EDGAR 10-K Filing

Company CIK: 1787005
Filing Year: 2021
Filename: 1787005_10-K_2021_0001104659-21-044505.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 $14.1 million, and issued 1,322,665 shares of common stock in exchange for the shares of common stock of Old Cincinnati Bancorp owned by stockholders of Old Cincinnati Bancorp, other than CF Mutual Holding Company, as of the effective date of the conversion. As a result of the conversion, CF Mutual Holding Company and Old Cincinnati Bancorp have ceased to exist.
Cincinnati Bancorp, Inc. conducts its business principally through its wholly-owned subsidiary, Cincinnati Federal. Because the conversion was effective in January 2020, the financial information contained in this Annual Report for periods prior to that date is the consolidated financial information for Old Cincinnati Bancorp, the predecessor of Cincinnati Bancorp, Inc.
The executive offices of Cincinnati Bancorp, Inc. are located at 6581 Harrison Avenue, Cincinnati, Ohio 45247, and the telephone number at that address is (513) 574-3025. Our website address is www.cincinnatifederal.com. Information on our website should not be considered a part of this annual report.
Cincinnati Bancorp, Inc. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System. At December 31, 2020, we had total assets of $237.1 million, total deposits of $152.2 million and total equity of $41.5 million. We recognized net income of $3.2 million for the year ended December 31, 2020.
Cincinnati Federal is a federal savings bank headquartered in Cincinnati, Ohio. Over the years, we have grown internally and we have also acquired a total of five mutual savings institutions, with our most recent acquisition occurring in 2018 with the acquisition of Kentucky Federal Savings and Loan Association effective October 12, 2018.
Our business consists primarily of taking deposits from the general public and investing those deposits, together with borrowings and funds generated from operations, in one- to four-family residential real estate loans, nonresidential real estate and multi-family loans, home equity loans and lines of credit, and construction and land loans. We also invest in securities, which consist primarily of mortgage-backed securities issued by U.S. government sponsored entities and Federal Home Loan Bank stock. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. We utilize advances from the Federal Home Loan Bank of Cincinnati (the “FHLB-Cincinnati”) for asset/liability management purposes and for additional funding for our operations.
Cincinnati Federal also operates an active mortgage banking unit with thirteen mortgage loan officers, which originates loans both for sale into the secondary market and for retention in our portfolio. The revenue from gain on sales of loans was $9.5 million for the fiscal year ended December 31, 2020.
Cincinnati Federal is subject to comprehensive regulation and examination by its primary federal regulator, the Office of the Comptroller of the Currency.
Market Area
We conduct our operations from our main office and three branch offices in Cincinnati, Ohio (Cincinnati) and two branch offices in Northern Kentucky. We also operate a loan production office in Clermont County, Ohio. Hamilton County, Ohio represents our primary geographic market area for loans and deposits. Our business operations are conducted in the larger Greater Cincinnati/Northern Kentucky metropolitan area which includes Warren, Butler and Clermont Counties in Ohio, Boone, Kenton and Campbell Counties in Kentucky, and Dearborn County, Indiana. We will, on occasion, make loans secured by properties located outside of our primary market. The local economy is diversified with services, trade and manufacturing employment being the most prominent employment sectors in Hamilton County. The employment base is diversified and there is no dependence on one area of the economy for continued employment. Major employers in the market include The Kroger Co., Catholic Healthcare Partners, The Procter & Gamble Company, the Greater Cincinnati/Northern Kentucky International Airport, Cincinnati Children’s Hospital, St. Elizabeth Healthcare, city and county governments, the University of Cincinnati and Northern Kentucky University. Our future growth opportunities will be influenced by the growth and stability of the regional, state and national economies, other demographic trends and the competitive environment. Hamilton County and Cincinnati have generally experienced a declining population since the 2000 census while the other counties in which we conduct business experienced population growth. The population decline in both Hamilton County and the City of Cincinnati results from other counties and northern Kentucky being more successful in attracting new and existing businesses to locate within their areas through economic incentives, including less expensive real estate options for office facilities. Individuals are moving to these other areas to be closer to their place of employment, for newer, less expensive housing and more suburban neighborhoods.
Competition
We face intense competition within our market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions. We also face competition from commercial banks, savings institutions, mortgage banking firms, consumer and finance companies and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2020, based on the most recent available FDIC data, our market share of deposits represented 0.10% of FDIC-insured deposits in Hamilton County, ranking us 18th in deposit market share. This data does not include deposits held by credit unions.
Lending Activities
General. Our principal lending activity is originating one- to four-family residential real estate loans and nonresidential real estate and multi-family loans, home equity loans and lines of credit, and construction and land loans. To a much lesser extent, we also originate commercial business loans and consumer loans. Subject to market conditions and our asset-liability analysis, we expect to increase our focus on nonresidential real estate and multi-family loans in an effort to diversify our overall loan portfolio and increase the overall yield earned on our loans. We also originate for sale and sell the majority of the fixed-rate one- to four-family residential real estate loans that we originate with terms of greater than 10 years, on both a servicing-retained and servicing-released, limited or no recourse basis, while retaining shorter-term fixed-rate and generally all adjustable-rate one- to four-family residential real estate loans in order to manage the duration and time to repricing of our loan portfolio. Loans are sold primarily to FHLB-Cincinnati, Freddie Mac or to private sector third party buyers.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
At December 31,
2017
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Real estate loans:
One- to four-family residential: (1)
Owner occupied	 $ 72,698 42.05 % $ 91,919 50.63 % $ 93,659 53.87 % $ 77.533 51.82 % $ 69,651 52.18 %
Non-owner occupied	 12,059 6.97 12,846 7.07 14,243 8.19 11,355 7.59 11,819 8.85
Nonresidential	 29,532 17.08 23,378 12.88 18,930 10.89 18,139 12.12 13,655 10.23
Multi-family	 41,749 24.15 36,628 20.17 27,140 15.61 23,895 15.97 21,351 16.00
Home equity lines of credit	 9,934 5.75 10,030 5.52 11,374 6.54 11,714 7.83 12,596 9.44
Construction and land	 5,841 3.38 5,329 2.94 7,294 4.20 6,173 4.13 3,887 2.91
Total real estate	 171,813 99.38 180,130 99.21 172,640 99.30 148,809 99.46 132,959 99.61
Commercial loans	 0.42 0.31 0.24 0.22 0.38
Consumer loans	 0.20 0.48 0.49 0.32 0.01
Total loans	 172,889 100.00 % 181,551 100.00 % 173,852 100.00 % 149,615 100.00 % 133,488 100.00 %
Less:
Deferred loan fees	 (333 )
(483 )
(491 )
(480 )
(428 )
Allowance for losses	 1,673
1,408
1,405
1,360
1,326
Undisbursed loan proceeds	 4,881
1,294
2,573
1,715
1,486
Total loans, net	 $ 166,668
$ 179,332
$ 170,365
$ 147,020
$ 131,104
(1) Includes $2.2 million, $1.9 million, $1.6 million, $1.8 million and $2.2 million of home equity loans at December 31, 2020, December 31, 2019, December 31, 2018, December 31, 2017 and December 31, 2016, respectively.
Contractual Maturities. The following tables set forth the contractual maturities of our total loan portfolio at December 31, 2020. Demand loans, which are loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.
December 31, 2020 One- to
Four-Family
Residential Real
Estate Nonresidential
Real Estate Multi-Family
Real Estate Construction
and Land
(In thousands)
Amounts due in:
$ 191 $ - $ - $ 597
- -
67
2024-2025	 1,210
2026-2030	 6,002 1,296 1,991
2031-2035	 5,098 3.020 1,459
2036 and beyond	 71,365 24,461 38,100 4,315
Total	 $ 84,757 $ 29,532 $ 41,749 $ 5,842
December 31, 2020 Home Equity
Lines of Credit Commercial Consumer Total
(In thousands)
Amounts due in:
$ 1,175 $ - $ 229 $ 2,192
- 1,028
-
2024-2025	 1,799 4,073
2026-2030	 6,732 - 16,213
2031-2035	 - 10,214
2036 and beyond	 - - 138,450
Total	 $ 9,934 $ 737 $ 338 $ 172,889
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth our fixed- and adjustable-rate loans at December 31, 2020 that are contractually due after December 31, 2021.
Due After December 31, 2021
Fixed Adjustable Total
(In thousands)
Real estate loans:
One- to four-family residential	 $ 30,179 $ 54,387 $ 84,566
Nonresidential	 1,003 28,529 29,532
Multi-family	 1,416 40,333 41,749
Home equity lines of credit	 - 8,759 8,759
Construction and land	 4,818 5,245
Total real estate	 33,025 136,826 169,851
Commercial loans	
Consumer loans	 -
Total loans	 $ 33,553 $ 137,144 $ 170,697
Loan Approval Procedures and Authority. Pursuant to federal law, the aggregate amount of loans that Cincinnati Federal is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Cincinnati Federal’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2020, based on the 15% limitation, Cincinnati Federal’s loans-to-one-borrower limit was approximately $5.5 million. On the same date, Cincinnati Federal had no borrowers with outstanding balances in excess of this amount. At December 31, 2020, our largest loan relationship with one borrower was for approximately $3.3 million, secured by a multifamily property, and was performing in accordance with its original terms on that date.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, bank statements and tax returns. We generally follow underwriting procedures that are consistent with Freddie Mac underwriting guidelines.
Under our loan policy, the loan underwriter of an application is responsible for ensuring proposals and approval of any extensions of credit are in compliance with internal policies and procedures and applicable laws and regulations, and for establishing and maintaining credit files and documentation sufficient to support the loan and to perfect any collateral position. Loans originated for sale may be approved by any loan underwriter, if the loan conforms to the underwriting guidelines established by the investor to whom the loan will be sold.
Loans to be held in our portfolio may not be approved solely by an underwriter, and generally require review and approval by our Chief Lending Officer, members of the loan committee or the board of directors. All loan approval amounts are based on the aggregate loans, including total balances of outstanding loans and the proposed loan to the individual borrower and any related entity. For one- to four-family owner-occupied real estate loans, our Chief Lending Officer, any two members of the loan committee or any one loan committee member and one underwriter are authorized to approve loans up to $424,100 in the aggregate.
For one- to four-family owner-occupied real estate, non-owner occupied one- to four-family owner-occupied real estate, commercial real estate, undeveloped lots or employee loans, any three members of the loan committee are authorized to approve up to $750,000 in the aggregate. The entire loan committee may approve loans up to $1,000,000 in the aggregate. For aggregate loans in excess of $1,000,000, approval of the board of directors is required.
For all other loans, our Chief Lending Officer or any two members of the loan committee are authorized to approve aggregate loans up to $50,000, with three loan committee members able to approve aggregate loans up to $250,000. As above, the approval of the full loan committee is required for loans up to $1,000,000 and approval of the board of directors is required for loans in excess of $1,000,000.
Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.
One- to Four-Family Residential Real Estate Lending. The focus of our lending program has historically been the origination of one- to four-family residential real estate loans. At December 31, 2020, we had $84.8 million of loans secured by one- to four-family real estate, representing 49.0% of our total loan portfolio. We originate both fixed- and adjustable-rate residential mortgage loans. At December 31, 2020, the one- to four-family residential mortgage loans held in our portfolio due after December 31, 2020 were comprised of 35.7% fixed-rate loans, and 64.3% adjustable-rate loans.
Prior to 2010, we engaged in significant non-owner occupied one- to four-family real estate lending. Many of these loans were made to investors who owned a number of rental properties, and which did not provide sufficient rental cash flows to service the repayment of the loans. There is a greater credit risk inherent in non-owner occupied properties, than in owner occupied properties since, like nonresidential real estate and multi-family loans, the repayment of these loans may depend, in part, on the successful management of the property and/or the borrower’s ability to lease the property. A downturn in the real estate market or the local economy could adversely affect the value of properties securing these loans or the revenues derived from these properties which could affect the borrower’s ability to repay the loan. Beginning with the economic downturn that began in 2008, we experienced higher levels of delinquencies and charge-offs in our non-owner occupied residential loan portfolio. Our management took steps to reduce our delinquent and non-performing assets in this portfolio, and to reduce this type of lending. See “-Delinquencies and Non-Performing Assets” below. At December 31, 2020, we had $12.1 million of non-owner occupied residential loans.
We currently originate a small number of non-owner occupied residential loans. Non-owner occupied loans as a percentage of total loans was 7.0%. We impose strict underwriting guidelines in the origination of such loans, including a maximum number of loans to the same borrower, local residency, and no prior bankruptcies and/or foreclosures. Properties securing non-owner occupied loans must be within 50 miles of a Cincinnati Federal branch office. We also generally limit loans on non-owner occupied properties to borrowers with no more than ten total rental properties as a way to mitigate the risks involved in lending to professional property investors.
Our one- to four-family residential real estate loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae. We also originate loans above the lending limit for conforming loans, which are referred to as “jumbo loans.” We also offer FHA, VA and Rural Housing Development loans, all of which we originate for sale on a servicing-released, non-recourse basis in accordance with FHA, VA and USDA guidelines. We use an underwriter with expertise in FHA/VA lending.
We generally limit the loan-to-value ratios of our owner-occupied one- to four-family residential mortgage loans to 85% of the purchase price or appraised value, whichever is lower. In addition, we may make one- to four-family residential mortgage loans with loan-to-value ratios up to 95% of the purchase price or appraised value, whichever is less, if the borrower obtains private mortgage insurance. Non-owner occupied one- to four-family residential mortgage loans are limited to an 80% loan-to-value ratio.
Our one- to four-family residential real estate loans typically have terms of up to 30 years, with non-owner occupied loans limited to a maximum term of 25 years. Our adjustable-rate one- to four-family residential real estate loans generally have fixed rates for initial terms of three, five or seven years, and adjust annually thereafter at a margin. In recent years, this margin has been between 2.75% and 3.25% over the weekly average yield on U.S. treasury securities adjusted to a constant maturity of one year. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.
Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on most of our adjustable-rate loans do not adjust for a period ranging from three years up to seven years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.
We also originate home equity lines of credit and fixed-term home equity loans. See “-Home Equity Loans and Lines of Credit.”
We do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” on one- to four-family residential real estate loans (i.e., generally loans with credit scores less than 660), except for loans originated for sale in the secondary market.
We currently offer a special residential mortgage program with preferred loan terms to new and existing medical physicians. This program includes (i) preferred treatment of new physician income with regard to positions offered or recently begun and (ii) mortgage loans with a loan-to-value ratio up to 95% to 100% without the need to obtain mortgage insurance for loans up to $600,000. Doctors licensed for at least one year or self-employed for at least two years may receive mortgage loans with loan-to-value ratios up to 90% to 100% without the need to obtain mortgage insurance for loans up to $700,000 and 85% for loans greater than $700,000. The portfolio of loans originated under this program was $4.6 million as of December 31, 2020.
Nonresidential Real Estate and Multi-Family Lending. In recent years, we have increased our nonresidential real estate and multi-family loans. Our nonresidential real estate loans are secured primarily by office buildings, retail and mixed-use properties, and light industrial properties located in our primary market area. Our multi-family loans are secured primarily by apartment buildings. At December 31, 2020, we had $29.5 million in nonresidential real estate loans and $41.7 million in multi-family real estate loans, representing 17.1% and 24.2% of our total loan portfolio, respectively.
Most of our nonresidential and multi-family real estate loans have a maximum term of up to 25 years. The interest rates on nonresidential real estate and multi-family loans are generally fixed for an initial period of three, five or seven years and adjust annually thereafter based on the One Year Treasury Rate. The maximum loan-to-value ratio of our nonresidential real estate loans is generally 75% while multi-family real estate loans have a maximum loan-to-value ratio of 80%. All loan-to-value ratios are subject to our underwriting procedures and guidelines. At December 31, 2020, our largest nonresidential real estate loan totaled $3.2 million and was secured by an industrial use facility. At that date, our largest multi-family real estate loan totaled $3.3 million and was secured by an apartment building. At December 31, 2020, both of these loans were performing in accordance with their original terms. Set forth below is information regarding our nonresidential real estate loans at December 31, 2020.
Type of Collateral Number of Loans Balance
(In thousands)
General commercial	 $ 7,241
Industrial/warehouse	 7,660
Retail/wholesale	 10,091
Mobile home park	
Service/professional	 4,278
Total	 $ 29,532
We consider a number of factors in originating nonresidential and multi-family real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All nonresidential real estate and multi-family loans are appraised by outside independent appraisers approved by the board of directors. Personal guarantees are generally obtained from the principals of nonresidential and multi-family real estate borrowers.
Loans secured by nonresidential and multi-family real estate generally are larger than one- to four-family residential loans and involve greater credit risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Repayment of nonresidential real estate loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower’s ability to repay the loan may be impaired. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate. At December 31, 2020, we had no non-performing nonresidential or multifamily real estate loans.
Construction Lending and Land Loans. We make construction loans to individuals for the construction of their primary residences and, to a limited extent, loans to builders and commercial borrowers. We also make a limited amount of land loans to complement our construction lending activities, as such loans are generally secured by lots that will be used for residential development. Land loans also include loans secured by land purchased for investment purposes. At December 31, 2020, our construction loans, including land loans, totaled $5.8 million, representing 3.4% of our total loan portfolio.
Loans to individuals for the construction of their residences are typically originated as construction/permanent loans, with a construction phase for up to 18 months. Upon completion of the construction phase, the loan automatically becomes a permanent loan. These construction loans have rates and terms comparable to one- to four-family residential loans offered by us. During the construction phase, the borrower pays interest only. The maximum loan-to-value ratio of owner-occupied single-family construction loans is generally 80%, or higher if mortgage insurance is obtained. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. Land loans are generally offered for terms of up to 5 years. The maximum loan-to-value ratio of land loans is 65% for developed lots and 50% for undeveloped land loans.
At December 31, 2020, our largest outstanding residential construction loan was for $804,000 of which $94,000 was outstanding. This loan was performing according to its original terms at December 31, 2020. At December 31, 2020, there were no residential construction loans that were 60 days or more delinquent.
Loans to builders for the construction of pre-sold and market (not pre-sold) homes typically run for up to 24 months. These construction loans have rates and terms comparable to one- to four-family residential loans offered by us. The maximum loan-to-value ratio of pre-sold builder construction loans is generally 80%, and this ratio is reduced to 65% on market homes. Construction loans to builders require that financial statements and tax returns be supplied and reviewed annually. Additionally, we limit construction loans to builders, to no more than two loans on market homes in one development at a time, or no more than one loan per builder at a time.
Loans for the construction of nonresidential or multi-family properties typically run for up to 18 months. These construction loans have rates and terms comparable to nonresidential real estate loans offered by us. The maximum loan-to-value ratio of nonresidential or multi-family construction loans is generally 75%. Nonresidential real estate construction loans also have a 50% pre-leasing requirement. No such requirement is placed on multi-family construction loans.
At December 31, 2020, our largest outstanding nonresidential or multi-family construction loan was $1.7 million. This loan was performing in accordance with its original terms at December 31, 2020.
The application process for a construction loan includes a submission to Cincinnati Federal of accurate plans, specifications and costs of the project to be constructed or developed. These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction (land plus building). Our construction loan agreements generally provide that loan proceeds are disbursed in increments as construction progresses.
Construction and land lending generally are made for relatively short terms. However, to the extent our construction loans are not made to owner-occupants of single-family homes, they are more vulnerable to changes in economic conditions and the concentration of credit with a limited number of borrowers. Further, the nature of these loans is such that they are more difficult to evaluate and monitor. Our risk of loss on a construction or land loan is dependent largely upon the accuracy of the initial estimate of the property’s value upon completion of the project and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial investments to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage.
Home Equity Loans and Lines of Credit. We offer home equity loans and lines of credit, which are generally made for owner-occupied homes, and are secured by first or second mortgages on residences. We generally offer these loans with a maximum loan-to-value ratio (including senior liens on the collateral property) of 90% if the first mortgage is originated by Cincinnati Federal and 85% if the first mortgage is not originated by Cincinnati Federal. We currently offer home equity lines of credit for a period of ten years, and generally at rates tied to the prevailing prime interest rate. We also offer home equity lines of credit on non-owner occupied properties, where the first mortgage is also originated by us, with a maximum loan-to-value ratio of 50% for a maximum term of two years. Our home equity loans and lines of credit are generally underwritten in the same manner as our one- to four-family residential loans. At December 31, 2020, we had $9.9 million of home equity lines of credit and $2.2 million of fixed-term home equity loans, representing 5.8% and 1.3% of our total loan portfolio, respectively. At December 31, 2020, we had no home equity lines of credit that were 30 days or more delinquent.
Home equity lines of credit and fixed-term home equity loans have greater risk than one- to four-family residential real estate loans secured by first mortgages. Our interest is generally subordinated to the interest of the institution holding the first mortgage. Even where we hold the first mortgage, we face the risk that the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and costs of foreclosure and we may be unsuccessful in recovering the remaining balance from those customers.
Commercial Business Loans. We have generally conducted very limited commercial business lending. We participated in the Paycheck Protection Program (“PPP”) and originated $634,000 in such loans. The board of directors has also authorized management to purchase up to $500,000 in commercial business loans from an unaffiliated commercial lender specializing in loans to physicians and other professionals in the medical field. These are installment loans amortizing over seven years and carry higher interest rates than traditional residential loans. These loans may be secured by liens on non-real estate business assets. These loans are often used for working capital, debt consolidation, equipment and other general business purposes. The loans to be purchased must be reviewed and found to be consistent with our loan policy and underwriting guidelines. As of December 31, 2020, we had acquired such loans in the aggregate amount of $158,000 or 0.1% of the loan portfolio. At December 31, 2020, the loans were performing in accordance with their original terms.
Consumer Lending. To date, our consumer lending apart from home equity loans and lines of credit has been limited. At December 31, 2020, we had $339,000 of consumer loans outstanding, representing approximately 0.2% of our total loan portfolio.
Originations, Purchases and Sales of Loans
Lending activities are conducted primarily by our salaried loan personnel operating at our main and branch office locations and by our loan officers. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both fixed- and adjustable-rate loans. Our ability to originate fixed- or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected by current and expected future levels of market interest rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.
Consistent with our interest rate risk strategy, we originate for sale and sell the majority of the fixed-rate, one- to four-family residential real estate loans that we originate with terms of greater than 10 years, on a combination of servicing-retained and servicing-released, limited or no recourse basis, while generally retaining shorter-term fixed-rate and all adjustable-rate one- to four-family residential real estate loans in order to manage the duration and time to repricing of our loan portfolio. Additionally, we consider the current interest rate environment in making decisions as to whether to hold the mortgage loans we originate for investment or to sell such loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. At December 31, 2020, we had $13.3 million in loans held for sale.
From time to time, we may purchase or sell participation interests in loans. We underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At December 31, 2020 and December 31, 2019, we had $4.2 million and $5.7 million in loan participation interests that we purchased. At those dates, we had $2.1 million and $4.2 million in loan participation interests sold.
Historically, we generally do not purchase whole loans or loan participations from third parties to supplement our loan production. However, we have purchased loans from a commercial lender specializing in loans to physicians and other professionals in the medical field. We may purchase additional loans from that lender in the future. See “-Commercial Business Loans.”
We generally sell our loans without recourse, except for customary representations and warranties provided in sales transactions. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities. For the years ended December 31, 2020 and 2019, we sold $291.4 million and $93.8 million of residential loans, respectively, of mortgage loans. Some of the mortgage loans were sold on a servicing-released basis, and we retained servicing on certain of these loans. At December 31, 2020, we serviced $230.2 million of fixed-rate and adjustable, one- to four-family residential real estate loans that we originated and sold in the secondary market.
The following table sets forth our loan origination, purchase, sale and principal repayment activity during the periods indicated.
Years Ended December 31,
(In thousands)
Total loans at beginning of period	 $ 181,551 $ 173,852
Loans originated:
Real estate loans:
One- to four-family residential:
Owner occupied	 318,745 109,976
Non-owner occupied	 4,260 3,730
Nonresidential	 10,812 7,540
Multi-family	 19,035 15,307
Home equity lines of credit	 8,215 5,031
Construction and land	 4,307 2,940
Total real estate	 365,374 144,524
Commercial loans	
Consumer loans	
Total loans	 366,276 145,168
Loans purchased:
Real estate loans:
One- to four-family residential:
Owner occupied	 - -
Non-owner occupied	 - -
Nonresidential	 - 1,700
Multi-family	 - 1,404
Home equity lines of credit	 - -
Construction and land	 - -
Total real estate	 - 3,104
Commercial loans	 - -
Consumer loans	 - -
Total loans	 - 3,104
Loans sold:
Real estate loans:
One- to four-family residential:
Owner occupied	 288,595 91,482
Non-owner occupied	 2,766 2,309
Nonresidential	 - -
Multi-family	 - 1,749
Home equity lines of credit	 - -
Construction and land	 - -
Total real estate	 291,361 95,540
Commercial loans	 - -
Consumer loans	 - -
Total loans	 291,361 95,540
Principal repayments and other	 83,577 45,033
Net loan activity	 (8,662 ) 7,699
Total loans at end of period	 $ 172,889 $ 181,551
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a loan payment becomes 20 days past due, we contact the customer by mailing a late notice. If a loan payment becomes 30 days past due, we mail a “right to cure” letter to the borrower and any co-makers and endorsers. If a loan payment becomes 90 days past due (or a borrower misses three consecutive payments, whichever occurs first), we send a demand letter and generally cease accruing interest. It is our policy to institute legal procedures for collection or foreclosure when a loan becomes 120 days past due, unless management determines that it is in the best interest of Cincinnati Federal to work further with the borrower to arrange a workout plan. From time to time we may accept deeds in lieu of foreclosure.
When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value, less estimated costs to sell.
Delinquent Loans. The following tables set forth our loan delinquencies, including nonaccrual loans, by type and amount at the dates indicated.
At December 31,
30-59Days
Past Due 60-89 Days
Past Due 90 Days or
More Past
Due 30-59 Days
Past Due 60-89 Days
Past Due 90 Days or
More Past
Due
(In thousands)
Real estate loans:
One- to four-family residential	 $ 97 $ 128 $ 174 $ - $ - $ 111
Nonresidential	 - - - - - -
Multi-family	 - - - - - -
Home equity lines of credit	 - - - - -
Construction and land	 - - - - - -
Total real estate	 98 -
Commercial loans	 - - - - - -
Consumer loans	 - - - - - -
Total	 $ 97 $ 128 $ 174 $ 98 $ - $ 111
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports with the Office of the Comptroller of the Currency and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.
On the basis of this review of our assets, our classified or special mention assets (presented gross of allowance) at the dates indicated were as follows:
At December 31,
(In thousands)
Special mention assets	 $ 1,101 $ 1,113
Substandard assets 	 1,351
Doubtful assets	 - -
Loss assets	 - -
Total classified assets	 $ 1,984 $ 2,464
Non-Performing Assets. We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days delinquent unless the loan is well-secured and in the process of collection. Loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until the loan qualifies for return to accrual. Generally, loans are restored to accrual status when all the principal and interest amounts contractually due are brought current, and future payments are reasonably assured. Loans are moved to non-accrual status in accordance with our policy, which is typically after 90 days of non-payment.
The following table sets forth information regarding our non-performing assets and troubled debt restructurings. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or loans modified at interest rates materially less than current market rates.
At December 31,
2017
(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One- to four-family residential:
Owner occupied	 $ 174 $ 111 $ 676 $ 130 $ 38
Non-owner occupied	 - - -
Nonresidential	 - - - -
Multi-family	 - - - -
Home equity lines of credit	 - - - - -
Construction and land	 - - - - -
Total real estate	 139
Commercial loans	 - - - - -
Consumer loans	 - - - -
Total non-accrual loans	 139
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	 153
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	 $ 174 $ 111 $ 847 $ 153 $ 58
Accruing loans past due 90 days or more:
Real estate loans:
One- to four-family residential:
Owner occupied	 $ - $ - $ - $ - $ -
Non-owner occupied	 - - - - -
Nonresidential	 - - - - -
Multi-family	 - - - - -
Home equity lines of credit	 - - - - -
Construction and land	 - - - - -
Total real estate	 - - - - -
Commercial loans	 - - - - -
Consumer loans	 - - - - -
Total accruing loans past due 90 days or more	 $ - $ - $ - $ - $ -
At December 31,
2017
(Dollars in thousands)
Accruing troubled debt restructured loans:
Real estate loans:
One- to four-family residential:
Owner occupied	 $ 854 $ 786 $ 514 $ 524 $ 565
Non-owner occupied	 306
Nonresidential	 - - - - -
Multi-family	 642
Home equity lines of credit	 - - - - -
Construction and land	 - - - - -
Total real estate	 1,143 1,445 1,370 1,472 1,647
Commercial loans	 - - - - -
Consumer loans	 - - - - -
Total accruing troubled debt restructured loans	 $ 1,143 $ 1,445 $ 1,370 $ 1,472 $ 1,647
Total non-performing assets and accruing troubled debt restructured loans $ 1,317 $ 1,556 $ 2,217 $ 1,635 $ 1,705
Total non-performing loans to total loans	 0.10 % 0.06 % 0.43 % 0.10 % 0.04 %
Total non-performing assets to total assets	 0.07 % 0.05 % 0.43 % 0.09 % 0.04 %
Total non-performing assets and accruing troubled debt restructured loans to total assets 0.56 % 0.64 % 1.12 % 0.95 % 1.10 %
Except as disclosed in the foregoing tables, other than $251,000 and $695,000 of loans designated as substandard, there were no other loans at December 31, 2020 and December 31, 2019, respectively, that are not already disclosed where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.
Interest income that would have been recorded for the years ended December 31, 2020 and 2019 had non-accruing loans been current according to their original terms amounted to $10,000 and $5,000, respectively. We recognized interest income for these loans totaling $3,000 and $2,000 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, all troubled debt restructurings were performing in accordance with their restructured terms.
Troubled Debt Restructurings. We occasionally modify loans to help a borrower stay current on his or her loan and to avoid foreclosure. We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating the strength of any guarantors based on documented current financial information, and assessing the current value of any collateral pledged. We generally do not forgive principal or interest on loans, but may do so if it is in our best interest and increases the likelihood that we can collect the remaining principal balance. We may modify the terms of loans to lower interest rates (which may be at below market rates), to provide for fixed interest rates on loans where fixed rates are otherwise not available, or to provide for interest-only terms. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests. At December 31, 2020, we had ten loans totaling $1.1 million that were classified as troubled debt restructurings.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well as the shortfall in collateral value could result in our charging off the loan or the portion of the loan that was impaired.
Among other factors, we consider current general economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan losses for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing data on our local markets from third party sources we believe to be reliable as a basis for assumptions about the impact of housing depreciation.
Substantially all of our loans are secured by collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically for a nonperforming real estate loan in the process of collection, the value of the underlying collateral is estimated using either the original independent appraisal, adjusted for current economic conditions and other factors, or a new independent appraisal, or evaluation and related general or specific allowances for loan losses are adjusted on a quarterly basis. If a nonperforming real estate loan is in the process of foreclosure and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, we will order a new independent appraisal or evaluation if it has not already been obtained. Any shortfall would result in immediately charging off the portion of the loan that was impaired.
Specific Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not classified as impaired to recognize the probable incurred losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.
As an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review our allowance for loan losses. Such agencies may require that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.
Years Ended December 31,
2017
(Dollars in thousands)
Allowance at beginning of period $ 1,408 $ 1,405 $ 1,360 $ 1,326 $ 1,367
Provision (credit) for loan losses 30 (121 )
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 $ 1,408 $ 1,405 $ 1,360 $ 1,326
Allowance to non-performing loans 961.49 % 1,268.47 % 188.59 % 888.89 % 2,286.21 %
Allowance to total loans outstanding at the end of the period 0.97 % 0.78 % 0.81 % 0.91 % 0.99 %
Net (charge-offs) recoveries to average loans outstanding during the period 0.00 % (0.01 )% 0.00 % 0.003 % 0.06 %
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
At December 31,
2017
Allowance
for Loan Losses Percent of Loans in Each Category to Total Loans Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Allowance for Loan Losses Percent of Loans in Each Category to Total Loans Allowance for Loan Losses Percent of Loans in Each Category to Total Loans
(Dollars in thousands)
Real estate loans:
One- to four-family residential:
Owner occupied $ 417 42.05 % $ 325 50.63 % $ 457 53.87 % $ 338 51.82 % $ 413 52.18 %
Non-owner occupied 6.97 7.07 8.19 7.59 8.85
Nonresidential 17.08 12.88 10.89 12.12 10.23
Multi-family 24.15 20.17 15.61 15.97 16.00
Home equity lines of credit 5.75 5.52 6.54 7.83 9.44
Construction and land 3.38 2.94 4.20 4.13 2.91
Total real estate 1,650 99.38 1,383 99.21 1,383 99.30 1,343 99.46 1,313 99.61
Commercial loans 0.42 0.31 0.24 0.22 0.38
Consumer loans 0.20 0.48 0.46 0.30 0.01
Total allocated allowance 1,673 100.00 % 1,408 100.00 % 1,405 100.00 % 1,360 100.00 % 1,367 100.00 %
Unallocated -
-
-
-
-
Total $ 1,673
$ 1,408
$ 1,405
$ 1,360
$ 1,367
At December 31, 2020, our allowance for loan losses represented 0.97% of total loans and 961.49% of nonperforming loans. Nonperforming loans increased from $111,000 at December 31, 2019 to $174,000 at December 31, 2020. At December 31, 2019, our allowance for loan losses represented 0.78% of total loans and 1,268.47% of nonperforming loans. The allowance for loan losses was $1.7 million at December 31, 2020 and $1.4 million at December 31, 2019. The Bank had no loan charge-offs during the year ended December 31, 2020 and net loan charge-offs of $22,000 during the year ended December 31, 2019.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, regulators, in reviewing our loan portfolio, may request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and increases may be necessary should the quality of any loan deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Investment Activities
General. The goals of our investment policy are to provide and maintain liquidity to meet day-to-day, cyclical and long-term liquidity needs, to help mitigate interest rate and market risk within the parameters of our interest rate risk policy, and to generate a dependable flow of earnings within the context of our interest rate and credit risk objectives. Subject to loan demand and our interest rate risk analysis, we will increase the balance of our investment securities portfolio when we have excess liquidity.
Our investment policy was adopted, and is reviewed annually, by the board of directors. All investment decisions require the approval of at least three senior management members, one of which shall be the President or Chief Financial Officer. The Chief Financial Officer provides an investment schedule detailing the investment portfolio which is reviewed at least monthly by the Bank’s asset-liability committee and the board of directors.
Our current investment policy permits, with certain limitations, investments in United States Treasury securities; securities issued by the United States Government and its agencies or government sponsored enterprises including mortgage-backed securities and collateralized mortgage obligations (“CMO”) issued by Fannie Mae, Ginnie Mae and Freddie Mac; corporate bonds and obligations; debt securities of state and municipalities; commercial paper; certificates of deposit in other financial institutions, and bank-owned life insurance.
At December 31, 2020, our investment portfolio consisted of securities and obligations issued by U.S. government-sponsored enterprises or the Federal Home Loan Bank. At December 31, 2020, we owned $2,801,800 of FHLB-Cincinnati stock. As a member of FHLB-Cincinnati, we are required to purchase stock in the FHLB-Cincinnati, which stock is carried at cost and classified as restricted equity securities.
Securities Portfolio Composition. The following table sets forth the amortized cost and estimated fair value of our available-for-sale securities portfolio at the dates indicated, all of which consisted of pass-through mortgage-backed securities.
At December 31,
Amortized Cost Estimated Fair Value Amortized Cost Estimated
Fair Value Amortized Cost Estimated
Fair Value
(In thousands)
Freddie Mac $ 3,575 $ 3,604 $ 4,057 $ 4,043 $ 81 $ 81
Fannie Mae 309
GNMA 1,403 1,420 2,378 2,381 - -
Total $ 5,171 $ 5,214 $ 6,741 $ 6,733 $ 629 $ 630
Mortgage-Backed Securities. At December 31, 2020, we had mortgage-backed securities with a carrying value of $5.2 million, which constituted our entire securities portfolio. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Cincinnati Federal. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our mortgage-backed securities are backed by either Freddie Mac, Fannie Mae or GNMA, which are government-sponsored enterprises.
Residential mortgage-backed securities issued by United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2020 and 2019, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. Adjustable-rate mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust.
One Year or Less More than One Year
through Five Years More than Five Years
through Ten Years More than Ten Years Total
December 31, 2020 Amortized Cost Weighted Average Yield Amortized Cost Weighted Average
Yield Amortized Cost Weighted Average
Yield Amortized Cost Weighted Average
Yield Amortized Cost Fair Value Weighted Average Yield
(Dollars in thousands)
Freddie Mac $ 3,575 0.59 % $ - -% $ - -% $ - -% $ 3,575 $ 3,604 0.59 %
Fannie Mae 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 %
One Year or Less More than One Year
through Five Years More than Five Years
through Ten Years More than Ten Years Total
December 31, 2019 Amortized Cost Weighted Average Yield Amortized Cost Weighted Average
Yield Amortized Cost Weighted Average
Yield Amortized Cost Weighted Average
Yield Amortized Cost Fair Value Weighted Average Yield
(Dollars in thousands)
Freddie Mac $ 4,057 2.19 % $ - -% $ - -% $ - -% $ 4,057 $ 4,043 2.19 %
Fannie Mae 3.69 % - -% - -% - -% 3.69 %
GNMA 2,378 2.25 % - -% - -% - -% 2,378 2,381 2.25 %
Total $ 6,741 2.28 % $ - -% $ - -% $ - -% $ 6,741 $ 6,733 2.28 %
Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also may use borrowings, primarily FHLB-Cincinnati advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits. Our deposits are generated primarily from our primary market area. We offer a selection of deposit accounts, including demand accounts, savings accounts, certificates of deposit and individual retirement accounts (IRAs). Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We do not accept brokered deposits, although we have the authority to do so.
We participate in the National CD Rateline Program as a wholesale source for certificates of deposit to supplement deposits generated through our retail banking operations. The Rateline Program provides an internet based listing service which connects financial institutions such as Cincinnati Federal with other financial institutions for jumbo certificates of deposit. Deposits obtained through the Rateline Program are not considered to be brokered deposits. At December 31, 2020, approximately $5.6 million of our certificates of deposit, representing 3.7% of our total deposits, had been obtained through the Rateline Program. At December 31, 2020, these certificates of deposit had an average term to maturity of eight months. Early withdrawal of these deposits is not permitted, which makes these accounts a more stable source of funds.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely upon personalized customer service, long-standing relationships with customers, and the favorable image of Cincinnati Federal in the community to attract and retain deposits. We recently implemented a fully functional electronic banking platform, including mobile app and on-line bill pay, as a service to our deposit customers.
The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Our ability to gather deposits is affected by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products.
The following table sets forth the distribution of our average total deposit accounts, by account type, for the periods indicated.
For the Years Ended December 31,
Average
Balance Percent Weighted
Average
Rate Average
Balance Percent Weighted
Average
Rate Average
Balance Percent Weighted
Average
Rate
(Dollars in thousands)
Deposit type:
Savings	 $ 42,179 27.33 % 0.28 % $ 35,040 24.63 % 0.53 % $ 26,390 21.47 % 0.25 %
Interest-bearing demand	 28,061 18.18 0..22 19,552 13.75 0.76 9,098 7.40 1.47
Certificates of deposit	 70,253 45.53 2.10 76,133 53.52 2.12 71,114 57.86 1.73
Interest-bearing deposits	 140,493 91.04 1.18 130,725 91.90 1.49 106,602 86.73 1.35
Non-interest bearing demand	 13,822 8.96 - 11,517 8.10 - 16,305 12.87 -
Total deposits	 $ 154,315 100.00 % 1.07 % $ 142,242 100.00 % 1.37 % $ 122,907 100.00 % 1.16 %
The following table sets forth our deposit activities for the periods indicated.
At or For the Years Ended
December 31,
(In thousands)
Beginning balance	 $ 143,411 $ 142,392
Net deposits (withdrawals) before interest credited	 7,434 (21 )
Interest credited	 1,362 1,040
Net increase in deposits	 8,796 1,019
Ending balance	 $ 152,207 $ 143,411
The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.
At December 31,
(In thousands)
Interest Rate:
Less than 1.00%	 $ 14,378 $ 785
1.00% to 1.99%	 10,628 17,087
2.00% to 2.99%	 35,979 57,630
3.00% to 3.99%	 1,220 1,736
Total	 $ 62,205 $ 77,238
The following table sets forth the amount and maturities of certificates of deposit accounts at the date indicated.
At December 31, 2020
Period to Maturity
Less Than or
Equal to
One Year
More Than
One to
Two Years
More Than
Two to
Three
Years More Than
Three Years Total Percent of
Total
(Dollars in thousands)
Interest Rate Range:
Less than 1.00%	 $ 8,890 $ 3,281 $ 351 $ 1,856 $ 14,378 23.11 %
1.00% to 1.99%	 7,928 1,642 10,628 17.09
2.00% to 2.99%	 17,181 9,356 4,915 4,527 35,979 57.84
3.00% to 3.99%	 1,132 - 1,220 1.96
Total	 $ 35,131 $ 14,359 $ 5,508 $ 7,207 $ 62,205 100.00 %
The following table sets forth the maturity of our jumbo certificates of deposit ($100,000 or greater) as of December 31, 2020.
At December 31, 2020
(In thousands)
Three months or less	 $ 4,031
Over three months through six months	 4,031
Over six months through one year	 7,538
Over one year to three years	 10,763
Over three years	 2,608
Total	 $ 28,971
Borrowings. We may obtain advances from the FHLB-Cincinnati by pledging as security our capital stock in the FHLB-Cincinnati and certain of our mortgage loans and mortgage-backed securities. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile. Recently, we have lengthened the maturities of our some of our FHLB advance borrowings to reduce interest rate risk. At December 31, 2020, we had $38.4 million of FHLB-Cincinnati advances. These advances had interest rates ranging from 1.59% to 2.90%. In addition to funding portfolio loans, we sometimes use FHLB-Cincinnati advances for short-term funding needs arising from our mortgage-banking activities.
In addition to the availability of FHLB-Cincinnati advances we also have a total of $11.5 million in lines of credit available from three commercial banks. No amount was outstanding on these lines of credit at December 31, 2020.
The following table sets forth information concerning balances and interest rates on borrowings at the dates and for the years indicated. All such borrowings consisted of FHLB-Cincinnati advances.
At or For the Year
Ended December 31,
(Dollars in thousands)
Balance outstanding at end of period	 $ 38,412 $ 47,172 $ 28,580
Weighted average interest rate at the end of period	 2.19 % 2.24 % 2.20 %
Maximum amount of borrowings outstanding at any month end during the period	 $ 53,675 $ 55,750 $ 40,144
Average balance outstanding during the period	 42,434 42,873 35,219
Weighted average interest rate during the period	 2.22 % 2.23 % 1.86 %
Employees and Human Capital
We believe that the success of a business is largely due to the quality of its employees, the development of each employee’s full potential, and the Company’s ability to provide timely and satisfying rewards. We encourage and support development of our employees and, whenever possible, strive to fill vacancies from within. We invest in learning and development including tuition reimbursement for courses, degree programs and fees for certifications. As of December 31, 2020, we had 72 full-time employees and 8 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.
Subsidiary Activities
Cincinnati Federal is the only subsidiary of Cincinnati Bancorp, Inc. Cincinnati Federal Investment Services, LLC, is the sole subsidiary of Cincinnati Federal and is currently inactive.
REGULATION AND SUPERVISION
General
As a federal savings bank, Cincinnati Federal is subject to examination and regulation by the Office of the Comptroller of the Currency, and is also subject to examination by the Federal Deposit Insurance Corporation. The federal system of regulation and supervision establishes a comprehensive framework of activities in which Cincinnati Federal may engage and is intended primarily for the protection of depositors and the Federal Deposit Insurance Corporation’s Deposit Insurance Fund. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors, and not for the protection of security holders. Cincinnati Federal also is a member of and owns stock in the Federal Home Loan Bank of Cincinnati, which is one of the 11 regional banks in the Federal Home Loan Bank System.
Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as Cincinnati Federal or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.
In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.
As a savings and loan holding company, Cincinnati Bancorp, Inc. is required to comply with the rules and regulations of the Federal Reserve Board. It is required to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement authority of the Federal Reserve Board. Cincinnati Bancorp, Inc. is also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Any change in applicable laws or regulations, whether by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Securities and Exchange Commission or Congress, could have a material adverse impact on the operations and financial performance of Cincinnati Bancorp, Inc. and Cincinnati Federal.
Set forth below is a brief description of material regulatory requirements that are or will be applicable to Cincinnati Federal and Cincinnati Bancorp, Inc. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Cincinnati Federal and Cincinnati Bancorp, Inc.
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Cincinnati Federal may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Cincinnati Federal may also establish subsidiaries that may engage in certain activities not otherwise permissible for Cincinnati Federal, including real estate investment and securities and insurance brokerage.
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the Office of the Comptroller of the Currency takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. As fully implemented on January 1, 2019, the capital conservation buffer requirement is 2.5% of risk-weighted assets.
At December 31, 2020, Cincinnati Federal’s capital exceeded all applicable requirements.
Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. At December 31, 2020, Cincinnati Federal was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings bank, Cincinnati Federal must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Cincinnati Federal must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings bank’s business.
Cincinnati Federal also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended. This test generally requires a savings bank to have at least 75% of its deposits held by the public and earn at least 25% of its income from loans and U.S. government obligations. Alternatively, a savings bank can satisfy this test by maintaining at least 60% of its assets in cash, real estate loans and U.S. Government or state obligations.
A savings bank that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2020, Cincinnati Federal satisfied the QTL test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the savings bank’s capital account. A federal savings bank must file an application with the Office of the Comptroller of the Currency for approval of a capital distribution if:
· 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, 2020, Cincinnati Federal met the criteria for being considered “well capitalized.”
Insurance of Deposit Accounts. The Deposit Insurance Fund of the Federal Deposit Insurance Corporation insures deposits at Federal Deposit Insurance Corporation insured financial institutions such as Cincinnati Federal. Deposit accounts in Cincinnati Federal are insured by the Federal Deposit Insurance Corporation generally up to a maximum of $250,000 per separately insured depositor. The Federal Deposit Insurance Corporation charges insured depository institutions premiums to maintain the Deposit Insurance Fund.
Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Institutions deemed to be less risky pay lower rates while institutions deemed riskier pay higher rates. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s deposits.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation was required to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation, which has exercised that discretion by establishing a long range fund ratio of 2%. The Federal Deposit Insurance Corporation announced that the ratio had declined to 1.30% at September 30, 2020 due largely to consequences of the COVID-19 pandemic. The FDIC adopted a plan to restore the fund to the 1.35% ratio within eight years but did not change its assessment schedule.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Cincinnati Federal. We cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not know of any practice, condition or violation that may lead to termination of our deposit insurance.
Privacy Regulations. Federal regulations generally require that Cincinnati Federal disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Cincinnati Federal is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Cincinnati Federal currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.
USA PATRIOT Act. Cincinnati Federal is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and customer identification requirements.
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Other Regulations
Interest and other charges collected or contracted for by Cincinnati Federal are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:
· 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 2020, the Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $127.5 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $127.5 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $16.9 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. Cincinnati Federal was in compliance with these requirements at December 31, 2020. However, effective March 26, 2020, the Federal Reserve Board reduced reserve requirement ratios on all net transaction accounts to zero percent, eliminating reserve requirements for all depository institutions, in response to the COVID-19 pandemic.
Federal Home Loan Bank System
Cincinnati Federal is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. Cincinnati Federal was in compliance with this requirement at December 31, 2020. Based on redemption provisions of the Federal Home Loan Bank of Cincinnati, the stock has no quoted market value and is carried at cost. Cincinnati Federal reviews for impairment, based on the ultimate recoverability, the cost basis of the Federal Home Loan Bank of Cincinnati stock. At December 31, 2020, no impairment had been recognized.
Holding Company Regulation
Cincinnati Bancorp, Inc. is a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement authority over Cincinnati Bancorp, Inc. and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Cincinnati Federal.
As a savings and loan holding company, Cincinnati Bancorp, Inc.’s activities are limited to those activities permissible by law for financial holding companies (if Cincinnati Bancorp, Inc. makes an election to be treated as a financial holding company and meets the other requirements to be a financial holding company) or multiple savings and loan holding companies. Cincinnati Bancorp, Inc. has no present intention to make an election to be treated as a financial holding company. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending and other activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, insurance and underwriting equity securities. Multiple savings and loan holding companies are authorized to engage in activities specified by federal regulation, including activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act.
Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of any depository institution not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act requires the Federal Reserve Board to establish minimum consolidated capital requirements for all depository institution holding companies that are as stringent as those required for the insured depository subsidiaries. However, savings and loan holding companies of under $3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve determines otherwise in particular cases.
The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing the “source of strength” doctrine that require holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of capital distributions previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding company should inform the Federal Reserve Board supervisory staff before redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Cincinnati Bancorp, Inc. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Federal Securities Laws
Cincinnati Bancorp, Inc. common stock is registered with the Securities and Exchange Commission after the conversion and stock offering. Cincinnati Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.
Change in Control Regulations
Under the Change in Bank Control Act, a federal statute, no person may acquire control of a savings and loan holding company, such as Cincinnati Bancorp, Inc., unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with Cincinnati Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Federal Reserve Board.
TAXATION
Federal Taxation
Method of Accounting. For federal income tax purposes, Cincinnati Bancorp, Inc. and Cincinnati Federal report their income and expenses on the cash method of accounting and use a tax year ending December 31 for filing their federal income tax returns.
Net Operating Loss Carryovers. Generally, a financial institution may carry a net operating loss forward indefinitely for losses generated in taxable years ending after December 31, 2017. Cincinnati Bancorp, Inc. had $610,000 of federal net loss carryforwards at December 31, 2020 that expire between 2028 and 2037 and $240,000 with no expiration.
Capital Loss Carryovers. A corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any undeducted loss remaining after the five year carryover period is not deductible. At December 31, 2020, the Company had no capital loss carryovers.
Corporate Dividends. Cincinnati Bancorp, Inc. may generally exclude from its income 100% of dividends received from Cincinnati Federal as a member of the same affiliated group of corporations.
State Taxation
Cincinnati Bancorp, Inc. and Cincinnati Federal are subject to Ohio taxation in the same general manner as other financial institutions. In particular, Cincinnati Bancorp, Inc. and Cincinnati Federal file a consolidated Ohio Financial Institutions Tax (“FIT”) return. The FIT is based upon the net worth of the consolidated group. For Ohio FIT purposes, savings institutions are currently taxed at a rate equal to 0.8% of taxable net worth.
Maryland State Taxation. As a Maryland business corporation, Cincinnati Bancorp, Inc. is required to file an annual report with and pay franchise taxes to the State of Maryland.

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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, 2020, the net book value of our office properties was $3.3 million, and the net book value of our furniture, fixtures and equipment was $156,000. The following table sets forth information regarding our offices.
Location
Leased or Owned Year Acquired
or Leased
Net Book Value of Real
Property
(In thousands)
Main Office:
6581 Harrison Ave
Cincinnati, OH 45247 Owned $ 1,127
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, 2020, we were not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business or in any legal proceedings the outcome of which would be material to our consolidated financial condition or results of operations.

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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 15, 2021, was approximately 230. Certain shares of Cincinnati Bancorp, Inc. are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Our board of directors has the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. Specifically, the Federal Reserve Board has issued a policy statement providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with its capital needs and overall financial condition. See “Item 1. Business-Taxation-Federal Taxation” and “-Regulation and Supervision-Holding Company Regulation.”
The common stock of Old Cincinnati Bancorp was traded on the OTC Pink Marketplace under the symbol “CNNB.” Effective January 22, 2020, Cincinnati Bancorp, Inc. has traded on the NASDAQ exchange under the symbol “CNNB.” The following table sets forth the high and low closing bid prices per share of the common stock of Old Cincinnati Bancorp for the quarters ended in 2019. The indicated prices do not include retail markups or markdowns or any commissions and do not necessarily reflect prices in actual transactions.
Fiscal Year Ended December 31, 2019 (1)
Quarter Ended: High Low Dividend
Paid
December 31, 2019 $ 10.24 $ 9.30 $ -
September 30, 2019 9.94 8.56 -
June 30, 2019 8.56 8.26 -
March 31, 2019 8.50 7.22 -
(1) Per share prices related to periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive recognition to the 1.6351 exchange ratio applied in the conversion offering.
(b) Sales of Unregistered Securities. Not applicable.
(c) Use of Proceeds. Not applicable.
(d) Securities Authorized for Issuance Under Equity Compensation Plans. Subject to permitted adjustments for certain corporate transactions, the 2017 Equity Incentive Plan, which was approved by stockholders, authorizes the issuance or delivery to participants of up to 192,844 shares of common stock pursuant to grants, of restricted stock awards, restricted stock unit awards, incentive stock options and non-qualified stock options.
The following information is presented for the 2017 Equity Incentive Plan as of December 31, 2020 (1):
Plan Category Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under plan
(excluding securities
reflected in column )
Equity compensation plans approved by stockholders	 156,368 $ 6.27
Equity compensation plans not approved by stockholders	 N/A N/A N/A
Total	 156,368 $ 6.27
(1) Share amounts related to periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive recognition to the 1.6351 exchange ratio applied in the conversion offering.
(e) Stock Repurchases. None.
(f) Stock Performance Graph. Not required for smaller reporting companies.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. Selected Financial Data
Not required for smaller reporting companies like Cincinnati Bancorp, Inc..

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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, 2020 and December 31, 2019 and our results of operations for the years ended December 31, 2020 and December 31, 2019. This section should be read in conjunction with the consolidated financial statements and notes thereto that appear elsewhere in this Annual Report on Form 10-K.
Overview
Cincinnati Federal provides financial services to individuals and businesses from our main office in Cincinnati, Ohio and our full service branch offices in Miami Heights, Anderson and Price Hill and in Covington and Florence in Northern Kentucky. Our primary market area includes Hamilton County, Ohio, and, to a lesser extent, Warren, Butler and Clermont Counties, Ohio. We also conduct business in the northern Kentucky region and make loans secured by properties in Campbell, Kenton and Boone Counties, Kentucky, as well as in Dearborn County, in southeastern Indiana.
Our business consists primarily of taking deposits from the general public and investing those deposits, together with borrowings and funds generated from operations, in one- to four-family residential real estate loans, and, to a lesser extent, nonresidential real estate and multi-family loans, home equity loans and lines of credit and construction and land loans. At December 31, 2020, $84.8 million, or 49.0% of our total loan portfolio, was comprised of one- to four-family residential real estate loans; $29.5 million, or 17.1%, consisted of nonresidential real estate loans; $41.7 million, or 24.1%, consisted of multi-family loans; $9.9 million, or 5.8%, consisted of home equity lines of credit; $1.1 million or 0.6% consisted of commercial business loans and consumer loans; and $5.8 million, or 3.4%, consisted of construction and land loans. We also invest in securities, which currently consist primarily of mortgage-backed securities issued by U.S. government sponsored entities and Federal Home Loan Bank stock.
Cincinnati Federal also operates an active mortgage banking unit with thirteen mortgage loan officers. This unit originates loans both for sale in the secondary market and for retention in our portfolio. The revenue from gain on sales of loans was $9.5 million for year ended December 31, 2020 and $2.1 million for year ended December 31, 2019.
We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. We utilize advances from the FHLB-Cincinnati for liquidity and for asset/liability management purposes. At December 31, 2020, we had $38.4 million in advances outstanding with the FHLB-Cincinnati.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of gain (loss) on sale of mortgage loans, checking account service fee income, interchange fees from debit card transactions and income from bank owned life insurance. Non-interest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy and equipment, data processing, franchise taxes, federal deposit insurance premiums, impairment losses on foreclosed real estate and other operating expenses.
We invest in bank owned life insurance to provide us with a funding source to offset some costs of our benefit plan obligations. Bank owned life insurance provides us with non-interest income that is nontaxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. At December 31, 2020, this limit was $9.1 million, and we had invested $4.2 million in bank owned life insurance.
Cincinnati Federal Investment Services, LLC, a wholly owned subsidiary of Cincinnati Federal under Ohio law, was formed in 2015 to offer nondeposit investment and insurance products in partnership with Infinex Investments, Inc. Cincinnati Federal Investment Services, LLC is currently inactive.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Business Strategy
Our current business strategy is to operate as a well-capitalized and profitable community bank dedicated to serving the needs of our consumer and business customers, and offering personalized and efficient customer service. Our goals are to increase interest income through loan portfolio growth, expand fee income with the mortgage banking unit, lower our cost of deposits by increasing non-maturity based accounts, achieve economies of scale through balance sheet growth and diversify sources of income. Highlights of our current business strategy include:
· Increasing our origination of nonresidential real estate and multi-family loans. We began originating a significant amount of nonresidential real estate and multi-family loans in the early 2000s. As of December 31, 2020 and 2019, such loans, together with construction and land loans, totaled $77.1 million and $65.3 million, or 211.4% and 258.8% of capital plus ALLL, respectively. Under our current board approved loan concentration policy, such loans (including construction and land loans) shall not exceed 300% of our capital plus ALLL. We intend to continue to increase our origination of nonresidential real estate and multi-family real estate loans, with a focus on multi-family loans. Most nonresidential real estate and multi-family loans are originated with adjustable rates. Nonresidential real estate and multi-family lending is expected to increase loan yields with shorter repricing terms than fixed-rate loans. Nonresidential real estate and multi-family originations in 2020 increased $7.0 million or 30.6% over 2019 origination levels. See “Business of Cincinnati Federal-Lending Activities-Commercial Real Estate and Multi-Family Lending.”
· Continuing to focus on our residential mortgage banking operations. For the year ended December 31, 2020, we originated $323.0 million of one-to four-family residential loans, and we sold $291.4 million of one-to four-family residential loans. For the year ended December 31, 2019, we originated $113.7 million of one-to four family residential loans, and we sold $93.8 million of one- to four-family residential loans. These loans are all sold on a non-recourse basis primarily to the FHLB-Cincinnati, Freddie Mac, and other private sector third-party buyers. Loans are sold on both a servicing-retained and servicing-released basis. Subject to mortgage market conditions, we intend to continue to increase the number of mortgage loan originators in order to increase our volume of sold loans with the potential for increased servicing income.
· Continuing to emphasize one- to four-family residential adjustable rate mortgage lending. We will continue to focus on originating one- to four-family adjustable rate mortgages for retention in our portfolio. As of December 31, 2020, $54.4 million, or 64.3%, of our one- to four-family residential mortgage loans, with contractual maturities after December 31, 2020, were adjustable rate loans. As of December 31, 2019, $83.0 million, or 46.1%, of our one- to four-family residential mortgage loans had adjustable rates. Adjustable rate loans have shorter repricing terms to mitigate interest rate risk.
· Increasing our “core” deposit base. We seek to increase our core deposit base, particularly checking accounts. Core deposits include all deposit account types except certificates of deposit. Core deposits are our least costly source of funds, which improves our interest rate spread, and represent our best opportunity to develop customer relationships that enable us to cross-sell our full complement of products and services. Core deposits also contribute non-interest income from account-related fees and services and are generally less sensitive to withdrawal when interest rates fluctuate. We have continued our marketing efforts for checking accounts through digital, print and outdoor advertising channels. Core deposits as of December 31, 2020 grew $23.8 million or 36.0% over December 31, 2019 balances. The increase is partially attributable to the increase in cash of $6.0 million at Cincinnati Bancorp, Inc. which is held in a deposit account at the Bank. We continue to significantly expand and improve the products and services we offer our retail and business deposit customers who maintain core deposit accounts and have improved our infrastructure for electronic banking services, including business online banking, mobile banking, bill pay, remote deposit capture, wire transfers and e-statements. The deposit infrastructure we have established can accommodate significant increases in retail and business deposit accounts without additional capital expenditure. We will also continue to use non-core deposits, including certificates of deposit from the National CD Rateline Program, as a source of funds, in accordance with our asset/liability policies and funding strategies.
· Implementing a managed growth strategy. We intend to pursue a growth strategy for the foreseeable future, with the goal of improving the profitability of our business through increased net interest income and new sources of non-interest income. Subject to market conditions, we intend to grow our one- to four-family residential adjustable rate, nonresidential real estate and multi-family loan portfolios. To a lesser extent we intend to grow our construction and commercial business loan portfolio.
Summary of Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from our internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that we may not be able to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.
In the course of working with borrowers, we may choose to restructure the contractual terms of certain loans. In this scenario, we attempt to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by us to identify if a troubled debt restructuring has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower’s current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms or a combination of the two. If such efforts by us do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time we commence foreclosure. We may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan. It is our policy that any restructured loans on nonaccrual, prior to being restructured, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, we review the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan.
With regards to determination of the amount of the allowance for credit losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.
Federal Home Loan Bank of Cincinnati Lender Risk Account Receivable. Certain loan sale transactions with the Federal Home Loan Bank of Cincinnati provide for establishment of a lender risk account receivable, which consists of amounts withheld from loan sale proceeds by the Federal Home Loan Bank of Cincinnati for absorbing inherent losses that are probable on those sold loans. These withheld funds are an asset as they are scheduled to be paid to us in future years, net of any credit losses on those loans sold. The receivables are initially measured at fair value. The fair value is estimated by discounting the cash flows over the life of each master commitment contract. The accretable yield is amortized over the life of the master commitment contract. Expected cash flows are re-evaluated at each measurement date. If there is an adverse change in expected cash flows, the accretable yield would be adjusted on a prospective basis and the asset would be evaluated for impairment.
Mortgage Servicing Rights. Mortgage servicing assets are recognized separately when rights are acquired through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale of loans originated by us are initially measured at fair value at the date of transfer. Cincinnati Federal subsequently measures each class of servicing asset using the fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in earnings in the period in which the changes occur.
Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing rights and may result in a reduction or addition to noninterest income.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.
Coronavirus (COVID-19) Impact
As a result of the spread of the coronavirus (COVID-19) pandemic, economic uncertainties have arisen which may negatively affect the financial position, results of operations and cash flows of the Company and, in particular, the collectability of the loan portfolio. The duration of these uncertainties and the ultimate financial effects cannot be reasonably estimated at this time.
Loan Modifications
Beginning in March 2020, we began receiving requests from certain of our borrowers for loan payment deferrals. These modifications for our portfolio loans are for the deferral of principal and interest payments up to 90 day terms. Loan deferral terms may be extended on a case-by-case basis. Each request is evaluated individually and evidenced by a signed loan modification agreement. Interest on loan deferrals continues to accrue during the deferral period. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. Collectability of accrued interest will be evaluated on a case-by-case basis once the deferral period is ended. At this time, it is uncertain what the potential impact of loan deferrals will have on the financial position, results of operations and the allowance for loan losses. The following table provides further information on coronavirus payment deferral modifications for loans held in portfolio approved as of December 31, 2020:
As of December 31, 2020
COVID-19 Deferrals Update Recorded
Balance Number
of Accounts
One to four family mortgage loans - owner occupied $ 515,278
One to four family mortgage loans - investment 89,842
Multifamily - -
Nonresidential 418,784
Land - -
Loan payment deferral modifications $ 1,023,904
As of December 31, 2020
Recorded Number
Residential Payment Deferrals by Deferral Type Balance of Accounts
One to four family mortgage loans - owner occupied
Three months or less principal and interest $ - -
More than three months principal and interest 515,278
One to four family mortgage loans - investment
Three months or less principal and interest - -
More than three months principal and interest 89,842
Total residential payment deferrals $ 605,120
Recorded Number
Commercial Payment Deferrals by Deferral Type Balance of Accounts
Multifamily:
Three months or less principal and interest $ - -
More than three months principal and interest - -
Nonresidential:
Three months or less principal and interest - -
More than three months principal and interest 418,784
Construction and land loans:
Three months or less principal and interest - -
More than three months principal and interest - -
Total commercial payment deferrals $ 418,784
The Company services loans for various investors, including the FHLB-Cincinnati and Freddie Mac. Under terms of our agreement with these entities we are required to remit principal and interest on a scheduled basis. We have conformed our loan deferral program to meet the guidance issued by the FHLB-Cincinnati and Freddie Mac. At this time, it is uncertain what potential impact the loan deferrals for sold loans will have on our financial position. The following table shows the coronavirus payment deferral modifications approved for loans sold as of December 31, 2020:
As of December 31, 2020
Recorded Number
COVID-19 Loans Serviced for Others Deferrals Update Investor Balance of Accounts
FHLB -Cincinnati $ 306,594
Freddie Mac 514,645
Total $ 821,239
Paycheck Protection Program
As part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Small Business Administration (“SBA”) has been authorized to guarantee loans under the Paycheck Protection Program (“PPP”) under the CARES Act through August 8, 2020. We began accepting applications on April 27, 2020. As of December 31, 2020, we had originated 23 PPP loans totaling $633,800. PPP loans are fully guaranteed by the SBA and therefore do not represent a credit risk. PPP loans are included within the commercial loans category.
Asset Impairment
Our mortgage servicing rights valuation has experienced a decrease as of December 31, 2020 as a result of increased prepayment speed assumptions due to the decrease in market interest rates in response to COVID-19. The fair value of our mortgage servicing rights, however, has increased due to the recording of mortgage servicing rights on increased levels of new loan originations. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future decreases in the fair value of our MSRs.
Financial position and results of operations
Pertaining to our December 31, 2020 financial condition and results of operations, COVID-19 had an impact on our allowance for loan losses (“ALL”). While we have not yet experienced any charge-offs related to COVID-19, our allowance for loan losses calculation and resulting provision for loan losses are impacted by changes in economic conditions. Given the increase in economic uncertainty since the pandemic was declared in early March, our need for additional allowance for loan losses has potentially increased. As of December 31, 2020, our significant credit quality indicators, such as levels of delinquent, classified, impaired and nonperforming loans, have not materially deteriorated. Should economic conditions in our market area worsen, we could experience a need for further increases in our allowance for loan losses and be required to record additional provisions for loan loss expense. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.
Capital and liquidity
As of December 31, 2020, all of our capital ratios were in excess of all regulatory requirements to be considered a “well capitalized” institution. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further losses.
We maintain access to multiple sources of liquidity. Wholesale funding sources, particularly the FHLB and National CD Rateline, have remained open to us. If funding costs become elevated for an extended period of time, it could have an adverse effect on our net interest margin. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
Our processes, controls and business continuity plan
Following guidance from the Governors of Ohio and Kentucky, the Company has deployed a successful remote working strategy, provided timely communication to our employees and customers, implemented protocols for employee safety, and initiated strategies for monitoring and responding to local COVID-19 impacts - including customer relief efforts. The Company’s preparedness efforts, coupled with timely plan implementation, resulted in minimal impacts to operations as a result of COVID-19. Prior technology planning resulted in the successful deployment of the majority of our operational teams to a remote environment. As the pandemic has progressed through the twelve months ended December 31, 2020, most of our employees returned to their offices. In October 2020, management made the decision to close our branch lobbies for in-person transactions unless by appointment due to the spike in COVID-19 cases in Ohio and Kentucky. As of December 31, our branch lobbies remained closed for in-person customer transactions. Our employees are working from home where practicable. We do not anticipate incurring additional material costs related to adhering to the State of Ohio or Kentucky’s mandated COVID-19 related business requirements. Our management team continues to meet as needed to respond to any future COVID-19 interruptions or developments. We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of our business continuity plans.
Lending
The Company’s loan exposure is predominately retail residential, multifamily and nonresidential in nature. See Note 3 of the Notes to Condensed Consolidated Financial Statements. As of December 31, 2020, the Company had no direct exposure to the hospitality, restaurant, travel, energy, aviation, healthcare or senior living industries. Although the Company has no direct exposure to the aviation industry, General Electric operates a jet engine plant in the Cincinnati area which has been adversely affected by the COVID-19 pandemic. Some of General Electric employees are borrowers from the Company, and their ability to service their debt may be or may become impaired. The bank has one nonresidential loan secured by property leased by a GE aviation subsidiary. The loan was current as of December 31, 2020.
Comparison of Financial Condition at December 31, 2020 and 2019
Total Assets. Total assets were $237.1 million at December 31, 2020, a decrease of $4.7 million, or 1.9%, from the $241.8 million at December 31, 2019. Cash and cash equivalents decreased $5.4 million, or 14.3%. Total loans, net of the allowance, decreased $12.7 million, or 7.1% due to higher prepayments. Offsetting the decrease in total assets was an increase in loans held for sale of $10.2 million, or 328.6%, to $13.3 million from $3.1 million at December 31, 2019. Interest-bearing time deposits increased $3.0 million at December 31, 2020.
Cash and Cash Equivalents. Cash and cash equivalents decreased $5.4 million, or 14.3%, to $32.3 million at December 31, 2020 from $37.7 million at December 31, 2019. This decrease was primarily the result of the return of $9.8 million of stock over-subscription proceeds and the increase in loans held for sale of $10.2 million, or 328.6%, partially offset by an increase of $8.8 million in deposits.
Available-for-Sale Securities. Investment securities available-for-sale decreased $1.5 million to $5.2 million at December 31, 2020 compared to $6.7 million at December 31, 2019 due to maturities. There were no purchases or sales of available-for-sale securities in 2020.
Loans Held for Sale. We currently sell certain fixed-rate, 15- and 30-year term, one-to-four family mortgage loans. We have sold loans on both a servicing-released and servicing-retained basis to: the FHLB-Cincinnati, through its mortgage purchase program; Freddie Mac; and certain private sector third-party buyers. Loans held for sale increased $10.2 million, or 328.6%, to $13.3 million at December 31, 2020 from $3.1 million at December 31, 2019. In 2020, we originated $301.6 million of loans for sale, all of which were one- to four-family residential real estate loans. Management intends to continue this sales activity in future periods to generate gain on sale revenue and servicing fee income.
During the year ended December 31, 2020, we sold $291.4 million of one-to- four family residential loans, on both a servicing-retained and servicing-released basis. Recent economic events, including a reduction in interest rates by the Federal Reserve Board, in its efforts to address the overall economic slowdown brought about by the COVID-19 pandemic, have reduced mortgage interest rates and have had a favorable impact on our originations of fixed-rate mortgage loans, which we have classified as held for sale to the secondary market. During the year ended December 31, 2020, in recognition of the increasing demand for mortgage lending related to the lower interest rate environment, and the opportunity to pursue increased mortgage banking business, we hired an additional five mortgage loan officers and nine lending and loan servicing support personnel. Management intends to continue this sales activity in future periods to generate gains on sale and servicing fee income, particularly if the prevailing low interest rate environment persists.
Net Loans. Net loans decreased $12.7 million, or 7.1%, to $166.7 million at December 31, 2020 from $179.3 million at December 31, 2019. During the year ended December 31, 2020, we originated $62.6 million of loans for the portfolio, $19.8 million of which were one- to four- family residential real estate loans, $10.8 million were nonresidential real estate loans, $19.1 million were multi-family loans, $7.7 million were home equity lines of credit, $4.3 million were construction and land loans, $634,000 were Paycheck Protection Plan (PPP) commercial business loans and $268,000 were consumer loans. The residential loan portfolio declined by $19.2 million, as borrowers elected to refinance their loans at lower mortgage rates, and the Bank elected to sell the preponderance of these new fixed rate residential loans in the secondary market. This decline in the residential loan portfolio was partially offset by net increases in the nonresidential loan portfolio of $6.2 million and $5.1 million in the multifamily loan portfolio. The growth in these segments reflects our strategy to grow the commercial real estate portfolio to enhance loan yields.
Mortgage Servicing Rights. Mortgage servicing rights increased to $2.0 million, or 66.9%, from $1.2 million at December 31, 2019. New mortgage servicing rights of $1.4 million were recognized while the fair value of mortgage servicing rights declined $600,000.
Other Assets. Other assets increased $366,000, or 29.6%, to $1.6 million at December 31, 2020 from $1.2 million at December 31, 2019. The increase was primarily due to the right of use lease of $181,000 for a loan production office, COVID payment deferrals of $321,000 and a mortgage banking derivative net asset of $499,000, partially offset by a $584,000 decrease in prepaid stock offering expenses.
Deposits. Deposits increased $8.8 million, or 6.1%, to $152.2 million at December 31, 2020 from $143.4 million at December 31, 2019. Our core deposits increased $23.8 million, or 36.0%, to $90.0 million at December 31, 2020 compared to December 31, 2019. Demand deposit accounts increased $13.3 million, or 46.4% as part of our strategy to increase lower cost funding sources. The Bank implemented a “free checking” marketing program through a third-party during the year. Time deposits decreased $15.0 million, or 19.5%, to $62.2 million at December 31, 2020 from $77.2 million at December 31, 2019. The decrease in time deposits was primarily due to the decline in the Bank’s time deposit offering rates, as a result of the decrease in market interest rates. In large part, maturing time deposits were moved to checking and savings accounts offering comparable interest rates with increased liquidity. Deposits obtained through the National CD Rateline Program decreased to $5.6 million at December 31, 2020 from $6.6 million at December 31, 2019. The decrease in retail and wholesale time deposits was part of the Bank’s strategy to reduce the cost of deposits in 2020. Management intends to continue its strategy of pursuing growth in lower cost core deposits in 2021.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances decreased $8.8 million, or 18.6%, to $38.4 million at December 31, 2020 from $47.2 million at December 31, 2019. The decrease in FHLB advances was part of our strategy to reduce our dependence on wholesale funding sources.
Stock Subscription Funds. Stock subscription funds were disbursed following the closing of the stock offering. The closing occurred effective January 22, 2020. The subscription offering was over-subscribed and $9.8 million was refunded to prospective investors after the closing date.
Stockholders’ Equity. Stockholders’ equity increased $17.7 million, or 74.1%, to $41.5 million at December 31, 2020 from $23.8 million at December 31, 2019. The increase resulted primarily from the $14.3 million net proceeds of the stock offering and net income of $3.2 million for the year ended December 31, 2020.
Comparison of Operating Results for the Years Ended December 31, 2020 and December 31, 2019
General. Net income for the year ended December 31, 2020 was $3.2 million, compared to a net income of $798,000 for the year ended December 31, 2019, an increase of $2.4 million or 295.2%. The increase was primarily due to a $7.7 million increase in noninterest income, partially offset by a $4.2 million increase in noninterest expense, a decrease in net interest income of $199,000, a $240,000 increase in the provision for loan losses and an increase of $732,000 increase in federal income tax expense. The increase in noninterest income was primarily attributable to higher residential mortgage lending activity as a result of the decrease in interest rates from the Federal Reserve’s response to the impact of COVID-19 on the economy. The decrease in long term interest rates had a positive impact on residential refinance and home purchase activity as reflected in the increase on gain on sale of loans. Mortgage banking revenue, including gain on sale of loans in 2020, is highly dependent on continued low mortgage rates.
Interest and Dividend Income. Interest and dividend income decreased $508,000, or 5.9%, to $8.0 million for the year ended December 31, 2020 from $8.5 million for the year ended December 31, 2019. This decrease was primarily attributable to a $365,000, or 4.5%, decrease in interest on loans receivable, primarily due to a 31 basis point decrease in the average yield on loans, as customers with higher yielding loans elected to refinance to lower rates. This decrease in the yield on loans was partially offset by a $4.6 million increase in the average balance outstanding year-to-year.
Interest income on securities increased $36,000, or 127.4%, as the average balance of investment securities increased $4.5 million to $5.9 million for the year ended December 31, 2020, from $1.4 million for the year ended December 31, 2019, reflecting higher levels of liquidity. The average yield on investment securities decreased 91 basis points to 1.09% for the year ended December 31, 2020 from 2.00% for the year ended December 31, 2019. The decrease in yield on available-for-sale securities was attributable to the purchase of lower yielding adjustable and floating rate mortgage-backed securities. Dividends on Federal Home Loan Bank stock and other investments decreased $179,000 primarily due to the decrease in the average yield on other interest-bearing deposits of 163 basis points. The average balance of other interest-bearing deposits, including certificates of deposit in other financial institutions, and federal funds sold increased $5.4 million to $19.0 million at December 31, 2020 compared to December 31, 2019.
Interest Expense. Total interest expense decreased $309,000, or 10.6%, to $2.6 million for the year ended December 31, 2020. Interest expense on deposit accounts decreased $295,000, or 15.1%, to $1.7 million for the year ended December 31, 2020 from $2.0 million for the year ended December 31, 2019. The decrease was primarily due to a decrease of 31 basis points in the average cost of deposits, which was partially offset by a $9.8 million increase in the average balance year-to-year. The average cost of interest-bearing demand accounts decreased 125 basis points to 0.22%, while average interest-bearing demand account balances increased $8.5 million at December 31, 2020. The average cost of savings accounts decreased 25 basis points to 0.28%, while average savings account balances increased $7.1 million at December 31, 2020.The average balance of certificates of deposits decreased $5.9 million while the average cost of certificates of deposits decreased 2 basis points to 2.10% at December 31, 2020.
Interest expense on FHLB advances decreased $14,000 to $941,000 for the year ended December 31, 2020 from $955,000 for the year ended December 31, 2019. The average balance of advances decreased $439,000 to $42.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, while the average cost of advances decreased one basis point to 2.22%.
Net Interest Income. Net interest income decreased $199,000, or 3.5%, to $5.4 million for the year ended December 31, 2020 from $5.6 million for the year ended December 31, 2019. Average net interest-earning assets increased $14.4 million compared to year end December 31, 2019. The interest rate spread decreased to 2.39% for the year ended December 31, 2020 from 2.69% for the year ended December 31, 2019. The net interest margin decreased to 2.58% for the year ended December 31, 2020 from 2.87% for the year ended December 31, 2019.
Provision for Loan Losses. Based on management’s analysis of the allowance for loan losses described in Note 1 of our financial statements “Nature of Operations and Summary of Significant Accounting Policies,” we recorded a provision for loan losses of $265,000 for the year ended December 31, 2020 compared to a provision for loan losses of $25,000 for the year ended December 31, 2019. The allowance for loan losses was $1.7 million, or 0.97% of total loans, at December 31, 2020, compared to $1.4 million or 0.78% of total loans, at December 31, 2019. The increase in the provision for loan losses in 2020 compared to 2019 was due primarily to the uncertainty of impact of the COVID-19 pandemic on the economy as a whole and on our market area in particular. The resurgence of COVID cases nationally in late 2020, and the prospect of continued economic weakness and continued high unemployment, indicated a qualitative factor adjustment was warranted to increase the allowance for loan losses. Along with the possible effects of the pandemic, we included in our consideration of the ALLL the continued low balances of our nonperforming loans and delinquent loans during 2020 and the decrease in historical charge-offs for the six year look back period. Total nonperforming loans were $174,000 and $111,000 at December 31, 2020 and 2019, respectively. Classified loans declined to $883,000 at December 31, 2020, from $1.4 million at December 31, 2019, and loans past due greater than 30 days totaled $398,000 and $209,000 at December 31, 2020 and 2019, respectively. The Bank had no loan charge-offs during the year ended December 31, 2020 and loan charge-offs totaled $23,000 for the year ended December 31, 2019. As a percentage of nonperforming loans, the allowance for loan losses was 962% and 1,268% at December 31, 2020 and 2019, respectively.
The allowance for loan losses reflects the estimate we believe to be adequate to cover incurred probable losses which were inherent in the loan portfolio, and adjusted for uncertainty due to COVID-19, at December 31, 2020. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.
Non-Interest Income. Non-interest income increased $7.7 million, or 261.4%, to $10.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to an increase of $7.4 million in gain on sales of loans. We sold $291.4 million in residential loans for the year ended December 31, 2020 compared to $92.0 million in residential loans for the year ended December 31, 2019. Other fee income increased $578,000, or 67.2%, due to an increase in the fair value of loan commitments. Fee income recognized from the Paycheck Protection Program was $9,000 for the year ended 2020.
Non-Interest Expense. Non-interest expense increased $4.2 million, or 54.5%, to $11.8 million for 2020 from $7.7 million for 2019. Salaries and employee benefits increased $3.5 million, or 79.9%. The increase in salaries and employee benefit expense was due to additional loan officers and loan origination and loan servicing support staff hired to accommodate the increased mortgage loan origination volume. During the year ended 2020 we hired five mortgage loan officers, one commercial real estate loan officer and eleven loan origination and loan servicing support staff. Loan costs increased $309,000, or 91.9% from the higher mortgage loan origination volume. Advertising expense increased $179,000, primarily from the implementation of a “free checking” marketing program through a third-party vendor. Occupancy costs increased $103,000, or 17.2% due in large part to leasing a loan production office to accommodate additional loan officers and lending support staff.
Federal Income Taxes. The provision for income taxes increased $732,000 to $820,000 in 2020. The increase was due primarily to increased income before income taxes of $3.1 million. The effective rates were 20.6% and 9.9% for the years ended December 31, 2020 and 2019, respectively. The increase in the effective tax rate in 2020 was due to a tax credit adjustment for merger expenses related to the Kentucky Federal acquisition taken in 2019.
Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax-equivalent yield adjustments have been made. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. All average balances are monthly average balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material differences in the information presented. Non-accrual loans were included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
For the Years Ended December 31,
Average Outstanding Balance Interest Average Yield/Rate Average Outstanding Balance Interest Average Yield/Rate Average Outstanding Balance Interest Average Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans $ 185,453 $ 7,806 4.21 % $ 180,885 $ 8,171 4.52 % $ 157,708 $ 6,733 4.27 %
Securities 5,948 1.09 1,397 2.00 2.62
Other (1) 19,043 0.82 13,670 2.45 10,353 2.34
Total interest-earning assets 210,444 8,027 3.81 195,952 8,534 4.36 168,824 6,994 4.14
Non-interest-earning assets 22,122
15,678
12,016
Total assets $ 232,566
$ 211,630
$ 180,840
Interest-bearing liabilities:
Savings $ 42,179 0.28 $ 35,040 0.53 $ 26,390 0.25
Interest-bearing demand 28,061 0.22 19,552 0.76 9,098 1.47
Certificates of deposit 70,253 1,477 2.10 76,133 1,615 2.12 71,114 1,230 1.73
Total deposits 140,493 1,654 1.18 130,725 1,948 1.49 06,602 1,429 1.35
FHLB borrowings 42,434 2.22 42,873 2.23 35,219 1.86
Total interest-bearing liabilities 182,927 2,595 1.42 173,598 2,903 1.67 141,821 2,083 1.47
Non-interest-bearing Demand 13,822
11,517
16,305
Other non-interest-bearing liabilities 4,264
3,590
3,292
Total non-interest-bearing liabilities 18,086
15,107
19,597
Total equity 31,553
22,925
19,422
Total liabilities and total equity $ 232,566
$ 211,630
$ 180,840
Net interest income
$ 5,432
$ 5,631
$ 4,911
Net interest rate spread (2)
2.39 %
2.69 %
2.67 %
Net interest-earning assets (3) $ 27,517
$ 22,354
$ 27,003
Net interest margin (4)
2.58 %
2.87 %
2.91 %
Average interest-earning assets to interest-bearing liabilities
115.04 %
112.88 %
119.04 %
(1) Consists of FHLB-Cincinnati stock, FHLB DDA, Fed Funds sold, certificates of deposit and cash reserves.
(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
Year Ended December 31,
2020 vs. 2019
Year Ended December 31,
2019 vs. 2018
Increase (Decrease) Due to Total Increase Increase (Decrease) Due to Total Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans $ 213 $ (578 ) $ (365 ) $ 1,028 $ 410 $ 1,438
Securities (6 ) (4 )
Other (437 ) (179 )
Total interest-earning assets (1,021 ) (507 ) 1,122 1,540
Interest-bearing liabilities:
Savings (89 ) (69 )
Interest-bearing demand (118 ) (87 ) (10 )
Certificates of deposit (123 ) (15 ) (138 )
Total deposits (72 ) (222 ) (294 )
FHLB borrowings (10 ) (4 ) (14 )
Total interest-bearing liabilities (82 ) (226 ) (308 )
Change in net interest income $ 596 $ (795 ) $ (199 ) $ 822 $ (102 ) $ 720
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are monetary in nature and sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.
Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we use to manage interest rate risk are:
· originating nonresidential real estate and multi-family loans, and, to a lesser extent, construction, consumer and commercial business loans, all of which tend to have shorter terms and higher interest rates than one- to four-family residential real estate loans, and which generate customer relationships that can result in larger non-interest bearing checking accounts;
· selling substantially all of our newly-originated longer-term fixed-rate one- to four-family residential real estate loans and retaining the shorter-term fixed-rate and adjustable-rate one- to four-family residential real estate loans that we originate, subject to market conditions and periodic review of our asset/liability management needs;
· reducing our dependence on certificates of deposit to support lending and investment activities and increasing our reliance on core deposits, including checking accounts and savings accounts, which are less interest rate sensitive than certificates of deposit; and
· purchasing adjustable and floating rate mortgage-back securities for the investment portfolio.
Our Board of Directors is responsible for the review and oversight of our Asset/Liability Committee, which is comprised of our executive management team and other essential operational staff. This committee is charged with developing and implementing an asset/liability management plan, and meets at least quarterly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
Net Portfolio Value. We compute amounts by which the net present value of our cash flow from assets, liabilities and off-balance sheet items (net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. We measure our interest rate risk and potential change in our NPV through the use of a financial model. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. Historically, the model estimated the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However, given the current level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The table below sets forth, as of December 31, 2020, the calculation of the estimated changes in our net portfolio value that would result from the designated immediate changes in the United States Treasury yield curve.
Estimated Increase (Decrease) in
NPV NPV as a Percentage of Present
Value of Assets (3)
Change in Interest
Rates (basis
points) (1)
Estimated
NPV (2)
Amount Percent NPV Ratio (4) Increase
(Decrease)
(basis points)
(Dollars in thousands)
+300 $ 43,600 $ (10,903 ) (20.00 )% 18.65 % (340 )
+200 48,197 (6,306 ) (11.57 )% 20.14 % (191 )
+100 51,786 (2,717 ) (4.99 )% 21.25 % (80 )
- 54,503 - - % 22.05 % -
49,377 (5,126 ) (9.40 )% 19.78 % (227 )
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) NPV Ratio represents NPV divided by the present value of assets.
The table above indicates that at December 31, 2020, in the event of an instantaneous parallel 100 basis point increase in interest rates, we would experience a 4.99% decrease in net portfolio value. In the event of an instantaneous 100 basis point decrease in interest rates, we would experience an 9.40% decrease in net portfolio value.
Rate Shift (1) Net Interest Income
Year 1 Forecast Year 1 Change
from Level
(Dollars in thousands)
+400 $ 5,820 (0.38 )%
+300 5,885 0.74 %
+200 5,930 1.51 %
+100 5,927 1.45 %
Level 5,842 -
5,657 (3.17 )%
(1) The calculated changes assume an immediate shock of the static yield curve.
Depending on the relationship between long-term and short-term interest rates, market conditions and consumer preference, we may place greater emphasis on maximizing our net interest margin than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe that the increased net income which may result from an acceptable mismatch in the actual maturity or re-pricing of our assets and liabilities can, during periods of declining or stable interest rates, provide sufficient returns to justify an increased exposure to sudden and unexpected increases in interest rates.
We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB-Cincinnati. At December 31, 2020, we had $38.4 million outstanding in advances from the FHLB-Cincinnati, and had the capacity to borrow approximately an additional $34.1 million from the FHLB-Cincinnati based on our collateral capacity. At December 31, 2020, we had an additional $11.5 million on lines of credit available with three commercial banks.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $6.7 million for the year ended December 31, 2020 and net cash used in operating activities was $1.5 million for the year ended December 31, 2019. Net cash provided by investing activities, which consists primarily of disbursements for loan originations and purchase of investment securities, partially offset by proceeds from maturing securities, pay downs on mortgage-backed securities and proceeds from sale of foreclosed assets was $10.4 million for the year ended December 31, 2020. Net cash used by investing activities was $14.9 million for the year ended December 31, 2019. Net cash used in financing activities, consisting primarily of the repayment of Federal Home Loan Bank borrowings, was $9.2 million for the year ended December 31, 2020. Net cash provided by financing activities, consisting mainly of the proceeds from the stock subscriptions and proceeds from Federal Home Loan Bank borrowings, was $43.0 million for the year ended December 31, 2019.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. We also anticipate continued participation in the National CD Rateline Program as a wholesale source of certificates of deposit, and continued use of FHLB-Cincinnati advances.
Cincinnati Bancorp, Inc. is a separate corporate entity from Cincinnati Federal and it must provide for its own liquidity to pay any dividends to its stockholders, to repurchase any shares of its common stock, and for other corporate purposes. Cincinnati Bancorp Inc.’s primary source of liquidity is any dividend payments it may receive from Cincinnati Federal. Cincinnati Bancorp, Inc. (on an unconsolidated basis) had $6.4 million in liquid assets at December 31, 2020. The increase in liquid assets was a primarily from stock offering proceeds. See “Regulation and Supervision - Federal Banking Regulation - Capital Distributions” for a discussion of the regulations applicable to the ability of Cincinnati Federal to pay dividends.
At December 31, 2020, Cincinnati Federal exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $34.8 million, or 14.8% of adjusted total assets, which is above the well-capitalized required level of $11.8 million, or 5.0%; total risk-based capital of $36.5 million, or 22.0% of risk-weighted assets, which is above the well-capitalized required level of $16.6 million, or 10.0%; and common equity tier 1 risk based capital of $34.8 million, or 21.0%, of risk weighted assets, which is above the well-capitalized required level of $10.8 million, or 6.5%. At December 31, 2019, Cincinnati Federal exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $23.5 million, or 10.2% of adjusted total assets, which is above the well-capitalized required level of $11.5 million, or 5.0%; and total risk-based capital of $24.9 million, or 16.3% of risk-weighted assets, which is above the well-capitalized required level of $15.3 million, or 10.0%. Accordingly, Cincinnati Federal was categorized as well capitalized at December 31, 2020 and 2019. Management is not aware of any conditions or events since the most recent notification that would change our category.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2020, we had outstanding commitments to originate loans of $28.5 million, unfunded lines of credit of $19.8 million and forward sale commitments of $41.8 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in one year or less from December 31, 2020 totaled $35.1 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
Please refer to Note 20 to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019 for a description of recent accounting pronouncements that may affect our financial condition and results of operations.
Impact of Inflation and Changing Price
The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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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, 2020. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020.
Evaluation of Internal Control Over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, utilizing the framework established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2020 were effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting.
During the quarter ended December 31, 2020, there were no changes in the Company’s internal control over financial reporting that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

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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 2021 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 2021 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 2021 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 2021 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
None.

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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 2021 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
The information in the Company’s definitive Proxy Statement for the 2021 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, 2020 and 2019;
(C) Consolidated Statements of Operations for the years ended December 31, 2020 and 2019;
(D) Consolidated Statements of Comprehensive Income for the years ended December 31, 2020 and 2019;
(E) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019;
(F) Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019; and
(G) Notes to Consolidated Financial Statements at and for the years ended December 31, 2020 and 2019.
(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.
Cincinnati Bancorp, Inc.
December 31, 2020 and 2019
Contents
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
Cincinnati Bancorp, Inc.
Cincinnati, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cincinnati Bancorp, Inc. (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
As described in Note 3 to the consolidated financial statements, the Company’s consolidated allowance for loan losses (ALL) was $1.7 million at December 31, 2020. The Company also describes in Note 1 of the consolidated financial statements the "Allowance for Loan Losses" accounting policy around this estimate. The ALL is an estimate of losses inherent in the loan portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable 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 determines that an outstanding loan will not be collected. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by Company 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 revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
The primary reason for our determination that the allowance for loan losses is a critical audit matter is that auditing the estimated allowance for loan losses involved significant judgment and complex review.
There is a high degree of subjectivity in evaluating management’s estimate, such as evaluating management's assessment of economic conditions and other environmental factors including the impact of the COVID-19 pandemic on the loan portfolio, evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades.
Our audit procedures related to the estimated allowance for loan losses included:
· Testing clerical and computational accuracy of the ALL model.
· Testing the completeness and accuracy of the underlying information utilized in the ALL model.
· Computing an independent calculation of an acceptable range and comparing it to the Company's estimate.
· Evaluating the qualitative and environmental adjustments to the historical loss rates, including assessing the basis for the adjustments and the reasonableness, reliability and relevance of the significant assumptions and underlying data.
· Evaluating the relevance and reliability of data and assumptions.
· Testing of the loan review function and the accuracy of loan grades determined. Specifically, utilizing internal loan review professionals to assist us in evaluating the appropriateness of loan grades and to assess the reasonableness of specific impairments on loans.
· Evaluating the accuracy and completeness of disclosures in the consolidated financial statements.
We have served as the Company's auditor since 2011.
/s/ BKD, LLP
Cincinnati, Ohio
March 31, 2021
Cincinnati Bancorp, Inc.
Consolidated Balance Sheets
December 31, 2020 and 2019
Assets
Cash and due from banks $ 2,951,787 $ 2,348,157
Interest-bearing demand deposits in banks 23,558,019 31,622,109
Federal funds sold 5,838,000 3,765,000
Cash and cash equivalents 32,347,806 37,735,266
Interest-bearing time deposits 3,000,000 -
Available-for-sale debt securities 5,213,830 6,733,213
Loans held for sale 13,345,370 3,114,081
Loans, net of allowance for loan losses of $1,672,545 and $1,407,545, respectively 166,667,918 179,332,026
Premises and equipment, net 3,487,826 3,354,447
Federal Home Loan Bank stock 2,801,800 2,657,400
Interest receivable 520,775 624,333
Mortgage servicing rights 2,025,323 1,213,815
Federal Home Loan Bank lender risk account receivable 1,947,271 1,713,240
Bank-owned life insurance 4,172,486 4,086,645
Other assets 1,603,150 1,237,095
Total assets $ 237,133,555 $ 241,801,561
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand $ 41,945,628 $ 28,658,432
Savings 48,056,629 37,514,343
Certificates of deposit 62,204,786 77,237,932
Total deposits 152,207,043 143,410,707
Federal Home Loan Bank advances 38,412,000 47,172,066
Stock subscription proceeds in escrow - 23,407,011
Advances from borrowers for taxes and insurance 1,946,340 1,806,638
Interest payable 73,585 91,636
Directors deferred compensation 601,536 559,295
Deferred tax liabilities 905,975 757,075
Other liabilities 1,483,105 515,968
Total liabilities 195,629,584 217,720,396
Commitments and Contingent Liabilities
Temporary Equity
ESOP Shares subject to mandatory redemption - 244,327
Stockholders' Equity
Preferred stock - authorized 1,000,000 shares, $0.01 par value, none issued - -
Common stock - authorized 14,000,000 shares, $0.01 par value, 2,975,625 and 2,972,391 issued and outstanding at December 31, 2020 and December 31, 2019, respectively (1) 29,756 29,607
Additional paid-in capital 23,266,485 7,529,850
Unearned ESOP shares (1,673,660 ) (449,313 )
Retained earnings - substantially restricted 20,173,404 17,017,683
Accumulated other comprehensive loss (292,014 ) (290,989 )
Total stockholders' equity 41,503,971 23,836,838
Total liabilities, temporary equity, and stockholders' equity $ 237,133,555 $ 241,801,561
(1) Share amounts related to the periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive recognition to the 1.6351 exchange ratio applied in the conversion offering. (see Note 1).
See Notes to Consolidated Financial Statements
Cincinnati Bancorp, Inc.
Consolidated Statements of Income
Years Ended December 31, 2020 and 2019
Interest and Dividend Income
Loans, including fees $ 7,805,587 $ 8,171,041
Securities 64,778 28,492
Dividends on Federal Home Loan Bank stock and other 156,353 334,948
Total interest and dividend income 8,026,718 8,534,481
Interest Expense
Deposits 1,653,918 1,948,595
Federal Home Loan Bank advances 940,754 954,999
Total interest expense 2,594,672 2,903,594
Net Interest Income 5,432,046 5,630,887
Provision for Loan Losses 265,000 25,000
Net Interest Income After Provision for Loan Losses 5,167,046 5,605,887
Noninterest Income
Gain on sales of loans 9,516,967 2,121,166
Mortgage servicing fees (costs) (301,014 ) (33,579 )
Mortgage derivative income 353,649 -
Other 1,084,320 860,132
Total noninterest income 10,653,922 2,947,719
Noninterest Expense
Salaries and employee benefits 7,795,886 4,334,338
Occupancy and equipment 700,851 597,741
Directors compensation 174,833 194,083
Data processing 598,483 640,747
Professional fees 337,166 349,252
Franchise tax 210,383 207,584
Deposit insurance premiums 32,889 37,391
Advertising 275,156 95,920
Software licenses 134,198 118,388
Loan costs 645,672 336,428
Net gains on sales of foreclosed assets - (104,814 )
Merger-related expenses - 18,000
Other 939,764 842,380
Total noninterest expense 11,845,281 7,667,438
Income Before Income Taxes 3,975,687 886,168
Provision for Income Taxes 819,966 87,694
Net Income $ 3,155,721 $ 798,474
Earnings per common share - basic $ 1.14 $ 0.28
Earnings per common share - diluted $ 1.12 $ 0.27
Weighted-average shares outstanding - basic (1) 2,749,689 2,865,400
Weighted-average shares outstanding - diluted (1) 2,789,346 2,907,811
(1) Share amounts related to the periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive recognition to the 1.6351 exchange ratio applied in the conversion offering. (see Note 1).
See Notes to Consolidated Financial Statements
Cincinnati Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2020 and 2019
Net Income $ 3,155,721 $ 798,474
Other Comprehensive Income:
Net unrealized gains (losses) on available-for-sale securities 50,548 (8,151 )
Tax (expense) benefit (10,615 ) 1,712
Changes in directors' retirement plan prior service costs (51,846 ) (40,643 )
Tax benefit 10,888 8,535
Other comprehensive loss (1,025 ) (38,547 )
Comprehensive Income $ 3,154,696 $ 759,927
See Notes to Consolidated Financial Statements
Cincinnati Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2020 and 2019
Accumulated
Additional
Unearned
Other
Total
Common
Paid-in
ESOP
Retained
Comprehensive
Stockholders'
Stock
Capital
Shares
Earnings
Loss
Equity
Balance, January 1, 2019
$ 29,593
$ 7,458,745
$ (494,245 )
$ 16,219,209
$ (252,442 )
$ 22,960,860
Issuance of common stock
12,860
-
-
-
12,874
ESOP shares subject to mandatory redemption
-
(63,764 )
-
-
-
(63,764 )
ESOP shares earned
-
18,857
44,932
-
-
63,789
Stock-based compensation expense
-
103,152
-
-
-
103,152
Net income
-
-
-
798,474
-
798,474
Other comprehensive loss
-
-
-
-
(38,547 )
(38,547 )
Balance, December 31, 2019
29,607
7,529,850
(449,313 )
17,017,683
(290,989 )
23,836,838
Proceeds from issuance of 1,652,960 shares of common stock (which included 132,237 shares to the ESOP), net of the offering costs of $1.2 million
29,756
15,577,194
(1,322,370 )
-
-
14,284,580
Contribution by CF Mutual Holding Company
50,000
-
-
-
50,000
Exchange of common stock
(29,607 )
-
-
-
-
(29,607 )
ESOP shares earned
-
(975 )
98,023
-
-
97,048
Stock-based compensation expense
-
110,416
-
-
-
110,416
Net income
-
-
-
3,155,721
-
3,155,721
Other comprehensive loss
-
-
-
-
(1,025 )
(1,025 )
Balance, December 31, 2020
$ 29,756
$ 23,266,485
$ (1,673,660 )
$ 20,173,404
$ (292,014 )
$ 41,503,971
See Notes to Consolidated Financial Statements
Cincinnati Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2020 and 2019
Operating Activities
Net income $ 3,155,721 $ 798,474
Items not requiring (providing) cash:
Depreciation and amortization 220,756 195,327
Provision for loan losses 265,000 25,000
Amortization of premiums and discounts on securities, net 22,654 10,430
Amortization of deferred prepayment penalty on Federal Home Loan Bank advances 3,086 4,628
Change in deferred income taxes 51,470 18,829
Gain on sale of loans (9,516,967 ) (2,121,166 )
Proceeds from the sale of loans held for sale 300,877,832 94,080,210
Origination of loans held for sale (301,592,154 ) (93,791,125 )
Earnings on cash surrender value of bank-owned life insurance (85,841 ) (89,403 )
Stock-based compensation expense 110,416 103,152
ESOP shares earned 97,048 63,789
Gain on sale of foreclosed assets - (104,814 )
Changes in:
Interest receivable 103,558 (54,674 )
Mortgage servicing rights (811,508 ) 38,925
Federal Home Loan Bank lender risk account receivable (234,031 ) (9,964 )
Other assets (366,055 ) (724,915 )
Interest payable (18,051 ) 37,691
Other liabilities 1,055,235 56,033
Net cash used in operating activities (6,661,831 ) (1,463,573 )
Investing Activities
Net change in interest-bearing deposits (3,000,000 ) -
Proceeds from maturities of available-for-sale securities 1,547,277 278,470
Purchase of available for sale securities - (6,399,903 )
Purchase of Federal Home Loan Bank stock (144,400 ) (74,300 )
Net change in loans 12,399,108 (9,040,122 )
Proceeds from the maturities of interest-bearing time deposits - 200,000
Purchase of premises and equipment (354,135 ) (142,589 )
Proceeds from sale of foreclosed assets - 255,039
Net cash provided by (used in) investing activities 10,447,850 (14,923,405 )
See Notes to Consolidated Financial Statements
Cincinnati Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2020 and 2019
Financing Activities
Net increase in deposits (14,610,675 ) 1,018,951
Proceeds from issuance of common stock 14,060,646 23,407,011
Proceeds from Federal Home Loan Bank advances 14,000,000 106,486,000
Repayment of Federal Home Loan Bank advances (22,763,152 ) (87,899,000 )
Proceeds from stock options exercised - 12,874
Net increase in advances from borrowers for taxes and insurance 139,702 7,219
Net cash provided by (used in) financing activities (9,173,479 ) 43,033,055
(Decrease) Increase in Cash and Cash Equivalents (5,387,460 ) 26,646,077
Cash and Cash Equivalents, Beginning of Year 37,735,266 11,089,189
Cash and Cash Equivalents, End of Year $ 32,347,806 $ 37,735,266
Supplemental Cash Flows Information
Interest paid $ 2,612,723 $ 2,865,903
Income taxes paid 441,193 -
Supplemental Disclosure of Noncash Investing and Financing Activities
Real estate acquired in settlement of loans $ - $ 48,127
See Notes to Consolidated Financial Statements
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Cincinnati Bancorp (“Bancorp”), the predecessor to Cincinnati Bancorp, Inc. (“Company”), was the mid-tier holding company for Cincinnati Federal (the “Bank”), a federally chartered stock savings and loan association that is primarily engaged in providing a full range of banking and financial services to individual and corporate customers. Our business operations are conducted in the larger Greater Cincinnati/Northern Kentucky metropolitan area which includes Hamilton, Warren, Butler and Clermont Counties in Ohio, Boone, Kenton and Campbell Counties in Kentucky, and Dearborn County, Indiana.
On October 14, 2015, the Bank had reorganized into the mutual holding company structure. As part of the reorganization, the Bancorp sold 773,663 shares of common stock at a price of $10.00 per share in a public offering and issued 945,587 shares of common stock to CF Mutual Holding Company, the Bancorp’s parent mutual holding company.
On December 20, 2019, the Bancorp’s shareholders approved a plan of conversion and reorganization, whereby CF Mutual Holding Company and Cincinnati Bancorp would convert and reorganize from the mutual holding company structure to the stock holding company structure. The conversion and reorganization were completed effective January 22, 2020, whereby the Company, a Maryland corporation and successor to the Bancorp, sold a total of 1,652,960 shares of common stock at a price of $10.00 per share in the subscription offering, which included 132,237 shares sold to Cincinnati Federal’s Employee Stock Ownership Plan, and issued 1,322,665 shares of common stock in exchange for the outstanding shares of common stock of the Bancorp owned by stockholders other than CF Mutual Holding Company. The exchange ratio for previously held shares of Cincinnati Bancorp was 1.6351 as applied in the conversion offering. References herein to the “Company” include Cincinnati Bancorp, Inc. and Cincinnati Bancorp before completion of the conversion.
The Company is subject to competition from other financial institutions. The Company is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
Revenue Recognition
On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2014-09 "Revenue from Contracts with Customers" (Accounting Standards Codification (ASC) 606) and all subsequent ASUs that modified ASC 606. ASC 606 provides that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Interest income, net securities gains (losses), gains from the sale of mortgage loans and bank-owned life insurance are not included within the scope of ASC 606. For the revenue streams in the scope of ASC 606, service charges on deposits and electronic banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All of the Company’s in scope revenue from contracts with customers is recognized within other noninterest income.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Service charges on deposit accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering and other fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance. Service charges are recorded in other noninterest income.
Interchange income: The Company earns interchange income from cardholder transactions conducted through the various payment networks. Interchange income from cardholder transactions represents a percentage of the underlying transaction value and is recognized daily, concurrently with the transaction processing services provided to the cardholder. The gross amount of these fees is processed through noninterest income. Interchange fees are recorded in other noninterest income.
Principles of Consolidation
The accompanying condensed consolidated financial statements include Cincinnati Bancorp and its wholly-owned subsidiary, Cincinnati Federal, together referred to as “the Company.” All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, loan servicing rights and fair values of financial instruments.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2020 and 2019, cash equivalents consisted primarily of due from accounts with the Federal Reserve, Federal Home Loan Bank of Cincinnati and other correspondent banks.
From time to time, the Company’s interest-bearing cash accounts may exceed the FDIC’s insured limit of $250,000 per account. At December 31, 2020, the Company held $2,829,000 in various correspondent banks. At December 31, 2020, the Company held $20,727,000 at the Federal Reserve Bank and Federal Home Loan Bank which are not subject to FDIC limits. Management considers the risk of loss to be low based on the quality of the institutions where the funds are maintained.
Interest-bearing Time Deposits in Banks
Interest-bearing deposits in banks are carried at cost.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Securities
Available-for- sale debt securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
For debt securities with fair value below amortized cost, when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income. Direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.
Loans
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six consecutive months.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Loans acquired at the effective date of a merger are recorded at fair value with no carryover of the acquired entity’s previously established allowance for loan losses. The excess of expected cash flows over the estimated fair value of the acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows result in the recognition of additional interest income over the remaining contractual lives of the loans. Management estimates the cash flows expected to be collected at acquisition using a third-party risk model, which incorporates the estimate of key assumptions, such as default rates and prepayment speeds.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.
In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower’s current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms or a combination of the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings commence. The Company may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan.
It is the Company’s policy that any restructured loans on nonaccrual prior to being restructured remain on nonaccrual status until six consecutive months of satisfactory borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, the Company reviews the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan.
With regards to determination of the amount of the allowance for credit losses, TDRs are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.
On March 27, 2020, the president of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”), which provides entities with optional temporary relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES Act allows financial institutions to suspend application of certain TDR accounting guidance for loan and lease modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. Section 4013 of the CARES Act was amended on December 27, 2020, to extend this relief until January 1, 2022. The relief can be applied to loan and lease modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan and lease modifications that defer or delay the payment of principal or interest, or change the interest rate on a loan. The Company chose to apply this relief to eligible loan and lease modifications.
Lender Reserve Account
Certain loan sale transactions with the Federal Home Loan Bank of Cincinnati (FHLB) provide for the establishment of a Lender Reserve Account (LRA). The LRA consists of amounts withheld from loan sale proceeds by the FHLB for absorbing inherent losses that are probable on those sold loans. These withheld funds are an asset to the Company as they are scheduled to be paid to the Company in future years, net of any credit losses on those loans sold. The receivables are initially measured at fair value. The fair value is estimated by discounting the cash flows over the life of each master commitment contract. The accretable yield is amortized over the life of the master commitment contract. Expected cash flows are re-evaluated at each measurement date. If there is an adverse change in expected cash flows, the accretable yield would be adjusted on a prospective basis and the asset evaluated for impairment.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Premises and Equipment
Depreciable assets are stated at cost, less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets.
The estimated useful lives for each major depreciable classification of premises and equipment are as follows:
Buildings and improvements 15-40 years
Equipment 3-5 years
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula, carried at par and evaluated for impairment.
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less estimated costs to sell, at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less estimated costs to sell. Net revenue and expenses from operations and changes in the valuation allowance are included in noninterest expense from foreclosed assets. There were no valuation allowances established during 2020 or 2019.
Mortgage Servicing Rights
Mortgage servicing assets are recognized separately when rights are acquired through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50 Transfers and Servicing), servicing rights resulting from the sale of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in earnings in the period in which the changes occur.
Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing rights and may result in a reduction or addition to noninterest income.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.
Derivatives
Derivatives are recognized as assets and liabilities on the consolidated balance sheets and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For nonexchange-traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation.
Derivative Loan Commitments
Mortgage loan commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance (ASC 815, Derivatives and Hedging). Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in noninterest income.
Forward Loan Sale Commitments
The Company carefully evaluates all loan sale agreements to determine whether they meet the definition of a derivative under the derivatives and hedging accounting guidance (ASC 815), as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company uses both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Accordingly, forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and liabilities with changes in their fair values recorded in other noninterest income.
The Company estimates the fair value of its forward loan sales commitments using a methodology similar to that used for derivative loan commitments.
Employee Stock Ownership Plan (“ESOP”)
The cost of unearned ESOP shares is shown as a reduction of stockholders’ equity. Compensation expense is based on the average fair value of shares as they are committed to be released to participant accounts and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares are used to reduce annual ESOP debt service. As of December 31, 2020, 36,733 shares have been released to eligible participants in the ESOP and 10,285 shares have been allocated to eligible participants in the ESOP. (See Note 12 - Employee and Director Benefits).
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.
If necessary, the Company recognizes interest and penalties on income taxes as a component of income tax expense.
With a few exceptions, the Company is no longer subject to examinations by tax authorities for years before 2017. As of December 31, 2020 and 2019, the Company had no uncertain tax positions.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized gains (losses) on available-for-sale securities and changes in the funded status of the directors’ retirement plan.
Earnings Per Share
Basic earnings per share (“EPS”) allocated to common shareholders is calculated using the two-class method and is computed by dividing net income allocated to common shareholders by the weighted-average number of common shares outstanding during the period. The two-class method is an earnings allocation formula that determines the EPS for each class of common stock and participating securities according to dividends distributed and participation rights in undistributed earnings.
Diluted EPS is adjusted for dilutive effects of stock-based compensation and is calculated using the two-class method or treasury method. The average number of common shares outstanding is increased to include the number of shares that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period, as well as for any adjustment to income that would result from the assumed issuance.
Unallocated common shares held by the Company’s ESOP are shown as a reduction in stockholders’ equity and are excluded from weighted-average common shares outstanding for both basic and diluted earnings per share calculations until they are committed to be released.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Subsidiary and Other Activities
The Bank had no active subsidiaries at December 31, 2020 and 2019.
Reclassifications
Certain reclassifications have been made to the 2019 consolidated financial statements to conform to the 2020 consolidated financial statement presentation. These reclassifications had no effect on net income.
Note 2: Securities
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:
Amortized Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
Available-for-Sale Debt Securities:
December 31, 2020:
Mortgage-backed securities of government sponsored entities $ 5,170,519 $ 46,278 $ (2,967 ) $ 5,213,830
December 31, 2019:
Mortgage-backed securities of government sponsored entities $ 6,740,450 $ 7,335 $ (14,572 ) $ 6,733,213
There were no sales of available-for-sale securities in 2020 and 2019.
Expected maturities on mortgage-backed securities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2020 and 2019, the Company’s investments consisted entirely of mortgage-backed securities which are not due at a single maturity date.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Total fair value of investments at December 31, 2020 reported at less than historical cost was $192,587 and was approximately 3.7% of the Company’s investment portfolio. The decline in available-for-sale securities reported at less than historical cost primarily resulted from the decrease in market interest rates during 2020. There was $5,814,388 or approximately 86% of the investment portfolio reported at less than historical cost at December 31, 2019.
The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2020 and 2019:
Less than 12 Months Months or More Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
December 31, 2020:
Mortgage-backed securities of government sponsored entities $ 51,122 $ (617 ) $ 141,465 $ (2,350 ) $ 192,587 $ (2,967 )
December 31, 2019:
Mortgage-backed securities of government sponsored entities $ 5,582,540 $ (14,154 ) $ 231,848 $ (418 ) $ 5,814,388 $ (14,572 )
Note 3: Loans and Allowance for Loan Losses
Categories of loans at December 31, 2020 and 2019 include:
December 31, December 31,
One to four family mortgage loans - owner occupied $ 72,697,588 $ 91,919,064
One to four family - investment 12,058,824 12,846,342
Multi-family mortgage loans 41,749,223 36,628,238
Nonresidential mortgage loans 29,531,917 23,377,598
Construction and land loans 5,841,415 5,329,188
Real estate secured lines of credit 9,934,387 10,029,917
Commercial loans 736,979 557,268
Other consumer loans 338,709 863,546
Total loans 172,889,042 181,551,161
Less:
Net deferred loan costs (332,908 ) (482,681 )
Undisbursed portion of loans 4,881,487 1,294,271
Allowance for loan losses 1,672,545 1,407,545
Net loans $ 166,667,918 $ 179,332,026
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Risk characteristics applicable to each segment of the loan portfolio are described as follows:
One to Four Family Mortgage Loans and Real Estate Secured Lines of Credit: The one to four family mortgage loans and real estate secured lines of credit are secured by owner-occupied one to four family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
One to Four Family Investment Property Loans: The one to four family investment property loans are secured by non-owner occupied one to four family residences. Repayment of these loans is primarily dependent on the net rental income and personal income of the borrowers. These loans are considered to be higher risk than owner occupied one to four family mortgage loans. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact investment property vacancies, property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Multi-Family and Nonresidential Mortgage Loans: These loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.
Construction and Land Loans: These loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.
Commercial Loans: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is impacted by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.
Other Consumer Loans: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is impacted by consumer economic factors (such as unemployment and general economic conditions in the Company’s market area) and the creditworthiness of a borrower.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2020 and December 31, 2019:
At or For the Year Ended December 31, 2020
One- to
Four-Family
Mortgage
Loans
Owner
Occupied One- to
Four-Family
Mortgage
Loans
Investment Multi-Family
Mortgage
Loans Nonresidential
Mortgage
Loans Construction
& Land
Loans Real Estate
Secured
Lines of
Credit Commercial
Loans Other
Consumer
Loans Total
Allowance for loan loans:
Balance, beginning of year $ 324,647 $ 82,219 $ 524,183 $ 277,026 $ 69,457 $ 105,187 $ 11,408 $ 13,418 $ 1,407,545
Provision (credit) charged to expense 91,757 17,759 146,639 39,306 26,978 (55,851 ) 5,703 (7,291 ) 265,000
(Charge-offs) recoveries - - - - - - - - -
Balance, end of year $ 416,404 $ 99,978 $ 670,822 $ 316,332 $ 96,435 $ 49,336 $ 17,111 $ 6,127 $ 1,672,545
Ending balance: Individually evaluated for impairment $ 20,722 $ 40,075 $ - $ - $ - $ - $ - $ - $ 60,797
Ending balance: Collectively evaluated for impairment $ 395,682 $ 59,903 $ 670,822 $ 316,332 $ 96,435 $ 49,336 $ 17,111 $ 6,127 $ 1,611,748
Loans:
Ending balance $ 72,697,588 $ 12,058,824 $ 41,749,223 $ 29,531,917 $ 5,841,415 $ 9,934,387 $ 736,979 $ 338,709 $ 172,889,042
Ending balance: Individually evaluated for impairment $ 1,236,597 $ 561,660 $ 210,524 $ - $ - $ 58,557 $ - $ - $ 2,067,338
Ending balance: Collectively evaluated for impairment $ 71,460,991 $ 11,497,164 $ 41,538,699 $ 29,531,917 $ 5,841,415 $ 9,875,830 $ 736,979 $ 338,709 $ 170,821,704
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
At or For the Year Ended December 31, 2019
One- to
Four-Family
Mortgage
Loans
Owner
Occupied One- to
Four-Family
Mortgage
Loans
Investment Multi-Family
Mortgage
Loans Nonresidential
Mortgage
Loans Construction
& Land
Loans Real Estate
Secured
Lines of
Credit Commercial
Loans Other
Consumer
Loans Total
Allowance for loan loans:
Balance, beginning of year $ 456,630 $ 123,017 $ 224,384 $ 182,338 $ 100,187 $ 296,873 $ 9,001 $ 12,642 $ 1,405,072
Provision (credit) charged to expense (117,552 ) (32,786 ) 299,799 94,688 (30,730 ) (191,686 ) 2,407 25,000
(Charge-offs) recoveries (14,431 ) (8,012 ) - - - - - (84 ) (22,527 )
Balance, end of year $ 324,647 $ 82,219 $ 524,183 $ 277,026 $ 69,457 $ 105,187 $ 11,408 $ 13,418 $ 1,407,545
Ending balance: Individually evaluated for impairment $ 20,722 $ 8,013 $ - $ - $ - $ - $ - $ - $ 28,735
Ending balance: Collectively evaluated for impairment $ 303,925 $ 74,206 $ 524,183 $ 277,026 $ 69,457 $ 105,187 $ 11,408 $ 13,418 $ 1,378,810
Loans:
Ending balance $ 91,919,064 $ 12,846,342 $ 36,628,238 $ 23,377,598 $ 5,329,188 $ 10,029,917 $ 557,268 $ 863,546 $ 181,551,161
Ending balance: Individually evaluated for impairment $ 1,115,573 $ 760,733 $ 507,066 $ 56,190 $ - $ 81,505 $ - $ - $ 2,521,067
Ending balance: Collectively evaluated for impairment $ 90,803,491 $ 12,085,609 $ 36,121,172 $ 23,321,408 $ 5,329,188 $ 9,948,412 $ 557,268 $ 863,546 $ 179,030,094
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
The Company has adopted a standard grading system for all loans.
Definitions are as follows:
Prime (1) loans are of superior quality with excellent credit strength and repayment ability proving a nominal credit risk.
Good (2) loans are of above average credit strength and repayment ability proving only a minimal credit risk.
Satisfactory (3) loans are of reasonable credit strength and repayment ability proving an average credit risk due to one or more underlying weaknesses.
Acceptable (4) loans are of the lowest acceptable credit strength and weakened repayment ability providing a cautionary credit risk due to one or more underlying weaknesses. New borrowers are typically not underwritten within this classification.
Special Mention (5) loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.
Substandard (6) loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful (7) loans have all the weaknesses inherent in those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.
Loss (8) loans are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off even though partial recovery may be affected in the future.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of December 31, 2020 and 2019:
December 31, 2020
One- to
Four-Family
Mortgage
Loans - Owner
Occupied One- to
Four- Family
Mortgage
Loans - Investment Multi-Family
Mortgage
Loans Nonresidential
Mortgage
Loans Construction
& Land
Loans Real Estate
Secured
Lines of
Credit Commercial
Loans Other
Consumer
Loans Total
Pass $ 71,930,902 $ 11,538,993 $ 41,669,892 $ 29,063,783 $ 5,841,415 $ 9,783,448 $ 736,979 $ 338,709 $ 170,904,121
Special mention 113,516 519,831 - 468,134 - - - - 1,101,481
Substandard 653,170 - 79,331 - - 150,939 - - 883,440
Doubtful - - - - - - - - -
Loss - - - - - - - - -
Total $ 72,697,588 $ 12,058,824 $ 41,749,223 $ 29,531,917 $ 5,841,415 $ 9,934,387 $ 736,979 $ 338,709 $ 172,889,042
December 31, 2019
One- to
Four- Family
Mortgage
Loans - Owner
Occupied One- to
Four- Family
Mortgage
Loans - Investment Multi-Family
Mortgage
Loans Nonresidential
Mortgage
Loans Construction
& Land
Loans Real Estate
Secured
Lines of
Credit Commercial
Loans Other
Consumer
Loans Total
Pass $ 91,281,765 $ 12,115,427 $ 36,256,469 $ 22,813,758 $ 5,329,188 $ 9,870,477 $ 557,268 $ 863,546 $ 179,087,898
Special mention - 548,876 - 563,840 - - - - 1,112,716
Substandard 637,299 182,039 371,769 - - 159,440 - - 1,350,547
Doubtful - - - - - - - - -
Loss - - - - - - - - -
Total $ 91,919,064 $ 12,846,342 $ 36,628,238 $ 23,377,598 $ 5,329,188 $ 10,029,917 $ 557,268 $ 863,546 $ 181,551,161
The pass portfolio within table above consists of loans graded Prime (1) through Acceptable (4).
The Company evaluates the loan risk grading system definitions and the allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the year ended December 31, 2020
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2020 and 2019:
December 31, 2020
30-59 Days
Past Due 60-89 Days
Past Due Days and
Greater
Past Due Total Past
Due Current Total Loans
Receivable Total
Loans > 90
Days Past
Due & Accruing
One to four-family mortgage loans $ 96,826 $ 127,616 $ 173,877 $ 398,319 $ 72,299,269 $ 72,697,588 $ -
One to four family - investment - - - - 12,058,824 12,058,824 -
Multi-family mortgage loans - - - - 41,749,223 41,749,223 -
Nonresidential mortgage loans - - - - 29,531,917 29,531,917 -
Construction & land loans - - - - 5,841,415 5,841,415 -
Real estate secured lines of credit - - - - 9,934,387 9,934,387 -
Commercial loans - - - - 736,979 736,979 -
Other consumer loans - - - - 338,709 338,709 -
Total $ 96,826 $ 127,616 $ 173,877 $ 398,319 $ 172,490,723 $ 172,889,042 $ -
December 31, 2019
30-59 Days
Past Due 60-89 Days
Past Due Days and
Greater
Past Due Total Past
Due Current Total Loans
Receivable Total
Loans > 90
Days Past
Due & Accruing
One to four-family mortgage loans $ - $ - $ 110,934 $ 110,934 $ 91,808,130 $ 91,919,064 $ -
One to four family - investment - - - - 12,846,342 12,846,342 -
Multi-family mortgage loans - - - - 36,628,238 36,628,238 -
Nonresidential mortgage loans - - - - 23,377,598 23,377,598 -
Construction & land loans - - - - 5,329,188 5,329,188 -
Real estate secured lines of credit 97,679 - - 97,679 9,932,238 10,029,917 -
Commercial loans - - - - 557,268 557,268 -
Other consumer loans - - - - 863,546 863,546 -
Total $ 97,679 $ - $ 110,934 $ 208,613 $ 181,342,548 $ 181,551,161 $ -
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310, Receivables), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in TDRs.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
The following tables present impaired loans at and for the years ended December 31, 2020 and 2019:
December 31, 2020
Recorded
Balance Unpaid
Principal
Balance Specific
Allowance Average
Investment
in Impaired
Loans Interest Income
Recognized
Loans without a specific valuation allowance
One- to four-family mortgage loans $ 1,177,459 $ 1,177,459 $ - $ 1,190,698 $ 52,684
One- to four-family - investment 352,514 352,514 - 362,021 19,387
Multi-family mortgage loans 210,524 210,524 - 330,855 22,817
Nonresidential mortgage loans - - - - -
Construction & land loans - - - - -
Real estate secured lines of credit 58,557 58,557 - 60,115 4,087
Commercial loans - - - - -
Other consumer loans - - - - -
Loans with a specific valuation allowance
One- to four-family mortgage loans 59,138 79,860 20,722 80,701 1,689
One- to four-family - investment 209,146 249,221 40,075 252,341 11,794
Multi-family mortgage loans - - - - -
Nonresidential mortgage loans - - - - -
Construction & land loans - - - - -
Real estate secured lines of credit - - - - -
Commercial loans - - - - -
Other consumer loans - - - - -
$ 2,067,338 $ 2,128,135 $ 60,797 $ 2,276,731 $ 112,458
December 31, 2019
Recorded
Balance Unpaid
Principal
Balance Specific
Allowance Average
Investment
in Impaired
Loans Interest Income
Recognized
Loans without a specific valuation allowance
One- to four-family mortgage loans $ 1,054,515 $ 1,054,515 $ - $ 1,077,076 $ 52,394
One- to four-family - investment 374,389 374,389 - 383,268 21,191
Multi-family mortgage loans 507,066 507,066 - 510,866 43,647
Nonresidential mortgage loans 56,190 56,190 - 75,260 4,583
Construction & land loans - - - - -
Real estate secured lines of credit 81,505 81,505 - 86,326 5,416
Commercial loans - - - - -
Other consumer loans - - - - -
Loans with a specific valuation allowance
One- to four-family mortgage loans 61,058 81,780 20,722 79,941 1,170
One- to four-family - investment 386,344 394,357 8,013 401,718 19,965
Multi-family mortgage loans - - - - -
Nonresidential mortgage loans - - - - -
Construction & land loans - - - - -
Real estate secured lines of credit - - - - -
Commercial loans - - - - -
Other consumer loans - - - - -
$ 2,521,067 $ 2,549,802 $ 28,735 $ 2,614,455 $ 148,366
Interest income recognized on a cash basis was not materially different than interest income recognized.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
The following table presents the Company’s nonaccrual loans at December 31, 2020 and 2019. This table excludes accruing TDRs, which totaled $1,143,000 and $1,445,000 at December 31, 2020 and 2019, respectively.
December 31, December 31,
One- to four-family mortgage loans $ 173,877 $ 110,934
One to four family - investment - -
Multi-family mortgage loans - -
Nonresidential mortgage loans - -
Construction and land loans - -
Real estate secured lines of credit - -
Commercial loans - -
Other consumer loans - -
Total $ 173,877 $ 110,934
The following tables present the new classified TDRs at December 31, 2020 and 2019:
December 31, 2020
Number of
Loans Pre-Modification
Recorded Balance Post-Modification
Recorded Balance
Mortgage loans on real estate:
Residential 1-4 family - owner occupied $ 82,561 $ 82,561
Residential 1-4 family - investment - - -
Multifamily - - -
Nonresidential mortgage loans - - -
Construction & land loans - - -
Construction & land loans - - -
Real estate secured lines of credit - - -
Commercial loans - - -
Consumer loans - - -
$ 82,561 $ 82,561
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
December 31, 2019
Number of
Loans Pre-
Modification
Recorded
Balance Post-Modification
Recorded Balance
Mortgage loans on real estate:
Residential 1-4 family - owner occupied $ 266,418 $ 240,926
Residential 1-4 family - investment - - -
Multifamily - - -
Nonresidential mortgage loans - - -
Construction & land loans - - -
Construction & land loans - - -
Real estate secured lines of credit - 40,627
Commercial loans - - -
Consumer loans - - -
$ 266,418 $ 281,553
Newly restructured loans by type of modification are as follows at December 31, 2020 and 2019:
December 31, 2020
Interest Only Term Combination Total
Modification
Mortgage loans on real estate:
Residential 1-4 family - owner occupied $ 82,561 $ - $ - $ 82,561
Residential 1-4 family -investment - - - -
Multifamily - - - -
Nonresidential mortgage loans - - - -
Construction & land loans - - - -
Real estate secured lines of credit - - - -
Commercial loans - - - -
Consumer loans - - - -
$ 82,561 $ - $ - $ 82,561
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
December 31, 2019
Interest Only Term Combination Total
Modification
Mortgage loans on real estate:
Residential 1-4 family - owner occupied $ - $ - $ 240,926 $ 240,926
Residential 1-4 family -investment - - - -
Multifamily - - - -
Nonresidential mortgage loans - - - -
Construction & land loans - - - -
Real estate secured lines of credit 40,627 - - 40,627
Commercial loans - - - -
Consumer loans - - - -
$ 40,627 $ - $ 240,926 $ 281,553
The Company had no loans that were modified as TDRs and that were impaired.
The Company had no TDRs modified during the years ended December 31, 2020 and 2019 that subsequently defaulted.
As of December 31, 2020, borrowers with loans designated as TDRs and totaling $932,000 of residential real estate loans and $211,000 of multifamily loans, met the criteria for placement back on accrual status. This criteria includes a minimum of six consecutive months of payment performance under existing or modified terms.
As of December 31, 2019, borrowers with loans designated as TDRs and totaling $937,635 of residential real estate loans and $507,065 of multifamily loans, met the criteria for placement back on accrual status. This criteria includes a minimum of six consecutive months of payment performance under existing or modified terms.
There were no foreclosed real estate properties at December 31, 2020 and 2019. There was one consumer mortgage loan in process of foreclosure at December 31, 2020 with a net loan balance of $65,500.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Note 4: Premises and Equipment
Major classifications of premises and equipment, stated at cost, are as follows:
Land $ 720,971 $ 720,971
Buildings and improvements 4,649,005 4,412,275
Furniture and equipment 1,131,050 1,013,645
6,501,026 6,146,891
Less accumulated depreciation (3,013,200 ) (2,792,444 )
Net premises and equipment $ 3,487,826 $ 3,354,447
Depreciation expense was $220,756 and $195,327 for the years ended December 31, 2020 and 2019, respectively.
Note 5: Loan Servicing
Loans serviced for others are not included in the accompanying balance sheets. The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The unpaid principal balance of residential mortgage loans serviced for others was $230,156,936 and $103,853,962 at December 31, 2020 and 2019, respectively.
The following summarizes the activity in mortgage servicing rights measured using the fair value method for the years ended December 31, 2020 and 2019:
Fair value as of the beginning of the year $ 1,213,815 $ 1,252,740
Recognition of mortgage servicing rights on the sale of loans 1,460,328 245,790
Change in fair value due to changes in valuation inputs or assumptions used in the valuation model (648,820 ) (284,715 )
Fair value at the end of the year $ 2,025,323 $ 1,213,815
Contractually specified servicing fees were approximately $348,000 and $251,000 for the years ended December 31, 2020 and 2019, respectively.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Certain loan sale transactions with the FHLB provide for establishment of an LRA. The LRA consists of amounts withheld from the loan sale proceeds by the FHLB for absorbing potential losses on those loans sold. These withheld funds are an asset to the Company as they are scheduled to be paid to the Company in future years, net of any credit losses on those loans sold. The LRA funds withheld to settle these potential losses totaled approximately $3,437,000 and $2,911,000 at December 31, 2020 and 2019, respectively; however, these receivables are recorded at fair value at the time of sale, which includes consideration of potential credit losses, at the time of the establishment of the LRA. In the event that the credit losses do not exceed the withheld funds, the LRA agreements provide for payment of these funds to the Company in seven annual installments beginning five years after the sale date or in 26 annual installments, beginning five years after the sale date. The carrying value of the LRA is equal to the initial fair value plus an interest component less any cash receipts, which totaled approximately $1,947,000 and $1,713,000 at December 31, 2020 and 2019, respectively. The Company had mandatory delivery contracts outstanding as of December 31, 2020 of $19.6 million.
Note 6: Time Deposits
Time deposits in denominations of $250,000 or more were approximately $2,584,000 and $3,777,000 at December 31, 2020 and 2019, respectively. Deposit accounts in excess of $250,000 are not insured by the FDIC. At December 31, 2020, approximately $5.6 million of our certificates of deposit had been obtained through the National CD Rateline program.
At December 31, 2020 and 2019, the scheduled maturities of time deposits were as follows:
One year or less $ 35,131,024 $ 32,896,686
Over one year to two years 14,359,679 25,095,507
Over two years to three years 5,507,330 10,338,194
Over three years to four years 4,077,670 4,837,993
Over four years to five years 2,922,656 3,861,470
Thereafter 206,427 208,082
$ 62,204,786 $ 77,237,932
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Interest expense during the years ended December 31, 2020 and 2019 for each major category of deposits was as follows:
Deposit Type:
Savings $ 61,269 $ 184,626
Interest Bearing Demand 115,409 148,163
Certificates of Deposit 1,477,240 1,615,806
Total Deposit Interest Expense $ 1,653,918 $ 1,948,595
Note 7: Federal Home Loan Bank Advances
FHLB advances are secured by a blanket pledge of qualifying mortgage loans totaling approximately $91,040,000 and $116,882,000 and the Company’s investment in FHLB stock at December 31, 2020 and 2019, respectively. Advances, at effective interest rates ranging from 1.59% to 2.90%, are subject to restrictions or penalties in the event of prepayment.
Aggregate annual maturities of FHLB advances at December 31, 2020 and 2019 are as follows:
One year or less $ 7,700,000 $ 8,763,152
Over one year to two years 15,600,000 7,700,000
Over two years to three years 8,600,000 15,600,000
Over three years to four years 6,512,000 15,112,000
38,412,000 47,175,152
Deferred prepayment penalty, net of amortization - (3,086 )
$ 38,412,000 $ 47,172,066
At December 31, 2020, we had $38.4 million outstanding in advances from the FHLB-Cincinnati, and had capacity to borrow approximately an additional $34.1 million from the FHLB-Cincinnati based on our collateral capacity. We also had $11.5 million available on lines of credit with three commercial banks. No amount was outstanding on these lines at December 31, 2020.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Note 8: Income Taxes
The provision for income taxes includes these components for the years ended December 31, 2020 and 2019.
Taxes currently payable $ 768,496 $ 68,865
Deferred income taxes 51,470 18,829
Income tax expense $ 819,966 $ 87,694
Computed at the statutory rate $ 834,894 $ 186,095
Increase (decrease) resulting from:
Bank-owned life insurance (18,027 ) (18,775 )
Acquired bank-owned life insurance - (36,329 )
Other 3,099 (43,297 )
Actual tax expense $ 819,966 $ 87,694
A reconciliation between the statutory income tax and the Company’s effective rate follows:
Computed at the statutory rate 21.00 % 21.00 %
Increase (decrease) resulting from:
Bank-owned life insurance (0.45 )% (2.12 )%
Merger expenses - (4.10 )%
Other 0.07 % (4.88 )%
Effective tax rate 20.62 % 9.90 %
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
The tax effects of temporary differences related to deferred taxes shown on the balance sheets at December 31, 2020 and 2019 were:
Deferred tax assets
Allowance for loan losses $ 333,573 $ 282,653
Loans held for sale 72,541 13,437
Operating lease right of use assets 37,879 -
Unrealized losses on available-for-sale securities - 1,520
Directors' Retirement Plan 126,323 117,452
Net operating loss 178,467 183,123
Other 43,562 24,939
792,345 623,124
Deferred tax liabilities
Deferred loan costs (69,911 ) (101,363 )
Prepaid penalties on FHLB advances - (648 )
Dividends on FHLB stock (332,211 ) (332,211 )
Mortgage servicing rights (425,318 ) (254,901 )
FHLB lender risk account receivable (408,927 ) (359,780 )
Depreciation (248,975 ) (195,450 )
Operating lease right of use liabilities (37,879 ) -
Unrealized gains on available-for-sale securities (9,095 ) -
Fair value mortgage banking derivative net assets (74,266 ) -
Other (72,416 ) (116,524 )
(1,678,998 ) (1,360,877 )
Valuation allowance (19,322 ) (19,322 )
Net deferred tax liability $ (905,975 ) $ (757,075 )
Retained earnings at both December 31, 2020 and 2019, include approximately $766,000 for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The deferred income tax liability on the preceding amount that would have been recorded if it was expected to reverse into taxable income in the foreseeable future was approximately $160,900 at both December 31, 2020 and 2019.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
As of December 31, 2020, the Company has net operating loss carryforwards of approximately $610,000 which expire between 2028 and 2037 and $240,000 with no expiration. A valuation allowance for deferred tax assets is provided for all or some portion of the deferred tax asset when it is more likely than not an amount will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances is included in income tax expense in the period they are identified. At December 31, 2020, the Company has a valuation allowance of $19,322 to reduce deferred tax assets to the amount that is more likely than not to be realized under Code Section 382 limitations.
Note 9: Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, included in stockholders’ equity, are as follows:
December 31, December 31,
Net unrealized gain (loss) on available for sale securities $ 43,311 $ (7,237 )
Directors' retirement plan (413,407 ) (361,104 )
(370,096 ) (368,341 )
Tax benefit (78,082 ) (77,352 )
Net of tax amount $ (292,014 ) $ (290,989 )
Note 10: Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), common equity Tier I capital (as defined) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). Management believes that, as of December 31, 2020 and 2019, the Bank met all capital adequacy requirements to which it was subject at such dates.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
Management opted out of the accumulated comprehensive income treatment under the Basel III capital requirements, and as such, unrealized gains and losses from available-for-sale securities will continue to be excluded from regulatory capital.
The below minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was phased in under Basel III from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer was 2.50% at December 31, 2020.
As of December 31, 2020, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
The Bank’s actual and required capital amounts and ratios are presented in the following table:
Actual Minimum Capital
Requirement Minimum to Be Well
Capitalized Under
Prompt Corrective Action
Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
As of December 31, 2020
Total risk-based capital
(to risk-weighted assets) $ 36,465 22.0 % $ 13,272 8.0 % $ 16,590 10.0 %
Tier I capital
(to risk-weighted assets) 34,792 21.0 % 9,954 6.0 % 13,272 8.0 %
Common Equity Tier I capital
(to risk-weighted assets) 34,792 21.0 % 7,465 4.5 % 10,783 6.5 %
Tier I capital
(to adjusted average total assets) 34,792 14.8 % 9,415 4.0 % 11,769 5.0 %
As of December 31, 2019
Total risk-based capital
(to risk-weighted assets) $ 24,898 16.3 % $ 12,204 8.0 % $ 15,255 10.0 %
Tier I capital
(to risk-weighted assets) 23,490 15.4 % 9,153 6.0 % 12,204 8.0 %
Common Equity Tier I capital
(to risk-weighted assets) 23,490 15.4 % 6,865 4.5 % 9,916 6.5 %
Tier I capital
(to adjusted average total assets) 23,490 10.2 % 9,183 4.0 % 11,478 5.0 %
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
Note 11: Related Party Transactions
At December 31, 2020 and 2019, the Company had loans outstanding to executive officers, directors and their affiliates (related parties). Annual activity consisted of the following:
Beginning balance $ 821,388 $ 879,142
New loans - -
Repayments 60,108 57,754
Ending balances $ 761,280 $ 821,388
In management’s opinion, such loans and other extensions of credit are consistent with sound lending practices and are within applicable regulatory lending limitations. In management’s opinion these loans did not involve more than normal risk of collectability or present other unfavorable features.
Deposits from related parties held by the Bank at December 31, 2020 and 2019 totaled $3,102,000 and $2,321,000, respectively.
Note 12: Employee and Director Benefits
The Company has a 401(k) profit-sharing plan covering substantially all employees. The Company’s contributions to the plan are determined annually by the Board of Directors of Cincinnati Federal. Contributions to the plan were approximately $197,000 and $124,100 for the years ended December 31, 2020 and 2019, respectively.
In connection with the conversion to the mutual holding company, Cincinnati Bancorp, established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees. The ESOP borrowed funds from Cincinnati Bancorp in an amount sufficient to purchase 67,397 shares (approximately 3.92% of the common stock sold in the initial stock offering). In the second-step stock offering completed January 22, 2020, the ESOP borrowed funds from Cincinnati Bancorp, Inc. and purchased 132,937 shares (approximately 8.0% of the common stock sold in the second-step offering). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Company and dividends received by the ESOP. Contributions will be applied to repay interest on the loan first, then the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 20 years. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants will vest in their accrued benefits under the ESOP at the rate of 20 percent per year after two years of service. Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Company. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP.
The debt of the ESOP is eliminated in consolidation. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends on unallocated ESOP shares, if any, are recorded as a reduction of debt and accrued interest. ESOP compensation expense was approximately $97,000 and $64,800 for the years ended December 31, 2020 and 2019, respectively.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
A summary of the ESOP shares as of December 31, 2020 and 2019 are as follows:
December 31, December 31,
Shares released to participants (1) 36,733 29,386
Shares allocated to participants 10,285 7,347
Unreleased shares 195,207 73,468
Total 242,225 110,201
Fair value of unreleased shares $ 2,252,689 $ 745,871
(1) Share amounts related to the periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive recognition to the 1.6351 exchange ratio applied in the conversion offering (see Note 1).
In addition, effective July 2014, the Company provides post-retirement benefits to directors of the Company. The Company accounts for the policies in accordance with ASC 715-60 Defined Benefit Plans, which requires companies to recognize a liability and related compensation costs that provide a benefit to a director extending to post-retirement periods. The liability is recognized based on the substantive agreement with the director.
The Company uses a December 31 measurement date for the plan. Information about the plan’s funded status and pension cost follows:
Change in benefit obligation:
Beginning of year $ 559,295 $ 487,077
Service cost 12,389 10,114
Interest cost 18,860 22,557
Loss/(gain) 97,340 69,547
Benefits paid (75,000 ) (30,000 )
End of year $ 612,884 $ 559,295
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
Amounts recognized in accumulated other comprehensive loss not yet recognized as components of net periodic benefit cost consist of:
Prior service cost $ 25,280 $ 25,280
Net loss $ 13,522 $ 7,676
The accumulated benefit obligation for the benefit plan was $612,884 and $559,295 at December 31, 2020, and December 31, 2019, respectively.
The estimated prior service credit for the plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is approximately $25,280.
Components of net periodic benefit cost:
Service cost $ 12,389 $ 10,114
Interest Cost 18,860 22,557
(Gain)/loss recognized 8,866 3,622
Prior service cost 25,280 25,280
$ 65,395 $ 61,573
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
The retiree accrued liability expected to be reversed from the plan as of December 31, 2020 and December 31, 2019 is as follows:
One year or less $ 15,000 $ 30,000
Over one year to two years 15,000 30,000
Over two years to three years 15,000 30,000
Over three years to four years 15,000 30,000
Over four years to five years 15,000 15,000
Thereafter 165,000 135,000
$ 240,000 $ 270,000
Significant assumptions for the benefit plan liability include the following as of December 31, 2020 and 2019:
Weighted average assumptions used to determine benefit cost obligation:
Discount Rate 3.08 % 4.14 %
Note 13: Operating Lease Income
The Company had one operating lease where it acts as lessor of office space at December 31, 2020. The subject office space was a branch location for an unaffiliated bank. The lessee notified the Company that the branch would be relocating within their banking system. The lease was set to expire in November 2021 with three additional renewal options for five years each. As the leased space is a bank branch facility with ATM and drive-thru lane functionality, the Company intends to occupy the vacated bank branch and operate a full-service branch facility. Rental income from leases was approximately $77,800 and $92,300 for the years ended December 31, 2020 and 2019, respectively.
Note 14: Disclosures About Fair Value of Assets and Liabilities
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full-term of the assets or liabilities.
Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities.
Recurring Measurements
The following tables present the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2020 and 2019:
Fair Value Measurements Using
Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs
Fair Value (Level 1) (Level 2) (Level 3)
December 31, 2020
Mortgage-backed securities of government sponsored entities $ 5,213,830 $ - $ 5,213,830 $ -
Mortgage servicing rights 2,025,323 - - 2,025,323
Derivative assets (included in other assets) 498,644 -
498,644
Derivative liabilities (included in other liabilities) 144,995 - 144,995 -
December 31, 2019
Mortgage-backed securities of government sponsored entities $ 6,733,213 $ - $ 6,733,213 $ -
Mortgage servicing rights 1,213,815 - - 1,213,815
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Available-for-sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 and Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
Derivative Financial Instruments
The fair value of the interest lock commitments is based on the investor prices for the underlying loans or current secondary market prices for loans with similar characteristics less estimated costs to originate the loans and adjusted for the anticipated funding probability (pull-through rate). The fair value of the interest rate lock commitments is classified as Level 3 in the fair value hierarchy.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of loan balance, weighted average coupon, weighted average maturity, escrow payments, servicing fees, prepayment speeds, float, cost to service, ancillary income, and discount rate. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.
Mortgage servicing rights are tested for impairment. Management measures mortgage servicing rights through use of a third-party independent valuation. Inputs to the model are reviewed by management.
The following is is reconciliation of the beginning and ending balances of recurring fair value measurements related to mortgage servicing rights recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:
Fair value as of the beginning of the year $ 1,213,815 $ 1,252,740
Recognition of mortgage servicing rights on the sale of loans 1,460,328 245,790
Change in fair value due to changes in valuation inputs or assumptions used in the valuation model (648,820 ) (284,715 )
Fair value at the end of the year $ 2,025,323 $ 1,213,815
Mortgage servicing rights are carried in the balance sheet at fair value and the changes in fair value are reported in other noninterest income in the period in which the changes occur.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Loan Commitments
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of interest rate lock commitments was $498,600, partially offset by a negative fair value on forward sale commitments of $145,000. The fair value of mortgage banking derivatives is estimated based on current market prices for loans of similar terms and credit quality.
Nonrecurring Measurements
The following table presents the fair value of assets measured at fair value on a nonrecurring basis and the level of hierarchy in which the fair value measurements fall at December 31, 2020 and 2019:
Fair Value Measurements Using
Carrying Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs
Amount (Level 1) (Level 2) (Level 3)
December 31, 2020
Collateral-dependent impaired loans $ 173,877 $ - $ - $ 173,877
December 31, 2019
Collateral-dependent impaired loans $ 51,568 $ - $ - $ 51,568
Collateral-dependent Impaired Loans
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2020 and 2019:
Fair Value Valuation Technique Unobservable Inputs Range
December 31, 2020
Mortgage servicing rights $ 2,025,323 Discounted
cash flow Discount rate
PSA prepayment speeds 10%
177-565%
Interest rate lock commitments $ 498,644 Secondary market prices Pull-through rate 85 %
Impaired loans (collateral dependent) $ 173,877 Market comparable properties Marketability discount 10%-15%
12%
December 31, 2019
Mortgage servicing rights $ 1,213,815 Discounted
cash flow Discount rate
PSA prepayment speeds 10%
89%-173%
Impaired loans (collateral dependent) $ 51,568 Market comparable properties Marketability discount 10%-15%
12%
Fair Value of Financial Instruments
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.
Cash and cash equivalents, Federal Home Loan Bank Stock and Interest Receivable
The carrying amount approximates fair value.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Loans Held for Sale
Fair value of loans held for sale is based on quoted market prices, where available, or is determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans and adjusted to reflect the inherent credit risk.
Loans
The estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” in estimating and disclosing the fair value of financial instruments. The fair value calculation discounted estimated cash flows using rates that incorporated discounts for credit, liquidity and marketability factors.
Federal Home Loan Bank Lender Risk Account Receivable
The fair value of the Federal Home Loan Bank lender risk account receivable is estimated by discounting the estimated remaining cash flows of each strata of the receivable at current rates applicable to each strata for the same remaining maturities.
Deposits
Deposits include demand deposits and savings accounts. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank Advances
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market.
If a quoted market price is not available, an expected present value technique is used to estimate fair value.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Stock Subscription Proceeds in Escrow, Advances from Borrowers for Taxes and Insurance and Interest Payable
The carrying amount approximates fair value.
Commitments to Originate Loans, Forward Sale Commitments, Letters of Credit and Lines of Credit
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 2020 and 2019, the fair value of letters of credit and lines of credit was not material.
The following table presents estimated fair values of the Company’s financial instruments carried at cost at December 31, 2020 and 2019:
Fair Value Measurements Using
Carrying Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs
Amount (Level 1) (Level 2) (Level 3)
December 31, 2020
Financial Assets:
Cash and cash equivalents $ 32,347,806 $ 32,347,806 $ - $ -
Interest-bearing time deposits 3,000,000 - 3,000,000 -
Loans held for sale 13,345,370 - 13,690,802 -
Loans, net of allowance for loan losses 166,667,918 - - 165,251,240
Federal Home Loan Bank stock 2,801,800 - 2,801,800 -
Interest receivable 520,775 - 520,775 -
Federal Home Loan Bank lender risk account receivable 1,947,271 - - 2,157,661
Financial Liabilities:
Deposits 152,207,043 90,002,257 63,577,288 -
Federal Home Loan Bank advances 38,412,000 - 39,718,400 -
Advances from borrowers for taxes and insurance 1,946,340 - 1,946,340 -
Interest payable 73,585 - 73,585 -
December 31, 2019
Financial Assets:
Cash and cash equivalents $ 37,735,266 $ 37,735,266 $ - $ -
Loans held for sale 3,114,081 - 3,178,068 -
Loans, net of allowance for loan losses 179,332,026 - - 175,117,724
Federal Home Loan Bank stock 2,657,400 - 2,657,400 -
Interest receivable 624,333 - 624,333 -
Federal Home Loan Bank lender risk account receivable 1,713,240 - - 1,820,707
Financial Liabilities:
Deposits 143,410,707 66,172,775 78,065,313 -
Federal Home Loan Bank advances 47,172,066 - 47,707,920 -
Stock subscription proceeds in escrow 23,407,011 23,407,011 -
Advances from borrowers for taxes and insurance 1,806,638 - 1,806,638 -
Interest payable 91,636 - 91,636 -
Note 15: Derivative Financial Instruments
The Company enters into commitments to originate loans whereby the interest rate on the loans is determined prior to funding (i.e. rate lock commitment). The Company also enters into forward mortgage loan commitments to sell to various investors to protect itself against exposure to various factors and to reduce sensitivity to interest rate movements.
Both the interest rate lock commitments and the related forward mortgage loan sales contracts are considered derivatives and are recorded on the consolidated balance sheets at fair value in accordance with FASB ASC 815, Derivatives and Hedging, with changes in fair value recorded in noninterest income in the accompanying consolidated statements of income. All such derivatives are considered stand-alone derivatives and have not been formally designated as hedges by management.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
The table below provides information on the Company’s derivative financial instruments as of December 31, 2020. The Company’s derivative instruments at December 31, 2019 were not material. Income related to derivative financial instruments included in noninterest income in the accompanying consolidated statements of income for the year ended December 31, 2020 is as follows:
Notional Asset Liability
Amount Derivatives Derivatives
December 31, 2020
Interest rate lock commitments $ 19,613,510 $ 498,644 -
Forward sale commitments 32,953,442 - 144,995
52,566,952 $ 498,644 144,995
Income (loss) related to derivative financial instruments included in noninterest income in the accompanying consolidated statements of income for the year ended December 31, 2020 is as follows:
Interest rate lock commitments $ 498,644
Forward sale commitments (144,995 )
353,649
Note 16: Commitments and Credit Risk
Commitments to Originate Loans
Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and
Forward sale commitments are commitments to sell groups of residential mortgage loans that the Company originates or purchases as part of its mortgage banking activities. The Company commits to sell the loans at specified prices in a future period. These commitments are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale since the Company is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market.
The dollar amount of commitments to fund fixed rate loans at December 31, 2020 and 2019 follows:
December 31, 2020 December 31, 2019
Interest Rate
Interest Rate
Amount Range Amount Range
Commitments to fund fixed-rate loans $ 28,451,835 2.25% - 3.25% $ 3,917,445 3.5% - 5.125%
Lines of Credit
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
Loan commitments outstanding at December 31, 2020 and 2019 were composed of the following:
December 31, December 31,
Commitments to originate loans for portfolio $ 189,200 $ 761,055
Forward sale commitments 41,791,767 7,031,526
Lines of credit 19,826,038 16,840,828
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Note 17: Earnings Per Share
Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the period, less shares in the Company’s ESOP that are unallocated and not committed to be released. The computations are as follows for December 31, 2020 and 2019:
Year ended December 31,
Net income $ 3,155,721 $ 798,474
Less allocation of net income to participating securities 28,869 7,372
Net income allocated to common shareholders 3,126,852 791,102
Shares outstanding for basic earnings per share (1):
Shares issued 2,970,211 2,944,383
Less: Average unearned ESOP shares and unvested restricted stock 220,522 78,983
Weighted-average shares outstanding - basic 2,749,689 2,865,400
Basic earnings per common share $ 1.14 $ 0.28
Effect of dilutive securities:
Weighted-average shares outstanding - basic 2,749,689 2,865,400
Stock options 39,657 42,411
Weighted-average shares outstanding - diluted 2,789,346 2,907,812
Diluted earnings per share $ 1.12 $ 0.27
(1) Share amounts related to the periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive recognition to the 1.6351 exchange ratio applied in the conversion offering. (see Note 1)
Note 18: Equity Incentive Plan
In May 2017, the Company’s stockholders approved the Cincinnati Bancorp 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan authorized the issuance or delivery to participants of up to 192,844 shares of the Company’s common stock pursuant to the grants of restricted stock awards, restricted stock unit awards, incentive stock options, and non-qualified stock options. Of this number, the maximum number of shares of Company common stock that may be issued under the 2017 Plan pursuant to the exercise of stock options is 137,476 (as adjusted) shares and the maximum number of shares of Company common stock that may be issued as restricted stock awards or restricted stock units is 55,098 (as adjusted) shares. Stock options awarded to employees may be incentive stock options or non-qualified stock options. Shares subject to award under the 2017 Plan may be authorized but unissued shares or treasury shares. The 2017 Plan contains annual and lifetime limits on certain types of awards to individual participants.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Awards may vest or become exercisable only upon the achievement of performance measures or based solely on the passage of time after award. Stock options and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the 2017 Plan).
Stock option awards and related information is as follows for the years ended December 31, 2020 and 2019:
Weighted-Average
Remaining Aggregate
Weighted-Average Contractual Term Intrinsic
Shares Exercise Price (Years) Value
December 31, 2020
Outstanding, beginning of period 126,634 $ 6.07 7.66 $ 528,573
Granted 11,000 $ 9.38
Exercised - -
Forfeited (3,306 ) $ 5.84
Outstanding, end of period 134,328 $ 6.34 6.87 $ 698,506
Exercisable, end of period 70,726 $ 5.92 6.56 $ 397,480
Weighted-Average
Remaining Aggregate
Weighted-Average Contractual Term Intrinsic
Shares Exercise Price (Years) Value
December 31, 2019
Outstanding, beginning of period 129,479 $ 5.84 8.50 $ 194,008
Granted 8,176 $ 9.36 10.00
Exercised (3,306 ) $ 5.84
Forfeited (7,714 ) $ 5.84
Outstanding, end of period 126,634 $ 6.07 7.66 $ 528,573
Exercisable, end of period 50,654 $ 5.84 7.50 $ 195,199
(1) Share amounts related to periods prior to the January 22, 2020 closing of the conversion offering have been restated to give retroactive recognition to the 1.6351 exchange ratio applied in the conversion offering. (see Note 1).
In June 2017, the Company awarded 55,098 (as adjusted) restricted shares to members of the Board of Directors and certain members of management. The restricted stock awards have a five year vesting period. Shares of restricted stock granted to employees under the 2017 Plan are subject to vesting based on continuous employment for a specified time period following the date of grant. During the restricted period, the holder is entitled to full voting rights and dividends, thus are considered participating securities.
Total compensation expense recognized in the income statement for share-based payment arrangements was $110,416 and $103,152 for the years ended December 31, 2020 and 2019, respectively.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
As of December 31, 2020, there was approximately $200,800 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.2 years.
Note 19: Multiemployer Defined Benefit Plan
In connection with the acquisition of Kentucky Federal Savings and Loan Association, Cincinnati Federal is now part of a multiple-employer pension plan that is considered a multiemployer plan for accounting purposes. The Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB Plan) is a tax-qualified defined benefit plan. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multiemployer plan for accounting purposes and as a multiple -employer plan under the Employee Retirement Income Security Act of 1974 and the IRC. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan contributions made by a participating employer may be used to provide benefits of other participating employers. If Cincinnati Federal chooses to stop participating in this plan, it may be required to pay an amount based on the underfunded status of the plan, referred to as the withdrawal liability. Effective June 30, 2016, participation in the plan was frozen.
The funded status (market value divided by funding target) of the plan at June 30, 2020 and 2019 was 85.68% and 85.94%, respectively.
Total contributions made to the Pentegra DB Plan, as reported on Form 5500, equal $138,321,604 and $164,570,408 for the plan years ended June 30, 2019 and June 30, 2018. Cincinnati Federal’s contribution to the Pentegra DB Plan for the fiscal year ending December 31, 2020 are not more than 5% of the total contributions to the Pentegra DB Plan for the plan year ended June 30, 2019.
Accounting Standards Update 2011-09 requires the use of the most recently available annual return (Form 5500) to determine if an employer’s contributions represent more than 5% of total contributions to the Pentegra DB Plan. The 2018 Form 5500 is the most recently available annual report. The Schedule SB contains the total contributions to the Pentegra DB Plan for the year ending June 30, 2019. Cincinnati Federal’s contributions to the plan were $107,772 and $105,511 for the years ending December 31, 2020 and 2019, respectively.
Plan
Name
Employer
Identification
Number
Company
Contributions
FIP/RP Status
Pending/Implemented
Expiration of
Collective Bargaining
Agreement
Pentegra Defined Benefit Plan for Financial Institutions
13-5645888/333
$ 107,772
$ 105,511
No
Not applicable
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Note 20: Recent Accounting Pronouncements
FASB ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326)
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income.
In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees.
The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today.
The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.
ASU No. 2016-13 is effective for public business entities that are U.S. Securities and Exchange Commission (SEC) filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For SEC filers that are Smaller Reporting Companies, all other public business entities, and other non-public entities, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).
The Company is currently evaluating the impact of these amendments to the Company’s financial position and results of operations and currently does not know or cannot reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from these amendments. The Allowance for Loan Losses (ALL) estimate is material to the Company and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the ALL at adoption date. The Company is anticipating a significant change in the processes and procedures to calculate the ALL, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for the other-than-temporary impairment on available-for-sale securities will be replaced with an allowance approach. The Company continues to collect and retain historical loan and credit data. The Company is in the process of identifying data gaps. Certain CECL models are currently being evaluated. The Audit Committee is informed of ongoing CECL developments. For additional information on the allowance for loan losses, see Notes 1 and 3.
FASB ASU 2016-02, Leases (Topic 842)
ASU No. 2016-02 Leases, was issued in February 2016 and requires a lessee to recognize in the statement of financial position a liability to make lease payments (“the lease liability”) and a right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
A lessee shall classify a lease as a finance lease if it meets any of the five listed criteria:
a. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
b. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
c. The lease term is for the major part of the remaining economic life of the underlying asset.
d. The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.
e. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
For finance leases, a lessee shall recognize in the statement of income interest on the lease liability separately from the amortization of the right-of-use asset. Amortization of the right-to-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating lease and shall recognize a single lease cost on a straight line basis over the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. On October 16, 2019, FASB approved a final ASU delaying the effective date for nonpublic business entities. Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. The Company adopted ASU No. 2016-02 effective January 1, 2020, as required, without material effect on the Company’s consolidated financial position or results of operations, since the Company does not have a material amount of lease agreements. The right of use asset and lease obligation recorded as of December 31, 2020 was approximately $180,000 and is reflected in other assets and liabilities, respectively on the balance sheet. The modified retrospective method was applied. Due to immateriality of the impact, certain disclosures under ASU 842 have been omitted.
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Note 21: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to the financial position, results of operations and cash flows of the Company:
Condensed Balance Sheet
Assets
Cash and due from banks $ 6,449,777 $ 459,178
Investment in bank subsidiary 34,676,167 23,396,464
Other assets 378,027 225,523
Total assets $ 41,503,971 $ 24,081,165
Temporary Equity
ESOP shares subject to mandatory redemption $ - $ 244,327
Stockholders' Equity 41,503,971 23,836,838
Total temporary equity and stockholders' equity $ 41,503,971 $ 24,081,165
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Condensed Statements of Income and Comprehensive Income
Dividend Income $ - $ 750,000
Merger-related expenses - 18,000
Other noninterest expenses 316,466 262,666
Total noninterest expense $ 316,466 $ 280,666
Income (loss) before federal income tax benefits and equity in undistributed income of the subsidiary (316,466 ) 469,334
Federal income tax benefits 66,456 102,907
Equity in undistributed income of subsidiary 3,405,731 226,233
Net Income $ 3,155,721 $ 798,474
Comprehensive Income $ 3,154,696 $ 759,927
Cincinnati Bancorp, Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
Condensed Statement of Cash Flows
Operating Activities
Net Income $ 3,155,721 $ 798,474
Items not requiring (providing) cash
Equity in undistributed income of subsidiary (3,405,731 ) (226,233 )
Increase (decrease) in cash due to changes in:
Accrued expenses and other assets (152,505 ) (398,607 )
Net cash provided by (used in) operating activities (402,515 ) 173,634
Investing Activities
Proceeds from second step stock issuance downstreamed to bank (7,667,532 ) -
Net cash provided by (used in) investing activities (7,667,532 ) -
Financing Activities
Issuance of common stock 14,060,646 -
Net cash provided by (used in) financing activities 14,060,646 -
Net change in cash and due from banks 5,990,599 173,634
Cash and due from banks at beginning of year 459,178 285,544
Cash and due from banks at end of year $ 6,449,777 $ 459,178
Note 22: Impact of COVID-19 on Cincinnati Bancorp, Inc.
In March 2020, the COVID-19 coronavirus was identified as a global pandemic and began affecting the health of large populations around the world. As a result of the spread of COVID-19, economic uncertainties arose which can ultimately affect the financial position, results of operations and cash flows of the Company as well as the Company’s customers. In response to economic concerns over COVID-19, in March 2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed into law by Congress. The CARES Act included relief for individual Americans, health care workers, small businesses and certain industries hit hard by the COVID-19 pandemic. The 2021 Consolidated Appropriations Act, passed by Congress in December 2020, extended certain provisions of the CARES Act affecting the Company into 2021.
The CARES Act included several provisions designed to help financial institutions like the Company in working with their customers. Section 4013 of the CARES Act, as extended, allows a financial institution to elect to suspend generally accepted accounting principles and regulatory determinations with respect to qualifying loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (TDR) until January 1, 2022. The Company has taken advantage of this provision to extend certain payment modifications to loan customers in need. As of December 31, 2020, the Company has six loans totaling $1.0 million that were modified during 2020 under the CARES Act guidance, that remain on modified terms. The Company modified other loans during 2020 under the guidance that have since returned to normal repayment status as of December 31, 2020.
(a)(3) Exhibits
3.1 Amended and Restated Articles of Incorporation of Cincinnati Bancorp, Inc. (1)
3.2 Bylaws of Cincinnati Bancorp, Inc. (1)
4.0 Form of Common Stock Certificate of Cincinnati Bancorp, Inc. (1)
4.1 Description of securities of Cincinnati Bancorp, Inc. Registered Under Section 12 of the Securities Exchange Act of 1934 (2)
10.1 Employment Agreement by and between Cincinnati Federal Savings and Loan Association and Gregory W. Meyers (3)
10.2 Split Dollar Life Insurance Plan (3)
10.3 Cincinnati Federal Savings and Loan Association Director Retirement Plan (3)
10.4 Form of Cincinnati Federal Employee Stock Ownership Plan (3)
10.5 Cincinnati Bancorp 2017 Equity Incentive Plan (4)
10.6 Change in Control Agreement by and between Robert A. Bedinghaus and Cincinnati Federal (5)
10.7 Change in Control Agreement by and between Joseph V. Bunke and Cincinnati Federal (5)
10.8 Change in Control Agreement by and between Herbert C. Brinkman and Cincinnati Federal (5)
21.0 Subsidiaries of the Registrant
23.0 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Principal Executive Officer, Pursuant to Rule 15d-14(a)
31.2 Certification of Principal Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
32.0 Certification of Principal Executive Officer and Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements
(1) Incorporated herein by reference to the Registration Statement on Form S-1, as amended (File No. 333-233708), of Cincinnati Bancorp, Inc., initially filed September 11, 2019.
(2) Incorporated herein by reference to Annual Report on Form 10-K of Cincinnati Bancorp, Inc., filed on March 30, 2020.
(3) Incorporated herein by reference to the Registration Statement on Form S-1, as amended (File No. 333-202657), of Cincinnati Bancorp, as initially filed on March 11, 2015.
(4) Incorporated by reference to Appendix A to Definitive Proxy Statement of Cincinnati Bancorp, filed on April 13, 2017.
(5) Incorporated by reference to Current Report on Form 8-K of Cincinnati Bancorp, Inc., filed on January 24, 2020.