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EX-32 - CERTIFICATION OF CEO AND CFO - Cullman Bancorp, Inc.dex32.htm
EX-31.2 - CERTIFICATION OF MICHAEL DUKE, CHIEF FINANCIAL OFFICER - Cullman Bancorp, Inc.dex312.htm
EX-31.1 - CERTIFICATION OF JOHN A. RILEY III, PRESIDENT AND CHIEF EXECUTIVE OFFICER - Cullman Bancorp, Inc.dex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY EXCHANGE REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2010

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from              to             

Commission File Number 000-53801

 

 

Cullman Bancorp, Inc.

(Exact Name of Registrant as Specified in Charter)

 

 

 

Federal   63-0052835
(State of Other Jurisdiction of
Incorporation)
  (I.R.S Employer
Identification Number)
316 Second Avenue S.W., Cullman, Alabama   35055
(Address of Principal Executive Officer)   (Zip Code)

256-734-1740

Registrant’s telephone number, including area code

Not Applicable

(Former name or former address, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated file   ¨    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.

2,512,750 of Common Stock, par value $.01 per share, were issued and outstanding as of November 5, 2010

 

 

 


Table of Contents

 

CULLMAN BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

 

    PART I     

ITEM 1.

 

FINANCIAL STATEMENTS – CULLMAN BANCORP, INC.

   1

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CULLMAN BANCORP, INC.

   13

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   19

ITEM 4T.

 

CONTROLS AND PROCEDURES

   19
 

PART II

  

ITEM 1.

 

LEGAL PROCEEDINGS

   20

ITEM 1A.

 

RISK FACTORS

   20

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   20

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

   20

ITEM 4.

 

[REMOVED AND RESERVED]

   20

ITEM 5.

 

OTHER INFORMATION

   20

ITEM 6.

 

EXHIBITS

   20


Table of Contents

 

Part I

 

ITEM 1. FINANCIAL STATEMENTS

CULLMAN BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(All amounts in thousands, except share and per share data)

 

     September 30,
2010
    December 31,
2009
 
     (Unaudited)        

ASSETS

    

Cash and cash equivalents

   $ 2,463      $ 2,174   

Federal funds sold

     3,253        3,058   
                

Cash and cash equivalents

     5,716        5,232   

Securities available for sale

     18,964        18,080   

Loans, net of allowance of $725 and $747, respectively

     176,135        172,747   

Loans held for sale

     181        445   

Premises and equipment, net

     10,726        10,324   

Foreclosed real estate

     1,480        931   

Accrued interest receivable

     1,176        1,027   

Restricted equity securities

     2,517        2,711   

Bank owned life insurance

     2,322        2,242   

Other assets

     648        840   
                

Total assets

   $ 219,865      $ 214,579   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits

    

Non-interest bearing

   $ 6,572      $ 1,726   

Interest bearing

     130,573        123,393   
                

Total deposits

     137,145        125,119   

Federal Home Loan Bank advances

     42,042        51,107   

Long-term debt

     833        833   

Accrued interest payable and other liabilities

     1,485        1,006   
                

Total liabilities

     181,505        178,065   

Shareholders’ equity

    

Common stock, $0.01 par value; 20,000,000 shares authorized; 2,512,750 shares outstanding at September 30, 2010 and December 31, 2009

     25        25   

Additional paid-in capital

     10,330        10,330   

Retained earnings

     28,647        27,082   

Accumulated other comprehensive income

     308        64   

Unearned ESOP shares, at cost

     (899     (936

Amount reclassified on ESOP shares

     (51     (51
                

Total shareholders’ equity

     38,360        36,514   
                

Total liabilities and shareholders’ equity

   $ 219,865      $ 214,579   
                

See accompanying notes to the consolidated financial statements

 

1


Table of Contents

CULLMAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(All amounts in thousands, except share and per share data)

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2010      2009     2010     2009  

Interest and dividend income:

         

Loans, including fees

   $ 2,825       $ 2,798      $ 8,397      $ 8,269   

Securities, taxable

     205         256        670        799   

Federal funds sold and other

     4         7        12        10   
                                 

Total interest income

     3,034         3,061        9,079        9,078   

Interest expense:

         

Deposits

     512         740        1,579        2,476   

Federal Home Loan Bank advances and other borrowings

     489         647        1,514        1,727   
                                 

Total interest expense

     1,001         1,387        3,093        4,203   
                                 

Net interest income

     2,033         1,674        5,986        4,875   

Provision for loan losses

     88         109        221        340   
                                 

Net interest income after provision for loan losses

     1,945         1,565        5,765        4,535   

Noninterest income:

         

Service charges on deposit accounts

     118         112        338        341   

Income on bank owned life insurance

     27         27        81        76   

Gain on sales of mortgage loans

     94         73        244        217   

Net gain on sales of securities

     —           7        11        6   

Impairment loss on securities

     —           —          —          (725

Other

     38         5        63        30   
                                 

Total noninterest income

     277         224        737        (55

Noninterest expense:

         

Salaries and employee benefits

     721         657        2,164        1,864   

Occupancy and equipment

     162         157        492        498   

Data processing

     121         115        372        355   

Professional and supervisory fees

     70         46        283        150   

Office expense

     29         33        85        93   

Advertising

     23         28        53        78   

FDIC deposit insurance

     45         52        111        238   

Losses on foreclosed real estate

     126         7        290        7   

Other

     91         71        226        215   
                                 

Total noninterest expense

     1,388         1,166        4,076        3,498   
                                 

Income before income taxes

     834         623        2,426        982   

Income tax expense

     297         217        861        552   
                                 

Net income

   $ 537       $ 406      $ 1,565      $ 430   
                                 

Other comprehensive income, net of tax

         

Unrealized gain on securities available for sale, net

   $ 103       $ 307      $ 252      $ 120   

Reclassification adjustment for losses (gains) realized in income, net of tax

     —           (4     (8     111   
                                 

Other comprehensive income

     103         303        244        231   
                                 

Comprehensive income

   $ 640       $ 709      $ 1,809      $ 661   
                                 

Earnings per share:

         

Basic and diluted (Note 3)

   $ 0.22         N/A      $ 0.65        N/A   

See accompanying notes to the consolidated financial statements

 

2


Table of Contents

 

CULLMAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(All amounts in thousands, except share and per share data)

 

     Common
Stock
     Additional
Paid-In
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Income (loss)
    Unearned
ESOP
Shares
    Amount
Reclassified
on ESOP
Shares
    Total  

Balance at January 1, 2010

   $ 25       $ 10,330       $ 27,082       $ 64      $ (936   $ (51   $ 36,514   

Net income

     —           —           1,565         —          —          —          1,565   

Net change in accumulated other comprehensive income

     —           —           —           244        —          —          244   

ESOP shares earned

     —           —           —           —          37        —          37   
                                                           

Balance at September 30, 2010

   $ 25       $ 10,330       $ 28,647       $ 308      $ (899   $ (51   $ 38,360   
                                                           

Balance at January 1, 2009

   $ —         $ —         $ 26,501       $ (56   $ —        $ —        $ 26,445   

Net income

     —           —           430         —          —          —          430   

Net change in accumulated other comprehensive income

     —           —           —           231        —          —          231   
                                                           

Balance at September 30, 2009

   $ —         $ —         $ 26,931       $ 175      $ —        $ —        $ 27,106   
                                                           

See accompanying notes to the consolidated financial statements

 

3


Table of Contents

 

CULLMAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(All amounts in thousands, except share and per share data)

 

     Nine Months Ended
September 30,
 
     2010     2009  

Cash Flows From Operating Activities

    

Net income

   $ 1,565      $ 430   

Adjustments to reconcile net income to net cash from operating activities:

    

Provision for loan losses

     221        340   

Depreciation and amortization, net

     146        120   

Deferred income tax benefit (expense)

     75        (122

Net gain on sale of securities

     (11     (6

Loss from other-than-temporary impairment on securities

     —          725   

Loss on sale and impairments of foreclosed real estate

     290        7   

Income on bank owned life insurance

     (81     (76

ESOP compensation expense

     37        —     

Gain on sale of mortgage loans

     (244     (217

Mortgage loans originated for sale

     (11,204     (11,364

Mortgage loans sold

     11,712        11,548   

Net change in operating assets and liabilities

    

Accrued interest receivable

     (149     46   

Accrued interest payable

     (63     (44

Other

     519        (370
                

Net cash from operating activities

     2,813        1,017   

Cash Flows From Investing Activities

    

Purchases of premises and equipment

     (646     (21

Purchases of securities

     (15,400     (4,000

Proceeds from maturities, paydowns and calls of securities

     14,669        6,550   

Proceeds from sale of securities

     250        750   

(Purchases) redemptions of restricted equity securities

     194        118   

Proceeds from sales of foreclosed real estate

     162        120   

Loan originations and payments, net

     (4,519     (6,731
                

Net cash from (used in) investing activities

     (5,290     (3,214

Cash Flows from Financing Activities

    

Net change in deposits

     12,026        6,783   

Repayment of Federal Home Loan Bank advances

     (9,065     (3,467
                

Net cash from (used in) financing activities

     2,961        3,316   
                

Change in cash and cash equivalents

     484        1,119   

Cash and cash equivalents, beginning of period

     5,232        8,926   
                

Cash and cash equivalents, end of period

   $ 5,716      $ 10,045   
                

Cash paid during the period for:

    

Interest paid

   $ 3,156      $ 4,247   

Income taxes paid

   $ 760      $ 555   

Supplemental noncash disclosures:

    

Transfers from loans to foreclosed assets

   $ 1,789      $ 591   

See accompanying notes to the consolidated financial statements

 

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Table of Contents

 

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(All amounts in thousands, except share and per share data)

(1) BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Cullman Bancorp, Inc. have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulations S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The consolidated financial statements of Cullman Bancorp, Inc. (“the Bancorp”) include the accounts of its wholly owned subsidiary, Cullman Savings Bank (“the Bank”) and its 99% ownership of Cullman Village Apartments (collectively referred to herein as “the Company,” “we,” “us,” or “our”). Intercompany transactions and balances are eliminated in the consolidation. The Company is majority owned (55%) by Cullman Savings Bank, MHC. These financial statements do not include the transactions and balances of Cullman Savings Bank, MHC.

Cullman Bancorp, Inc., headquartered in Cullman, Alabama was formed to serve as the stock holding company for Cullman Savings Bank as part of the mutual-to-stock conversion of Cullman Savings Bank. On October 8, 2009, the Bank completed its conversion and reorganization from a mutual savings bank into a two-tier mutual holding stock company. In accordance with the plan of reorganization, Cullman Bancorp, Inc. (of which Cullman Savings Bank became a wholly-owned subsidiary) issued and sold shares of capital stock to eligible depositors of Cullman Savings Bank and others.

Since the entities are under common control, the reorganization was accounted for at historical cost and presented as if the transaction occurred at the beginning of the latest period shown. A total of 1,080,483 shares were sold in the conversion at $10 per share, raising $10.8 million of gross proceeds. Approximately $900 of conversion expenses were offset against the gross proceeds. Cullman Bancorp, Inc.’s common stock began trading on the over-the-counter market under the symbol “CULL” on October 9, 2009. In addition, the Bank contributed $100 in cash and 50,255 shares of common stock to a charitable foundation that the Bank established in connection with the reorganization. The contribution of cash and shares of common stock totaled $603. The shares sold to the public and contributed to the charitable foundation represent 45% of Cullman Bancorp’s outstanding shares. Cullman Savings Bank, MHC owns 55% or 1,382,012 shares.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2010 and December 31, 2009 and the results of operations and cash flows for the interim periods ended September 30, 2010 and 2009. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Form 10-K Annual Report of Cullman Bancorp, Inc. for the year ended December 31, 2009. Balances shown on the consolidated financial statements for periods prior to October 8, 2009 represent the balances of Cullman Savings Bank only.

(2) NEW ACCOUNTING STANDARDS

In January 2010, the FASB issued an update to previously issued accounting standards for fair value measurements and disclosures. This update enhances disclosures for recurring and nonrecurring fair value measurements. An entity will be required to disclose the amounts of significant transfers in and out of Levels 1 and 2 and a description of the reasons for the transfers. Additionally, within the reconciliation of assets and liabilities measured at fair value using Level 3 inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements at their gross amounts instead of net. This amendment also provided clarification on the level of disaggregation of each class of assets and liabilities measured at fair value and the level of disclosure required for inputs and valuation techniques used to measure fair value for both recurring and nonrecurring assets and liabilities that fall in either Level 2 or Level 3. This amendment is effective for interim and annual reporting periods beginning after December 31, 2009, except for the disclosures related to the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted the disclosure standards required for periods beginning after December 31, 2009. The effects of adopting this guidance were not significant to the financial statements. The effects of adopting the amended standards effective for fiscal years beginning after December 15, 2010 are not expected to be significant to the financial statements.

 

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Table of Contents

 

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(All amounts in thousands, except share and per share data)

In July 2010, FASB issued an update to previously issued accounting standards with regard to disclosures about the credit quality of financing receivables and the allowance for credit losses. This update is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in this update encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Company has evaluated the impact of the adoption of this guidance and intends to comply with the new disclosure requirements, beginning with the annual financial statements as of and for the period ended December 31, 2010.

(3) EARNINGS PER SHARE

Basic earnings per common share is determined by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share is determined by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period, adjusted for the dilutive effect of common share equivalents. Diluted earnings per common share is equal to basic earnings per common share for the three and nine month periods ended September 30, 2010 as there were no potentially dilutive common shares. The factors used in the earnings per common share computation follow:

 

     Three months ended
September 30, 2010
    Nine months ended
September 30, 2010
 

Basic

    

Net income

   $ 537      $ 1,565   
                

Weighted average common shares outstanding

     2,512,750        2,512,750   

Less: Average unallocated ESOP shares

     (93,575     (93,575
                

Average shares

     2,419,175        2,419,175   
                

Basic earnings per common share

   $ 0.22      $ 0.65   
                

There were no potential dilutive common shares for the period presented. There were no common shares outstanding during the three and nine months ended September 30, 2009.

 

6


Table of Contents

 

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(All amounts in thousands, except share and per share data)

(4) SECURITIES AVAILABLE FOR SALE AND RESTRICTED EQUITY SECURITIES

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income at September 30, 2010 and December 31, 2009 were as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair

Value
 

September 30, 2010 (Unaudited)

          

U.S. Government sponsored agencies

   $ 6,997       $ 75       $ —        $ 7,072   

Municipal—taxable

     5,157         138         —          5,295   

Residential mortgage-backed, GSE

     3,253         114         —          3,367   

Residential mortgage-backed, private label

     1,181         36         —          1,217   

Ultra Short mortgage mutual fund

     1,887         126         —          2,013   
                                  

Total

   $ 18,475       $ 489       $ —        $ 18,964   
                                  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 

December 31, 2009

          

U.S. Government sponsored agencies

   $ 9,745       $ 15       $ (50   $ 9,710   

Municipal—taxable

     506         —           (22     484   

Residential mortgage-backed, GSE

     4,068         126         —          4,194   

Residential mortgage-backed, private label

     1,531         —           (50     1,481   

Ultra Short mortgage mutual fund

     2,126         85         —          2,211   
                                  

Total

   $ 17,976       $ 226       $ (122   $ 18,080   
                                  

The Company’s mortgage-backed securities are primarily issued by government agencies and government sponsored enterprises (“GSEs”) such as Fannie Mae and Ginnie Mae as denoted in the table above as GSE. At September 30, 2010 and December 31, 2009, the Company had only one private label mortgage-backed security.

Sales of available for sale securities during the three and nine months ended September 30, 2010 and 2009 were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  
     (Unaudited)      (Unaudited)  

Proceeds

   $ —           250       $ 250         750   

Gross gains

     —           7         11         8   

Gross losses

     —           —           —           (2

 

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Table of Contents

 

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(All amounts in thousands, except share and per share data)

The amortized cost and fair value of the investment securities portfolio are shown below by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

     September 30, 2010  
   (Unaudited)  
   Amortized
Cost
     Estimated
Fair Value
 

Due from five to ten years

   $ 2,501       $ 2,543   

Due after ten years

     9,653         9,824   

Mutual fund

     1,887         2,013   

Residential mortgage-backed

     4,434         4,584   
                 

Total

   $ 18,475       $ 18,964   
                 

Carrying amounts of securities pledged to secure public deposits, repurchase agreements, and Federal Home Loan Bank advances as of September 30, 2010 and December 31, 2009 were $5,604 and $8,000, respectively. At September 30, 2010 and December 31, 2009, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored agencies, in an amount greater than 10% of shareholders’ equity.

There were no securities with unrealized losses at September 30, 2010. The following table shows securities with unrealized losses at December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

     Less than 12 months     12 Months or More     Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

December 31, 2009

               

U.S. Government sponsered agencies

   $ 5,696       $ (50   $ —         $ —        $ 5,696       $ (50

Municipal—taxable

     484         (22     —           —          484         (22

Residential mortgage-backed, private label

     —           —          1,481         (50     1,481         (50
                                                   

Total

   $ 6,180       $ (72   $ 1,481       $ (50   $ 7,661       $ (122
                                                   

The unrealized loss on the private label mortgage-backed security at December 31, 2009 recovered in value and was not recognized into income during 2010. Additionally, management considered the unrealized losses on three municipal securities, and based on the length of time that the securities’ fair values had been below amortized cost, the severity of the unrealized losses and the belief that these securities’ fair values would recover in the near term, no other-than-temporary impairments were recorded.

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company considers the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer. Additionally, the Company considers its intent to sell or whether it will be more likely than not it will be required to sell the security prior to the security’s anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal Government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

The Company’s mutual fund consists of investment in shares of Shay Ultra Short Mortgage Fund. As required by accounting standards, when a decline in fair value below cost is deemed to be other-than-temporary, the unrealized loss must be recognized as a charge to earnings. The Company considered the length of time this mutual fund had been impaired, the unpredictability for recovery to cost, and losses on sales of shares of the mutual fund during the nine months ended

 

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(All amounts in thousands, except share and per share data)

September 30, 2009. The Company sold $750 of shares of the mutual fund during the nine months ended September 30, 2009 and had the intent to continue selling shares of the mutual fund. Therefore, the unrealized losses for other-than-temporary impairment were recorded in earnings for the nine months ended September 30, 2009 at a pretax amount of $114 and is included in impairment loss on securities for the nine months ended September 30, 2009. The Company sold $250 of shares during the nine months ended September 30, 2010 and may continue to sell shares of the mutual fund in the future. Therefore, the Company may recognize any future other-than-temporary impairments into earnings.

Restricted Equity Securities

At September 30, 2010 and December 31, 2009, restricted equity securities consisted of shares of Federal Home Loan Bank (FHLB) Stock, which is carried at cost, less any impairment charges and classified as restricted equity securities. Similar to available for sale securities, the Company periodically evaluates these shares of stock for impairment based on ultimate recovery of par value.

On May 1, 2009, Silverton Bank, N.A. was closed by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) and was placed into receivership. The Company concluded that its investments in common stock of Silverton Bank’s Holding Company, Silverton Financial Services, Inc. were impaired and accordingly recorded an estimated other-than-temporary impairment charge of $611 during the first quarter of 2009 and is included in impairment loss on securities for the nine months ended September 30, 2009.

(5) LOANS

The components of loans receivable at September 30, 2010 and December 31, 2009 were as follows:

 

     September 30,
2010
    December 31,
2009
 
     (Unaudited)        

Real estate loans:

    

One- to four-family

   $ 83,950      $ 81,436   

Multi-family

     4,762        5,780   

Commercial real estate

     63,584        60,602   

Construction

     6,189        6,235   
                

Total real estate loans

     158,485        154,053   

Commercial loans

     8,020        7,506   

Consumer loans

     10,808        12,479   
                

Total loans

     177,313        174,038   

Net deferred loan fees

     (453     (544

Allowance for loan losses

     (725     (747
                

Loans, net

   $ 176,135      $ 172,747   
                

 

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(All amounts in thousands, except share and per share data)

Activity in the allowance for loan losses for the three and nine months ended was as follows:

 

     Three months ended September 30,     Nine months ended September 30,  
     (Unaudited)     (Unaudited)  
     2010     2009     2010     2009  

Beginning balance

   $ 796      $ 706      $ 747      $ 472   

Provision for loan losses

     88        109        221        340   

Loans charged off

     (159     (107     (248     (107

Recoveries

     —          1        5        4   
                                

Ending balance

   $ 725      $ 709      $ 725      $ 709   
                                

Individually impaired loans at September 30, 2010 and December 31, 2009 were as follows:

 

     September 30,
2010
     December 31,
2009
 
     (Unaudited)         

Loans with no allocated allowance for loan losses

   $ 4,909       $ 2,924   

Loans with allocated allowance for loan losses

     718         815   
                 

Total

   $ 5,627       $ 3,739   
                 

Amount of allowance for loan losses allocated

   $ 120       $ 96   

Average of individually impaired loans during the period

   $ 4,713       $ 3,783   

Interest income recognized and cash basis interest income during the impairment period in September 30, 2010 and December 31, 2009 was $150 and $289, respectively.

Non-performing loans at September 30, 2010 and December 31, 2009 were as follows:

 

     September 30,
2010
     December 31,
2009
 
     (Unaudited)         

Loans past due 90 days and still on accrual

   $ —         $ —     

Non-accrual loans

     231         —     
                 

Total non-performing loans

     231         —     

Troubled debt restructurings

     2,610         —     
                 

Total non-performing loans and troubled debt restructurings

   $ 2,841       $ —     
                 

Non-performing loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(All amounts in thousands, except share and per share data)

(6) FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other 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.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

The tables below present the balances of assets and liabilities measured at fair value on a recurring and non-recurring basis by level within the hierarchy as of September 30, 2010 and December 31, 2009:

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

Fair Value Measurements

Using Significant Other Observable Inputs

(Level 2)

 

     September 30,
2010
     December 31,
2009
 
     (Unaudited)         

Financial assets:

     

U.S. Government sponsored agencies

   $ 7,072       $ 9,710   

Municipal—taxable

     5,295         484   

Residential mortgage-backed, GSE

     3,367         4,194   

Residential mortgage-backed, private label

     1,217         1,481   

Ultra Short mortgage mutual fund

     2,013         2,211   
                 

Total investment securities available for sale

   $ 18,964       $ 18,080   
                 

 

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(All amounts in thousands, except share and per share data)

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements

Using Significant Unobservable Inputs

(Level 3)

 

     September 30,
2010
     December 31,
2009
 
     (Unaudited)         

Assets:

     

Impaired loans, with specific allocations

   $ 598       $ 719   

Other real estate owned

     1,480         931   

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $718 and $815, with a valuation allowance of $120 and $96 at September 30, 2010 and December 31, 2009, respectively. The resulting addition to the provision for loan losses from these impairments was $24 and $27 for the nine months ended September 30, 2010 and for the year ended December 31, 2009.

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $1,480 and $931 at September 30, 2010 and December 31, 2009, respectively. The net carrying amount is made up of the outstanding balance net of a valuation allowance. The outstanding balance and valuation allowance of other real estate owned at September 30, 2010 and December 31, 2009 were $1,690 and $210, and $992 and $61, respectively. The resulting write-downs for the nine months ended September 30, 2010 and for the year ended December 31, 2009 were $210 and $61, respectively.

Many of the Bank’s assets and liabilities are financial instruments whose carrying amounts reported in the balance sheet approximate fair value. These items include cash and cash equivalents, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. It was not practicable to determine the fair value of restricted equity securities due to restrictions placed on its transferability. Fair value of debt is based on current rates for similar financing. The estimated fair values of the Bank’s remaining on-balance sheet financial instruments at September 30, 2010 and December 31, 2009 are summarized below:

 

     September 30, 2010      December 31, 2009  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
     (Unaudited)                

Financial assets

           

Cash and cash equivalents

   $ 5,716       $ 5,716       $ 5,232       $ 5,232   

Securities available for sale

     18,964         18,964         18,080         18,080   

Loans, net

     176,135         188,738         172,747         182,434   

Loans held for sale

     181         181         445         445   

Accrued interest receivable

     1,176         1,176         1,027         1,027   

Restricted equity securities

     2,517         N/A         2,711         N/A   

Financial liabilities

           

Deposits

     137,145         138,774         125,119         130,979   

Federal Home Loan Bank Advances

     42,042         46,463         51,107         53,992   

Long-term debt

     833         833         833         833   

Accrued interest payable

     234         234         300         300   

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CULLMAN BANCORP, INC.

This Quarterly Report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

 

   

statements of our goals, intentions and expectations;

 

   

statements regarding our business plans and prospects and 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 Quarterly Report.

The following factors, among others, could cause the actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

   

our ability to manage our operations during the current United States economic recession;

 

   

our ability to manage the risk from the growth of our commercial real estate lending;

 

   

significant increases in our loan losses, exceeding our allowance;

 

   

changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments and inflation;

 

   

adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);

 

   

general economic conditions, either nationally or in our market area;

 

   

changes in consumer spending, borrowing and savings habits, including lack of consumer confidence in financial institutions;

 

   

potential increases in deposit assessments;

 

   

significantly increased competition among depository and other financial institutions;

 

   

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the authoritative accounting and auditing bodies;

 

   

legislative or regulatory changes, including increased banking assessments, that adversely affect our business and earnings; and

 

   

changes in our organization, compensation and benefit plans.

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 Form 10-K Annual Report of Cullman Bancorp, Inc. for the year ended December 31, 2009.

 

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Comparison of Financial Condition at September 30, 2010 and December 31, 2009

Our total assets increased to $219.9 million at September 30, 2010 from $214.6 million at December 31, 2009. The increase was primarily attributable to an increase in net loans of $3.4 million, stemming mainly from increases in one-to-four family and commercial real estate loans.

The $12.0 million increase in deposits reflected a $7.2 million increase in interest bearing deposits and a $4.8 million increase in non-interest bearing deposits. The increase in interest bearing deposits reflected an increase of $5.7 million, or 7.8%, of total Certificates of Deposit to $78.4 million from $72.7 million at December 31, 2009 and an increase in savings accounts of $6.4 million, or 48.4%, from $13.3 million to $19.7 million at September 30, 2010.

Total equity increased to $38.4 million at September 30, 2010 from $36.5 million at December 31, 2009. The net increase of $1.9 million, or 5.2%, was primarily attributable to net income of $1.6 million for the nine months ended September 30, 2010 and an increase in accumulated other comprehensive income of $244,000.

 

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Average Balance and Yields

The following tables set forth average balance sheets, average yields and rates, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, fees, discounts and premiums that are amortized or accreted to income.

 

     For The Three Months Ended September 30  
     2010     2009  
     Average
Balance
     Interest and
Dividends
     Yield
Cost
    Average
Balance
     Interest and
Dividends
     Yield
Cost
 
     (Dollars in thousands)  

Assets:

  

Interest-earning assets:

                

Loans

   $ 175,366       $ 2,825         6.39   $ 169,678       $ 2,798         6.54

Securities available for sale

     18,802         205         4.33        20,804         256         4.88   

Other interest-earning assets

     5,928         4         0.29        5,800         7         0.48   
                                        

Total interest-earning assets

     200,096         3,034         6.01        196,282         3,061         6.19   

Noninterest earning assets

     17,875              17,546         
                            

Total average assets

   $ 217,971            $ 213,828         
                            

Liabilities and equity:

                

Interest-bearing liabilities:

                

NOW and demand deposits

   $ 24,043         36         0.59      $ 30,576         57         0.74   

Regular savings and other deposits

     16,816         30         0.71        12,966         32         0.98   

Money market deposits

     10,167         22         0.86        8,941         33         1.46   

Certificates of deposit

     78,719         424         2.14        76,965         618         3.19   
                                        

Total interest-bearing deposits

     129,745         512         1.57        129,448         740         2.27   

FHLB advances

     42,145         486         4.58        51,284         643         4.97   

Other borrowings

     833         3         1.44        860         4         1.87   
                                        

Total interest-bearing liabilities

     172,723         1,001         2.30        181,592         1,387         3.03   

Noninterest-bearing demand deposits

     5,719              4,221         

Other noninterest-bearing liabilities

     1,641              1,298         
                            

Total liabilities

     180,083              187,111         

Equity

     37,888              26,717         
                            

Total liabilities and equity

   $ 217,971            $ 213,828         
                            

Net interest income

      $ 2,033            $ 1,674      
                            

Interest rate spread

           3.71           3.16

Net interest margin

           4.03           3.38

Average interest-earning assets to average interest-bearing liabilities

     1.16 X              1.08 X         

 

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Table of Contents

 

     For The Nine Months Ended September 30  
     2010     2009  
     Average
Balance
     Interest and
Dividends
     Yield
Cost
    Average
Balance
     Interest and
Dividends
     Yield
Cost
 
     (Dollars in thousands)  

Assets:

  

Interest-earning assets:

                

Loans

   $ 174,573       $ 8,397         6.43   $ 167,746       $ 8,269         6.59

Securities available for sale

     19,431         670         4.61        21,379         799         5.00   

Other interest-earning assets

     7,614         12         0.22        6,335         10         0.21   
                                        

Total interest-earning assets

     201,618         9,079         6.02        195,460         9,078         6.21   

Noninterest earning assets

     16,892              17,986         
                            

Total average assets

   $ 218,510            $ 213,446         
                            

Liabilities and equity:

                

Interest-bearing liabilities:

                

NOW and demand deposits

   $ 25,884         118         0.61      $ 31,367         224         0.95   

Regular savings and other deposits

     15,283         91         0.80        12,120         109         1.20   

Money market deposits

     10,794         78         0.97        9,472         119         1.68   

Certificates of deposit

     76,561         1,292         2.26        78,288         2,024         3.46   
                                        

Total interest-bearing deposits

     128,522         1,579         1.64        131,247         2,476         2.52   

FHLB advances

     46,844         1,505         4.30        51,581         1,715         4.45   

Other borrowings

     833         9         1.44        860         12         1.87   
                                        

Total interest-bearing liabilities

     176,199         3,093         2.35        183,688         4,203         3.06   

Noninterest-bearing demand deposits

     3,580              2,009         

Other noninterest-bearing liabilities

     1,366              1,158         
                            

Total liabilities

     181,145              186,855         

Equity

     37,365              26,591         
                            

Total liabilities and equity

   $ 218,510            $ 213,446         
                            

Net interest income

      $ 5,986            $ 4,875      
                            

Interest rate spread

           3.67           3.15

Net interest margin

           3.97           3.33

Average interest-earning assets to average interest-bearing liabilities

     1.14 X              1.06 X         

 

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Table of Contents

 

Comparison of Operating Results for the Three Months Ended September 30, 2010 and 2009

General. We recorded net income of $537,000 for the three months ended September 30, 2010 compared to a net income of $406,000 for the three months ended September 30, 2009. The increase in net income was primarily attributable to a $359,000 increase in net interest income for the three months ended September 30, 2010.

Interest Income. Interest income decreased slightly by $27,000 for the three months ended September 30, 2010 from $3.1 million for the three months ended September 30, 2009, reflecting decrease in average yield to 6.01% for the three months ended September 30, 2010 from 6.19% for the three months ended September 30, 2009. The decrease in yield offset the increase in the average balance of interest earning assets of $3.8 million. The decrease in market interest rates contributed to the downward re-pricing of a portion of our existing assets and lower rates for new assets.

Interest income on loans increased slightly by $27,000 for the three months ended September 30, 2010 from $2.8 million for the three months ended September 30, 2009, reflecting the increase in the average balance of our loans to $175.4 million from $169.7 million, which more than offset the decrease in the average yield on loans to 6.39% from 6.54%. The lower average yield on our loan portfolio reflected the impact of decreases in market interest rates on our adjustable-rate loan products, as well as decreased rates on newly originated loans with interest rates based on lower market interest rates.

Interest income on investment securities decreased to $205,000 for the three months ended September 30, 2010 from $256,000 for the three months ended September 30, 2009, reflecting a decrease in the average balance of such securities to $18.8 million from $20.8 million, as well as a decrease in the average yield on such securities to 4.33% from 4.88%.

Interest Expense. Interest expense decreased $386,000, or 27.83%, to $1.0 million for the three months ended September 30, 2010 from $1.4 million for the three months ended September 30, 2009. The decrease reflected a decrease in the average rate paid on deposits and borrowings to 2.30% in the 2010 period from 3.03% in the 2009 period, as well as a decrease in the average balance of such deposits and borrowings to $172.7 million for the 2010 period from $181.6 million for the 2009 period.

Interest expense on certificates of deposit decreased to $424,000 for the three months ended September 30, 2010 from $618,000 for the three months ended September 30, 2009, reflecting an increase in the average balance of such certificates to $78.7 million from $77.0 million offset by a decrease in the average cost of such certificates to 2.14% from 3.19%. The decrease in the average cost of such certificates reflected the re-pricing in response to interest rate cuts initiated by the Federal Reserve Board during 2009 and the lower market interest rates resulting from such cuts.

Interest expense on NOW and demand deposits, along with savings deposits and money market deposits decreased to $88,000 for the three months ended September 30, 2010 from $122,000 for the three months ended September 30, 2009, reflecting a decrease of $1.5 million in the average balance of such deposits as well as a decrease in the average cost of such deposits to 0.69% from 0.93% for the same periods ended.

Interest expense on borrowings, primarily advances from the Federal Home Loan Bank, decreased to $489,000 for the three months ended September 30, 2010 from $647,000 for the three months ended September 30, 2009, reflecting a decrease in the average rate paid on such borrowings to 4.51% from 4.92% and a decrease in the average balance of $9.1 million for the same periods ended.

Net Interest Income. Net interest income increased to $2.0 million for the three months ended September 30, 2010 from $1.7 million for the three months ended September 30, 2009. The increase reflected an increase in our interest rate spread to 3.71% from 3.16%. The ratio of our interest-earning assets to average interest-bearing liabilities increased to 1.16X for the three months ended September 30, 2010 from 1.08X for the three months ended September 30, 2009. Our net interest margin also increased to 4.03% from 3.38%. The increases in our interest rate spread and net interest margin reflected the continued re-pricing of our deposits at lower rates in the decreasing interest rate environment.

Provision for Loan Losses. We recorded a provision for loan losses of $88,000 for the three months ended September 30, 2010 compared to $109,000 for the three months ended September 30, 2009. The allowance for loan losses was $725,000 or 0.41% of total loans at September 30, 2010 compared to $709,000, or 0.41% of total loans at September 30, 2009. The decrease in our provision was attributed to the decrease in our nonperforming loans of $282,000 to $231,000 at September 30, 2010 from $513,000 at September 30, 2009 and a decrease in the allowance allocated to individually impaired loans to $120,000 from $252,000 for the same periods. We had $2.6 million in troubled debt restructurings at September 30, 2010 and no troubled debt restructures at September 30, 2009. Our non-performing loans decreased significantly from the total at the end of the first quarter of 2010 of $1.4 million but still remains higher than our total of $0 at December 31, 2009. We used the same methodology in assessing the allowances for both periods. To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended September 30, 2010 and 2009.

 

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Noninterest Income. Noninterest income increased to $277,000 for the three months ended September 30, 2010 from $224,000 for the three months ended September 30, 2009. The increase in noninterest income was due primarily to an increase of $21,000 or 28.7%, on gains on the sale of mortgage loans and an increase of other noninterest income of $33,000 primarily from profit on sale of foreclosed real estate properties in 2010 compared to the same period in 2009.

Noninterest Expense. Noninterest expense increased $222,000, or 18.2%, for the three months ended September 30, 2010 from $1.2 million for the three months ended September 30, 2009. The increase was primarily attributable to an increase in losses on foreclosed real estate sales. There were $126,000 of losses for the three months ended September 30, 2010 and $7,000 of losses for the three months ended September 30, 2009. The higher noninterest expense also reflected an increase in salaries and employee benefits of $64,000, or 9.7%, as a result of increased bonus accruals stemming from increased profitability of the Company.

Income Tax Expense. The provision for income taxes was $297,000 for the three months ended September 30, 2010 compared to $217,000 for the three months ended September 30, 2009. Our effective tax rate remained relatively flat at 35.6% and 34.8% for the three months ended September 30, 2010 and 2009, respectively.

Comparison of Operating Results for the Nine Months Ended September 30, 2010 and 2009

General. We recorded net income of $1.6 million for the nine months ended September 30, 2010 compared to net income of $430,000 for the nine months ended September 30, 2009. The increase in net income was primarily attributable to an other-than-temporary impairment loss of $725,000, partially offset by an increase in income tax expense, recognized during the nine months ended September 30, 2009 on securities available-for-sale and an increase of $1.1 million of net interest income during the nine months ended September 30, 2010.

Interest Income. Interest income remained relatively the same at $9.1 million for the nine months ended September 30, 2010 and 2009. A decrease in the average yield on earning assets to 6.02% for the nine months ended September 30, 2010 from 6.21% for the nine months ended September 30, 2009 was offset by an increase in the average balances of earning assets of $6.1 million for the nine months ended September 30, 2010.

Interest income on loans increased to $8.4 million for the nine months ended September 30, 2010 from $8.3 million for the nine months ended September 30, 2009, reflecting the increase in the average balance of our loans to $174.6 million from $167.7 million, which more than offset the decrease in the average yield on loans to 6.43% from 6.59%. The lower average yield on our loan portfolio reflected the impact of decreases in market interest rates on our adjustable-rate loan products, as well as decreased rates on newly originated loans with interest rates based on lower market interest rates.

Interest income on investment securities decreased to $670,000 for the nine months ended September 30, 2010 from $799,000 for the nine months ended September 30, 2009, reflecting a decrease in the average balance of such securities to $19.4 million from $21.4 million, as well as a decrease in the average yield on such securities to 4.61% from 5.00%.

Interest Expense. Interest expense decreased $1.1 million, or 26.4%, to $3.1 million for the nine months ended September 30, 2010 from $4.2 million for the nine months ended September 30, 2009. The decrease reflected a decline in the average cost of deposits and borrowings to 2.35% in the 2010 period from 3.06% in the 2009 period, as well as a decrease in the average balance of such deposits and borrowings to $176.2 million for the 2010 period from $183.7 million for the 2009 period.

Interest expense on certificates of deposit decreased to $1.3 million for the nine months ended September 30, 2010 from $2.0 million for the nine months ended September 30, 2009, reflecting a decrease in the average balance of such certificates to $76.6 million from $78.3 million as well as a decrease in the average cost of such certificates to 2.26% from 3.46%. The decrease in the average cost of such certificates reflected the re-pricing in response to interest rate cuts initiated by the Federal Reserve Board during 2009 and the lower market interest rates resulting from such cuts.

Interest expense on NOW and demand deposits, along with savings deposits and money market deposits decreased to $287,000 for the nine months ended September 30, 2010 from $452,000 for the nine months ended September 30, 2009, reflecting a decrease of $998,000 in the average balance of such deposits as well as a decrease in the average cost of such deposits to 0.74% from 1.14% for the period ended September 30, 2009.

Interest expense on borrowings, primarily advances from the Federal Home Loan Bank, decreased to $1.5 million for the nine months ended September 30, 2010 from $1.7 million for the nine months ended September 30, 2009, as the average rate paid on such borrowings decreased to 4.25% from 4.40% and the average balance of such borrowings decreased to $47.7 million from $52.4 million.

 

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Net Interest Income. Net interest income increased to $6.0 million for the nine months ended September 30, 2010 from $4.9 million for the nine months ended September 30, 2009. The increase reflected an increase in our interest rate spread to 3.67% from 3.15%. The ratio of our interest-earning assets to average interest-bearing liabilities increased to 1.14X for the nine months ended September 30, 2010 from 1.06X for the nine months ended September 30, 2009. Our net interest margin also increased to 3.97% from 3.33%. The increases in our interest rate spread and net interest margin reflected the continued re-pricing of our deposits at lower rates in the decreasing interest rate environment.

Provision for Loan Losses. We recorded a provision for loan losses of $221,000 for the nine months ended September 30, 2010 compared to $340,000 for the nine months ended September 30, 2009. The allowance for loan losses was $725,000 or 0.41% of total loans at September 30, 2010 compared to $709,000, or 0.41% of total loans at September 30, 2009. The decrease in our provision was attributed to the decrease in our nonperforming loans of $282,000 to $231,000 at September 30, 2010 from $513,000 at September 30, 2009 and a decrease in the allowance allocated to individually impaired loans to $120,000 from $252,000 for the same periods. We had $2.6 million in troubled debt restructurings at September 30, 2010 and no troubled debt restructurings at September 30, 2009. We used the same methodology in assessing the allowances for both periods. To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the nine months ended September 30, 2010 and 2009.

Noninterest Income. Noninterest income increased to $737,000 for the nine months ended September 30, 2010 from ($55,000) for the nine months ended September 30, 2009. The increase in noninterest income was due to $725,000 of pretax other-than-temporary impairment losses on available-for-sale securities in the 2009 period compared to no such losses in the 2010 period.

Noninterest Expense. Noninterest expense increased to $4.1 million for the nine months ended September 30, 2010 from $3.5 million for the nine months ended September 30, 2009. The increases were primarily in salaries and employee benefits of $300,000, professional and supervisory fees of $133,000, and net losses on foreclosed real estate of $283,000, offset partially by a $127,000, or 53.4%, decrease in the FDIC deposit insurance premium. The increase in salaries and employee benefits was attributable to increases in bonus accruals as a result of increased profitability of the Company for the nine months ended September 30, 2010 as compared with the same period ended in 2009. Professional and supervisory fee increases were attributed to the increased costs associated with a public company, and the decrease in the FDIC deposit insurance premium was primarily attributed to a one-time special assessment recorded during the nine month period ended September 30, 2009 of $94,000 not recognized during the same period of 2010.

Income Tax Expense. The provision for income taxes was $861,000 for the nine months ended September 30, 2010 compared to $552,000 for the nine months ended September 30, 2009. Our effective tax rate was 35.5% for the nine months ended September 30, 2010 compared to 56.2% for the nine months ended September 30, 2009. The higher effective tax rate for the nine months ended September 30, 2009 was not meaningful due to other-than-temporary impairment losses on available-for-sale securities. Impairment losses on equity securities are considered capital losses, and can only be used as a tax deduction for federal income tax purposes to the extent of capital gains.

 

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosures of quantitative and qualitative market risk are not required by smaller reporting companies, such as the Company.

 

ITEM 4T. 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 Senior 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 September 30, 2010. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2010, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

 

ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are subject to various legal actions that are considered ordinary routine litigation incidental to the business of the Company, and no claim for money damages exceeds ten percent of the Company’s consolidated assets. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.

 

ITEM 1A. RISK FACTORS

Disclosures of risk factors are not required by smaller reporting companies, such as the Company.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

  (a) Not applicable.

 

  (b) Not applicable.

 

  (c) The Company did not repurchase any shares of common stock during the nine months ended September 30, 2010.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4. [REMOVED AND RESERVED]

 

ITEM 5. OTHER INFORMATION

None

 

ITEM 6. EXHIBITS

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the Signatures.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Cullman Bancorp, Inc.

Date: November 5, 2010

 

/s/ John A. Riley III
John A. Riley III
President & Chief Executive Officer
/s/ Michael Duke
Michael Duke
Senior Vice President and Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit
number

  

Description

31.1    Certification of John A. Riley III, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2    Certification of Michael Duke, Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1    Certification of John A. Riley III, President and Chief Executive Officer, and Michael Duke, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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