Cullman Bancorp Inc MD

PART I

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

March 31, 2024 and December 31, 2023

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF NET INCOME (unaudited)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial statements of Cullman Bancorp, Inc. (“the Bancorp”) include the accounts of its wholly owned subsidiary, Cullman Savings Bank (“the Bank”), together referred to as “the Company”.

The Company provides financial services through its offices in Cullman County, Alabama. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers ability to repay their loans is dependent on the real estate and general economic conditions in the area. The unaudited consolidated financial statements, including the notes thereto, have been prepared in accordance with U.S. GAAP interim reporting requirements and general banking industry guidelines, and therefore, do not include all information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K.

Risk and Uncertainties: The ongoing economic challenges, including issues such as rising inflation and effects of related governmental responses continue to evolve, in addition to the risk related to recent and potential bank failures. Because of the significant uncertainties related to the inflation and its potential effects on customers and prospects, and on the national and local economy as a whole, there can be no assurances as to how it may ultimately affect the Company. Related to potential bank failures, there can be no assurance on how our customers will react. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and off-balance sheet credit exposures as well as run off of deposits.

RECENT ACCOUNTING PRONOUCEMENTS AND ACCOUNTING CHANGES

As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), the Company is permitted an extended transition period for complying with new or revised accounting standards affecting public companies. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1.235 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of our initial public offering (December 31, 2026), (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the fiscal year in which the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year. We have elected to take advantage of this extended transition period, which means that the financial statements included herein, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. If we do so, we will prominently disclose this decision in the first periodic report following our decision, and such decision is irrevocable. As a filer under the JOBS Act, we will implement new accounting standards subject to the effective dates required for non-public entities.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADOPTION OF NEW ACCOUNTING STANDARDS:

The Company did not modify or adopt any new accounting policies during the three months ended March 31, 2024 that were not disclosed in the Company's 2023 audited consolidated financial statements included on the Form 10-K.

The Company has reviewed newly issued not yet effective accounting standards and concluded as of March 31, 2024, there are none that are likely to impact the Company's financial statements or disclosures.

NOTE 2 – SECURITIES AVAILABLE FOR SALE

Debt Securities

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income at March 31, 2024 and December 31, 2023 were as follows:

(1)Small Business Administration

The Company’s mortgage-backed securities are primarily issued by agencies such as Fannie Mae and Ginnie Mae. There wereno sales or calls of securities for thethree months ended March 31, 2024 and 2023.

The amortized cost and fair value of the investment securities portfolio are shown below by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

NOTE 2 – SECURITIES AVAILABLE FOR SALE (CONTINUED)

Carrying amounts of securities pledged to secure public deposits as of March 31, 2024 and December 31, 2023 were $9,066 and $9,350, respectively. At March 31, 2024 and December 31, 2023, there wereno holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

Securities with unrealized losses at March 31, 2024 and December 31, 2023, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

Unrealized losses have not been recognized into income because the issuers bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continues to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

All of the securities except for two municipal-taxable securities have unrealized losses at March 31, 2024. None of the unrealized losses for these securities have been recognized into net income for the period ended March 31, 2024 because the issuer's bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach their maturity date or reset date.

NOTE 3 – LOANS

Loans at March 31, 2024 and December 31, 2023 were as follows:

The following table present the activity in the allowance for credit losses by portfolio segment for the period ending March 31, 2024.

The following tables present the activity in the allowance for credit losses for the periods ended December 31, 2023 and March 31, 2023. The recorded investment in loans in any of the following tables does not include accrued and unpaid interest or any deferred loan fees or costs, as amounts are not significant.

For collateral-dependent loans, the allowance for credit losses is individually assessed based on the fair value of the collateral less estimated costs of sale. The following table presents the amortized cost bases of collateral-dependent loans by class of loans as March 31, 2024 and December 31, 2023.

The difference between interest income recognized and cash basis interest income recognized was not material.

The following tables present the aging of the recorded investment in past due loans at March 31, 2024 and December 31, 2023 by portfolio class of loans:

A loan need not be placed in nonaccrual status if the loan is a consumer loan (loans to individuals for household, family and other personal expenditures) or the loan is secured by a one- to four family residential property. Such loans should be subject to other alternative methods of evaluation to assure that the Bank's interest income is not materially overstated. The loans that were past due 90 days or more were accruing interest as of March 31, 2024 and December 31, 2023 due to the fact that they were well secured and in the process of collection. As of March 31, 2024 and December 31, 2023, there were no loans on nonaccrual.

Loan Modifications to Borrowers Experiencing Financial Difficulty:

Occasionally, the Company may make certain modifications of loans to borrowers experiencing financial difficulty.

These modifications may be in the form of an interest rate reduction, a term extension or a combination thereof.

Upon the Company's determination that a modified loan has subsequently been uncollectible, the portion of the loan

deemed uncollectible is charged off against the allowance for credit losses on loans held for investment.

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of these modifications efforts. During the quarter ended March 31, 2024 and the year ended December 31, 2023, the Company had no modified loans to borrowers experiencing financial difficulty.

Credit Quality Indicators:

The Company utilizes a grading system whereby all loans are assigned a grade based on the risk profile of each loan. Loan grades are determined based on an evaluation of relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. All loans, regardless of size, are analyzed and are given a grade based upon the management’s assessment of the ability of borrowers to service their debts. The analysis is performed on a quarterly basis.

The Company uses the following definitions for loan grades:

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

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

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

Loans not meeting the criteria above are graded Pass. These loans are included within groups of homogeneous pools of loans based upon portfolio segment and class for estimation of the allowance for credit losses on a collective basis.

At March 31, 2024, based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

At December 31, 2023, based on the most recent analysis performed, the loan grade for each loan by portfolio class is as follows:

NOTE 4- PREMISES AND EQUIPMENT

Premises and equipment at March 31, 2024 and December 31, 2023 were as follows:

As of March 31, 2024, building and improvements included construction in process for the Hanceville branch and a new 278 drive-through for $36 and $6,135 respectively. As of December 31, 2023, building and improvements included construction in process for the Hanceville branch, South branch and the new 278 drive through for $8, $55, and $4,676 respectively. The address of the new drive-through is 515 4th Street N.W. Cullman, Alabama 35055. Depreciation expense for thethree months ended March 31, 2024 and 2023 was $150 and $128, respectively.

NOTE 5 – DEPOSITS

Time deposits that meet or exceed the FDIC insurance limit of $250 at March 31, 2024 and December 31, 2023 were $42,228 and $36,395, respectively. Scheduled maturities of time deposits at March 31, 2024 for the next five years were as follows:

At March 31, 2024 and 2023, overdraft demand and savings deposits reclassified to loans totaled $55 and $42, respectively.

NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER DEBT

At March 31, 2024 and December 31, 2023, advances from the Federal Home Loan Bank were as follows:

NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER DEBT (CONTINUED)

Each advance, in the table above, is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $80,678 and $80,011 of eligible first mortgage one-to-four family, multi-family, and commercial loans under a blanket lien arrangement at March 31, 2024 and December 31, 2023, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow funds of $123,007 at March 31, 2024.

Payments over the next five years are as follows:

The Company had approximately $10,000 available in a line of credit for federal funds (or the equivalent thereof) with correspondent banks at March 31, 2024 and December 31, 2023. There wereno amounts outstanding as of March 31, 2024 or December 31, 2023.

NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN

With the conversion to the stock holding company,354,599 shares were sold to the Employee Stock Ownership Plan (ESOP). The ESOP borrowed from the Company to purchase the shares of the Company’s common stock at $10. The Company combined the preexisting loan with the current loan.

The Company will make discretionary contributions to the ESOP, as well as paying dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts.

Participants receive the shares at the end of employment. A participant may require stock received to be repurchased unless the stock is traded on an established market.

The ESOP compensation expense for the three months ended March 31, 2024 and 2023 was $38 and $75, respectively. At March 31, 2024, there were 282,557 shares not yet released having an aggregate market value of $2,811 based on the closing price of $9.95.

NOTE 8 – STOCK BASED COMPENSATION

In May 2020, the stockholders approved the Cullman Bancorp, Inc. 2020 Equity Incentive Plan (the “2020 Equity Incentive Plan”) for employees and directors of the Company. The Equity Incentive Plan authorizes the issuance of up to 200,000 shares of the Company’s common stock, with no more than 80,000 of shares as restricted stock awards and 120,000 as stock options, either incentive stock options or non-qualified stock options. These amounts have been subsequently converted at the exchange ratio of 2.8409-to-one for the mutual-to-stock conversion, rounding down for fractional shares. The exercise price of options granted under the Equity Incentive Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.

In May 2023, the stockholders approved the Cullman Bancorp, Inc. 2023 Equity Incentive Plan (the "2023 Equity Incentive Plan") for employees and directors of the Company. The 2023 Equity Incentive Plan authorizes the issuance of up to 620,548 shares of the Company's common stock, with no more than 177,299 of shares as restricted stock awards and 443,249 as stock options, either incentive stock options or non-qualified stock options. The exercise price of the options granted under the 2023 Equity Incentive Plan may not be less than the fair market value on the date the stock options is granted. The Compensation Committee of the Board of Directors has sole discretion to determine the amount and to whom equity incentive awards are granted.

As of March 31, 2024, there wereno shares available for future grants under these plans, except in the event of forfeitures.

The following table summarizes stock option activity for thethree months ended March 31, 2024:

(1) Based on the closing price of $9.95 as of March 31, 2024. Intrinsic value for stock options is defined as the difference between the current market value and the exercise price multiplied by the number of in-the-money options.

NOTE 8 – STOCK BASED COMPENSATION (CONTINUED)

Stock based compensation expense for stock options for the three months ended March 31, 2024 and 2023 was $27 for each quarter in relation to the 340,903 options. Unrecognized compensation cost related to nonvested stock options at March 31, 2024 was $144 and is expected to be recognized over 1.33 years related to the 2020 Equity Plan.

In relation to the 2023 Equity Incentive Plan, there wereno options vested as of March 31, 2024. Stock based compensation expense for the stock options for the three months ended March 31, 2024 was $30 andno expenses for the three months ended March 31, 2023. Unrecognized compensation cost related to nonvested stock options at March 31, 2024 was $504 and is expected to be recognized over 4.25 years.

The following table summarizes non-vested restricted stock activity for the quarter ended March 31, 2024:

The following table summarizes the restricted stock fair value:

Stock-based compensation expense for restricted stock included in noninterest expense for the three months ended March 31, 2024 and 2023 was $112 for each quarter in relation to the 2020 Equity Plan. Unrecognized compensation expense for nonvested restricted stock awards was $597 as of March 31, 2024 and is expected to be recognized over 1.33 years related to the 2020 Equity Plan.

For the three months ended March 31, 2024, stock-based compensation expense for restricted stock included in noninterest expense was $95 in relation to the 2023 Equity Plan. Unrecognized compensation expense for nonvested restricted stock awards was $1,644 as of March 31, 2024 and is expected to be recognized over 4.33 years related to the 2023 Equity Plan.

NOTE 9 - REGULATORY CAPITAL MATTERS

Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of March 31, 2024, the Bank meets all capital adequacy requirements to which they are subject. The Bancorp is not subject to regulatory capital requirements due to its size.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of March 31, 2024 and December 31, 2023, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

The community bank leverage ratio framework (CBLR framework) provides qualifying community banking organizations an optional, simplified measure to determine capital adequacy. The Bank initially made the CBLR election as of December 31, 2020.

The community bank leverage ratio removes the requirement for qualifying banking organizations to calculate and report risk-based capital but rather only requires a Tier 1 to average assets (leverage) ratio. Qualifying banking organizations that elect to use the community bank leverage rate framework and that maintain a leverage ratio of greater than required minimums will be considered to have satisfied the generally applicable risk based and leverage capital requirements in the agencies’ capital rules (generally applicable rule) and, if applicable, will be considered to have met the well capitalized ratio requirements for purposes of the Federal Deposit Insurance Act. The community bank leverage ratio minimum requirement is currently 9.00%.

An eligible banking organization can opt out of the CBLR framework and revert back to the risk-weighting framework without restriction. As of March 31, 2024 the Bank was a qualifying community banking organization as defined by the federal banking agencies and elected to measure capital adequacy under the CBLR framework.

NOTE 9 - REGULATORY CAPITAL MATTERS (CONTINUED)

Actual and required capital amounts for the Bank and ratios at March 31, 2024 and December 31, 2023 are presented below:

Dividend Restrictions - The Company’s principal source of funds for dividend payments is dividends received from the Bank as well as proceeds retained from the mutual-to-stock conversion. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. During 2024, the Bank could, without prior approval from its regulators, declare dividends of approximately $7,136 plus any 2024 net profits retained to the date of the dividend declaration.

NOTE 10 – FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability; or generated from model-based techniques that use at least one significant assumption not observable in the market. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The Company used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Equity securities are carried at fair value, with changes in fair value reported in net income. This investment is considered an equity security with readily determinable fair value not held for trading (Level 3).

For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The Company’s taxable municipal investment securities’ fair values are determined based on a discounted cash flow analysis prepared by an independent third party.

Collateral Dependent Loans: For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral dependent loans are evaluated on a quarterly basis and associated specific reserves are adjusted accordingly.

Foreclosed Real Estate: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for loans where the value is $100 or above (for both collateral-dependent loans and other real estate owned) are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. In accordance to company policy, if the Company holds the property for overtwo years, an updated appraisal or validation would be obtained in order to determine if the fair value amount should be adjusted.

Assets and Liabilities Measured on a Recurring Basis

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

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2024 or December 31, 2023. There wereno transfers between levels during the three months ended March 31, 2024 or 2023.

Our state and municipal securities valuations are supported by analysis prepared by an independent third party. Their approach to determining fair value involves using recently executed transactions for similar securities and market quotations for similar securities. As these securities are not rated by the rating agencies and trading volumes are thin, it was determined that these were valued using Level 3 inputs. The significant unobservable inputs used in the fair value measurement of the Company's taxable municipal securities are discount rates and credit spreads that the market would require for taxable municipal securities with similar maturities and risk characteristics. Significant increases/(decreases) in any of those inputs in isolation would result in a significantly lower/(higher) fair value measurement.

Assets and Liabilities Measured on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of March 31, 2024 and December 31, 2023 (amounts in thousands):

The Company has estimated the fair values of these assets using Level 3 inputs, specifically the appraised value of the collateral. Impaired loan balances represent those collateral dependent impaired loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the impaired loan for the amount of the credit loss. The Company hadno Level 3 assets measured at fair value on a recurring basis at March 31, 2024 and December 31, 2023. For Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023 appraisals were used for the valuation technique. For the significant unobservable input, the appraisal discounts and the weighted average input of 15% to 20% were used. This is for the period ended March 31, 2024 and December 31, 2023.

The carrying amounts and estimated fair values of the Company’s on-balance sheet financial instruments at March 31, 2024 and December 31, 2023 are summarized below:

NOTE 11 – EARNINGS PER COMMON SHARE

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

Stock options for 268,200 and 136,356 shares of common stock were not considered in computing diluted earnings per share for 2024 and 2023, respectively because they were antidilutive.