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 June 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 August 11, 2011.

 

 

 

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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

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Table of Contents

Part I

 

ITEM 1.

FINANCIAL STATEMENTS

CULLMAN BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

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

 

		June 30, 2011				December 31, 2010
		(Unaudited)
ASSETS
Cash and cash equivalents		$	1,957			$	2,368
Federal funds sold			14,861				174
Cash and cash equivalents			16,818				2,542
Securities available for sale			23,893				24,117
Loans, net of allowance of $1,009 and $854, respectively			173,804				177,317
Loans held for sale			—				320
Premises and equipment, net			10,787				10,612
Foreclosed real estate			1,702				1,997
Accrued interest receivable			1,124				1,157
Restricted equity securities			2,545				2,595
Bank owned life insurance			2,403				2,349
Other assets			760				849
Total assets		$	233,836			$	223,855
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing		$	10,721			$	6,188
Interest bearing			134,156				130,211
Total deposits			144,877				136,399
Federal Home Loan Bank advances			47,000				47,000
Long-term debt			816				816
Accrued interest payable and other liabilities			1,612				1,370
Total liabilities			194,305				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 June 30, 2011 and December 31, 2010			26				25
Additional paid-in capital			10,389				10,330
Retained earnings			30,024				29,134
Accumulated other comprehensive income (loss)			79				(232	)
Unearned ESOP shares, at cost			(862	)			(887	)
Amount reclassified on ESOP shares			(125	)			(100	)
Total shareholders’ equity			39,531				38,270
Total liabilities and shareholders’ equity		$	233,836			$	223,855

See accompanying notes to the consolidated financial statements

 

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CULLMAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Interest and dividend income:
Loans, including fees		$	2,715			$	2,813			$	5,484			$	5,572
Securities, taxable			222				238				449				465
Federal funds sold and other			8				4				14				8
Total interest income			2,945				3,055				5,947				6,045
Interest expense:
Deposits			422				527				863				1,067
Federal Home Loan Bank advances and other borrowings			429				514				853				1,025
Total interest expense			851				1,041				1,716				2,092
Net interest income			2,094				2,014				4,231				3,953
Provision for loan losses			107				76				199				133
Net interest income after provision for loan losses			1,987				1,938				4,032				3,820
Noninterest income:
Service charges on deposit accounts			102				110				202				220
Income on bank owned life insurance			27				28				53				54
Gain on sales of mortgage loans			42				86				99				150
Net gain on sales of securities			—				—				—				11
Other			13				13				28				25
Total noninterest income			184				237				382				460
Noninterest expense:
Salaries and employee benefits			826				764				1,592				1,443
Occupancy and equipment			143				165				300				330
Data processing			121				124				253				251
Professional and supervisory fees			92				118				233				213
Office expense			30				33				64				56
Advertising			13				17				34				30
FDIC deposit insurance			38				29				70				66
Losses on foreclosed real estate			86				90				136				164
Other			49				61				131				135
Total noninterest expense			1,398				1,401				2,813				2,688
Income before income taxes			773				774				1,601				1,592
Income tax expense			283				264				586				564
Net income		$	490			$	510			$	1,015			$	1,028
Other comprehensive income, net of tax
Unrealized gain on securities available for sale, net of tax		$	364			$	117			$	311			$	149
Reclassification adjustment for gains realized in income, net of tax			—				(1	)			—				(8	)
Other comprehensive income			364				116				311				141
Comprehensive income		$	854			$	626			$	1,326			$	1,169
Earnings per share: (Note 3)
Basic		$	0.20			$	0.21			$	0.41			$	0.43
Diluted		$	0.20				N/A			$	0.41				N/A
Dividends declared per common share		$	—				—			$	0.08				—

See accompanying notes to the consolidated financial statements

 

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CULLMAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

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

 

		Common Stock				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (loss)				Unearned ESOP Shares				Amount Reclassified on ESOP Shares				Total
Balance at January 1, 2010		$	25			$	10,330			$	27,082			$	64			$	(936	)		$	(51	)		$	36,514
Net income											1,028																1,028
Net change in accumulated other comprehensive income															141								—				141
ESOP shares earned			—				—				—				—				25				—				25
Balance at June 30, 2010		$	25			$	10,330			$	28,110			$	205			$	(911	)		$	(51	)		$	37,708
Balance at January 1, 2011		$	25			$	10,330			$	29,134			$	(232	)		$	(887	)		$	(100	)		$	38,270
Net income											1,015																1,015
Net change in accumulated other comprehensive income															311												311
ESOP shares earned																			25								25
Stock-based compensation expense							60																				60
Dividends (1)											(125	)															(125	)
Issuance of 49,249 shares of restricted stock			1				(1	)																			—
Reclassification of common stock in ESOP subject to repurchase obligation			—				—				—				—				—				(25	)			(25	)
Balance at June 30, 2011		$	26			$	10,389			$	30,024			$	79			$	(862	)		$	(125	)		$	39,531

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 Mutual Holding Company.

See accompanying notes to the consolidated financial statements

 

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CULLMAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

 

		Six Months Ended June 30,
		2011				2010
Cash Flows From Operating Activities
Net income		$	1,015			$	1,028
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses			199				133
Depreciation and amortization, net			157				113
Deferred income tax benefit (expense)			(150	)			34
Net gain on sale of securities			—				(11	)
Loss on sale and impairments of foreclosed real estate			136				164
Income on bank owned life insurance			(53	)			(54	)
ESOP compensation expense			25				25
Stock based compensation expense			60				—
Gain on sale of mortgage loans			(99	)			(150	)
Mortgage loans originated for sale			(4,478	)			(6,866	)
Mortgage loans sold			4,897				6,834
Net change in operating assets and liabilities
Accrued interest receivable			33				(108	)
Accrued interest payable			(6	)			(39	)
Other			278				72
Net cash from operating activities			2,014				1,175
Cash Flows From Investing Activities
Purchases of premises and equipment			(329	)			(634	)
Purchases of securities			(2,996	)			(14,401	)
Proceeds from maturities, paydowns and calls of securities			3,711				12,299
Proceeds from sale of securities			—				250
Proceeds from sales of foreclosed real estate			10				125
Redemptions of restricted equity securities			50				—
Loan originations and payments, net			3,463				(1,742	)
Net cash from (used in) investing activities			3,909				(4,103	)
Cash Flows from Financing Activities
Net change in deposits			8,478				10,897
Cash payment of dividends			(125	)			—
Repayment of Federal Home Loan Bank advances			—				(3,993	)
Net cash from financing activities			8,353				6,904
Change in cash and cash equivalents			14,276				3,976
Cash and cash equivalents, beginning of period			2,542				5,232
Cash and cash equivalents, end of period		$	16,818			$	9,208
Cash paid during the period for:
Interest paid		$	1,722			$	2,131
Income taxes paid		$	720			$	581
Supplemental noncash disclosures:
Transfers from loans to foreclosed assets		$	1,051			$	827
Loans advanced for sales of foreclosed assets		$	1,200			$	—

See accompanying notes to the consolidated financial statements

 

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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 June 30, 2011 and December 31, 2010 and the results of operations and cash flows for the interim periods ended June 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 standards with regard to accounting for troubled debt restructurings. This update requires that when evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. In evaluating whether a concession has been granted, a creditor must evaluate whether (i) a debtor has access to funds at a market rate for debt with similar risk characteristics as the restructured debt in order to determine if the restructuring would be considered to be at a below-market rate, indicating that the creditor has granted a concession, (ii) a temporary or permanent increase in contractual interest rate as a result of a restructuring may be considered a concession because the new contractual interest rate on the restructured debt is still below the market interest rate for new debt with similar risk characteristics, and (iii) a restructuring that results in a delay in payment is either significant and is a concession or is insignificant and is not a concession. In evaluating whether a debtor is experiencing financial difficulties, a creditor may conclude that a debtor is experiencing financial difficulties, even though the debtor is not currently in payment default.

A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without a modification of the debt. The provisions of this update are effective for the first interim period beginning on or after June 15, 2011 and should be applied retroactively to the beginning of the annual period of adoption. The Company does not believe that compliance with this update will have a material effect on the financial statements.

 

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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								Six months ended
		2011				2010				2011				2010
Earnings per share
Net Income		$	490			$	510			$	1,015			$	1,028
Less: Distributed earnings allocated to participating securities			—				—				(4	)			—
Less: (Undistributed income) dividends in excess of earnings allocated to participating securities			—				—				(8	)			—
Net earnings allocated to common stock		$	490			$	510			$	1,003			$	1,028
Weighted common shares outstanding including participating securities			2,561,996				2,512,750				2,557,099				2,512,750
Less: Participating securities			(49,249	)			—				(49,249	)			—
Less: Average Unallocated ESOP Shares			(88,650	)			(93,575	)			(88,650	)			(93,575	)
Weighted average shares			2,424,097				2,419,175				2,419,200				2,419,175
Basic earnings per share		$	0.20			$	0.21			$	0.41			$	0.43
Net earnings allocated to common stock		$	490			$	510			$	1,003			$	1,028
Weighted average shares			2,424,097				2,419,175				2,419,200				2,419,175
Add: dilutive effects of assumed exercises of stock options			7,601				—				3,837				—
Average shares and dilutive potential common shares			2,431,698				2,419,175				2,423,037				2,419,175
Dilutive earnings per share		$	0.20				N/A			$	0.41				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 six months ended June 30, 2011. Stock options for 115,523 and 119,287 were not included in computed diluted EPS for the three and six months ended June 30, 2011 because they were antidilutive. There were no potential dilutive common shares for the three and six months ended June 30, 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)

 

(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) income at June 30, 2011 and December 31, 2010 were as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
June 30, 2011 (Unaudited)
U.S. Government agencies		$	13,993			$	35			$	(228	)		$	13,800
Municipal - taxable			5,150				142				(6	)			5,286
Residential mortgage-backed, GSE			2,468				102				—				2,570
Residential mortgage-backed, private label			742				4				—				746
Ultra Short mortgage mutual fund			1,414				77				—				1,491
Total		$	23,767			$	360			$	(234	)		$	23,893
		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 June 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 six months ended June 30, 2011 and 2010 were as follows:

 

		Three Months Ended June 30, 2011								Six Months Ended June 30, 2011
		2011				2010				2011				2010
		(Unaudited)								(Unaudited)
Proceeds		$	—			$	—			$	—			$	250
Gross gains			—				—				—				11

 

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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 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.

 

		June 30, 2011
		(Unaudited)
		Amortized Cost				Estimated Fair Value
Due from one to five years		$	—			$	—
Due from five to ten years			5,003				5,039
Due after ten years			14,140				14,047
Mutual fund			1,414				1,491
Residential mortgage-backed			3,210				3,316
Total		$	23,767			$	23,893

Carrying amounts of securities pledged to secure public deposits, repurchase agreements, and Federal Home Loan Bank advances as of June 30, 2011 and December 31, 2010 were $7,384 and $6,320, respectively. At June 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 June 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:

 

		Less than 12 months								12 Months or More								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
June 30, 2011 (Unaudited)
U.S. Government agencies		$	9,769			$	(228	)		$	—			$	—			$	9,769			$	(228	)
Municipal - taxable			1,043				(6	)			—				—				1,043				(6	)
Total temporarily impaired		$	10,812			$	(234	)		$	—			$	—			$	10,812			$	(234	)
		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 nine US Government agency securities and one municipal security with unrealized losses at June 30, 2011. None of the unrealized losses for these securities have been recognized into net income for the three and six months ended June 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 interest rates. The fair value is expected to recover as the bonds approach their maturity date or reset date.

 

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

 

(5)

LOANS

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

 

		June 30, 2011				December 31, 2010
		(Unaudited)
Real estate loans:
One- to four-family		$	83,403			$	83,721
Multi-family			5,293				4,837
Commercial real estate			63,068				63,443
Construction			5,174				8,936
Total real estate loans			156,938				160,937
Commercial loans			7,571				7,371
Consumer loans			10,675				10,276
Total loans			175,184				178,584
Net deferred loan fees			(371	)			(413	)
Allowance for loan losses			(1,009	)			(854	)
Loans, net		$	173,804			$	177,317

 

 

9

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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 following tables present the activity in the allowance for loan losses for the three and six months ended June 30, 2011 and the balances of the allowance for loan losses and recorded investment in loans by portfolio class based on impairment method at June 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.

 

10

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

		Real estate
Six months ended June 30, 2011 (Unaudited)		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			(2	)			—				(47	)			—				—				—				(49	)
Recoveries			—				—				—				—				—				5				5
Provisions			118				1				81				(4	)			—				3				199
Ending balance		$	448			$	10			$	390			$	5			$	47			$	109			$	1,009
Ending allowance attributed to loans:
Individually evaluated for impairment			100				—				85				—				25				—			$	210
Collectively evaluted for impairment			348				10				305				5				22				109				799
Total ending allowance balance:		$	448			$	10			$	390			$	5			$	47			$	109			$	1,009
Loans:
Loans individually evaluated for impairment:		$	2,384			$	1,939			$	3,409			$	—			$	108			$	123			$	7,963
Loans collectively evaluated for impairment:			81,019				3,354				59,659				5,174				7,463				10,552				167,221
Total ending loans balance		$	83,403			$	5,293			$	63,068			$	5,174			$	7,571			$	10,675			$	175,184
		Real estate
Three months ended June 30, 2011 (Unaudited)		One-to- Four Family				Multi-family				Commercial				Construction				Commercial				Consumer				Total
Allowance for loan losses:
Beginning balance		$	391			$	10			$	340			$	5			$	47			$	105			$	898
Charge-offs			—				—				—				—				—				—				—
Recoveries			—				—				—				—				—				4				4
Provisions			57				—				50				—				—				—				107
Ending balance		$	448			$	10			$	390			$	5			$	47			$	109			$	1,009

 

11

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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 evaluated 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 six months ended June 30, 2010:

 

		Three months 2010				Six months 2010
		(Unaudited)				(Unaudited)
Beginning balance		$	802			$	747
Provision for loan losses			76				133
Loans charged off			(86	)			(89	)
Recoveries			4				5
Ending balance		$	796			$	796

 

12

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

 

		June 30, 2011 (Unaudited)																				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		$	1,359			$	1,359			$	—			$	1,837			$	34			$	2,714			$	2,714			$	—
Multi-family			1,939				1,939				—				1,971				71				1,993				1,993				—
Commercial			3,212				3,212				—				3,577				150				3,445				3,445				—
Contruction			—				—				—				—				—				—				—				—
Total real estate loans			6,510				6,510				—				7,385				255				8,152				8,152				—
Commercial			50				50				—				57				—				61				61				—
Consumer loans			123				123				—				149				3				165				165				—
Total		$	6,683			$	6,683			$	—			$	7,591			$	258			$	8,378			$	8,378			$	—
With recorded allowance:
Real estate loans:
One- to four-family		$	1,025			$	1,025			$	100			$	683			$	22			$	—			$	—			$	—
Multi-family			—				—				—				—				—				—				—				—
Commercial			197				197				85				200				1				280				280				95
Contruction			—				—				—				—				—				—				—				—
Total real estate loans			1,222				1,222				185				883				23				280				280				95
Commercial			58				58				25				52				—				49				49				25
Consumer loans			—				—				—				—				—				—				—				—
Total		$	1,280			$	1,280			$	210			$	935			$	23			$	329			$	329			$	120
Totals:
Real estate		$	7,732			$	7,732			$	185			$	8,268			$	278			$	8,432			$	8,432			$	95
Commercial and Consumer			231				231				25				258				3				275				275				25
Total		$	7,963			$	7,963			$	210			$	8,526			$	281			$	8,707			$	8,707			$	120

 

13

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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 average balance of loans individually evaluated for impairment for the six months ended June 30, 2010 was $4,467. Interest income recognized and cash basis interest income recognized during the impairment period in December 31, 2010 was $197. Interest income recognized was equal to cash collected during the three and six months ended June 30, 2011.

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

 

June 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		$	623			$	677			$	28			$	1,328			$	82,075			$	83,403			$	—
Multi-family			—				—				—				—				5,293				5,293				—
Commercial			275				550				567				1,392				61,676				63,068				—
Construction			—				—				—				—				5,174				5,174				—
Total real estate loans			898				1,227				595				2,720				154,218				156,938				—
Commercial loans			85				58				—				143				7,428				7,571				—
Consumer loans			29				—				—				29				10,646				10,675				—
Total		$	1,012			$	1,285			$	595			$	2,892			$	172,292			$	175,184			$	—
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			$	—

 

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Nonaccrual loans at June 30, 2011 and December 31, 2010 were $595 and $221, respectively. These loans are disclosed by portfolio segment above in the “90 days or more past due” column. 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 June 30, 2011 and December 31, 2010 were $5,652 and $5,459, respectively. The amount of impairment allocated to loans whose loan terms have been modified in troubled debt restructurings at June 30, 2011 and December 31, 2010 was $210 and $35, respectively. The Company has committed to no additional amounts at June 30, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

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.

 

15

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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 June 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
		(Unaudited)								(Unaudited)								(Unaudited)								(Unaudited)								(Unaudited)								(Unaudited)
Pass		$	79,230			$	78,909			$	3,354			$	2,844			$	54,202			$	51,184			$	5,174			$	8,936			$	7,463			$	7,234			$	10,520			$	10,272			$	159,943			$	159,379
Special mention			327				955				—				—				4,830				6,987				—				—				—				—				—				—				5,157				7,942
Substandard			3,846				3,857				1,939				1,993				4,036				5,272				—				—				108				137				155				4				10,084				11,263
Doubtful			—				—				—				—				—				—				—				—				—				—				—				—				—				—
Total		$	83,403			$	83,721			$	5,293			$	4,837			$	63,068			$	63,443			$	5,174			$	8,936			$	7,571			$	7,371			$	10,675			$	10,276			$	175,184			$	178,584

 

16

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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.

 

17

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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 June 30, 2011 and December 31, 2010:

Assets and Liabilities Measured on a Recurring Basis

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

 

Fair Value Measurements Using Significant Other Observable Inputs (Level 2)
		June 30, 2011				December 31, 2010
		(Unaudited)
Financial assets:
U.S. Government sponsored agencies		$	13,800			$	13,532
Municipal - taxable			5,286				5,055
Residential mortgage-backed, GSE			2,570				3,051
Residential mortgage-backed, private label			746				983
Ultra Short mortgage mutual fund			1,491				1,496
Total investment securities available for sale		$	23,893			$	24,117

Assets and Liabilities Measured on a Non-Recurring Basis

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

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		June 30, 2011				December 31, 2010
		(Unaudited)
Assets:
Impaired loans, with specific allocations
Real estate loans:
One-to four-family		$	925			$	—
Multi-family			—				—
Commercial			112				185
Construction			—				—
Total real estate loans			1,037				185
Commercial			33				24
Total loans		$	1,070			$	209
Foreclosed real estate:
One-to four-family		$	1,195			$	987
Multi-family			—				—
Commercial			507				1,010
Construction			—				—
Total foreclosed real estate		$	1,702			$	1,997

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had carrying amounts of $1,070 and $209, which consists of the unpaid principal balances of $1,280 and $329 less

 

18

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CULLMAN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

valuation allowances of $210 and $120 at June 30, 2011 and December 31, 2010, respectively. The impact to the provision to loan losses from the change in the valuation allowances was not material for the three and six months ended June 30, 2011 and an increase in the provision of $24 for the year ended December 31, 2010.

Foreclosed real estate, which is measured at fair value less costs to sell, had a net carrying amount of $1,702 and $1,997 at June 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 June 30, 2011 and December 31, 2010 were $2,007 and $305, and $2,206 and $209, respectively. The resulting write-downs for the three and six months ended June 30, 2011 and for the year ended December 31, 2010 were $96 and $209, respectively.

Loans held for sale, which are carried at the lower of cost or fair value, had fair values in excess of cost at 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 June 30, 2011 and December 31, 2010 are summarized below:

 

		June 30, 2011								December 31, 2010
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(Unaudited)
Financial assets
Cash and cash equivalents		$	16,818			$	16,818			$	2,542			$	2,542
Securities available for sale			23,893				23,893				24,117				24,117
Loans, net			173,804				185,830				177,317				190,054
Loans held for sale			—				—				320				320
Accrued interest receivable			1,124				1,124				1,157				1,157
Restricted equity securities			2,545				N/A				2,595				N/A
Financial liabilities
Deposits			144,877				146,037				136,399				137,685
Federal Home Loan Bank Advances			47,000				50,222				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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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 June 30, 2011 there were no shares available for future grants under this plan.

The following table summarizes stock option activity for the six months ended June 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 - June 30, 2011			123,124			$	10.30				9.50			$	332,435	(1)
Fully vested and exercisable at June 30, 2011			—			$	—				—			$	—
Expected to vest in future periods			123,124
Fully vested and expected to vest - June 30, 2011			123,124			$	10.30				9.50			$	332,435	(1)

 

(1)	Based on closing price of $13.00 per share on June 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.

 

20

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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 months ended June 30, 2011. Stock-based compensation expense for stock options for the three and six months ended June 30, 2011 was $4 and $9, respectively. Total unrecognized compensation cost related to nonvested stock options was $75 at June 30, 2011 and is expected to be recognized over a weighted-average period of 4.5 years.

The following table summarizes non-vested restricted stock activity for the six months ended June 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 six months ended June 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 six months ended June 30, 2011 was $25 and $51, respectively. Unrecognized compensation expense for nonvested restricted stock awards was $456 and is expected to be recognized over 4.5 years.

 

(8)	SUBSEQUENT EVENT

On July 19, 2011, the Board of Directors of the Company declared a quarterly dividend of $0.08 per share of the Company’s common stock. The dividend will be payable to the shareholders of record as of August 1, 2011 and will be paid on August 15, 2011.

 

21

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ITEM 2.

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

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

 

•

statements of our goals, intentions and expectations;

 

•

statements regarding our business plans and prospects and growth and operating strategies;

 

•

statements regarding the asset quality of our loan and investment portfolios; and

 

•

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

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

 

•

our ability to manage our operations during the current United States 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.

On April 27, 2011, several areas in the State of Alabama, including Cullman County, were struck by significant storms, which included a number of tornadoes. While none of the banking offices of the Company were significantly damaged and all banking operations have resumed, the local economy and many of our customers have been adversely affected by the storm. In addition, the collateral properties on many of our loans have been destroyed or significantly damaged. The impact of government assistance, private insurance and rebuilding efforts are uncertain at this time. While we believe that the storm is likely to have an impact on the Company, we are unable to quantify the financial impact at this time.

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

Our total assets increased to $233.8 million at June 30, 2011 from $223.9 million at December 31, 2010. The increase was primarily attributable to an increase in cash and cash equivalents of $14.3 million, or 561.2%, partially offset by decreases in loans of $3.5 million, or 1.98%. The most significant source of the increase came from an increase in federal funds sold of $14.7 million to $14.9 million from $174,000 at December 31, 2010. The increase in federal funds sold reflected an increase in our deposits of $8.5 million to $144.9 million at June 30, 2011 from $136.4 million at December 31, 2010 and a lower demand for loans.

Total equity increased to $39.5 million at June 30, 2011 from $38.3 million at December 31, 2010. The net increase of $1.3 million, or 3.30%, was primarily attributable to net income of $1.0 million and a net change in accumulated other comprehensive income of $311,000 partially offset by $125,000 of dividends declared during the three months ended March 31, 2011.

 

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Non-Performing Assets

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

 

		June 30, 2011				December 31, 2010
		(Dollars in thousands)
Non-Accrual:
Real estate loans:
One- to four-family		$	28			$	61
Multi-family			—				—
Commercial real estate			567				156
Construction			—				—
Total real estate loans			595				217
Commercial loans			—				—
Consumer loans			—				4
Total nonaccrual loans		$	595			$	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			—				—
Total accruing loans past due 90 days or more			—				—
Total of nonaccrual and 90 days or more past due loans		$	595			$	221
Foreclosed real estate
One- to four-family		$	1,195			$	1,559
Commercial			507				438
Other nonperforming assets			—				—
Total nonperforming assets			2,297				2,218
Troubled debt restructurings			5,652				5,459
Troubled debt restructurings and total nonperforming assets		$	7,949			$	7,677
Total nonperforming loans to gross loans			0.34	%			0.12	%
Total nonperforming assets to total assets			0.98	%			0.99	%
Total nonperforming assets and troubled debt restructurings to total assets			3.40	%			3.43	%

 

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Average Balance and Yields

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

 

		For The Three Months Ended June 30,
		2011												2010
		Average Balance				Interest  and Dividends				Yield Cost				Average Balance				Interest and Dividends				Yield Cost
		(Dollars in thousands)
Assets:
Interest-earning assets:
Loans		$	175,150			$	2,715				6.22	%		$	174,648			$	2,813				6.46	%
Securities available for sale			23,118				222				3.85				20,155				238				4.74
Other interest-earning assets			10,524				8				0.30				8,187				4				0.20
Total interest-earning assets			208,792				2,945				5.66				202,990				3,055				6.04
Noninterest earning assets			18,208												16,547
Total average assets		$	227,000											$	219,537
Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits		$	25,551				31				0.49			$	26,284				38				0.58
Regular savings and other deposits			16,862				21				0.49				15,140				29				0.77
Money market deposits			7,702				11				0.57				11,306				27				0.96
Certificates of deposit			80,834				359				1.78				76,938				433				2.26
Total interest-bearing deposits			130,949				422				1.29				129,668				527				1.63
FHLB advances			47,000				426				3.64				47,419				511				4.32
Other borrowings			815				3				1.48				833				3				1.44
Total interest-bearing liabilities			178,764				851				1.91				177,920				1,041				2.35
Noninterest-bearing demand deposits			7,563												7,384
Other noninterest-bearing liabilities			1,394												1,134
Total liabilities			187,721												186,438
Equity			39,279												33,099
Total liabilities and equity		$	227,000											$	219,537
Net interest income						$	2,094											$	2,014
Interest rate spread											3.75	%											3.69	%
Net interest margin											4.02	%											3.98	%
Average interest-earning assets to average interest-bearing liabilities			1.17	X											1.14	X

 

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		For The Six Months Ended June 30,
		2011												2010
		Average Balance				Interest and Dividends				Yield Cost				Average Balance				Interest and Dividends				Yield Cost
		(Dollars in thousands)
Assets:
Interest-earning assets:
Loans		$	176,127			$	5,484				6.28	%		$	174,170			$	5,572				6.45	%
Securities available for sale			23,293				449				3.89				19,752				465				4.75
Other interest-earning assets			7,494				14				0.38				8,470				8				0.19
Total interest-earning assets			206,914				5,947				5.80				202,392				6,045				6.02
Noninterest earning assets			18,351												16,390
Total average assets		$	225,265											$	218,782
Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits		$	24,855			$	65				0.52			$	26,819			$	82				0.62
Regular savings and other deposits			16,794				44				0.53				14,503				61				0.85
Money market deposits			7,896				24				0.60				11,112				56				1.02
Certificates of deposit			80,513				730				1.83				75,464				868				2.32
Total interest-bearing deposits			130,058				863				1.34				127,898				1,067				1.68
FHLB advances			47,000				847				3.63				49,232				1,020				4.18
Other borrowings			815				6				1.48				833				5				1.21
Total interest-bearing liabilities			177,873				1,716				1.95				177,963				2,092				2.37
Noninterest-bearing demand deposits			7,023												6,925
Other noninterest-bearing liabilities			1,333												1,068
Total liabilities			186,229												185,956
Equity			39,036												32,826
Total liabilities and equity		$	225,265											$	218,782
Net interest income						$	4,231											$	3,953
Interest rate spread											3.85	%											3.65	%
Net interest margin											4.12	%											3.94	%
Average interest-earning assets to average interest-bearing liabilities			1.16	X											1.14	X

 

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

General. We recorded net income of $490,000 for the three months ended June 30, 2011 compared to net income of $510,000 for the three months ended June 30, 2010. The decrease in net income was primarily attributable to a $53,000 decrease in noninterest income and an increase in income tax expense of $19,000 for the three months ended June 30, 2011, offset partially by an increase of $49,000 in net interest income after the provision for loan losses.

Interest Income. Interest income decreased by $110,000 for the three months ended June 30, 2011 from $3.1 million for the three months ended June 30, 2010, reflecting a decrease in the yield on interest earning assets to 5.66% from 6.04%, offsetting the increase in the average balance of interest earning assets to $208.8 million for the three months ended June 30, 2011 compared to $202.9 million for the three months ended June 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 $98,000 for the three months ended June 30, 2011 from $2.8 million for the three months ended June 30, 2010, reflecting a decrease in the average yield on loans to 6.22% from 6.46%, which offset the increase in the average balance of our loans to $175.2 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 decreased slightly to $222,000 for the three months ended June 30, 2011 from $238,000 for the three months ended June 30, 2010. The decrease reflected a decrease in the yield on securities to 3.85% for the three months ended June 30, 2011from 4.74% for the three months ended June 30, 2010. The decrease in yield offset the increase in the average balance of securities of $3.0 million for the same periods.

Interest Expense. Interest expense decreased $190,000, or 18.2%, to $851,000 for the three months ended June 30, 2011 from $1.0 million for the three months ended June 30, 2010. The decrease reflected a decrease in the average rate paid on deposits and borrowings to 1.91% in the 2011 period from 2.35% in the 2010 period. The decrease in the average rate paid on deposits more than offset the increase in the average balances of deposits of $1.3 million for the three months ended June 30, 2011 over the three months ended June 30, 2010.

Interest expense on certificates of deposit decreased to $359,000 for the three months ended June 30, 2011 from $433,000 for the three months ended June 30, 2010, reflecting a decrease in the average cost of certificates of deposit to 1.78% for the three months ended June 30, 2011 compared with 2.26% for the three months ended June 30, 2010. The decrease in the average cost of certificates of deposits more than offset the increase in their average balances of $3.9 million for the three months ended June 30, 2011. The decrease in the average cost of such certificates reflected the re-pricing in response to interest rate cuts initiated by the Federal Reserve Board during 2010 and the lower market interest rates resulting from such cuts.

Interest expense on NOW and demand deposits, along with savings deposits and money market deposits decreased to $63,000 for the three months ended June 30, 2011 from $94,000 for the three months ended June 30, 2010, reflecting a decrease of $2.6 million in the average balance of such deposits as well as a decrease in the average cost of such deposits to 0.50% from 0.72%.

Interest expense on borrowings, primarily advances from the Federal Home Loan Bank, decreased to $429,000 for the three months ended June 30, 2011 from $514,000 for the three months ended June 30, 2010, reflecting a decrease in the average rate paid on such borrowings to 3.59% from 4.26%.

Net Interest Income. Net interest income increased to $2.1 million for the three months ended June 30, 2011 from $2.0 million for the three months ended June 30, 2010. The increase reflected an increase in our interest rate spread to 3.75% from 3.69%. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 1.17X for the three months ended June 30, 2011 from 1.14X for the three months ended June 30, 2010. Our net interest margin also increased to 4.02% from 3.98%. 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 $107,000 for the three months ended June 30, 2011 compared to $76,000 for the three months ended June 30, 2010. The allowance for loan losses was $1.0 million or 0.58% of total loans at June 30, 2011 compared to $796,000, or 0.46% of total loans at June 30, 2010. The increase in our provision was attributed to the slight increase in historical losses over the previous four quarters at June 30, 2011 compared to June 30, 2010, as well as the increase in qualitative factor adjustments for one-to-four family residential and consumer loan portfolios. We had $5.6 million in troubled debt restructurings at June 30, 2011 and no troubled debt restructures at June 30,

 

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2010. Our non-accrual loans have increased to $595,000 at June 30, 2011 from $221,000 at December 31, 2010. Our foreclosed real estate has decreased slightly to $1.7 million at June 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 June 30, 2011 and 2010.

Noninterest Income. Noninterest income decreased to $184,000 for the three months ended June 30, 2011 from $237,000 for the three months ended June 30, 2010. The decrease in noninterest income was due primarily to a decrease in the gain on sales of mortgage loans of $44,000 for the three months ended June 30, 2011 compared with June 30, 2010.

Noninterest Expense. Noninterest expense decreased slightly by $3,000 for the three months ended June 30, 2011 over the three months ended June 30, 2011. The decrease reflected overall decreases in most of our operating expenses, most specifically occupancy and equipment and professional and supervisory fees of $22,000 and $26,000, respectively for the three months ended June 30, 2011 over 2010. These decreases offset an increase in salaries and employee benefits of $62,000, or 8.11%. The increase in salaries and employee benefits is the result of increased bonus accruals stemming from increased profitability of the Company and compensation expense related to our stock based compensation plans related to stock options and restricted stock awarded during the three months ended June 30, 2011.

Income Tax Expense. The provision for income taxes was $283,000 for the three months ended June 30, 2011 compared to $264,000 for the three months ended June 30, 2010. Our effective tax rate increased to 36.6% for the three months ended June 30, 2011 from 34.1% for the three months ended June 30, 2010.

Comparison of Operating Results for the Six Months Ended June 30, 2011 and 2010

General. Net income for the six months ended June 30, 2011 remained relatively unchanged as compared to the six months ended June 30, 2010. The increase in net interest income after the provision for loan losses of $212,000 was offset by a decrease in noninterest income of $78,000 and an increase in noninterest expense of $125,000.

Interest Income. Interest income decreased slightly by $98,000 for the six months ended June 30, 2011 from $6.0 million for the six months ended June 30, 2010, reflecting a decrease in yields on interest earning assets to 5.80%, which more than offset the increase in the average balance of interest earning assets of $4.5 million to $206.9 million for the six months ended June 30, 2011 from $202.4 million for the six months ended June 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 $88,000 for the six months ended June 30, 2011 from $5.6 million for the six months ended June 30, 2010, reflecting a decrease in the average yield on loans to 6.28% from 6.45%, which offset the increase in the average balance of our loans to $176.1 million from $174.2 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 decreased $16,000 for the six months ended June 30, 2011 as compared with June 30, 2010. The decrease in the yield on securities available for sale to 3.89% for the six months ended June 30, 2011 from 4.75% for the six months ended June 30, 2010 more than offset the increase of $3.5 million in their average balances.

Interest Expense. Interest expense decreased $376,000, or 18.0%, to $1.7 million for the six months ended June 30, 2011 from $2.1 million for the six months ended June 30, 2010. The decrease reflected a decrease in the average rate paid on deposits and borrowings to 1.95% in the 2011 period from 2.37% in the 2010 period and a decrease in the average balances of deposits of $90,000 for the six months ended June 30, 2011 over the six months ended June 30, 2010.

Interest expense on certificates of deposit decreased to $730,000 for the six months ended June 30, 2011 from $868,000 for the six months ended June 30, 2010, reflecting a decrease in the average cost of certificates of deposit to 1.83% for the six months ended June 30, 2011 compared with 2.32% for the six months ended June 30, 2010. The decrease in the average cost of certificates of deposits more than offset the increase in their average balances of $5.0 million for the six months ended June 30, 2011. The decrease in the average cost of such certificates reflected the re-pricing in response to interest rate cuts initiated by the Federal Reserve Board during 2010 and the lower market interest rates resulting from such cuts.

Interest expense on NOW and demand deposits, along with savings deposits and money market deposits decreased to $132,000 for the six months ended June 30, 2011 from $199,000 for the six months ended June 30, 2010, reflecting a decrease of $2.9 million in the average balance of such deposits as well as a decrease in the average cost of such deposits to 0.54% from 0.77%.

 

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Interest expense on borrowings, primarily advances from the Federal Home Loan Bank, decreased to $853,000 for the six months ended June 30, 2011 from $1.0 million for the six months ended June 30, 2010, reflecting a decrease in the average rate paid on such borrowings to 3.63% from 4.20% and a decrease in the average balance of $2.2 million.

Net Interest Income. Net interest income increased to $4.2 million for the six months ended June 30, 2011 from $4.0 million for the six months ended June 30, 2010. The increase reflected an increase in our interest rate spread to 3.85% from 3.65%. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 1.16X for the six months ended June 30, 2011 from 1.14X for the six months ended June 30, 2010. Our net interest margin also increased to 4.12% from 3.94%. 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 $199,000 for the six months ended June 30, 2011 compared to $133,000 for the six months ended June 30, 2010. The allowance for loan losses was $1.0 million or 0.58% of total loans at June 30, 2011 compared to $796,000, or 0.46% of total loans at June 30, 2010. The increase in our provision was attributed to the slight increase in historical losses over the previous four quarters at June 30, 2011 compared to June 30, 2010, as well as the increase in qualitative factor adjustments for one-to-four family residential and consumer loan portfolios. We had $5.6 million in troubled debt restructurings at June 30, 2011 and no troubled debt restructures at June 30, 2010. Our non-accrual loans have increased to $595,000 at June 30, 2011 from $221,000 at December 31, 2010. Our foreclosed real estate has decreased slightly to $1.7 million at June 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 six months ended June 30, 2011 and 2010.

Noninterest Income. Noninterest income decreased to $382,000 for the six months ended June 30, 2011 from $460,000 for the six months ended June 30, 2010. The decrease in noninterest income was due primarily to a decrease in service charges on deposit accounts of $18,000, and decreases in the gain on sales of securities of $11,000 and mortgage loans of $51,000 for the six months ended June 30, 2011 compared with June 30, 2010.

Noninterest Expense. Noninterest expense increased $125,000, or 4.65%, for the six months ended June 30, 2011 from $2.7 million for the six months ended June 30, 2010. The increase was primarily attributable to an increase in salaries and employee benefits of $149,000, or 10.32%, and professional and supervisory fees of $20,000, or 9.40%, offset partially by a decrease in occupancy and equipment expense of $30,000, or 9.10%. The increase in salaries and employee benefits was the result of increased bonus accruals stemming from increased profitability of the Company and compensation expense related to our stock based compensation plans related to stock options and restricted stock awarded during the six months ended June 30, 2011.

Income Tax Expense. The provision for income taxes was $586,000 for the six months ended June 30, 2011 compared to $564,000 for the six months ended June 30, 2010. Our effective tax rate increased slightly to 36.6% from 35.4% 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 June 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 $41.5 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. 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 June 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: August 11, 2011

 

 

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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 June 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.

 

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