CULLMAN BANCORP, INC. Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect," "will," "may," "continue" and words of similar meaning. These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the asset quality of our loan and investment portfolios; and
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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. You should not place undue reliance on such statements. 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 actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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conditions relating to the COVID-19 or any other pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;
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general economic conditions, either nationally or in our market areas, that are worse than expected;
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changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
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our ability to access cost-effective funding;
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fluctuations in real estate values and both residential and commercial real estate market conditions;
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demand for loans and deposits in our market area;
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our ability to implement and change our business strategies;
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competition among depository and other financial institutions;
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inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increases in the level of defaults, losses and prepayments on loans we have made and make;
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adverse changes in the securities or secondary mortgage markets;
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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
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changes in the quality or composition of our loan or investment portfolios;
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technological changes that may be more difficult or expensive than expected;
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the inability of third-party providers to perform as expected;
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a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
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our ability to manage market risk, credit risk and operational risk;
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our ability to enter new markets successfully and capitalize on growth opportunities;
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our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we have acquired or may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
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changes in consumer spending, borrowing and savings habits;
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changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the
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our ability to retain key employees;
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the effect of national or international terrorism, conflict or war;
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our compensation expense associated with equity allocated or awarded to our employees; and
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changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Comparison of Financial Condition at
Total assets increased$51.4 million , or 14.5%, to$406.1 million atSeptember 30, 2022 from$354.7 million atDecember 31, 2021 . The increase was due to an increase in loans, which was funded by an increase in deposits and advances. 40
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Cash and cash equivalents decreased$33.2 million , or 53.6%, to$28.7 million atSeptember 30, 2022 from$61.9 million atDecember 31, 2021 . The decrease was due to loan growth, payoff of advances and investment purchases. Gross loans held for investment increased$73.7 million , or 29.0%, to$328.3 million atSeptember 30, 2022 from$254.6 million atDecember 31, 2021 . The increase was primarily due to an increase in one-to-four family loans, which increased$32.8 million , or 25.7%, to$160.6 million atSeptember 30, 2022 from$127.8 million atDecember 31, 2021 . The increase was also due to an increase in commercial real estate loans, which increased$18.0 million , or 23.4% from$95.0 million atSeptember 30, 2022 from$77.0 million atDecember 31, 2021 . Securities available for sale increased$5.5 million or 25.8%, to$26.8 million atSeptember 30, 2022 from$21.3 million atDecember 31, 2021 . We used a portion of deposits brought in during the nine months endedSeptember 30, 2022 to invest in securities. Total deposits increased$54.7 million , or 23.6%, to$286.7 million atSeptember 30, 2022 from$232.0 million atDecember 31, 2021 . We experienced increases in regular savings and other deposits of$27.4 million , or 49.6%, to$82.7 million atSeptember 30, 2022 from$55.3 million atDecember 31, 2021 , and in interest-bearing demand deposits of$29.4 million , or 37.6%, to$107.6 million atSeptember 30, 2022 from$78.2 million atDecember 31, 2021 . Noninterest bearing demand deposits increased$2.8 million or 21.0% to$16.2 million atSeptember 30, 2022 from$13.4 million atDecember 31, 2021 . The increases are a result of an increase in new accounts. Borrowings decreased$3.5 million , or 18.9%, to$15.0 million of borrowings atSeptember 30, 2022 , from$18.5 million atDecember 31, 2021 . We used a portion of the excess cash received from deposits during the nine months endedSeptember 30, 2022 to pay off a portion of our advances and recognized a net gain of$87,000 for repaying$18.5 million of borrowings. During the month of September, we received a$15.0 million advance to support loan growth. Stockholders' equity decreased$1.2 million , or 1.2%, to$98.5 million atSeptember 30, 2022 from$99.7 million atDecember 31, 2021 . The decrease was mainly due to the decrease in accumulated other income (unrealized losses on securities available for sale) of$4.1 million for the nine months endedSeptember 30, 2022 , partially offset by an increase in retained earnings of$2.4 million for the nine months endedSeptember 30, 2022 . The decrease in unrealized losses on securities available for sale was due to the recent increase in interest rates causing the fair value of our securities to decrease. Stockholders' equity (book value) per share atSeptember 30, 2022 was$13.30 . 41
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Table of Contents Average Balance Sheets The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Deferred loan fees totaled$11,000 and$113,000 as ofSeptember 30, 2022 andSeptember 30, 2021 , respectively. Loan balances exclude loans held for sale. Three
Months Ended
2022 2021
Average Average Average Average
Outstanding Yield/Rate Outstanding Yield/Rate
Balance Interest (1) Balance Interest (1)
(Dollars in thousands)
Interest-earning assets:
Loans (excluding PPP loans) $ 319,258 $ 3,892 4.88 % $ 240,926 $ 3,017 5.01 %
PPP loans - - - 2,802 128 18.27 %
Securities 29,329 254 3.46 % 21,138 119 2.25 %
Federal Home Loan Bank stock 270 2 2.96 % 1,421 15 4.22 %
Federal funds sold 17,288 95 2.20 % 83,140 27 0.13 %
Total interest-earning assets 366,145 4,243 4.64 % 349,427 3,306 3.78 %
Noninterest-earning assets 23,501 19,190
Total assets $ 389,646 $ 368,617
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 104,077 32 0.12 % $ 76,021 24 0.13 %
Regular savings and other
deposits 82,632 66 0.32 % 52,184 25 0.19 %
Money market deposits 3,297 1 0.12 % 4,408 2 0.18 %
Certificates of deposit 75,839 155 0.82 % 83,037 219 1.05 %
Total interest-bearing
deposits 265,845 254 0.38 % 215,650 270 0.50 %
Federal Home Loan Bank
advances
and other borrowings 2,500 27 4.32 % 33,500 149 1.78 %
Total interest-bearing
liabilities 268,345 281 0.42 % 249,150 419 0.67 %
Noninterest-bearing demand
deposits 15,617 13,724
Other noninterest-bearing
liabilities 7,163 7,415
Total liabilities 291,125 270,289
Total shareholders' equity 98,521 98,328
Total liabilities and
shareholders'
equity $ 389,646 $ 368,617
Net interest income $ 3,962 $ 2,887
Net interest rate spread (2) 4.22 % 3.11 %
Net interest-earning assets
(3) $ 97,800 $ 100,277
Net interest margin (4) 4.33 % 3.28 %
Average interest-earning
assets tointerest-bearing liabilities 1.36x 1.40x (1) Annualized.
(2)
Net interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(3)
Net interest-earning assets represent total interest-earning assets less total
interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total
interest-earning assets.
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For the Nine Months Ended September 30,
2022 2021
Average Average Average Average
Outstanding Yield/Rate Outstanding Yield/Rate
Balance Interest (1) Balance Interest (1)
(Dollars in thousands)
Interest-earning assets:
Loans (excluding PPP loans) $ 289,772 $ 11,074 5.10 % $ 236,719 $ 9,258 5.21 %
PPP loans 104 36 46.15 % 3,420 314 12.24 %
Securities 26,787 588 2.93 % 19,966 335 2.24 %
Federal Home Loan Bank stock 255 17 8.89 % 1,819 61 4.47 %
Federal funds sold 33,858 187 0.74 % 66,517 50 0.10 %
Total interest-earning assets 350,776 11,902 4.52 % 328,441 10,018 4.07 %
Noninterest-earning assets 21,454 19,018
Total assets $ 372,230 $ 347,459
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 95,882 84 0.12 % $ 76,235 70 0.12 %
Regular savings and other
deposits 73,132 126 0.23 % 48,812 69 0.19 %
Money market deposits 4,102 5 0.16 % 4,617 6 0.17 %
Certificates of deposit 76,696 473 0.82 % 84,734 714 1.12 %
Total interest-bearing
deposits 249,812 688 0.37 % 214,398 859 0.53 %
Federal Home Loan Bank
advances
and other borrowings 2,194 48 2.92 % 41,266 543 1.75 %
Total interest-bearing
liabilities 252,006 736 0.39 % 255,664 1,402 0.73 %
Noninterest-bearing demand
deposits 14,722 12,965
Other noninterest-bearing
liabilities 6,418 8,728
Total liabilities 273,146 277,357
Total shareholders' equity 99,084 70,102
Total liabilities and
shareholders'
equity $ 372,230 $ 347,459
Net interest income $ 11,166 $ 8,616
Net interest rate spread (2) 4.13 % 3.34 %
Net interest-earning assets
(3) $ 98,770 $ 72,777
Net interest margin (4) 4.24 % 3.50 %
Average interest-earning
assets to
interest-bearing
liabilities 1.39x 1.28x
(1)
Annualized.
(2)
Net interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(3)
Net interest-earning assets represent total interest-earning assets less total
interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total
interest-earning assets.
The following tables present the effects of changing rates and volumes on our
net interest income for the three and nine months ended September 30, 2022 and
2021. The rate column shows the effects attributable to changes in rate (changes
in rate multiplied by prior volume). The volume column shows the effects
attributable to changes in volume (changes in volume multiplied by prior rate).
The total column represents the sum of the prior columns. For purposes of these
tables, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately based on the changes due to rate
and the changes due to volume. There were no out-of-period items or adjustments
required to be excluded from the tables below.
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For the Three Months ended September 30, 2022 vs. 2021
Increase (Decrease) Due to Total Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans (excluding PPP
loans) $ 3,823 $ (2,948 ) $ 875
PPP Loans (128 ) - (128 )
Securities 283 (148 ) 135
Federal Home Loan Bank
stock (34 ) 21 (13 )
Federal funds sold (1,449 ) 1,517 68
Total interest-earning
assets 2,495 (1,558 ) 937
Interest-bearing
liabilities:
Interest-bearing demand
Deposits 154 (146 ) 8
Regular savings and other
deposits 97 (56 ) 41
Money market deposits (1 ) - (1 )
Certificates of deposit (59 ) (5 ) (64 )
Total interest-bearing
deposits 191 (207 ) (16 )
Federal Home Loan Bank
advances (1,339 ) 1,217 (122 )
Total interest bearing
liabilities (1,148 ) 1,010 (138 )
Change in net interest
income $ 3,643 $ (2,568 ) $ 1,075
For the Nine Months ended September 30, 2022 vs. 2021
Increase (Decrease) Due to Total Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans (excluding PPP
loans) $ 2,765 $ (949 ) $ 1,816
PPP Loans (406 ) 128 (278 )
Securities 153 100 253
Federal Home Loan Bank
stock (70 ) 26 (44 )
Federal funds sold (33 ) 170 137
Total interest-earning
assets 2,409 (525 ) 1,884
Interest-bearing
liabilities:
Interest-bearing demand
Deposits 156 (142 ) 14
Regular savings and other
deposits 46 11 57
Money market deposits (1 ) - (1 )
Certificates of deposit (90 ) (151 ) (241 )
Total interest-bearing
deposits 111 (282 ) (171 )
Federal Home Loan Bank
advances (684 ) 189 (495 )
Total interest bearing
liabilities (573 ) (93 ) (666 )
Change in net interest
income $ 2,982 $ (432 ) $ 2,550
Comparison of Operating Results for the Three months ended
General. Net income was$926,000 for the three months endedSeptember 30, 2022 , compared to net loss of$501,000 for the three months endedSeptember 30, 2021 . We experienced loss due to the one-time pre-tax$1.6 million expense for the contribution of common stock and cash to the Foundation in the third quarter of 2021. Additionally, there was an 44
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increase in net income primarily due to an increase in interest income resulting from an increase in loans.
Interest Income. Interest income increased$937,000 , or 28.3%, to$4.2 million for three months endedSeptember 30, 2022 from$3.3 million for the three months endedSeptember 30, 2021 . The increase was due primarily to an increase in interest income on loans (excluding PPP loans), which is our primary source of interest income. Interest income on loans (excluding PPP loans) increased$875,000 , or 29.0%, to$3.9 million for the three months endedSeptember 30, 2022 from$3.0 million for the three months endedSeptember 30, 2021 . Our average balance of loans (excluding PPP loans) increased$78.3 million , or 32.5% for the three months endedSeptember 30, 2022 , to$319.3 million for three months endedSeptember 30, 2022 from$240.9 million for the three months endedSeptember 30, 2021 . The increase is due to our decision to retain longer-term, fixed-rate loans instead of selling them, as well as the continued growth of commercial lending. Our weighted average yield on loans (excluding PPP loans) decreased 13 basis points to 4.88% for the three months endedSeptember 30, 2022 compared to 5.01% for the three months endedSeptember 30, 2021 . The decrease was a reflection of the low rate environment and competition when the loans were originated. Interest Expense. Interest expense decreased$138,000 , or$32 .9% to$281,000 for the three months endedSeptember 30, 2022 compared to$419,000 for the three months endedSeptember 30, 2021 . The decrease is due primarily to a decrease in borrowings balances. Interest expense on deposits decreased$16,000 , or 5.9%, to$245,000 for the three months endedSeptember 30, 2022 compared to$270,000 for the three months endedSeptember 30, 2021 . The decrease was due primarily to a decrease in interest expense on certificates of deposit. Interest expense on certificates of deposit decreased$64,000 , or 29.2%, to$155,000 for the three months endedSeptember 30, 2022 , compared to$219,000 for the three months endedSeptember 30, 2021 . We experienced decreases in both the average balance of certificates of deposit ($7.2 million , or 8.7%) for the three months endedSeptember 30, 2022 and 2021, and rates paid on certificates of deposit (23 basis points, to 0.82%) for the three months endedSeptember 30, 2022 and 2021. We have allowed higher-rate certificates of deposit to run off during the current interest rate environment. Interest expense on borrowings decreased$122,000 , or 81.9%, to$27,000 for the three months endedSeptember 30, 2022 , compared to$149,000 for the three months endedSeptember 30, 2021 . The average balance of borrowings decreased$31.0 million , or 92.5% to$2.5 million for the three months endedSeptember 30, 2022 , compared to$33.5 million for the three months endedSeptember 30, 2021 . The average rate paid on borrowings increased to 4.32% for the three months endedSeptember 30, 2022 compared to 1.78% for the three months endedSeptember 30, 2021 . The increase was due to paying off lower rate advances in 2021. Net Interest Income. Net interest income increased$1.1 million , or 37.2%, to$4.0 million for the three months endedSeptember 30, 2022 from$2.9 million for the three months endedSeptember 30, 2021 . Our interest rate spread increased to 4.22% for the three months endedSeptember 30, 2022 , compared to 3.11% for the three months endedSeptember 30, 2021 , while our interest margin increased to 4.33% for the three months endedSeptember 30, 2022 compared to 3.28% for the three months endedSeptember 30, 2021 . 45
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Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. After an evaluation of these factors,$120,000 was recorded in the provision for loan losses for the three months endedSeptember 30, 2022 compared to no provision expense for the three months endedSeptember 30, 2021 . Our allowance for loan losses was$2.7 million atSeptember 30, 2022 compared to$2.4 million atDecember 31, 2021 and$2.4 million atSeptember 30, 2021 . The ratio of our allowance for loan losses to total loans was 0.82% atSeptember 30, 2022 compared to 0.95% atDecember 31, 2021 and 0.98% atSeptember 30, 2021 , while the allowance for loan losses to non-performing loans was 823% atSeptember 30, 2022 compared to 1,247% atDecember 31, 2021 . We had no charge-offs or recoveries during the three months endedSeptember 30, 2022 compared to$8,000 of charge-offs and$2,000 of recoveries for the three months endedSeptember 30, 2021 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atSeptember 30, 2022 . However, future changes in the factors we use to calculate the allowance for loan losses, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, theOffice of the Comptroller of the Currency , as an integral part of its examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. Non-interest Income. Non-interest income increased$13,000 , or 3.3%, to$402,000 for the three months endedSeptember 30, 2022 from$389,000 for the three months endedSeptember 30, 2021 . The increase was due to an increase in service charges for new deposit accounts as well as income received from additional bank owned life insurance purchased in 2022. Non-interest Expense. Non-interest expense decreased$1.0 million , or 25.3%, to$3.0 million for the three months endedSeptember 30, 2022 compared to$4.0 million for the three months endedSeptember 30, 2021 . The decrease was primarily due to the one-time pre-tax$1.6 million expense for the contribution of common stock and cash to the Foundation in the third quarter of 2021. The decrease was partially offset by an increase in salaries and employee benefits expense, due to an increase in employees. Income Tax Expense. We recognized income tax (benefit) expense of$358,000 and ($185,000 ) for the three months endedSeptember 30, 2022 and 2021, respectively, resulting in effective rates of 27.9 and 27.0%, respectively. 46
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Comparison of Operating Results for the Nine months ended
General. Net income was$3.2 million for the nine months endedSeptember 30, 2022 , compared to$1.1 million for the nine months endedSeptember 30, 2021 . We experienced a decrease in non-interest expense due to the one-time pre-tax$1.6 million expense for the contribution of common stock and cash to the Foundation in the third quarter of 2021 and an increase in interest income, due to loan growth, as well as a decrease in interest expense, related to changes in market interest rates. Interest Income. Interest income increased$1.9 million , or 18.8%, to$11.9 for the nine months endedSeptember 30, 2022 from$10.0 million for the nine months endedSeptember 30, 2021 . The increase was due primarily to an increase in interest income on loans (excluding PPP loans), which is our primary source of interest income. Interest income on loans (excluding PPP loans) increased$1.8 million , or 19.6%, to$11.1 million for the nine months endedSeptember 30, 2022 from$9.3 million for the nine months endedSeptember 30, 2021 . Our average balance of loans (excluding PPP loans) increased$53.1 million , or 22.4%, to$289.8 million for the nine months endedSeptember 30, 2022 from$236.7 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to the growth in our one-to four family and commercial real estate loans. Our weighted average yield on loans (excluding PPP loans) decreased 11 basis points to 5.10% for the nine months endedSeptember 30, 2022 compared to 5.21% for the nine months endedSeptember 30, 2021 . The decreases are a reflection of the low rate environment when the loans were originated. Interest Expense. Interest expense decreased$666,000 , or 47.5%, to$736,000 for the nine months endedSeptember 30, 2022 compared to$1.4 million for the nine months endedSeptember 30, 2021 . These decreases are due to a decrease in borrowings balances. Interest expense on deposits decreased$171,000 , or 19.9%, to$688,000 for the nine months endedSeptember 30, 2022 compared to$859,000 for the nine months endedSeptember 30, 2021 . The decrease was due primarily to a decrease in interest expense on certificates of deposit. Interest expense on certificates of deposit decreased$241,000 , or 33.8%, to$473,000 for the nine months endedSeptember 30, 2022 from$714,000 for the nine months endedSeptember 30, 2021 . We experienced decreases in both the average balance of certificates of deposit ($8.0 million , or 9.5%) for the nine months endedSeptember 30, 2022 and 2021, and rates paid on certificates of deposit (30 basis points, to 0.82%) for the nine months endedSeptember 30, 2022 and 2021. The decline in balances, which were at higher rates, caused our decrease in average rates. Interest expense on borrowings decreased$495,000 , or 91.2%, to$48,000 for the nine months endedSeptember 30, 2022 compared to$543,000 for the nine months endedSeptember 30, 2021 . The average balance of borrowings decreased$39.1 million , or 94.7%, to$2.2 million for the nine months endedSeptember 30, 2022 compared to$41.3 million for the nine months endedSeptember 30, 2021 . The decrease is due to paying down the advances. Net Interest Income. Net interest income increased$2.6 million , or 29.6%, to$11.2 million for the nine months endedSeptember 30, 2022 from$8.6 million for the nine months endedSeptember 30, 2021 . Our interest rate spread increased 79 basis points to 4.13% for the nine 47
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months endedSeptember 30, 2022 , compared to 3.34% for the nine months endedSeptember 30, 2021 , while our net interest margin increased 74 basis points to 4.24% for the nine months endedSeptember 30, 2022 compared to 3.50% for the nine months endedSeptember 30, 2021 . Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. After an evaluation of these factors,$275,000 was recorded in the provision for loan losses for the nine months endedSeptember 30, 2022 , compared to$25,000 for the nine months endedSeptember 30, 2021 . Our provision increase was mainly due to our loan growth. We had$1,000 of net recoveries for the nine months endedSeptember 30, 2022 compared to$10,000 of charge-offs and$5,000 of recoveries for the nine months endedSeptember 30, 2021 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atSeptember 30, 2022 . However, future changes in the factors we use to calculate the allowance for loan losses, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, theOffice of the Comptroller of the Currency , as an integral part of its examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. Non-interest Income. Non-interest income increased$55,000 to$1.3 million for the nine months endedSeptember 30, 2022 from$1.2 million for the nine months endedSeptember 30, 2021 . Service charges on deposit accounts increased$140,000 to$753,000 for the nine months endedSeptember 30, 2022 from$613,000 for the nine months endedSeptember 30, 2021 due to an increase in new accounts. We also recognized a gain on the sale of foreclosed real estate of$46,000 during the nine months endedSeptember 30, 2022 . These increases were offset by the gain on sale of mortgage loans decreasing by$123,000 , or 58.9%, as we sold$3.3 million of mortgage loans during the nine months endedSeptember 30, 2022 compared to$6.7 million of such sales during the nine months endedSeptember 30, 2021 . Non-interest Expense. Non-interest expense decreased$483,000 , or 5.7%, to$7.9 million for the nine months endedSeptember 30, 2022 compared to$8.4 million for the nine months endedSeptember 30, 2021 . The decrease was primarily due to the one-time pre-tax$1.6 million expense for the contribution of common stock and cash to the Foundation in the third quarter of 2021, which was partially offset by an increase in salaries and employee benefits expense of$718,000 , or 15.4%, to$5.4 million for the nine months endedSeptember 30, 2022 compared to$4.7 million for the nine months endedSeptember 30, 2021 , due to annual salary increases and rising benefits expense as well as an increase in employees. 48
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Income Tax Expense. We recognized income tax expense of$973,000 and$252,000 for the nine months endedSeptember 30, 2022 and 2021, respectively, resulting in effective rates of 23.1% and 18.2%, respectively. The change is due to the tax benefit of the contribution to the Foundation.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from theFederal Home Loan Bank of Atlanta . AtSeptember 30, 2022 andDecember 31, 2021 , we had a$114.6 million and 111.3 million line of credit with theFederal Home Loan Bank of Atlanta , and had$15.0 million and$18.5 million outstanding as of those dates, respectively. In addition, atSeptember 30, 2022 , we had an unsecured federal funds line of credit of$10.0 million . No amount was outstanding on this line of credit atSeptember 30, 2022 . While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was$5.3 million and$4.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of investment securities and bank owned life insurance, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on securities, was$88.9 million and$12.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Net cash provided by financing activities, consisting primarily of activity in deposit accounts and proceeds fromFederal Home Loan Bank borrowings, offset by repayment ofFederal Home Loan Bank borrowings, was$50.4 million and$37.8 million for the nine months endedSeptember 30, 2022 and 2021, respectively. We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. AtSeptember 30, 2022 ,Cullman Savings Bank exceeded all of its regulatory capital requirements, and was categorized as well capitalized. Management is not aware of any conditions or events since the most recent notification that would change our category.
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