CINCINNATI BANCORP, INC. General
Management's discussion and analysis of the financial condition and results of operations at and for the three and nine months endedSeptember 30, 2022 and 2021 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q and with the audited consolidated financial statements and notes thereto at and for the year endedDecember 31, 2021 , appearing in the Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Cautionary Note Regarding Forward -Looking Statements
This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "believe," "contemplate," "continue," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:
? statements of our goals, intentions and expectations;
? statements regarding our business plans, prospects, growth and operating
strategies;
? statements regarding the asset quality of our loan and investment portfolios;
and
? estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-Q except as may be required by applicable law or regulation.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
? risks associated with widespread inflation or deflation;
? risks of overall labor pressures and continued global supply-chain disruptions;
changes in interest rates generally, including changes in the relative
differences between short term and long term interest rates and in deposit
? interest rates, that may affect our net interest margin and funding sources,
and our ability to originate loans for portfolio and for sale in the secondary
market;
adverse changes in the financial industry, securities, credit and national or
? local real estate markets (including real estate values), or in the secondary
mortgage markets;
? risks related to the valuation of mortgage servicing rights, particularly
changes in prepayment speeds due to changes in interest rates;
? the use of estimates in determining fair value of certain of our assets, which
may prove to be incorrect and result in significant declines in valuations;
the scope, duration and severity of the COVID-19 pandemic and its effect on our
? business and operations, our customers, including their ability to make timely
loan payments, our service providers, and on the economy and financial markets;
? Government action in response to the COVID-19 pandemic and its effect on our
business and operations;
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? our ability to manage our operations under the current economic conditions
nationally and in our market area;
? we may incur increased charge-offs in the future;
? we may lose customers to our competitors;
significant increases in our loan losses, including as a result of our
? inability to resolve classified and non-performing assets or reduce risks
associated with our loans, and management's assumptions in determining the
adequacy of the allowance for loan losses;
credit risks of lending activities, including changes in the level and trend of
? loan delinquencies and write-offs and in our allowance for loan losses and
provision for loan losses;
? competition among depository and other financial institutions;
? our ability to successfully implement our business plan and to grow our
franchise to improve profitability;
? our ability to attract and maintain deposits, and to obtain FHLB-Cincinnati
advances;
fluctuations in the demand for loans, which may be affected by the number of
? unsold homes, land and other properties in our market areas and by declines in
the value of real estate in our market area;
? changes in consumer spending, borrowing and savings habits;
? risks related to a high concentration of loans secured by real estate located
in our market area;
the results of examinations by our regulators, including the possibility that
our regulators may, among other things, require us to increase our allowance
? for loan losses, write down assets, change our regulatory capital position,
limit our ability to borrow funds or maintain or increase deposits, or prohibit
us from paying dividends, which could adversely affect our dividends and
earnings;
? changes in the level of government support of housing finance;
? our ability to enter new markets successfully and capitalize on growth
opportunities;
changes in laws or government regulations or policies affecting financial
institutions which could result in, among other things, increased deposit
? insurance premiums and assessments, increased capital requirements, and
increased regulatory fees and compliance costs, and the resources we have
available to address such changes;
changes in accounting policies and practices, as may be adopted by the bank
? regulatory agencies, the
and
changes in our compensation and benefit plans, and our ability to retain key
? members of our senior management team and to address staffing needs in response
to product demand or to implement our strategic plans;
? loan delinquencies and changes in the underlying cash flows of our borrowers;
? our ability to control costs and expenses, particularly those associated with
operating as a publicly traded company;
? the risk of failure or security breaches of computer systems on which we depend
or other cyber security risks;
? the ability of key third-party service providers to perform their obligations
to us;
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? changes in the financial condition or future prospects of issuers of securities
that we own;
other economic, competitive, governmental, regulatory and operational factors
? affecting our operations, pricing, products and services described elsewhere in
this quarterly report and in our Annual Report on Form 10-K for the year ended
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in
the Annual Report on Form 10-K for the fiscal year ended
Coronavirus (COVID-19) Impact
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 until January 1, 2022 , allowed 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).
The Company has taken advantage of this provision to extend certain payment
modifications to loan customers in need. As of December 31, 2021 , the Company
had no loans that were modified under the CARES Act guidance, that remain on
modified terms.
Comparison of Financial Condition at
Total Assets. Total assets were$292.3 million atSeptember 30, 2022 , an increase of$40.8 million , or 16.2% fromDecember 31, 2021 . The increase was primarily due to an increase in loans, net of allowances, of$47.8 million , partially offset by a decrease in cash and cash equivalents of$4.5 million and a decrease in loans held for sale of$3.2 million . The increase in loans, net of allowances, was primarily due to the shift in demand from 30-year and 15-year fixed rate loans to adjustable-rate loan products. As a result, lower rate adjustable-rate mortgages (ARM loans), particularly 5/1, 7/1 and 10/1 ARMs were more attractive to borrowers during the nine months endedSeptember 30, 2022 . The Company, generally, does not sell ARM loans but maintains them in the loan portfolio. Total asset growth, and loan growth in particular, are not anticipated to continue to increase at the pace experienced during the nine months endedSeptember 30, 2022 , given expected continued market interest rates. The Company has adjusted mortgage pricing to increase secondary market sales while slowing loan portfolio growth to match funding capacity. Cash and Cash Equivalents. Cash and cash equivalents decreased$4.5 million , or 20.8%, to$17.3 million atSeptember 30, 2022 , from$21.9 million atDecember 31, 2021 . The decrease in cash and cash equivalents was primarily attributable to funding the net increase in loans, net of allowances.Available-for-Sale Debt Securities . Available-for-sale debt securities, which consisted entirely ofU.S. government-sponsored mortgage-backed securities, decreased$1.1 million or 13.9%, to$6.8 million atSeptember 30, 2022 from$7.9 million atDecember 31, 2021 , due primarily to the principal repayments on the securities and the$509,000 increase in the unrealized loss during the nine months endedSeptember 30, 2022 . 30
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Net Loans. Net loans increased$47.8 million , or 24.4%, to$243.3 million atSeptember 30, 2022 from$195.5 million December 31, 2021 . The increase in loans was primarily attributable to a$34.8 million or 49.5%, increase in one to four family owner-occupied mortgage loans. Nonresidential mortgage loans increased$8.3 million , or 19.9%. Multifamily loans increased$4.5 million , or 8.3%. One to four family nonowner-occupied mortgage loans increased$2.9 million , or 28.0%. The increase in one to four family residential loans is due to the shift in loan originations from fixed rate loans sold to the secondary market to 5/1, 7/1 and 10/1 adjustable-rate mortgages. The shift from the origination of fixed rate loans to be sold in the secondary market to adjustable-rate loans to be held in our portfolio is expected to negatively impact our ability to generate gains on the sales of loans. However, the increase in the origination of adjustable-rate mortgages is expected to positively impact our interest income in a rising interest rate environment. The undisbursed portion of construction loans increased$4.4 million , or 36.6%, to$16.6 million . The undisbursed portions of the loans are expected to be disbursed in the next six to eighteen months as construction is completed. However, residential construction loan disbursements have been slower than expected due to supply chain and labor shortage issues. Loans Held for Sale. We currently sell certain fixed-rate, 15- and 30-year term, one-to-four family mortgage loans. We have sold loans on both a servicing-released and servicing-retained basis to: the FHLB-Cincinnati, through its mortgage purchase program; Freddie Mac; and certain private sector third-party buyers. Loans held for sale decreased$3.2 million , or 39.5%, to$4.9 million atSeptember 30, 2022 from$8.1 million atDecember 31, 2021 . Market interest rates increased during the period which had a negative impact on our ability to originate loans for sale in the secondary market. Continued increases in market interest rates is expected to continue and hamper our ability to generate gains on sales of loans. During the nine months endedSeptember 30, 2022 , we had proceeds of$107.0 million from sales of one-to- four family residential loans, on both a servicing-retained and servicing-released basis. Our volume of loan sales declined by$112.5 million , or 51.2%, from$219.4 million for the nine months endedSeptember 30, 2021 to$107.0 million for the nine months endedSeptember 30, 2022 . Assets held for sale. During the quarter endedJune 30, 2022 , the Company filed notice with theOffice of the Comptroller of the Currency ("OCC") that theCovington, Kentucky branch location would close onAugust 12, 2022 . On that date, the deposit accounts of theCovington branch were transferred to theFlorence, Kentucky location. The Company has accepted a purchase offer for the property and the transaction is expected to be completed inNovember 2022 . TheCovington branch location is carried at the lower of cost or market with a value of$691,451 . Mortgage Servicing Rights. We recognize mortgage servicing rights when loans are sold on a servicing-retained basis, which are initially, and subsequently, carried at fair value based upon independent third-party appraisals. The fair value of our mortgage servicing rights, based upon the most recent independent appraisal, increased$899,000 , or 40.3%, to$3.1 million atSeptember 30, 2022 , from$2.2 million atDecember 31, 2021 , primarily due to slower prepayment speed assumptions. Generally, estimated mortgage prepayment speeds decrease when market interest rates increase, resulting in an increase in the fair value of mortgage servicing rights. A slowdown in mortgage refinance activity would be expected to have a favorable impact on the fair value of our mortgage servicing rights. The balance of residential mortgage loans serviced primarily for Freddie Mac and the FHLB ofCincinnati decreased to$269.6 million atSeptember 30, 2022 compared to$282.0 atDecember 31, 2021 . New mortgage servicing rights recorded for the nine months endedSeptember 30, 2022 were$119,700 . The change in fair value of mortgage servicing rights was an increase of$779,400 for the nine months endedSeptember 30, 2022 . The appraised value of the mortgage servicing rights increased 37 basis points to 1.16% atSeptember 30, 2022 from 0.79% atDecember 31, 2021 . Deposits. Deposits increased$23.8 million , or 11.6%, to$228.3 million atSeptember 30, 2022 from$204.5 million atDecember 31, 2021 . The increase in deposits was primarily due to an increase of$23.3 million , or 28.0%, in certificates of deposit, primarily obtained through the National CD Rateline deposit listing service. The increase in National CD Rateline funds was used primarily to fund loan growth during the nine months endedSeptember 30, 2022 . Demand deposits increased$366,000 , or 0.8% and savings deposits were stable at$75.7 million . Borrowings.Federal Home Loan Bank advances increased$20.0 million atSeptember 30, 2022 . The Company had no outstanding borrowings atDecember 31, 2021 . The increase in FHLB advance borrowing was used to fund the increase in loans. Stockholders' Equity. Stockholders' equity decreased$3.2 million , or 7.5%, to$39.7 million atSeptember 30, 2022 from$42.9 million atDecember 31, 2021 . The decrease was primarily due to a one-time, special dividend of$1.00 per share, totaling$3.0 million , paid to shareholders during the nine months endedSeptember 30, 2022 and share repurchases totaling$1.6 million . Accumulated other comprehensive loss increased$350,000 due to increased unrealized losses in the fair value of the investment 31
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portfolio due to the increase in market interest rates. Investment losses are primary concentrated in one monthly floating rate security tied to the secured overnight funding rate (SOFR). All other investment securities are monthly adjustable-rate securities tied to the one-month T-Bill, one month LIBOR or the one-yearTreasury index. These decreases were partially offset by net income of$1.3 million for the nine months endedSeptember 30, 2022 .
Comparison of Operating Results for the Three Months Ended
General. The Company recorded net income of$868,000 for the quarter endedSeptember 30, 2022 , an increase of$962,000 compared to a net loss of$95,000 for the quarter endedSeptember 30, 2021 . The increase in net income was due primarily to a$227,000 increase in net interest income and a$1.2 million decrease in noninterest expense, partially offset by a$153,000 decrease in noninterest income, a$21,000 increase in the provision for loan losses and a$247,000 increase in the provision for income taxes. Interest and Dividend Income. Interest income increased$460,000 , or 20.4%, to$2.7 million for the quarter endedSeptember 30, 2022 compared to the comparable quarter in 2021. Interest income on portfolio loans increased$356,000 , or 16.6%, to$2.5 million for the three months endedSeptember 30, 2022 . The average balance of portfolio loans during the three months endedSeptember 30, 2022 increased$48.4 million to$242.8 million . The increase in average portfolio loans outstanding was concentrated in one to four residential, nonresidential mortgage loans and multifamily loans. The average yield on loans decreased 29 basis points to 4.12% for the three months endedSeptember 30, 2022 from 4.41% for the three months endedSeptember 30, 2021 . The average balance of loans held for sale decreased$8.1 million , or 59.7%, during the quarter endedSeptember 30, 2022 compared to the same quarter in 2021. Interest income on other interest-earning assets increased$80,000 , or 533.3%, to$95,000 for the three months endedSeptember 30, 2022 compared to the same period in 2021. The yield on other interest-bearing assets increased 228 basis points to 2.70% for the three months endedSeptember 30, 2022 . The average balance on other interest-earning assets decreased$275,000 to$14.1 million . The balance on Federal Home LoanBank Stock increased to$4.2 million . The dividend rate paid on FHLB stock was 5.00% atSeptember 30, 2022 . Interest income on securities, other interest-bearing assets and FHLB stock has been favorably impacted by the increase in short-term market interest rates. The investment securities portfolio is composed of monthly adjustable-rate securities tied to the one-month T-Bill, one month LIBOR or the one-yearTreasury index. Interest Expense. Total interest expense increased$233,000 , or 73.2%, to$551,000 for the quarter endedSeptember 30, 2022 from$318,000 for the quarter endedSeptember 30, 2021 . Interest expense on borrowings increased$28,000 , or 37.8%. Interest expense on deposits increased$205,000 , or 84.0%, to$449,000 for the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 . The increase in deposit interest expense between the comparable quarters in 2022 from 2021 was primarily due to a 23 basis point increase in the average cost of deposits and a$51.4 million increase in the average balance of deposits during the third quarter of 2022 compared to the same quarter in 2021. Interest expense on savings accounts increased$125,000 during the quarter endedSeptember 30, 2022 compared to the quarter endedSeptember 30, 2021 , due to an increase of$23.6 million in average savings balances. The average cost of savings accounts increased 57 basis points to 0.76% during the quarter endedSeptember 30, 2022 . The increase in balances was primarily attributable to deposit relationships established by two local municipalities. The average cost of interest-bearing demand deposits was 15 basis points for the quarter endedSeptember 30, 2022 compared to 16 basis points for the quarter endedSeptember 30, 2021 . The average balances in interest-bearing demand accounts increased$4.8 million during the three months endedSeptember 30, 2022 compared toSeptember 30, 2021 . Interest expense on certificates of deposit increased$79,000 , or 38.3%. The average cost of certificates increased 7 basis points to 1.13%. The average balance of certificates of deposit increased$23.0 million to$100.6 million for the three months endedSeptember 30, 2022 compared to the same period endedSeptember 30, 2021 . Interest expense on FHLB advances increased$28,000 , or 37.8%, to$102,000 for the quarter endedSeptember 30, 2022 from the quarter endedSeptember 30, 2021 . The average balance of advances decreased$11.4 million , or 38.9%, for the quarter endedSeptember 30, 2022 . The average cost of FHLB borrowings increased 176 basis points to 2.77% for the quarter endedSeptember 30, 2022 . Net Interest Income. Net interest income increased$227,000 , or 11.7%, for the quarter endedSeptember 30, 2022 compared to the same quarter in 2021. The interest rate spread decreased to 3.04% for the quarter endedSeptember 30, 2022 compared to 3.18% for the quarter endedSeptember 30, 2021 . The net interest margin decreased 12 basis points to 3.18% for the quarter endedSeptember 30, 2022 , compared to 3.30% for the quarter endedSeptember 30, 2021 . 32
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Provision for Loan Losses. Based on our analysis, we recorded a provision for loan losses of$21,000 for the three months endedSeptember 30, 2022 . The allowance for loan losses was$1.8 million , or 0.70% of total loans, atSeptember 30, 2022 , compared to$1.7 million , or 0.81% of total loans, atSeptember 30, 2021 . Given the growth in the loan portfolio during the nine months endedSeptember 30, 2022 , an increase in the allowance was warranted. Total past due loans were$54,000 , or 0.02% of loans atSeptember 30, 2022 . The Company had no net charge-offs during the three-month period endedSeptember 30, 2022 . As a percentage of nonperforming loans, the allowance for loan losses was 3,416.3% atSeptember 30, 2022 . The credit quality of the Bank's loan portfolio remained consistent, as measured by low levels of nonperforming and delinquent loans, classified loans and impaired loans. As ofSeptember 30, 2022 , we had no loans deferring loan payments under a forbearance agreement. Management continues to monitor the loan portfolio closely in recognition of the prevailing economic uncertainties. The allowance for loan losses reflects the estimate we believe to be adequate to cover probable losses which were inherent in the loan portfolio atSeptember 30, 2022 . While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Non-Interest Income. Non-interest income decreased$153,000 , or 7.2%, to$2.0 million for the quarter endedSeptember 30, 2022 from$2.1 million for the comparable quarter in 2021. The gain on sale of loans decreased$1.5 million , or 69.6%, to$641,000 for the quarter endedSeptember 30, 2022 from$2.1 million for the comparable quarter in 2021. The volume of loans sold during the three months endedSeptember 30, 2022 totaled$33.2 million , a decrease of$38.4 million , or 53.6%, from the$71.6 million loan sales volume during the three months endedSeptember 30, 2021 . Net mortgage derivative income was$315,000 for the quarter endedSeptember 30, 2022 , compared to net mortgage derivative expense of$31,000 for the quarter endedSeptember 30, 2021 . The increase in market interest rates negatively impacted gain on sale of loans in the quarter endedSeptember 30, 2022 and is likely to have a continuing negative impact on noninterest income for the remainder of 2022. Net mortgage servicing fees increased$932,000 for the three months endedSeptember 30, 2022 compared to the same period in 2021. The fair value of mortgage servicing rights increased$533,000 for the quarter endedSeptember 30, 2022 compared to a decrease in the fair value of$399,000 for the comparable quarter in 2021. The change in fair value of mortgage servicing rights is highly dependent on estimated changes in mortgage prepayment speeds. Generally, estimated mortgage prepayment speeds decrease when market interest rates increase, resulting in an increase in the fair value of mortgage servicing rights. The value of the mortgage servicing rights was increased by the recognition of$18,000 in new mortgage servicing rights for the quarter endedSeptember 30, 2022 compared to$200,000 in new mortgage servicing rights for the quarter endedSeptember 30, 2021 . The increase in market interest rates is likely to have a positive impact on the value of mortgage servicing rights as loan prepayments slow, however, increasing market interest rates are likely to decrease mortgage origination volumes and negatively impact the level of new mortgage servicing rights. Non-Interest Expense. Non-interest expense decreased$1.2 million , or 27.8%, to$3.0 million for the quarter endedSeptember 30, 2022 , from the comparable quarter in 2021, primarily due to the decrease of$763,000 in FHLB advance prepayment penalties incurred during the comparable period in 2021. Salaries and employee benefits decreased$294,000 , or 13.5%, to$1.9 million for the quarter endedSeptember 30, 2022 from$2.2 million for the comparable quarter in 2021, due primarily to decreased loan officer commission expense and mortgage banking staff reductions. Loan costs decreased$44,000 , or 22.5% due to lower mortgage origination volumes. Advertising expense decreased$49,000 , or 48.1%, due primarily to fewer checking account marketing and direct-mail marketing campaign expenses. Professional fees increased$35,000 , primarily due to legal fees expensed for a lawsuit challengingOhio sales tax on data processing services. Federal Income Taxes. The provision for federal income taxes increased$247,000 for the three months endedSeptember 30, 2022 , compared to the same period in 2021. The increase was due primarily to a$1.2 million increase in pretax earnings period-to-period. The effective tax rates were 21.6% and 7.5% for the three months endedSeptember 30, 2022 and 2021, respectively. The effective tax rate for the three months endedSeptember 30, 2021 was decreased by a tax accrual adjustment. 33 Table of Contents
Average Balances and Yields. The following tables set forth average balance
sheets, average yields and costs, and certain other information for the periods
indicated. No tax-equivalent yield adjustments have been made. Any adjustments
necessary to present yields on a tax-equivalent basis are insignificant. All
average balances are monthly average balances. Management does not believe that
the use of month-end balances instead of daily average balances has caused any
material differences in the information presented. Non-accrual loans were
included in the computation of average balances only. The yields set forth below
include the effect of deferred fees, discounts, and premiums that are amortized
or accreted to interest income or interest expense.
For
the Three Months Ended
2022 2021
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
Interest-earning assets:
Loans $ 242,778 $ 2,499 4.12 % $ 194,341 $ 2,143 4.41 %
Loans held for sale 5,455 60 4.40 13,537 84 2.48
Securities 6,904 45 2.61 8,829 14 0.63
Fed Funds 2,862 18 2.52 4,305 1 0.09
Other (1) 14,062 95 2.70 14,337 15 0.42Total interest-earning assets 272,061 2,717
3.99 235,349 2,257 3.84 Non-interest-earning assets
15,390 15,612
Total assets $ 287,451 $ 250,961
Interest-bearing liabilities:
Savings $ 78,956 151 0.76 $ 55,336 26 0.19
Interest-bearing demand 35,525 13 0.15 30,699 12 0.16
Certificates of deposit 100,630 285
1.13 77,666 206 1.06
Total deposits 215,111 449 0.83 163,701 244 0.60
FHLB borrowings 18,000 102 2.27 29,441 74 1.01Total interest-bearing liabilities 233,111 551 0.95 193,142 318 0.66 Non-interest-bearing demand 12,735 17,566 Other non-interest-bearing liabilities 4,100 5,508 Total non- interest-bearing liabilities 16,835 23,074 Total equity 37,505 34,745 Total liabilities and total equity$ 287,451 $ 250,961 Net interest income$ 2,166 $ 1,939 Net interest rate spread (2) 3.04 % 3.18 % Net interest-earning assets (3)$ 38,950 $ 42,207 Net interest margin (4) 3.18 % 3.30 % Average interest-earning assets to interest-bearing liabilities 116.71 % 121.85 %
(1) Consists of FHLB-Cincinnati stock, FHLB DDA, certificates of deposit and cash
reserves.
Net interest rate spread represents the difference between the weighted (2) average yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
Interest on loans includes loan fee income of$39,000 for the three months endedSeptember 30, 2022 and$210,000 of loan fee income for the three months endedSeptember 30, 2021 .
Comparison of Operating Results for the Nine Months Ended
General. The Company recorded net income of$1.3 million for the nine months endedSeptember 30, 2022 , a decrease of$26,000 , or 2.0%, from the nine-month period endedSeptember 30, 2021 . The decrease in net income was due to a$3.0 million 34 Table of Contents
decrease in noninterest income, primarily due to a$4.7 million decrease in gain on sale of loans, and a$155,000 increase in the provision for loan losses, partially offset by a$1.3 million increase in net interest income and a$1.9 million decrease in noninterest expense. Interest and Dividend Income. Interest income increased$939,000 , or 15.4%, to$7.0 million for the nine months endedSeptember 30, 2022 compared toSeptember 30, 2021 . Interest income on portfolio loans increased$841,000 , or 14.6%, to$6.6 million as ofSeptember 30, 2022 . The average balance of portfolio loans during the nine months endedSeptember 30, 2022 increased$40.0 million to$222.6 million , compared to the nine months endedSeptember 30, 2021 . The increase in average portfolio loans outstanding was primarily concentrated in one to four family owner-occupied mortgage loans, nonresidential mortgage loans, multifamily loans, and land and construction loans. The average yield on loans decreased 25 basis points to 3.94% for the nine months endedSeptember 30, 2022 from 4.19% for the nine months endedSeptember 30, 2021 . The average balance of loans held for sale decreased$7.0 million during the nine months endedSeptember 30, 2022 compared to the same nine month period in 2021, while the average yield on loans held for sale increased 147 basis points, to 4.02% for the nine months endedSeptember 30, 2022 from 2.55% for the same nine months in 2021. Interest income on securities increased$26,000 , or 46.0%, for the nine months endedSeptember 30, 2022 . The yield on securities increased 67 basis points due to higher market interest rates. The average balance of securities decreased$1.6 million to$7.3 million atSeptember 30, 2022 . The investment securities portfolio is composed of monthly adjustable-rate securities tied to the one month T-Bill, one month LIBOR or the one yearTreasury index. Interest income on other interest-earning assets increased$122,000 , or 282.4%. The yield on other interest-bearing assets increased 123 basis points due to a higher dividend rate paid on FHLB stock and the increase in short term interest rates. Interest Expense. Total interest expense decreased$313,000 , or 23.7%, to$1.0 million for the nine months endedSeptember 30, 2022 from$1.3 million for the nine months endedSeptember 30, 2021 . Interest expense on deposit accounts decreased$102,000 , or 12.9%, to$894,000 for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The decrease in deposit expense between comparable periods in 2022 from 2021 was primarily due to an 11 basis point decrease in the average cost of deposits primarily due to lower market interest rates. Interest expense on savings increased$177,000 , or 236.0%, during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , due to an increase in the average balance of savings accounts of$24.6 million . The average cost of savings accounts increased 24 basis points compared to the same period endedSeptember 30, 2021 . Interest expense on interest-bearing demand accounts increased$5,000 , or 15.2%. The average cost of interest-bearing demand deposits increased 1 basis point to 15 basis points. The average balances in interest-bearing demand accounts increased$3.9 million during the nine months endedSeptember 30, 2022 compared to the same period endedSeptember 30, 2021 . Interest expense on certificates of deposit decreased$79,000 , or 11.6%. The average cost of certificates decreased 47 basis points to 0.89%. The average balance of certificates of deposit increased$24.2 million to$90.8 million for the nine months endedSeptember 30, 2022 compared to the same period endedSeptember 30, 2021 . Interest expense on FHLB advances decreased$416,000 , or 78.4%, to$114,000 for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 . The average balance of advances decreased$26.0 million , or 76.1%, for the nine months endedSeptember 30, 2022 . The average cost of FHLB borrowings decreased 21 basis points to 1.86% for the nine months endedSeptember 30, 2022 from 2.07% for the same period in 2021. Net Interest Income. Net interest income increased$1.3 million , or 26.3%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The interest rate spread increased to 3.06% for the nine months endedSeptember 30, 2022 compared to 2.62% for the nine months endedSeptember 30, 2021 . The net interest margin increased 38 basis points to 3.17% atSeptember 30, 2021 compared to 2.79% atSeptember 30, 2021 . Provision for Loan Losses. Based on our analysis of the factors described in "Critical Accounting Policies - Allowance for Loan Losses" we recorded a provision for loan losses of$155,000 for the nine months endedSeptember 30, 2022 . The allowance for loan losses was$1.8 million , or 0.70% of total loans, atSeptember 30, 2022 , compared to$1.7 million , or 0.81% of total loans, atSeptember 30, 2021 . The Company had no net charge-offs during the nine-month period endedSeptember 30, 2021 . Given the growth in the loan portfolio during the nine months endedSeptember 30,2022 , an increase in the allowance was warranted. Total past due loans were$54,000 , or 0.02% of loans atSeptember 30, 2022 . The Company had net recoveries of$6,000 during the nine-month 35
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period ended
The credit quality of the Bank's loan portfolio remained consistent with recent periods, as measured by low levels of nonperforming and delinquent loans, classified loans and impaired loans. As ofSeptember 30, 2022 , we had no loans deferring loan payments under a forbearance agreement. Management continues to monitor its loan portfolio closely in recognition of the prevailing economic uncertainties. The allowance for loan losses reflects the estimate we believe to be adequate to cover probable losses which were inherent in the loan portfolio atSeptember 30, 2022 . While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Non-Interest Income. Non-interest income decreased$3.0 million , or 39.6%, to$4.6 million for the nine months endedSeptember 30, 2022 from$7.7 million for the comparable period in 2021. The gain on sale of loans decreased$4.7 million , or 68.2%, to$2.2 million for the nine months endedSeptember 30, 2022 from$6.9 million for the comparable nine months in 2021. The volume of loans sold during the nine months endedSeptember 30, 2022 totaled$107.0 million , a decrease of$112.4 million , or 51.3%, from the$219.4 million loan sales volume during the nine months endedSeptember 30, 2021 .
Mortgage derivative income was
Mortgage servicing fee income increased$1.2 million , or 1,137.4%, primarily due to an increase in the value of mortgage service rights during the nine months endedSeptember 30, 2022 compared to the same period in 2021. The value of mortgage servicing rights increased$779,000 for the nine months endedSeptember 30, 2022 compared to a decrease in the fair value of$369,000 for the comparable period in 2021. The change in fair value of mortgage servicing rights is highly dependent on estimated changes in mortgage prepayment speeds. Generally, estimated mortgage prepayment speeds decrease when market interest rates increase, resulting in an increase in the fair value of mortgage servicing rights. With the increase in interest rates initiated by theFederal Reserve Board in 2022, a decrease in the mortgage prepayment speed assumption has had a favorable impact on the fair value of our mortgage servicing rights during 2022. The recognition of new mortgage servicing rights was$120,000 for the nine months endedSeptember 30, 2022 compared to$861,000 for the nine months endedSeptember 30, 2021 . Non-Interest Expense. Non-interest expense decreased$1.9 million , or 17.9%, to$8.8 million for the nine months endedSeptember 30, 2022 , compared to$10.8 million for the same period in 2021. Salaries and employee benefits decreased$1.1 million , or 16.1%, to$5.5 million for the nine months endedSeptember 30, 2022 from$6.6 million for the comparable period in 2021, due primarily to decreased mortgage lending and servicing support staff, decreased loan officer commission expense, and related decreased payroll tax expense and 401(k) matching contributions. FHLB advance prepayment penalties of$763,000 recognized in the nine-month period endedSeptember 30, 2021 did not recur in 2022. Loan costs decreased$176,000 , or 29.7%, due to the decreased loan volume. Occupancy and equipment expense decreased$71,000 , or 12.1%, due primarily to branch security upgrades and laptop computer replacement expenses incurred in the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , the Company filed notice with the OCC that theCovington, Kentucky branch location would be closed onAugust 12, 2022 . At that date, all deposit accounts were transferred to theFlorence, Kentucky location. The Company has accepted a purchase offer for the real estate property. The transaction is expected to close inNovember 2022 . These decreases were partially offset by a$47,000 , or 16.1%, increase in professional fees and a$48,000 loss on sales of foreclosed assets. Professional fees increased, primarily due to legal fees expensed for a lawsuit challengingOhio sales tax on data processing services. Federal Income Taxes. The provision for federal income taxes was$361,000 for the nine months endedSeptember 30, 2022 , compared to tax expense of$353,000 forSeptember 30, 2021 , a decrease of$8,800 , or 2.5%. The effective tax rates were 22.0% and 21.2% for the nine months endedSeptember 30, 2022 and 2021, respectively. Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made. Any adjustments necessary to 36 Table of Contents 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 Nine Months Ended
2022 2021
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
Interest-earning assets:
Loans $ 222,569 $ 6,584 3.94 % $ 182,548 $ 5,743 4.19 %
Loans held for sale 5,539 167 4.02 12,573 240 2.55
Securities 7,288 83 1.52 8,903 57 0.85
Fed Funds 3,592 25 0.93 6,304 1 0.02
Other (1) 14,017 165 1.57 17,097 43 0.34Total interest-earning assets 253,005 7,024
3.70 227,425 6,084 3.57 Non-interest-earning assets
15,395 15,549
Total assets $ 268,400 $ 242,974
Interest-bearing liabilities:
Savings $ 77,926 252 0.43 $ 53,293 75 0.19
Interest-bearing demand 34,707 38 0.15 30,840 33 0.14
Certificates of deposit 90,805 604
0.89 66,556 683 1.36
Total deposits 203,438 894 0.59 150,689 791 0.70
FHLB borrowings 8,175 114 1.86 34,163 530 2.07Total interest-bearing liabilities 211,613 1,008
0.64 184,852 1,321 0.95 Non-interest-bearing demand
15,282 17,979
Other non-interest-bearing liabilities 4,239 5,299
Total non-interest-bearing liabilities 19,521 23,278
Total equity 37,266 34,844
Total liabilities and total equity $ 268,400 $ 242,974
Net interest income $ 6,016 $ 4,763
Net interest rate spread (2) 3.06 % 2.62 %
Net interest-earning assets (3) $ 41,392 $ 42,573
Net interest margin (4) 3.17 % 2.79 %
Average interest-earning assets to
interest-bearing liabilities 119.56 % 123.03 %
(5) Consists of FHLB-Cincinnati stock, FHLB DDA, certificates of deposit and cash
reserves.
Net interest rate spread represents the difference between the weighted (6) average yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(7) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(8) Net interest margin represents net interest income divided by average total
interest-earning assets.
Interest on loans includes loan fee income of$17,000 for the nine months endedSeptember 30, 2022 and$199,000 of loan fee income for the nine months endedSeptember 30, 2021 . 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.
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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;
increasing our reliance on core deposits, including checking accounts and
? savings accounts, which are less interest rate sensitive than certificates of
deposit; and
? purchasing adjustable and floating rate mortgage-backed securities for the
investment portfolio.
Our Board of Directors is responsible for the review and oversight of our Asset/Liability Committee, which is comprised of our executive management team and other essential operational staff. This committee is charged with developing and implementing an asset/liability management plan, and meets at least quarterly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Liquidity and Capital Resources. Liquidity is the ability to meet financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. The Bank's primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from the sale or maturities of securities. In addition, the Bank may borrow from the FHLB. AtSeptember 30, 2022 , the Bank had$20.0 million in advances outstanding from the FHLB. AtSeptember 30, 2022 , the Bank had collateral based capacity to borrow an additional$39.7 million . The Bank had additional lines of credit with three commercial banks totaling$11.5 million . Additionally, the Bank has contingent funding sources with CDARS and the StoneCastle's Federally Insured Cash Account (FICA) program. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was$4.5 million and$3.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from maturing securities and pay downs on mortgage-backed securities, was$48.1 million and$30.7 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was$39.1 million and$10.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. We also anticipate continued participation in the National CD Rateline Program as a wholesale source of certificates of deposit, and continued use of FHLB-Cincinnati advances. 38
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Cincinnati Bancorp, Inc. is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividend to its stockholders, to fund repurchases of its common stock, and for other corporate purposes. The Company's primary source of liquidity is dividend payments, if any, received from the Bank. The Bank's ability to pay dividends is subject to regulatory restrictions. AtSeptember 30, 2022 ,Cincinnati Bancorp, Inc. (on an unconsolidated, stand-alone basis) had liquid assets of$1.5 million . AtSeptember 30, 2022 , the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of$38.1 million , or 13.3% of adjusted total assets, which is above the well-capitalized required level of$14.4 million , or 5.0%; total risk-based capital of$40.0 million , or 17.1% of risk-weighted assets, which is above the well-capitalized required level of$23.3 million , or 10.0% of risk-weighted assets; and common equity tier 1 risk based capital of$38.1 million , or 16.3%, of risk-weighted assets, which is above the well-capitalized required level of$15.2 million , or 6.5%. AtDecember 31, 2021 , the Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of$37.0 million , or 14.7% of adjusted total assets, which is above the well-capitalized required level of$12.6 million , or 5.0%; and total risk-based capital of$38.7 million , or 20.0% of risk-weighted assets, which is above the well-capitalized required level of$19.3 million , or 10.0% of risk-weighted assets. Accordingly, the Bank was categorized as well capitalized atSeptember 30, 2022 , andDecember 31, 2021 . Management is not aware of any conditions or events since the most recent notification that would change the Bank's 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. AtSeptember 30, 2022 , we had outstanding commitments to originate fixed-rate loans of$4.5 million , unfunded lines of credit of$25.4 million and forward sale commitments of$9.4 million . We had commitments to originate loans for portfolio of$2.7 million and undisbursed portion of loans of$16.6 million atSeptember 30, 2022 . 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 fromSeptember 30, 2022 totaled$63.6 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 utilizeFederal 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.
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