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$68.5 million , or 19.3%, to$423.2 million atDecember 31, 2022 from$354.7 million atDecember 31, 2021 . The increase was due to an increase in loans funded by cash and an increase in deposits and borrowings. Total deposits increased$60.9 million , or 26.3%, to$292.9 million atDecember 31, 2022 from$232.0 million atDecember 31, 2021 . The increase in deposits was due to increases in regular savings and other deposits categories, as we have grown accounts throughout the year. Net income increased$2.4 million , or 139.0%, to$4.2 million for the year endedDecember 31, 2022 , compared to$1.8 million for the year endedDecember 31, 2021 . The increase was due primarily to the one-time pre-tax$1.6 million expense for the contribution of common stock and cash to our new charitable foundation in the third quarter of 2021. The additional increase was due to increases in interest income and a decrease in interest expense, partially offset by increases in non-interest expense and income tax expense. Interest income increased$3.2 million , or 23.6%, to$16.5 million for the year endedDecember 31, 2022 from$13.4 million for the year endedDecember 31, 2021 . The increase was due primarily to an increase in interest income on loans, which is our 28 -------------------------------------------------------------------------------- primary source of interest income. Interest expense decreased$421,000 , or 23.6%, to$1.4 million for the year endedDecember 31, 2022 compared to$1.8 million for the year endedDecember 31, 2021 , due to a decrease of$55,000 in interest expense on deposits and a decrease of$366,000 in interest expense on borrowings. We recorded provisions for loan losses of$438,000 and$60,000 for the years endedDecember 31, 2022 and 2021, respectively. Our allowance for loan losses was$2.8 million atDecember 31, 2022 and$2.4 million atDecember 31, 2021 . The allowance for loan losses to total loans was 0.85% atDecember 31, 2022 compared to 0.94% atDecember 31, 2021 , while the allowance for loan losses to non-performing loans was 850.60% atDecember 31, 2022 compared to 810.10% atDecember 31, 2021 . We had charge-offs of$44,000 and recoveries of$41,000 during the year endedDecember 31, 2022 .
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.
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, 2022 andDecember 31, 2021 . The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory 29 --------------------------------------------------------------------------------
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.
We will be adopting the current expected credit losses ("CECL") methodology for
calculating our allowance for loan losses, effective
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, Inc. files 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.
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,
2022 2021 2020
(In thousands)
Selected Financial Condition Data:
Total assets $ 423,229 $ 354,709 $ 331,396
Securities available for sale 29,796 21,313 18,875
Loans held for sale - - 173
Loans receivable, net 329,943 252,160 231,799
Premises and equipment, net 10,851 9,484 8,576
Foreclosed real estate 50 400 434
Federal Home Loan Bank
stock and Federal Reserve Bank stock, at cost 2,033 859 2,541
Bank owned life insurance 8,964 5,737 5,657
Deposits 292,949 232,021 216,963
Borrowings 25,000 18,500 53,500
Shareholders' equity 100,182 99,734 56,875
30--------------------------------------------------------------------------------
For the Years Ended December 31,
2022 2021 2020
(In thousands)
Selected Operating Data:
Interest income $ 16,529 $ 13,370 $ 14,172
Interest expense 1,365 1,786 2,867
Net interest income 15,164 11,584 11,305
Provision for loan losses 438 60 152Net interest income after provision for loan losses 14,726
11,524 11,153 Noninterest income 1,686 1,509 1,449 Noninterest expense 11,128 10,939 8,099 Income before income tax expense 5,284 2,094 4,503 Income tax expense 1,101 344 957 Net income$ 4,183 $ 1,750 $ 3,546 Earnings per share - basic (1)$ 0.59 $ 0.25 $ 0.52 Earnings per share - diluted (1)$ 0.59 $ 0.25 $ 0.52 At or For the Years Ended December 31, 2022 2021 2020 (1) Performance Ratios: Return on average assets 1.09 % 0.50 % 1.13 % Return on average equity 4.21 % 2.26 % 6.43 % Interest rate spread (2) 4.04 % 3.30 % 3.54 % Net interest margin (3) 4.19 % 3.46 % 3.75 % Noninterest expense to average assets 2.90 % 3.11 % 2.57 % Efficiency ratio (4) 67.80 % 84.00 % 64.27 % Average interest-earning assets to average interest-bearing liabilities 1.37x 1.31x 1.22x Capital Ratios: Average equity to average assets 25.85 % 21.93 % 17.52 % Tier 1 capital to average assets (5) 19.58 % 18.83 % 15.49 % Asset Quality Ratios: Allowance for loan losses as a percentage of total loans 0.85 % 0.94 % 1.01 %
Allowance for loan losses as a percentage of
non-performing loans 850.60 % 810.10 % 1935.25 % Net (charge-offs) recoveries to average outstanding loans during the year - (0.01)% - Non-performing loans as a percentage of total loans 0.10 % 0.12 % 0.05 % Non-performing loans as a percentage of total assets 0.09 % 0.08 % 0.04 %
Total non-performing assets as a percentage
of total assets 0.10 % 0.14 % 0.17 % Other: Number of offices 4 4 4 Number of full-time equivalent employees 59 50 50 (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.
31
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Comparison of Financial Condition at
Total assets increased$68.5 million , or 19.3%, to$423.2 million atDecember 31, 2022 from$354.7 atDecember 31, 2021 . The increase was due to an increase in loans funded from cash and an increase in deposits and borrowings. Cash and cash equivalents decreased$25.3 million to$36.6 million atDecember 31, 2022 from$61.9 million atDecember 31, 2021 . The decrease was due to an increase in loans funded. Gross loans held for investment increased$78.2 million , or 30.7%, to$332.8 million atDecember 31, 2022 from$254.6 million atDecember 31, 2021 . The increase was primarily due to an increase in one-to-four family residential real estate loans, which increased$44.4 million , or 34.8%, to$172.2 million atDecember 31, 2022 from$127.8 million atDecember 31, 2021 . Commercial real estate loans have increased$19.0 million , or 24.7% to$96.0 million atDecember 31, 2022 from$77.0 million atDecember 31, 2021 . Securities available-for-sale increased$8.5 million , or 39.8%, to$29.8 million atDecember 31, 2022 from$21.3 million atDecember 31, 2021 . We purchased$3.0 million inU.S. Government agency securities during 2022 as well as$11.0 million in mortgage backed securities,$1.0 million in commercial mortgage backed securities and$715,000 in municipal securities in order to pledge the increase in our deposits under the Security for Alabama Funds Enhancement program. Total deposits increased$60.9 million , or 26.3%, to$292.9 million atDecember 31, 2022 from$232.0 atDecember 31, 2021 . The increase in deposits was due to increases in regular savings and other deposits categories, as we have grown accounts. Interest bearing demand accounts increased$46.3 million or 67.7% to$114.9 million atDecember 31, 2022 from$68.6 million atDecember 31, 2021 . Regular savings and other deposits increased$24.3 million , or 44.0%, to$79.6 million atDecember 31, 2022 from$55.3 million atDecember 31, 2021 .
We had
Shareholders' equity increased by$448,000 , or 0.4%, to$100.2 million atDecember 31, 2022 compared to$99.7 million atDecember 31, 2021 . The increase was due to earnings during the year, partially offset by an increase in other comprehensive loss. Stockholders' equity (book value) per share atDecember 31, 2022 was$13.55 . We had no intangible assets atDecember 31, 2022 . 32 --------------------------------------------------------------------------------
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$10,000 and$46,000 for the years endedDecember 31, 2022 and 2021, respectively. Loan balances exclude loans held for sale. For the Years Ended December 31, 2022 2021 Average Average Outstanding Average Outstanding Average Balance Interest Yield/Rate Balance Interest Yield/Rate (Dollars in thousands) Interest-earning assets: Loans$ 301,161 15,202 5.05 %$ 242,017 $ 12,759 5.27 % Securities 27,745 848 3.06 % 20,356 461 2.26 % Federal Home Loan Bank/ Federal Reserve stock 494 22 4.45 % 1,691 74 4.37 % Federal funds sold 32,718 457 1.40 % 70,452 76 0.11 % Total interest-earning assets 362,118 16,529 4.56 % 334,516 13,370 4.00 % Noninterest-earning assets 22,039 18,749 Total assets$ 384,157 $ 353,265 Interest-bearing liabilities: Interest-bearing demand deposits$ 99,797 123 0.12 %$ 77,301 95 0.12 % Regular savings and other deposits 75,398 221 0.29 % 50,278 94 0.19 % Money market deposits 3,799 6 0.16 % 4,627 8 0.17 % Certificates of deposit 77,302 705 0.91 % 83,956 913 1.09 % Total interest-bearing deposits 256,296 1,055 0.41 % 216,162 1,110 0.51 % Federal Home Loan Bank advances and other borrowings 7,614 310 4.07 % 38,568 676 1.75 % Total interest-bearing liabilities 263,910 1,365 0.52 % 254,730 1,786 0.70 % Noninterest-bearing demand deposits 14,739 13,163 Other noninterest-bearing liabilities 6,209 7,887 Total liabilities 284,858 275,780 Total shareholders' equity 99,299 77,485 Total liabilities and shareholders' equity$ 384,157 $ 353,265 Net interest income$ 15,164 $ 11,584 Net interest rate spread (1) 4.04 % 3.30 % Net interest-earning assets (2)$ 98,208 $ 79,786 Net interest margin (3) 4.19 % 3.46 % Average interest-earning assets to interest-bearing liabilities 1.37x 1.31x 33
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(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.
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, 2022 vs. 2021
Increase (Decrease) Due to Total Increase
Volume Rate (Decrease)
Interest-earning assets: (In thousands)
Loans $ 3,118 $ (675 ) $ 2,443
Securities 167 220 387
Federal Home Loan Bank and Federal Reserve
Bank stock (52 ) - (52 )
Fed funds sold and other (42 ) 423 381
Total interest-earning assets 3,191 (32 ) 3,159
Interest-bearing liabilities:
Interest-bearing demand deposits 27 1 28
Regular savings and other deposits 48 79 127
Money Market deposits (1 ) (1 ) (2 )
Certificates of deposits (73 ) (135 ) (208 )
Total deposits 1 (56 ) (55 )
Federal Home Loan Bank advances and other
borrowings (542 ) 176 (366 )
Total interest-bearing liabilities (541 ) 120 (421 )
Change in net interest income $ 3,732 $ (152 ) $ 3,580
Comparison of Operating Results for the Years Ended
General. Net income increased$2.4 million , or 139.0%, to$4.2 million atDecember 31, 2022 compared to$1.8 million atDecember 31, 2021 . The increase 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 an increase in interest income, with the changes in interest income and interest expense primarily due to changes in the market interest rates, partially offset by increases in non-interest expense and income tax expense. Interest Income. Interest income increased$3.2 million , or 23.6%, to$16.5 million atDecember 31, 2022 from$13.4 million atDecember 31, 2021 . The increase was due primarily to an increase in interest income on loans, which is our primary source of interest income. Interest income on loans increased$2.4 million , or 19.1%, to$15.2 million for the year endedDecember 31, 2022 from$12.8 million for the year endedDecember 31, 2021 . Our average balance of loans increased$59.1 million , or 24.4% for the year endedDecember 31, 2022 . The increase is due to the increase in our loan demand. Our weighted average yield on loans decreased 22 basis points to 5.05% for the year endedDecember 31, 2022 compared to 5.27% for the year endedDecember 31, 2021 . The decrease was a reflection of the low rate environment when the loans were originated. Additionally, we recognized$378,000 of interest income on PPP loans during the year endedDecember 31, 2021 , compared to$32,000 for the year endedDecember 31, 2022 . Interest Expense. Interest expense decreased$421,000 , or 23.6%, to$1.4 million for the year endedDecember 31, 2022 compared to$1.8 million for the year endedDecember 31, 2021 . The decrease was due to a decrease of$55,000 in interest expense on deposits and a decrease of$366,000 in interest expense on borrowings in 2022. The decrease in interest expense on deposits was due primarily to a decrease in interest expense on certificates of deposit, which decreased$208,000 , or 22.8%, to$705,000 for the year endedDecember 31, 2022 from$913,000 for the year ended 34 --------------------------------------------------------------------------------December 31, 2021 . 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. Interest paid on other deposit types increased due to an increase in rates. Regular savings and other deposits interest expense increased$127,000 or 135.1% and interest bearing demand deposits interest expense increased$28,000 or 29.5%. Interest expense on borrowings decreased$366,000 , or 54.1%, and was$310,000 for the year endedDecember 31, 2022 compared to$676,000 for the year endedDecember 31, 2021 . The average rate we paid on borrowings increased to 4.07% for the year endedDecember 31, 2022 compared to 1.75% for the year endedDecember 31, 2021 . The average balances decreased$31.0 million , or 80.3%, to$7.6 million for the year endedDecember 31, 2022 compared to$38.6 million for the year endedDecember 31, 2021 . Net Interest Income. Net interest income increased$3.6 million , or 30.9%, to$15.2 million for the year endedDecember 31, 2022 from$11.6 million for the year endedDecember 31, 2021 , as a result of our interest income increasing faster than our interest expense. Our interest rate spread increased 74 basis points to 4.04% for the year endedDecember 31, 2022 , compared to 3.30% for the year endedDecember 31, 2021 , while our net interest margin increased 73 basis points to 4.19% for the year endedDecember 31, 2022 compared to 3.46% for the year endedDecember 31, 2021 . 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, we recorded provisions for loan losses of$438,000 and$60,000 for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. Our allowance for loan losses was$2.8 million for the year endedDecember 31, 2022 and$2.4 million for the year endedDecember 31, 2021 . The ratio of our allowance for loan losses to total loans was 0.85% atDecember 31, 2022 compared to 0.94% atDecember 31, 2021 , while the allowance for loan losses to non-performing loans was 850.6% atDecember 31, 2022 compared to 810.1% atDecember 31, 2021 . We had charge-offs of$44,000 and recoveries of$41,000 during the year endedDecember 31, 2022 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atDecember 31, 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 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 may have to adjust our allowance for loan losses. Non-interest Income. Non-interest income increased$177,000 , or 11.7%, to$1.7 million for the year endedDecember 31, 2022 from$1.5 million for the year endedDecember 31, 2021 . Service charges on deposit accounts increased$177,000 , or 20.9%, as we have increased the number of deposit accounts. 35 --------------------------------------------------------------------------------
Non-interest Expense. Non-interest expense information is as follows.
Years Ended December 31, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee
benefits $ 7,594 $ 6,366 $ 1,228 19.3 %
Occupancy and equipment 937 856 81 9.5 %
Data processing 864 711 153 21.5 %
Professional and
supervisory fees 779 549 230 41.9 %
Office expense 201 234 (33 ) -14.1 %
Advertising 179 166 13 7.8 %
FDIC deposit insurance 76 79 (3 ) -3.8 %
Contribution to Foundation - 1,581 (1,581 ) (100.0 )%
Other 498 397 101 25.4 %
Total noninterest expense $ 11,128 $ 10,939 $ 189 1.7 %
Salaries and employee benefits expense increased due to in an increase in
employees as well as annual salary increases and rising benefits expense.
Professional and supervisory expenses increased due to inflation cost from our
vendors. Data processing expense increased due to the annual increase based on
the consumer price index included in our contract with our core data processor.
Income Tax Expense. We recognized income tax expense of $1.1 million and
$344,000 for the years ended December 31, 2022 and 2021, respectively, resulting
in effective rates of 20.8% and 16.4%. Income tax expense increased as a result
of higher income before income taxes in 2022. The increase in the effective tax
rate was due to a net loss related to the contribution to the Foundation in
2021.
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
•
laddering the maturities of our investment securities and our borrowings.
36
--------------------------------------------------------------------------------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, 2022 and 2021, 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, 2022
Change in Interest Rates Net Interest Income Year 1 Change
(basis points) (1) Year 1 Forecast from Level
(Dollars in thousands)
+400 $ 19,348 10.18%
+300 18,914 7.71%
+200 18,476 5.22%
+100 18,034 2.70%
Level 17,560 -
(100 ) 16,860 (3.98)%
(200 ) 16,006 (8.85)%
At December 31, 2021Change 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)%
(1)
Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that atDecember 31, 2022 , in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 5.22% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 8.85% decrease in net interest income. AtDecember 31, 2021 , in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced an 11.94% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 8.45% 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. 37 --------------------------------------------------------------------------------
The tables below sets forth, as of
At December 31, 2022
Estimated Increase (Decrease) in EVE as a Percentage of Present
EVE Value of Assets (3)
Increase
(Decrease)
Change in Interest Estimated (basis
Rates (basis points) (1) EVE (2) Amount Percent EVE Ratio (4) points)
(Dollars in thousands)
+400 $ 81,637 $ (18,828 ) -18.74 % 21.68 % (253.19)%
+300 86,822 (13,643 ) -13.58 % 22.50 % (171.13)%
+200 92,120 (8,345 ) -8.31 % 23.30 % (91.72)%
+100 97,325 (3,140 ) -3.13 % 24.02 % (19.37)%
+50 99,220 (1,245 ) -1.24 % 24.20 % (1.81)%
- 100,465 - - 24.22 % -
-50 101,286 821 82.00 % 24.14 % (7.66)%
-100 101,691 1,226 1.22 % 23.98 % (23.92)%
-200 101,068 603 0.60 % 23.37 % (84.72)%
At December 31, 2021
Estimated Increase (Decrease)in EVE as a Percentage of Present
EVE Value of Assets (3)
Increase
(Decrease)
Change in Interest Estimated (basis
Rates (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%
(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, 2022 , in the event of an
instantaneous parallel 200 basis point increase in interest rates, we would
experience a 8.31% decrease in EVE, and in the event of an instantaneous 200
basis point decrease in interest rates, we would experience a 0.60% increase in
EVE. At December 31, 2021 , in the event of an instantaneous parallel 200 basis
point increase in interest rates, we would have experienced a 10.70% decrease in
EVE, and in the event of an instantaneous 200 basis point decrease in interest
rates, we would have experienced a 3.76% 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.
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--------------------------------------------------------------------------------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, 2022 and 2021, we had a$96.3 million and a$111.3 million line of credit with theFederal Home Loan Bank of Atlanta , and had$25.0 million and$18.5 million outstanding as of those dates, respectively. In addition, atDecember 31, 2022 and 2021, we had an unsecured federal funds line of credit of$10.0 million . No amount was outstanding on this line of credit atDecember 31, 2022 or 2021. 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$5.8 million and$5.1 million for the years endedDecember 31, 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$97.6 million and$22.7 million for the years endedDecember 31, 2022 and 2021, 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$66.5 million and$19.1 million for the years endedDecember 31, 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. AtDecember 31, 2022 ,Cullman Savings Bank exceeded all of its regulatory capital requirements, and was categorized as well capitalized atDecember 31, 2022 . 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 been 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.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
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--------------------------------------------------------------------------------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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