the same general manner as other financial institutions. In particular, Cincinnati Bancorp, Inc. and Cincinnati Federal file a consolidated Ohio Financial Institutions Tax (“FIT”) return. The FIT is based upon the net worth of the consolidated group. For Ohio FIT purposes, savings institutions are currently taxed at a rate equal to 0.8% of taxable net worth.
Maryland State Taxation. As a Maryland business corporation, Cincinnati Bancorp, Inc. is required to file an annual report with and pay franchise taxes to the State of Maryland.

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ITEM 1A. RISK FACTORS
ITEM 1A.RISK FACTORS
The presentation of Risk Factors is not required of smaller reporting companies like Cincinnati Bancorp, Inc.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2.PROPERTIES
As of December 31, 2021, the net book value of our office properties was $3.3 million, and the net book value of our furniture, fixtures and equipment was $151,000. The following table sets forth information regarding our offices.
Leased or
Year Acquired
Net Book Value of
Location
Owned
or Leased
Real Property
(In thousands)
Main Office:
6581 Harrison Ave Cincinnati, OH 45247
Owned
$
1,214
Branch Offices:
1270 Nagel Rd. Cincinnati, OH 45255
Owned
7553 Bridgetown Rd. Cincinnati, OH 45248
Owned
4310 Glenway Ave Cincinnati, OH 45205
Owned
1050 Scott Street Covington, KY 41011
Owned
6890 Dixie Highway Florence, KY 41042
Owned
We believe that current facilities are adequate to meet our present and foreseeable needs, subject to possible future expansion.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.LEGAL PROCEEDINGS
At December 31, 2021, we were not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business or in any legal proceedings the outcome of which would be material to our consolidated financial condition or results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a)Market, Holder and Dividend Information. The common stock of Cincinnati Bancorp, Inc. is listed on the Nasdaq Capital Market under the symbol “CNNB.” The number of holders of record of Cincinnati Bancorp, Inc.’s common stock as of March 8, 2022, was approximately 230. Certain shares of Cincinnati Bancorp, Inc. are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
(b)Sales of Unregistered Securities. Not applicable.
(c)Use of Proceeds. Not applicable.
(d)Stock Repurchases.
The following table provides information regarding the Company’s purchase of its common stock during the quarter ended December 31, 2021:
Total Number of
Maximum Number of Shares
Total Number of
Average Price
Shares Purchased
That May Yet Be Purchased
Period
Shares Purchased
Per Share
of Publicly Announced Program (1)
Under the Program (1)
October 1 to 31, 2021
$
14.69
45,559
103,222
November 1 to 30, 2021
$
14.59
46,423
102,358
December 1 to 31, 2021
1,956
$
14.38
48,379
100,402
(1) On February 16, 2021, the Company announced the adoption of a stock repurchase program under which the Company could repurchase up to 148,781 shares of its common stock, or approximately 5% of the then current outstanding shares. At December 31, 2021, the Company had purchased a total of 48,379 shares of the Company’s common stock under this program at an average price of $14.02 per share, and there remained 100,402 shares still available for repurchase under the program. The timing of the purchases will depend on certain factors, including but not limited to, market conditions and prices, available funds and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan that will be adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Any repurchased shares will be held by the Company as authorized but unissued shares. The repurchase program has no expiration date, but may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares.
(e)Stock Performance Graph. Not required for smaller reporting companies.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.[Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
This section is intended to help potential investors understand our financial performance through a discussion of the factors affecting our financial condition at December 31, 2021 and December 31, 2020 and our results of operations for the years ended December 31, 2021 and December 31, 2020. This section should be read in conjunction with the consolidated financial statements and notes thereto that appear elsewhere in this Annual Report on Form 10-K.
Overview
Cincinnati Federal provides financial services to individuals and businesses from our main office in Cincinnati, Ohio and our full service branch offices in Miami Heights, Anderson and Price Hill and in Covington and Florence in Northern Kentucky. Our primary market area includes Hamilton County, Ohio, and, to a lesser extent, Warren, Butler and Clermont Counties, Ohio. We also conduct business in the northern Kentucky region and make loans secured by properties in Campbell, Kenton and Boone Counties, Kentucky, as well as in Dearborn County, in southeastern Indiana.
Our business consists primarily of taking deposits from the general public and investing those deposits, together with borrowings and funds generated from operations, in one- to four-family residential real estate loans, nonresidential real estate and multi-family loans, home equity loans and lines of credit and construction and land loans. At December 31, 2021, $80.7 million, or 38.6% of our total loan portfolio, was comprised of one- to four-family residential real estate loans; $41.8 million, or 20.0%, consisted of nonresidential real estate loans; $55.0 million, or 26.3%, consisted of multi-family loans; $11.4 million, or 5.5%, consisted of home equity lines of credit; $19.4 million, or 9.3%, consisted of construction and land loans; $649,000 or 0.3% consisted of commercial business loans and consumer loans. We also invest in securities, which currently consist primarily of mortgage-backed securities issued by U.S. government sponsored entities and Federal Home Loan Bank stock.
Cincinnati Federal also operates an active mortgage banking unit with thirteen mortgage loan officers. This unit originates loans both for sale in the secondary market and for retention in our portfolio. The revenue from gain on sales of loans was $8.8 million for year ended December 31, 2021 and $9.5 million for year ended December 31, 2020.
We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. We utilize advances from the FHLB-Cincinnati for liquidity and for asset/liability management purposes. At December 31, 2021, we had no advances outstanding with the FHLB-Cincinnati.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of gain (loss) on sale of mortgage loans, checking account service fee income, interchange fees from debit card transactions and income from bank owned life insurance. Non-interest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy and equipment, data processing, franchise taxes, federal deposit insurance premiums, impairment losses on foreclosed real estate and other operating expenses.
We invest in bank owned life insurance to provide us with a funding source to offset some costs of our benefit plan obligations. Bank owned life insurance provides us with non-interest income that is nontaxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. At December 31, 2021, this limit was $9.7 million, and we had invested $4.3 million in bank owned life insurance.
Cincinnati Federal Investment Services, LLC, a wholly owned subsidiary of Cincinnati Federal under Ohio law, was formed in 2015 to offer nondeposit investment and insurance products. Cincinnati Federal Investment Services, LLC is currently inactive.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Business Strategy
Our current business strategy is to operate as a well-capitalized and profitable community bank dedicated to serving the needs of our consumer and business customers, and offering personalized and efficient customer service. Our goals are to increase interest income through loan portfolio growth, expand fee income with the mortgage banking unit, lower our cost of deposits by increasing non-maturity based accounts, achieve economies of scale through balance sheet growth and diversify sources of income. Highlights of our current business strategy include:
● Increasing our origination of nonresidential real estate and multi-family loans. We began originating a significant amount of nonresidential real estate and multi-family loans in the early 2000s. As of December 31, 2021 and 2020, such loans, together with construction and land loans (net of undisbursed loan proceeds), totaled $104.0 million and $77.1 million, or 268.8% and 211.4% of capital plus ALLL, respectively. Under our current Board-approved loan concentration policy, such loans (including construction and land loans, net of undisbursed loan proceeds) shall not exceed 300% of our capital plus ALLL. We intend to continue to increase our origination of nonresidential real estate and multi-family real estate loans, with a focus on multi-family loans. Most nonresidential real estate and multi-family loans are originated with adjustable rates. Nonresidential real estate and multi-family lending is expected to increase loan yields with shorter repricing terms than fixed-rate loans See “Business of Cincinnati Federal-Lending Activities-Commercial Real Estate and Multi-Family Lending.”
● Continuing to focus on our residential mortgage banking operations. For the year ended December 31, 2021, we originated $267.7 million of one-to four-family residential loans for sale, and we sold $272.9 million of one-to four-family residential loans. These loans are all sold on a non-recourse basis primarily to the FHLB-Cincinnati, Freddie Mac, and other private sector third-party buyers. Loans are sold on both a servicing-retained and servicing-released basis. Subject to mortgage market conditions, we intend to continue to increase the number of mortgage loan originators in order to increase our volume of sold loans with the potential for increased servicing income.
● Continuing to emphasize one- to four-family residential adjustable rate mortgage lending. We will continue to focus on originating one- to four-family adjustable rate mortgages for retention in our portfolio. As of December 31, 2021, $40.9 million, or 51.0%, of our one- to four-family residential mortgage loans, with contractual maturities after December 31, 2022, were adjustable rate loans. As of December 31, 2020, $54.4 million, or 64.3%, of our one- to four-family residential mortgage loans had adjustable rates. Adjustable rate loans have shorter repricing terms to mitigate interest rate risk.
● Increasing our “core” deposit base. We seek to increase our core deposit base, particularly checking accounts. Core deposits include all deposit account types except certificates of deposit. Core deposits are our least costly source of funds, which improves our interest rate spread, and represent our best opportunity to develop customer relationships that enable us to cross-sell our full complement of products and services. Core deposits also contribute non-interest income from account-related fees and services and are generally less sensitive to withdrawal when interest rates fluctuate. We have continued our marketing efforts for checking accounts through digital, print and outdoor advertising channels. Core deposits as of December 31, 2021 grew $31.3 million or 34.8% over December 31, 2020 balances. The increase is partially attributable to opening a $16.4 million deposit relationship with a local municipality. We continue to significantly expand and improve the products and services we offer our retail and business deposit customers who maintain core deposit accounts and have improved our infrastructure for electronic banking services, including business online banking, mobile banking, bill pay, remote deposit capture, wire transfers and e-statements. The deposit infrastructure we have established can accommodate significant increases in retail and business deposit accounts without additional capital expenditure. We will also continue to use non-core deposits, including certificates of deposit from the National CD Rateline Program, as a source of funds, in accordance with our asset/liability policies and funding strategies.
● Implementing a managed growth strategy. We intend to pursue a growth strategy for the foreseeable future, with the goal of improving the profitability of our business through increased net interest income. During the year ended December 31, 2021 we prepaid our outstanding FHLB-Cincinnati advances and incurred prepayment penalties of $767,000. The prepayment of the FHLB advances significantly decreased our cost of funds. Subject to market conditions, we intend to focus on growing our nonresidential real estate and multi-family loan portfolios as discussed above. To a lesser extent we intend to grow our one to four family residential and construction loan portfolios.
Summary of Critical Accounting Policies and Critical Accounting Estimates
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. For the year ended December 31, 2021, there were no loan losses charged against the allowance.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from our internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that we may not be able to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. In most cases impaired loans are collateral dependent. The appraised value is sensitive to a number of factors including condition of the property. During the year-ended December 31, 2021 there were no additional charge-offs on collateral dependent loans.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.
In the course of working with borrowers, we may choose to restructure the contractual terms of certain loans. In this scenario, we attempt to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by us to identify if a troubled debt restructuring has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower’s current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms or a combination of the two. If such efforts by us do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time we commence foreclosure. We may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan. It is our policy that any restructured loans on nonaccrual, prior to being restructured, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, we review the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan.
With regards to determination of the amount of the allowance for credit losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.
Federal Home Loan Bank of Cincinnati Lender Risk Account Receivable. Certain loan sale transactions with the Federal Home Loan Bank of Cincinnati provide for establishment of a lender risk account receivable, which consists of amounts withheld from loan sale proceeds by the Federal Home Loan Bank of Cincinnati for absorbing inherent losses that are probable on those sold loans. These withheld funds are an asset as they are scheduled to be paid to us in future years, net of any credit losses on those loans sold. The receivables are initially measured at fair value. The fair value is estimated by discounting the cash flows over the life of each master commitment contract. The accretable yield is amortized over the life of the master commitment contract. Expected cash flows are re-evaluated at each measurement date. If there is an adverse change in expected cash flows, the accretable yield would be adjusted on a prospective basis and the asset would be evaluated for impairment. For the year ended December 31, 2021 there were no adverse changes in cash flows expected.
Mortgage Servicing Rights. Mortgage servicing assets are recognized separately when rights are acquired through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale of loans originated by us are initially measured at fair value at the date of transfer. Cincinnati Federal subsequently measures each class of servicing asset using the fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in earnings in the period in which the changes occur.
Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing rights and may result in a reduction or addition to noninterest income. During the year ended December 31, 2021, the fair value of the mortgage servicing rights decreased $736,000 primarily from an increase in prepayment speed assumptions.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.
Coronavirus (COVID-19) Impact
As a result of the spread of the coronavirus (COVID-19) pandemic, economic uncertainties have arisen which may negatively affect the financial position, results of operations and cash flows of the Company and, in particular, the collectability of the loan portfolio. The duration of these uncertainties and the ultimate financial effects cannot be reasonably estimated at this time.
Loan Modifications
Beginning in March 2020, we began receiving requests from certain of our borrowers for loan payment deferrals. In connection with the implementation of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and related provisions, we elected the temporary relief in the CARES Act not to apply the guidance in ASC 310-40 on accounting for troubled debt restructurings (TDRs) to loan modifications related to COVID-19 made between March 1, 2020 and the earlier of (1) December 31, 2020 or (2) 60 days after the end of the COVID-19 national emergency. The relief was only applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2020.
These modifications for our portfolio loans were for the deferral of principal and interest payments up to 90 day terms. Loan deferral terms may be extended on a case-by-case basis. Each request was evaluated individually and evidenced by a signed loan modification agreement. Interest on loan deferrals continued to accrue during the deferral period. While interest and fees were still accrued to income, through normal GAAP accounting, should eventual credit losses on these deferred payments have emerged, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At December 31, 2021, all loan deferral periods had ended and all affected loans had returned to regular repayment terms. In the event of a renewed escalation of the Covid-19 spread, it is uncertain what the potential impact of loan deferrals will have on the Company’s financial position, results of operations and the allowance for loan losses.
As of December 31, 2021, the Company had no loans remaining in loan deferral status. As of December 31, 2021, borrowers who had requested loan payment forbearance had returned to repayment under the original terms of the loan.
The Company services loans for various investors, including the FHLB-Cincinnati and Freddie Mac. Under terms of our agreement with these entities we are required to remit principal and interest on a scheduled basis. We have conformed our loan deferral program to meet the guidance issued by the FHLB-Cincinnati and Freddie Mac. As of December 31, 2021, there were no sold loans remaining in loan deferral status. As of December 31, 2021, all other borrowers requesting loan payment forbearance had returned to repayment under the original terms of the loan. In the event of a renewed escalation of the COVID-19 spread, it is uncertain what potential impact the loan deferrals for sold loans will have on our financial position.
Paycheck Protection Program
As part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Small Business Administration (“SBA”) has been authorized to guarantee loans under the Paycheck Protection Program (“PPP”) under the CARES Act through August 8, 2020. We began accepting applications on April 27, 2020. We originated a total of 23 PPP loans totaling $633,800 under the initial PPP. As of December 31, 2021, all loans originated under the original program have been forgiven. We participated in the second round of the PPP and originated seven loans totaling $185,000. As of December 31, 2021, all second round PPP loans had been forgiven.
Asset Impairment
Our mortgage servicing rights (MSRs) have experienced a decrease in their fair value as of December 31, 2021 as mortgage prepayment speed assumptions increased during the year ended December 31, 2021. The low mortgage interest rate environment resulted in increased loan origination volumes which offset the decline in valuation. The volume of loans sold with mortgage servicing rights retained has increased and resulted in an overall increase in the recorded value of our mortgage servicing rights since December 31, 2020. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future changes in the fair value of our MSRs.
Financial position and results of operations
While we have not experienced any charge-offs related to COVID-19 as of December 31, 2021, our allowance for loan losses calculation and resulting provision for loan losses are impacted by changes in economic conditions. In recent months the economy has experienced moderate growth per the January 2022 Federal Reserve Beige Book summary. As of December 31, 2021, our significant credit quality indicators, such as levels of delinquent, classified, impaired and nonperforming loans, have not deteriorated. Should economic conditions in our market area worsen, we could experience a need for further increases in our allowance for loan losses and be required to record additional provisions for loan loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 worsen or are prolonged.
Capital and liquidity
As of December 31, 2021, all of our capital ratios were in excess of all regulatory requirements to be considered a “well capitalized” institution. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further losses.
We maintain access to multiple sources of liquidity. Wholesale funding sources, particularly the FHLB and National CD Rateline, have remained open to us. If funding costs become elevated for an extended period of time, it could have an adverse effect on our net interest margin. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
Our processes, controls and business continuity plan
Following guidance from the Governors of Ohio and Kentucky, the Company deployed a successful remote working strategy, provided timely communication to our employees and customers, implemented protocols for employee safety, and initiated strategies for monitoring and responding to local COVID-19 impacts - including customer relief efforts. The Company’s preparedness efforts, coupled with timely plan implementation, resulted in minimal impacts to operations as a result of COVID-19. Prior technology planning resulted in the successful deployment of the majority of our operational teams to a remote environment. As the pandemic has progressed, all of our office employees have returned to the office. As of December 31, 2021, our branch lobbies were open for customer transactions with appropriate safety measures established. We do not anticipate incurring additional material costs related to adhering to the State of Ohio or Kentucky’s mandated COVID-19 related business requirements. Our management team continues to meet as needed to respond to any future COVID-19 interruptions or developments. We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity plans.
Lending
The Company’s loan exposure is predominately residential, multifamily and nonresidential in nature. See Note 3 of the Notes to Condensed Consolidated Financial Statements. As of December 31, 2021, the Company had no direct exposure to the hospitality, restaurant, travel, energy, aviation, healthcare or senior living industries.
Comparison of Financial Condition at December 31, 2021 and 2020
Total Assets. Total assets were $251.5 million at December 31, 2021, an increase of $14.3 million, or 6.0%, over the $237.1 million at December 31, 2020. The increase in total assets was due primarily to an increase in loans of $28.9 million and an increase in available for sale debt securities of $2.7 million, which were partially offset by a decrease in cash and cash equivalents of $10.5 million, a decrease in loans held for sale of $5.2 million and a decrease in interest-bearing time deposits of $3.0 million.
Cash and Cash Equivalents. Cash and cash equivalents decreased $10.5 million, or 32.5%, to $21.9 million at December 31, 2021 from $32.3 million at December 31, 2020. This decrease was primarily the result of funding loan growth and an increase in available-for-sale securities.
Available-for-Sale Securities. Investment securities available-for-sale increased $2.7 million to $7.9 million at December 31, 2021 compared to $5.2 million at December 31, 2020 due to the purchase of a $5.0 million monthly adjustable mortgage-backed security, partially offset by maturities of $2.3 million. There were no purchases or sales of available-for-sale securities in 2020.
Loans Held for Sale. We currently sell certain fixed-rate, 15- and 30-year term, one-to-four family mortgage loans. We have sold loans on both a servicing-released and servicing-retained basis to: the FHLB-Cincinnati, through its mortgage purchase program; Freddie Mac; and certain private sector third-party buyers. Loans held for sale decreased $5.2 million, or 39.1%, to $8.1 million at December 31, 2021 from $13.3 million at December 31, 2020. In 2021, we originated $267.7 million of loans for sale, all of which were one- to four-family residential real estate loans.
During the year ended December 31, 2021, we sold $272.9 million of one-to- four family residential loans, on both a servicing-retained and servicing-released basis. The reduction in interest rates implemented by the Federal Reserve Board in 2020 continued to have a favorable impact on the residential real estate market and our originations of fixed-rate mortgage loans in 2021. Management intends to continue this sales activity in future periods to generate gains on sale and servicing fee income. However, with market interest rates expected to increase throughout 2022, and real estate activity returning to more normal levels, it is unclear what level of activity we may be able to generate during 2022.
Net Loans. Net loans increased $28.9 million, or 17.3%, to $195.5 million at December 31, 2021 from $166.7 million at December 31, 2020. During the year ended December 31, 2021, we originated $89.3 million of loans for the portfolio, $22.4 million of which were one- to four- family residential real estate loans, $21.2 million were nonresidential real estate loans, $21.4 million were multi-family loans, $7.6 million were home equity lines of credit, $16.7 million were construction and land loans. The one-to-four family residential loan portfolio declined by $4.1 million, as borrowers elected to refinance their loans at lower mortgage rates, and the Bank elected to sell the majority of these new fixed rate residential loans in the secondary market. This decline in the residential loan portfolio was offset by net increases in the nonresidential loan portfolio of $12.2 million and $13.3 million in the multifamily loan portfolio. The growth in these segments reflects our strategy to grow the commercial real estate portfolio to enhance loan yields.
Mortgage Servicing Rights. Mortgage servicing rights increased to $2.2 million, or 10.1%, from $2.0 million at December 31, 2021. New mortgage servicing rights of $941,000 were recognized while the fair value of mortgage servicing rights declined $736,000 due to higher prepayment speed assumptions. Mortgage servicing rights are valued by an independent third-party. During 2021 the value of mortgage servicing rights decreased to 79 basis points at December 31, 2021 from 88 basis points at December 31, 2020.
Other Assets. Other assets decreased $534,000, or 33.3%, to $1.1 million at December 31, 2021 from $1.6 million at December 31, 2020. The decrease was primarily due to a decrease in the fair value of mortgage banking derivatives and the collection of COVID deferral balances.
Deposits. Deposits increased $52.2 million, or 34.3%, to $204.5 million at December 31, 2021 from $152.2 million at December 31, 2020. Our core deposits increased $31.3 million, or 34.8%, to $121.3 million at December 31, 2021 compared to December 31, 2020. Demand deposit accounts increased $3.8 million, or 9.2% and savings increased $27.5 million, or 57.2%, as part of our strategy to increase lower cost funding sources. Time deposits increased $20.9 million, or 33.7%, to $83.1 million at December 31, 2021 from $62.2 million at December 31, 2020. The increase in time deposits was primarily due to the increase in National CD Rateline deposits to replace higher rate FHLB-Cincinnati advances. Deposits obtained through the National CD Rateline Program increased to $40.9 million at December 31, 2021 from $5.6 million at December 31, 2020. The increase in wholesale time deposits was part of the Bank’s strategy to reduce the cost of funds by repaying higher rate FHLB advances. Per the following Average Balances and Yield table, the cost of interest-bearing liabilities decreased 58 basis points for the year ended December 31, 2021 compared to the year ended December 31, 2020. Management intends to continue its strategy of pursuing growth in lower cost core deposits in 2022.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances decreased $38.4 million. We had no outstanding advances at December 31, 2021. The decrease in FHLB advances was part of our strategy to reduce our cost of funds. While the prepayment of advances resulted in FHLB advance prepayment penalties of $767,000 on a pre-tax basis, management anticipates a pretax interest expense reduction of approximately $120,000 per quarter as a result of this transaction, which represents the elimination of interest expense on FHLB borrowings, net of the interest expense expected on the new CD Rateline deposits.
Stockholders’ Equity. Stockholders’ equity increased $1.4 million, or 3.4%, to $42.9 million at December 31, 2021 from $41.5 million at December 31, 2020. The increase resulted primarily from net income of $1.6 million for the year ended December 31, 2021.
Comparison of Operating Results for the Years Ended December 31, 2021 and December 31, 2020
General. Net income for the year ended December 31, 2021 was $1.65 million, compared to a net income of $3.2 million for the year ended December 31, 2020, a decrease of $1.5 million or 47.8%. The decrease was primarily due to a $1.0 million decrease in noninterest income and a $2.3 million increase in noninterest expense, partially offset by a $1.2 million increase in net interest income and a $265,000 decrease in the provision for loan losses. The decrease in noninterest income was primarily attributable to decreases in gain on sale of loans and mortgage derivative income. The increase in noninterest expense was primarily attributable to increased personnel expenses of $805,000 due to salary and payroll tax expense increases, benefit plan expense increases, and healthcare expense increases. Noninterest expense included Federal Home Loan Bank advance prepayment penalties of $767,000.
Interest and Dividend Income. Interest and dividend income increased $129,000, or 1.6%, to $8.2 million for the year ended December 31, 2021 from $8.0 million for the year ended December 31, 2020. This increase was primarily attributable to a $212,000, or 2.7%, increase in interest on loans receivable, primarily due to a $12.6 million increase in the average balance on loans, partially offset by a 19 basis point decrease in the average yield on loans.
Interest income on securities decreased $7,000, or 10.7%. The average yield on investment securities decreased 42 basis points to 0.67% for the year ended December 31, 2021 from 1.09% for the year ended December 31, 2020. The decrease in the average yield on available-for-sale securities was attributable to the purchase of lower yielding adjustable and floating rate mortgage-backed securities. Dividends on Federal Home Loan Bank stock and other investments decreased $76,000 primarily due to the decrease in the average yield on other interest-bearing deposits of 45 basis points. The average balance of other interest-bearing deposits, including certificates of deposit in other financial institutions, and federal funds sold increased $2.6 million to $21.6 million at December 31, 2021 compared to December 31, 2020.
Interest Expense. Total interest expense decreased $1.0 million, or 39.5%, to $1.6 million for the year ended December 31, 2021. Interest expense on deposit accounts decreased $625,000, or 37.8%, to $1.0 million for the year ended December 31, 2021 from $1.7 million for the year ended December 31, 2020. The decrease was primarily due to a decrease of 53 basis points in the average cost of deposits, which was partially offset by a $19.0 million increase in the average balance year-to-year. The average cost of interest-bearing demand accounts decreased 7 basis points to 0.15%, while average interest-bearing demand account balances increased $3.1 million at December 31, 2021. The average cost of savings accounts decreased 9 basis points to 0.19%, while average savings account balances increased $15.5 million at December 31, 2021.The average balance of certificates of deposits increased $364,000 while the average cost of certificates of deposits decreased 87 basis points to 1.23% at December 31, 2021.
Interest expense on FHLB advances decreased $401,000 to $540,000 for the year ended December 31, 2021 from $941,000 for the year ended December 31, 2020. The average balance of advances decreased $15.5 million. There were no FHLB advances outstanding at December 31, 2021.
Net Interest Income. Net interest income increased $1.2 million, or 21.3%, to $6.6 million for the year ended December 31, 2021 from $5.4 million for the year ended December 31, 2020. Average net interest-earning assets increased $18.0 million compared to year end December 31, 2020. The interest rate spread increased to 2.73% for the year ended December 31, 2021 from 2.39% for the year ended December 31, 2020. The net interest margin increased to 2.88% for the year ended December 31, 2021 from 2.58% for the year ended December 31, 2020.
Provision for Loan Losses. Based on management’s analysis of the allowance for loan losses described in Note 1 of our financial statements “Nature of Operations and Summary of Significant Accounting Policies,” we did not record a provision for loan losses for the year ended December 31, 2021 compared to a provision for loan losses of $265,000 for the year ended December 31, 2020. The allowance for loan losses was $1.7 million, or 0.80% of total loans, at December 31, 2021, compared to $1.7 million or 0.97% of total loans, at December 31, 2020. The increase in the provision for loan losses in 2020 was due primarily to the uncertainty of impact of the COVID-19 pandemic on the economy as a whole and on our market area in particular. The resurgence of COVID cases nationally in late 2020, and the prospect of continued economic weakness and continued high unemployment, indicated a qualitative factor adjustment was warranted to increase the allowance for loan losses at December 31, 2020. We included in our consideration of the ALLL the continued low balances of our nonperforming loans and delinquent loans during 2021 and the continuing decrease in historical charge-offs for the six year look back period. Total nonperforming loans were $120,000 and $174,000 at December 31, 2021 and 2020, respectively. Substandard loans declined to $641,000 at December 31, 2021, from $883,000 at December 31, 2020, and loans past due greater than 30 days totaled $216,000 and $398,000 at December 31, 2021 and 2020, respectively. The Bank had no loan charge-offs during the years ended December 31, 2021 and 2020. As a percentage of nonperforming loans, the allowance for loan losses was 1,392% and 962% at December 31, 2021 and 2020, respectively.
The allowance for loan losses reflects the estimate we believe to be adequate to cover incurred probable losses which were inherent in the loan portfolio at December 31, 2021. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.
Non-Interest Income. Non-interest income decreased $1.0 million, or 9.8%, to $9.6 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was due to a decrease of $755,000 in gain on sales of loans and a $587,000 decrease in mortgage derivative income. The decrease in mortgage banking related revenue was due to an increase in market interest rates. The increase in market interest rates resulted in a decline in the demand for refinance loans. While we expect interest rates to rise in 2022, resulting in real estate activity returning to normal levels, it is unclear what level of activity we may be able to generate during 2022.
Non-Interest Expense. Non-interest expense increased $2.3 million, or 19.0%, to $14.1 million from $11.8 million at December 31, 2020. Salaries and employee benefits increased $805,000, or 10.3%. The increase in salaries and employee benefit expense was due to higher wage costs due to competitive pressures, increased equity incentive plan expense, ESOP expense and higher payroll tax expense. The increase in equity incentive plan expenses is the result of grants made under the equity incentive plans approved by stockholders in May 2021. ESOP expenses increased due to the increase in share price during the year ended December 31, 2021.
Federal Home Loan Bank advance prepayment penalty expense increased $767,000 as the Bank repaid all outstanding FHLB advance borrowings. The FHLB advance funding was primarily replaced by $36.7 million in National CD Rateline funds at an average rate of 0.29% and a term of 23 months.
Data processing costs increased $249,000, or 41.6% from due to account growth, new product usage growth, increased ATM management costs, and increased transaction volumes. Advertising expense increased $53,000, primarily from our checking account marketing program through a third-party vendor. Franchise tax expense increased $76,000, or 36.3% due to the increase in Bank equity at December 31, 2020.
Federal Income Taxes. The provision for income taxes decreased $372,000, or 45.3%, to $448,000 at December 31, 2021. The decrease was due primarily to decreased income before income taxes of $1.9 million, or 47.3%. The effective rates were 21.4% and 20.6% for the years ended December 31, 2021 and 2020, respectively.
Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. All average balances are monthly average balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material differences in the information presented. Non-accrual loans were included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
Interest-earning assets:
Loans
$
186,250
$
7,695
4.13
%
$
172,006
$
7,434
4.32
%
Loans held for sale
11,860
2.72
13,447
2.77
Securities
8,689
0.67
5,948
1.09
Fed Funds
5,021
0.02
5,581
0.36
Other (1)
16,599
0.48
13,462
1.01
Total interest-earning assets
228,419
8,155
3.57
210,444
8,027
3.81
Non-interest-earning assets
16,384
22,122
Total assets
$
244,803
$
232,566
Interest-bearing liabilities:
Savings
$
57,685
0.19
$
42,179
0.28
Interest-bearing demand
31,192
0.15
28,061
0.22
Certificates of deposit
70,617
1.23
70,253
1,477
2.10
Total deposits
159,494
1,029
0.65
140,493
1,654
1.18
FHLB borrowings
26,895
2.01
42,434
2.22
Total interest-bearing liabilities
186,389
1,569
0.84
182,927
2,595
1.42
Non-interest-bearing Demand
18,002
13,822
Other non-interest-bearing liabilities
4,404
4,264
Total non-interest-bearing liabilities
22,406
18,086
Total equity
36,008
31,553
Total liabilities and total equity
$
244,803
$
232,566
Net interest income
$
6,586
$
5,432
Net interest rate spread (2)
2.73
%
2.39
%
Net interest-earning assets (3)
$
42,030
$
27,517
Net interest margin (4)
2.88
%
2.58
%
Average interest-earning assets to interest-bearing liabilities
122.55
%
115.04
%
(1) Consists of FHLB-Cincinnati stock, FHLB DDA, certificates of deposit and cash reserves.
(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
Interest on loans includes loan fee income of $233,000 for the year ended December 31, 2021 and $94,000 of loan fee expense for the year ended December 31, 2020. Loan fee income increased in 2021 due to prepayment penalties received on commercial real estate loans.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
Year Ended December 31,
2021 vs. 2020
Increase (Decrease) Due to
Total Increase
Volume
Rate
(Decrease)
(In thousands)
Interest-earning assets:
Loans
$
$
$
Securities
(1)
(6)
(7)
Other
(3)
(73)
(76)
Total interest-earning assets
Interest-bearing liabilities:
Savings
(24)
(3)
Interest-bearing demand
(25)
(16)
Certificates of deposit
(614)
(606)
Total deposits
(7)
(618)
(625)
FHLB borrowings
(319)
(82)
(401)
Total interest-bearing liabilities
(326)
(700)
(1,026)
Change in net interest income
$
$
$
1,155
There were no out-of-period items or adjustments related to the above table.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are monetary in nature and sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.
Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we use to manage interest rate risk are:
● originating nonresidential real estate and multi-family loans, and, to a lesser extent, construction, consumer and commercial business loans, all of which tend to have shorter terms and higher interest rates than one- to four-family residential real estate loans, and which generate customer relationships that can result in larger non-interest bearing checking accounts;
● selling substantially all of our newly-originated longer-term fixed-rate one- to four-family residential real estate loans and retaining the shorter-term fixed-rate and adjustable-rate one- to four-family residential real estate loans that we originate, subject to market conditions and periodic review of our asset/liability management needs;
● reducing our dependence on certificates of deposit to support lending and investment activities and increasing our reliance on core deposits, including checking accounts and savings accounts, which are less interest rate sensitive than certificates of deposit; and
● purchasing adjustable and floating rate mortgage-backed securities for the investment portfolio.
Our Board of Directors is responsible for the review and oversight of our Asset/Liability Committee, which is comprised of our executive management team and other essential operational staff. This committee is charged with developing and implementing an asset/liability management plan, and meets at least quarterly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
Net Portfolio Value. We compute amounts by which the net present value of our cash flow from assets, liabilities and off-balance sheet items (net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. We measure our interest rate risk and potential change in our NPV through the use of a financial model. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. Historically, the model estimated the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However, given the current level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The table below sets forth, as of December 31, 2021, the calculation of the estimated changes in our net portfolio value that would result from the designated immediate changes in the United States Treasury yield curve.
Estimated Increase
NPV as a Percentage of
(Decrease) in
Present
NPV
Value of Assets (3)
Change in Interest
Increase
Rates (basis
Estimated
NPV
(Decrease)
points) (1)
NPV (2)
Amount
Percent
Ratio(4)
(basis points)
(Dollars in thousands)
+300
$
49,675
$
(19,601)
(28.29)
%
20.57
%
(608)
+200
56,709
(12,567)
(18.14)
%
22.84
%
(381)
+100
63,236
(6,040)
(8.72)
%
24.85
%
(180)
-
69,276
-
-
%
26.65
%
-
64,455
(4,821)
(6.96)
%
24.12
%
(253)
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) NPV Ratio represents NPV divided by the present value of assets.
The table above indicates that at December 31, 2021, in the event of an instantaneous parallel 100 basis point increase in interest rates, we would experience an 8.72% decrease in net portfolio value. In the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 6.96% decrease in net portfolio value.
Net Interest Income
Year 1 Change
Rate Shift (1)
Year 1 Forecast
from Level
(Dollars in
thousands)
+400
$
6,809
(9.20)
%
+300
6,995
(6.72)
%
+200
7,218
(3.75)
%
+100
7,426
(0.98)
%
Level
7,499
-
7,319
(2.40)
%
(1)The calculated changes assume an immediate shock of the static yield curve.
The table above indicates a decrease in net interest income in an increasing interest rate shock scenario. This decrease in net interest income would indicate that the model projects the cost of funds to increase faster than asset yields. The Bank will monitor and adjust assumptions for decay rates and deposit rate sensitivity as market interest rates change. The effect of interest rate changes may be mitigated to the extent deposit costs are less sensitive to market interest rate changes than the model projects. Actual balance sheet composition may differ from projections and mitigate the impact of interest rate changes, as well.
We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB-Cincinnati. At December 31, 2021, we had no outstanding advances from the FHLB-Cincinnati, and had the capacity to borrow approximately an additional $44.7 million from the FHLB-Cincinnati based on our collateral capacity. At December 31, 2021, we had an additional $11.5 million on lines of credit available with three commercial banks.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $6.6 million for the year ended December 31, 2021 and net cash used in operating activities was $6.7 million for the year ended December 31, 2020. Net cash used in investing activities, which consists primarily of disbursements for loan originations and purchase of investment securities, partially offset by proceeds from maturing securities, pay downs on mortgage-backed securities and proceeds from sale of foreclosed assets was $30.1 million for the year ended December 31, 2021. Net cash provided by investing activities was $10.4 million for the year ended December 31, 2020. Net cash provided by financing activities, consisting primarily of a net increase in deposits, the repayment of Federal Home Loan Bank borrowings and repurchase of common stock, was $13.0 million for the year ended December 31, 2021. Net cash used in financing activities, consisting mainly of a decrease in deposits, the proceeds from the stock subscriptions and repayment of Federal Home Loan Bank borrowings, was $9.2 million for the year ended December 31, 2020.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. We also anticipate continued participation in the National CD Rateline Program as a wholesale source of certificates of deposit, and continued use of FHLB-Cincinnati advances.
Cincinnati Bancorp, Inc. is a separate corporate entity from Cincinnati Federal and it must provide for its own liquidity to pay any dividends to its stockholders, to repurchase any shares of its common stock, and for other corporate purposes. Cincinnati Bancorp Inc.’s primary source of liquidity is any dividend payments it may receive from Cincinnati Federal. Cincinnati Bancorp, Inc. (on an unconsolidated basis) had $5.7 million in liquid assets at December 31, 2021.
At December 31, 2021, Cincinnati Federal exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $37.0 million, or 14.7% of adjusted total assets, which is above the well-capitalized required level of $12.6 million, or 5.0%; total risk-based capital of $38.7 million, or 20.0% of risk-weighted assets, which is above the well-capitalized required level of $19.3 million, or 10.0%; and common equity tier 1 risk based capital of $37.0 million, or 19.2%, of risk-weighted assets, which is above the well-capitalized required level of $12.6 million, or 6.5% of risk-weighted assets. At December 31, 2020, Cincinnati Federal exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $34.8 million, or 14.8% of adjusted total assets, which is above the well-capitalized required level of $11.8 million, or 5.0%; and total risk-based capital of $36.5 million, or 22.0% of risk-weighted assets, which is above the well-capitalized required level of $16.6 million, or 10.0%. Accordingly, Cincinnati Federal was categorized as well capitalized at December 31, 2021 and 2020. Management is not aware of any conditions or events since the most recent notification that would change our category.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2021, we had outstanding commitments to originate fixed-rate loans of $15.3 million, unfunded lines of credit of $20.9 million and forward sale commitments of $23.4 million. We had commitments to originate loans for portfolio of $3.4 million at December 31, 2021 and $189,000 at December 31, 2020. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in one year or less from December 31, 2021 totaled $31.1 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
Please refer to Note 19 to the Consolidated Financial Statements for the years ended December 31, 2021 and 2020 for a description of recent accounting pronouncements that may affect our financial condition and results of operations.
Impact of Inflation and Changing Price
The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Management of Market Risk.”

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s Consolidated Financial Statements, including supplemental data begin on page of this Annual Report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2021. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2021.
Evaluation of Internal Control Over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, utilizing the framework established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2021 were effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting.
During the quarter ended December 31, 2021, there were no changes in the Company’s internal control over financial reporting that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B.OTHER INFORMATION
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information in the Company’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders under the captions “Corporate Governance”, “Items to be voted on by Stockholders’ - Item 1 Election of Directors” and “Other Information Relating to Directors and Executive Officers - Section 16(a) Beneficial Ownership of Reporting Company” is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.EXECUTIVE COMPENSATION
The information in the Company’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders under the caption “Directors’ Compensation” and “Executive Compensation” is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership-Stock Ownership of Certain Beneficial Owners” in the definitive Proxy Statement for the 2022 Annual Meeting of Stockholders’.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership-Stock Ownership of Management” in the definitive Proxy Statement for the 2022 Annual Meeting of Stockholders’.
(c) Changes in Control
Management of the Company knows of no arrangements, including any pledge by any person or securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
(d) Equity Compensation Plan Information
The following information is presented for the Cincinnati Bancorp 2017 Equity Incentive Plan and the Cincinnati Bancorp, Inc. 2021 Equity Incentive Plan, as of December 31, 2021:
Number of securities
Number of securities to be
remaining available for
issued upon exercise of
Weighted-average exercise
future issuance under
outstanding options,
price of outstanding options,
equity compensation plans
warrants and rights
warrants and rights
(excluding securities
Plan Category
(column a)
(column b)
reflected in column (a)
Equity compensation plans approved by stockholders
296,342
$
10.64
Equity compensation plans not approved by stockholders
N/A
N/A
N/A
Total
296,342
$
10.64

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information in the Company’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders under the captions “Corporate Governance - Director Independence” and “Other Information Relating to Directors and Executive Officers - Transactions with Related Persons is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
Our independent registered public accounting firm is BKD, LLP, Cincinnati, OH, Auditor Firm ID: 686.
The information in the Company’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders under the caption “Items to be voted by Stockholders’ - Item 2 “Ratification of Appointment of Independent Registered Public Accounting Firm” is incorporated herein by reference.”
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)Financial Statements
The documents filed as a part of this Form 10-K are:
(A) Report of Independent Registered Public Accounting Firm;
(B) Consolidated Balance Sheets at December 31, 2021 and 2020;
(C) Consolidated Statements of Operations for the years ended December 31, 2021 and 2020;
(D) Consolidated Statements of Comprehensive Income for the years ended December 31, 2021 and 2020;
(E) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020;
(F) Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020; and
(G) Notes to Consolidated Financial Statements at and for the years ended December 31, 2021 and 2020.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(a)(3) Exhibits
3.1
Amended and Restated Articles of Incorporation of Cincinnati Bancorp, Inc. (1)
3.2
Bylaws of Cincinnati Bancorp, Inc. (1)
4.0
Form of Common Stock Certificate of Cincinnati Bancorp, Inc. (1)
4.1
Description of securities of Cincinnati Bancorp, Inc. Registered Under Section 12 of the Securities Exchange Act of 1934 (2)
10.1
Employment Agreement by and between Cincinnati Federal Savings and Loan Association and Gregory W. Meyers (3)
10.2
Split Dollar Life Insurance Plan (3)
10.3
Cincinnati Federal Savings and Loan Association Director Retirement Plan (3)
10.4
Form of Cincinnati Federal Employee Stock Ownership Plan (3)
10.5
Cincinnati Bancorp 2017 Equity Incentive Plan (4)
10.6
Cincinnati Bancorp, Inc. 2021 Equity Incentive Plan (5)
10.7
Change in Control Agreement by and between Robert A. Bedinghaus and Cincinnati Federal (6)
10.8
Change in Control Agreement by and between Joseph V. Bunke and Cincinnati Federal (6)
10.9
Change in Control Agreement by and between Herbert C. Brinkman and Cincinnati Federal (6)
21.0
Subsidiaries of the Registrant
23.0
Consent of Independent Registered Public Accounting Firm
31.1
Certification of Principal Executive Officer, Pursuant to Rule 15d-14(a)
31.2
Certification of Principal Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
32.0
Certification of Principal Executive Officer and Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements
(1)Incorporated herein by reference to the Registration Statement on Form S-1, as amended (File No. 333-233708), of Cincinnati Bancorp, Inc., initially filed September 11, 2019.
(2)Incorporated herein by reference to Annual Report on Form 10-K of Cincinnati Bancorp, Inc., filed on March 30, 2020.
(3)Incorporated herein by reference to the Registration Statement on Form S-1, as amended (File No. 333-202657), of Cincinnati Bancorp, as initially filed on March 11, 2015.
(4)Incorporated herein by reference to Appendix A to Definitive Proxy Statement of Cincinnati Bancorp, filed on April 13, 2017.
(5)Incorporated herein by reference to Appendix A to Definitive Proxy Statement of Cincinnati Bancorp, Inc., filed on April 12, 2021.
(6)Incorporated herein by reference to Current Report on Form 8-K of Cincinnati Bancorp, Inc., filed on January 24, 2020.