CULLMAN BANCORP, INC. The objective of this section is to help readers understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements that appear elsewhere in this Annual Report on Form 10-K. Overview Total assets increased$23.3 million , or 7.0%, to$354.7 million atDecember 31, 2021 from$331.3 million atDecember 31, 2020 . The increase was due to an increase in loans funded by an increase in deposits and equity from the capital raised in the conversion. During the year, we have been holding more longer-term, fixed-rate loans in our portfolio than during 2020. Total deposits increased$15.1 million , or 6.9%, to$232.0 million atDecember 31, 2021 from$217.0 million atDecember 31, 2020 . The increase in deposits was due to the increase in the regular savings and other deposits categories, as we have grown accounts and customers have continued to reduce spending. Net income decreased$1.8 million , or 50.7%, to$1.8 million for the year endedDecember 31, 2021 , compared to$3.5 million for the year endedDecember 31, 2020 . The decrease was due primarily 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 additional decrease was due to increases in non-interest expense and a decrease in interest income, partially offset by decreases in interest expense and income tax expense. Interest income decreased$802,000 , or 5.7%, to$13.4 million for the year endedDecember 31, 2021 from$14.2 million for the year endedDecember 31, 2020 . The decrease was due primarily to a decrease in interest income on loans (excluding PPP loans), which is our primary source of interest income. Interest expense decreased$1.1 million , or 37.7%, to$1.8 million for the year endedDecember 31, 2021 compared to$2.9 million for the year endedDecember 31, 2020 , due to a decrease of$586,000 in interest expense on deposits and a decrease of$495,000 in interest expense on borrowings. We recorded provisions for loan losses of$60,000 and$152,000 for the years endedDecember 31, 2021 and 2020, respectively. Our allowance for loan losses was$2.4 million atDecember 31, 2021 and 2020. The allowance for loan losses to total loans was 0.94% atDecember 31, 2021 compared to 1.01% atDecember 31, 2020 , while the allowance for loan losses to non-performing loans was 810.10% atDecember 31, 2021 compared to 1,935.25% atDecember 31, 2020 . We had charge-offs of$20,000 and recoveries of$15,000 during the year endedDecember 31, 2021 . 29 --------------------------------------------------------------------------------
Impact of COVID-19 Outbreak
To address the economic impact inthe United States , the CARES Act was signed into law onMarch 27, 2020 . The CARES Act included a number of provisions that affected us, including accounting relief for TDRs. The CARES Act also established the PPP through the SBA, which allowed us to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements.
In addition, the
•
Operating our branches under a drive-through model with appointment-only lobby service when needed.
•
Offering assistance to our customers affected by the COVID-19 pandemic, which includes payment deferrals, waiving certain fees, suspending property foreclosures, and participating in the CARES Act and lending programs for businesses, including the PPP.
We have implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act, COVID-19 related modifications to loans that were current as ofDecember 31, 2019 are exempt from TDR classification underU.S. GAAP. In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to loans that were current as of the loan modification program implementation date are not TDRs. During the year endedDecember 31, 2020 , we granted short-term payment deferrals on 61 loans, totaling approximately$17.7 million in aggregate principal amount. As ofDecember 31, 2021 , all of these loans, have returned to normal payment status. Given the unprecedented uncertainty and rapidly evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact on our business, results of operations and financial condition are uncertain. Adverse effects on our business and results of operations could include: decreased demand for our products and services, protracted periods of lower interest rates, increased non-interest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs.
Summary of Significant Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity withU.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company" we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have determined to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards. 30 --------------------------------------------------------------------------------
The following represent our significant accounting policies:
Allowance for Loan Losses. The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for loan losses. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan losses. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management's judgment, is adequate to absorb probable losses in the loan portfolio. Management's evaluation process used to determine the appropriateness of the allowance for loan losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the allowance for loan losses could change significantly. The allocation methodology applied byCullman Savings Bank is designed to assess the appropriateness of the allowance for loan losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, 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 non-accrual 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. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the allowance for loan losses was appropriate atDecember 31, 2021 andDecember 31, 2020 . The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for loan losses and, as a result of such reviews, we may have to adjust our allowance for loan losses. TheFinancial Accounting Standards Board has delayed the effective date of the implementation of the Current Expected Credit Loss, or CECL, standard forCullman Bancorp andCullman Savings Bank untilJanuary 1, 2023 . CECL will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for loan losses that are incurred or probable, which will greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses and may require us to increase our allowance for credit losses. Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management's current assessment, the impact of which could be significant to the results of operations and reported earnings.Cullman Bancorp will file consolidated federal and state income tax returns withCullman Savings Bank . Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. We may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense. 31 --------------------------------------------------------------------------------
Selected Consolidated Financial and Other Data
The summary information presented below at each date or for each of the years presented is derived in part from our consolidated financial statements.
At December 31,
2021 2020 2019
(In thousands)
Selected Financial Condition Data:
Total assets $ 354,709 $ 331,396 $ 298,055
Securities available for sale 21,313 18,875 23,544
Loans held for sale - 173 -
Loans receivable, net 252,160 231,799 248,785
Premises and equipment, net 9,484 8,576 8,538
Foreclosed real estate 400 434 386
Federal Home Loan Bank
stock, at cost 859 2,541 2,452
Bank owned life insurance 5,737 5,657 5,506
Deposits 232,021 216,963 188,888
Borrowings 18,500 53,500 51,500
Shareholders' equity 99,734 56,875 53,395
For the Years Ended December 31,
2021 2020 2019
(In thousands)
Selected Operating Data:
Interest income $ 13,370 $ 14,172 $ 14,332
Interest expense 1,786 2,867 3,118
Net interest income 11,584 11,305 11,214
Provision for loan losses 60 152 55
Net interest income after provision for
loan losses 11,524 11,153 11,159
Noninterest income 1,509 1,449 1,456
Noninterest expense 10,939 8,099 7,863
Income before income tax expense 2,094 4,503 4,752
Income tax expense 344 957 1,018
Net income $ 1,750 $ 3,546 $ 3,734
Earnings per share - basic (1) $ 0.25 $ 0.52 $ 0.55
Earnings per share - diluted (1) $ 0.25 $ 0.52 $ 0.55
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At or For the Years Ended December 31,
2021 2020 2019
Performance Ratios:
Return on average assets 0.50 % 1.13 % 1.26 %
Return on average equity 2.26 % 6.43 % 7.17 %
Interest rate spread (2) 3.30 % 3.54 % 3.74 %
Net interest margin (3) 3.46 % 3.75 % 3.98 %
Noninterest expense to average assets 3.11 % 2.57 % 2.66 %
Efficiency ratio (4) 84.00 % 64.27 % 62.33 %
Average interest-earning assets to average
interest-bearing liabilities 1.31x 1.22x 1.22x
Capital Ratios:
Average equity to average assets 21.93 % 17.52 % 17.60 %
Total capital to risk-weighted assets (5) N/A (5) N/A (5) 22.40 %
Tier 1 capital to risk-weighted assets (5) N/A (5) N/A (5) 21.41 %
Common equity tier 1 capital to
risk-weighted
assets (5) N/A (5) N/A (5) 21.41 %
Tier 1 capital to average assets (5) 18.83 % 15.49 % 15.86 %
Asset Quality Ratios:
Allowance for loan losses as a percentage
of total loans 0.94 % 1.01 % 0.88 %
Allowance for loan losses as a percentage
of
non-performing loans 810.10 % 1935.25 % 1642.96 %
Net (charge-offs) recoveries to average
outstanding
loans during the year (0.01)% - -
Non-performing loans as a percentage of
total loans 0.12 % 0.05 % 0.05 %
Non-performing loans as a percentage of
total assets 0.08 % 0.04 % 0.05 %
Total non-performing assets as a
percentage
of total assets 0.14 % 0.17 % 0.17 %
Other:
Number of offices 4 4 4
Number of full-time equivalent employees 50 50 49
(1)
Amounts related to the periods prior to the
(2)
Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (3) Represents net interest income as a percentage of average interest-earning assets. (4) Represents noninterest expenses divided by the sum of net interest income after provision and noninterest income. (5) Ratios are forCullman Savings Bank . During the year endedDecember 31, 2020 ,Cullman Savings Bank elected the "community bank leverage ratio" alternate capital reporting framework. For additional information, see "Supervision and Regulation-Federal Banking Regulation-Capital Requirements." 33 --------------------------------------------------------------------------------
Comparison of Financial Condition at
Total assets increased$23.3 million , or 7.0%, to$354.7 million atDecember 31,2021 from$331.4 atDecember 31,2020 . The increase was due to an increase in loans funded from an increase in deposits and and increase in equity from the stock conversion. Cash and cash equivalents increased$1.6 million to$61.9 million atDecember 31, 2021 from$60.4 million atDecember 31, 2020 . The increase was due to an increase in deposits from an increase in accounts and continued reduced spending by our customers. Gross loans held for investment increased$20.3 million , or 8.7%, to$254.6 million atDecember 31, 2021 from$234.3 million atDecember 31, 2020 . The increase was primarily due to an increase in one-to-four family residential real estate loan, which increased$12.9 million , or 11.3%, to$127.7 million atDecember 31, 2021 from$114.8 million atDecember 31, 2020 . We have held more longer-term loans in our portfolio than 2020. Construction loans have increased$10.0 million , or 181.9% to $$15.8 million atDecember 31, 2021 from$5.5 million atDecember 31, 2020 . This is a combination of commercial and mortgage construction. Securities available-for-sale increased$2.4 million , or 12.9%, to$21.3 million atDecember 31, 2021 from$18.9 million atDecember 31, 2020 . We purchased$3 million inU.S Government agencies during 2021 as well as replacing municipal securities that were called in order to diversify our portfolio. Total deposits increased$15.1 million , or 6.9%, to$232.0 million atDecember 31, 2021 from$217.0 atDecember 31, 2020 . The increase in deposits was due to the increase in the regular savings and other deposits categories, as we have grown accounts and customers have continued to reduced spending. Regular savings and other deposits increased$13.9 million , or 33.5%, to$55.3 million atDecember 31, 2021 from$41.4 million atDecember 31, 2020 . We had$18.5 million of borrowings atDecember 31, 2021 , compared to$53.5 million of borrowings atDecember 31, 2020 . We decreased our borrowings based on the high amount of liquidity the bank had during 2021. We regularly review or liquidity position based on alternative uses of available funds as well as market conditions. Shareholders' equity increased by$42.8 million , or 75.4%, to$99.7 million atDecember 31, 2021 compared to$56.9 million atDecember 31, 2020 . The increase was due primarily to the capital raised in the offering. 34 --------------------------------------------------------------------------------
Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual 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$46,000 and$170,000 for the years endedDecember 31, 2021 and 2020, respectively. Loan balances exclude loans held for sale. The decrease in deferred loan fees is due to the PPP balance decrease allowing the fee income to be recognized. Stockholders' equity (book value) per share atDecember 31, 2021 was$10.46 . We had no intangible assets atDecember 31, 2021 . For the Years Ended December 31, 2021 2020 Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate (Dollars in thousands) Interest-earning assets: Loans (excluding PPP loans)$ 239,145 12,381 5.18 %$ 236,982 $ 13,126 5.54 % PPP loans 2,872 378 13.17 % 9,075 342 3.77 % Securities 20,356 461 2.26 % 20,465 530 2.59 % Federal Home Loan Bank stock 1,691 74 4.37 % 2,662 130 4.88 % Federal funds sold 70,452 76 0.11 % 32,553 44 0.14 % Total interest-earning assets 334,516 13,370 4.00 % 301,737 14,172 4.70 % Noninterest-earning assets 18,749 12,989 Total assets$ 353,265 $ 314,726 Interest-bearing liabilities: Interest-bearing demand deposits$ 77,301 95 0.12 %$ 60,916 125 0.21 % Regular savings and other deposits 50,278 94 0.19 % 35,749 86 0.24 % Money market deposits 4,627 8 0.17 % 4,524 14 0.31 % Certificates of deposit 83,956 913 1.09 % 90,603 1,471 1.62 % Total interest-bearing deposits 216,162 1,110 0.51 % 191,792 1,696 0.88 % Federal Home Loan Bank advances and other borrowings 38,568 676 1.75 % 56,374 1,171 2.08 % Total interest-bearing liabilities 254,730 1,786 0.70 % 248,166 2,867 1.16 % Noninterest-bearing demand deposits 13,163 9,902 Other noninterest-bearing liabilities 7,887 1,523 Total liabilities 275,780 259,591 Total shareholders' equity 77,485 55,135 Total liabilities and shareholders' equity$ 353,265 $ 314,726 Net interest income$ 11,584 $ 11,305 Net interest rate spread (1) 3.30 % 3.54 % Net interest-earning assets (2)$ 79,786 $ 53,571 Net interest margin (3) 3.46 % 3.75 % Average interest-earning assets to interest-bearing liabilities 1.31x 1.22x -------- (1) 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. (2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average total interest-earning assets. 35 --------------------------------------------------------------------------------
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income for the years indicated. 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 this table, 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 table below.
Years Ended
December 31, 2021 vs. 2020
Increase (Decrease) Due to Total Increase
Volume Rate (Decrease)
Interest-earning assets: (In thousands)
Loans (excluding PPP loans) $ 120 $ (865 ) $ (745 )
PPP loans (234 ) 270 36
Securities (3 ) (66 ) (69 )
Federal Home Loan Bank stock (47 ) (9 ) (56 )
Fed funds sold and other 53 (21 ) 32
Total interest-earning assets (111 ) (691 ) (802 )
Interest-bearing liabilities:
Interest-bearing demand deposits 34 (64 ) (30 )
Regular savings and other deposits 35 (27 ) 8
Money Market deposits - (6 ) (6 )
Certificates of deposits (108 ) (450 ) (558 )
Total deposits (39 ) (547 ) (586 )
Federal Home Loan Bank advances and other
borrowings (370 ) (125 ) (495 )
Total interest-bearing liabilities (409 ) (672 ) (1,081 )
Change in net interest income $ 298 $ (19 ) $ 279
Comparison of Operating Results for the Years Ended
General. Net income decreased$1.8 million , or 50.7%, to$1.8 million atDecember 31, 2021 compared to$3.5 million atDecember 31, 2020 . 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. Additionally, there was a decrease in interest income, offset by a decrease in interest expense, with the changes in interest income and interest expense primarily due to changes in the market interest rates. Interest Income. Interest income decreased$802,000 , or 5.7%, to$13.4 million atDecember 31, 2021 from$14.2 million atDecember 31, 2020 . The decrease was due primarily to a decrease in interest income on loans (excluding PPP loans), which is our primary source of interest income. Interest income on loans decreased$709,000 , or 5.3%, to$12.8 million for the year endedDecember 31, 2021 from$13.4 million for the year endedDecember 31, 2020 . Our average balance of loans increased$2.2 million , or 0.9% for the year endedDecember 31, 2021 The increase is due to the decision to no longer sell longer-term, fixed-rate loans. Our weighted average yield on loans (excluding PPP loans) decreased 36 basis points to 5.18% for the year endedDecember 31, 2021 compared to 5.54% for the year endedDecember 31, 2020 . The decrease was due to the current market interest rates. We recognized$378,000 of interest income on PPP loans during the year endedDecember 31, 2021 , compared to$342,000 for the year endedDecember 31, 2020 . As ofDecember 31, 2021 , we had approximately$39,000 of additional interest and fee income on PPP loans to be recognized in future periods. Interest Expense. Interest expense decreased$1.1 million , or 37.7%, to$1.8 million for the year endedDecember 31, 2021 compared to$2.9 million for the year endedDecember 31, 2020 . The decrease was due to a decrease of$586,000 in interest expense on deposits and a decrease of$495,000 in interest expense on borrowings in 2021. The decrease in interest expense on deposits was due primarily to a decrease in interest expense on certificates of deposit, which decreased$558,000 , or 37.9%, to$913,000 for the year endedDecember 31, 2021 from$1.5 million for the year endedDecember 31, 2020 . We experienced decreases in both the average balance of and rates paid on certificates of deposit. We have allowed higher-rate certificates of deposit to run off during the current interest rate environment, and rates have decreased due to changes in market interest rates. Interest paid on other deposit types also decreased (particularly 36 --------------------------------------------------------------------------------
interest-bearing demand deposits, which decreased
Interest expense on borrowings decreased$495,000 , or 42.3%, and was$676,000 for the year endedDecember 31, 2021 compared to$1.2 million for the year endedDecember 31, 2020 . The average rate we paid on borrowings decreased 33 basis points to 1.75% for the year endedDecember 31, 2021 compared to 2.08% for the year endedDecember 31, 2020 . The average balances decreased$17.8 million , or 31.6%, to$38.6 million for the year endedDecember 31, 2021 compared to$56.4 million for the year endedDecember 31, 2020 . Net Interest Income. Net interest income increased$279,000 , or 2.5%, to$11.6 million for the year endedDecember 31, 2021 from$11.3 million for the year endedDecember 31, 2020 , as a result of our interest expense decreasing faster than our interest income. Our interest rate spread decreased 24 basis points to 3.30% for the year endedDecember 31, 2021 , compared to 3.54% for the year endedDecember 31, 2020 , while our net interest margin decreased 29 basis points to 3.46% for the year endedDecember 31, 2021 compared to 3.75% for the year endedDecember 31, 2020 . Provision for Loan Losses. Provision 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 specific loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loan or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See "Summary of Significant Accounting Policies" for additional information. After an evaluation of these factors, and particularly in light of the ongoing COVID-19 pandemic, we recorded provisions for loan losses of$60,000 and$152,000 for the years endedDecember 31, 2021 and 2020, respectively. Our allowance for loan losses was$2.4 million for both the years endedDecember 31, 2021 and 2020. The ratio of our allowance for loan losses to total loans was 0.94% atDecember 31, 2021 compared to 1.01% atDecember 31, 2020 , while the allowance for loan losses to non-performing loans was 810.1% atDecember 31, 2021 compared to 1,935.3% atDecember 31, 2020 . We had charge-offs of$20,000 and recoveries of$5,000 during the year endedDecember 31, 2021 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atDecember 31, 2021 . 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 Comptroller of 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 my have to adjust our allowance for loan losses. Non-interest Income. Non-interest income increased$60,000 , or 4.1%, to$1.5 million for the year endedDecember 31, 2021 from$1.4 million for the year endedDecember 31, 2020 . Service charges on deposit accounts increased$112,000 , or 15.3%, as we have increased the number of deposit accounts. Additionally we had a net gain of$46,000 from prepayments of FHLB advances. Offsetting the increase in non-interest income, gain on sale of mortgage loans decreased$202,000 , or 43.7%, as we sold$9.1 million of mortgage loans during the year endedDecember 31, 2021 compared to$17.7 million of such sales during the year endedDecember 31, 2020 . 37
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Non-interest Expense. Non-interest expense information is as follows.
Years Ended December 31, Change
2021 2020 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 6,366 $ 5,502 $ 864 15.7 %
Occupancy and equipment 856 765 91 11.9 %
Data processing 711 549 162 29.5 %
Professional and supervisory fees 549 528 21 4.0 %
Office expense 234 202 32 15.8 %
Advertising 166 87 79 90.8 %
FDIC deposit insurance 79 47 32 68.1 %
Contribution to Foundation 1,581 0 1,581 100.0 %
Other 397 419 (22 ) (7.2)%
Total noninterest expense $ 10,939 $ 8,099 $ 2,840 35.1 %
Salaries and employee benefits expense increased due to annual salary increases
and rising benefits expense as well as stock-based compensation related to
equity grants. Data processing expense increased due to the annual increase
based on CPI index within our contract with our core data processor.
Additionally we had a 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.
Income Tax Expense. We recognized income tax expense of $344,000 and $957,000
for the years ended December 31, 2021 and 2020, respectively, resulting in
effective rates of 16.4% and 21.3%. Income tax expense decreased as a result of
lower income before income taxes in 2021. The decrease in the effective tax rate
was due to a net loss related to the contribution to the Foundation.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee, which consists of members of senior management, is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:
•
growing our volume of core deposit accounts;
•
selling long-term, fixed-rate loans, depending on pricing;
•
holding higher levels of cash and cash equivalents;
•
continuing the diversification of our loan portfolio by adding more commercial-related loans, which typically have shorter maturities; and
38
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laddering the maturities of our investment securities and our borrowings.
By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.
We generally do not engage in hedging activities, such as engaging in futures or options, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities. Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions thatthe United States Treasury yield curve increases instantaneously by up to 400 basis points or decreases instantaneously by up to 200 basis points, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the "Change in Interest Rates" column below. The tables below sets forth, as ofDecember 31, 2021 and 2020, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes inthe United States Treasury yield curve. AtDecember 31, 2021
Change in Interest Rates Net Interest Income Year 1 Change
(basis points) (1) Year 1 Forecast from Level
(Dollars in thousands)
+400 $ 14,246 22.54%
+300 13,642 17.35%
+200 13,014 11.94%
+100 12,355 6.28%
Level 11,626 -
-100 11,152 (4.08)%
-200 10,644 (8.45)%
At December 31, 2020Change in Interest Rates Net Interest Income Year 1 Change
(basis points) (1) Year 1 Forecast from Level
(Dollars in thousands)
+400 $ 12,595 21.18%
+300 12,119 16.60%
+200 11,609 11.69%
+100 11,012 5.95%
Level 10,394 -
-100 10,029 (3.51)%
-200 9,617 (7.48)%
(1)
Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that atDecember 31, 2021 , in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 11.94% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 8.45% decrease in net interest income. AtDecember 31, 2020 , in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced an 11.69% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 7.48% decrease in net interest income. Net Economic Value. We also compute amounts by which the net present value of our assets and liabilities (economic value of equity, or "EVE") would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve instantaneously by up to 400 basis points or decreases instantaneously by up to 200 basis points, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. 39 --------------------------------------------------------------------------------
The tables below sets forth, as of
At December 31, 2021
Estimated Increase (Decrease) in EVE as a Percentage of Present
EVE Value of Assets (3)
Increase
Change in Interest (Decrease)
Rates (basis Estimated (basis
points) (1) EVE (2) Amount Percent EVE Ratio (4) points)
(Dollars in thousands)
+400 $ 64,374 $ (18,383 ) -22.21 % 19.87 % (298.66)%
+300 69,108 (13,650 ) -16.49 % 20.74 % (212.03)%
+200 73,904 (8,854 ) -10.70 % 21.56 % (130.13)%
+100 78,530 (4,228 ) -5.11 % 22.28 % (58.08)%
+50 84,530 1,772 2.50 % 22.58 % (27.51)%
- 82,758 - - 22.86 % -
-50 84,530 1,772 2.14 % 23.06 % 20.05%
-100 85,872 3,114 3.76 % 23.15 % 28.84%
-200 85,866 3,108 3.76 % 22.59 % 26.39%
At December 31, 2020
EVE as a Percentage of Present
Estimated Increase (Decrease) in EVE Value of Assets (3)
Increase
Change in Interest (Decrease)
Rates (basis Estimated (basis
points) (1) EVE (2) Amount Percent EVE Ratio (4) points)
(Dollars in thousands)
+400 $ 53,121 $ (6,260 ) -10.54 % 17.22 % 23
+300 55,411 (3,969 ) -6.68 % 17.51 % 6
+200 57,334 (2,047 ) -3.45 % 17.66 % 21
+100 58,678 (702 ) -1.18 % 17.64 % 19
+50 59,121 (260 ) -44.00 % 17.57 % 12
- 59,381 - - 17.45 % -
-50 58,998 (383 ) -0.64 % 14.14 % -30
-100 57,594 (1,787 ) -3.01 % 16.55 % -89
-200 53,793 (5,588 ) -9.41 % 15.11 % -234
(1)
Assumes an immediate uniform change in interest rates at all maturities.
(2)
EVE is the discounted present value of expected cash flows from assets,
liabilities and off-balance sheet contracts.
(3)
Present value of assets represents the discounted present value of incoming cash
flows on interest-earning assets.
(4)
EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at December 31, 2021 , in the event of an
instantaneous parallel 200 basis point increase in interest rates, we would
experience a 10.70% decrease in EVE, and in the event of an instantaneous 200
basis point decrease in interest rates, we would experience a 3.76% decrease in
EVE. At December 31, 2020 , in the event of an instantaneous parallel 200 basis
point increase in interest rates, we would have experienced a 3.45% decrease in
EVE, and in the event of an instantaneous 200 basis point decrease in interest
rates, we would have experienced a 9.41% decrease in EVE.
Certain shortcomings are inherent in the methodologies used in the above
interest rate risk measurements. Modeling changes require making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the net
interest income and net economic value tables presented assume that the
composition of our interest-sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and
assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the tables provide an indication of our
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates, and actual results may differ. Furthermore, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Additionally, certain assets, such as adjustable-rate loans, have
features that restrict changes in interest rates both on a short-term basis and
over the life of the asset. In the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the tables.
Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
40
--------------------------------------------------------------------------------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 . AtDecember 31, 2021 and 2020, we had a$111.3 million and a$97.3 million line of credit with theFederal Home Loan Bank of Atlanta , and had$18.5 million and$53.5 million outstanding as of those dates, respectively. In addition, atDecember 31, 2021 and 2020, we had an unsecured federal funds line of credit of$10.0 million . No amount was outstanding on this line of credit atDecember 31, 2021 or 2020. 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$5.1 million and$3.4 million for the years endedDecember 31, 2021 and 2020, respectively. Net cash provided by (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$22.7 million and$21.7 million for the years endedDecember 31, 2021 and 2020, respectively. Net cash provided by (used in) 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$19.1 million and$29.1 million for the years endedDecember 31, 2021 and 2020, 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. AtDecember 31, 2021 ,Cullman Savings Bank exceeded all of its regulatory capital requirements, and was categorized as well capitalized atDecember 31, 2021 . Management is not aware of any conditions or events since the most recent notification that would change our category. The net proceeds from the offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including funding loans. Our financial condition and results of operations will be enhanced by the net proceeds from the offering, which will increase our net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the offering, as well as other factors associated with the offering, our return on equity has bee adversely affected following the offering.
Recent Accounting Pronouncements
Please refer to Note 1 to the audited financial statements included with this document for a description of recent accounting pronouncements that may affect our financial condition and results of operations.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance withU.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution's performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 41 --------------------------------------------------------------------------------
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is included in "ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," above.
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