Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period ended September 30, 2011

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  x    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 filer   ¨    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.

2,561,996 of Common Stock, par value $.01 per share, were issued and outstanding as of November 7, 2011.

 

 

 


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.

     22   
ITEM 3.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     30   
ITEM 4.  

CONTROLS AND PROCEDURES

     30   
 

PART II

  
ITEM 1.  

LEGAL PROCEEDINGS

     31   
ITEM 1A.  

RISK FACTORS

     31   
ITEM 2.  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     31   
ITEM 3.  

DEFAULTS UPON SENIOR SECURITIES

     31   
ITEM 4.  

REMOVED AND RESERVED

     31   
ITEM 5.  

OTHER INFORMATION

     31   
ITEM 6.  

EXHIBITS

     31   


Table of Contents

Part I

 

ITEM 1. FINANCIAL STATEMENTS

CULLMAN BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

 

     September 30,     December 31,  
     2011     2010  

ASSETS

    

Cash and cash equivalents

   $ 2,276      $ 2,368   

Federal funds sold

     14,251        174   
  

 

 

   

 

 

 

Cash and cash equivalents

     16,527        2,542   

Securities available for sale

     25,994        24,117   

Loans, net of allowance of $1,149 and $854, respectively

     170,683        177,317   

Loans held for sale

     291        320   

Premises and equipment, net

     10,961        10,612   

Foreclosed real estate

     2,116        1,997   

Accrued interest receivable

     1,132        1,157   

Restricted equity securities

     2,521        2,595   

Bank owned life insurance

     2,429        2,349   

Other assets

     908        849   
  

 

 

   

 

 

 

Total assets

   $ 233,562      $ 223,855   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

    

Deposits

    

Non-interest bearing

   $ 9,955      $ 6,188   

Interest bearing

     133,664        130,211   
  

 

 

   

 

 

 

Total deposits

     143,619        136,399   

Federal Home Loan Bank advances

     47,000        47,000   

Long-term debt

     816        816   

Accrued interest payable and other liabilities

     2,063        1,370   
  

 

 

   

 

 

 

Total liabilities

     193,498        185,585   

Shareholders’ equity

    

Common stock, $0.01 par value; 20,000,000 shares authorized; 2,561,996 and 2,512,750 shares outstanding, respectively, at September 30, 2011 and December 31, 2010

     26        25   

Additional paid-in capital

     10,418        10,330   

Retained earnings

     30,268        29,134   

Accumulated other comprehensive income (loss)

     327        (232

Unearned ESOP shares, at cost

     (850     (887

Amount reclassified on ESOP shares

     (125     (100
  

 

 

   

 

 

 

Total shareholders’ equity

     40,064        38,270   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 233,562      $ 223,855   
  

 

 

   

 

 

 

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      Nine Months  
     Ended September 30,      Ended September 30,  
     2011      2010      2011      2010  

Interest and dividend income:

           

Loans, including fees

   $ 2,728       $ 2,825       $ 8,211       $ 8,397   

Securities, taxable

     222         205         671         670   

Federal funds sold and other

     11         4         25         12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     2,961         3,034         8,907         9,079   

Interest expense:

           

Deposits

     373         512         1,236         1,579   

Federal Home Loan Bank advances and other borrowings

     434         489         1,286         1,514   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     807         1,001         2,522         3,093   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     2,154         2,033         6,385         5,986   

Provision for loan losses

     201         88         399         221   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     1,953         1,945         5,986         5,765   

Noninterest income:

           

Service charges on deposit accounts

     105         118         306         338   

Income on bank owned life insurance

     26         27         79         81   

Gain on sales of mortgage loans

     65         94         164         244   

Net gain on sales of securities

     —           —           —           11   

Other

     13         38         41         63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     209         277         590         737   

Noninterest expense:

           

Salaries and employee benefits

     761         721         2,354         2,164   

Occupancy and equipment

     164         162         463         492   

Data processing

     123         121         376         372   

Professional and supervisory fees

     78         70         311         283   

Office expense

     33         29         96         85   

Advertising

     21         23         54         53   

FDIC deposit insurance

     27         45         97         111   

Losses on foreclosed real estate

     132         126         268         290   

Other

     100         91         233         226   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     1,439         1,388         4,252         4,076   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     723         834         2,324         2,426   

Income tax expense

     275         297         861         861   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 448       $ 537       $ 1,463       $ 1,565   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income, net of tax

           

Unrealized gain (loss) on securities available for sale, net of tax

   $ 195       $ 103       $ 559       $ 252   

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

     —           —           —           (8
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     195         103         559         244   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 643       $ 640       $ 2,022       $ 1,809   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share: (Note 3)

           

Basic

   $ 0.18       $ 0.22       $ 0.59       $ 0.65   

Diluted

   $ 0.18         N/A       $ 0.59         N/A   

Dividends declared per common share

   $ 0.08         —         $ 0.16         —     

See accompanying notes to the consolidated financial statements

 

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Table of Contents

CULLMAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

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

 

                        Accumulated           Amount        
            Additional           Other     Unearned     Reclassified on        
     Common      Paid-In     Retained     Comprehensive     ESOP     ESOP        
     Stock      Capital     Earnings     Income (loss)     Shares     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, 2011

   $ 25       $ 10,330      $ 29,134      $ (232   $ (887   $ (100   $ 38,270   

Net income

          1,463              1,463   

Net change in accumulated other comprehensive income

            559            559   

ESOP shares earned

              37          37   

Stock-based compensation expense

        89                89   

Dividends (1)

          (329           (329

Issuance of 49,249 shares of restricted stock

     1         (1             —     

Reclassification of common stock in ESOP subject to repurchase obligation

     —           —          —          —          —          (25     (25
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 26       $ 10,418      $ 30,268      $ 327      $ (850   $ (125   $ 40,064   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cash dividends of $0.08 per share were declared on March 15, 2011 for 1,554,984 of the 2,561,996 shares outstanding at March 31, 2011. Cullman Savings Bank, MHC, the Company’s mutual holding company, was granted a dividend payment waiver from the Office of Thrift Supervision for all but 375,000 of the 1,382,012 shares of the Company’s stock held by Cullman Savings Bank, MHC. No future dividend waivers are expected to be granted by the Office of Thrift Supervision. Dividends of $0.08 per share were declared on July 19, 2011 on all shares outstanding as of that date.

See accompanying notes to the consolidated financial statements

 

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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,  
     2011     2010  

Cash Flows From Operating Activities

    

Net income

   $ 1,463      $ 1,565   

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

    

Provision for loan losses

     399        221   

Depreciation and amortization, net

     237        146   

Deferred income tax (benefit) expense

     (230     75   

Net gain on sale of securities

     —          (11

Loss on sale and impairments of foreclosed real estate

     268        290   

Income on bank owned life insurance

     (79     (81

ESOP compensation expense

     37        37   

Stock based compensation expense

     89        —     

Gain on sale of mortgage loans

     (164     (244

Mortgage loans originated for sale

     (7,138     (11,204

Mortgage loans sold

     7,331        11,712   

Net change in operating assets and liabilities

    

Accrued interest receivable

     25        (149

Accrued interest payable

     (6     (63

Other

     516        519   
  

 

 

   

 

 

 

Net cash from operating activities

     2,748        2,813   

Cash Flows From Investing Activities

    

Purchases of premises and equipment

     (581     (646

Purchases of securities

     (7,993     (15,400

Proceeds from maturities, paydowns and calls of securities

     6,998        14,669   

Proceeds from sale of securities

     —          250   

Proceeds from sales of foreclosed real estate

     10        162   

Redemptions of restricted equity securities

     74        194   

Loan originations and payments, net

     5,838        (4,519
  

 

 

   

 

 

 

Net cash from (used in) investing activities

     4,346        (5,290

Cash Flows from Financing Activities

    

Net change in deposits

     7,220        12,026   

Cash payment of dividends

     (329     —     

Repayment of Federal Home Loan Bank advances

     —          (9,065
  

 

 

   

 

 

 

Net cash from financing activities

     6,891        2,961   
  

 

 

   

 

 

 

Change in cash and cash equivalents

     13,985        484   

Cash and cash equivalents, beginning of period

     2,542        5,232   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 16,527      $ 5,716   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest paid

   $ 2,528      $ 3,156   

Income taxes paid

   $ 1,078      $ 760   

Supplemental noncash disclosures:

    

Transfers from loans to foreclosed assets

   $ 1,676      $ 1,789   

Loans advanced for sales of foreclosed assets

   $ 1,279      $ —     

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” or the “Company”) 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 (53.9%) 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 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.

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, 2011 and December 31, 2010 and the results of operations and cash flows for the interim periods ended September 30, 2011 and 2010. 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, 2010.

(2) NEW ACCOUNTING STANDARDS

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 complied with all disclosure requirements under this update.

In April 2011, FASB issued an update to previously issued accounting to provide additional guidance to clarify when a loan modification or restructuring is considered a troubled debt restructuring (TDR) in order to address current diversity in practice and lead to more consistent application of U.S. GAAP for debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. The update clarifies the guidance regarding the evaluation of both considerations above and clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a TDR. This update is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, we may identify receivables that are newly considered to be troubled debt restructurings. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has complied with the requirements of this update, which did not have a material effect 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)

 

(3) EARNINGS PER SHARE (“EPS”)

Basic EPS 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 EPS 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. The factors used in the earnings per common share computation follow:

 

     Three months ended     Nine months ended  
     September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 

Earnings per share

        

Net Income

   $ 448      $ 537      $ 1,463      $ 1,565   

Less: Distributed earnings allocated to participating securities

     (4     —          (8     —     

Less: (Undistributed income) dividends in excess of earnings allocated to participating securities

     (5     —          (22     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings allocated to common stock

   $ 439      $ 537      $ 1,433      $ 1,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted common shares outstanding including participating securities

     2,561,996        2,512,750        2,558,749        2,512,750   

Less: Participating securities

     (49,249     —          (49,249     —     

Less: Average Unearned ESOP Shares

     (88,650     (93,575     (88,650     (93,575
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares

     2,424,097        2,419,175        2,420,850        2,419,175   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.18      $ 0.22      $ 0.59      $ 0.65   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings allocated to common stock

   $ 439      $ 537      $ 1,433      $ 1,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares

     2,424,097        2,419,175        2,420,850        2,419,175   

Add: dilutive effects of assumed exercises of stock options

     14,401        —          9,627        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Average shares and dilutive potential common shares

     2,438,498        2,419,175        2,430,477        2,419,175   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dilutive earnings per share

   $ 0.18        N/A      $ 0.59        N/A   
  

 

 

   

 

 

   

 

 

   

 

 

 

Options to purchase 123,124 shares of the Company’s common stock at a weighted-average exercise price of $10.30 per share were outstanding during the three and nine months ended September 30, 2011. There were no potential dilutive common shares for the three and nine months ended September 30, 2010.

 

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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)

 

(4) SECURITIES AVAILABLE FOR SALE

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at September 30, 2011 and December 31, 2010 were as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 

September 30, 2011

          

U.S. Government agencies

   $ 15,990       $ 52       $ (6   $ 16,036   

Municipal—taxable

     5,148         328         —          5,476   

Residential mortgage-backed, GSE

     2,241         98         —          2,339   

Residential mortgage-backed, private label

     682         —           (29     653   

Ultra Short mortgage mutual fund

     1,414         76         —          1,490   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 25,475       $ 554       $ (35   $ 25,994   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 

December 31, 2010

          

U.S. Government agencies

   $ 13,997       $ 13       $ (478   $ 13,532   

Municipal—taxable

     5,154         23         (122     5,055   

Residential mortgage-backed, GSE

     2,959         92         —          3,051   

Residential mortgage-backed, private label

     961         22         —          983   

Ultra Short mortgage mutual fund

     1,414         82         —          1,496   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 24,485       $ 232       $ (600   $ 24,117   
  

 

 

    

 

 

    

 

 

   

 

 

 

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, 2011 and December 31, 2010, 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, 2011 and 2010 were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Proceeds

   $ —         $ —         $ —         $ 250   

Gross gains

     —           —           —           11   

 

7


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. Securities not due at a single maturity and securities with no maturity date are shown separately.

 

     September 30, 2011  
     Amortized
Cost
     Estimated Fair
Value
 

Due from one to five years

   $ 1,000       $ 1,001   

Due from five to ten years

     8,002         8,079   

Due after ten years

     12,136         12,432   

Mutual fund

     1,414         1,490   

Residential mortgage-backed

     2,923         2,992   
  

 

 

    

 

 

 

Total

   $ 25,475       $ 25,994   
  

 

 

    

 

 

 

Carrying amounts of securities pledged to secure public deposits, repurchase agreements, and Federal Home Loan Bank advances as of September 30, 2011 and December 31, 2010 were $6,409 and $6,320, respectively. At September 30, 2011 and December 31, 2010, there were no holdings of securities of any one issuer, other than the U.S. Government agencies, in an amount greater than 10% of shareholders’ equity.

The following table shows securities with unrealized losses at September 30, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

$00,000 $00,000 $00,000 $00,000 $00,000 $00,000
     Less than 12 months     12 Months or More      Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

September 30, 2011

                

U.S. Government agencies

   $ 1,991       $ (6   $ —         $ —         $ 1,991       $ (6

Residential mortgage-backed, private label

     653         (29     —           —           653         (29
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired

   $ 2,644       $ (35   $ —         $ —         $ 2,644       $ (35
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

$00,0000 $00,0000 $00,0000 $00,0000 $00,0000 $00,0000
     Less than 12 months     12 Months or More      Total  
     Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

December 31, 2010

                

U.S. Government agencies

   $ 10,519       $ (478   $ —         $ —         $ 10,519       $ (478

Municipal—taxable

     3,589         (122     —           —           3,589         (122
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired

   $ 14,108       $ (600   $ —         $ —         $ 14,108       $ (600
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

There were two U.S. Government agency securities along with the one private label mortgage-backed security with unrealized losses at September 30, 2011. None of the unrealized losses for these securities have been recognized into net income for the three and nine months ended September 30, 2011 because the issuer’s bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach their maturity date or reset date.

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 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 agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

 

8


Table of Contents

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(5) LOANS

Loans at September 30, 2011 and December 31, 2010 were as follows:

 

     September 30,     December 31,  
     2011     2010  

Real estate loans:

    

One- to four-family

   $ 81,988      $ 83,721   

Multi-family

     5,236        4,837   

Commercial real estate

     64,539        63,443   

Construction

     3,190        8,936   
  

 

 

   

 

 

 

Total real estate loans

     154,953        160,937   

Commercial loans

     7,227        7,371   

Consumer loans

     10,010        10,276   
  

 

 

   

 

 

 

Total loans

     172,190        178,584   

Net deferred loan fees

     (358     (413

Allowance for loan losses

     (1,149     (854
  

 

 

   

 

 

 

Loans, net

   $ 170,683      $ 177,317   
  

 

 

   

 

 

 

 

 

9


Table of Contents

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables present the activity in the allowance for loan losses for the three and nine months ended September 30, 2011 and the balances of the allowance for loan losses and recorded investment in loans by portfolio class based on impairment method at September 30, 2011 and December 31, 2010. The recorded investment in loans in any of the following tables does not include accrued and unpaid interest or any deferred loan fees or costs, as amounts are not significant.

 

     Real estate                    

Nine months ended September 30, 2011

   One-to-
Four
Family
    Multi-family      Commercial     Construction     Commercial     Consumer     Total  

Allowance for loan losses:

               

Beginning balance

   $ 332      $ 9       $ 356      $ 9      $ 47      $ 101      $ 854   

Charge-offs

     (33     —           (78     —          —          —          (111

Recoveries

     —          —           —          —          —          7        7   

Provisions

     301        1         131        (6     (5     (23     399   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 600      $ 10       $ 409      $ 3      $ 42      $ 85      $ 1,149   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance attributed to loans:

               

Individually evaluated for impairment

     240        —           110        —          25        —          375   

Collectively evaluted for impairment

     360        10         299        3        17        85        774   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance:

   $ 600      $ 10       $ 409      $ 3      $ 42      $ 85      $ 1,149   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Loans individually evaluated for impairment:

   $ 2,071      $ 1,925       $ 3,516      $ —        $ 50      $ 122      $ 7,684   

Loans collectively evaluated for impairment:

     79,917        3,311         61,023        3,190        7,177        9,888        164,506   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loans balance

   $ 81,988      $ 5,236       $ 64,539      $ 3,190      $ 7,227      $ 10,010      $ 172,190   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Real estate                    

Three months ended September 30, 2011

   One-to-
Four
Family
    Multi-family      Commercial     Construction     Commercial     Consumer     Total  

Allowance for loan losses:

               

Beginning balance

   $ 448      $ 10       $ 390      $ 5      $ 47      $ 109      $ 1,009   

Charge-offs

     (31     —           (32     —          —          —          (63

Recoveries

     —          —           —          —          —          2        2   

Provisions

     183        —           51        (2     (5     (26     201   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $      600      $      10       $      409      $        3      $      42      $        85      $     1,149   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

     Real estate                       

December 31, 2010

   One-to-
Four
Family
     Multi-family      Commercial      Construction      Commercial      Consumer      Total  

Allowance for loan losses:

                    

Ending allowance attributed to loans:

                    

Individually evaluated for impairment

   $ —         $ —         $ 95       $ —         $ 25       $ —         $ 120   

Collectively evaluted for impairment

     332         9         261         9         22         101         734   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance:

   $ 332       $ 9       $ 356       $ 9       $ 47       $ 101       $ 854   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment:

   $ 2,713       $ 1,993       $ 3,724       $ —         $ 112       $ 165       $ 8,707   

Loans collectively evaluated for impairment:

     81,008         2,844         59,719         8,936         7,259         10,111         169,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 83,721       $ 4,837       $ 63,443       $ 8,936       $ 7,371       $ 10,276       $ 178,584   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the activity in the allowance for loan losses for the three and nine months ended September 30, 2010:

 

     Three months
2010
    Nine months
2010
 

Beginning balance

   $ 796      $ 747   

Provision for loan losses

     88        221   

Loans charged off

     (159     (248

Recoveries

     —          5   
  

 

 

   

 

 

 

Ending balance

   $ 725      $ 725   
  

 

 

   

 

 

 

 

11


Table of Contents

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents loans individually evaluated for impairment by portfolio class at September 30, 2011 and December 31, 2010, including the average recorded investment balance and interest earned for the nine months ended September 30, 2011:

 

     September 30, 2011      December 31, 2010  
     Unpaid
principal
balance
     Recorded
investment
     Related
allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Unpaid
principal
balance
     Recorded
investment
     Related
allowance
 

With no recorded allowance:

                       

Real estate loans:

                       

One- to four-family

   $ 856       $ 856       $ —         $ 1,592       $ 39       $ 2,714       $ 2,714       $ —     

Multi-family

     1,925         1,925         —           1,959         107         1,993         1,993         —     

Commercial

     3,319         3,319         —           3,513         221         3,445         3,445         —     

Construction

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     6,100         6,100         —           7,064         367         8,152         8,152         —     

Commercial

     —           —           —           43         —           61         61         —     

Consumer loans

     122         122         —           142         3         165         165         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,222       $ 6,222       $ —         $ 7,249       $ 370       $ 8,378       $ 8,378       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With recorded allowance:

                       

Real estate loans:

                       

One- to four-family

   $ 1,215       $ 1,215       $ 240       $ 816       $ 31       $ —         $ —         $ —     

Multi-family

     —           —           —           —           —           —           —           —     

Commercial

     197         197         110         200         1         280         280         95   

Construction

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,412         1,412         350         1,016         32         280         280         95   

Commercial

     50         50         25         52         —           49         49         25   

Consumer loans

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,462       $ 1,462       $ 375       $ 1,068       $ 32       $ 329       $ 329       $ 120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals:

                       

Real estate

   $ 7,512       $ 7,512       $ 350       $ 8,080       $ 399       $ 8,432       $ 8,432       $ 95   

Commercial and Consumer

     172         172         25         237         3         275         275         25   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,684       $ 7,684       $ 375       $ 8,317       $ 402       $ 8,707       $ 8,707       $ 120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The average balance of loans individually evaluated for impairment for the nine months ended September 30, 2010 was $4,713. Interest income recognized and cash basis interest income recognized during the impairment period ended December 31, 2010 was $197. Interest income recognized was equal to cash collected during the three and nine months ended September 30, 2011.

The following tables present the aging of the recorded investment in past due loans at September 30, 2011 and December 31, 2010 by portfolio class of loans:

 

September 30, 2011 (Unaudited)

   30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days
or More
Past Due
     Total
Past Due
     Current      Total
Loans
     Accruing
loans
past due 90
days or more
 

Real estate loans:

                    

One- to four-family

   $     524       $ 120       $ —         $     644       $ 81,344       $ 81,988       $ —     

Multi-family

     —           —           —           —           5,236         5,236         —     

Commercial

     —           103         —           103         64,436         64,539         —     

Construction

     —           —           —           —           3,190         3,190         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     524         223         —           747         154,206         154,953         —     

Commercial loans

     —           25         —           25         7,202         7,227         —     

Consumer loans

     14         19         1         34         9,976         10,010         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 538       $ 267       $ 1       $ 806       $ 171,385       $ 172,190       $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2010

   30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days
or More
Past Due
     Total
Past Due
     Current      Total
Loans
     Accruing
loans
past due 90
days or more
 

Real estate loans:

                    

One- to four-family

   $ 654       $ 118       $ 61       $ 833       $ 82,888       $ 83,721       $ —     

Multi-family

     613            —           613         4,224         4,837         —     

Commercial

        107         156         263         63,180         63,443         —     

Construction

     —           —           —           —           8,936         8,936         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1,267         225         217         1,709         159,228         160,937         —     

Commercial loans

     —           —           —           —           7,371         7,371         —     

Consumer loans

     82         121         4         207       $ 10,069         10,276         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,349       $ 346       $ 221       $ 1,916       $ 176,668       $ 178,584       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Nonaccrual loans at September 30, 2011 and December 31, 2010 were $190 and $221, respectively. These loans are disclosed by portfolio segment above in the “90 days or more past due” column, except for one residential mortgage loan that was not past due at September 30, 2011. Additional required disclosure by class was deemed immaterial to the financial statements. 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.

Troubled Debt Restructurings:

Troubled debt restructurings at September 30, 2011 and December 31, 2010 were $5,152 and $5,459, respectively. The amount of impairment allocated to loans whose loan terms have been modified in troubled debt restructurings at September 30, 2011 and December 31, 2010 was $285 and $35, respectively. The Company has committed to no additional amounts at September 30, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

During the nine months ended September 30, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rated of the loans; an extensions of the maturity date at a stated rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risks.

The modifications made during the nine months ended September 30, 2011 involved a short-term change in the payment structure.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2011:

 

     Number of
Loans
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Troubled Debt Restructurings:

        

Real estate loans:

        

One- to four-family

     2       $ 193       $ 193   

Multi-family

     —           —           —     

Commercial real estate

     1         73         73   

Construction

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     3         266         266   

Commercial loans

     1         50         50   

Consumer loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     4       $ 316       $ 316   
  

 

 

    

 

 

    

 

 

 

The troubled debt restructurings described above did not have an effect on the allowance for loan losses and there were no charge offs during the nine months ended September 30, 2011. There were no troubled debt restructurings during the three month period September 30, 2011.

There were two residential real estate loans with a recorded investment of $709 that were modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine months ended September 30, 2011. A loan is considered to be in payment default once it is 60 days contractually past due under the modified terms. The troubled debt restructurings that subsequently defaulted as described above did not increase the allowance for loans losses but resulted in charge offs of $31 during the three and nine months ended September 30, 2011.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

14


Table of Contents

CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Credit Quality Indicators:

The Company utilizes a grading system whereby all loans are assigned a grade based on the risk profile of each loan. Loan grades are determined based on an evaluation of relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. All loans, regardless of size, are analyzed and are given a grade based upon the management’s assessment of the ability of borrowers to service their debts. Loans with balances greater than $100 are evaluated on a quarterly basis and smaller loans are reviewed as necessary based on change in borrower status or payment history.

The Company uses the following definitions for loan grades:

 

   

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loan or of the institution’s credit position at some future date.

 

   

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

   

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above are graded Pass. These loans are included within groups of homogenous pools of loans based upon portfolio segment and class for estimation of the allowance for loan losses on a collective basis. Loan relationships graded substandard and doubtful of $100 or more are individually evaluated for impairment.

 

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

At September 30, 2011 and December 31, 2010 and based on the most recent analysis performed, the loan grade for each loan by portfolio class is as follows:

 

     Real estate                                            
     One-to-four                                                                                      
     Family      Multi-family      Commercial      Construction      Commercial      Consumer      Totals  
     2011      2010      2011      2010      2011      2010      2011      2010      2011      2010      2011      2010      2011      2010  

Pass

   $ 77,591       $ 78,909       $ 3,312       $ 2,844       $ 55,601       $ 51,184       $ 3,190       $ 8,936       $ 7,077       $ 7,234       $ 9,855       $ 10,272       $ 156,626       $ 159,379   

Special mention

     324         955         —           —           4,799         6,987         —           —           —           —           —           —           5,123         7,942   

Substandard

     4,073         3,857         1,924         1,993         4,139         5,272         —           —           150         137         155         4         10,441         11,263   

Doubtful

     —           —           —           —           —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 81,988       $ 83,721       $ 5,236       $ 4,837       $ 64,539       $ 63,443       $ 3,190       $ 8,936       $ 7,227       $ 7,371       $ 10,010       $ 10,276       $ 172,190       $ 178,584   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 foreclosed real estate 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.

 

 

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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, 2011 and December 31, 2010:

Assets and Liabilities Measured on a Recurring Basis

Level 1 and 2 assets and liabilities measured at fair value on a recurring basis are summarized below:

 

     Fair Value Measurements  
     (Level 1)      (Level 2)      (Level 1)      (Level 2)  
     September 30,      September 30,      December 31,      December 31,  
      2011      2011      2010      2010  

Financial assets:

           

U.S. Government sponsored agencies

   $ —         $ 16,036       $ —         $ 13,532   

Municipal—taxable

     —           5,476         —           5,055   

Residential mortgage-backed, GSE

     —           2,339         —           3,051   

Residential mortgage-backed, private label

     —           653         —           983   

Ultra Short mortgage mutual fund

     1,490         —           1,496         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

   $ 1,490       $ 24,504       $ 1,496       $ 22,621   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets and Liabilities Measured on a Non-Recurring Basis

Level 3 assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

     Fair Value Measurements  
     (Level 3)  
     September 30,      December 31,  
     2011      2010  

Assets:

     

Impaired loans, with specific allocations

     

Real estate loans:

     

One-to four-family

   $ 975       $ —     

Multi-family

     —           —     

Commercial

     87         185   

Construction

     —           —     
  

 

 

    

 

 

 

Total real estate loans

     1,062         185   

Commercial

     25         24   
  

 

 

    

 

 

 

Total loans

   $ 1,087       $ 209   
  

 

 

    

 

 

 

Foreclosed real estate:

     

One-to four-family

   $ 1,600       $ 987   

Multi-family

     —           —     

Commercial

     516         1,010   

Construction

     —           —     
  

 

 

    

 

 

 

Total foreclosed real estate

   $ 2,116       $ 1,997   
  

 

 

    

 

 

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had carrying amounts of $1,087 and $209, which consists of the unpaid principal balances of $1,462 and $329 less valuation allowances of $375 and $120 at September 30, 2011 and December 31, 2010, respectively. The impact to the provision to loan losses from the change in the valuation allowances was $165 for the three and $255 for the nine months ended September 30, 2011 and an increase in the provision of $24 for the year ended December 31, 2010.

 

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Foreclosed real estate, which is measured at fair value less costs to sell, had a net carrying amount of $2,116 and $1,997 at September 30, 2011 and December 31, 2010, respectively. The net carrying amount consists of the outstanding balance net of a valuation allowance. The outstanding balance and valuation allowance of other real estate owned at September 30, 2011 and December 31, 2010 were $2,537 and $421, and $2,206 and $209, respectively. The resulting write-downs for the three and nine months ended September 30, 2011 were $212 and $116, respectively and $209 for the year ended December 31, 2010

Loans held for sale, which are carried at the lower of cost or fair value, had fair values that approximated costs at September 30, 2011 and December 31, 2010 and were therefore carried at cost with no fair value valuation allowance at both period ends.

The carrying amounts and estimated fair value of the Company’s on-balance sheet financial instruments at September 30, 2011 and December 31, 2010 are summarized below:

 

     September 30,      December 31, 2010  
     Carrying      Fair      Carrying      Fair  
     Amount      Value      Amount      Value  

Financial assets

           

Cash and cash equivalents

   $ 16,527       $ 16,527       $ 2,542       $ 2,542   

Securities available for sale

     25,994         25,994         24,117         24,117   

Loans, net

     170,683         182,637         177,317         190,054   

Loans held for sale

     291         291         320         320   

Accrued interest receivable

     1,132         1,132         1,157         1,157   

Restricted equity securities

     2,521         N/A         2,595         N/A   

Financial liabilities

           

Deposits

     143,619         144,912         136,399         137,685   

Federal Home Loan Bank Advances

     47,000         51,405         47,000         50,801   

Long-term debt

     816         816         816         816   

Accrued interest payable

     234         234         247         247   

The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. The methods for determining the fair values for securities were described previously. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of restricted equity securities due to restrictions placed on transferability. The fair value of off-balance sheet items is not consider material.

 

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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)

 

(7) STOCK BASED COMPENSATION

In December of 2010, the stockholders approved the Cullman Bancorp, Inc. 2010 Equity Incentive Plan (the “Equity Incentive Plan”) for employees and directors of the Company. The Equity Incentive Plan authorizes the issuance of up to 172,373 shares of the Company’s common stock, with no more than 49,249 of shares as restricted stock awards and 123,124 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Equity Incentive Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.

On January 18, 2011, the compensation committee of the board of directors approved the issuance of 123,124 options to purchase Company stock and 49,249 shares of restricted stock. Stock options and restricted stock vest over a five year period, and stock options expire ten years after issuance. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued. At September 30, 2011 there were no shares available for future grants under this plan.

The following table summarizes stock option activity for the nine months ended September 30, 2011:

 

     Options     Weighted-Average
Exercise
Price/Share
    Weighted-Average
Remaining
Contractual Life
(in years)
    Aggregate
Intrinsic  Value
 
          
          
          

Outstanding—January 1, 2011

     —          —         

Granted

     123,124        10.30       

Exercised

     —          —         

Forfeited

     —          —         
  

 

 

       

Outstanding—September 30, 2011

     123,124      $ 10.30        9.31      $ 393,997 (1) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Fully vested and exercisable at September 30, 2011

     —        $ —          —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Expected to vest in future periods

     123,124         
  

 

 

       

Fully vested and expected to vest—September 30, 2011

     123,124      $ 10.30        9.31      $ 393,997 (1) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Based on closing price of $13.50 per share on September 30, 2011.

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price.

The fair value for each option grant is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions. The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate. The expected dividend yield is estimated using the projected annual dividend level and recent stock price of the Company’s common stock at the date of grant. Expected stock volatility is based on historical volatilities of the SNL Financial Index of Thrifts. The expected life of the options is calculated based on the “simplified” method as provided for under Staff Accounting Bulletin No. 110.

 

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The weighted-average assumptions used in the Black-Scholes option pricing model for the years indicated were as follows:

 

     2011  

Risk-free interest rate

     2.86

Expected dividend yield

     4.37

Expected stock volatility

     10.29   

Expected life (years)

     7   

Fair value

   $ 0.675   

There were no options that vested during the three and nine months ended September 30, 2011. Stock-based compensation expense for stock options for the three and nine months ended September 30, 2011 was $4 and $12, respectively. Total unrecognized compensation cost related to nonvested stock options was $71 at September 30, 2011 and is expected to be recognized over a weighted-average period of 4.3 years.

The following table summarizes non-vested restricted stock activity for the nine months ended September 30, 2011:

 

     2011  

Balance—beginning of year

     —     

Granted

     49,249   

Forfeited

     —     

Earned and issued

     —     
  

 

 

 

Balance—end of period

     49,249   
  

 

 

 

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (generally five years) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. The weighted-average grant date fair value of restricted stock granted during the nine months ended September 30, 2011 was $10.30 per share or $507. Stock-based compensation expense for restricted stock included in non-interest expense for the three and nine months ended September 30, 2011 was $25 and $77, respectively. Unrecognized compensation expense for nonvested restricted stock awards was $430 and is expected to be recognized over 4.3 years.

(8) SUBSEQUENT EVENT

On October 18, 2011, the Board of Directors of the Company declared a dividend of $0.08 per share of the Company’s common stock. The dividend will be payable to the shareholders of record as of October 31, 2011 and will be paid on November 15, 2011.

 

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Table of Contents
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 weak economic condition;

 

   

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, 2010.

 

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Table of Contents

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

Our total assets increased to $233.6 million at September 30, 2011 from $223.9 million at December 31, 2010. The increase was primarily attributable to an increase in cash and cash equivalents of $14.0 million, or 550.2%, partially offset by decreases in loans of $6.6 million, or 3.7%. The most significant source of the increase came from an increase in federal funds sold of $14.1 million to $14.3 million from $174,000 at December 31, 2010. The increase in federal funds sold reflected an increase in our deposits of $7.2 million to $143.6 million at September 30, 2011 from $136.4 million at December 31, 2010 and a lower demand for loans.

Total equity increased to $40.1 million at September 30, 2011 from $38.3 million at December 31, 2010. The net increase of $1.8 million, or 4.7%, was primarily attributable to net income of $1.5 million and a net change in accumulated other comprehensive income of $559,000 partially offset by $329,000 of dividends declared during the nine months ended September 30, 2011.

 

 

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Table of Contents

Non-Performing Assets

The table below sets forth the amounts and categories of our non-performing assets at the dates indicated:

 

     September 30,     December 31,  
     2011     2010  
     (Dollars in thousands)  

Non-Accrual:

    

Real estate loans:

    

One- to four-family

   $ 189      $ 61   

Multi-family

     —          —     

Commercial real estate

     —          156   

Construction

     —          —     
  

 

 

   

 

 

 

Total real estate loans

     189        217   

Commercial loans

     —          —     

Consumer loans

     —          4   
  

 

 

   

 

 

 

Total nonaccrual loans

   $ 189      $ 221   
  

 

 

   

 

 

 

Accruing loans past due 90 days or more:

    

Real estate loans:

    

One- to four-family

   $ —        $ —     

Multi-family

     —          —     

Commercial real estate

     —          —     

Construction

     —          —     
  

 

 

   

 

 

 

Total real estate loans

     —          —     

Commercial loans

     —          —     

Consumer loans

     1        —     
  

 

 

   

 

 

 

Total accruing loans past due 90 days or more

     1        —     
  

 

 

   

 

 

 

Total of nonaccrual and 90 days or more past due loans

   $ 190      $ 221   
  

 

 

   

 

 

 

Foreclosed real estate

    

One- to four-family

   $ 1,600      $ 1,559   

Commercial

     516        438   

Other nonperforming assets

     —          —     
  

 

 

   

 

 

 

Total nonperforming assets

     2,306        2,218   
  

 

 

   

 

 

 

Troubled debt restructurings

     5,152        5,459   
  

 

 

   

 

 

 

Troubled debt restructurings and total nonperforming assets

   $ 7,458      $ 7,677   
  

 

 

   

 

 

 

Total nonperforming loans to gross loans

     0.11     0.12

Total nonperforming assets to total assets

     0.99     0.99

Total nonperforming assets and troubled debt restructurings to total assets

     3.19     3.43

 

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Table of Contents

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,  
     2011     2010  
     Average     Interest and      Yield     Average     Interest and      Yield  
     Balance     Dividends      Cost     Balance     Dividends      Cost  
     (Dollars in thousands)  

Assets:

  

Interest-earning assets:

              

Loans

   $ 173,598      $ 2,728         6.23   $ 175,366      $ 2,825         6.39

Securities available for sale

     23,972        222         3.67        18,802        205         4.33   

Other interest-earning assets

     17,781        11         0.25        5,928        4         0.29   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     215,351        2,961         5.46        200,096        3,034         6.01   

Noninterest earning assets

     18,273             17,875        
  

 

 

        

 

 

      

Total average assets

   $ 233,624           $ 217,971        
  

 

 

        

 

 

      

Liabilities and equity:

              

Interest-bearing liabilities:

              

NOW and demand deposits

   $ 27,994        20         0.28      $ 24,043        36         0.59   

Regular savings and other deposits

     17,729        14         0.32        16,816        30         0.71   

Money market deposits

     8,416        8         0.36        10,167        22         0.86   

Certificates of deposit

     79,743        331         1.65        78,719        424         2.14   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     133,882        373         1.11        129,745        512         1.57   

FHLB advances

     47,000        431         3.64        42,145        486         4.58   

Other borrowings

     815        3         1.46        833        3         1.44   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     181,697        807         1.76        172,723        1,001         2.30   

Noninterest-bearing demand deposits

     10,177             5,719        

Other noninterest-bearing liabilities

     1,692             1,641        
  

 

 

        

 

 

      

Total liabilities

     193,566             180,083        

Equity

     40,058             37,888        
  

 

 

        

 

 

      

Total liabilities and equity

   $ 233,624           $ 217,971        
  

 

 

        

 

 

      

Net interest income

     $ 2,154           $ 2,033      
    

 

 

        

 

 

    

Interest rate spread

          3.69          3.71

Net interest margin

          3.97          4.03

Average interest-earning assets to average interest-bearing liabilities

     1.19          1.16     

 

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Table of Contents
     For The Nine Months Ended September 30,  
     2011     2010  
     Average     Interest and      Yield     Average     Interest and      Yield  
     Balance     Dividends      Cost     Balance     Dividends      Cost  
     (Dollars in thousands)  

Assets:

  

Interest-earning assets:

              

Loans

   $ 175,275      $ 8,211         6.26   $ 174,573      $ 8,397         6.43

Securities available for sale

     23,522        671         3.81        19,431        670         4.61   

Other interest-earning assets

     10,961        25         0.30        7,614        12         0.21   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     209,758        8,907         5.68        201,618        9,079         6.02   

Noninterest earning assets

     18,224             16,892        
  

 

 

        

 

 

      

Total average assets

   $ 227,982           $ 218,510        
  

 

 

        

 

 

      

Liabilities and equity:

              

Interest-bearing liabilities:

              

NOW and demand deposits

   $ 25,913        85         0.44      $ 25,884        118         0.61   

Regular savings and other deposits

     17,109        59         0.46        15,283        91         0.80   

Money market deposits

     8,071        31         0.52        10,794        78         0.97   

Certificates of deposit

     80,253        1,061         1.77        76,561        1,292         2.26   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     131,346        1,236         1.26        128,522        1,579         1.64   

FHLB advances

     47,000        1,277         3.63        46,844        1,505         4.30   

Other borrowings

     815        9         1.48        833        9         1.44   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     179,161        2,522         1.88        176,199        3,093         2.35   

Noninterest-bearing demand deposits

     8,136             3,580        

Other noninterest-bearing liabilities

     1,454             1,366        
  

 

 

        

 

 

      

Total liabilities

     188,751             181,145        

Equity

     39,231             37,365        
  

 

 

        

 

 

      

Total liabilities and equity

   $ 227,982           $ 218,510        
  

 

 

        

 

 

      

Net interest income

     $ 6,385           $ 5,986      
    

 

 

        

 

 

    

Interest rate spread

          3.80          3.67

Net interest margin

          4.07          3.97

Average interest-earning assets to average interest-bearing liabilities

     1.17          1.14     

 

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Comparison of Operating Results for the Three Months Ended September 30, 2011 and 2010

General. We recorded net income of $448,000 for the three months ended September 30, 2011 compared to net income of $537,000 for the three months ended September 30, 2010. The decrease in net income was primarily attributable to a $68,000 decrease in noninterest income and an increase in noninterest expense of $51,000 for the three months ended September 30, 2011, offset partially by an increase of $8,000 in net interest income after the provision for loan losses.

Interest Income. Interest income decreased by $73,000 for the three months ended September 30, 2011 from $3.0 million for the three months ended September 30, 2010, reflecting a decrease in the yield on interest earning assets to 5.46% from 6.01%, offsetting the increase in the average balance of interest earning assets to $215.3 million for the three months ended September 30, 2011 compared to $200.1 million for the three months ended September 30, 2010. 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 decreased slightly by $97,000 for the three months ended September 30, 2011 from $2.8 million for the three months ended September 30, 2010, reflecting a decrease in the average yield on loans to 6.23% from 6.39% and a decrease the average balance of our loans to $173.6 million from $175.4 million. 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 increased slightly to $222,000 for the three months ended September 30, 2011 from $205,000 for the three months ended September 30, 2010. The decrease in the yield on securities to 3.67% for the three months ended September 30, 2011 from 4.33% for the three months ended September 30, 2010 was more than offset by the increase in the average balance of securities of $5.2 million for the period.

Interest Expense. Interest expense decreased $194,000, or 19.4%, to $807,000 for the three months ended September 30, 2011 from $1.0 million for the three months ended September 30, 2010. The decrease reflected a decrease in the average rate paid on deposits and borrowings to 1.8% in the 2011 period from 2.3% in the 2010 period. The decrease in the average rate paid on deposits and borrowings more than offset the increase in their average balances of $9.0 million for the three months ended September 30, 2011 over the three months ended September 30, 2010. The decrease in the average cost deposits reflected the re-pricing in response to interest rate cuts initiated by the Federal Reserve Board during 2010 and the lower market interest rates resulting from such cuts.

Interest expense on certificates of deposit decreased to $331,000 for the three months ended September 30, 2011 from $424,000 for the three months ended September 30, 2010, reflecting a decrease in the average cost of certificates of deposit to 1.6% for the three months ended September 30, 2011 compared with 2.1% for the three months ended September 30, 2010. The decrease in the average cost of certificates of deposits more than offset the increase in their average balances of $1.0 million for the three months ended September 30, 2011.

Interest expense on NOW and demand deposits, along with savings deposits and money market deposits decreased to $42,000 for the three months ended September 30, 2011 from $88,000 for the three months ended September 30, 2010, reflecting a decrease of $3.1 million in the average balance of such deposits as well as a decrease in the average cost of such deposits to 0.31% from 0.70%.

Interest expense on borrowings, primarily advances from the Federal Home Loan Bank, decreased to $434,000 for the three months ended September 30, 2011 from $489,000 for the three months ended September 30, 2010, reflecting a decrease in the average rate paid on such borrowings to 3.7% from 4.6%.

Net Interest Income. Net interest income increased to $2.1 million for the three months ended September 30, 2011 from $2.0 million for the three months ended September 30, 2010. The increase reflected an increase in our ratio of average interest-earning assets to average interest-bearing liabilities to 1.19X for the three months ended September 30, 2011 from 1.16X for the three months ended September 30, 2010. Our interest rate spread and net interest margin remained relatively unchanged for the three months ended September 30, 2011 from the same period in 2010.

Provision for Loan Losses. We recorded a provision for loan losses of $201,000 for the three months ended September 30, 2011 compared to $88,000 for the three months ended September 30, 2010. The allowance for loan losses was $1.1 million or 0.67% of total loans at September 30, 2011 compared to $854,000, or 0.48% of total loans at December 31, 2010. The increase in our provision was attributed to the slight increase in historical losses over the previous four quarters ended September 30, 2011 compared to September 30, 2010, an increase in qualitative factor adjustments for one-to-four family residential and consumer loan portfolios, and an increase in the provision as a result of an increase in the valuation allowance related to impaired loans of $165,000. We had $5.2 million in troubled debt restructurings at September 30, 2011 compared

 

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with $5.4 million at December 31, 2010. Our non-accrual loans decreased slightly to $190,000 at September 30, 2011 from $221,000 at December 31, 2010. Our foreclosed real estate has increased slightly to $2.1 million at September 30, 2011 from $2.0 million at December 31, 2010. We used the same methodology in assessing the allowance 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, 2011 and 2010.

Noninterest Income. Noninterest income decreased to $209,000 for the three months ended September 30, 2011 from $277,000 for the three months ended September 30, 2010. The decrease in noninterest income was due primarily to a decrease in the gain on sales of mortgage loans of $29,000 and a decrease in service charges on deposit accounts of $13,000 for the three months ended September 30, 2011 compared with the three months ended September 30, 2010.

Noninterest Expense. Noninterest expense increased slightly by $51,000 for the three months ended September 30, 2011 over the three months ended September 30, 2010. The increase reflected an increase in salaries and employee benefits of $40,000, or 5.55%, for the three months ended September 30, 2011 over the three months ended September 30, 2010 arising from the addition of our stock based compensation plans during 2011. The increase in salaries and employee benefits was offset partially by a decrease in our FDIC insurance premiums of $18,000, or 40.00%, for the same periods.

Income Tax Expense. The provision for income taxes was $275,000 for the three months ended September 30, 2011 compared to $297,000 for the three months ended September 30, 2010. Our effective tax rate increased to 38.04% for three months ended September 30, 2011 from 35.61% for the three months ended September 30, 2010.

Comparison of Operating Results for the Nine Months Ended September 30, 2011 and 2010

General. Net income for the nine months ended September 30, 2011 decreased to $1.5 million from $1.6 million for the nine months ended September 30, 2010. The decrease in net income was primarily attributable to a decrease in noninterest income of $147,000, or 19.95%, and an increase in noninterest expense of $176,000, or 4.32% for the nine months ended September 30, 2011 over the nine months ended September 30, 2010. The decrease in noninterest income and increase in noninterest expense more than offset the modest increase in net interest income after the provision for loan losses of $221,000, or 3.83%.

Interest Income. Interest income decreased by $172,000 for the nine months ended September 30, 2011 from $9.1 million for the nine months ended September 30, 2010, reflecting a decrease in yields on interest earning assets to 5.68%, which more than offset the increase in the average balance of interest earning assets of $8.1 million to $209.7 million for the nine months ended September 30, 2011 from $201.6 million for the nine months ended September 30, 2010 perid. 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 decreased $186,000 for the nine months ended September 30, 2011 from $8.4 million for the nine months ended September 30, 2010, reflecting a decrease in the average yield on loans to 6.26% from 6.43%, which offset the increase in the average balance of our loans to $175.3 million from $174.6 million. 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 remained relatively the same for the nine months ended September 30, 2011 as compared with September 30, 2010. The decrease in the yield on securities available for sale to 3.81% for the nine months ended September 30, 2011 from 4.61% for the nine months ended September 30, 2010 more than offset the increase of $4.1 million in their average balances.

Interest Expense. Interest expense decreased $571,000, or 18.46%, to $2.5 million for the nine months ended September 30, 2011 from $3.1 million for the nine months ended September 30, 2010. The decrease reflected a decrease in the average rate paid on deposits and borrowings to 1.88% in the 2011 period from 2.35% in 2010, which more than offset the increase in the average balances of deposits and borrowings of $2.9 million for the period ended September 30, 2011. The decrease in the average cost of deposits reflected the re-pricing in response to interest rate cuts initiated by the Federal Reserve Board during 2010 and the lower market interest rates resulting from such cuts.

Interest expense on certificates of deposit decreased to $1.1 million for the nine months ended September 30, 2011 from $1.3 million for the nine months ended September 30, 2010, reflecting a decrease in the average cost of certificates of deposit to 1.77% for the nine months ended September 30, 2011 compared with 2.26% for the nine months ended September 30, 2010. The decrease in the average cost of certificates of deposits more than offset the increase in their average balances of $3.6 million for the nine months ended September 30, 2011.

 

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Interest expense on NOW and demand deposits, along with savings deposits and money market deposits decreased to $175,000 for the nine months ended September 30, 2011 from $287,000 for the nine months ended September 30, 2010, reflecting a decrease of $868,000 in the average balance of such deposits as well as a decrease in the average cost of such deposits to 0.46% from 0.74%.

Interest expense on borrowings, primarily advances from the Federal Home Loan Bank, decreased to $1.3 million for the nine months ended September 30, 2011 from $1.5 million for the nine months ended September 30, 2010, reflecting a decrease in the average rate paid on such borrowings to 3.60% from 4.25%, which more than offset the increase in the average balance of borrowings of $138,000 for the nine months ended September 30, 2011.

Net Interest Income. Net interest income increased to $6.4 million for the nine months ended September 30, 2011 from $6.0 million for the nine months ended September 30, 2010. The increase reflected an increase in our interest rate spread to 3.80% from 3.67%. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 1.17X for the nine months ended September 30, 2011 from 1.14X for the nine months ended September 30, 2010. Our net interest margin also increased to 4.07% from 3.97%. 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 $399,000 for the nine months ended September 30, 2011 compared to $221,000 for the nine months ended September 30, 2010. The allowance for loan losses was $1.1 million or 0.67% of total loans at September 30, 2011 compared to $854,000, or 0.48% of total loans at December 31, 2010. The increase in our provision was attributed to the slight increase in historical losses over the previous four quarters ended September 30, 2011 compared to September 30, 2010, an increase in qualitative factor adjustments for one-to-four family residential and consumer loan portfolios, and an increase in our provision as a result of an increase in our valuation allowance for impaired loans of $255,000. We had $5.2 million in troubled debt restructurings at September 30, 2011 compared with $5.4 million at December 31, 2010. Our non-accrual loans decreased slightly to $190,000 at September 30, 2011 from $221,000 at December 31, 2010. Our foreclosed real estate has increased slightly to $2.1 million at September 30, 2011 from $2.0 million at December 31, 2010. We used the same methodology in assessing the allowance 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, 2011 and 2010.

Noninterest Income. Noninterest income decreased to $590,000 for the nine months ended September 30, 2011 from $737,000 for the nine months ended September 30, 2010. The decrease in noninterest income was due primarily to a decrease in service charges on deposit accounts of $32,000, or 9.47%, and a decrease in the gain on sales of mortgage loans of $80,000, or 32.79%, for the nine months ended September 30, 2011. The decrease in the volume of mortgage loans sold has contributed to declines in gains.

Noninterest Expense. Noninterest expense increased $176,000, or 4.32%, for the nine months ended September 30, 2011 from $4.1 million for the nine months ended September 30, 2010. The increase was primarily attributable to an increase in salaries and employee benefits of $190,000, or 8.78%, offset mostly by a decrease in occupancy and equipment expense of $29,000, or 5.89%, and a decrease in the losses on sales of foreclosed real estate of $22,000, or 7.59%. The increase in salaries and employee benefits was the result of increased compensation expense related to our stock based compensation plans related to stock options and restricted stock awarded during the nine months ended September 30, 2011.

Income Tax Expense. The provision for income taxes was $861,000 for the nine months ended September 30, 2011 and 2010. The effective tax rates increased modestly to 37.05% from 35.49% for the same periods.

 

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Liquidity and Capital Resources

Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government sponsored agencies and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have additional borrowing capacity with the Federal Home Loan Bank of Atlanta. At September 30, 2011, we had $47.0 million in advances from the Federal Home Loan Bank of Atlanta and an available borrowing limit of an additional $46.2 million.

Common Stock Dividend Policy. During the quarter ended March 31, 2011, the Company declared a dividend of $0.08 per share, or $125,000 on all outstanding shares, except for 1,007,012 of the 1,382,012 shares of the Company’s common stock held by Cullman Savings Bank, MHC. The OTS granted the Cullman Savings Bank, MHC a waiver on payment of the dividend on that portion of the shares. No future dividend waivers are expected to be granted by the OTS. Dividends of $0.08 per share were declared on July 19, 2011 on all shares outstanding as of that date.

On October 18, 2011, the Board of Directors of the Company declared a dividend of $0.08 per share of the Company’s common stock. The dividend will be payable to the shareholders of record as of October 31, 2011 and will be paid on November 15, 2011.

The determination of future dividends on the Company’s common stock will depend on conditions existing at that time.

 

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 4. CONTROLS AND PROCEDURES

a) Evaluation of Disclosure Controls and Procedures.

An evaluation as of the end of the period covered by this quarterly report was carried out 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,” which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. 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.

b) Changes in Internal Control over Financial Reporting.

The Company’s management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the quarterly period covered by this report and has concluded that there was no change during the quarterly period covered by this report that has materially affected, or is 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 three months ended September 30, 2011.

 

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 7, 2011

 

/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    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.
101    The following materials from the Cullman Bancorp, Inc. Form 10-Q for the quarter ended September 30, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Cash Flows and (iv) related notes, tagged as blocks of text.

 

33