Cincinnati Bancorp

Pursuant to a Plan of Conversion and Reorganization (the “Plan of Conversion”) adopted by the MHC’s Board of Directors on July 17, 2019, the MHC intends to convert from a mutual holding company to a stock holding company whereby a newly chartered Maryland corporation, Cincinnati Bancorp, Inc., will succeed to the Company and become the stock holding company of the Bank. In accordance with the Plan of Conversion, the shares of common stock of the Company owned by persons other than the MHC (the shares owned by CF MHC will be canceled) will be converted into shares of common stock of Cincinnati Bancorp, Inc. based on an exchange ratio and Cincinnati Bancorp, Inc. will offer for sale shares of common stock, representing the MHC’s ownership interest in the Company, in a subscription offering and, if necessary, in a community offering and a syndicated community offering. Consummation of the conversion is subject to final regulatory approval as well as approval by the MHC’s members (i.e., depositors and certain borrowers of the Bank) and by the Company’s stockholders (including approval by the holders of a majority of the outstanding shares of common stock of the Company owned by persons other than the MHC). For additional information, refer to Cincinnati Bancorp, Inc.’s Registration Statement on Form S-1, as amended (SEC File No. 333-233708), filed with the Securities and Exchange Commission.

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” we recorded a $25,000 provision for loan losses for the three months ended September 30, 2019, an increase of $10,000 from the quarter ended September 30, 2018. The allowance for loan losses was $1.4 million, or 0.76% of total loans, at September 30, 2019, compared to $1.4 million, or 0.89% of total loans, at September 30, 2018. The Company had $23,000, or 0.01% in net charge-offs during the three month period ended September 30, 2019 and had no net charge-offs during the period ended September 30, 2018. As a percentage of nonperforming loans, the allowance for loan losses was 468.8% at September 30, 2019, compared to 368.8% at September 30, 2018.

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Non-Interest Expense. Non-interest expense increased $152,000, or 8.7%, to $1.9 million for the quarter ended September 30, 2019 compared to the comparable quarter in 2018. The increase in noninterest expense was primarily attributable to the merger of Kentucky Federal. Salaries and employee benefits increased $228,000, or 26.7%, to $1.1 million for the quarter ended September 30, 2019 from $852,000 for the comparable quarter in 2018, due to increased loan officer commission expense, increased healthcare costs, and increased payroll expense. Loan costs increased $20,000, or 20.8% due to increased loan origination activity. Offsetting the overall increase in non-interest expenses were a $36,000 gain on sale of foreclosed assets in the 2019 quarter, and the absence of $149,000 of merger-related expenses recorded in the 2018 quarter. In addition, data processing expense decreased $22,000, or 13.8%, to $136,000 during the quarter ended September 30, 2019 from $158,000 for the quarter ended September 30, 2018, due to cost savings from the integration of accounts acquired in the merger of Kentucky Federal. The migration of Kentucky Federal accounts to the Company’s data processing system was completed during the second quarter of 2019, and resulted in the elimination of the overlap of maintaining dual data processing systems. Advertising expense decreased $29,000, or 66.0%, due to a pause in advertising while newer marketing strategies were being formulated and implemented.

Non-Interest Income. Non-interest income decreased $42,000, or 2.1%, to $2.0 million for the nine months ended September 30, 2019 from the comparable nine months in 2018. The decrease was primarily due to a $24,000 decrease in gain on sales of loans and a $103,000 decrease in mortgage servicing fees, partially offset by an increase of $86,000 in other income. The decrease in gain on sale of loans was due primarily to competitive pricing pressures in the local market. The decrease in mortgage servicing fees was due primarily to a decline in the appraised fair value of mortgage servicing rights during the nine months ended September 30, 2019. The change in fair value of mortgage servicing rights is highly dependent on estimated changes in mortgage prepayment speeds. Generally, estimated mortgage prepayment speeds increase when market rates decrease resulting in a decrease in the fair value of mortgage servicing rights. Increasing mortgage prepayment speeds had an adverse impact on the value of our mortgage servicing rights. The increase in other income was due primarily to an increase in loan fees and service fees on deposits.

Non-Interest Expense. Non-interest expense increased $741,000, or 14.9%, to $5.7 million for the nine months ended September 30, 2019, compared to the same period in 2018. The increase was due primarily to a $639,000, or 25.6%, increase in salary and employee benefits to $3.1 million in the first nine months of 2019 from $2.5 million for the comparable nine months in 2018, attributable to increased staffing levels as well as termination and retention bonuses for certain Kentucky Federal employees. Merger related expenses decreased $213,000 with the completion of the merger. Data processing expense increased $68,000, or 15.1%, to $518,000 during the nine months ended September 30, 2019 from $450,000 for the nine months ended September 30, 2018, due primarily to overall growth including the addition of Kentucky Federal’s accounts. Efficiencies in data processing costs following the merger were not realized until the final integration of Kentucky Federal’s data processing was completed on April 26, 2019. Franchise tax expense increased $38,000, or 32.6% due to the increase in equity from the Kentucky Federal merger. Advertising expense decreased $41,000, or 35.0% due to a reduction in billboard, print and social media marketing while newer marketing strategies were being formulated and implemented. The increases in non-interest expenses were partially offset by an increase in gains on sales of foreclosed real estate of $90,000 during the nine months ended September 30, 2019.