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CULL Cullman Bancorp

Filed: 12 Mar 21, 4:19pm
Table of Contents

As filed with the Securities and Exchange Commission on March 12, 2021

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Cullman Bancorp, Inc.

Cullman Savings Bank Profit Sharing Plan

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland  6036  Being applied for

(State or other jurisdiction of

incorporation or organization)

  

(Primary Standard Industrial

Classification Code Number)

  

(I.R.S. Employer

Identification Number)

316 Second Avenue SW

Cullman, Alabama 35055

(256) 734-1740

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

John A. Riley, III

Chairman of the Board, President and Chief Executive Officer

316 Second Avenue SW

Cullman, Alabama 35055

(256) 734-1740

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Kip A. Weissman, Esq.

Ned Quint, Esq.

Luse Gorman, PC

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

(202) 274-2000

 

Edward G. Olifer, Esq.

Stephen F. Donahoe, Esq.

Kilpatrick, Townsend & Stockton LLP

607 14th Street, N.W., Suite 900

Washington, D.C. 20005

(202) 208-5800

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ☒

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer    Accelerated filer  
Non-accelerated filer    Smaller reporting company  
    Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  ☐

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be
registered

 Proposed
maximum
offering price
per share(1)
 

Proposed
maximum
aggregate

offering price(1)

 

Amount of

registration fee

Common Stock, $0.01 par value per share

 7,406,000 shares $10.00 $74,060,000 $8,080

Participation Interests

 499,066 interests (2)      (2)

 

 

(1)

Estimated solely for purposes of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

(2)

The securities of Cullman Bancorp, Inc. to be purchased by the Cullman Savings Bank Profit Sharing Plan are included in the amount shown for the common stock. Accordingly, no separate fee is required for the participation interests. In accordance with Rule 457(h) of the Securities Act of 1933, as amended, the registration fee has been calculated on the basis of the number of shares of common stock that may be purchased with the current assets of such Plan.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 


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Prospectus Supplement

Interests in

CULLMAN SAVINGS BANK PROFIT SHARING PLAN

Offering of Participation Interests in up to 496,066 Shares of

Cullman Bancorp, Inc.

Common Stock

 

 

Cullman Bancorp, Inc., a new Maryland corporation that we refer to as “New Cullman” throughout this supplement, is offering shares of common stock for sale at $10.00 per share in connection with the conversion of Cullman Bancorp, Inc., a federal corporation that we refer to as “Old Cullman,” throughout this prospectus supplement from the mutual holding company to stock holding company form of organization (the “Conversion”). The shares being offered represent the ownership interest in “Old Cullman” owned by Cullman Savings Bank, MHC. Old Cullman’s common stock currently trades on the Pink Open Market operated by OTC Markets Group under the trading symbol “CULL.” We expect that New Cullman’s common stock will be quoted on the Nasdaq Capital Market (“NASDAQ”) upon conclusion of the stock offering and we have applied to list the shares of New Cullman common stock on the NASDAQ under the trading symbol “CULL.”

The Bank has registered on behalf of the Cullman Savings Bank Profit Sharing Plan (the “Plan”) up to 496,066 participation interests so that the trustee of the Plan could purchase up to 496,066 shares of New Cullman common stock in the offering, at the purchase price of $10.00 per share. Of the maximum that may be acquired by the Plan, the shares available to purchase in the Plan will be reduced by the aggregate amount of participant loans outstanding. This prospectus supplement relates to the election of Plan participants to direct the trustee of the Plan to invest up to 100% of their Plan accounts in the Stock Purchase Fund on the date of the stock offering.

The prospectus of New Cullman, dated                     , accompanies this prospectus supplement. It contains detailed information regarding the stock offering of New Cullman common stock and the financial condition, results of operations and business of New Cullman and the Bank. This prospectus supplement provides information regarding the Plan. You should read this prospectus supplement together with the prospectus and keep both for future reference.

 

 

For a discussion of risks that you should consider, see “Risk Factors” beginning on page      of the accompanying prospectus and “Notice of Your Rights Concerning Employer Securities” below.

The interests in the Plan and the offering of the shares of New Cullman common stock have not been approved or disapproved by the Federal Deposit Insurance


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Corporation, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission or any other federal or state securities regulator. Any representation to the contrary is a criminal offense.

The securities offered in this prospectus supplement and in the prospectus are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

This prospectus supplement may be used only in connection with offers and sales by New Cullman of participation interests in shares of common stock pursuant to the Plan. No one may use this prospectus supplement to re-offer or resell participation interests or shares of New Cullman common stock acquired through the Plan.

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. New Cullman, the Bank and the Plan have not authorized anyone to provide you with information that is different.

This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of common stock or shares of common stock of New Cullman representing an ownership interest in New Cullman common stock shall under any circumstances imply that there has been no change in the affairs of New Cullman or any of its subsidiaries or the Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement.

 

 

The date of this prospectus supplement is                     .


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TABLE OF CONTENTS

 

THE OFFERING

   1 

Securities Offered

   1 

Stock Purchase Fund

   1 

Purchase Priorities

   1 

Purchases in the Offering and Oversubscriptions

   2 

Composition of Cullman Stock Fund

   3 

Value of the Plan Assets

   3 

Election to Purchase Stock in the Stock Offering

   4 

How to Order Stock in the Offering

   4 

Order Deadline

   6 

Irrevocability of Transfer Direction

   6 

Other Purchases in Your Account During the Offering Period

   6 

Additional Purchases of New Cullman Stock After the Offering

   7 

Purchase Price of Common Stock in the Offering and After the Offering

   7 

Nature of a Participant’s Interest in the Common Stock

   7 

Voting Rights of Common Stock

   7 

DESCRIPTION OF THE PLAN

   8 

Introduction

   8 

Eligibility and Participation

   8 

Contributions under the Plan

   8 

Limitations on Contributions

   9 

Benefits under the Plan

   9 

Investment of Contributions and Account Balances

   9 

Performance History

   10 

Description of the Investment Funds

   11 

Stock Purchase Fund

   15 

Withdrawals from the Plan

   16 

Administration of the Plan

   16 

Amendment and Termination

   17 

Merger, Consolidation or Transfer

   17 

Federal Income Tax Consequences

   17 

Notice of Your Rights Concerning Employer Securities

   18 

Additional ERISA Considerations

   19 

Securities and Exchange Commission Reporting and Short-Swing Profit Liability

   20 

Financial Information Regarding Plan Assets

   20 

LEGAL OPINION

   20 


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THE OFFERING

 

Securities Offered  

New Cullman is offering participants in the Cullman Savings Bank Profit Sharing Plan (the “Plan”) the opportunity to purchase stock of New Cullman through the Plan. All purchases of common stock of New Cullman will be denominated in shares of common stock of New Cullman. The common stock will be held in the Stock Purchase Fund established under the Plan in connection with the stock offering, and the common stock is often referred to as “participation interests.” The Plan may acquire up to 496,066 shares of New Cullman common stock in the stock offering. Your investment in stock in connection with the stock offering through the Stock Purchase Fund is subject to the purchase priorities contained in the Plan of Conversion and Reorganization of Cullman Savings Bank, MHC (“Plan of Conversion”).

 

Information with regard to the Plan is contained in this prospectus supplement and information with regard to the financial condition, results of operations and business of New Cullman is contained in the accompanying prospectus. The address of the principal executive office of New Cullman and the Bank is 316 2nd Avenue SW, Cullman, Alabama 35055. The Bank’s telephone number is (256) 734-1740.

 

All elections to purchase stock in the offering and any questions about this prospectus supplement should be addressed to John A. Riley, III, President and Chief Executive Officer, Cullman Savings Bank, 316 2nd Avenue SW, Cullman, Alabama 35055.

Stock Purchase Fund  In connection with the Conversion and stock offering, you may elect to designate a percentage of your Plan account balance (up to 100%, reduced by the amount you then have invested the Cullman Stock Fund and any participant loan you have outstanding) to the Stock Purchase Fund, to be used to purchase common stock of New Cullman issued in the stock offering at $10.00 per share. In making this determination, you should carefully consider the information set forth on page 17 of this prospectus supplement under “Notice of Your Rights Concerning Employer Securities — The Importance of Diversifying Your Retirement Savings.” The trustee of the Stock Purchase Fund will purchase common stock of New Cullman at $10.00 per share to be held as shares of common stock of New Cullman in accordance with your directions.
Purchase Priorities  Plan participants are eligible to direct a transfer of funds to the Stock Purchase Fund. However, such directions are subject to the purchase priorities and purchase limitations in the Plan of Conversion, which provides for a subscription and community offering, as described below.

 

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In the offering, the purchase priorities are as follows and apply in the case more shares are ordered than are available for sale (an “oversubscription”):

 

Subscription offering:

 

(1)   First, to depositors with accounts at Cullman Savings Bank with aggregate balances of at least $50.00 a the close of business on January 31, 2020.

 

(2)   Second, to Cullman Savings Bank’s tax-qualified plans, including the employee stock ownership plan and the Plan.

 

(3)   Third, to depositors with accounts at Cullman Savings Bank with aggregate balances of at least $50.00 at the close of business on March 31, 2021.

 

(4)   Fourth, to depositors of Cullman Savings Bank at the close of business on [MEMBER RECORD DATE].

 

If there are shares remaining after all of the orders in the subscription offering have been filled, shares will be offered in a community offering with a preference to natural persons residing in Cullman County, Alabama.

 

If you fall into subscription offering categories (1), (3) or (4) above, you have subscription rights to purchase New Cullman common stock in the subscription offering. You may also be able to purchase shares of New Cullman common stock in the subscription offering even though you are ineligible to purchase through subscription offering categories (1), (3) or (4) by purchasing stock in the Plan through subscription offering category (2), reserved for Cullman Savings Bank’s tax-qualified employee plans.

Purchases in the Offering and Oversubscriptions  The trustee of the Plan will purchase common stock of New Cullman in the stock offering in accordance with your directions. Once you make your election, the amount that you elect to transfer from your existing investment options for the purchase of shares of common stock of New Cullman in connection with the stock offering will be removed from your existing investment options immediately and transferred to an interest-bearing cash account in the Stock Purchase Fund, pending the formal closing of the offering, several weeks later.

 

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After the end of the stock offering period, we will determine whether all or any portion of your order may be filled (based on your purchase priority as described above and whether the stock offering is oversubscribed). The amount that can be used toward your order will be applied to the purchase of common stock of New Cullman

 

In the event the stock offering is oversubscribed, i.e. there are more orders for shares of common stock than shares available for sale in the stock offering, and the trustee is unable to use the full amount allocated by you to purchase shares of common stock in the stock offering, the amount that cannot be invested in shares of common stock, and any interest earned, will be reinvested in the other investment funds of the Plan in accordance with your then existing investment election (in proportion to your investment direction for future contributions).

 

If you choose not to direct the investment of your account balances towards the purchase of any shares in the offering, your account balances will remain in the investment funds of the Plan as previously directed by you.

 

At the conclusion of the offering, once the eligible assets in the Stock Purchase Fund have been used to purchase New Cullman common stock, the shares will be transferred to and held in the Cullman Stock Fund. Your interests in the Cullman Stock Fund will be referred to as participation interests and will be denominated in shares of New Cullman common stock.

Composition of Cullman Stock Fund  

The value of one participation interest will equal one share of common stock of New Cullman, which will be initially valued at $10.

 

Following the stock offering, each day, the aggregate value of the Cullman Stock Fund will be determined by dividing the total market value of the Cullman Stock Fund at the end of the day by the total number of shares held in the Cullman Stock Fund as of the previous day’s end. The change in share value reflects the day’s change in New Cullman common stock price, and the value of each participation interest should be the same as one share of New Cullman common stock. Your account in the Cullman Stock Fund will be reported to you on your regular Plan participant statements. You can also go on-line at any time to principal.com or call 1-800-547-7754 to review your account balances

Value of the Plan Assets  As of December 31, 2020, the market value of the assets of the Plan attributable to active and former employees of the Bank was approximately $4,960,662.89. The Plan administrator informed

 

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  each participant of the value of his or her account balance under the Plan as of December 31, 2020, however participants can also go on-line and look at their account balances at any time.
Election to Purchase Stock in the Stock Offering  In connection with the stock offering, the Plan will permit you to direct the trustee to transfer all or a portion of your account balance in the Plan to the Stock Purchase Fund for the purchase of shares of common stock of New Cullman at $10.00 each in the offering. The trustee of the Plan will subscribe for common stock of New Cullman offered for sale in connection with the stock offering, in accordance with each participant’s direction. In making this determination, you should carefully consider the information set forth on page 17 of this prospectus supplement under “Notice of Your Rights Concerning Employer Securities — The Importance of Diversifying Your Retirement Savings.”
How to Order Stock in the Offering  

You can elect to transfer (in whole percentages or dollar amounts) all or a portion of your account balance in the Plan to the Stock Purchase Fund. Please note the following conditions concerning this election:

 

•  You can direct all or a portion of your current account to the Stock Purchase Fund in increments of $10.00.

 

•  Your election is subject to a minimum purchase of 25 shares of common stock, which equals $250.

 

•  Your election, plus any order you place outside the Plan, are together subject to a maximum purchase of 25,000 shares, which equals $250,000 or, together with associates or if persons acting in concert with such person or entity, a maximum purchase of 50,000 shares, which equals $500,000.

 

•  The election period closes at 3:00 p.m., Central Time, on [DATE].

 

•  Your election to purchase common stock in the offering through the Plan will be accepted by Principal Financial Group, the recordkeeper of the Plan. After your election is accepted by Principal Financial Group, it will be used by the trustee to purchase shares of common stock sold in the offering. As of the date of the formal closing of the offering, which will occur several weeks after the election period ends, the common stock purchased based on your election will be transferred to the Stock Purchase Fund and any remaining funds (including any remaining funds due to rounding the

 

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stock purchase amount down to the closest dollar amount divisible by $10.00) will be transferred out of the Stock Purchase Fund account for your investment in other funds under the Plan, based on your election currently on file for future contributions. During the stock offering period, you will continue to have the ability to transfer amounts that are not directed to purchase stock in the Stock Purchase Fund among all other investment funds.

 

•  The amount you elect to transfer to the Stock Purchase Fund will be held separately until the offering closes. Therefore, this money is not available for distributions, loans, or withdrawals until the transaction is completed, which is expected to be several weeks after the closing of the subscription offering period.

 

Follow these steps to make your election to use all or part of your account balance in the Plan to purchase shares of common stock in the stock offering.

 

•  Go to www.principal.com and log into your Plan account. In Account Login, click on drop down and choose “Personal”, then “GO.” Enter your Username and Password. If you haven’t established your Username and Password, click on the link “Establish your Username and Password” and follow the prompts.

 

•  On your Personal Summary Page, choose the line for the Cullman Savings Bank Profit Sharing Plan.

 

•  When you reach “Your Account Overview,” click on “Investments” across the top navigation of the screen, and then click on “change Investments.”

 

•  When you reach the “Change Investments” screen, click on the box titled “Move Balances.” Then click on Make a transfer.

 

•  If you want to transfer a percentage of some of your current investments, enter the percentage you would like to transfer “From” each investment. If you would like to transfer a dollar amount, click on “Advanced Transfer Features” and choose “dollars,” then enter the amount you would like to transfer “From” each investment. When you have completed transferring “From” each investment, choose “Continue.” Principal Financial Group will provide additional instructions.

 

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•  Enter the percentage or dollars that you will be transferring into the Stock Purchase Fund. The Stock Purchase Fund is a money market investment that will hold the funds until the stock offering is concluded. All of the funds that you transferred “From” other investments must be transferred to another investment. The total percentage must be 100% or, if transferring dollars, all of the dollars must be transferred “To” another investment.

 

•  When you have completed the “To” portion of the transaction, click continue. You will be taken to a confirmation page. Please review your transaction for accuracy, if you need to make changes, click on “Cancel” or “Start Over” or “Previous” to make changes. If the information is correct, click on the box, “I confirm the information above and authorize Principal Life Insurance Company to process this request.” You will receive a communication in your Message Center confirming your transaction.

Order Deadline  If you wish to make an election, then you must make your election online at www.principal.com and return your Stock Information Form in the pre-paid envelope to John A. Riley, III, President and Chief Executive Officer, Cullman Savings Bank, 316 2nd Avenue SW, Cullman, Alabama 35055; no later than [3:00 p.m., Central Time, on [Deadline]]. To allow for processing, this deadline is prior to the subscription offering period deadline (which is [DATE]).
Irrevocability of Transfer Direction  

Once you make an election to transfer amounts to the Stock Purchase Fund to be used by the trustee to purchase New Cullman stock in connection with the stock offering, you may not change your election.

 

Your election is irrevocable. You will, however, continue to have the ability to transfer amounts not directed towards the purchase of stock among all of the other investment funds on a daily basis.

Other Purchases in Your Account During the Offering Period  Whether or not you choose to purchase stock in the offering through the Plan, you will at all times have complete access to those amounts in your account that you do not apply towards purchases in the offering. For example, you will be able to purchase other funds within the Plan with that portion of your account balance that you do not apply towards purchases in the offering during the offering period. Such purchases will be made at the prevailing market price in the same manner as you make such purchases now, i.e., through internet access to your account.

 

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Additional Purchases of New Cullman Stock After the Offering  After the offering closes, you will have the opportunity to direct the Plan trustee to sell any shares that you purchased in the offering. You will also have the opportunity to purchase any additional shares in the open market, to the extent shares are available. New Cullman common stock will be listed on the Nasdaq stock market. Special restrictions may apply to transfers directed to and from the Cullman Stock Fund by the participants who are subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, relating to the purchase and sale of securities by officers, directors and principal shareholders of New Cullman.
Purchase Price of Common Stock in the Offering and After the Offering  The trustee will pay $10.00 per share of common stock in the stock offering, which will be the same price paid by all other persons for a share of common stock in the stock offering. No sales commision will be charged for common stock purchased in the stock offering.
Nature of a Participant’s Interest in the Common Stock  The common stock acquired by the trustee will be denominated in shares of common stock of New Cullman in trust for the participants of the Plan. Shares of common stock of New Cullman acquired by the trustee at your direction will be allocated to your account.
Voting Rights of Common Stock  The Bank may allow Plan participants to direct the trustee as to how to vote their shares of New Cullman common stock. If the trustee does not receive voting instructions, the trustee will be directed by the Bank to vote such shares in the same proportion as the voting instructions received from other participants related to their shares of New Cullman common stock held by the Plan, provided that such vote is made in accordance with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). All voting instructions will be kept confidential.

 

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DESCRIPTION OF THE PLAN

Introduction

Cullman Savings Bank originally adopted the plan effective as of January 1, 1984. In connection with the Conversion of Old Cullman, the Bank desire to allow participants to purchase common stock of New Cullman in their accounts in the Plan. The Plan is a tax-qualified profit sharing plan established in accordance with the requirements under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”).

The Bank intends that the Plan, in operation, will comply with the requirements under Section 401(a) of the Code. The Bank will adopt any amendments to the Plan that may be necessary to ensure the continuing qualified status of the Plan under the Code and applicable Treasury Regulations.

ERISA. The Plan is an “individual account plan” other than a “money purchase pension plan” within the meaning of ERISA. As such, the Plan is subject to all of the provisions of Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the Code Relating to Retirement Plans) of ERISA, except to the funding requirements contained in Part 3 of Title I of ERISA, which by their terms do not apply to an individual account plan (other than a money purchase plan). The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding requirements contained in Title IV of ERISA are not applicable to participants or beneficiaries under the Plan.

Reference to Full Text of Plan. The following portions of this prospectus supplement summarize certain provisions of the Plan. They are not complete and are qualified in their entirety by the full text of the Plan. Copies of the Plan are available to all employees by filing a request with the Plan Administrator c/o Cullman Savings Bank, Attn: John A. Riley, President and Chief Executive Officer. You are urged to read carefully the full text of the Plan.

Eligibility and Participation

As an employee of the Bank, you are eligible to become a participant in the Plan on the entry date coinciding with or immediately following completion of one year of service, completion of 1,000 hours of employment and attainment of age 19. The entry dates under the Plan are January 1 and July 1.

As of December 31, 2020, there were approximately 40 active and former employees with account balances in the Plan.

Contributions under the Plan

No Participant Contributions. You are not permitted to make contributions to the Plan.

Profit Sharing Contributions. The Bank may, in its discretion, make discretionary contributions to the accounts of eligible participants from time to time on a nondiscriminatory basis. The amount of any profit sharing contributions, if made, will be determined in the sole

 

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discretion of the Bank and will only be available to participants who have 1,000 hours of service during the plan year and are employed on the last of the plan year.

Limitations on Contributions

The total amount of contributions that you make and any contribution your employer makes on your behalf to your account in one year is generally limited to the lesser of 100% of your compensation or $58,000 (for 2021), or if applicable, $64,500 (for 2021) including catch-up contributions.

Rollovers. You may make a rollover contribution of an eligible rollover distribution from any other qualified retirement plan or an individual retirement arrangement (IRA). These funds will be maintained in a separate rollover account in which you will have a nonforfeitable vested interest.

Benefits under the Plan

Vesting. Generally, your profit sharing contributions, if any, will vest in accordance with the following:

 

Years of Vesting Service

  Vesting Percentage
Less than 3  0%
3 or more  100%

Distribution at Termination of Employment. You will be entitled to receive a distribution of the vested amounts in your account when your employment terminates for any reason. Your benefit will be equal to the vested balance of your account. The Plan will make involuntary cash-out distributions of vested account balances in accordance with the Plan. If you are not a 5% or more owner of your employer, your required benefit commencement date is the April 1st following the close of the year in which the later occurs: you attain age 72 (age 70 12, if you were born on or before June 30, 1949) or you terminate employment.

Distribution after Death of Participant. In the event of your death, the value of your entire account will be payable to your beneficiary in accordance with the Plan.

Investment of Contributions and Account Balances

All amounts credited to your accounts under the Plan are held in the Plan trust (the “Trust”), which is administered by the trustee of the Plan. Prior to the effective date of the offering, you were provided the opportunity to direct the investments of your account into one of the investment options described below.

 

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Performance History

The following table provides performance data with respect to the investment funds in the Plan:

 

   Average Annual Total Return
(as of 1/31/2021 quarter end)
 

Inv Manage or Sub-Advisor
Investment Option

  1 yr  3 yr   5 yr   10 yr   Since
Inception
   Inception
Date
 

Vanguard Group Vanguard Value Index Admiral Fund

   4.10   4.84    11.65    10.82    6.60    11/13/2000 

Principal Global Investors LargeCap S&P 500 Index Separate Account-Z

   17.21   11.65    16.09    13.43    10.07    01/01/1990 

Vanguard Group Vanguard Growth Index Admiral Fund

   34.72   19.90    21.57    16.34    8.20    11/13/2000 

Wells Fargo Fund Management Wells Fargo Special Mid Cap Value R6 Fund

   4.16   5.21    11.33    11.00    10.31    06/28/2013 

Principal Global Investors MidCap S&P 400 Index Separate Account-Z

   18.35   7.87    13.91    11.36    10.02    08/31/1999 

Carillon Tower Advisors Carillon Eagle Mid Cap Growth R6 Fund

   37.23   17.92    21.97    14.85    16.92    08/15/2011 

American Beacon Small Cap Value R5 Fund

   12.16   2.68    10.29    8.92    9.83    12/31/1998 

Principal Global Investors SmallCap S&P 600 Index Separate Account-Z

   23.22   9.00    15.18    12.51    10.43    08/31/1999 

Janus Henderson Triton N Fund

   30.42   14.00    18.92    14.70    16.20    05/31/2012 

Principal Real Estate Inv Real Estate Securities Separate Account

   (5.45  7.71    7.93    9.63    10.87    12/31/2002 

Dimensional Fund Advisors DFA Emerging Markets Core Equity I Fund

   22.81   1.95    12.79    3.51    8.02    04/05/2005 

Dimensional Fund Advisors DFA International Core Equity I Fund

   10.69   0.70    9.04    5.11    5.5    09/15/2005 

Principal Global Investors Diversified International Separate Account-Z

   17.41   3.75    10.23    6.69    7.57    05/20/1987 

Vanguard Group Vanguard International Growth Admiral Fund

   68.93   20.58    24.74    12.86    10.18    08/13/2001 

Multiple Sub-Advisors Principal LifeTime Hybrid Income CIT Z

   8.76   5.76    6.22    5.14    6.23    07/07/2009 

Multiple Sub-Advisors Principal LifeTime Hybrid 2010 CIT Z

   9.79   5.95    7.45    6.36    8.28    07/07/2009 

Multiple Sub-Advisors Principal LifeTime Hybrid 2015 CIT Z

   10.74   6.20    8.27    7.00    9.11    07/07/2009 

Multiple Sub-Advisors Principal LifeTime Hybrid 2020 CIT Z

   12.14   6.66    9.28    7.72    9.96    07/07/2009 

Multiple Sub-Advisors Principal LifeTime Hybrid 2025 CIT Z

   13.29   7.07    10.18    8.32    10.64    07/07/2009 

Multiple Sub-Advisors Principal LifeTime Hybrid 2030 CIT Z

   14.41   7.39    10.94    8.85    11.22    07/07/2009 

Multiple Sub-Advisors Principal LifeTime Hybrid 2035 CIT Z

   15.19   7.74    11.64    9.28    11.71    07/07/2009 

Multiple Sub-Advisors Principal LifeTime Hybrid 2040 CIT Z

   15.76   7.84    12.11    9.62    12.07    07/07/2009 

Multiple Sub-Advisors Principal LifeTime Hybrid 2045 CIT Z

   16.15   7.92    12.49    9.85    12.38    07/07/2009 

Multiple Sub-Advisors Principal LifeTime Hybrid 2050 CIT Z

   16.51   8.00    12.81    10.05    12.47    07/07/2009 

 

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Multiple Sub-Advisors Principal LifeTime Hybrid 2055 CIT Z

   16.47    7.96    12.94    10.09    12.59    07/07/2009 

Multiple Sub-Advisors Principal LifeTime Hybrid 2060 CIT Z

   16.83    8.08    13.06    —      9.44    01/01/2014 

Multiple Sub-Advisors Principal LifeTime Hybrid 2065 CIT Z

   17.48    8.29    —      —      9.35    01/01/2018 

AB LP AB High Income Z Fund

   2.91    3.42    7.19    5.88    4.99    10/15/2013 

BlackRock Advisors, LLC iShares US Aggregate Bond Index K Fund

   4.76    5.49    3.94    3.61    5.08    07/02/1993 

Capital Research and Mgmt Co American Funds Bond Fund of America R6 Fund

   8.41    6.70    4.86    4.29    5.38    05/01/2009 

PIMCO Global Bond Opportunities (USD-Hedged) Inst Fund

   6.23    4.59    4.65    5.03    5.66    02/25/1998 

Vanguard Group Vanguard Inflation-Protected Securities Admiral Fund

   9.19    6.25    4.74    3.74    4.10    06/10/2005 

Description of the Investment Funds

Fixed Income Guaranteed Option. This is a guaranteed general-account backed group annuity contract, issued by Principal Life Insurance Company (Principal Life) to Principal Trust Company as custodian. A rate of interest contractually guaranteed by Principal Life is credited to participant account balances. No redemption fees, early withdrawal charges, or market value adjustments are charged on participant transfers of assets into or out of the contract. An employer-level surrender of the plan’s interest or initiated transfer will be subject to either a 12-month advance notice or a 5% surrender charge, whichever the plan fiduciary chooses. Notification of a plan’s intent to terminate its interest may be revoked within 90 days of our receipt of such notice, after which time, notice becomes irrevocable. The Fixed Income Guaranteed Option may make available higher guaranteed rates. If these are available and a plan fiduciary chooses to move a plan’s interest to a higher guaranteed rate, a charge of 1.50% of the plan’s interest applies. If there are multiple higher guaranteed rates available, the 1.50% charge applies to each higher rate that the plan fiduciary elects. See the Fact Sheet for important details on this charge.

Vanguard Group Vanguard Value Index Admiral Fund. The investment seeks to track the performance of a benchmark index that measures the investment return of large-capitalization value stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Large Cap Value Index, a broadly diversified index predominantly made up of value stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

Principal Global Investors LargeCap S&P 500 Index Separate Account-Z. The investment option normally invests the majority of assets in common stocks of companies that compose the S&P 500 Index. Management attempts to mirror the investment performance of the index by allocating assets in approximately the same weightings as the S&P 500 Index. Over the long-term, management seeks a very close correlation between the performance of the Separate Account before expenses and that of the S&P 500 Index.

 

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Vanguard Group Vanguard Growth Index Admiral Fund. The investment seeks to track the performance of a benchmark index that measures the investment return of the CRSP US Large Cap Growth Index. The fund employs an indexing investment approach designed to track the performance of index, a broadly diversified index predominantly made up of growth stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund is non-diversified.

Wells Fargo Fund Management Wells Fargo Special Mid Cap Value R6 Fund. The investment seeks long-term capital appreciation. The fund normally invests at least 80% of its net assets in equity securities of medium-capitalization companies. It invests principally in equity securities of medium-capitalization companies, which the manager defines as securities of companies with market capitalizations within the range of the Russell Midcap(R) Index at the time of purchase.

Principal Global Investors MidCap S&P 400 Index Separate Account-Z. The investment option normally invests the majority of assets in common stocks of companies that compose the S&P MidCap 400 Index. Management attempts to mirror the investment performance of the index by allocating assets in approximately the same weightings as the S&P MidCap 400 Index. Over the long-term, management seeks a very close correlation between the performance of the Separate Account before expenses and that of the S&P MidCap 400 Index.

Carillon Tower Advisors Carillon Eagle Mid Cap Growth R6 Fund. The investment seeks long-term capital appreciation. The fund normally invests at least 80% of its net assets (plus the amount of any borrowings for investment purposes) in the equity securities of mid-capitalization companies. The fund will invest primarily in the equity securities of companies that the portfolio managers believe have the potential for above-average earnings or sales growth, reasonable valuations and acceptable debt levels.

American Beacon Small Cap Value R5 Fund. The investment seeks long-term capital appreciation and current income. Under normal circumstances, at least 80% of the fund’s net assets (plus the amount of any borrowings for investment purposes) are invested in equity securities of small market capitalization U.S. companies. These companies have market capitalizations of $5 billion or less at the time of investment. The fund’s investments may include common stocks, real estate investment trusts (“REITs”), American Depositary Receipts (“ADRs”) and U.S. dollar-denominated foreign stocks traded on U.S. exchanges (collectively, “stocks”).

Principal Global Investors SmallCap S&P 600 Index Separate Account-Z. The investment seeks long-term growth of capital and normally invests the majority of assets in common stocks of companies that compose the S&P SmallCap 600 Index. Management attempts to mirror the investment performance of the index by allocating assets in approximately the same weightings as the S&P 600 Index. Over the long-term, management seeks a very close correlation between the performance of the Separate Account before expenses and that of the S&P 600 Index.

Janus Henderson Triton N Fund. The investment seeks long-term growth of capital. The fund pursues its investment objective by investing at least 50% of its equity assets in small- and

 

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medium-sized companies. It may also invest in larger companies with strong growth potential. Small- and medium-sized companies are defined by the portfolio managers as those companies whose market capitalization falls within the range of companies in the Russell 2500(R) Growth Index at the time of initial purchase. The fund may also invest in foreign securities, which may include investments in emerging markets.

Principal Real Estate Inv Real Estate Securities Separate Account-Z. The investment seeks to generate a total return. Under normal circumstances, the fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies principally engaged in the real estate industry at the time of purchase. It invests in value equity securities, an investment strategy that emphasizes buying securities that appear to be undervalued. The fund concentrates its investments (invest more than 25% of its net assets) in securities in the real estate industry. It is non-diversified.

Dimensional Fund Advisors DFA Emerging Markets Core Equity I Fund. The investment seeks long-term capital appreciation. The Portfolio purchases a broad and diverse group of securities associated with emerging markets, which may include frontier markets (emerging market countries in an earlier stage of development), authorized for investment by Dimensional Fund Advisors LP’s (the “Advisor”) Investment Committee (“Approved Markets”), with a greater emphasis on small capitalization, value, and/or high profitability companies.

Dimensional Fund Advisors DFA International Core Equity I Fund. The investment seeks long-term capital appreciation. The fund purchases a broad and diverse group of securities of non-U. S. companies in developed markets with a greater emphasis on small capitalization, value, and/or high profitability companies as compared to their representation in the International Universe. As a non-fundamental policy, under normal circumstances, it will invest at least 80% of its net assets in equity securities.

Principal Global Investors Diversified International Separate Account-Z. The investment option normally invests the majority of assets in companies in at least three different countries. It invests in securities of companies with their principal place of business or principal office outside of the United States; companies for which the principal securities trade on a foreign exchange; and companies, regardless of where their securities are traded, that derive 50% or more of their total revenue from goods or services produced or sold outside of the United States. The Separate Account may invest in securities of companies with small to medium market capitalizations.

Vanguard Group Vanguard International Growth Admiral Fund. The investment seeks to provide long-term capital appreciation. The fund invests predominantly in the stocks of companies located outside the United States and is expected to diversify its assets in countries across developed and emerging markets. In selecting stocks, the fund’s advisors evaluate foreign markets around the world and choose large-, mid-, and small-capitalization companies considered to have above-average growth potential. The fund uses multiple investment advisors.

Multiple Sub-Advisors Principal LifeTime Hybrid Income CIT Z. The investment option seeks current income and, as a secondary objective, capital appreciation. To pursue its goal, this Target Date Fund generally invests in affiliated and may invest in nonaffiliated open-ended

 

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mutual funds, insurance company separate accounts, and collective trust funds that Principal Trust considers appropriate based on investors who have reached their investment time horizon.

Multiple Sub-Advisors Principal LifeTime Hybrid 2010 CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2015 CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2020 CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2025 CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2030 CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2035 CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2040 CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2045 CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2050 CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2055 CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2060+ CIT Z.

Multiple Sub-Advisors Principal LifeTime Hybrid 2065 CIT Z. The investment option seeks a total return consisting of long-term growth of capital and current income. To pursue its goal, this Target Date Fund generally invests in affiliated open-ended mutual funds, insurance company separate accounts, unaffiliated mutual funds, and unaffiliated collective trust funds that Principal Trust considers appropriate based on the remaining time horizon of a particular Target Date Fund.

Fixed Income Guaranteed Option. This is a guaranteed general account-backed group annuity contract. A rate of interest contractually guaranteed by Principal Life is credited to participant account balances. The contract makes benefit payments to participants without restriction (i.e. no early termination charges or surrender charges for plan benefit events). A surrender elected by a plan fiduciary will be subject to a 12 month advance notice or a 5% surrender charge, whichever the plan fiduciary chooses. Notification of a plan’s intent to terminate its interest may be revoked within 90 days of our receipt of such notice, after which time, notice becomes irrevocable.

ABLP AB High Income Z Fund. The investment seeks to maximize total returns from price appreciation and income. The fund pursues income opportunities from government, corporate, emerging market and high-yield sources. It has the flexibility to invest in a broad range of fixed-income securities in both developed and emerging market countries. The fund’s investments may include U.S. and non-U.S. corporate debt securities and sovereign debt securities. It may invest, without limitation, in either U.S. Dollar-denominated or non-U.S. Dollar-denominated fixed-income securities.

 

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BlackRock Advisors, LLC iShares US Aggregate Bond Index K Fund. The investment seeks to provide investment results that correspond to the total return performance of fixed-income securities in the aggregate, as represented by the Bloomberg Barclays U.S. Aggregate Bond Index. The fund is a “feeder” fund that invests all of its assets in the Master Portfolio of MIP, which has the same investment objective and strategies as the fund. Under normal circumstances, at least 90% of the value of the fund’s assets, plus the amount of any borrowing for investment purposes, is invested in securities comprising the Barclays U.S. Aggregate Index.

Capital Research and Mgmt Co American Funds Bond Fund of America R6 Fund. The investment seeks to provide as high a level of current income as is consistent with the preservation of capital. The fund normally invests at least 80% of its assets in bonds and other debt securities. It invests a majority of its assets in debt securities rated A3 or better or A- or better. It may invest in debt securities and mortgage-backed securities issued by government-sponsored entities and federal agencies and instrumentalities that are not backed by the full faith and credit of the U.S. government.

PIMCO Global Bond Opportunities (USD-Hedged) Inst Fund. The investment seeks maximum total return, consistent with preservation of capital. The fund normally invests at least 80% of its assets in Fixed Income Instruments that are economically tied to at least three countries (one of which may be the United States), which may be represented by forwards or derivatives such as options, futures contracts or swap agreements. It normally invests at least 25% of its net assets in instruments that are economically tied to foreign (non-U.S.) countries. The fund may invest, without limitation, in derivative instruments. It is non-diversified.

Vanguard Group Vanguard Inflation-Protected Securities Admiral Fund. The investment seeks to provide inflation protection and income consistent with investment in inflation-indexed securities. The fund invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government, its agencies and instrumentalities, and corporations. It may invest in bonds of any maturity; however, its dollar-weighted average maturity is expected to be in the range of 7 to 20 years. At a minimum, all bonds purchased by the fund will be rated investment-grade or, if unrated, will be considered by the advisor to be investment-grade.

An investment in any of the funds listed above is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. As with any mutual fund investment, there is always a risk that you may lose money on your investment in any of the funds listed above.

Stock Purchase Fund

In connection with the stock offering, the Plan now offers the Stock Purchase Fund as an additional choice to the investment options described above. The Stock Purchase Fund invests primarily in the shares of common stock of New Cullman In connection with the stock offering, you may, in the manner described earlier, direct the trustee to invest up to 100% of your Plan account in Stock Purchase Fund.

 

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As of the date of this prospectus supplement, there is no established market for New Cullman common stock. Accordingly, there is no record of the historical performance of the Stock Purchase Fund. Performance of the Stock Purchase Fund depends on a number of factors, including the financial condition and profitability of New Cullman and the Bank and market conditions for shares of New Cullman common stock generally.

Investments in the Stock Purchase Fund involve special risks common to investments in the shares of common stock of New Cullman In making a decision to invest all or a part of your account balance in the Stock Purchase Fund, you should carefully consider the information set forth on page 17 of this prospectus supplement under “Notice of Your Rights Concerning Employer Securities – The Importance of Diversifying Your Retirement Savings.”

For a discussion of material risks you should consider, see “Risk Factors” beginning on page 18 of the attached prospectus and the section of this prospectus supplement called “Notice of Your Rights Concerning Employer Securities” below.

Withdrawals from the Plan

Applicable federal law requires the Plan to impose substantial restrictions on the right of a Plan participant to withdraw amounts held for his or her benefit under the Plan prior to the participant’s termination of employment with the Bank. A substantial federal tax penalty may also be imposed on withdrawals made prior to the participant’s attainment of age 59 12, regardless of whether such a withdrawal occurs during his or her employment with the Bank or after termination of employment.

Withdrawal from your Account prior to Retirement. Once you have attained age 59 12, you may request distribution of all or part of the amounts credited to your account.

Hardship Withdrawals. If you incur a financial hardship, you may request a withdrawal from the portion of your account.

Rollover Contributions. You may withdraw amounts you contributed to the Plan as a rollover contribution at any time.

Loan. Loans are not permitted under the Plan.

Administration of the Plan

The Trustee. The trustee of the Plan is John A. Riley, III, President and Chief Executive Officer, Cullman Savings Bank. Mr. Riley serves as trustee for all the investments funds under the Plan, including during the stock offering period for Cullman Bancorp, Inc. common stock.

Plan Administrator. Pursuant to the terms of the Plan, the Plan is administered by the Plan administrator. The address of the Plan administrator is Cullman Savings Bank, 316 2nd Avenue SW, Cullman, Alabama 35055 The Plan administrator is responsible for the administration of the Plan, interpretation of the provisions of the Plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the Plan,

 

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maintenance of plan records, books of account and all other data necessary for the proper administration of the Plan, preparation and filing of all returns and reports relating to the Plan which are required to be filed with the U.S. Department of Labor and the Internal Revenue Service, and for all disclosures required to be made to participants, beneficiaries and others under Sections 104 and 105 of ERISA.

Reports to Plan Participants. The Plan administrator will furnish you a statement at least quarterly showing the balance in your account as of the end of that period, the amount of contributions allocated to your account for that period, and any adjustments to your account to reflect earnings or losses (if any). In addition, you can go on-line to principal.com or call 1-(800) 547-7754 at any time to review your account balances.

Amendment and Termination

It is the intention of the Bank to continue the Plan indefinitely. Nevertheless, the Bank may terminate the Plan at any time. If the Plan is terminated in whole or in part, then regardless of other provisions in the Plan, you will have a fully vested interest in your accounts. The Bank reserves the right to make any amendment or amendments to the Plan which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that the Bank may make any amendment it determines necessary or desirable, with or without retroactive effect, to comply with ERISA.

Merger, Consolidation or Transfer

In the event of the merger or consolidation of the Plan with another plan, or the transfer of the trust assets to another plan, the Plan requires that you would receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer.

Federal Income Tax Consequences

The following is a brief summary of the material federal income tax aspects of the Plan. You should not rely on this summary as a complete or definitive description of the material federal income tax consequences relating to the Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. Please consult your tax advisor with respect to any distribution from the Plan and transactions involving the Plan.

As a “tax-qualified retirement plan,” the Code affords the Plan special tax treatment, including:

(1) the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the Plan each year;

(2) participants pay no current income tax on amounts contributed by the employer on their behalf; and

 

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(3) earnings of the Plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments.

The Bank will administer the Plan to comply with the requirements of the Code as of the applicable effective date of any change in the law.

Lump-Sum Distribution. A distribution from the Plan to a participant or the beneficiary of a participant will qualify as a lump-sum distribution if it is made within one taxable year, on account of the participant’s death, disability or separation from service, or after the participant attains age 59 12, and consists of the balance credited to participants under the Plan and all other profit sharing plans (and in some cases all other stock bonus plans), if any, maintained by the Bank. The portion of any lump-sum distribution required to be included in your taxable income for federal income tax purposes consists of the entire amount of the lump-sum distribution, less the amount of after-tax contributions, if any, you have made to this Plan and any other profit sharing plans maintained by the Bank, which is included in the distribution.

New Cullman Common Stock Included in Lump-Sum Distribution. If a lump-sum distribution includes New Cullman common stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount may be reduced by the amount of any net unrealized appreciation with respect to New Cullman common stock, that is, the excess of the value of New Cullman common stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of New Cullman common stock, for purposes of computing gain or loss on its subsequent sale, equals the value of New Cullman common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of New Cullman common stock, to the extent of the amount of net unrealized appreciation at the time of distribution, will constitute long-term capital gain, regardless of the holding period of New Cullman common stock. Any gain on a subsequent sale or other taxable disposition of New Cullman common stock, in excess of the amount of net unrealized appreciation at the time of distribution, will be considered long-term capital gain. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed by regulations to be issued by the Internal Revenue Service.

Distributions: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA. You may roll over virtually all distributions from the Plan to another qualified plan or to an individual retirement account (IRA) in accordance with the terms of the other plan or account.

Notice of Your Rights Concerning Employer Securities

Federal law provides specific rights concerning investments in employer securities, such as New Cullman common stock. Because you may have investments in New Cullman common stock under the Plan, you should take the time to read the following information carefully.

Your Rights Concerning Employer Securities. The Plan must allow you to elect to move any portion of your account that is invested in the Stock Purchase Fund from that investment into other investment alternatives under the Plan. You may contact the Plan Administrator shown

 

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above for specific information regarding this new right, including how to make this election. In deciding whether to exercise this right, you will want to give careful consideration to the information below that describes the importance of diversification. All of the investment options under the Plan are available to you if you decide to diversify out of the Stock Purchase Fund.

The Importance of Diversifying Your Retirement Savings. To help achieve long-term retirement security, you should give careful consideration to the benefits of a well-balanced and diversified investment portfolio. Spreading your assets among different types of investments can help you achieve a favorable rate of return, while minimizing your overall risk of losing money. This is because market or other economic conditions that cause one category of assets, or one particular security, to perform very well often cause another asset category, or another particular security, to perform poorly. If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified. Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk.

In deciding how to invest your retirement savings, you should take into account all of your assets, including any retirement savings outside of the Plan. No single approach is right for everyone because, among other factors, individuals have different financial goals, different time horizons for meeting their goals, and different tolerance for risk. Therefore, you should carefully consider the rights described here and how these rights affect the amount of money that you invest in New Cullman common stock through the Plan.

It is also important to periodically review your investment portfolio, your investment objectives, and the investment options under the Plan to help ensure that your retirement savings will meet your retirement goals.

Additional ERISA Considerations

As noted above, the Plan is subject to certain provisions of ERISA, including special provisions relating to control over the Plan’s assets by participants and beneficiaries. The Plan’s feature that allows you to direct the investment of your account balances is intended to satisfy the requirements of Section 404(c) of ERISA relating to control over plan assets by a participant or beneficiary. The effect of this is two-fold. First, you will not be deemed a “fiduciary” because of your exercise of investment discretion. Second, no person who otherwise is a fiduciary, such as the Bank, the Plan Administrator, or the Plan’s trustee is liable under the fiduciary responsibility provision of ERISA for any loss which results from your exercise of control over the assets in your Plan account.

Because you will be entitled to invest all or a portion of your account balance in the Plan in New Cullman common stock, the regulations under Section 404(c) of ERISA require that the Plan establish procedures that ensure the confidentiality of your decision to purchase, hold, or sell employer securities, except to the extent that disclosure of such information is necessary to comply with federal or state laws not preempted by ERISA. These regulations also require that your exercise of voting and similar rights with respect to the common stock be conducted in a way that ensures the confidentiality of your exercise of these rights.

 

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Securities and Exchange Commission Reporting and Short-Swing Profit Liability

Section 16 of the Securities Exchange Act of 1934, as amended, imposes reporting and liability requirements on officers, directors, and persons beneficially owning more than 10% of public companies such as New Cullman Section 16(a) of the Securities Exchange Act of 1934 requires the filing of reports of beneficial ownership. Within 10 days of becoming an officer, director or person beneficially owning more than 10% of the shares of New Cullman the individual must fill out a Form 3 reporting initial beneficial ownership and file it with the Securities and Exchange Commission. Changes in beneficial ownership, such as purchases, sales and gifts generally must be reported periodically, either on a Form 4 within two business days after the change occurs, or annually on a Form 5 within 45 days after the close of New Cullman’s fiscal year. Discretionary transactions in and beneficial ownership of the common stock through the Stock Purchase Fund of the Plan by officers and persons beneficially owning more than 10% of the common stock of New Cullman generally must be reported to the Securities and Exchange Commission by such individuals.

In addition to the reporting requirements described above, Section 16(b) of the Securities Exchange Act of 1934, as amended, provides for the recovery by New Cullman of profits realized by an officer, director or any person beneficially owning more than 10% of New Cullman’s common stock resulting from non-exempt purchases and sales of New Cullman common stock within any six-month period.

The Securities and Exchange Commission has adopted rules that provide exemptions from the profit recovery provisions of Section 16(b) for all transactions in employer securities within an employee benefit plan, provided certain requirements are met. These requirements generally involve restrictions upon the timing of elections to acquire or dispose of employer securities for the accounts of Section 16(b) persons.

Except for distributions of common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons affected by Section 16(b) are required to hold shares of common stock distributed from the Plan for six months following such distribution and are prohibited from directing additional purchases within the Stock Purchase Fund for six months after receiving such a distribution.

Financial Information Regarding Plan Assets

Financial information representing the assets available for plan benefits at December 31, 2020, is available upon written request to the Plan Administrator at the address shown above.

LEGAL OPINION

The validity of the issuance of the common stock has been passed upon by Luse Gorman, PC, Washington, D.C., which firm acted as special counsel to New Cullman in connection with New Cullman’s stock offering.

 

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PROSPECTUS

 

LOGO

(Proposed Holding Company for Cullman Savings Bank)

Up to 3,748,853 Shares of Common Stock

(Subject to Increase to up to 4,311,181 Shares)

 

 

Cullman Bancorp, Inc., a newly formed Maryland corporation that we refer to as “New Cullman” throughout this prospectus, is offering shares of common stock for sale on a best efforts basis in connection with the conversion of Cullman Savings Bank, MHC from the mutual holding company to the stock holding company form of organization. The shares we are offering represent the majority ownership interest in Cullman Bancorp, Inc., a federal corporation that we refer to as “Old Cullman,” currently owned by Cullman Savings Bank, MHC, a federally chartered mutual holding company. Old Cullman’s common stock is currently listed on the Pink Open Market operated by OTC Markets Group under the symbol “CULL.” We expect the shares of New Cullman common stock will trade on the Nasdaq Capital Market under the symbol “CULL.” We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

The shares of common stock are first being offered for sale in a subscription offering to eligible depositors of Cullman Savings Bank and to tax-qualified employee benefit plans of Cullman Savings Bank. Shares not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to residents of the communities served by Cullman Savings Bank. Any shares of common stock not purchased in the subscription or community offerings may be offered for sale to the public through a syndicate of broker-dealers, referred to in this prospectus as the syndicated community offering. The syndicated community offering may commence before the subscription and community offerings (including any extensions) have expired. However, no shares purchased in the subscription offering or the community offering will be issued until the completion of any syndicated community offering. We may sell up to 4,311,181 shares of common stock because of demand for the shares of common stock or changes in market conditions, without resoliciting subscribers. We must sell a minimum of 2,770,891 shares to complete the offering.

In addition to the shares we are selling in the offering, the shares of common stock of Old Cullman currently owned by public stockholders will be exchanged for shares of common stock of New Cullman based on an exchange ratio that will result in existing public stockholders owning approximately the same percentage of common stock of New Cullman as they owned of the common stock of Old Cullman immediately before the completion of the conversion. The number of shares we expect to issue in the exchange ranges from 1,893,909 shares to 2,946,699 shares. In addition, New Cullman intends to contribute to a new charitable foundation we are establishing in connection with the conversion $100,000 in cash and shares of common stock equal to 2% of the shares to be outstanding following the completion of the conversion and the offering. The aggregate value of the contribution of cash and shares of common stock will be up to $1.6 million at the adjusted maximum of the offering range.

The minimum purchase order is 25 shares. Generally, no individual, or individuals acting through a single qualifying account held jointly, may purchase more than 25,000 shares ($250,000) of common stock, and no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than 50,000 shares ($500,000) of common stock in all categories of the offering combined.

The subscription offering will expire at 4:30 p.m., Central Time, on [expiration date]. We expect that the community offering, if held, will expire at the same time. We may extend the expiration date of the subscription and/or community offerings without notice to you until [extension date], or longer if the Federal Reserve Board approves a later date. No single extension may exceed 90 days and the offering must be completed by [final extension date]. Once submitted, orders are irrevocable unless the subscription and community offerings are terminated or extended, with regulatory approval, beyond [extension date], or the number of shares of common stock to be sold is increased to more than 4,311,181 shares or decreased to less than 2,770,891 shares. If the subscription and community offerings are extended past [extension date], all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to the notice of extension, we will promptly return your funds with interest or cancel your deposit account withdrawal authorization. If the number of shares to be sold in the offering is increased to more than 4,311,181 shares or decreased to less than 2,770,891 shares, we will resolicit subscribers, and all funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest. Funds received in the subscription and the community offerings will be held in a segregated account at Cullman Savings Bank and will earn interest at [interest rate]% per annum until completion or termination of the offering.

Raymond James & Associates, Inc. will assist us in selling the shares on a best efforts basis in the subscription and community offerings, and will serve as sole manager for any syndicated community offering. Raymond James & Associates, Inc. is not required to purchase any shares of common stock that are sold in the offering.

OFFERING SUMMARY

Price: $10.00 per Share

 

   Minimum   Midpoint   Maximum   Adjusted Maximum 

Number of shares

   2,770,891    3,259,872    3,748,853    4,311,181 

Gross offering proceeds

  $27,708,910   $32,589,720   $37,488,530   $43,111,810 

Estimated offering expenses, excluding selling agent fees and expenses (1)

  $1,093,000   $1,093,000   $1,093,000   $1,093,000 

Selling agent fees and expenses (1)(2)

  $395,000   $409,010   $453,860   $505,440 

Estimated net proceeds

  $26,220,910   $31,096,710   $35,941,670   $41,513,370 

Estimated net proceeds per share

  $9.46   $9.54   $9.59   $9.63 

 

(1)

See “The Conversion and Offering—Plan of Distribution; Selling Agent and Underwriter Compensation” for a discussion of Raymond James & Associates, Inc.’s compensation for this offering and the compensation to be received by Raymond James & Associates, Inc. and the other broker-dealers that may participate in the syndicated community offering.

(2)

Includes records agent fees and expenses payable to Raymond James & Associates, Inc. See “The Conversion and Offering—Records Agent Services.”

 

 

This investment involves a degree of risk, including the possible loss of principal. See “Risk Factors” beginning on page 20.

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Neither the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

RAYMOND JAMES

For assistance, contact the Stock Information Center at [stock center number].

The date of this prospectus is [Prospectus date].


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SUMMARY

The following summary explains the significant aspects of the conversion, the offering and the exchange of existing shares of Old Cullman common stock for shares of New Cullman common stock. It may not contain all of the information that is important to you. Before making an investment decision, you should read this entire document carefully, including the consolidated financial statements and the related notes, and the section entitled “Risk Factors.”

Our Organizational Structure and the Proposed Conversion

Since 2009, we have operated in a two-tier mutual holding company structure. Old Cullman is a federal corporation that is our publicly-traded stock holding company and the parent company of Cullman Savings Bank. At December 31, 2020, Old Cullman had consolidated assets of $331.4 million, deposits of $217.0 million and stockholders’ equity of $56.9 million. Old Cullman’s parent company is Cullman Savings Bank, MHC, a federally chartered mutual holding company. At December 31, 2020, Old Cullman had 2,449,919 shares of common stock outstanding, of which 1,403,731 shares, or 57.3%, were owned by Cullman Savings Bank, MHC, and the remaining 1,046,188 shares were held by the public, including 50,225 held by Cullman Savings Bank Foundation.

Pursuant to the terms of the plan of conversion and reorganization, which we refer to as the “plan of conversion,” we are converting from the mutual holding company corporate structure to the fully public stock holding company corporate structure. Upon completion of the conversion, Cullman Savings Bank, MHC and Old Cullman will cease to exist and New Cullman will become the successor corporation to Old Cullman. The conversion will be accomplished by the merger of Cullman Savings Bank, MHC with and into Old Cullman, followed by the merger of Old Cullman with and into New Cullman. The shares of New Cullman common stock being offered for sale represent the majority ownership interest in Old Cullman currently owned by Cullman Savings Bank, MHC. In addition, we intend to contribute cash and shares of common stock to a new charitable foundation we are establishing in connection with the conversion. Public stockholders of Old Cullman will receive shares of common stock of New Cullman in exchange for their shares of Old Cullman at an exchange ratio intended to preserve approximately the same aggregate ownership interest in New Cullman as public stockholders had in Old Cullman, adjusted downward to reflect certain assets held by Cullman Savings Bank, MHC, without giving effect to new shares purchased in the offering, cash paid in lieu of any fractional shares or the effect of shares issued to the charitable foundation. The shares of Old Cullman common stock owned by Cullman Savings Bank, MHC will be canceled.

The following diagram shows our current organizational structure, reflecting ownership percentages at December 31, 2020:

 

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After the conversion and offering are completed, we will be organized as a fully public stock holding company, with the stock of New Cullman held as follows:

 

LOGO

Our Business

Our business activities are conducted primarily through Cullman Savings Bank. Cullman Savings Bank is a federally chartered stock savings bank headquartered in Cullman, Alabama. Cullman Savings Bank was originally chartered in 1887 under the name Cullman Building & Loan. In 1994, we converted to a federal savings bank charter and changed our name to Cullman Savings Bank. In 2009, we reorganized into the mutual holding company form of ownership.

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans, commercial real estate loans and commercial and industrial loans and, to a lesser extent, construction loans, multi-family real estate loans and consumer loans. We also invest in limited amounts of securities. We offer a variety of deposit accounts, including checking accounts, savings accounts, individual retirement accounts and certificate of deposit accounts. We also use Federal Home Loan Bank advances to fund our operations.

Cullman Savings Bank is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency. Cullman Savings Bank is a member of the Federal Home Loan Bank system.

New Cullman is a newly formed Maryland corporation. Following the completion of the conversion and offering, New Cullman will be the holding company for Cullman Savings Bank and will succeed Old Cullman as the publicly traded holding company of Cullman Savings Bank. Our executive offices are located at 316 Second Avenue SW, Cullman, Alabama 35055 and our telephone number is (256) 734-1740. Our website address is www.cullmansavingsbank.com. Information on our website is not considered a part of this document.

Business Strategy

We have focused primarily on continuing and enhancing our community-oriented retail banking strategy. Highlights of our current business strategy include the following:

 

  

Continue to focus on residential lending. We have been and will continue to be primarily a one- to four-family residential real estate lender for borrowers in our market area. As of December 31, 2020, $114.8 million, or 49.0%, of our total loan portfolio consisted of one- to four-family

 

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residential real estate loans (including home equity loans and lines of credit). We also utilize our secondary market capacity so that we can offer loans, including long-term fixed-rate loans, to our customers that we do not wish to retain in our loan portfolio from an asset/liability management standpoint. We consider the current interest rate environment in making decisions as to whether to hold our originated mortgage loans for investment or to sell the loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint, and we sold $17.7 million of one- to four-family residential real estate loans during the year ended December 31, 2020. Such loan sales also enhance non-interest income, as we recognized $462,000 in fee income from loan sales during the year ended December 31, 2020.

 

  

Increase commercial real estate lending. While we will continue to emphasize one- to four-family residential mortgage loans, we also have increased and intend to continue to increase our origination of commercial real estate loans in order to increase the yield of, and reduce the term to repricing of, our total loan portfolio. We originated $27.7 million of commercial real estate loans during the year ended December 31, 2020 and, at December 31, 2020, $77.8 million, or 33.2%, of our total loan portfolio consisted of commercial real estate loans. The additional capital raised in the offering will further increase our commercial lending capacity by enabling us to originate more loans and loans with larger balances. This will permit us to serve commercial borrowers with larger lending needs and to originate larger commercial loans than we have in the past.

 

  

Manage credit risk to maintain a low level of nonperforming assets. We believe that maintaining strong asset quality is paramount to our long-term success. We follow conservative underwriting guidelines with sound loan administration, and focus on originating loans secured by real estate located within our market area only. This includes enhanced loan monitoring of higher risk portfolio segments, higher risk individual loans and larger relationships within the portfolio, and more frequent loan grade review. Our non-performing assets and troubled debt restructurings totaled $2.8 million or 0.9% of total assets at December 31, 2020. Our total non-performing loans to total loans ratio was 0.06% at December 31, 2020.

 

  

Continue to increase core deposits. We will continue to emphasize our efforts to increase “core deposits,” such as statement savings accounts, money market accounts and regular and commercial checking accounts. Core deposits provide a stable source of funds to support loan growth at costs consistent with enhancing our interest rate spread and net interest margin. Core deposits also help us maintain loan-to-deposit ratios at levels consistent with regulatory expectations. At December 31, 2020, $130.9 million, or 60.3% of our deposits, were core deposits. We intend to attract and retain core deposits by offering competitive products that meet the full-service banking needs of our customers, by emphasizing quality customer service, and through our convenient locations and advertising and promotions programs.

 

  

Expand banking relationships to a larger base of customers. We were established in 1887 and have been operating continuously in Cullman County since that time. Our share of Federal Deposit Insurance Corporation-insured deposits in Cullman County as of June 30, 2020 (the latest date for which such information is available) was 10.7%. We continually seek to expand our customer base by using our recognized brand name and the goodwill developed over years of providing timely and efficient banking services that larger financial institutions cannot offer. This includes our participation in the PPP, described below, which gave us access to customers who could not access that program through larger financial institutions.

 

  

Continue to support our customers and our local community. The COVID-19 pandemic has restricted the level of economic activity in our markets, resulting in increased unemployment and negative impacts on many businesses, thereby threatening the repayment ability of some of our borrowers. As we have done during prior economic downturns, we are taking actions to support our customers and our local community. For example, during the year ended December 31, 2020, we originated $9.8 million of small business loans under the PPP, created by the CARES Act,

 

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which was signed into law in March 2020. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. In addition, during the year ended December 31, 2020, we granted short-term payment deferrals on 61 loans, totaling approximately $17.7 million, that were otherwise performing. As of December 31, 2020, 60 of these loans, totaling $14.9 million, have returned to normal payment status. Furthermore, in response to the pandemic, we implemented protocols and processes to help protect our employees, customers and communities, including operating our branch offices under a drive-through model with appointment-only lobby service for a period of time, leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home. We have also used a portion of our marketing budget to directly support our community during the COVID pandemic by spending money at local businesses instead of using such funds for traditional advertising.

Impact of COVID-19 Outbreak

During the first quarter of 2020, global financial markets experienced significant volatility resulting from the spread of a novel coronavirus known as COVID-19. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has restricted the level of economic activity in our markets. In response to the pandemic, the governments of the state of Alabama and of most other states took preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These measures dramatically increased unemployment in the United States and negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers.

To address the economic impact in the United States, the CARES Act was signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us, including accounting relief for troubled debt restructurings (“TDRs”). The CARES Act also established the Paycheck Protection Program (“PPP”) through the Small Business Administration (“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 December 2020, Congress amended the CARES Act through the Consolidated Appropriations Act of 2021, which provided additional COVID-19 relief to American families and business, including extending TDR relief under the CARES Act until the earlier of January 1, 2022, or 60 days following the termination of the national emergency.

In addition, the Board of Governors of the Federal Reserve System, which we refer to as the “Federal Reserve Board,” took steps to bolster the economy by, among other things, reducing the federal funds rate and the discount-window borrowing rate to near zero. In response to the pandemic, we implemented protocols and processes to help protect our employees, customers and communities. These measures include:

 

  

Operating our branches under a drive-through model with appointment-only lobby service for a period of time, leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home.

 

  

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 of December 31, 2019 are exempt from TDR classification under accounting principles generally accepted in the United States (“U.S. GAAP”). In addition, the bank regulatory

 

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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 ended December 31, 2020, we granted short-term payment deferrals on 61 loans, totaling approximately $17.7 million in aggregate principal amount. As of December 31, 2020, 60 of these loans, totaling $14.9 million, have returned to normal payment status, while one loan for $2.8 million, secured by 10 lots of vacant land totaling 16.6 acres, with a loan-to-value ratio of 56%, has been re-extended beyond the initial six-month deferral period.

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. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued adverse effect on our business and results of operations, which could include, but not be limited to: 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.

For additional information, see “Risk Factors—Risks Related to the COVID-19 Pandemic—The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.”

Reasons for the Conversion and Offering

Our primary reasons for converting to the fully public stock form of ownership and undertaking the stock offering are to:

 

  

Facilitate future mergers and acquisitions. Although we do not currently have any understandings or agreements regarding any specific acquisition transaction, the stock holding company structure will give us greater flexibility to structure, and make us a more attractive and competitive bidder for, mergers and acquisitions of other financial institutions or financial service companies as opportunities arise. The additional capital raised in the offering also will enable us to consider larger merger transactions. In addition, although we intend to remain an independent financial institution, the stock holding company structure may make us a more attractive acquisition candidate for other institutions. Applicable regulations prohibit anyone from acquiring or offering to acquire more than 10% of our stock for three years following completion of the conversion without regulatory approval.

 

  

Improve the liquidity of our shares of common stock. We expect that the larger number of shares that will be outstanding after completion of the conversion and offering, as well as our shares of stock being traded on the Nasdaq Capital Market, will result in a more liquid and active market for New Cullman common stock. A more liquid and active market will make it easier for our stockholders to buy and sell our common stock and will give us greater flexibility in implementing capital management strategies.

 

  

Transition our organization to a stock holding company structure, which gives us greater flexibility to access the capital markets compared to our existing mutual holding company structure. The stock holding company structure gives us greater flexibility to access the capital markets to support our growth through possible future equity and debt offerings. We have no current plans, agreements or understandings regarding any additional equity or debt offerings.

 

  

Facilitate our stock holding company’s ability to pay dividends to our public stockholders. Current regulations of the Federal Reserve Board substantially restrict the ability of Cullman Savings Bank, MHC to waive dividends declared by Old Cullman. Accordingly, because any

 

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dividends declared and paid by Old Cullman have been paid to Cullman Savings Bank, MHC along with all other stockholders, the amount of dividends available for all other stockholders has been less than if Cullman Savings Bank, MHC were to waive the receipt of dividends. The conversion will eliminate our mutual holding company structure and will facilitate our ability to pay dividends to all stockholders of New Cullman, subject to legal, regulatory and financial considerations applicable to all financial institutions. See “Our Dividend Policy.”

 

  

Enhance our regulatory capital position to support growth. A strong capital position is essential to achieving our long-term objectives of growing Cullman Savings Bank and building stockholder value. Although Cullman Savings Bank significantly exceeds all regulatory capital requirements, the proceeds from the offering will materially strengthen our capital position and enable us to support our potential growth and expansion through larger legal lending limits. The augmented regulatory capital will be essential to the continued implementation of our business strategy.

Terms of the Offering

We are offering for sale between 2,770,891 and 3,748,853 shares of common stock first to eligible depositors of Cullman Savings Bank and to our tax-qualified employee benefit plans and, to the extent shares remain available, we may offer shares in a community offering to the general public, with a preference given first to natural persons (including trusts of natural persons) residing in Cullman County, Alabama. If necessary, we will also offer for sale shares to the general public in a syndicated community offering. The number of shares of common stock to be sold may be increased to up to 4,311,181 shares as a result of demand for the shares of common stock in the offering or changes in market conditions. Unless the number of shares of common stock to be offered is increased to more than 4,311,181 shares or decreased to fewer than 2,770,891 shares, or the subscription and community offerings are extended beyond [extension date], subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the subscription and community offerings are extended past [extension date], all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. All subscribers will be notified by mail sent to the address the subscriber provides on the stock order form they have submitted. If you do not respond to the notice of extension, your order will be cancelled and we will promptly return your funds with interest at [interest rate]% per annum or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 4,311,181 shares or decreased to less than 2,770,891 shares, all subscribers’ stock orders will be canceled, their withdrawal authorizations will be canceled and funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest at [interest rate]% per annum. We will then resolicit subscribers, giving them an opportunity to place new orders for a period of time. No shares purchased in the subscription offering and community offering will be issued until the completion of any syndicated community offering, if utilized.

The purchase price of each share of common stock offered for sale in the offering is $10.00. All investors will pay the same purchase price per share, regardless of whether the shares are purchased in the subscription offering, a community offering or a syndicated community offering. Investors will not be charged a commission to purchase shares of common stock in the offering. Raymond James & Associates, Inc., which we refer to as “Raymond James,” our marketing agent in the offering, will use its best efforts to assist us in selling shares of our common stock in the offering but is not obligated to purchase any shares of common stock in the offering.

How We Determined the Offering Range, the Exchange Ratio and the $10.00 Per Share Purchase Price

The amount of common stock we are offering for sale and the exchange ratio for the exchange of shares of Old Cullman for shares of New Cullman are based on an independent appraisal of the estimated market value of New Cullman, assuming the offering has been completed. Keller & Company, Inc., our independent appraiser, has estimated that, as of February 12, 2021, this market value was $56.0 million. Based on federal regulations, this market value forms the midpoint of a valuation range with a minimum of $47.6 million and a maximum of $64.4 million. Based on this valuation range, the 57.3% ownership interest of Cullman Savings Bank, MHC in Old Cullman as of December 31, 2020 being sold in the offering, certain assets held by Cullman Savings Bank, MHC and the $10.00 per share price, the number of shares of common stock being offered for sale by New Cullman

 

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ranges from 2,770,891 shares to 3,748,853 shares. The purchase price of $10.00 per share was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. The exchange ratio ranges from 1.8094 shares at the minimum of the offering range to 2.4481 shares at the maximum of the offering range, and will generally preserve in New Cullman the percentage ownership of public stockholders in Old Cullman immediately before the completion of the conversion. Keller & Company, Inc. will update its appraisal before we complete the conversion and offering. If, as a result of demand for the shares or changes in market conditions, Keller & Company, Inc. determines that our estimated pro forma market value has increased, we may sell up to 4,311,181 shares without further notice to you. If our pro forma market value at that time is either below $47.6 million or above $74.1 million, then, after consulting with the Federal Reserve Board, we may: terminate the offering and promptly return all funds with interest; set a new offering range and provide all subscribers the opportunity to place a new order; or take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission.

The appraisal also reflects the contribution of cash and shares of common stock to the charitable foundation in connection with the conversion. See “Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation.”

The appraisal is based in part on Old Cullman’s financial condition and results of operations, the pro forma effect of the additional capital raised in the offering, and an analysis of a peer group of ten publicly traded savings and loan and bank holding companies that Keller & Company, Inc. considers comparable to Old Cullman. The appraisal peer group consists of the following companies, all of which are traded on the Nasdaq Stock Market. Assets are as of December 31, 2020.

 

Company Name

  Ticker
Symbol
  Headquarters  Total Assets 
         (In millions) 

BankFinancial Corporation

  BFIN  Burr Ridge, IL  $1,596.3 

ESSA Bancorp, Inc.

  ESSA  Stroudsburg, PA  $1,862.9 

First Savings Financial Group, Inc.

  FSFG  Jeffersonville, IN  $1,869.4 

HMN Financial, Inc.

  HMNF  Rochester, MN  $909.6 

Home Federal Bancorp, Inc. of Louisiana

  HFBL  Shreveport, LA  $536.0 

IF Bancorp, Inc.

  IROQ  Watseka, IL  $713.4 

Provident Financial Holdings, Inc.

  PROV  Riverside, CA  $1,170.7 

Prudential Bancorp, Inc.

  PBIP  Philadelphia, PA  $1,193.3 

Severn Bancorp, Inc.

  SVBI  Annapolis, MD  $949.9 

WVS Financial Corp.

  WVFC  Pittsburgh, PA  $313.7 

In comparing New Cullman with the peer group, Keller & Company, Inc. made modest upward adjustments for earnings and financial condition. Keller & Company, Inc. made downward adjustments for: (1) market area; (2) stock liquidity; (3) dividends; (4) subscription interest; and (5) marketing of the issue, and made no adjustments for management and asset, loan and deposit growth.

The upward adjustment for earnings took into consideration our higher return on average assets and core return on average assets but consistently lower return on average equity and core return on average equity. We have also demonstrated a higher net interest margin. The upward adjustment for financial condition recognizes our higher equity to assets and lower non-performing assets to assets but lower reserves to gross loans and similar reserves to non-performing assets, relative to the comparable group. The downward adjustment for market area took into consideration our market area’s minimal growth in population and households combined with the area’s consistently lower levels of median household income and median housing value. In addition, the market area has an unusually high level of home-based financial institutions and resultant high level of competition, evidenced by modest historical growth trends. A downward adjustment has been made for our lower dividend yield relative to the peer group. There was a downward adjustment for subscription interest, recognizing these unusual times in the overall economy due to COVID-19 and the larger size of the offering in such a smaller market area. The modest downward adjustment for stock liquidity recognized that the shares being offered are 57.1% of the shares outstanding as compared to 100% for the comparable group. The downward adjustment related to the marketing of the issue took

 

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into consideration the currently volatile stock market conditions both for bank and thrift stocks and the total market overall.

The following table presents a summary of selected pricing ratios for New Cullman (on a pro forma basis) as of and for the twelve months ended December 31, 2020, and for the peer group companies based on earnings and other information as of and for the twelve months ended December 31, 2020, with stock prices as of February 12, 2021, as reflected in the appraisal report. Compared to the average pricing of the peer group, and based upon the information in the following table, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 27.84% on a price-to-book value basis, a discount of 31.17% on a price-to-tangible book value basis, and a discount of 17.49% on a price-to-earnings basis.

 

   Price-to-earnings multiple   Price-to-book value ratio  Price-to-tangible book value ratio 

New Cullman (on a pro forma basis, assuming completion of the conversion)

     

Adjusted Maximum

   22.22x    77.16  77.16

Maximum

   18.87x    70.77  70.77

Midpoint

   16.13x    64.56  64.56

Minimum

   13.70x    57.74  57.74

Valuation of peer group companies, all of which are fully converted (on an historical basis)

     

Averages

   19.55x    89.47  93.79

Medians

   14.38x    87.53  93.31

The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and offering the shares of our common stock will trade at or above the $10.00 per share purchase price. Furthermore, the pricing ratios presented in the appraisal were used by Keller & Company, Inc. to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Offering—Stock Pricing and Number of Shares to be Issued.”

Effect of Cullman Savings Bank, MHC’s Assets on Minority Stock Ownership

Public stockholders of Old Cullman will receive shares of common stock of New Cullman in exchange for their shares of common stock of Old Cullman pursuant to an exchange ratio that is designed to provide public stockholders with the same ownership percentage of the common stock of New Cullman after the conversion as their ownership percentage in Old Cullman immediately before the conversion, without giving effect to new shares purchased in the offering, cash paid in lieu of any fractional shares or the effect of shares issued to the charitable foundation. However, the exchange ratio will be adjusted downward to reflect assets held by Cullman Savings Bank, MHC (other than shares of common stock of Old Cullman) at the completion of the conversion, which net assets consist primarily of cash totaling $2.6 million as of the date of the appraisal. This adjustment would decrease Old Cullman’s public stockholders’ ownership interest in New Cullman from 42.7% to 39.8% (which also reflects the issuance of shares to the charitable foundation), and would increase the ownership interest of persons who purchase stock in the offering from 57.3% (the amount of Old Cullman’s outstanding stock held by Cullman Savings Bank, MHC) to 58.2% (which also reflects the issuance of shares to the charitable foundation).

The Exchange of Existing Shares of Old Cullman Common Stock

If you are a stockholder of Old Cullman immediately before the completion of the conversion, your shares will be exchanged for shares of common stock of New Cullman. The number of shares of common stock you will receive will be based on the exchange ratio, which will depend upon our final appraised value and the percentage of outstanding shares of Old Cullman common stock owned by public stockholders immediately before the completion

 

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of the conversion. The following table shows how the exchange ratio will adjust, based on the appraised value of New Cullman as of February 12, 2021, assuming public stockholders of Old Cullman own 42.7% of Old Cullman common stock and Cullman Savings Bank, MHC had assets (excluding its shares of Old Cullman common stock) of $2.6 million immediately before the completion of the conversion. The table also shows the number of shares of New Cullman common stock a hypothetical owner of Old Cullman common stock would receive in exchange for 100 shares of Old Cullman common stock owned at the completion of the conversion, depending on the number of shares of common stock issued in the offering.

 

   Shares to be Sold in
This Offering
  Shares of New
Cullman to be Issued
for Shares of
Old Cullman
  Shares to be Issued
to Charitable
Foundation
  Total Shares
of Common
Stock to be
Issued in
Exchange
and
Offering
   Exchange
Ratio
   Equivalent
Value of
Shares
Based
Upon
Offering
Price (1)
   Equivalent
Pro Forma
Tangible
Book Value
Per
Exchanged
Share (2)
   Whole
Shares to
be
Received
for 100
Existing
Shares (3)
 
   Amount   Percent  Amount   Percent  Amount   Percent 

Minimum

   2,770,891    58.2  1,893,909    39.8  95,200    2.0  4,760,000    1.8094   $18.09   $31.34    180 

Midpoint

   3,259,872    58.2  2,228,128    39.8  112,000    2.0  5,600,000    2.1288    21.29    32.98    212 

Maximum

   3,748,853    58.2  2,562,347    39.8  128,800    2.0  6,440,000    2.4481    24.48    34.59    244 

Adjusted Maximum

   4,311,181    58.2  2,946,699    39.8  148,120    2.0  7,406,000    2.8153    28.15    36.49    281 

 

(1)

Represents the value of shares of New Cullman common stock to be received in the conversion by a holder of one share of Old Cullman, pursuant to the exchange ratio, based upon the $10.00 per share offering price.

(2)

Represents the pro forma tangible book value per share at each level of the offering range multiplied by the respective exchange ratio. At December 31, 2020, Old Cullman’s tangible book value per share was $23.21.

(3)

Cash will be paid in lieu of fractional shares.

No fractional shares of New Cullman common stock will be issued to any public stockholder of Old Cullman. For each fractional share that otherwise would be issued, New Cullman will pay cash equal to the product obtained by multiplying the fractional share interest to which the holder otherwise would be entitled by the $10.00 per share offering price.

Outstanding options to purchase shares of Old Cullman common stock will convert into and become options to purchase shares of New Cullman common stock based upon the exchange ratio. The aggregate exercise price, duration and vesting schedule of these options will be unaffected by the conversion. At December 31, 2020, there were 82,290 outstanding options to purchase shares of Old Cullman common stock, of which 2,290 have vested. The outstanding options will be converted into options to purchase 148,895 shares of common stock at the minimum of the offering range and 231,671 shares of common stock at the adjusted maximum of the offering range. Because federal regulations prohibit us from repurchasing our common stock during the first year following the conversion unless compelling business reasons exist to do so, we may use authorized but unissued shares to fund option exercises that occur during the first year following the conversion. If all existing options were exercised and funded with authorized but unissued shares of common stock following the conversion, stockholders would experience ownership dilution of approximately 3.0%.

Intended Use of the Proceeds From the Offering

We intend to contribute at least 50% of the net proceeds from the offering to Cullman Savings Bank, fund a loan to our employee stock ownership plan to finance its purchase of shares of common stock in the stock offering, contribute $100,000 in cash to the new charitable foundation and retain the remainder of the net proceeds from the offering at New Cullman. Therefore, assuming we sell 3,259,872 shares of common stock in the stock offering at the midpoint of the offering range, and we have net proceeds of $31.1 million, we intend to contribute $15.5 million to Cullman Savings Bank, loan $2.7 million to our employee stock ownership plan to fund its purchase of shares of common stock, contribute $100,000 to the new charitable foundation and retain the remaining $12.8 million of the net proceeds at New Cullman.

 

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New Cullman may use the funds it retains for investment in securities, to repurchase shares of common stock, to acquire other financial institutions or financial services companies, to pay cash dividends and for other general corporate purposes. Cullman Savings Bank may use the proceeds it receives to support increased lending, enhance existing, or support growth and the development of new, products and services, or expand its branch network by establishing or acquiring new branches or by acquiring other financial institutions or financial services companies. We do not currently have any agreements or understandings regarding any acquisition or branch transactions.

See “How We Intend to Use the Proceeds from the Offering” for additional information.

Persons Who May Order Shares of Common Stock in the Offering

We are offering the shares of common stock for sale in a subscription offering in the following descending order of priority:

 

 (i)

To depositors with accounts at Cullman Savings Bank with aggregate balances of at least $50.00 at the close of business on January 31, 2020.

 

 (ii)

To our tax-qualified employee benefit plans (including Cullman Savings Bank’s employee stock ownership plan), which may subscribe for, in the aggregate, up to 10% of the shares of common stock sold in the offering and issued to the charitable foundation. We expect our employee stock ownership plan to purchase 8% of the shares of common stock sold in the offering and issued to the charitable foundation.

 

 (iii)

To depositors with accounts at Cullman Savings Bank with aggregate balances of at least $50.00 at the close of business on March 31, 2021.

 

 (iv)

To depositors of Cullman Savings Bank at the close of business on [member record date].

Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to natural persons (including trusts of natural persons) residing in Cullman County, Alabama. The community offering is expected to begin concurrently with the subscription offering, but may begin concurrently with, during or promptly after the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering and the community offering in a syndicated community offering. Raymond James will act as sole manager for the syndicated community offering. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated community offering, and our interpretation of the terms and conditions of the plan of conversion will be final. Any determination to accept or reject stock orders in the community offering or syndicated community offering will be based on the facts and circumstances available to management at the time of the determination.

If we receive orders for more shares than we are offering for sale, we may not be able to fully or partially fill your order. A detailed description of the subscription offering, the community offering and the syndicated community offering, as well as a discussion regarding allocation procedures, can be found in the section of this prospectus entitled “The Conversion and Offering.”

Limits on How Much Common Stock You May Purchase

The minimum number of shares of common stock that may be purchased is 25 shares.

Generally, no individual, or individuals acting through a single qualifying account acting jointly, may purchase more than 25,000 shares ($250,000) of common stock. If any of the following persons purchase shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 50,000 shares ($500,000) of common stock:

 

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your spouse or relatives of you or your spouse living in your house;

 

  

most companies, trusts or other entities in which you are a senior officer, partner, trustee or have a substantial beneficial interest; or

 

  

other persons who may be your associates or persons acting in concert with you.

Unless we determine otherwise, persons having the same residence or mailing address and persons exercising subscription rights through qualifying accounts registered to the same address will be subject to the overall purchase limitation of 50,000 shares ($500,000).

In addition to the above purchase limitations, there is an ownership limitation for current stockholders of Old Cullman other than our employee stock ownership plan. Shares of common stock that you purchase in the offering individually and together with persons described above, plus any shares you and they receive in exchange for existing shares of Old Cullman common stock, may not exceed 9.9% of the total shares of common stock to be issued and outstanding after the completion of the conversion and offering. However, if, based on your current ownership level, you will own more than 9.9% of the total shares of common stock of New Cullman to be issued and outstanding after the completion of the conversion and offering following the exchange of your shares of Old Cullman common stock, you will be ineligible to purchase any new shares in the offering. You will be required to obtain regulatory approval or non-objection before acquiring 10% or more of New Cullman’s common stock.

Subject to regulatory approval, we may increase or decrease the purchase and ownership limitations at any time. See the detailed description of the purchase limitations in “The Conversion and Offering—Additional Limitations on Common Stock Purchases.”

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

In the subscription offering and community offering, you may pay for your shares only by:

 

 (i)

personal check, bank check or money order made payable directly to Cullman Bancorp, Inc.; or

 

 (ii)

authorizing us to withdraw available funds (without any early withdrawal penalty) from your Cullman Savings Bank deposit account(s), other than checking accounts or individual retirement accounts (“IRAs”).

You may not use any type of third-party check to pay for shares of common stock. Do not submit cash. Wire transfers will not be accepted. Applicable regulations prohibit Cullman Savings Bank from lending funds or extending credit to any person to purchase shares of common stock in the offering. You may not submit a Cullman Savings Bank line of credit check. You may not designate withdrawal from Cullman Savings Bank’s accounts with check-writing privileges; rather, submit a check. If you request a direct withdrawal from an account with check-writing privileges, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and will immediately withdraw the amount from the specified account(s). You may not authorize direct withdrawal from a Cullman Savings Bank individual retirement account. See “—Using Individual Retirement Account Funds to Purchase Shares of Common Stock.”

You may subscribe for shares of common stock in the subscription and community offerings by delivering a signed and completed original stock order form, together with full payment payable to Cullman Bancorp, Inc. or authorization to withdraw funds from one or more of your Cullman Savings Bank deposit accounts, provided that the stock order form is received (not postmarked) before 4:30 p.m., Central Time, on [expiration date], which is the expiration of the subscription offering period. You may submit your stock order form and payment by overnight delivery to the address listed on the stock order form (recommended) or regular mail using the stock order reply envelope provided. You may also hand-deliver stock order forms to our Stock Information Center, located at Cullman Savings Bank’s main office, 316 Second Avenue SW, Cullman, Alabama, during normal business hours.

 

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Hand-delivered stock order forms will be accepted only at this location. We will not accept stock order forms at our other offices. Do not mail stock order forms to Cullman Savings Bank’s offices.

See “The Conversion and Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Payment for Shares” for a complete description of how to purchase shares in the subscription and community offerings.

Using Individual Retirement Account Funds to Purchase Shares of Common Stock

You may be able to subscribe for shares of common stock using funds in your IRA or other retirement account. If you wish to use some or all of the funds in your Cullman Savings Bank IRA or other retirement account, the applicable funds must be transferred to a self-directed account maintained by an independent custodian or trustee, such as a brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent custodian or trustee. Because individual circumstances differ and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [expiration date] offering deadline, for assistance with purchases using funds in your IRA or other retirement account you may have at Cullman Savings Bank or elsewhere. Whether you may use such funds to purchase shares in the offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

See “The Conversion and Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Payment for Shares” and “—Using Individual Retirement Account Funds” for a complete description of how to use IRA funds to purchase shares of common stock in the offering.

Market for Common Stock

Existing publicly held shares of Old Cullman’s common stock are listed on the Pink Open Market operated by OTC Markets Group under the symbol “CULL.” Upon completion of the conversion, the shares of common stock of New Cullman will replace the existing shares, and we expect the shares of New Cullman common stock will trade on the Nasdaq Capital Market under the symbol “CULL.” In order to list our stock on the Nasdaq Capital Market, we are required to have at least three broker-dealers who will make a market in our common stock. As of [stockholder record date], Old Cullman had                      registered market makers in its common stock.

Our Dividend Policy

Old Cullman currently pays an annual dividend of $0.35 per share, which equates to $0.19 per share at the minimum of the offering range and $0.12 at the adjusted maximum of the offering. Following completion of the stock offering, our board of directors expects to declare annual dividends on our shares of common stock, and will also have the authority to declare quarterly and/or special dividends on our shares of common stock. However, the board’s determination of whether to declare a dividend and the amount of any such dividend is subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No decision has been made with respect to the amount, if any, and timing of any dividend payments. We cannot assure you that we will pay dividends in the future, or, if dividends are paid, that any such dividends will not be reduced or eliminated in the future.

For information regarding our proposed dividend policy, see “Our Dividend Policy.”

Purchases by Directors and Executive Officers

We expect our directors and executive officers, together with their associates, to subscribe for                  shares of common stock in the offering, representing     % of the shares to be sold at the minimum of the offering range. The purchase price paid by them will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Following the conversion, our

 

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directors and executive officers, together with their associates, are expected to beneficially own                  shares of common stock (including any stock options exercisable within 60 days of [stockholder record date]), or     % of our total outstanding shares of common stock at the minimum of the offering range, which includes shares they currently own in Old Cullman that will be exchanged for shares of New Cullman.

See “Subscriptions by Directors and Executive Officers” for more information on the proposed purchases of shares of common stock by our directors and executive officers.

Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

The deadline for submitting orders to purchase shares of common stock in the subscription and community offerings is 4:30 p.m., Central Time, on [expiration date], unless we extend this deadline. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by this time.

Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 4:30 p.m., Central Time, on [expiration date], whether or not we have been able to locate each person entitled to subscription rights.

See “The Conversion and Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Expiration Date” for a complete description of the deadline for purchasing shares in the stock offering.

You May Not Sell or Transfer Your Subscription Rights

Applicable regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares that you are purchasing. We intend to take legal action, including reporting persons to federal or state agencies, against anyone who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe you have sold or transferred your subscription rights. On the stock order form, you cannot add the names of others for joint or beneficial stock registration who do not have subscription rights or who qualify only in a lower subscription offering priority than you. Doing so may jeopardize your subscription rights. You may only add those who were eligible to purchase shares of common stock in the subscription offering at your date of eligibility. In addition, the stock order form requires that you list all deposit accounts you held at your date of eligibility, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation.

Delivery of Shares of Common Stock

All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the conversion and offering. We expect trading in the stock to begin on the day of completion of the conversion and offering or the next business day. The conversion and offering are expected to be completed as soon as practicable following satisfaction of the conditions described below in “—Conditions to Completion of the Conversion.” Until a statement reflecting your ownership of shares of common stock is available and delivered to you, you may not be able to sell the shares of common stock that you purchased in the offering, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

 

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Conditions to Completion of the Conversion

We cannot complete the conversion and offering unless:

 

  

The plan of conversion is approved by at least a majority of votes eligible to be cast by members of Cullman Savings Bank, MHC (i.e., eligible depositors of Cullman Savings Bank as of the close of business on [member record date]);

 

  

The plan of conversion is approved by Old Cullman stockholders holding at least two-thirds of the outstanding shares of common stock of Old Cullman as of the close of business on [stockholder record date], including shares held by Cullman Savings Bank, MHC;

 

  

The plan of conversion is approved by Old Cullman stockholders holding at least a majority of the outstanding shares of common stock of Old Cullman as of the close of business on [stockholder record date], excluding shares held by Cullman Savings Bank, MHC;

 

  

We sell at least the minimum number of shares of common stock offered in the offering;

 

  

We receive approval from the Federal Reserve Board; and

 

  

The Office of the Comptroller of the Currency approves an amendment to Cullman Savings Bank’s charter to provide for a liquidation account.

Subject to member, stockholder and regulatory approvals, we intend to contribute shares of common stock and cash to the charitable foundation in connection with the conversion. However, member and stockholder approval of the contribution to the charitable foundation is not a condition to the completion of the conversion and offering.

Cullman Savings Bank, MHC intends to vote its shares in favor of the plan of conversion and in favor of the contribution to the charitable foundation. At the close of business on [stockholder record date], Cullman Savings Bank, MHC owned 1,403,731 shares, or approximately 57.3%, of the outstanding shares of common stock of Old Cullman. At the close of business on [stockholder record date], the directors and executive officers of Old Cullman and their affiliates owned                  shares of Old Cullman (excluding exercisable options), or     % of the outstanding shares of common stock and     % of the outstanding shares of common stock excluding shares held by Cullman Savings Bank, MHC. They intend to vote those shares in favor of the plan of conversion and in favor of the contribution to the charitable foundation.

Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

If we do not receive orders for at least 2,770,891 shares of common stock, we may take one or more steps to sell the minimum number of shares of common stock in the offering range. Specifically, we may:

 

 (i)

increase the purchase limitations; and/or

 

 (ii)

seek regulatory approval to extend the offering beyond [extension date], as long as we resolicit subscribers who previously submitted subscriptions in the offering.

If we extend the offering past [extension date], all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to the notice of extension, we will cancel your stock order and promptly return your funds with interest for funds received in the subscription and community offering or cancel your deposit account withdrawal authorization. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount will be given the opportunity to increase their subscriptions up to the then-applicable limit.

 

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Possible Change in the Offering Range

Keller & Company, Inc. will update its appraisal before we complete the conversion and offering. If, as a result of demand for the shares or changes in market conditions, Keller & Company, Inc. determines that our pro forma market value has increased, we may sell up to 4,311,181 shares in the offering without further notice to you. If our pro forma market value at that time is either below $47.6 million or above $74.1 million, then, after consulting with the Federal Reserve Board, we may:

 

  

terminate the stock offering and promptly return all funds (with interest paid on funds received in the subscription and community offerings);

 

  

set a new offering range; or

 

  

take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission.

If we set a new offering range, we will promptly return funds, with interest at [interest rate]% per annum, for funds received for purchases in the subscription and community offerings, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. We will then resolicit subscribers, allowing them to place a new stock order for a period of time.

Possible Termination of the Offering

We may terminate the offering at any time before the special meeting of members of Cullman Savings Bank, MHC and the special meeting of stockholders of Old Cullman that have been called to vote on the conversion, and at any time after member and stockholder approval with regulatory approval. If we terminate the offering, we will promptly return your funds with interest at [interest rate]% per annum, and we will cancel deposit account withdrawal authorizations.

Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion

We expect our employee stock ownership plan, which is a tax-qualified retirement plan operated for the benefit of Cullman Savings Bank’s employees, to purchase up to 8% of the shares of common stock we sell in the offering and issue to the charitable foundation. If market conditions warrant, in the judgment of its trustees, the employee stock ownership plan’s subscription order will not be filled and the employee stock ownership plan may elect to purchase shares in the open market following the completion of the conversion, subject to the approval of the Federal Reserve Board.

We intend to implement one or more new stock-based benefit plans no earlier than six months after completion of the conversion. Stockholder approval of these plans would be required. We have not determined whether we would adopt the plans within or after 12 months following the completion of the conversion. If we implement stock-based benefit plans within 12 months following the completion of the conversion, the stock-based benefit plans would be limited to reserving a number of shares (i) up to 4% of the shares of common stock sold in the offering and issued to the charitable foundation for awards of restricted stock to key employees and directors, at no cost to the recipients, and (ii) up to 10% of the shares of common stock sold in the offering and issued to the charitable foundation for issuance pursuant to the exercise of stock options by key employees and directors. If the stock-based benefit plan is adopted more than 12 months after the completion of the conversion, it would not be subject to the percentage limitations set forth above. We have not yet determined the definitive number of shares that would be reserved for issuance under these plans. For a description of our current stock-based benefit plan, see “Management—Benefits to be Considered Following Completion of the Conversion—Stock-Based Benefit Plans.”

The following table summarizes the number of shares of common stock and the aggregate dollar value of grants that are available under one or more stock-based benefit plans if such plans reserve a number of shares of common stock equal to 4% and 10% of the shares sold in the stock offering and issued to the charitable foundation

 

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for restricted stock awards and stock options, respectively. The table shows the dilution to stockholders if all such shares are issued from authorized but unissued shares, instead of purchased in the open market. A portion of the stock grants shown in the table below may be made to non-management employees. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all qualifying employees.

 

   Number of Shares to be Granted or Purchased  Dilution
Resulting
From
Issuance of
Shares for
Stock-Based
Benefit Plans
    
  At Minimum
of Offering
Range
   At
Adjusted
Maximum of
Offering
Range
   As a
Percentage of
Common
Stock to be
Sold in the
Offering and
Issued to the
Charitable
Foundation
  Value of Grants (In
Thousands) (1)
 
 At
Minimum of
Offering
Range
   At Adjusted
Maximum of
Offering
Range
 

Employee stock ownership plan

   229,287    356,744    8.0  N/A (2)  $2,293   $3,567 

Restricted stock awards

   114,643    178,372    4.0   2.4  1,146    1,784 

Stock options

   286,609    445,930    10.0   5.7  742    1,155 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   630,539    981,046    22.0  7.8% (2)  $4,181   $6,506 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value for restricted stock awards is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $2.59 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; an expected option term of ten years; a dividend yield of 1.48%; a risk-free rate of return of 0.70%; and expected volatility of 18.08%. The actual value of stock options granted will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted.

(2)

No dilution is reflected for the employee stock ownership plan because such shares are assumed to be purchased in the offering.

We may fund our stock-based benefit plans through open market purchases, as opposed to new issuances of stock; however, if any options previously granted under our existing 2020 Equity Incentive Plan are exercised during the first year following completion of the offering, they will be funded with newly issued shares as federal regulations do not permit us to repurchase our shares during the first year following the completion of the offering, except to fund the grants of restricted stock under a stock-based benefit plan or under extraordinary circumstances.

The following table presents information as of December 31, 2020 regarding our employee stock ownership plan, our 2020 Equity Incentive Plan, and our proposed new stock-based benefit plan. The table below assumes that 7,406,000 shares are outstanding after the offering, which includes the sale of 4,311,181 shares in the offering at the adjusted maximum of the offering range, the issuance of 148,120 shares to the charitable foundation and the issuance of shares of New Cullman in exchange for shares of Old Cullman based on an exchange ratio of 2.8153. It also assumes that the value of the stock is $10.00 per share.

 

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Existing and New Stock Benefit Plans

  Participants   Shares at Adjusted
Maximum of
Offering Range
  Estimated Value of
Shares
  Percentage of
Shares Outstanding
After the
Conversion
 

Employee Stock Ownership Plan:

   
Officers and
Employees
 
 
    

Shares purchased in 2009 offering (1)

     277,307 (2)  $2,773,070   3.74

Shares to be purchased in this offering

     356,744   3,567,440   4.82 
    

 

 

  

 

 

  

 

 

 

Total employee stock ownership plan shares

     634,051  $6,340,510   8.56
    

 

 

  

 

 

  

 

 

 

Restricted Stock Awards:

   
Directors, Officers
and Employees
 
 
    

2020 Equity Incentive Plan (1)

     225,224 (3)  $2,252,240   3.04

New shares of restricted stock

     178,374   1,783,740 (4)   2.41 
    

 

 

  

 

 

  

 

 

 

Total shares of restricted stock

     403,598  $4,035,980   5.45
    

 

 

  

 

 

  

 

 

 

Stock Options:

   
Directors, Officers
and Employees
 
 
    

2020 Equity Incentive Plan (1)

     337,836 (5)  $540,000   4.56

New stock options

     445,930   1,154,959 (6)   6.02 
    

 

 

  

 

 

  

 

 

 

Total stock options

     783,766  $1,694,959   10.58
    

 

 

  

 

 

  

 

 

 

Total of stock benefit plans

     1,821,415  $12,071,449   24.59
    

 

 

  

 

 

  

 

 

 

 

(1)

The number of shares indicated in the table and the footnotes has been adjusted for the 2.8153 exchange ratio at the adjusted maximum of the offering range.

(2)

At December 31, 2020, 237,558 of these shares have been allocated to participants.

(3)

At December 31, 2020, all of these shares have been awarded and none have vested.

(4)

The value of restricted stock awards is determined based on their fair value as of the date grants are made. For purposes of this table, the fair value of awards under the new stock-based benefit plan is assumed to be the same as the offering price of $10.00 per share.

(5)

At December 31, 2020, all of these options have been awarded and none have vested.

(6)

The weighted-average fair value of stock options has been estimated at $2.59 per option, using the Black-Scholes option pricing model with the following assumptions: exercise price, $10.00; trading price on date of grant, $10.00; dividend yield, 1.48%; expected term, ten years; expected volatility, 18.08%; and risk-free rate of return, 0.70%. The actual value of option grants will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted.

Tax Consequences

Cullman Savings Bank, MHC, Old Cullman, Cullman Savings Bank and New Cullman have received an opinion of counsel, Luse Gorman, PC, regarding the material federal income tax consequences of the conversion, and have received an opinion of Taylor Vise Brown & King, LLC regarding the material Alabama tax consequences of the conversion. As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to Cullman Savings Bank, MHC, Old Cullman, Cullman Savings Bank, New Cullman, persons eligible to subscribe in the subscription offering, or existing stockholders of Old Cullman (except as to cash paid for fractional shares). Existing stockholders of Old Cullman who receive cash in lieu of fractional shares of New Cullman will recognize a gain or loss equal to the difference between the cash received and the tax basis of the fractional share.

Our Contribution of Shares of Common Stock and Cash to the Charitable Foundation

To further our commitment to our local community, we intend to make a contribution of shares of common stock and cash to a new charitable foundation that we intend to establish as part of the conversion and stock offering. The new charitable foundation will be dedicated to supporting charitable causes and community development activities in the communities in which we operate. The contribution to the charitable foundation has been approved by the boards of directors of Cullman Savings Bank, MHC, Old Cullman, New Cullman and Cullman Savings Bank. In addition, the contribution to the charitable foundation is subject to the approval of the members of Cullman Savings Bank, MHC, the stockholders of Old Cullman and the Federal Reserve Board. Assuming we receive all required approvals, we intend to contribute shares of common stock equal to 2% of the shares to be outstanding following the completion of the conversion and offering and $100,000 in cash to the charitable foundation.

 

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The contribution to the charitable foundation will result in an after-tax expense of approximately $1.2 million at the adjusted maximum of the offering, which will reduce our earnings during the quarter in which the contribution to the foundation is made, offset in part by a corresponding tax benefit.

If the members of Cullman Savings Bank, MHC or the stockholders of Old Cullman do not approve the contribution to the charitable foundation, we will proceed with the conversion and offering without making the contribution to the charitable foundation and subscribers for common stock will not be resolicited (unless required by the Federal Reserve Board).

For a further discussion of the financial impact of our contribution to the foundation, see “Risk Factors—Risks Related to the Contribution to the Charitable Foundation—The contribution to The Cullman Foundation will dilute your ownership interests and adversely affect net income,” “—Our contribution to The Cullman Foundation may not be tax deductible, which could reduce our profits,” “Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation” and “The Cullman Foundation.”

Emerging Growth Company Status

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as we are an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies. See “Risk Factors—Risks Related to Laws and Regulations—We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors” and “Supervision and Regulation—Emerging Growth Company Status.”

An emerging growth company may elect to use an extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. We have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

Risk Factors

An investment in New Cullman’s common stock is subject to risk, including risks related to our business and this offering.

Specific areas of risk related to our business include those related to the COVID-19 pandemic; our lending activities; laws and regulations; market interest rates; our business strategy; economic conditions; competitive matters; operational matters; accounting matters; our reputation; our existing equity plan; legal matters; societal responses to climate change; and federal government shutdowns.

Specific risks related to this offering include those related to the future trading price of the common stock of New Cullman; use of the net offering proceeds; our return on equity after the completion of the offering; intended new stock-based benefit plans; anti-takeover factors; forum selection provision for certain litigation; the trading market for the common stock of New Cullman; the irrevocability of your investment decision; potential adverse tax consequences related to subscription rights; and our contribution to the charitable foundation.

Before making an investment decision, you should read this entire document carefully, including the section entitled “Risk Factors” that immediately follows and that discusses the above risks in further detail.

 

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How You Can Obtain Additional Information—Stock Information Center

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, call our Stock Information Center at [stock center number]. The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:30 p.m., Central Time, and will be closed on bank holidays.

 

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RISK FACTORS

You should consider carefully the following risk factors in evaluating an investment in the shares of common stock. In addition to these risks and the other risks and uncertainties described elsewhere in this prospectus, there may be additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or results of operations.

Risks Related to the COVID-19 Pandemic

The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.

The coronavirus (COVID-19) pandemic has caused significant economic dislocation in the United States as many state and local governments have placed restrictions on business. This has resulted in a slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, millions of individuals have filed claims for unemployment, and stock markets have declined in value. In response to the COVID-19 outbreak, the Federal Reserve Board reduced the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10- and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers, and federal legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Limitations have been placed on our ability to foreclose on properties during the pandemic. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have employees working remotely as needed and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

 

  

demand for our products and services may decline, making it difficult to grow assets and income;

 

  

if the economy is unable to substantially and successfully reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charge-offs and reduced income;

 

  

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

 

  

our allowance for loan losses has been and may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

 

  

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

 

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as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may continue to decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

 

  

our cyber security risks are increased as the result of an increase in the number of employees working remotely;

 

  

litigation, regulatory enforcement risk and reputation risk regarding our participation in the PPP and the risk that the SBA may not fund some or all PPP loan guarantees;

 

  

we rely on third-party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

 

  

Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs;

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable replacements in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

Risks Related to our Lending Activities

We intend to increase our originations of commercial real estate and commercial loans. These loans involve credit risks that could adversely affect our financial condition and results of operations.

At December 31, 2020, commercial real estate loans totaled $77.8 million, or 33.2% of our loan portfolio, and commercial loans (excluding PPP loans) totaled $20.3 million, or 8.7% of our loan portfolio. Given their larger balances and the complexity of the underlying collateral, commercial real estate loans and commercial loans generally have more risk than the one- to four-family residential real estate loans we originate. Because the repayment of commercial real estate loans and commercial loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. A downturn in the real estate market or the local economy could adversely impact the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of non-performing loans. Further, unlike residential mortgage and commercial real estate loans, commercial loans may be secured by collateral other than real estate, such as inventory and accounts receivable, the value of which may depreciate over time, may be more difficult to appraise and may be more susceptible to fluctuation in value at default. In addition, the physical condition of non-owner-occupied properties may be below that of owner-occupied properties due to lax property maintenance standards, which have a negative impact on the value of the collateral properties. As our commercial real estate and commercial loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase.

The offering will allow us to increase our loans-to-one borrower limit, which may result in larger loan balances. In addition, to the extent that borrowers have more than one commercial loan outstanding, an adverse development with respect to one loan or one credit relationship could expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential real estate loan. Furthermore, if loans that are collateralized by commercial real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.

 

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Our emphasis on residential mortgage loans exposes us to lending risks.

At December 31, 2020, $114.8 million, or 49.0%, of our loan portfolio was secured by one- to four-family real estate and we intend to continue to make loans of this type after the offering. One- to four-family residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Declines in real estate values could cause some of our residential mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.

The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in our local market area.

While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our loan portfolio is comprised of loans secured by property located in Cullman County, Alabama. This makes us vulnerable to a downturn in the local economy and real estate markets. Adverse conditions in the local economy such as unemployment, recession, a catastrophic event or other factors beyond our control could impact the ability of our borrowers to repay their loans, which could impact our net interest income. Decreases in local real estate values caused by economic conditions, recent changes in tax laws or other events could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure. Further, deterioration in local economic conditions could drive the level of loan losses beyond the level we have provided for in our allowance for loan losses, which in turn could necessitate an increase in our provision for loan losses and a resulting reduction to our earnings and capital.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions or the results of our analyses are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. In addition, our emphasis on loan growth and on increasing our portfolios of commercial real estate and commercial business loans, as well as any future credit deterioration, including as a result of COVID-19, could require us to increase our allowance for loan losses in the future. At December 31, 2020, our allowance for loan losses was 1.01% of total loans and 92.05% of non-performing loans. Material additions to our allowance would materially decrease our net income.

The Financial Accounting Standards Board has delayed the effective date of the implementation of the Current Expected Credit Loss, or CECL, standard for New Cullman and Cullman Savings Bank until January 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 would likely require us to increase our allowance for credit losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.

In addition, bank regulators periodically review our allowance for loan losses and, as a result of such reviews, we may be required to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as a result of such review or otherwise may have a material adverse effect on our financial condition and results of operations.

We are subject to environmental liability risk associated with lending activities or properties we own.

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties, or with respect to properties that we own in operating our business. During the ordinary course of business, we may foreclose on and take title to properties

 

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securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

We are subject to regulatory enforcement risk, reputation risk and litigation risk regarding our participation in the PPP, and we are subject to the risk that the SBA may not fund some or all PPP loan guarantees.

The CARES Act included the PPP as a loan program administered through the SBA. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved lenders, subject to detailed qualifications and eligibility criteria.

Because of the short timeframe between the passing of the CARES Act and implementation of the PPP, some of the rules and guidance relating to PPP were issued after lenders began processing PPP applications. Also, there was and continues to be uncertainty in the laws, rules and guidance relating to the PPP. Since the opening of the PPP, several banks have been subject to litigation regarding the procedures used in processing PPP applications and the payment of fees to agents that assisted borrowers in obtaining PPP loans. In addition, some banks and borrowers have received negative media attention associated with PPP loans. We may be exposed to litigation risk and negative media attention related to our participation in the PPP. If any such litigation is not resolved in in our favor, it may result in significant financial liability to us or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation or media attention could have a material adverse impact on our business, financial condition, and results of operations.

Federal and state regulators can impose or request that we consent to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect our business, reputation, results of operation and financial condition, and thereby adversely affect your investment.

We also have credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which we originated, funded or serviced loans, including any issue with the eligibility of a borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced a PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

Risks Related to Laws and Regulations

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

Cullman Savings Bank is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency, and New Cullman will be subject to extensive regulation, supervision and examination by the Federal Reserve Board. Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of the federal deposit insurance fund and the depositors of Cullman Savings Bank, rather than for our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the adequacy of the level of our allowance for loan losses. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations, control the methods by which financial institutions conduct business, implement

 

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strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are suspected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on pursuing acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations. Furthermore, these rules and regulations continue to evolve and expand. We have not been subject to fines or other penalties, or have suffered business or reputational harm, as a result of money laundering activities in the past.

We are subject to stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and define “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The regulations also establish a “capital conservation buffer” of 2.5%, and the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the capital conservation buffer amount.

The application of these capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we are unable to comply with such requirements. Specifically, following the completion of the offering, Cullman Savings Bank’s ability to pay dividends to New Cullman will be limited if it does not maintain the capital conservation buffer required by the capital rules, which may further limit New Cullman’s ability to pay dividends to its stockholders. See “Supervision and Regulation—Federal Banking Regulation—Capital Requirements.”

The Federal Reserve Board may require us to commit capital resources to support Cullman Savings Bank.

Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Thus, any borrowing that must be done by New Cullman to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.

 

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Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board, who regulates the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

New Cullman is an emerging growth company, and we expect that New Cullman will cease to be an emerging growth company at the end of the fiscal year following the fifth anniversary of the completion of the offering. For as long as New Cullman continues to be an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company, New Cullman also will not be subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which would require that our independent auditors review and attest as to the effectiveness of our internal control over financial reporting. We have also elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. Investors may find our common stock less attractive since we have chosen to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

Risks Related to Market Interest Rates

A continuation of the historically low interest rate environment may adversely affect our net interest income and profitability.

In recent years the Federal Reserve Board has maintained interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. Our ability to reduce our interest expense may be limited at current interest rate levels while the average yield on our interest-earning assets may continue to decrease. A continuation of a low interest rate environment may adversely affect our net interest income, which would have an adverse effect on our profitability.

Future changes in interest rates could reduce our profits and asset values.

Net interest income makes up a majority of our income and is based on the difference between:

 

  

the interest income we earn on interest-earning assets, such as loans and securities; and

 

  

the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.

 

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The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions, our interest-bearing liabilities generally have shorter contractual maturities than our interest-earning assets. This imbalance can create significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities. In a period of declining interest rates, the interest income we earn on our assets may decrease more rapidly than the interest we pay on our liabilities, as borrowers prepay or refinance mortgage loans, and mortgage-backed securities and callable investment securities are called, requiring us to reinvest those cash flows at lower, current interest rates. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions that originate longer-term, fixed-rate mortgage loans.

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and ultimately affect our earnings.

We monitor interest rate risk through the use of simulation models, including estimates of the amounts by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) and our net interest income would change in the event of a range of assumed changes in market interest rates. As of December 31, 2020, in the event of an instantaneous 200 basis point increase in interest rates, we estimate that we would experience a 3.45% decrease in EVE and an 11.69% increase in net interest income. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

Risks Related to our Business Strategy

Our business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.

Our business strategy includes growth in assets, deposits and the scale of our operations. Achieving such growth will require us to attract customers that currently bank at other financial institutions in our market area. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities and the level of competition from other financial institutions. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected. Furthermore, there can be considerable costs involved in opening branches and expanding lending capacity, and generally a period of time is required to generate the necessary revenues to offset these costs, especially in areas in which we do not have an established presence. Accordingly, any such business expansion can be expected to negatively impact our earnings until certain economies of scale are reached.

We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.

We depend on the services of the members of our senior management team who direct our strategy and operations. Our executive officers and lending personnel possess substantial expertise, extensive knowledge of our markets and key business relationships, and have been integral in the restructuring of our operations, including the implementation of a more aggressive sales culture within our institution. Any one of them could be difficult to replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete in our markets. See “Management.”

 

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Secondary mortgage market conditions could have a material impact on our financial condition and results of operations.

Our mortgage banking operation provides a significant portion of our non-interest income. In addition to being affected by interest rates, the secondary mortgage markets are also subject to investor demand for residential mortgage loans and increased investor yield requirements for these loans. These conditions may fluctuate or worsen in the future. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have a material adverse effect on our financial condition and results of operations.

New lines of business or new products and services may subject us to additional risks.

From time to time, we may implement new lines of business or offer new products and services within existing lines of business. In addition, we will continue to invest in research, development, and marketing for new products and services. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we may invest significant time and resources. Initial timetables for the development and introduction of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. Furthermore, if customers do not perceive our new offerings as providing significant value, they may fail to accept our new products and services. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, the burden on management and our information technology of introducing any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations.

Acquisitions may disrupt our business and dilute stockholder value.

We evaluate merger and acquisition opportunities with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions with consideration consisting of cash and/or equity securities may occur at any time. We would seek acquisition partners that offer us either significant market presence or the potential to expand our market footprint and improve profitability through economies of scale or expanded services.

Acquiring other banks, businesses, or branches may have an adverse effect on our financial results and may involve various other risks commonly associated with acquisitions, including, among other things:

 

  

payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term;

 

  

potential exposure to unknown or contingent liabilities of the target company, as well as potential asset quality problems of the target company;

 

  

potential volatility in reported income associated with goodwill impairment losses;

 

  

difficulty and expense of integrating the operations and personnel of the target company;

 

  

inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits of the acquisition;

 

  

potential disruption to our business and diversion of our management’s time and attention;

 

  

the possible loss of key employees and customers of the target company; and

 

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potential changes in banking or tax laws or regulations that may affect the target company.

Risks Related to Economic Conditions

A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could adversely affect our operations, financial condition and earnings.

Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans. A deterioration in economic conditions, especially local conditions, as a result of COVID-19 or otherwise, could have the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations, and could more negatively affect us compared to a financial institution that operates with more geographic diversity:

 

  

demand for our products and services may decline;

 

  

loan delinquencies, problem assets and foreclosures may increase;

 

  

collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and

 

  

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, civil unrest, an outbreak of hostilities or other international or domestic calamities, an epidemic or pandemic, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Risks Related to Competitive Matters

Strong competition within our market area may limit our growth and profitability.

Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, financial technology or “fintech companies,” and unregulated or less regulated non-banking entities. Many of these competitors are substantially larger than us and have substantially greater resources and higher lending limits than we have and offer certain services that we do not or cannot provide. In addition, some of our competitors offer loans with lower interest rates and/or more attractive terms than loans we offer. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to successfully compete for business and qualified employees in our market areas. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase our interest-earning assets. For additional information see “Business of Cullman Savings Bank—Competition.”

Our small size may make it more difficult for us to compete.

Our small asset size may make it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers.

 

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Accordingly, we are not always able to offer new products and services as quickly as our competitors. Lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult to generate meaningful non-interest income from such activities as securities and insurance brokerage. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

Risks Related to Operational Matters

We face significant operational risks because of our reliance on technology. Our information technology systems may be subject to failure, interruption or security breaches.

Information technology systems are critical to our business. Our business requires us to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and our own business, operations, plans and business strategies. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans. Our computer systems, data management and internal processes, as well as those of third parties, are integral to our performance. Our operational risks include the risk of malfeasance by employees or persons outside our company, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. There have been increasing efforts by third parties to breach data security at financial institutions. Such attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information, damages to systems, or other material disruptions to network access or business operations. Although we take protective measures and believe that we have not experienced any of the data breaches described above, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have an impact on information security. Because the techniques used to cause security breaches change frequently, we may be unable to proactively address these techniques or to implement adequate preventative measures.

In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, loss of customers and damage to our reputation, and face regulatory action or civil litigation. Any of these events could have a material adverse effect on our financial condition and results of operations. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits.

We outsource critical operation to third-party service providers. Systems failures, interruptions and cybersecurity breaches could have a material adverse effect on us.

We outsource a majority of our data processing requirements to third-party providers. Accordingly, our operations are exposed to the risk that these vendors will not perform in accordance with our contractual agreements with them, or we also could be adversely affected if such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. If our third-party providers encounter difficulties, or if we have difficulty communicating with those service providers, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected, which could have a material adverse effect on our financial condition and results of operations. Threats to information security also exist in the processing of customer information through various other vendors and their personnel, and our third-party service providers may be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We likely will expend additional resources to protect against the threat of such security breaches and computer viruses, or to alleviate problems caused by such security breaches or viruses. To the extent that the activities of our third-party service providers or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation costs and other possible liabilities. To our knowledge, the services and programs provided to us by third parties have not experienced any

 

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material security breaches. However, the existence of cyber-attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.

Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which may include Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased and brokered certificates of deposit. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

Risks Related to Accounting Matters

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

In preparing this prospectus, as well as periodic reports we will be required to file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our evaluation of the adequacy of our allowance for loan losses, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans, valuation allowances associated with the realization of deferred tax assets and our determinations with respect to amounts owed for income taxes.

Changes in accounting standards could affect reported earnings.

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

Other Risks Related to Our Business

We are a community bank and our ability to maintain our reputation, which is critical to the success of our business, may materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, cybersecurity incidents and questionable or fraudulent activities of our customers. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased governmental regulation, any or all of which could adversely affect our business and operating results.

 

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The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

As a result of the completion of the offering, we will become a public reporting company. The obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We will make changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

Our 2020 Equity Incentive Plan has increased our expenses and reduced our income, and may dilute your ownership interests.

Our stockholders previously approved the Cullman Bancorp, Inc. 2020 Equity Incentive Plan. During the year ended December 31, 2020, we recognized $232,000 in non-interest expense relating to this stock benefit plan, and we will recognize additional expenses in the future as additional grants are made and awards vest.

We may fund the 2020 Equity Incentive Plan either through open market purchases or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of common stock to fund this plan will be subject to many factors, including, but not limited to, applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, our capital levels, alternative uses for our capital and our financial performance. Stockholders would experience a reduction in ownership interest in the event newly issued shares of our common stock are used to fund stock issuances under the plan.

Legal and regulatory proceedings and related matters could adversely affect us.

We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, reputation, or our financial condition and results of our operations.

Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.

Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.

A protracted government shutdown could negatively affect our financial condition and results of operations.

A protracted federal government shutdown could result in reduced income for government employees or employees of companies that engage in business with the federal government, which could result in greater loan

 

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delinquencies, increases in our non-performing, criticized and classified assets and a decline in demand for our products and services. During any protracted federal government shutdown, we may not be able to close certain loans and we may not be able to recognize non-interest income on the sale of loans. Some of the loans we originate are sold directly to government agencies, and some of these sales may be unable to be consummated during the shutdown. In addition, some borrowers may determine not to proceed with their home purchase and not close on their loans, either due to a delay in closing their loans or due to concerns over employment status, which would result in a permanent loss of the related non-interest income.

Risks Related to the Offering

The future price of our shares of common stock may be less than the $10.00 purchase price per share in the offering.

If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $10.00 purchase price. In many cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, changes in laws and regulations, investor perceptions of New Cullman and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.

We intend to contribute between $13.1 million and $18.0 million of the net proceeds of the offering (or $20.8 million at the adjusted maximum of the offering range) to Cullman Savings Bank. We may use the remaining net proceeds to invest in short-term investments and for general corporate purposes, including repurchasing shares of our common stock and paying dividends. We also expect to use a portion of the net proceeds we retain to fund a loan to our employee stock ownership plan to purchase shares of common stock in the offering, and to make a contribution to a new charitable foundation. Cullman Savings Bank may use the net proceeds it receives to fund new loans, expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies, or for other general corporate purposes. However, except for the funding the loan to the employee stock ownership plan and the contribution to the charitable foundation, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have broad discretion in determining the amount of the net proceeds we apply to different uses and when we apply or reinvest such proceeds. Also, certain of these uses, such as opening new branches or acquiring other financial institutions, may require the approval of the Office of the Comptroller of the Currency or the Federal Reserve Board. We have not established a timetable for investing the net proceeds, and we cannot predict how long we will require to invest the net proceeds. Our failure to reinvest these funds effectively would reduce our profitability and may adversely affect the value of our common stock.

Our return on equity may be low following the stock offering. This could negatively affect the trading price of our shares of common stock.

Net income divided by average stockholders’ equity, known as “return on equity,” is a ratio many investors use to compare the performance of financial institutions. Our return on equity may be low until we are able to leverage the additional capital we receive from the stock offering. Our return on equity also will be negatively affected by added expenses associated with our employee stock ownership plan and the stock-based benefit plans we currently sponsor and intend to adopt. Our return on average equity was 6.43% for the year ended December 31, 2020, with consolidated equity of $56.9 million at December 31, 2020. Our pro forma consolidated equity as of December 31, 2020, assuming completion of the offering, is estimated to be between $81.1 million at the minimum

 

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of the offering range and $93.9 million at the adjusted maximum of the offering range. Until we can increase our net interest income and non-interest income and leverage the capital raised in the stock offering, our return on equity may be low, which may reduce the market price of our shares of common stock.

Our stock-based benefit plans will increase our expenses and reduce our income.

We intend to adopt one or more new stock-based benefit plans after the conversion, subject to stockholder approval, which will increase our annual compensation and benefit expenses related to the stock options and stock awards granted to participants. The actual amount of these new stock-related compensation and benefit expenses will depend on the number of options and stock awards granted under the plans, the fair market value of our stock or options on the date of grant, the vesting period, and other factors which we cannot predict at this time. If we adopt stock-based benefit plans within 12 months following the conversion, the shares of common stock reserved for issuance pursuant to awards of restricted stock and grants of options under such plans would be limited to 4% and 10%, respectively, of the total shares of our common stock sold in the offering and issued to the charitable foundation. If we adopt stock-based benefit plans more than 12 months after the completion of the conversion, we may adopt plans that allow for greater amounts of awards and options and, therefore, we could award restricted shares of common stock or grant options in excess of these amounts, which would further increase costs.

In addition, we will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. The expense in the first year following the offering for our employee stock ownership plan and for our new stock-based benefit plans, assuming such plans had been implemented at the beginning of the year, is estimated to be approximately $600,000 ($474,000 after tax) at the adjusted maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of our proposed stock-based plans, see “Management—Benefits to be Considered Following Completion of the Conversion.”

The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.

We intend to adopt one or more new stock-based benefit plans following the stock offering. These plans may be funded either through open market purchases of our common stock or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of our common stock to fund these plans will be subject to many factors, including applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of our stock, our capital levels, alternative uses for our capital and our financial performance. While our intention is to fund the new stock-based benefit plans through open market purchases, stockholders would experience a 2.4% dilution in ownership interest if newly issued shares of our common stock are used to fund stock options in an amount equal to 10% of the shares sold in the offering and issued to the charitable foundation, and all such stock options are exercised, and a 5.7% dilution in ownership interest if newly issued shares of our common stock are used to fund shares of restricted common stock in an amount equal to 4% of the shares sold in the offering and issued to the charitable foundation. Such dilution would also reduce earnings per share. If we adopt the plans more than 12 months following the conversion, new stock-based benefit plans would not be subject to these size limitations and stockholders could experience even greater dilution.

Although the implementation of new stock-based benefit plans would be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

 

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We have not determined when we will adopt one or more new stock-based benefit plans. Stock-based benefit plans adopted more than 12 months following the completion of the conversion may exceed regulatory restrictions on the size of stock-based benefit plans adopted within 12 months, which would further increase our costs.

If we adopt stock-based benefit plans more than 12 months following the completion of the conversion, then grants of shares of common stock or stock options under our proposed stock-based benefit plans may exceed 4% and 10%, respectively, of shares of common stock sold in the offering and issued to the charitable foundation. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our stock-based benefit plans will increase our expenses and reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “—The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.” Although the implementation of stock-based benefit plans would be subject to stockholder approval, the timing of the implementation of such plans will be at the discretion of our board of directors.

Various factors may make takeover attempts more difficult to achieve.

Certain provisions of our articles of incorporation and bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of New Cullman without our board of directors’ approval. Under regulations applicable to the conversion, for a period of three years following completion of the conversion, no person may offer to acquire or acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board and receive the Federal Reserve Board’s non-objection before acquiring control of a savings and loan holding company. There also are provisions in our articles of incorporation and bylaws that we may use to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of our outstanding shares of common stock. Furthermore, shares of restricted stock and stock options that we may grant to employees and directors, stock ownership by our management and directors and other factors may make it more difficult for companies or persons to acquire control of New Cullman without the consent of our board of directors, and may increase the cost of an acquisition. Taken as a whole, these statutory or regulatory provisions and provisions in our articles of incorporation and bylaws could result in our being less attractive to a potential acquirer and therefore could adversely affect the market price of our common stock. For additional information, see “Restrictions on Acquisition of New Cullman” and “Management—Benefits to be Considered Following Completion of the Conversion.”

Our articles of incorporation provide that, subject to limited exception, state and federal courts in the State of Maryland are the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, and other employees.

The articles of incorporation of New Cullman provide that, unless New Cullman consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of New Cullman, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of New Cullman to New Cullman or New Cullman’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Maryland General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine will be conducted in a state or federal court located within the State of Maryland, in all cases subject to the court’s having personal jurisdiction over the indispensible parties named as defendants. This exclusive forum provision does not apply to claims arising under the federal securities laws. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum it finds favorable for disputes with New Cullman and its directors, officers, and other employees or may cause a stockholder to incur additional expense by having to bring a claim in a judicial forum that is distant from where the stockholder resides, or both. In addition, if a court were to find this exclusive forum provision to be inapplicable or unenforceable in a particular action, we may incur additional costs associated with resolving the action in another jurisdiction, which could have a material adverse effect on our financial condition and results of operations.

 

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There may be a limited trading market in our shares of common stock, which would hinder your ability to sell our common stock and may lower the market price of our common stock.

We expect that our common stock will be traded on the on the Nasdaq Capital Market under the symbol “CULL” upon conclusion of the offering, subject to compliance with certain conditions, including having 300 “round lot” stockholders (stockholders owning more than 100 shares) and at least three companies making a market for our common stock. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. Purchasers of common stock in this offering should have long-term investment intent and should recognize that there may be a limited trading market in the common stock, which could make it difficult to sell the common stock after the offering and may have an adverse impact on the price at which the common stock can be sold.

Our stock value may be negatively affected by applicable regulations that restrict stock repurchases.

Applicable regulations generally restrict us from repurchasing our shares of common stock during the first year following the offering. Stock repurchases are a capital management tool that can enhance the value of a company’s stock, and our inability to repurchase our shares of common stock during the first year following the stock offering may negatively affect our stock price.

You may not revoke your decision to purchase New Cullman common stock in the subscription or community offerings after you send us your order.

Funds submitted or automatic deposit withdrawals authorized to purchase shares of common stock in the subscription and community offerings will be held by us until the completion or termination of the conversion and offering. Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by Keller & Company, Inc., among other factors, there may be one or more delays in completing the conversion and offering. Orders submitted in the subscription and community offerings are irrevocable, and purchasers will have no access to their funds unless the offering is terminated, or extended beyond [extension date], or the number of shares to be sold in the offering is increased to more than 4,311,181 shares or decreased to fewer than 2,770,891 shares.

The distribution of subscription rights could have adverse income tax consequences.

If the subscription rights granted in connection with the stock offering are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. We have received an opinion of counsel, Luse Gorman, PC, that it is more likely than not that such rights have no value; however, such opinion is not binding on the Internal Revenue Service.

Risks Related to Our Contribution to the Charitable Foundation

The contribution to The Cullman Foundation will dilute your ownership interests and adversely affect net income.

We intend to make a contribution to a new charitable foundation, The Cullman Foundation, in connection with the conversion and offering. We intend to contribute to the foundation up to 148,120 shares of common stock and $100,000 in cash. The contribution will reduce our net income for the quarter and year in which we make the contribution and the after-tax expense would be approximately $1.2 million at the adjusted maximum of the offering range. In addition, persons purchasing shares in the stock offering will have their ownership and voting interests diluted by up to 1.17% due to the issuance of shares of common stock to the charitable foundation.

 

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Our contribution to The Cullman Foundation may not be tax deductible, which could reduce our profits.

The Internal Revenue Service may not grant tax-exempt status to the charitable foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. The total value of the contribution would be $1.6 million at the adjusted maximum of the offering range, which would result in after-tax expense of approximately $1.2 million. In the event that the Internal Revenue Service does not grant tax-exempt status to the charitable foundation or the contribution to the charitable foundation is otherwise not tax deductible, we would recognize after-tax expense up to the total value of the entire contribution.

In addition, even if the contribution is tax deductible, we may not have sufficient taxable income to be able to fully use the tax deduction from our contribution to The Cullman Foundation. Pursuant to the Internal Revenue Code, an entity is permitted to deduct up to 10% of its taxable income (income before federal income taxes and charitable contributions) in any one year for charitable contributions. Any contribution in excess of the 10% limit may be deducted for federal income tax purposes over each of the six years following the year in which the charitable contribution is made. Accordingly, a charitable contribution could, if necessary, be deducted over a six-year period.

 

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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 the consolidated financial statements of Old Cullman. The information at and for the years ended December 31, 2020 and 2019 was derived from the audited consolidated financial statements of Old Cullman included elsewhere in this prospectus. The information at and for the years ended December 31, 2018, 2017 and 2016 was derived in part from the audited consolidated financial statements of Old Cullman that are not included in this prospectus. The following information is only a summary, and should be read in conjunction with the consolidated financial statements and related notes of Old Cullman beginning on page F-1 of this prospectus.

 

   At December 31, 
   2020   2019   2018   2017   2016 
   (In thousands) 

Selected Financial Condition Data:

          

Total assets

  $331,396   $298,055   $293,392   $284,093   $274,041 

Securities available for sale

   18,875    23,544    22,920    23,747    22,764 

Loans held for sale

   173    —       135    690    485 

Loans receivable, net

   231,799    248,785    242,920    221,348    221,972 

Premises and equipment, net

   8,576    8,538    8,638    9,967    10,290 

Foreclosed real estate

   434    386    129    823    1,015 

Federal Home Loan Bank stock, at cost

   2,541    2,452    2,337    2,328    2,514 

Bank owned life insurance

   5,657    5,506    5,355    5,206    5,057 

Deposits

   216,963    188,888    189,950    184,266    169,648 

Borrowings

   53,500    51,500    49,000    49,000    54,000 

Shareholders’ equity

   56,875    53,395    50,689    46,815    46,590 
   For the Years Ended December 31, 
   2020   2019   2018   2017   2016 
   (In thousands) 

Selected Operating Data:

          

Interest income

  $14,172   $14,332   $13,673   $12,711   $12,075 

Interest expense

   2,867    3,118    2,508    2,387    2,194 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   11,305    11,214    11,165    10,324    9,881 

Provision for loan losses

   152    55    83    —       294 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

   11,153    11,159    11,082    10,324    9,587 

Noninterest income

   1,449    1,456    1,647    1,574    1,524 

Noninterest expense

   8,099    7,863    7,844    7,531    6,939 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

   4,503    4,752    4,885    4,367    4,172 

Income tax expense

   957    1,018    1,046    1,787    1,437 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $3,546   $3,734   $3,839   $2,580   $2,735 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share - basic

  $1.49   $1.57   $1.62   $1.08   $1.15 

Earnings per share - diluted

  $1.49   $1.56   $1.62   $1.08   $1.13 

 

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   At or For the Years Ended December 31, 
   2020  2019  2018  2017  2016 

Performance Ratios:

      

Return on average assets

   1.13  1.26  1.33  0.92  1.06

Return on average equity

   6.43  7.17  7.87  5.52  6.03

Interest rate spread (1)

   3.54  3.74  4.06  3.92  4.05

Net interest margin (2)

   3.75  3.98  4.16  4.01  4.15

Noninterest expense to average assets

   2.57  2.66  2.72  2.70  2.68

Efficiency ratio (3)

   64.27  62.33  61.62  63.30  62.45

Average interest-earning assets to average interest-bearing liabilities

   1.18x   1.12x   1.10x   1.10x   1.11x 

Capital Ratios:

      

Average equity to average assets

   17.52  17.60  16.88  16.74  17.52

Total capital to risk-weighted assets (4)

   N/A(4)   22.40  21.55  22.21  20.77

Tier 1 capital to risk-weighted assets (4)

   N/A(4)   21.41  20.55  21.16  19.71

Common equity tier 1 capital to risk-weighted assets (4)

   N/A(4)   21.41  20.55  21.16  19.71

Tier 1 capital to average assets (4)

   15.49  15.86  15.17  14.78  14.44

Asset Quality Ratios:

      

Allowance for loan losses as a percentage of total loans

   1.01  0.88  0.88  0.93  0.94

Allowance for loan losses as a percentage of non-performing loans

   1,788.64  1,642.96  519.95  367.02  270.90

Net (charge-offs) recoveries to average outstanding loans during the year

   0.00  0.00  0.00  0.02  0.03

Non-performing loans as a percentage of total loans

   0.06  0.05  0.17  0.25  0.35

Non-performing loans as a percentage of total assets

   0.04  0.05  0.14  0.20  0.28

Total non-performing assets as a percentage of total assets

   0.17  0.17  0.19  0.49  0.66

Other:

      

Number of offices

   4   4   4   4   4 

Number of full-time equivalent employees

   50   49   45   47   46 

 

(1)

Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(2)

Represents net interest income as a percentage of average interest-earning assets.

(3)

Represents noninterest expenses divided by the sum of net interest income and noninterest income.

(4)

Ratios are for Cullman Savings Bank. During the year ended December 31, 2020, Cullman Savings Bank elected the “community bank leverage ratio” alternate capital reporting framework. For additional information, see “Supervision and Regulation—Federal Banking Regulations—Capital Requirements.”

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “would,” “should,” “could” or “may,” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

  

statements of our goals, intentions and expectations;

 

  

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

 

  

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

 

  

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

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

 

  

conditions relating to the COVID-19 pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;

 

  

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

  

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

 

  

our ability to access cost-effective funding;

 

  

fluctuations in real estate values and both residential and commercial real estate market conditions;

 

  

demand for loans and deposits in our market area;

 

  

our ability to implement and change our business strategies;

 

  

competition among depository and other financial institutions;

 

  

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

 

  

adverse changes in the securities or secondary mortgage markets;

 

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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;

 

  

changes in the quality or composition of our loan or investment portfolios;

 

  

technological changes that may be more difficult or expensive than expected;

 

  

the inability of third-party providers to perform as expected;

 

  

a failure or breach of our operational or security systems or infrastructure, including cyberattacks;

 

  

our ability to manage market risk, credit risk and operational risk;

 

  

our ability to enter new markets successfully and capitalize on growth opportunities;

 

  

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we have acquired or may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

 

  

changes in consumer spending, borrowing and savings habits;

 

  

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

 

  

our ability to retain key employees;

 

  

our compensation expense associated with equity allocated or awarded to our employees; and

 

  

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. See “Risk Factors” beginning on page 20. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $26.2 million and $35.9 million, or $41.5 million if the offering range is increased by 15%.

We intend to use the net proceeds as follows:

 

   Based Upon the Sale at $10.00 Per Share of: 
   2,770,891 Shares  3,259,872 Shares  3,748,853 Shares  4,311,181 Shares (1) 
   Amount   Percent of
Net
Proceeds
  Amount   Percent of
Net
Proceeds
  Amount   Percent of
Net
Proceeds
  Amount   Percent of
Net
Proceeds
 
   (Dollars in thousands) 

Gross offering proceeds

  $27,709    $32,599    $37,489    $43,112   

Less: offering expenses

   1,488     1,502     1,547     1,598   
  

 

 

   

 

 

  

 

 

    

 

 

    

 

 

   

Net offering proceeds

  $26,221    100.0 $31,097    100.0 $35,942    100.0 $41,514    100.0
  

 

 

   

 

 

  

 

 

    

 

 

    

 

 

   

Distribution of net proceeds:

             

To Cullman Savings Bank

  $13,111    50.0 $15,549    50.0 $17,971    50.0 $20,757    50.0

To fund loan to employee stock ownership plan

  $2,293    8.7 $2,697    8.7 $3,102    8.6 $3,567    8.6

To fund cash contribution to charitable foundation

  $100    0.4 $100    0.3 $100    0.3 $100    0.2

Retained by New Cullman

  $10,717    40.9 $12,751    41.0 $14,769    41.1 $17,090    41.2

 

(1)

As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will reduce Cullman Savings Bank’s deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if all the shares offered were not sold in the subscription and community offerings and instead a portion of the shares were sold in a syndicated community offering.

New Cullman may use the proceeds it retains from the offering:

 

  

to invest in securities;

 

  

to repurchase shares of its common stock;

 

  

to finance the potential acquisition of financial institutions or financial services companies, although we do not currently have any agreements or understandings regarding any specific acquisition transaction;

 

  

to pay cash dividends to stockholders; and

 

  

for other general corporate purposes.

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. Under current federal regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except when extraordinary circumstances exist and with prior regulatory approval, or except to fund the granting of restricted stock awards (which would require notification to the Federal Reserve Board) or tax-qualified employee stock benefit plans.

 

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Cullman Savings Bank may use the net proceeds it receives from the offering:

 

  

to fund new loans;

 

  

to enhance existing products and services, hire additional employees and support growth and the development of new products and services;

 

  

to expand its banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies as opportunities arise, although we do not currently have any understandings or agreements to acquire a financial institution or other entity;

 

  

to invest in securities; and

 

  

for other general corporate purposes.

Initially, a substantial portion of the net proceeds will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities. We have not determined specific amounts of the net proceeds that would be used for the purposes described above. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, the attractiveness and availability of potential acquisitions to expand our operations, and overall market conditions. The use of the proceeds may also change depending on our ability to receive regulatory approval to establish new branches or acquire other financial institutions.

We expect our return on equity may be low until we are able to reinvest effectively the additional capital raised in the offering. Until we can increase our net interest income and non-interest income, our return on equity may be below the industry average, which may negatively affect the value of our common stock. See “Risk Factors—Risks Related to the Offering—Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance” and “—Our return on equity may be low following the stock offering. This could negatively affect the trading price of our shares of common stock.”

OUR DIVIDEND POLICY

Old Cullman currently pays an annual dividend of $0.35 per share, which equates to $0.19 per share at the minimum of the offering range and $0.12 at the adjusted maximum of the offering. Following completion of the stock offering, our board of directors expects to declare annual dividends on our shares of common stock, and will also have the authority to declare quarterly and/or special dividends on our shares of common stock. However, the board’s determination of whether to declare a dividend and the amount of any such dividend is subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No decision has been made with respect to the amount, if any, and timing of any dividend payments. We cannot assure you that we will pay dividends in the future, or that any such dividends will not be reduced or eliminated in the future.

New Cullman will not be permitted to pay dividends on its common stock if its stockholders’ equity would be reduced below the amount of the liquidation account established by New Cullman in connection with the conversion. The source of dividends will depend on the net proceeds retained by New Cullman and earnings thereon, and dividends from Cullman Savings Bank. In addition, New Cullman will be subject to state law limitations and federal bank regulatory policy on the payment of dividends. Maryland law generally limits dividends if the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend or if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.

 

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After the completion of the conversion, Cullman Savings Bank will not be permitted to pay dividends on its capital stock owned by New Cullman, its sole stockholder, if Cullman Savings Bank’s stockholder’s equity would be reduced below the amount of the liquidation account established in connection with the conversion. In addition, Cullman Savings Bank will not be permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. Cullman Savings Bank must provide notice to the Federal Reserve Board and file an application with the Office of the Comptroller of the Currency for approval of a capital distribution if the total capital distributions for the applicable calendar year exceed the sum of its net income for that year to date plus its retained net income for the preceding two years, or it would not be at least adequately capitalized following the distribution.

Any payment of dividends by Cullman Savings Bank to New Cullman that would be deemed to be drawn from Cullman Savings Bank’s bad debt reserves established before 1988, if any, would require a payment of taxes at the then-current tax rate by Cullman Savings Bank on the amount of earnings deemed to be removed from the pre-1988 bad debt reserves for such distribution. Cullman Savings Bank does not intend to make any distribution that would create such a federal tax liability.

We intend to file a consolidated federal tax return with Cullman Savings Bank. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal tax purposes. Additionally, during the three-year period following the conversion, we will not be permitted to make any capital distribution to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

MARKET FOR THE COMMON STOCK

Old Cullman’s common stock is currently listed on the Pink Open Market operated by OTC Markets Group under the symbol “CULL.” Upon completion of the conversion, we expect the shares of common stock of New Cullman will replace the existing shares of Old Cullman and trade on the Nasdaq Capital Market under the symbol “CULL.” In order to list our stock on the Nasdaq Capital Market, we are required to have at least three broker-dealers who will make a market in our common stock. As of [stockholder record date], Old Cullman had                  registered market makers in its common stock.

The following table sets forth the high and low bid prices for shares of Cullman common stock for the periods indicated, as obtained from the Pink Open Market, as well as dividends declared during such periods.

 

   Price Per Share   Dividends
Declared Per
Share
 
   High   Low 

Year Ending December 31, 2021

            

Second quarter (through [stockholder record date])

  $    $    $—    

First quarter

  $23.00   $22.00   $0.35 

Year Ended December 31, 2020

            

Fourth quarter

  $22.15   $20.00   $—    

Third quarter

  $23.50   $20.00   $—    

Second quarter

  $22.25   $22.00   $—    

First quarter

  $28.50   $13.00   $0.35 

Year Ended December 31, 2019

            

Fourth quarter

  $27.58   $26.25   $—    

Third quarter

  $26.25   $25.65   $—    

Second quarter

  $26.15   $25.51   $—    

First quarter

  $26.50   $25.90   $0.35 

As of the close of business on [stockholder record date], there were 2,450,408 shares of common stock outstanding, including 1,046,677 publicly held shares (shares held by stockholders other than Cullman Savings Bank, MHC), and approximately                  stockholders of record.

 

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On March 9, 2021, the business day immediately preceding the public announcement of the conversion, and on [stockholder record date], the closing prices of Old Cullman common stock as reported on the OTC Pink Market were $24.50 per share and $                 per share, respectively. On the effective date of the conversion, all publicly held shares of Old Cullman common stock, including shares of common stock held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of New Cullman common stock determined pursuant to the exchange ratio. See “The Conversion and Offering—Share Exchange Ratio for Current Stockholders.” Options to purchase shares of Old Cullman common stock will be converted into options to purchase a number of shares of New Cullman common stock determined pursuant to the exchange ratio, with the same aggregate exercise price. See “Beneficial Ownership of Common Stock.”

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

At December 31, 2020, Cullman Savings Bank exceeded all of the applicable regulatory capital requirements and was considered “well capitalized.” During the year ended December 31, 2020, Cullman Savings Bank elected the “community bank leverage ratio” alternate capital reporting framework. For additional information, see “Supervision and Regulation—Federal Banking Regulations—Capital Requirements.”

The table below sets forth the historical equity capital and regulatory capital of Cullman Savings Bank at December 31, 2020, and the pro forma equity capital and regulatory capital of Cullman Savings Bank after giving effect to the sale of shares of common stock at $10.00 per share. The table also compares historical and pro forma capital levels to those required to be considered “well capitalized.” The table assumes that Cullman Savings Bank receives 50% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering.”

 

   Cullman Savings Bank
Historical at

December 31, 2020
  Cullman Savings Bank Pro Forma at December 31, 2020 Based Upon the Sale in the  Offering of: 
  2,770,891 Shares  3,259,872 Shares  3,748,853 Shares  4,311,181 Shares (1) 
   Amount   Percent
of Assets
  Amount  Percent
of Assets
  Amount  Percent
of Assets
  Amount  Percent
of Assets
  Amount  Percent
of Assets
 
   (Dollars in thousands) 

Equity

  $51,232    15.5 $60,904   17.7 $62,734   18.1 $64,550   18.6 $66,639   19.1
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

  

Community bank leverage capital (2)

  $50,690    15.5 $60,362   17.6 $62,192   18.0 $64,008   18.4 $66,097   18.9

Community bank leverage

requirement

   26,442    8.0   27,470   8.0   27,655   8.0   27,833   8.0   27,970   8.0 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Excess

  $24,248    10.5 $32,892   9.6 $34,537   10.0 $36,175   10.4 $38,127   10.9
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Reconciliation of capital infused into Cullman Savings Bank:

 

        

Net proceeds

 

 $13,111   $15,549   $17,971   $20,757  

Less: Common stock acquired by stock-based benefit plans

 

  (1,146   (1,349   (3,102   (1,783 

Less: Common stock acquired by employee stock ownership plan

 

  (2,293   (2,698   (1,551   (3,567 
 

 

 

   

 

 

   

 

 

   

 

 

  

Pro forma increase

 

 $9,672   $11,502   $13,318   $15,407  
     

 

 

   

 

 

   

 

 

   

 

 

  

 

(1)

As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)

Tier 1 leverage capital levels are shown as a percentage of total average assets.

 

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CAPITALIZATION

The following table presents the historical consolidated capitalization of Old Cullman at December 31, 2020 and the pro forma consolidated capitalization of New Cullman after giving effect to the conversion and offering based upon the assumptions set forth in the “Pro Forma Data” section.

 

   Old Cullman
Historical at
December 31,
2020
  New Cullman Pro Forma at December 31, 2020 Based upon the Sale in the
Offering at $10.00 per share of:
 
  2,770,891
Shares
  3,259,872
Shares
  3,748,853
Shares
  4,311,181
Shares (1)
 
   (Dollars in thousands) 

Deposits (2)

  $216,963  $216,963  $216,963  $216,963  $216,963 

Borrowed funds

   53,500   53,500   53,500   53,500   53,500 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total deposits and borrowed funds

  $270,463  $270,463  $270,463  $270,463  $270,463 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Stockholders’ equity:

      

Preferred stock, $0.01 par value, 5,000,000 shares authorized (post-conversion) (3)

   —      —      —      —      —    

Common stock, $0.01 par value, 30,000,000 shares authorized (post-conversion); shares to be issued as reflected (3)(4)

   24   48   56   64   74 

Additional paid-in capital (3)

   6,687   32,492   37,306   42,120   47,654 

MHC capital contribution

   —      2,634   2,634   2,634   2,634 

Retained earnings (5)

   49,679   49,679   49,679   49,679   49,679 

Accumulated other comprehensive income

   542   542   542   542   542 

After-tax expense of contribution to charitable foundation

   —      (831  (964  (1,097  (1,249

Common stock held by employee stock ownership plan (6)

   (57  (2,350  (2,754  (3,159  (3,624

Common stock to be acquired by stock-based benefit plans (7)

   —      (1,146  (1,349  (1,551  (1,783
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total stockholders’ equity

  $56,875  $81,068  $85,150  $89,232  $93,927 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Pro Forma Shares Outstanding:

      

Shares offered for sale

   —      2,770,891   3,259,872   3,748,853   4,311,181 

Exchange shares issued

   —      1,893,909   2,228,128   2,562,347   2,946,699 

Shares issued to charitable foundation

   —      95,200   112,000   128,800   148,120 
   

 

 

  

 

 

  

 

 

  

 

 

 

Total shares outstanding

   —      4,760,000   5,600,000   6,440,000   7,406,000 
   

 

 

  

 

 

  

 

 

  

 

 

 

Total stockholders’ equity as a percentage of total assets

   17.03  22.72  23.58  24.42  25.37

Tangible equity as a percentage of tangible assets

   17.03  22.72  23.58  24.42  25.37

 

(1)

As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)

Does not reflect withdrawals from deposit accounts to purchase shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.

(3)

Old Cullman currently has 20,000,000 authorized shares of common stock, $0.01 par value per share, and 1,000,000 authorized shares of preferred stock, par value $0.01 per share. On a pro forma basis, common stock and additional paid-in capital have been revised to reflect the number of shares of New Cullman common stock to be outstanding.

(4)

No effect has been given to the issuance of additional shares of New Cullman common stock pursuant to the exercise of options under one or more stock-based benefit plans. If the plans are implemented within the first year after the closing of the offering, an amount up to 10% of the shares of New Cullman common stock sold in the offering and issued to the charitable foundation will be reserved for issuance upon the exercise of options under the plans. No effect has been given to the exercise of options currently outstanding. See “Management.”

(5)

The retained earnings of Cullman Savings Bank will be substantially restricted after the conversion. See “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”

(footnotes continue on following page)

 

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(continued from previous page)

 

(6)

Assumes that 8% of the shares sold in the offering and issued to the charitable foundation will be acquired by the employee stock ownership plan financed by a loan from New Cullman. The loan will be repaid principally from Cullman Savings Bank’s contributions to the employee stock ownership plan. Since New Cullman will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on New Cullman’s consolidated financial statements. Accordingly, the shares of common stock acquired by the employee stock ownership plan are shown in this table as a reduction of total stockholders’ equity.

(7)

Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the offering and issued to the charitable foundation will be purchased for grant by one or more stock-based benefit plans. The funds to be used by such plans to purchase the shares will be provided by New Cullman. The dollar amount of common stock to be purchased is based on the $10.00 per share purchase price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the purchase price in the offering. New Cullman will accrue compensation expense to reflect the vesting of shares pursuant to such stock-based benefit plans and will credit capital in an amount equal to the charge to operations. Implementation of such plans will require stockholder approval.

 

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PRO FORMA DATA

The following tables summarize historical data of Old Cullman and pro forma data of New Cullman at and for the year ended December 31, 2020. This information is based on assumptions set forth below and in the tables, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.

The net proceeds are based upon the following assumptions:

 

 (i)

all of the shares of common stock will be sold in the subscription and community offerings;

 

 (ii)

our employee stock ownership plan will purchase 8% of the shares of common stock sold in the offering and issued to the charitable foundation with a loan from New Cullman. The existing loan obligation of our employee stock ownership plan, equal to $62,000 at December 31, 2020, will be combined with the new loan. The combined loan will be repaid in substantially equal payments of principal and interest (at the prime rate of interest, as may be adjusted annually) over 25 years. Interest income that we earn on the loan will offset the interest paid by Cullman Savings Bank. The effect on earnings for the employee stock ownership plan is the cost of amortizing the combined loan over 25 years, net of historical expense for the period;

 

 (iii)

we will pay Raymond James a fee of 1.0% with respect to shares sold in the subscription and community offering. No fee will be paid with respect to shares of common stock purchased by our qualified and non-qualified employee stock benefit plans, or stock purchased by our officers, directors and employees, and their immediate families, and no fee will be paid with respect to exchange shares or shares issued to the charitable foundation; and

 

 (iv)

total expenses of the offering, other than the fees and commissions to be paid to Raymond James and other broker-dealers, will be $1.1 million.

In addition, the expenses of the offering may vary from those estimated, and the fees paid to Raymond James will vary from the amounts estimated if the amount of shares of New Cullman common stock sold varies from the amounts assumed above or if any shares are sold in the syndicated community offering.

We calculated pro forma consolidated net income as if the estimated net proceeds we received had been invested at the beginning of the period at an assumed interest rate of 1.21% (0.96% on an after-tax basis). This represents the yield on the five-year U.S. Treasury Note at December 31, 2020, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate federal regulations require that we assume in presenting pro forma data.

We further believe that the reinvestment rate is factually supportable because:

 

  

the yield on the U.S. Treasury Note can be determined and/or estimated from third-party sources; and

 

  

we believe that U.S. Treasury securities are not subject to credit losses due to a U.S. Government guarantee of payment of principal and interest.

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. For pro forma earnings per share calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts as if the shares of common stock were outstanding at the beginning of the period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

 

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The pro forma data gives effect to the implementation of one or more stock-based benefit plans. We have assumed that stock-based benefit plans will reserve for restricted stock awards a number of shares of common stock equal to 4% of the shares of common stock sold in the stock offering and issued to the charitable foundation at the same price for which they were sold in the stock offering. We have assumed that awards of common stock granted under such plans vest over a five-year period.

We also have assumed that options will be granted under stock-based benefit plans to acquire shares of common stock equal to 10% of the shares of common stock sold in the stock offering and issued to the charitable foundation. We have assumed that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $2.59 for each option.

We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of the shares of common stock sold in the stock offering and issued to the charitable foundation and that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than 12 months following the completion of the stock offering.

As discussed under “How We Intend to Use the Proceeds from the Offering,” we intend to contribute 50% of the net proceeds from the stock offering to Cullman Savings Bank, and we will retain the remainder of the net proceeds from the stock offering. We will use a portion of the proceeds we retain to fund a loan to the employee stock ownership plan and make the contribution to the charitable foundation. We will retain the rest of the proceeds for future use.

The pro forma data does not give effect to:

 

  

withdrawals from deposit accounts to purchase shares of common stock in the stock offering;

 

  

our results of operations after the stock offering; or

 

  

changes in the market price of the shares of common stock after the stock offering.

The following pro forma data may not be representative of the financial effects of the offering at the date on which the offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders’ equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Moreover, pro forma stockholders’ equity per share does not give effect to the liquidation accounts to be established in the conversion or, in the unlikely event of a liquidation of Cullman Savings Bank, to the tax effect of the recapture of the bad debt reserve. See “The Conversion and Offering—Liquidation Rights.”

 

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   At or for the Year Ended December 31, 2020
Based upon the Sale at $10.00 Per Share of:
 
   2,770,891
Shares
  3,259,872
Shares
  3,748,853
Shares
  4,311,181
Shares (1)
 
   (Dollars in thousands, except per share amounts) 

Gross proceeds of offering

  $27,709  $32,599  $37,489  $43,112 

Market value of shares issued to charitable foundation

   952   1,120   1,288   1,481 

Market value of shares issued in the exchange

   18,939   22,281   25,623   29,467 
  

 

 

  

 

 

  

 

 

  

 

 

 

Pro forma market capitalization

  $47,600  $56,000  $64,400  $74,060 
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross proceeds of offering

  $27,709  $32,599  $37,489  $43,112 

Expenses

   (1,488  (1,502  (1,547  (1,598
  

 

 

  

 

 

  

 

 

  

 

 

 

Estimated net proceeds

     

Cash contribution to charitable foundation

   (100  (100  (100  (100

Common stock purchased by employee stock ownership plan

   (2,293  (2,697  (3,102  (3,567

Common stock purchased by stock-based benefit plans

   (1,146  (1,349  (1,551  (1,784
  

 

 

  

 

 

  

 

 

  

 

 

 

Estimated net proceeds, as adjusted

  $22,682  $26,951  $31,189  $36,083 
  

 

 

  

 

 

  

 

 

  

 

 

 

For the Year Ended December 31, 2020

             

Consolidated net earnings:

     

Historical

  $3,546  $3,546  $3,546  $3,546 

Income on adjusted net proceeds

   171   204   237   274 

Income on mutual holding company asset contribution

   20   20   20   20 

Employee stock ownership plan (2)

   (73  (86  (99  (114

Stock awards (3)

   (175  (206  (237  (272

Stock options (4)

   (137  (162  (186  (214
  

 

 

  

 

 

  

 

 

  

 

 

 

Pro forma net income

  $3,353  $3,316  $3,281  $3,240 

Earnings per share (5):

     

Historical

  $0.78  $0.67  $0.58  $0.50 

Income on adjusted net proceeds

   0.04   0.04   0.04   0.04 

Income on mutual holding company asset contribution

   0.00   0.00   0.00   0.00 

Employee stock ownership plan (2)

   (0.02  (0.02  (0.02  (0.02

Stock awards (3)

   (0.04  (0.04  (0.04  (0.04

Stock options (4)

   (0.03  (0.03  (0.03  (0.03
  

 

 

  

 

 

  

 

 

  

 

 

 

Pro forma earnings per share (5)

  $0.73  $0.62  $0.53  $0.45 
  

 

 

  

 

 

  

 

 

  

 

 

 

Offering price to pro forma net earnings per share

   13.70x   16.13x   18.87x   22.22x 

Number of shares used in earnings per share calculations

   4,529,704   5,329,063   6,128,423   7,047,636 

At December 31, 2020

             

Stockholders’ equity:

     

Historical

  $56,875  $56,875  $56,875  $56,875 

Estimated net proceeds

   26,221   31,097   35,942   41,514 

Equity increase from mutual holding company

   2,634   2,634   2,634   2,634 

Stock contribution to charitable foundation

   952   1,120   1,288   1,481 

Cash contribution to charitable foundation

   (100  (100  (100  (100

Expense of contribution to charitable foundation

   (952  (1,120  (1,288  (1,481

Tax benefit of contribution to charitable foundation

   221   256   291   332 

Common stock acquired by employee stock ownership plan (2)

   (2,293  (2,697  (3,102  (3,567

Common stock acquired by stock-based benefit plans (3)

   (1,146  (1,349  (1,551  (1,784
  

 

 

  

 

 

  

 

 

  

 

 

 

Pro forma stockholders’ equity (6)

  $82,412  $86,716  $90,989  $95,904 
  

 

 

  

 

 

  

 

 

  

 

 

 

Pro forma tangible stockholders’ equity (6)

  $82,412  $86,716  $90,989  $95,904 
  

 

 

  

 

 

  

 

 

  

 

 

 

Stockholders’ equity per share (7):

     

Historical

  $11.95  $10.16  $8.83  $7.68 

Estimated net proceeds

   5.51   5.55   5.58   5.61 

Equity increase from mutual holding company

   0.55   0.47   0.41   0.36 

Stock contribution to charitable foundation

   0.20   0.20   0.20   0.20 

Cash contribution to charitable foundation

   (0.02  (0.02  (0.02  (0.01

Tax expense of stock contribution to charitable foundation

   (0.20  (0.20  (0.20  (0.20

Tax benefit of contribution to charitable foundation

   0.05   0.05   0.05   0.04 

Common stock acquired by employee stock ownership plan (2)

   (0.48  (0.48  (0.48  (0.48

Common stock acquired by stock-based benefit plans (3)

   (0.24  (0.24  (0.24  (0.24
  

 

 

  

 

 

  

 

 

  

 

 

 

Pro forma stockholders’ equity per share (6) (7)

  $17.32  $15.49  $14.13  $12.96 
  

 

 

  

 

 

  

 

 

  

 

 

 

Pro forma tangible stockholders’ equity per share (6) (7)

  $17.32  $15.49  $14.13  $12.96 
  

 

 

  

 

 

  

 

 

  

 

 

 

 

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   At or for the Year Ended December 31, 2020
Based upon the Sale at $10.00 Per Share of:
 
   2,770,891
Shares
  3,259,872
Shares
  3,748,853
Shares
  4,311,181
Shares (1)
 
   (Dollars in thousands, except per share amounts) 

Offering price as percentage of pro forma stockholders’ equity per share

   57.74  64.56  70.77  77.16

Offering price as percentage of pro forma tangible stockholders’ equity per share

   57.74  64.56  70.77  77.16

Number of shares outstanding for pro forma book value per share calculations

   4,760,000   5,600,000   6,440,000   7,406,000 

 

(1)

As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)

Assumes that 8% of the shares of common stock sold in the offering and issued to the charitable foundation will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from New Cullman, and the outstanding loan with respect to existing shares of Old Cullman held by the employee stock ownership plan will be refinanced and consolidated with the new loan. Cullman Savings Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Cullman Savings Bank’s total annual payments on the employee stock ownership plan debt are based upon 25 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 718-40, “Compensation—Stock Compensation—Employee Stock Ownership Plans” (“ASC 718-40”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Cullman Savings Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 21.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 9,596, 11,289, 12,982 and 14,932 shares were committed to be released during the year ended December 31, 2020 at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for net income per share calculations.

(3)

Assumes that one or more stock-based benefit plans reserve an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering and issued to the charitable foundation. Stockholder approval of the plans and purchases by the plans may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from New Cullman or through open market purchases. Shares in the stock-based benefit plans are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by New Cullman. The tables assume that (i) the stock-based benefit plan acquires the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the plan is amortized as an expense during the year ended December 31, 2020, and (iii) the plan expense reflects an effective combined federal and state tax rate of 21.0%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 2.4%.

(4)

Assumes that options are granted under one or more stock-based benefit plans to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering and issued to the charitable foundation. Stockholder approval of the plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were both $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $2.59 for each option and that the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period using an effective combined federal and state tax rate of 21.0%. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for calculating earnings per share. There can be no assurance that the exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 5.7%.

(footnotes continue on following page)

 

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(continued from previous page)

 

(5)

Per share figures include publicly held shares of Old Cullman common stock that will be issued in exchange for shares of New Cullman common stock in the conversion. See “The Conversion and Offering—Share Exchange Ratio for Current Stockholders.” Net income per share computations are determined by taking the number of shares assumed to be sold in the offering, the number of shares to be issued to the charitable foundation and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See footnote 2, above. The number of shares of common stock actually sold and the corresponding number of shares issued to the foundation and exchange shares may be more or less than the assumed amounts.

(6)

The retained earnings of Cullman Savings Bank will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”

(7)

Per share figures include publicly held shares of Old Cullman common stock that will be issued in exchange for shares of New Cullman common stock in the conversion. Stockholders’ equity per share calculations are based upon the sum of (i) the number of shares assumed to be sold in the offering, (ii) shares to be issued to the charitable foundation and (iii) shares to be issued in exchange for publicly held shares at the minimum, midpoint and maximum of the offering range, respectively. The exchange shares reflect an exchange ratio of 1.8094, 2.1288, 2.4481 and 2.8153 at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively. The number of shares actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.

 

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COMPARISON OF VALUATION AND PRO FORMA INFORMATION

WITH AND WITHOUT THE CHARITABLE FOUNDATION

As reflected in the table below, at the minimum, midpoint, maximum and adjusted maximum of the valuation range, our pro forma valuation is $47.6 million, $56.0 million, $64.4 million and $74.1 million with the charitable foundation, as compared to $46.6 million, $54.9 million, $63.1 million and $72.6 million, respectively, without the charitable foundation, as estimated by Keller & Company, Inc. There is no assurance that in the event the charitable foundation were not formed, the appraisal prepared at that time would conclude that our pro forma market value would be the same as that estimated in the table below. Any appraisal prepared at that time would be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions.

For comparative purposes only, set forth below are certain pricing ratios and financial data and ratios at and for the year ended December 31, 2020 at the minimum, midpoint, maximum and adjusted maximum of the offering range, assuming the stock offering was completed at the beginning of the year, with and without the charitable foundation.

 

   Minimum of Offering Range  Midpoint of Offering Range  Maximum of Offering Range  Adjusted Maximum of
Offering Range
 
   With
Foundation
  Without
Foundation
  With
Foundation
  Without
Foundation
  With
Foundation
  Without
Foundation
  With
Foundation
  Without
Foundation
 
   (Dollars in thousands, except per share amounts) 

Estimated stock offering amount

  $27,709  $27,709  $32,599  $32,599  $37,488  $37,488  $43,112  $43,112 

Estimated full value

   47,600   46,648   56,000   54,880   64,400   63,112   74,060   72,578 

Total assets

   356,843   356,911   361,101   361,229   365,359   365,473   370,256   370,369 

Total liabilities

   275,431   274,521   274,385   274,521   274,370   274,521   274,352   274,520 

Pro forma stockholders’ equity

   82,412   82,390   86,716   86,708   90,989   90,952   95,904   95,849 

Pro forma net income

   3,353   3,386   3,316   3,361   3,281   3,335   3,240   3,305 

Pro forma stockholders’ equity per share

   17.32   17.66   15.49   15.80   14.13   14.41   12.96   13.10 

Pro forma net income per share

   0.73   0.73   0.62   0.61   0.53   0.53   0.45   0.45 

Pro forma pricing ratios:

         

Offering price as a percentage of pro forma stockholders’ equity per share

   57.74  56.63  64.56  63.29  70.77  69.40  77.16  76.34

Offering price to pro forma net income per share

   13.70x   13.70x   16.13x   16.13x   18.87x   18.87x   22.22x   22.22x 

Pro forma financial ratios:

         

Return on assets

   0.94  0.95  0.92  0.93  0.90  0.91  0.88  0.89

Return on equity

   4.07   4.11   3.82   3.88   3.61   3.67   3.38   3.45 

Equity to assets

   22.81   23.08   24.01   24.00   24.90   24.89   25.80   25.88 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information at and for the years ended December 31, 2020 and 2019 is derived in part from the audited consolidated financial statements that appear elsewhere in this prospectus. You should read the information in this section in conjunction with the other business and financial information contained in this prospectus, including the consolidated financial statements and related notes of Old Cullman provided elsewhere in this prospectus.

Overview

Total assets increased $33.3 million, or 11.2%, to $331.4 million at December 31, 2020 from $298.1 million at December 31, 2019. The increase was due to an increase in cash equivalents resulting from the repayment and sales of loans, the calls and maturities of securities available for sale and an increase in deposits from the deposit of government stimulus funds as well as reduced spending by our customers. We have continued to sell longer-term, fixed rate loans as part of our efforts to manage interest rate risk, and we have allowed loan refinancings to run off in the current interest rate environment. However, the capital we raise in the offering will enable us to hold more longer-term loans in our portfolio. Total deposits increased $28.1 million, or 14.9%, to $217.0 million at December 31, 2020 from $188.9 million at December 31, 2019. We experienced increases in all deposit categories except for certificates of deposit, as customers have deposited government stimulus funds at the same time as they have reduced spending.

Net income decreased $188,000, or 5.0%, to $3.5 million for the year ended December 31, 2020, compared to $3.7 million for the year ended December 31, 2019. The decrease was due primarily to increases in non-interest expense and the provision for loan losses, and a decrease in interest income, partially offset by decreases in interest expense and income tax expense. Interest income decreased $160,000, or 1.1%, to $14.2 million for the year ended December 31, 2020 from $14.3 million for the year ended December 31, 2019. 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 $251,000, or 8.1%, to $2.9 million for the year ended December 31, 2020 compared to $3.1 million for the year ended December 31, 2019, due to a decrease of $201,000 in interest expense on deposits and a decrease of $50,000 in interest expense on borrowings.

In light of the COVID-19 pandemic, we recorded provisions for loan losses of $152,000 and $55,000 for the years ended December 31, 2020 and 2019, respectively. Our allowance for loan losses was $2.4 million at December 31, 2020 compared to $2.2 million at December 31, 2019. The allowance for loan losses to total loans was 1.01% at December 31, 2020 compared to 0.88% at December 31, 2019, while the allowance for loan losses to non-performing loans was 1,788.64% at December 31, 2020 compared to 1,642.96% at December 31, 2019. We had charge-offs of $20,000 and recoveries of $11,000 during the year ended December 31, 2020.

Impact of COVID-19 Outbreak

During the first quarter of 2020, global financial markets experienced significant volatility resulting from the spread of a novel coronavirus known as COVID-19. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has restricted the level of economic activity in our markets. In response to the pandemic, the governments of the state of Alabama and of most other states took preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These measures dramatically increased unemployment in the United States and negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers.

To address the economic impact in the United States, the CARES Act was signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us, including accounting relief for TDRs. The

 

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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 Federal Reserve Board took steps to bolster the economy by, among other things, reducing the federal funds rate and the discount-window borrowing rate to near zero. In response to the pandemic, we implemented protocols and processes to help protect our employees, customers and communities. These measures included:

 

  

Operating our branches under a drive-through model with appointment-only lobby service for a period of time, leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home.

 

  

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 of December 31, 2019 are exempt from TDR classification under accounting principles generally accepted in the United States (“U.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 ended December 31, 2020, we granted short-term payment deferrals on 61 loans, totaling approximately $17.7 million in aggregate principal amount. As of December 31, 2020, 60 of these loans, totaling $14.9 million, have returned to normal payment status, while one loan for $2.8 million, secured by 10 lots of vacant land totaling 16.6 acres, with a loan-to-value ratio of 56%, has been re-extended beyond the initial six-month deferral period.

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. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued adverse effect on our business and results of operations, which could include, but not be limited to: 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.

Business Strategy

We have focused primarily on continuing and enhancing our community-oriented retail banking strategy. Highlights of our current business strategy include the following:

 

  

Continue to focus on residential lending. We have been and will continue to be primarily a one- to four-family residential real estate lender for borrowers in our market area. As of December 31, 2020, $114.8 million, or 49.0%, of our total loan portfolio consisted of one- to four-family residential real estate loans (including home equity loans and lines of credit). We also utilize our secondary market capacity so that we can offer loans, including long-term fixed-rate loans, to our customers that we do not wish to retain in our loan portfolio from an asset/liability management standpoint. We consider the current interest rate environment in making decisions as to whether to hold our originated mortgage loans for investment or to sell the loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint, and

 

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we sold $17.7 million of one- to four-family residential real estate loans during the year ended December 31, 2020. Such loan sales also enhance non-interest income, as we recognized $462,000 in fee income from loan sales during the year ended December 31, 2020.

 

  

Increase commercial real estate lending. While we will continue to emphasize one- to four-family residential mortgage loans, we also have increased and intend to continue to increase our origination of commercial real estate loans in order to increase the yield of, and reduce the term to repricing of, our total loan portfolio. We originated $27.7 million of commercial real estate loans during the year ended December 31, 2020 and, at December 31, 2020, $77.8 million, or 33.2%, of our total loan portfolio consisted of commercial real estate loans. The additional capital raised in the offering will further increase our commercial lending capacity by enabling us to originate more loans and loans with larger balances. This will permit us to serve commercial borrowers with larger lending needs and to originate larger commercial loans than we have in the past.

 

  

Manage credit risk to maintain a low level of nonperforming assets. We believe that maintaining strong asset quality is paramount to our long-term success. We follow conservative underwriting guidelines with sound loan administration, and focus on originating loans secured by real estate located within our market area only. This includes enhanced loan monitoring of higher risk portfolio segments, higher risk individual loans and larger relationships within the portfolio, and more frequent loan grade review. Our non-performing assets and troubled debt restructurings totaled $2.8 million or 0.9% of total assets at December 31, 2020. Our total non-performing loans to total loans ratio was 0.06% at December 31, 2020.

 

  

Continue to increase core deposits. We will continue to emphasize our efforts to increase “core deposits,” such as passbook and statement savings accounts, money market accounts and regular and commercial checking accounts. Core deposits provide a stable source of funds to support loan growth at costs consistent with enhancing our interest rate spread and net interest margin. Core deposits also help us maintain loan-to-deposit ratios at levels consistent with regulatory expectations. At December 31, 2020, $130.9 million, or 60.3% of our deposits, were core deposits. We intend to attract and retain core deposits by offering competitive products that meet the full-service banking needs of our customers, by emphasizing quality customer service, and through our convenient locations and advertising and promotions programs.

 

  

Expand banking relationships to a larger base of customers. We were established in 1887 and have been operating continuously in Cullman County since that time. Our share of Federal Deposit Insurance Corporation-insured deposits in Cullman County as of June 30, 2020 (the latest date for which such information is available) was 10.7%. We continually seek to expand our customer base by using our recognized brand name and the goodwill developed over years of providing timely and efficient banking services that larger financial institutions cannot offer. This includes our participation in the PPP, described below, which gave us access to customers who could not access that program through larger financial institutions.

 

  

Continue to support our customers and our local community. The COVID-19 pandemic has restricted the level of economic activity in our markets, resulting in increased unemployment and negative impacts on many businesses, thereby threatening the repayment ability of some of our borrowers. As we have done during prior economic downturns, we are taking actions to support our customers and our local community. For example, during the year ended December 31, 2020, we originated $9.8 million of small business loans under the PPP, created by the CARES Act, which was signed into law in March 2020. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. In addition, during the year ended December 31, 2020, we granted short-term payment deferrals on 61 loans, totaling approximately $17.7 million, that were otherwise performing. As of December 31, 2020, 60 of these loans, totaling $14.9 million, have returned to normal payment status. Furthermore, in response to the pandemic, we implemented protocols and processes to help protect our employees,

 

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customers and communities, including operating our branch offices under a drive-through model with appointment-only lobby service for a period of time, leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home. We have also used a portion of our marketing budget to directly support our community during the COVID pandemic by spending money at local businesses instead of using such funds for traditional advertising.

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 with U.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 by Cullman 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

 

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believes the allowance for loan losses was appropriate at December 31, 2020 and December 31, 2019. 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.

The Financial Accounting Standards Board has delayed the effective date of the implementation of the Current Expected Credit Loss, or CECL, standard for New Cullman and Cullman Savings Bank until January 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.

Old Cullman files consolidated federal and state income tax returns with Cullman 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.

Comparison of Financial Condition at December 31, 2020 and 2019

Total assets increased $33.3 million, or 11.2%, to $331.4 million at December 31, 2020 from $298.1 million at December 31, 2019. The increase was due to an increase in cash equivalents resulting from the repayment and sales of loans, the calls and maturities of securities available for sale and an increase in deposits from the deposit of government stimulus funds as well as reduced spending by our customers.

Cash and cash equivalents increased $54.3 million to $60.4 million at December 31, 2020 from $6.1 million at December 31, 2019. The increase was due to repayments and sales of loans, calls and maturities of securities available for sale and an increase in deposits from the deposit of government stimulus funds as well as reduced spending by our customers. We regularly review our liquidity position based on alternative uses of available funds as well as market conditions.

Gross loans held for investment decreased $16.7 million, or 6.7%, to $234.3 million at December 31, 2020 from $251.0 million at December 31, 2019. The decrease was primarily due to a decrease in one- to four-family residential real estate loans, which decreased $12.6 million, or 9.9%, to $114.8 million at December 31, 2020 from $127.4 million at December 31, 2019. We have continued to sell longer-term, fixed rate loans as part of our efforts to manage interest rate risk, and we have allowed loan refinancings to run off in the current interest rate environment. However, the capital we raise in the offering will enable us to hold more longer-term loans in our portfolio, subject to market conditions. Commercial business loans decreased $8.2 million, or 28.8%, and

 

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construction loans decreased $3.2 million, or 36.8%, each due to a slowdown in the economy resulting from the COVID-19 pandemic.

Securities available-for-sale decreased $4.7 million, or 19.8%, to $18.9 million at December 31, 2020 from $23.5 million at December 31, 2019. We did not replace securities that matured or were called as we did not need securities to pledge as collateral for borrowings, and there are currently limited investments available that satisfy the criteria set forth in our investment policy.

Total deposits increased $28.1 million, or 14.9%, to $217.0 million at December 31, 2020 from $188.9 million at December 31, 2019. We experienced increases in all deposit categories except for certificates of deposit, as customers have deposited government stimulus funds at the same time as they have reduced spending. Certificates of deposit decreased $7.9 million, or 8.4%, to $86.0 million at December 31, 2020 from $93.9 million at December 31, 2019. We have allowed higher-rate certificates of deposit to run off during the current interest rate environment.

We had $53.5 million of borrowings at December 31, 2020, compared to $51.5 million of borrowings at December 31, 2019. We increased our borrowings at the end of 2020 to lock in low rates.

Stockholders’ equity increased by $3.5 million, or 6.5%, to $56.9 million at December 31, 2020 compared to $53.4 million at December 31, 2019. The increase was due primarily to net income of $3.5 million for the year ended December 31, 2020, along with an increase in accumulated other income (unrealized gains on securities available-for-sale) of $498,000 for the year ended December 31, 2020.

 

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Average Balance Sheets

The following tables set 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 $170,000 and $34,000 for the years ended December 31, 2020 and 2019, respectively. Loan balances exclude loans held for sale.

 

   For the Years Ended December 31, 
   2020  2019 
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
  Average
Outstanding
Balance
   Interest   Average
Yield/Rate
 
   (Dollars in thousands) 

Interest-earning assets:

           

Loans (excluding PPP loans)

  $236,982   $13,126    5.54 $246,756   $13,360    5.41

PPP loans

   9,075    342    3.77  —       —       —    

Securities

   20,465    530    2.59  23,215    633    2.73

Federal Home Loan Bank stock

   2,662    130    4.88  2,412    150    6.22

Federal funds sold

   32,553    44    0.14  9,551    189    1.98
  

 

 

   

 

 

    

 

 

   

 

 

   

Total interest-earning assets

   301,737    14,172    4.70  281,934    14,332    5.08

Noninterest-earning assets

   12,989       13,790     
  

 

 

      

 

 

     

Total assets

  $314,726      $295,724     
  

 

 

      

 

 

     

Interest-bearing liabilities:

           

Interest-bearing demand deposits

  $60,916    125    0.21 $51,065    166    0.33

Regular savings and other deposits

   35,749    86    0.24  31,491    93    0.30

Money market deposits

   4,524    14    0.31  3,933    14    0.36

Certificates of deposit

   90,603    1,471    1.62  94,221    1,624    1.72
  

 

 

   

 

 

    

 

 

   

 

 

   

Total interest-bearing deposits

   191,792    1,696    0.88  180,710    1,897    1.05

Federal Home Loan Bank advances and other borrowings

   56,374    1,171    2.08  50,601    1,221    2.41
  

 

 

   

 

 

    

 

 

   

 

 

   

Total interest-bearing liabilities

   248,166    2,867    1.16  231,311    3,118    1.35
    

 

 

        

Noninterest-bearing demand deposits

   9,902       9,419     

Other noninterest-bearing liabilities

   1,523       2,952     
  

 

 

      

 

 

     

Total liabilities

   259,591       243,682     

Total shareholders’ equity

   55,135       52,042     
  

 

 

      

 

 

     

Total liabilities and shareholders’ equity

  $314,726      $295,724     
  

 

 

      

 

 

     

Net interest income

    $11,305      $11,214   
    

 

 

      

 

 

   

Net interest rate spread (1)

       3.54      3.74

Net interest-earning assets (2)

  $53,571      $50,623     
  

 

 

      

 

 

     

Net interest margin (3)

       3.75      3.98

Average interest-earning assets to interest-bearing liabilities

   1.22x       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.

 

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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, 2020 vs. 2019
 
   Increase (Decrease) Due to   Total Increase 
   Volume   Rate   (Decrease) 
       (In thousands)     

Interest-earning assets:

      

Loans (excluding PPP loans)

  $(529  $295   $(234

PPP loans

   342    —      342 

Securities

   (75   (28   (103

Federal Home Loan Bank stock

   16    (36   (20

Federal funds sold and other

   455    (600   (145
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   209    (369   (160
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Interest-bearing demand deposits

   165    (206   (41

Regular savings and other deposits

   13    (20   (7

Money market deposits

   2    (2   —   

Certificates of deposit

   (62   (91   (153
  

 

 

   

 

 

   

 

 

 

Total deposits

   118    (319   (201

Federal Home Loan Bank advances and other borrowings

   139    (189   (50
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   257    (508   (251
  

 

 

   

 

 

   

 

 

 

Change in net interest income

  $(48  $139   $91 
  

 

 

   

 

 

   

 

 

 

Comparison of Operating Results for the Years Ended December 31, 2020 and 2019

General. Net income decreased $188,000, or 5.0%, to $3.5 million for the year ended December 31, 2020, compared to $3.7 million for the year ended December 31, 2019. The decrease was due primarily to increases in non-interest expense and the provision for loan losses, and a decrease in interest income, partially offset by decreases in interest expense and income tax expense.

Interest Income. Interest income decreased $160,000, or 1.1%, to $14.2 million for the year ended December 31, 2020 from $14.3 million for the year ended December 31, 2019. 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 $234,000, or 1.8%, to $13.1 million for the year ended December 31, 2020 from $13.4 million for the year ended December 31, 2019. Our average balance of loans decreased $9.8 million, or 4.0%, to $237.0 million for the year ended December 31, 2020 from $246.8 million for the year ended December 31, 2019. The decrease is due to our decisions to continue to sell longer-term, fixed rate loans as part of our efforts to manage interest rate risk and allow loan refinancings to run off in the current interest rate environment, and also due to commercial lending slowing due to COVID-19 pandemic. Our weighted average yield on loans (excluding PPP loans) increased 13 basis points to 5.54% for the year ended December 31, 2020 compared to 5.41% for the year ended December 31, 2019, as allowed lower-yield loans to run off during the current interest rate environment. We recognized $342,000 of interest income on PPP loans during the year ended December 31, 2020, compared to no such income during the year ended December 31, 2019. As of December 31, 2020, we had an additional $221,000 of interest and fee income on PPP loans to be recognized in future periods.

 

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Interest Expense. Interest expense decreased $251,000, or 8.1%, to $2.9 million for the year ended December 31, 2020 compared to $3.1 million for the year ended December 31, 2019, due to a decrease of $201,000 in interest expense on deposits and a decrease of $50,000 in interest expense on borrowings.

The decrease in interest expense on deposits was due primarily to a decrease in interest expense on certificates of deposit, which decreased $153,000, or 9.4%, to $1.5 million for the year ended December 31, 2020 from $1.6 million for the year ended December 31, 2019. 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 interest-bearing demand deposits, which decreased $41,000, or 24.7%) due a decrease in rates, despite increases in the average balance.

Interest expense on borrowings decreased $50,000, or 4.1%, and was $1.2 million for each of the years ended December 31, 2020 and 2019. The rate we paid on borrowings decreased 33 basis points to 2.08% for the year ended December 31, 2020 compared to 2.41% for the year ended December 31, 2019, offsetting an increase in the average balance of borrowings of $5.8 million, or 11.4%. The decrease in rate reflected decreases in market interest rates.

Net Interest Income. Net interest income increased $91,000, or 0.8%, to $11.3 million for the year ended December 31, 2020 from $11.2 million for the year ended December 31, 2019, as a result of our interest expense decreasing faster than our interest income. Our interest rate spread decreased 20 basis points to 3.54% for the year ended December 31, 2020, compared to 3.74% for the year ended December 31, 2019, while our net interest margin decreased 23 basis points to 3.75% for the year ended December 31, 2020 compared to 3.98% for the year ended December 31, 2019.

Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and 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. See “—Summary of Significant Accounting Policies” for additional information.

After an evaluation of these factors, and particularly in light of the COVID-19 pandemic, which caused us to increase our qualitative loss factors, we recorded provisions for loan losses of $152,000 and $55,000 for the years ended December 31, 2020 and 2019, respectively. Our allowance for loan losses was $2.4 million at December 31, 2020 compared to $2.2 million at December 31, 2019. The allowance for loan losses to total loans was 1.01% at December 31, 2020 compared to 0.88% at December 31, 2019, while the allowance for loan losses to non-performing loans was 1,788.64% at December 31, 2020 compared to 1,642.96% at December 31, 2019. We had charge-offs of $20,000 and recoveries of $11,000 during the year ended December 31, 2020.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at December 31, 2020. 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, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses.

Non-interest Income. Non-interest income decreased $7,000, to $1.4 million for the year ended December 31, 2020 from $1.5 million for the year ended December 31, 2019. Service charges on deposit accounts decreased $62,000, or 7.8%, as we have waived certain service charges during the COVID-19 pandemic, and non-sufficient funds fees decreased $133,000, or 25.4%, due to customers being overdrawn less as a result of the deposit of

 

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stimulus funds and reduced spending. Gain on sale of mortgage loans increased $53,000, or 13.0%, as we sold $17.7 million of mortgage loans during the year ended December 31, 2020 compared to $12.4 million of such sales during the year ended December 31, 2019.

Non-interest Expense. Non-interest expense information is as follows.

 

   Years Ended
December 31,
   Change 
   2020   2019   Amount   Percent 
   (Dollars in thousands) 

Salaries and employee benefits

  $5,502   $5,148   $354    6.9

Occupancy and equipment

   765    819    (54   (6.6

Data processing

   549    648    (99   (15.3

Professional and supervisory fees

   528    422    106    25.1 

Office expense

   202    207    (5   (2.4

Advertising

   87    176    (89   (50.6

Federal deposit insurance premiums

   47    37    10    27.0 

Other

   419    406    13    3.2 
  

 

 

   

 

 

   

 

 

   

Total noninterest expense

  $8,099   $7,863   $236    3.0
  

 

 

   

 

 

   

 

 

   

 

 

 

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. Professional and supervisory fees increased due to a customary increase in fees as well as additional work performed. Data processing expense decreased due to the renegotiation of our core data processing contract.

Income Tax Expense. We recognized income tax expense of $957,000 and $1.0 million for the years ended December 31, 2020 and 2019, respectively, resulting in effective rates of 21.3% and 21.4%. Income tax expense decreased as a result of lower income before income taxes in 2020.

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.

 

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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 that the 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 table below sets forth, as of December 31, 2020, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

 

At December 31, 2020

Change in Interest Rates

(basis points) (1)

  Net Interest Income
Year 1 Forecast
  Year 1 Change
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 at December 31, 2020, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience an 11.69% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 7.48% decrease in net interest income. At December 31, 2019, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 4.07% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 7.66% 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.

 

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The table below sets forth, as of December 31, 2020, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.

 

At December 31, 2020

 

Change in Interest

Rates (basis points)
(1)

            EVE as a Percentage of Present
Value of Assets (3)
 
  

Estimated

EVE (2)

   Estimated Increase (Decrease) in
EVE
  

EVE

Ratio (4)

  Increase
(Decrease)

(basis points)
 
  Amount  Percent 
       (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  (0.44)%   17.57  12 

—  

   59,381    —     —     17.45  —   

-50

   58,998    (383  (0.64)%   17.14  (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, 2020, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 3.45% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 9.41% decrease in EVE. At December 31, 2019, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced an 8.11% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 1.60% increase 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.

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 the Federal Home Loan Bank of Atlanta. At December 31, 2020 and December 31, 2019, we had a $97.3 million and a $90.4 million line of credit with the Federal Home Loan Bank of Atlanta, and had

 

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$53.5 million and $51.5 million outstanding as of those dates, respectively. In addition, at December 31, 2020, we had an unsecured federal funds line of credit of $10.0 million. No amount was outstanding on this line of credit at December 31, 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 $3.4 million and $4.5 million for the years ended December 31, 2020 and 2019, 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 $21.7 million and $(6.6) million for the years ended December 31, 2020 and 2019, respectively. Net cash provided by (used in) financing activities, consisting primarily of activity in deposit accounts and proceeds from Federal Home Loan Bank borrowings, offset by repayment of Federal Home Loan Bank borrowings, was $29.1 million and $(269,000) for the years ended December 31, 2020 and 2019, 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.

At December 31, 2020, Cullman Savings Bank exceeded all of its regulatory capital requirements, and was categorized as well capitalized at December 31, 2020. Management is not aware of any conditions or events since the most recent notification that would change our category. See “Historical and Pro Forma Regulatory Capital Compliance.”

The net proceeds from the offering will significantly increase 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 will be adversely affected following the offering. See “Risk Factors—Risks Related to the Offering—Our return on equity may be low following the stock offering. This could negatively affect the trading price of our shares of common stock.”

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2020, we had outstanding commitments to originate loans of $26.3 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from December 31, 2020 totaled $46.4 million. Management expects that a substantial portion of the maturing time deposits will be retained. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

 

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Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Recent Accounting Pronouncements

Please refer to Note 1 to the audited financial statements of Old Cullman for the years ended December 31, 2020 and 2019 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 with U.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.

BUSINESS OF NEW CULLMAN AND OLD CULLMAN

New Cullman

New Cullman is a Maryland corporation that was organized in March 2021. Upon completion of the conversion, it will become the holding company of Cullman Savings Bank and will succeed to all of the business and operations of Old Cullman and Cullman Savings Bank, MHC, each of which will cease to exist upon completion of the conversion.

As part of the conversion, New Cullman will receive the cash and securities held by Old Cullman, the cash held by Cullman Savings Bank, MHC, and the net proceeds it retains from the offering. A portion of the net proceeds will be used to fund a loan to the Cullman Savings Bank Employee Stock Ownership Plan. New Cullman will have no significant liabilities. It intends to use the support staff and offices of Cullman Savings Bank and will pay Cullman Savings Bank for these services. If New Cullman expands or changes its business in the future, it may hire its own employees.

New Cullman intends to invest the net proceeds of the offering as discussed under “How We Intend to Use the Proceeds From the Offering.” In the future, it may pursue other business activities, including mergers and acquisitions, investment alternatives and diversification of operations. There are, however, no current understandings or agreements for these activities.

New Cullman will be a savings and loan holding company and subject to comprehensive regulation by the Federal Reserve Board.

Old Cullman

Old Cullman, a federal corporation that was organized in 2009, is a savings and loan holding company headquartered in Cullman, Alabama. Old Cullman’s common stock is quoted on the Pink Open Market operated by the OTC Markets Group under the symbol “CULL.” Old Cullman conducts its operations primarily through its wholly owned subsidiary, Cullman Savings Bank, a federally chartered savings bank. Old Cullman manages its operations as one unit, and thus does not have separate operating segments. At December 31, 2020, Old Cullman had consolidated assets of $331.4 million, deposits of $217.0 million and stockholders’ equity of $56.9 million.

 

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Old Cullman was formed as part of the mutual holding company reorganization of Cullman Savings Bank, which was completed in 2009. In connection with the reorganization, Old Cullman sold 1,080,483 shares of common stock to the public at $10.00 per share, representing 43% of its outstanding shares of common stock, and issued 50,225 shares of stock and $100,000 in cash to Cullman Savings Bank Foundation. Cullman Savings Bank, MHC has been organized as a mutual holding company under the laws of the United States and owns the remaining majority of the outstanding common stock of Old Cullman.

The executive offices of Old Cullman are located at 316 Second Avenue SW, Cullman, Alabama 35055, and its telephone number is (256) 734-1740. Old Cullman is subject to comprehensive regulation and examination by the Federal Reserve Board.

BUSINESS OF CULLMAN SAVINGS BANK

Cullman Savings Bank is a federally chartered stock savings bank headquartered in Cullman, Alabama. Cullman Savings Bank was originally chartered in 1887 under the name Cullman Building & Loan. In 1994, we converted to a federal savings bank charter and changed our name to Cullman Savings Bank. In 2009, we reorganized from the mutual to the stock form of ownership in connection with the mutual holding company reorganization.

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans, commercial real estate loans and commercial and industrial loans and, to a lesser extent, construction loans, multi-family real estate loans and consumer loans. We also invest in limited amounts of securities. We offer a variety of deposit accounts, including checking accounts, savings accounts, individual retirement accounts and certificate of deposit accounts. We also use Federal Home Loan Bank advances to fund our operations.

Cullman Savings Bank is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency. Cullman Savings Bank is a member of the Federal Home Loan Bank system. Our website address is www.cullmansavingsbank.com. Information on our website is not considered a part of this document.

Market Area

We conduct our operations from our main office and two additional branch offices, all of which are located in Cullman, Alabama, and one branch office in Hanceville, Alabama. All of our branch offices are located in Cullman County, Alabama. Cullman County, which is largely suburban and rural in nature, is located in north-central Alabama between the cities of Birmingham (approximately 50 miles away) and Huntsville (approximately 55 miles away). We consider Cullman County our primary market area for lending and deposits.

Cullman County’s local economy is somewhat diversified, with employment in wholesale/retail trade, education/healthcare/social services and services comprising the largest employment sectors. Other major employment sectors include finance/insurance/real estate and construction. In addition, many of our residents commute to Birmingham or Huntsville for employment due to the location of those cities compared to Cullman.

Cullman County’s population, which is estimated to be approximately 84,000 as of January 2021, increased at an annual growth rate of 0.6% from 2016 to January 2021, versus comparable Alabama and U.S. population growth rates of 0.2% and 0.5%, respectively. The number of households in Cullman County increased at a 0.6% annual rate from 2016 to January 2021, which exceeded and matched the comparable Alabama and U.S. household growth rates of 0.2% and 0.6%, respectively. Projected five-year population and household growth rates for Cullman County are above the comparable projected growth rates for Alabama and are slightly below the comparable U.S. projected growth rates.

Cullman County’s January 2021 median household income of $49,162 was below the Alabama median of $53,669 and below the U.S. median of $67,761. Similarly, per capita income and household income distribution

 

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measures also reflected lower levels of income for Cullman County and Alabama relative to the comparable U.S. measures. Cullman County’s somewhat rural characteristics and lower cost of living are considered factors that contribute to its comparatively lower income measures. Over the next five years, Cullman County is projected to experience slightly higher growth rates in household income and per capita income relative to the comparable projected Alabama and U.S. growth rates.

Competition

We face competition within our local market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions. We also face competition from savings institutions, mortgage banking firms, consumer finance companies, financial technology or “fintech” companies and credit unions and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2020 (the most recent date for which data is available), our market share of deposits represented 10.7% of Federal Deposit Insurance Corporation-insured deposits in Cullman County, ranking us fifth in market share of deposits out of 12 institutions operating in Cullman County.

Lending Activities

General. Our principal lending activity is the origination of one- to four-family residential mortgage loans and commercial real estate loans, and, to a lesser extent, multi-family mortgage loans, construction loans, land loans, home equity loans, commercial loans and consumer loans.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated, excluding loans held for sale. In addition to the loans included in the table below, at December 31, 2020, we had $7.2 million of loans in process. At December 31, 2020 we had $173,000 of loans held for sale.

 

   At December 31, 
   2020  2019 
   Amount   Percent  Amount   Percent 
       (Dollars in thousands)     

Real estate loans:

   

One- to four-family residential

  $114,766    48.98 $127,362    50.73

Multi-family

   4,867    2.08   4,540    1.81 

Commercial

   77,841    33.22   74,167    29.54 

Construction

   5,504    2.35   8,712    3.47 

Commercial loans

   20,340    8.68   28,572    11.38 

Consumer loans:

       

Home equity loans and lines of credit

   3,520    1.50   4,966    1.98 

Other consumer

   2,347    1.00   2,718    1.08 

Payroll Protection Program loans

   5,145    2.20   —      —   
  

 

 

   

 

 

  

 

 

   

 

 

 
   234,330    100.00  251,037    100.00
    

 

 

    

 

 

 

Less:

       

Net deferred loan fees

   (170    (34  

Allowance for losses

   (2,361    (2,218  
  

 

 

    

 

 

   

Total loans

  $231,799    $248,785   
  

 

 

    

 

 

   

 

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Contractual Maturities. The following table sets forth the contractual maturities of our total loan portfolio at December 31, 2020. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The tables present contractual maturities and do not reflect repricing or the effect of prepayments. Actual maturities may differ.

 

   One- to Four-
Family
Residential
Real Estate
   Multi-Family
Real Estate
   Commercial
Real Estate
   Construction 
       (In thousands)     

Amounts due in:

        

One year or less

  $1,696   $734   $10,719   $5,201 

More than one to five years

   7,608    1,942    32,064    303 

More than five to 15 years

   15,627    2,191    34,159    —   

More than 15 years

   89,835    —      899    —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $114,766   $4,867   $77,841   $5,504 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

   Commercial   Consumer   Payroll
Protection
Program
   Total 
       (In thousands)     

Amounts due in:

        

One year or less

  $8,191   $1,288   $—     $27,829 

More than one to five years

   6,197    1,214    5,145    54,473 

More than five to 15 years

   5,857    3,365    —      61,199 

More than 15 years

   95    —      —      90,829 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $20,340   $5,867   $5,145   $234,330 
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth our fixed and adjustable-rate loans at December 31, 2020 that are contractually due after December 31, 2021.

 

   Due After December 31, 2021 
   Fixed   Adjustable   Total 
       (In thousands)     

Real estate loans:

      

One- to four-family residential

  $108,000   $5,069   $113,069 

Multi-family

   3,910    222    4,132 

Commercial

   64,373    2,749    67,122 

Construction

   303    —      303 

Commercial loans

   12,149    —      12,149 

Consumer loans:

      

Home equity loans and lines of credit

   3,250    248    3,498 

Other consumer

   1,081    —      1,081 

Payroll Protection Program loans

   5,142    —      5,142 
  

 

 

   

 

 

   

 

 

 

Total loans

  $198,208   $8,288   $206,496 
  

 

 

   

 

 

   

 

 

 

One- to-Four Family Residential Real Estate Lending. We originate long-term permanent loans secured by mortgages on owner-occupied one- to four-family residences. At December 31, 2020, $114.8 million, or 49.0% of our total loan portfolio, consisted of permanent loans on one- to four-family residences. At that date, our average outstanding one- to four-family residential real estate loan balance was $108,000 and our largest outstanding residential loan had a principal balance of $1.8 million. Virtually all of the residential loans we originate are secured by properties located in our market area.

Due to consumer demand in the current low market interest rate environment, many of our recent originations are 15- to 30-year fixed-rate loans secured by one- to four-family residential real estate. We generally originate our fixed-rate one- to four-family residential loans in accordance with secondary market standards to

 

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permit their sale on a servicing-released basis. However, to accommodate customers, we will originate loans that do not conform with secondary market standards, and we will usually hold such loans in our portfolio.

In order to reduce the term to repricing of our loan portfolio, we also originate adjustable-rate one- to four-family residential mortgage loans. Our current adjustable-rate mortgage loans carry interest rates that adjust annually based on the Federal Home Loan Bank of San Francisco 11th District Monthly Weighted Average Cost of Funds Index. Many of our adjustable-rate one- to four-family residential mortgage loans have fixed rates for initial terms of five or ten years. Such loans carry terms to maturity of up to 30 years. At December 31, 2020, $6.6 million, or 5.7% of our one- to four-family residential real estate loans, had adjustable rates of interest.

We evaluate both the borrower’s ability to make principal, interest and escrow payments and the value of the property that will secure the loan. Our one- to-four family residential mortgage loans do not currently include prepayment penalties, are non-assumable and do not produce negative amortization. Our one- to-four family residential mortgage loans customarily include due-on-sale clauses giving us the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage. We currently originate residential mortgage loans for our portfolio with loan-to-value ratios of up to 89.99% for owner-occupied one- to-four family homes and up to 80% for non-owner occupied homes.

Commercial Real Estate Lending. In recent years, we have sought to increase our commercial real estate loans. Our commercial real estate loans are secured primarily by office buildings, retail and mixed-use properties and restaurants located in our primary market area. At December 31, 2020, we had $77.8 million in commercial real estate loans, representing 33.2% of our total loan portfolio.

Most of our commercial real estate loans have a five-year balloon term with amortization periods of up to 20 years. The maximum loan-to-value ratio of our commercial real estate loans is generally 85%. At December 31, 2020, our largest commercial real estate loan totaled $6.1 million and was secured by two hotels. At December 31, 2020, this loan was performing in accordance with its contractual terms.

Classified within our commercial real estate loans are land loans. We make a limited amount of land loans to complement our construction lending activities, and such loans are generally secured by lots that will be used for commercial real estate development. Land loans also include loans secured by farm land and land purchased for investment purposes. Land loans are generally offered for terms of up to 15 years. The maximum loan-to-value ratio of land loans is 75%.

Set forth below is information regarding our commercial real estate loans at December 31, 2020:

 

Type of Loan

  Number of Loans   Balance 
       (In thousands) 

Residential one- to four-family non-owner occupied

   7   $2,911 

Office/mixed use

   28    10,603 

Poultry house/car wash/skating rink

   33    14,041 

Retail/wholesale automobile-tire center

   38    13,022 

Restaurant/fast food/gas station/grocery

   11    7,010 

Hotel/motel/inn

   2    6,331 

Self-storage facility

   6    6,112 

Other commercial real estate

   73    17,811 
  

 

 

   

 

 

 

Total

   198   $77,841 
  

 

 

   

 

 

 

We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the

 

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factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All commercial real estate loans are appraised by outside independent appraisers approved by the board of directors or by internal evaluations, where permitted by regulation. Personal guarantees are generally obtained from the principals of commercial real estate borrowers and, in the case of church loans, guarantees from the applicable denomination are generally obtained.

Commercial Business Lending. We originate commercial business loans and lines of credit to small- and medium-sized companies in our primary market area. Our commercial business loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. The commercial business loans that we offer are fixed-rate loans, generally for a one-year term. Our commercial business loan portfolio consists primarily of secured loans, along with a small amount of unsecured loans. At December 31, 2020, we had $20.3 million of commercial business loans outstanding, representing 8.7% of the total loan portfolio, and we may increase this type of lending in the future.

When making commercial business loans, we consider the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. Commercial business loans are generally secured by accounts receivable, inventory and equipment.

The CARES Act established the PPP through the SBA, which allowed us to lend money to small businesses to maintain employee payrolls through the COVID-19 crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meet certain other requirements. PPP loans have a fixed interest rate of 1.00% and a maturity date of either two or five years. Such loans totaled $5.1 million at December 31, 2020.

At December 31, 2020, our largest commercial business loan relationship totaled $3.8 million and was secured by sales tax receipts. At December 31, 2020, this loan was performing in accordance with its contractual terms.

Multi-Family Real Estate Lending. At December 31, 2020, we had $4.9 million in multi-family real estate loans, representing 2.1% of our total loan portfolio. The multi-family real estate loans we originate generally have a maximum amortization term of 20 years and are secured by apartment buildings located within our primary market area. Our multi-family real estate loans are structured as balloon loans, with interest rates on these loans generally fixed for an initial period of three to five years and then adjusted based on current market rates and competition. These loans are generally made in amounts of up to 80% of the lesser of the appraised value or the purchase price of the property with an appropriate projected debt service coverage ratio.

Our underwriting procedures include considering the borrower’s expertise and require verification of the borrower’s credit history, income and financial statements, banking relationships, references and income projections for the property. We generally obtain personal guarantees on these loans.

At December 31, 2020, our largest multi-family loan had a balance of $1.0 million and was secured by an apartment complex. At December 31, 2020, this loan was performing in accordance with its contractual terms.

Construction Lending. We make construction loans to individuals for the construction of their primary residences and, to a limited extent, loans to builders and commercial borrowers for owner-occupied projects. At December 31, 2020, our construction loans totaled $5.5 million, representing 2.4% of our total loan portfolio.

Loans to individuals for the construction of their residences typically run for up to 12 months and then convert to permanent loans. These construction loans have rates and terms comparable to one-to-four family residential loans offered by us. During the construction phase, the borrower pays interest only. The maximum loan-to-value ratio of owner-occupied single-family construction loans is 85%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans.

 

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At December 31, 2020, our largest outstanding consumer construction loan was for $595,000 of which $540,000 was outstanding. This loan was performing according to its contractual terms at December 31, 2020.

Home Equity Lending. We originate variable-rate and fixed-rate home equity lines of credit secured by a lien on the borrower’s primary residence. Our home equity products are limited to 89.99% of the property value less any other mortgages when we hold the first mortgage, and 80% when we do not hold the first mortgage. We use the same underwriting standards for home equity lines of credit as we use for one- to four-family residential mortgage loans. At December 31, 2020, we had $3.5 million or 1.5% of our total loans in home equity loans and outstanding advances under home equity lines of credit and an additional $6.7 million of funds committed, but not advanced, under home equity lines of credit.

Consumer Lending. We originate limited amounts of consumer loans apart from home equity lines of credit. At December 31, 2020, we had $2.3 million of consumer loans outstanding, representing 1.0% of the total loan portfolio. Consumer loans consist of loans secured by deposits, automobile loans and miscellaneous other types of installment loans.

Loan Underwriting Risks

Commercial Real Estate Loans. Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential real estate loans. The primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors to provide monthly, quarterly, semi-annual or annual financial statements, depending on the size of the loan, on commercial real estate loans. In reaching a decision on whether to make a commercial real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We have generally required that the properties securing these real estate loans have an aggregate debt service ratio, including the guarantor’s cash flows and the borrower’s other projects, of at least 1.15x.

If we foreclose on a commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate loans can be unpredictable and substantial.

Commercial and Industrial Loans. Our commercial and industrial loans are originated primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, collateral for commercial and industrial loans consists of accounts receivable, inventory or equipment. Credit support provided by the borrower for most of these loans is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself.

Construction Loans. Our construction loans are based upon estimates of costs and values associated with the completed project. Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations.

Construction lending involves additional risks when compared with permanent lending because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds

 

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required to complete a project and the related loan-to-value ratio. In addition, generally during the term of a construction loan, interest may be funded by the borrower or disbursed from an interest reserve set aside from the construction loan budget. These loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If the appraised value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.

Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, an increased monthly payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying collateral also may be adversely affected in a high interest rate environment.

Consumer Loans. Consumer loans may entail greater risk than residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Originations, Purchases and Sales of Loans

Lending activities are conducted primarily by our salaried loan personnel operating at our main office. All loans we originate are underwritten pursuant to our policies and procedures. We originate fixed-rate loans and adjustable-rate loans. Our ability to originate fixed-rate loans or adjustable-rate loans depends on relative customer demand for such loans, which is affected by current and expected future levels of market interest rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.

We sell certain loans we originate into the secondary market. We consider the pricing for loans as well as the current interest rate environment in making decisions as to whether to hold the mortgage loans we originate for investment or to sell such loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. At December 31, 2020, we had $173,000 in loans held for sale. We sell loans on a “best efforts” basis, and we generally have not retained the servicing rights on the mortgage loans sold in the secondary mortgage market.

From time to time, to diversify our risk, we will purchase or sell participation interests in loans. We underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At December 31, 2020, we had $1.6 million in loan participation interests. We generally do not purchase whole loans from third parties to supplement our loan production.

Loan Approval Procedures and Authority

Pursuant to federal law, the aggregate amount of loans that Cullman Savings Bank is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Cullman Savings Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2020, based on the 15% limitation, Cullman Savings Bank’s loans-to-one-borrower limit was approximately $7.7 million. At December 31, 2020, our largest loan relationship with one borrower was a single loan for $6.1 million, which was secured by two hotels, and the underlying loan was performing in accordance with its contractual terms on that date.

 

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Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, bank statements and tax returns.

All loan approval amounts are based on the aggregate loans (total credit exposure), including total balances of outstanding loans and the proposed loan to the individual borrower and any related entity. Our Chief Executive Officer has individual authorization to approve loans up to $500,000. Each of our Director of Lending and our Executive Vice President has individual authorization to approve loans up to $250,000. An individual loan or aggregate credit commitment in excess of $3.0 million requires approval by the Chief Executive Officer, Director of Lending and Executive Vice President, along with the Loan Committee, and must be reported to the board of directors prior to the loan transaction occurring.

Generally, we require title insurance or abstracts on our mortgage loans as well as extended coverage in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.

Delinquencies and Asset Quality

Delinquency Procedures. When a borrower fails to make a required monthly loan payment by the last day of the month, a late notice is generated stating the payment and late charges due. Our policies provide borrowers that become 60 days or more delinquent are contacted by phone or mail to determine the reason for nonpayment and to discuss future payments, although in practice we generally contact such borrowers within 30 days. If repayment is not possible or doubtful, the loan will be brought to the board of directors for possible foreclosure. Once the board of directors declares a loan due and payable, a certified letter is sent to the borrower explaining the entire balance of the loan is due and payable. The borrower is permitted ten additional days to submit payment. If the loan is reinstated, foreclosure proceedings will be discontinued and the borrower will be permitted to continue to make payments. If the borrower does not respond, we will initiate foreclosure proceedings.

Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method. 

When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This

 

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usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due.

Under the CARES Act, COVID-19 related modifications to loans that were current as of December 31, 2019 are exempt from troubled debt restructuring classification under U.S. GAAP. In addition, the bank regulatory agencies have issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) for loans that were current as of the loan modification program implementation date are not troubled debt restructurings. During the year ended December 31, 2020, we granted short-term deferrals on 61 loans that were otherwise performing, totaling approximately $17.7 million. As of December 31, 2020, 60 of these loans, totaling $14.9 million, have returned to normal payment status and one loan for $2.8 million, secured by 10 lots of vacant land totaling 16.6 acres, with a loan-to-value ratio of 56%, has been re-extended beyond the initial six-month deferral period.

Delinquent Loans. The following tables set forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated. We had no PPP loans delinquent at December 31, 2020.

 

   At December 31, 
   2020   2019 
   30 to 59
Days
Past Due
   60 to 89
Days
Past Due
   90 Days
or More
Past Due
   30 to 59
Days
Past Due
   60 to 89
Days
Past Due
   90 Days
or More
Past Due
 
           (In thousands)         

Real estate loans:

            

One- to four-family residential

  $1,723   $370   $104   $1,447   $1,151   $85 

Multi-family

   —      —      —      —      —      —   

Commercial

   437    —      —      —      —      —   

Construction

   —      —      —      —      —      —   

Commercial loans

   8    —      —      113    4    —   

Consumer loans:

            

Home equity loans and lines of credit

   —      33    —      —      —      —   

Other consumer

   2    —      —      21    —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $2,170   $403   $104   $1,581   $1,155   $85 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Non-Performing Assets. The following table sets forth information regarding our non-performing assets. Non-accrual loans include non-accruing troubled debt restructurings of $18,000 and $50,000 as of December 31, 2020 and December 31, 2019. No PPP loans were considered non-performing at December 31, 2020.

 

   At December 31, 
   2020  2019 
   (Dollars in thousands) 

Non-accrual loans:

   

Real estate loans:

   

One- to four-family residential

  $18  $23 

Multi-family

   —     —   

Commercial

   —     —   

Construction

   —     —   

Commercial and industrial loans

   —     27 

Consumer loans:

   

Home equity loans and lines of credit

   —     —   

Other consumer

   —     —   
  

 

 

  

 

 

 

Total non-accrual loans

   18   50 
  

 

 

  

 

 

 

Accruing loans past due 90 days or more

   104   85 

Real estate owned:

   

One- to four-family residential

   108   60 

Multi-family

   —     —   

Commercial

   326   326 

Construction

   —     —   
  

 

 

  

 

 

 

Total real estate owned

   434   386 
  

 

 

  

 

 

 

Total non-performing assets

  $566  $521 
  

 

 

  

 

 

 

Total accruing troubled debt restructured loans

  $2,319  $2,457 

Total non-performing loans to total loans

   0.06  0.05

Total non-accruing loans to total loans

   0.01  0.02

Total non-performing assets to total assets

   0.17  0.17

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, such that additional general or specific loss allowances may be required.

 

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In connection with the filing of our periodic reports with the Office of the Comptroller of the Currency and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.

On the basis of this review of our assets, our classified and special mention assets at the dates indicated were as follows:

 

   At December 31, 
  2020   2019 
  (In thousands) 

Substandard assets

  $8,439   $2,593 

Doubtful assets

   —      —   

Loss assets

   —      —   
  

 

 

   

 

 

 

Total classified assets

  $8,439   $2,593 
  

 

 

   

 

 

 

Special mention assets

  $112   $—   

Foreclosed real estate

  $434   $386 

The increase in substandard assets was primarily due to one large commercial loan relationship being downgraded.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on various factors, including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and 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.

As an integral part of their examination process, the Office of the Comptroller of the Currency 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.

 

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The following table sets forth activity in our allowance for loan losses for the years indicated.

 

   For the Years Ended December 31, 
  2020  2019 
  (Dollars in thousands) 

Allowance for loan losses at beginning of year

  $2,218  $2,163 

Provision for loan losses

   152   55 

Charge-offs:

   

Real estate loans:

   

One- to four-family residential

   —     —   

Multi-family

   —     —   

Commercial

   —     —   

Construction

   —     —   

Commercial and industrial loans

   —     —   

Consumer loans:

   

Home equity loans and lines of credit

   —     —   

Other consumer

   (20  (1

Payroll Protection Program loans

   —     —   
  

 

 

  

 

 

 

Total charge-offs

   (20  (1
  

 

 

  

 

 

 

Recoveries:

   

Real estate loans:

   

One- to four-family residential

   5   1 

Multi-family

   —     —   

Commercial

   —     —   

Construction

   —     —   

Commercial and industrial loans

   —     —   

Consumer loans:

   

Home equity loans and lines of credit

   —     —   

Other consumer

   6   —   

Payroll Protection Program loans

   —     —   
  

 

 

  

 

 

 

Total recoveries

   11   1 
  

 

 

  

 

 

 

Net (charge-offs) recoveries

   (9  —   
  

 

 

  

 

 

 

Allowance at end of year

  $2,361  $2,218 
  

 

 

  

 

 

 

Allowance to non-performing loans

   1,788.64  1,642.96

Allowance to total loans outstanding at the end of the year

   1.01  0.88

Net (charge-offs) recoveries to average loans outstanding during the year

   0.00  

 

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Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

   At December 31, 
   2020  2019 
   Allowance
for Loan
Losses
   Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
  Percent of
Loans in
Each
Category
to Total
Loans
  Allowance
for Loan
Losses
   Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
  Percent of
Loans in
Each
Category
to Total
Loans
 
          (Dollars in thousands)        

Real estate loans:

   

One- to four-family residential

  $1,300    55.07  48.98 $1,200    54.10  50.73

Multi-family

   27    1.15   2.08   21    0.95   1.81 

Commercial

   746    31.57   33.22   632    28.49   29.54 

Construction

   37    1.57   2.35   66    2.98   3.47 

Commercial and industrial loans

   187    7.93   8.68   223    10.05   11.38 

Consumer loans:

         

Home equity loans and lines of credit

   38    1.61   1.50   47    2.12   1.98 

Other consumer

   26    1.10   1.00   29    1.31   1.08 

Paycheck Protection Program loans

   —      —     2.20   —      —     —   
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total

  $2,361    100.00  100.00 $2,218    100.00  100.00
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Investment Activities

General. The goals of our investment policy are to provide and maintain liquidity, meet pledging requirements, generate a reasonable rate of return, and minimize credit and interest rate risk. Subject to loan demand and our interest rate risk analysis, we will increase the balance of our investment securities portfolio when we have excess liquidity.

Our investment policy is reviewed annually by management and any changes to the policy are recommended to and subject to the approval of the board of directors. Authority to make investments under the approved investment policy guidelines is delegated to our President and Chief Executive Officer and our Chief Financial Officer (all investment decisions require the approval of both investment officers). All investment transactions are reviewed at regularly scheduled quarterly meetings of the board of directors.

Our current investment policy permits investments in securities issued by the U.S. Government and its agencies or government sponsored enterprises. We also invest in mortgage-backed securities and, to a lesser extent, mutual funds that invest in mortgage-backed securities. Our investment policy also permits, with certain limitations, investments in bank-owned life insurance, collateralized mortgage obligations, asset-backed securities, real estate mortgage investment conduits, Alabama revenue bonds and municipal securities.

At December 31, 2020, our investment securities portfolio totaled $18.2 million, and consisted primarily of securities and obligations issued by municipalities. In addition, at December 31, 2020, we owned $2.5 million of Federal Home Loan Bank of Atlanta stock. As a member of Federal Home Loan Bank of Atlanta, we are required to purchase stock in the Federal Home Loan Bank of Atlanta, which stock is carried at cost and classified as restricted equity securities.

 

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Portfolio Maturities and Yields. The composition and maturities of the available-for-sale investment securities portfolio at December 31, 2020 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. Yields on tax-exempt obligations have not been computed on a tax-equivalent basis, as the effect would not be material.

 

   One Year or Less  More than
One Year to Five Years
  More than
Five Years to Ten Years
  More than
Ten Years
  Total 
   Amortized
Cost
   Weighted
Average
Yield
  Amortized
Cost
   Weighted
Average
Yield
  Amortized
Cost
   Weighted
Average
Yield
  Amortized
Cost
   Weighted
Average
Yield
  Amortized
Cost
   Fair
Value
   Weighted
Average
Yield
 
                 (Dollars in thousands)                

Securities available-for-sale:

                  

Municipal securities - taxable

  $—      —    $430    2.87 $2,421    3.54 $8,235    2.43 $11,086   $11,612    2.69

Municipal securities - tax-exempt

   365    1.87  1,250    2.67  904    2.20  290    2.38  2,809    2,850    2.38

Residential mortgage-backed, government-sponsored enterprise

   —      —     —      —     765    2.14  2,058    1.97  2,823    2,890    2.02

SBA-guaranteed

debenture

   —      —     —      —     1,471    1.96  —      —     1,471    1,523    1.96
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

Total

  $365    1.87 $1,680    2.72 $5,561    2.71 $10,583    2.34 $18,189   $18,875    2.48
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

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Sources of Funds

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Our deposits are generated primarily from our primary market area. We offer a selection of deposit accounts, including savings accounts, checking accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We have the authority to accept brokered deposits, and had $10.2 million of such deposits as of December 31, 2020. In addition, we had $14.9 million of municipal deposits at December 31, 2020.

On a periodic basis, we establish interest rates paid, maturity terms, service fees and withdrawal penalties. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely upon personalized customer service, long-standing relationships with customers, and the favorable image of Cullman Savings Bank in the community to attract and retain local deposits. We also seek to obtain deposits from our commercial loan customers.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions.

The following table sets forth the distribution of total deposits by account type at the dates indicated.

 

   At December 31, 
   2020  2019 
   Amount   Percent  Average
Rate
  Amount   Percent  Average
Rate
 
   (Dollars in thousands)    

Noninterest-bearing demand deposits

  $14,374    6.63   $10,415    5.51  

Interest-bearing demand deposits

   69,758    32.15   0.21   51,766    27.41   0.33 

Regular savings and other deposits

   41,404    19.08   0.24   28,727    15.21   0.30 

Money market deposits

   5,383    2.48   0.31   4,046    2.14   0.36 

Certificates of deposit

   86,044    39.66   1.62   93,934    49.73   1.72 
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total

  $216,963    100.00  0.88 $188,888    100.00  1.05
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

As of December 31, 2020 and 2019, the aggregate amount of uninsured deposits (deposits in amounts greater than or equal to $250,000, which is the maximum amount for federal deposit insurance) was $86.6 million and $70.0 million, respectively. In addition, as of December 31, 2020, the aggregate amount of all our uninsured certificates of deposit was $35.1 million. We have no deposits that are uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance. The following table sets forth the maturity of the uninsured certificates of deposit as of December 31, 2020.

 

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   At
December 31, 2020
 
   (In thousands) 

Maturity Period:

  

Three months or less

  $5,417 

Over three through six months

   4,730 

Over six through twelve months

   6,245 

Over twelve months

   18,718 
  

 

 

 

Total

  $35,110 
  

 

 

 

Borrowings. As of December 31, 2020, we had a $97.3 million line of credit with the Federal Home Loan Bank of Atlanta, of which 53.5 million was outstanding at that date with a weighted average cost of 1.74%. In addition to the Federal Home Loan Bank of Atlanta line of credit, we have an unsecured federal funds lines of credit, in the amount of $10.0 million. No amount was outstanding on this line of credit at December 31, 2020.

Subsidiary Activities

Old Cullman has no subsidiaries other than Cullman Savings Bank.

Personnel

As of December 31, 2020, we had 50 full-time employees and no part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good working relations with our employees.

Properties

We conduct our operations from our main office and two additional branch offices, all of which are located in Cullman, Alabama, and one branch office in Hanceville, Alabama. All of our branch offices are located in Cullman County, Alabama. At December 31, 2020, the net book value of our premises and equipment was $8.6 million.

Legal Proceedings

We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

SUPERVISION AND REGULATION

General

As a federal savings bank, Cullman Savings Bank is subject to examination and regulation by the Office of the Comptroller of the Currency, and is also subject to examination by the Federal Deposit Insurance Corporation as deposit insurer. The federal system of regulation and supervision establishes a comprehensive framework of activities in which Cullman Savings Bank may engage and is intended primarily for the protection of depositors and the Federal Deposit Insurance Corporation’s Deposit Insurance Fund, and not for the protection of security holders. Cullman Savings Bank also is a member of and owns stock in the Federal Home Loan Bank of Atlanta, which is one of the 11 regional banks in the Federal Home Loan Bank System.

Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; provide oversight for the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings, interest rate sensitivity and other factors. These ratings are inherently subjective and the receipt of a less than

 

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satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as Cullman Savings Bank, or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.

In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Many financial “consumer protection” statutes are implemented by regulations issued by the Consumer Financial Protection Bureau. For federal savings banks of Cullman Savings Bank’s asset size, compliance with such statutes and regulations is determined by the Office of the Comptroller of the Currency through its examinations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.

As a savings and loan holding company following the conversion, New Cullman will be required to comply with the rules and regulations of the Federal Reserve Board. It will be required to file certain reports with the Federal Reserve Board and will be subject to examination by and the enforcement authority of the Federal Reserve Board. New Cullman will also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in applicable laws or regulations, whether by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Securities and Exchange Commission or Congress, could have a material adverse impact on the operations and financial performance of New Cullman and Cullman Savings Bank.

Set forth below is a brief description of material regulatory requirements that are or will be applicable to Cullman Savings Bank and New Cullman. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Cullman Savings Bank and New Cullman.

Federal Banking Regulation

Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, a federal savings bank may generally invest in mortgage loans secured by residential real estate without an aggregate limit, and commercial business, commercial real estate and consumer loans, certain types of debt securities and certain other assets, subject to overall percentage of assets or capital limits. Federal savings banks are also subject to a “Qualified Thrift Lender Test,” or “QTL Test,” which generally requires that a specified percentage of overall assets be residential mortgages and related investments.

Effective July 1, 2019, the Office of the Comptroller of the Currency issued a final rule, pursuant to a provision of the Economic Growth Regulatory Relief and Consumer Protection Act (“EGRRCPA”), that permits a federal savings bank to elect to exercise national bank powers without converting to a national bank charter. The election is available to federal savings banks that had total consolidated assets of $20 billion or less as of December 31, 2017. Cullman Savings Bank has not exercised the covered savings association election.

Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.

In determining the amount of risk-weighted assets for calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk-weight factor assigned by the regulations based on the risks believed inherent in the type of

 

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asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the Office of the Comptroller of the Currency takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.

EGRRCPA required the federal banking agencies, including the Office of the Comptroller of the Currency, to establish a “community bank leverage ratio” of between 8% and 10% for institutions with assets of less than $10 billion. Institutions with capital complying with the ratio and otherwise meeting the specified requirements and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. The community bank leverage ratio was established at 9% Tier 1 capital to total average assets, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is provided with a two quarter grace period to regain compliance. Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable regulatory capital requirements.

The CARES Act lowered the community bank leverage ratio to 8%, with federal regulation making the reduced ratio effective April 23, 2020. Another regulation was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter. Cullman Savings Bank has opted in to the community bank leverage framework.

At December 31, 2020, Cullman Savings Bank’s capital exceeded all applicable requirements.

Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the excess is secured by readily marketable collateral, which generally does not include real estate. At December 31, 2020, Cullman Savings Bank was in compliance with the loans-to-one borrower limitations.

Qualified Thrift Lender Test. As a federal savings association, Cullman Savings Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Cullman Savings Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of every 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.

 

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Cullman Savings Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended. This test generally requires a savings association to have at least 75% of its deposits held by the public and earn at least 25% of its income from loans and U.S. government obligations. Alternatively, a savings association can satisfy this test by maintaining at least 60% of its assets in cash, real estate loans and U.S. Government or state obligations.

A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2020, Cullman Savings Bank satisfied the QTL test.

Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends and other transactions charged to the savings bank’s capital account. A federal savings bank must file an application with the Office of the Comptroller of the Currency for approval of a capital distribution if:

 

  

the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two years;

 

  

the savings bank would not be at least adequately capitalized following the distribution;

 

  

the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or

 

  

the savings bank is not eligible for expedited treatment of its filings, generally due to an unsatisfactory CAMELS rating or being subject to a cease and desist order or formal written agreement that requires action to improve the institution’s financial condition.

Even if an application is not otherwise required, every savings bank that is a subsidiary of a savings and loan holding company, such as Cullman Savings Bank, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.

A notice or application related to a capital distribution may be disapproved if:

 

  

the federal savings bank would be undercapitalized following the distribution;

 

  

the proposed capital distribution raises safety and soundness concerns; or

 

  

the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

In addition, the Federal Deposit Insurance Act generally provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings bank also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form.

Community Reinvestment Act and Fair Lending Laws. All insured depository institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. The Office of the Comptroller of the Currency is required to assess the federal savings bank’s record of compliance with the Community Reinvestment Act. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In

 

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addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as other federal regulatory agencies and the Department of Justice.

In June 2020, the Office of the Comptroller of the Currency issued a final rule clarifying and expanding the activities that qualify for Community Reinvestment Act credit and, according to the agency, seeking to create a more consistent and objective method for evaluating Community Reinvestment Act performance. The final rule was effective October 1, 2020, but compliance with certain of the revised requirements is not mandatory until January 1, 2024 for institutions of Cullman Savings Bank’s asset size.

The Community Reinvestment Act requires all institutions insured by the Federal Deposit Insurance Corporation to publicly disclose their rating. Cullman Savings Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

Transactions with Related Parties. An insured depository institution’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with, an insured depository institution such as Cullman Savings Bank. New Cullman will be an affiliate of Cullman Savings Bank because of its control of Cullman Savings Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.

Cullman Savings Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:

 

  

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

 

  

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Cullman Savings Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by Cullman Savings Bank’s board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.

Enforcement. The Office of the Comptroller of the Currency has primary enforcement responsibility over federal savings banks and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings bank. Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or recommend to the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular federal savings bank.

 

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If such action is not taken, the Federal Deposit Insurance Corporation has authority to take the action under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Branching. Federal law permits well capitalized and well managed holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. In addition, federal savings banks may establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.

Prompt Corrective Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under applicable regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on the payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more additional restrictions, including a regulatory order to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, ceasing receipt of deposits from correspondent banks, dismissal of directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

 

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The previously referenced final rules establishing an elective “community bank leverage ratio” regulatory capital framework provide that a qualifying institution whose capital exceeds the community bank leverage ratio and opts to use that framework will be considered “well-capitalized” for purposes of prompt corrective action.

At December 31, 2020, Cullman Savings Bank met the criteria for being considered “well capitalized.”

Insurance of Deposit Accounts. The Deposit Insurance Fund of the Federal Deposit Insurance Corporation insures deposits at Federal Deposit Insurance Corporation-insured financial institutions such as Cullman Savings Bank, generally up to a maximum of $250,000 per separately insured depositor. The Federal Deposit Insurance Corporation charges insured depository institutions premiums to maintain the Deposit Insurance Fund.

Under the Federal Deposit Insurance Corporation’s risk-based assessment system, institutions deemed less risky of failure pay lower assessments. Assessments for institutions of less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution’s failure within three years.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Cullman Savings Bank. We cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not know of any practice, condition or violation that may lead to termination of our deposit insurance.

Privacy Regulations. Federal regulations generally require that Cullman Savings Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Cullman Savings Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Cullman Savings Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.

USA PATRIOT Act. Cullman Savings Bank is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and customer identification requirements.

Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

 

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Other Regulations

Interest and other charges collected or contracted for by Cullman Savings Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:

 

  

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

  

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

  

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; and

 

  

Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The deposit operations of Cullman Savings Bank also are subject to, among others, the:

 

  

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

  

Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and

 

  

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Federal Home Loan Bank System

Cullman Savings Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. Cullman Savings Bank was in compliance with this requirement at December 31, 2020. Based on redemption provisions of the Federal Home Loan Bank of Atlanta, the stock has no quoted market value and is carried at cost. Cullman Savings Bank reviews for impairment, based on the ultimate recoverability, the cost basis of the Federal Home Loan Bank of Atlanta stock. At December 31, 2020, no impairment had been recognized.

Holding Company Regulation

New Cullman will be a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board will have enforcement authority over New Cullman and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Cullman Savings Bank.

As a savings and loan holding company, New Cullman’s activities will be limited to those activities permissible by law for financial holding companies (if New Cullman makes an election to be treated as a financial holding company and meets the other requirements to be a financial holding company) or multiple savings and loan

 

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holding companies. New Cullman has no present intention to make an election to be treated as a financial holding company. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending and other activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, insurance and underwriting equity securities. Multiple savings and loan holding companies are authorized to engage in activities specified by federal regulation, including activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act.

Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of any depository institution not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such factors as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition or the law of the state in which the target is located authorizes such acquisitions by out-of-state savings and loan holding companies.

Savings and loan holding companies with less than $3 billion in consolidated assets are exempt from consolidated regulatory capital requirements, unless the Federal Reserve Board determines otherwise in particular cases.

The Federal Reserve Board has promulgated regulations implementing the “source of strength” doctrine that require holding companies, including savings and loan holding companies, to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

The Federal Reserve Board has issued supervisory policies regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Federal Reserve Board guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of capital distributions previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. Federal Reserve Board guidance also states that a holding company should inform the Federal Reserve Board supervisory staff before redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result, at the end of a quarter, in a net reduction in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of New Cullman to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

Change in Control Regulations

Under the Change in Bank Control Act, no person may acquire “control” of a savings and loan holding company, such as New Cullman, unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. There is a presumption of control upon the acquisition

 

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of 10% or more of a class of voting stock under certain circumstances, such as where the holding company involved has its shares registered under the Securities Exchange Act of 1934.

The Federal Reserve Board has adopted a final rule, effective September 30, 2020, that revises its framework for determining whether a company has a “controlling influence” over a bank or savings and loan holding company for purposes of the Bank and Savings and Loan Holding Company Acts.

Federal Securities Laws

New Cullman common stock will be registered with the Securities and Exchange Commission after the conversion and stock offering. New Cullman will be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of common stock issued in New Cullman’s public offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of New Cullman may be resold without registration. Shares purchased by an affiliate of New Cullman will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If New Cullman meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of New Cullman that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of New Cullman, or the average weekly volume of trading in the shares during the preceding four calendar weeks.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Emerging Growth Company Status

New Cullman is an emerging growth company. For as long as New Cullman continues to be an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company, New Cullman also will not be subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which would require that our independent auditors review and attest as to the effectiveness of our internal control over financial reporting. We have also elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Such an election is irrevocable during the period a company is an emerging growth company. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

New Cullman will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of the completion of this offering; (ii) the first fiscal year after our annual gross revenues are $1.07 billion (adjusted for inflation) or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million at the end of the second quarter of that fiscal year.

 

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TAXATION

Cullman Savings Bank, MHC, Old Cullman and Cullman Savings Bank are, and New Cullman will be, subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize certain pertinent tax matters and is not a comprehensive description of the tax rules applicable to Old Cullman, New Cullman or Cullman Savings Bank.

Our federal and state tax returns have not been audited for the past five years.

Federal Taxation

Method of Accounting. Old Cullman and Cullman Savings Bank currently report income and expenses on the accrual method of accounting and use a tax year ending December 31 for filing their federal income tax returns. Old Cullman and Cullman Savings Bank file a consolidated federal income tax return. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for income taxes on bad debt reserves by savings institutions. For taxable years beginning after 1995, Cullman Savings Bank has been subject to the same bad debt reserve rules as commercial banks. It currently utilizes the experience method under Section 585 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).

Alternative Minimum Tax. For income generated prior to January 1, 2018, the Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, less an exemption amount, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent tax computed this way exceeds tax computed by applying the regular tax rates to regular taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Tax Cuts and Jobs Act repealed the alternative minimum tax for income generated after January 1, 2018. At December 31, 2020, Old Cullman had no minimum tax credit carryovers.

Net Operating Loss Carryovers. As a result of the Tax Cuts and Jobs Act generally, a financial institution may carry net operating losses forward indefinitely, if incurred after December 31, 2017. At December 31, 2020, Old Cullman had no federal net operating loss carryforwards.

Capital Loss Carryovers. A corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which it is carried and is used to offset any capital gains. Any undeducted loss remaining after the five-year carryover period is not deductible. At December 31, 2020, Old Cullman had no capital loss carryovers.

Corporate Dividends. Old Cullman may generally exclude from its income 100% of dividends received from Cullman Savings Bank as a member of the same affiliated group of corporations.

State Taxation

Alabama State Taxation. New Cullman and Cullman Savings Bank will be required to file Alabama income tax returns and pay tax at a stated tax rate of 6.5% of Alabama taxable income. For these purposes, Alabama taxable income generally means federal taxable income subject to certain modifications, primarily the exclusion of interest income on United States obligations and the deduction of federal income taxes paid.

Maryland State Taxation. As a Maryland business corporation, New Cullman is required to file an annual report with and pay franchise taxes to the State of Maryland.

 

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MANAGEMENT

Our Directors and Executive Officers

Our board of directors is comprised of seven members. Directors serve three-year staggered terms so that approximately one-third of the directors are elected at each annual meeting. The following sets forth certain information regarding the members of our board of directors, and executive officers who are not directors, including the terms of office of board members. Except as indicated herein, there are no arrangements or understandings between any director and any other person pursuant to which the director was selected. Age information is as of December 31, 2020, and term as a director includes service with Cullman Savings Bank.

With respect to directors, the biographies contain information regarding the person’s business experience and the experiences, qualifications, attributes or skills that caused the board of directors to determine that the person should serve as a director. Each director of New Cullman is also a director of Cullman Savings Bank and Cullman Savings Bank, MHC.

All of our directors are long-time residents of the communities we serve and many of such individuals have operated, or currently operate, businesses located in such communities. As a result, each director continuing in office has significant knowledge of the businesses that operate in our market area, an understanding of the general real estate market, values and trends in such communities and an understanding of the overall demographics of such communities. As a community banking institution, we believe that the local knowledge and experience of our directors assists us in assessing the credit and banking needs of our customers, developing products and services to better serve our customers and in assessing the risks inherent in our lending operations. As local residents, our directors are also exposed to the advertising, product offerings and community development efforts of competing institutions which, in turn, assists us in structuring its marketing efforts and community outreach programs.

Directors with terms ending following the fiscal year ending December 31, 2021:

Gregory T. Barksdale. Age 54. Mr. Barksdale is a District Sales Manager for ALFA Insurance. He has been employed with ALFA Insurance since 2003. From 1991 until 2003, he was employed as a banker in Cullman County, and has expertise in consumer and commercial lending. Mr. Barksdale brings the board of directors a unique perspective of the community in areas of economic development, residential housing and commercial opportunities. Mr. Barksdale’s business experience with financial institutions also gives him extensive insights into the challenges and opportunities in our overall operations and lending activities. Director since 2013.

Dr. Paul D. Bussman. Age 64. Dr. Bussman has been a practicing dentist in Cullman since 1983. He also served as the Alabama State Senator for the 4th District (Cullman, Winston and Lawrence Counties) from 2010 to 2018. Dr. Bussman’s senatorial experience and experience in our local markets provides us with substantial insights and discipline for enhancing our public perception and corporate citizenship initiatives. Director since 1994.

Directors with terms ending following the fiscal year ending December 31, 2022:

Nancy McClellan. Age 63. Ms. McClellan has been a lawyer in private practice since 1982. She is a partner with the law firm of Bland, Harris & McClellan, P.C., of Cullman, Alabama, and has served as attorney for Cullman Savings Bank since 2001. Ms. McClellan’s Master of Laws degree with a concentration in taxation provides the board of directors with a unique perspective in addressing the legal requirements of Old Cullman and its subsidiaries. Her professional experience also provides us with expertise in the areas of real estate and estate law. Director since 1999.

Lynne Morton. Age 44. Ms. Morton is a Territory Manager with TriGreen Equipment and has been involved with John Deere products since 2000. Ms. Morton is responsible for financial budgets, operation processes and human resources for all departments within her dealerships. Her significant experience in employee development, training, and business management provides the board with substantial insight into operations and development. Director since 2020.

 

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Directors with terms ending following the fiscal year ending December 31, 2023:

John A. Riley, III. Age 56. Mr. Riley has served as President and Chief Executive Officer of Cullman Savings Bank since 2006. He was initially employed by Cullman Savings Bank in 1993 as a loan officer and held several positions prior to being named Chief Executive Officer, including Senior Vice President for Lending, a position he held from 1999 to 2006. Mr. Riley’s positions as President and Chief Executive Officer foster clear accountability, effective decision-making, a clear and direct channel of communication from senior management to the full board of directors, and alignment on corporate strategy. Director since 2000.

Robin Parson. Age 54. Ms. Parson has served as Executive Vice President and Chief Operations Officer of Old Cullman since 2009 and Cullman Savings Bank since 2006. She was initially employed by Cullman Savings Bank in 1985 as a teller and held several positions before being named Chief Operations Officer. Ms. Parson’s extensive experience in a variety of roles at Cullman Savings Bank provides a broad and unique perspective on the challenges facing our organization and our business strategies and operations. Director since 2019.

Chad T. Burks. Age 44. Mr. Burks has been the owner of Burks Brothers Pools since 2001. He is a commercial general contractor and owns several commercial rental properties in the Cullman area. Mr. Burks has strong marketing, sales, and customer service assessment skills. Mr. Burks’s experience as a small business owner gives him extensive insight into the customers who live in our market areas and economic developments affecting the communities in which we operate, as well as the challenges facing small businesses in our market area. Mr. Burks’s work experience also provides valuable insight into budgeting and financial strategy. Director since 2019.

Executive Officers Who Are Not Directors

The following sets forth information regarding our executive officers who are not directors. Age information is as of December 31, 2020. The executive officers of Cullman Savings Bank are elected annually.

T’aira Ugarkovich. Age 36. Ms Ugarkovich has served as Executive Vice President of Cullman Savings Bank the past three years. Previously, Ms. Ugarkovich was our Chief Credit Officer. Ms. Ugarkovich is a 2017 graduate from Alabama Banking School. Ms. Ugarkovich has 13 years of banking experience. Prior to working at Cullman Savings Bank, Ms. Ugarkovich was a Credit Officer for four years and Treasury Management Officer for two years at Progress Bank. Ms. Ugarkovich has a Bachelor of Science degree in Finance from the University of Alabama in Huntsville.

Katrina Stephens. Age 37. Ms. Stephens was named our Senior Vice President and Chief Financial Officer in 2015. Ms. Stephens is a 2018 graduate from Alabama Banking School. Ms. Stephens was previously a Senior Level Internal Auditor at Regions Bank, where she began working in 2011. Prior to Regions, Ms. Stephens worked as a Senior External Auditor at Pricewaterhouse Coopers, where she began working in 2007. Ms. Stephens has a Master of Accountancy degree from the University of Alabama and is a Certified Public Accountant.

Board Independence

The board of directors has determined that each of our directors, with the exception of Chairman of the Board, President and Chief Executive Officer John A. Riley, III, Executive Vice President and Chief Operations Officer Robin Parson and Director Nancy McClellan is “independent” as defined in the listing standards of the Nasdaq Stock Market. Mr. Riley and Ms. Parson are not independent because they are our executive officers, and Ms. McClellan is not independent because of legal fees paid to her firm, which totaled $61,000 for the year ended December 31, 2020. In determining the independence of our directors, the board of directors considered relationships between Cullman Savings Bank and our directors that are not required to be reported under “—Transactions With Certain Related Persons,” consisting of deposit accounts that our directors maintain at Cullman Savings Bank.

 

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Transactions With Certain Related Persons

The Sarbanes-Oxley Act of 2002 generally prohibits publicly traded companies from making loans to their executive officers and directors, but it contains a specific exemption from such prohibition for loans made by federally insured financial institutions, such as Cullman Savings Bank, to their executive officers and directors in compliance with federal banking regulations. Federal regulations permit executive officers and directors to receive the same terms that are widely available to other employees as long as the director or executive officer is not given preferential treatment compared to the other participating employees. Cullman Savings Bank makes loans to its employees through an employee loan program pursuant to which loans are made at a reduced rate. The reduced rate is 100 basis points above the Federal Home Loan Bank of San Francisco’s 11th District Cost of Funds Rate, rounded up to the nearest quarter percentage, and adjusted annually.

The tables below list our directors and executive officers who participated in the employee loan program during the years ended December 31, 2020 and 2019. No other directors or executive officers of Cullman Savings Bank participated in the employee loan program during these periods.

 

Name

  Type of Loan   Largest
Aggregate

Balance
1/1/20 to
12/31/20
   Principal
Balance
12/31/20
   Principal Paid
1/1/20 to
12/31/20
   Interest Paid
1/1/20 to
12/31/20
   Interest
Rate

Gregory T. Barksdale

   Residential mortgage   $130,762   $105,260   $25,502   $2,929   2.25%

Paul D. Bussman

   Residential mortgage   $317,791   $299,922   $17,869   $7,079   2.25%

Chad T. Burks

   Residential mortgage   $341,618   $330,358   $11,261   $7,571   2.25%

John A. Riley, III

   Residential mortgage   $660,200   $639,781   $20,419   $14,648   2.25%

Robin Parson

   Residential mortgage   $179,426   $171,380   $8,046   $3,954   2.25%

Katrina Stephens

   Residential mortgage   $386,961   $376,588   $10,373   $8,600   2.25%

T’aira Ugarkovich

   Residential mortgage   $358,800   $347,420   $11,380   $7,956   2.25%

 

Name

  Type of Loan   Largest
Aggregate

Balance
1/1/19 to
12/31/19
   Principal
Balance
12/31/19
   Principal Paid
1/1/19 to
12/31/19
   Interest Paid
1/1/19 to
12/31/19
   Interest
Rate

Gregory T. Barksdale

   Residential mortgage   $155,289   $130,762   $24,526   $2,974   2.25%

Paul D. Bussman

   Residential mortgage   $322,128   $317,791   $14,337   $7,412   2.25%

Chad T. Burks

   Residential mortgage   $351,861   $341,618   $10,242   $9,784   2.25%

John A. Riley, III

   Residential mortgage   $680,321   $660,200   $20,121   $15,244   2.25%

Robin Parson

   Residential mortgage   $186,194   $179,426   $6,768   $4,463   2.25%

Katrina Stephens

   Residential mortgage   $397,104   $386,961   $10,143   $8,831   2.25%

T’aira Ugarkovich

   Residential mortgage   $368,950   $358,800   $10,150   $7,515   2.25%

These loans neither involve more than the normal risk of collection nor present other unfavorable features. Loans made to directors or executive officers, including any modification of such loans, must be approved by a majority of disinterested members of the board of directors. The interest rate on loans to directors and officers is the same as that offered to other employees.

Since January 1, 2019, other than described above, and except for loans to directors and executive officers made in the ordinary course of business that were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to Cullman Savings Bank and for which management believes neither involve more than the normal risk of collection nor present other unfavorable features, we and our subsidiary have not had any transaction or series of transactions, or business relationships, nor are any such transactions or relationships proposed, in which the amount involved exceeds $120,000 and in which our directors or executive officers have a direct or indirect material interest.

Pursuant to our Policy and Procedures for Approval of Related Person Transactions, the Audit Committee periodically reviews, no less frequently than twice a year, a summary of transactions in excess of $25,000 with our directors, executive officers, and their family members, for the purpose of determining whether the transactions are within our policies and should be ratified and approved. Additionally, pursuant to our Code of Business Conduct

 

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and Ethics, all of our executive officers and directors must disclose any personal or financial interest in any matter that comes before New Cullman.

Executive Compensation

The following table sets forth for the year ended December 31, 2020 certain information as to the total compensation paid to our President and Chief Executive Officer and our two other most highly compensated executive officers. Each executive is referred to as a “named executive officer.”

 

Summary Compensation Table

 

Name and principal
position

  Year   Salary
($)
   Bonus
($)
   Stock
Awards
($)(1)
   Option
Awards
($)(1)
   Nonqualified
Deferred
Compensation
Earnings

($)(2)
   All other
Compensation
($)(3)
   Total
($)
 

John A. Riley, III, Chairman of the Board, President and Chief Executive Officer

   2020    250,000    75,000    560,000    135,000    23,939    84,813    1,128,752 

Robin Parson, Executive Vice President and Chief Operating Officer

   2020    156,000    46,890    246,400    59,400    15,673    70,523    594,886 

T’aira Ugarkovich, Executive Vice President

   2020    125,000    37,500    336,000    81,000    7,121    33,172    619,793 

 

(1)

In accordance with FASB ASC Topic 718, the reported amount represents the full grant date value of each award. Since awards vest at a rate of 20% per year beginning in 2021, none of the named executive officers recognized any income from the awards during 2020. The assumptions used in the calculation of these amounts are included in footnote [•] to our audited financial statements beginning on page F-1 of this prospectus. For stock option awards, amounts reported are grant date fair values computed based upon the Black-Scholes option valuation model, and the actual value, if any, that may be realized will depend on the excess of the stock price over the exercise price on the date the option is exercised. Therefore, there is no assurance that the value of an option realized by a named executive officer will be at or near the value shown above.

(2)

The non-qualified deferred compensation earnings represents the above market earnings on compensation that was deferred by each named executive officer under the amended and restated deferred incentive plan, which is described below.

(3)

A break-down of the various elements of compensation in this column is set forth in the following table:

 

Name

  All Other Compensation 
  Profit
Sharing
($)
   Director
Fees
($)
   Directors’
Deferral
Plan

($)
   Employee Stock
Ownership Plan
($)
   Total All Other
Compensation

($)
 

John A. Riley, III

   42,000    21,000    6,000    15,813    84,813 

Robin Parson

   29,534    21,000    6,000    13,989    70,523 

T’aira Ugarkovich

   24,375    —      —      8,797    33,172 

Benefit Plans and Agreements

Anticipated Future Employment Agreements. In connection with the conversion, Cullman Savings Bank intends to enter into new employment agreements with Mr. John A. Riley, III, Ms. Robin Parson and Ms. T’aira Ugarkovich which will be effective on the date of the conversion. Each agreement has similar terms. Commencing on the first anniversary of the agreements and on each subsequent anniversary thereafter, the agreements will be renewed for an additional year so that the remaining term will be three years, unless a notice is provided to the executive that the agreement will not renew. The current base salaries for Mr. Riley, Ms. Parson and Ms. Ugarkovich are $250,000, $156,000 and $140,000, respectively. In addition to the base salary, each agreement will provide for, among other things, participation in bonus programs and other fringe benefit plans applicable to executive employees. The executive’s employment may be terminated for cause at any time, in which event the executive would have no right to receive compensation or other benefits for any period after termination.

 

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Certain events resulting in the executive’s termination or resignation entitle the executive to payments of severance benefits following termination of employment. In the event of the executive’s involuntary termination for reasons other than for cause, disability or retirement, or in the event the executive resigns during the term of the agreement following (a) failure to appoint the executive to the executive position set forth in the agreement, (b) a material change in the executive’s function, duties or responsibilities resulting in a reduction of the responsibility, scope, or importance of executive’s position, (c) relocation of the executive’s office by more than 25 miles, (d) a material reduction in the benefits or perquisites paid to the executive unless such reduction is part of a reduction that is generally applicable to officers or employees of Cullman Savings Bank, or (e) a material breach of the employment agreement by Cullman Savings Bank, then the executive would be entitled to a severance payment in the form of a cash lump sum equal to (a) two times (three times for Mr. Riley) the sum of (i) the highest rate of base salary paid to the executive at any time, and (ii) the highest bonus paid to the executive at any time during the prior three years. In addition, the executive would be entitled to receive a lump sum payment equal to the present value of the contributions that would reasonably have been expected to be made on executive’s behalf under Cullman Savings Bank’s defined contribution plans (e.g., our 401(k) Plan or Employee Stock Ownership Plan) if the executive had continued working for two full calendar years earning the salary that would have been achieved during such period. Internal Revenue Code Section 409A may require that a portion of the above payments cannot be made until six months after termination of employment if the executive is a “key employee” under Internal Revenue Service rules. In addition, the executive would be entitled, at no expense to the executive, to the continuation of life insurance and non-taxable medical and dental coverage for two (three for Mr. Riley) full calendar years, or, if participation by the executive is not permitted under the terms of the applicable health plans, or if providing such benefits would subject Cullman Savings Bank to penalties, then Cullman Savings Bank shall pay the executive a cash lump sum payment reasonably estimated to be equal to the cost of such non-taxable medical and dental benefits.

In the event of a change in control of Cullman Savings Bank or New Cullman, followed by the executive’s involuntary termination other than for cause, disability or retirement, or resignation for one of the reasons set forth above within 18 months thereafter, the executive would be entitled to a severance payment in the form of a cash lump sum equal to (a) two times (three times for Mr. Riley) the sum of (i) the highest rate of base salary paid to the executive at any time, and (ii) the highest bonus paid to the executive with respect to the three completed fiscal years prior to the change of control, plus (b) a lump sum equal to the present value of the contributions that would reasonably have been expected to be made on the executive’s behalf under Cullman Savings Bank’s defined contribution plans (e.g., 401(k) Plan and Employee Stock Ownership Plan) if the executive had continued working for two (three for Mr. Riley) full calendar years, earning the salary that would have been achieved during such period. In addition, the executive would be entitled, at no expense to the executive, to the continuation of life insurance and non-taxable medical and dental coverage for 24 (36 for Mr. Riley) months following the termination of two full calendar years employment, or if providing such benefits would subject Cullman Savings Bank to penalties, then Cullman Savings Bank shall pay the executive a cash lump sum payment reasonably estimated to be equal to the cost of such non-taxable medical and dental benefits. In the event payments made to the executive include an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code, such payments will be cutback by the minimum dollar amount necessary to avoid this result.

Under each employment agreement, if an executive becomes disabled within the meaning of such term under Section 409A of the Internal Revenue Code, the executive shall receive benefits under any short-term or long-term disability plans maintained by Cullman Savings Bank.

Upon termination of the executive’s employment, the executive shall be subject to certain restrictions on their ability to compete for a period of six months following termination of employment, or to solicit business or employees of Cullman Savings Bank and New Cullman for a period of one year following termination of employment.

Amended and Restated Deferred Incentive Plan. Cullman Savings Bank maintains an Amended and Restated Deferred Incentive Plan whereby Mr. Riley, Ms. Parson and Ms. Ugarkovich receive an annual amount credited to their account. The executives do not contribute to the plan. For 2020, Mr. Riley, Ms. Parson and Ms. Ugarkovich would receive an award of 20% of base salary if the return on assets is 1.10% or greater. The specific

 

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goals are determined annually and are subject to the discretion of the board of directors. For 2020, the board of directors set the specific goals in consultation with our President and Chief Executive Officer. The Amended and Restated Deferred Incentive Plan, which is an unfunded plan, provides that each annual award is credited with an assumed annual return equal to the greater of an interest rate equal to 6% or 10 times Cullman Savings Bank’s return on assets for the most recently completed year, but not to exceed an interest rate of 10%. In addition, each annual award is subject to a five-year cliff vesting schedule and executives will become 100% vested upon a change in control, death, disability or retirement. Executives will receive a distribution upon termination of service, or if earlier, the occurrence of an unforeseen emergency, death, disability or change in control.

Life Insurance Agreements. Cullman Savings Bank has purchased life insurance policies for Mr. Riley, Ms. Parson and Ms. Ugarkovich. Under the agreements, the beneficiaries of Mr. Riley, Ms. Parson and Ms. Ugarkovich are entitled to a death benefit paid by the insurer from the policy proceeds equal to $175,000, $175,000 and $175,000, respectively.

Profit Sharing Plan. Cullman Savings Bank maintains a tax-qualified defined contribution plan for eligible employees (the “Profit Sharing Plan”). All employees who are at least 19 years old who have completed at least one year of entry service are eligible to participate in the Profit Sharing Plan. The Bank may make an annual discretionary contribution to the Profit Sharing Plan, which is shared among all eligible participants, including the named executive officers. Participants may not make any contributions to the Profit Sharing Plan but they may direct the investments of their account balances. To be eligible to share in the discretionary profit sharing contribution, a participant must be employed on December 31. A participant will also be eligible to share in the profit sharing contribution if he or she was an active participant at any time during the plan year and retired, died or became totally disabled. The discretionary profit sharing contribution is divided among participants on the basis of each participant’s proportional share of compensation relative to all participants. Participants become 100% vested in the contributions made to their account upon the completion of three years of service. In 2020, Cullman Savings Bank made a discretionary contribution in the amount of $460,000 to the Profit Sharing Plan.

Employee Stock Ownership Plan. Cullman Savings Bank maintains an employee stock ownership plan. Eligible employees who have attained age 19 and completed 1,000 hours of service during a continuous 12-month period are eligible to participate in the plan. In 2009, the employee stock ownership plan trust borrowed funds from Old Cullman and used those funds to purchase 98,500 shares of Old Cullman common stock. Collateral for the loan is the common stock purchased by the employee stock ownership plan. The loan will be repaid principally from Cullman Savings Bank discretionary contributions to the employee stock ownership plan and the last loan payment is scheduled to occur on December 31, 2021. The loan documents provide that the loan may be repaid over a shorter period, without penalty for prepayments. The interest rate for the employee stock ownership plan loan is an adjustable rate equal to the prime rate, as published in The Wall Street Journal. The interest rate adjusts annually and is the prime rate on the first business day of the calendar year, retroactive to January 1 of such year. Shares purchased by the employee stock ownership plan are held in a suspense account for allocation among participants as the loan is repaid.

Contributions to the employee stock ownership plan and shares released from the suspense account in an amount proportional to the repayment of the employee stock ownership plan loan are allocated among employee stock ownership plan participants on the basis of compensation in the year of allocation. Participants become 100% vested upon the completion of three years of service. Participants also become fully vested automatically upon normal retirement, death or disability, or termination of the employee stock ownership plan. Generally, participants receive distributions from the employee stock ownership plan upon separation from service. The employee stock ownership plan reallocates any unvested shares forfeited upon termination of employment among the remaining participants.

The employee stock ownership plan permits participants to direct the trustee as to how to vote the shares of common stock allocated to their accounts. The trustee votes unallocated shares and allocated shares for which participants do not provide instructions on any matter in the same ratio as those shares for which participants provide instructions, subject to fulfillment of the trustee’s fiduciary responsibilities.

 

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In connection with the conversion, we expect the employee stock ownership plan to purchase up to 8% of the shares of New Cullman common stock sold in the offering and issued to the charitable foundation. We anticipate that the employee stock ownership plan will fund its stock purchase with a loan from New Cullman equal to the aggregate purchase price of the common stock. The loan will be repaid principally through Cullman Savings Bank’s contribution to the employee stock ownership plan and dividends payable on common stock held by the employee stock ownership plan over the anticipated 25-year term of the loan. It is expected that the original employee stock ownership plan loan, described above, will be refinanced and rolled into the loan to be received by the employee stock ownership plan loan from New Cullman in connection with the conversion. If market conditions warrant, in the judgment of its trustees, the employee stock ownership plan’s subscription order will not be filled and the employee stock ownership plan may elect to purchase shares in the open market following the completion of the conversion, subject to applicable regulatory approvals.

Outstanding Equity Awards at Fiscal Year End. The following table sets forth information with respect to outstanding equity awards as of December 31, 2020 for the named executive officers.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

Name

  Option awards  Stock awards
  Number of
securities
underlying
unexercised
options (#)
exercisable
   Number of
securities
underlying
unexercised
options (#)
unexercisable
  Option
exercise
price ($)
  Option
expiration date
  Number of
Shares or Units
of Stock That
Have Not Vested
(#)
   Market Value of
Shares or Units
of Stock That
Have Not Vested
($) (1)

John A. Riley, III

   —     30,000  28.00  8/18/2030   20,000   440,000

Robin Parson

   —     13,200  28.00  8/18/2030   8,800   193,600

T’aira Ugarkovich

   —     18,000  28.00  8/18/2030   12,000   264,000

 

(1)

Based on a closing price of Old Cullman’s common stock of $22.00 as of December 31, 2020.

2020 Equity Incentive Plan. In 2020, stockholders approved the Cullman Bancorp, Inc. 2020 Equity Incentive Plan (the “2020 Equity Incentive Plan”), which provides for the grant of stock-based awards to our directors and executive officers.

The 2020 Equity Incentive Plan authorizes the issuance or delivery to participants of up to 200,000 shares of Old Cullman’s common stock pursuant to grants of incentive and non-qualified stock options and restricted stock awards. Of this number, the maximum number of shares of Old Cullman common stock that may be issued under the 2020 Equity Incentive Plan pursuant to the exercise of stock option is 120,000, and the maximum number of shares of Old Cullman common stock that may be issued as restricted stock awards is 80,000 shares.

The 2020 Equity Incentive Plan is administered by the members of the Compensation Committee (the “Committee”) who are “Disinterested Board Members,” as defined in the 2020 Equity Incentive Plan. The Committee has full and exclusive power within the limitations set forth in the 2020 Equity Incentive Plan to make decisions and determinations regarding: (1) the selection of participants and the granting of awards; (2) establishing the terms and conditions relating to each award; (3) adopting rules, regulations and guidelines for carrying out the 2020 Equity Incentive Plan’s purposes; and (4) interpreting the provisions of the 2020 Equity Incentive Plan and any award agreement. The 2020 Equity Incentive Plan also permits the Committee to delegate all or part of its responsibilities and powers to any person or persons selected by it.

Employees and outside directors are eligible to receive awards under the Equity Incentive Plan. Awards may be granted in a combination of restricted stock awards, incentive stock options, and non-qualified stock options. The exercise price of stock options granted under the Equity Incentive Plan may not be less than the fair market value on the date the stock option is granted. Stock options are subject to vesting conditions and restrictions as determined by the Committee. Stock awards under the 2020 Equity Incentive Plan will be granted only in whole shares of common stock. All shares of restricted stock and all stock option grants will be subject to conditions established by the Committee that are set forth in the applicable award agreement.

 

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To date, all stock options and restricted stock awards are subject to time-based vesting and vest over a five-year period, with 20% of the awards vesting each year. The recipients of restricted stock awards are entitled to receive any cash dividends paid on all restricted stock awards, whether such awards are vested or not, and have voting rights consistent with the holders of our common stock generally.

Directors’ Compensation

The following table sets forth for the year ended December 31, 2020 certain information as to the total compensation we paid to our non-employee directors. Mr. Riley and Ms. Parson received director fees of $21,000 for the year ended December 31, 2020, which is included in above Summary Compensation Table.

 

   Director Compensation Table For the Year Ended December 31, 2020 

Name

  Fees Earned or
Paid in Cash

($)
   Stock Awards
($)(1)
   Option Awards
($)(1)
   Nonqualified
Deferred
Compensation
Earnings

($)(2)
   All Other
Compensation
($)(3)
   Total
($)
 

Gregory T. Barksdale

   21,000    112,000    27,000    1,891    6,000    167,891 

Chad T. Burks

   21,000    112,000    27,000    570    6,000    166,570 

Paul D. Bussman

   21,000    112,000    27,000    13,156    6,000    179,156 

Kim J. Chaney (4)

   5,250    —      —      21,792    1,500    28,542 

Nancy McClellan

   21,000    112,000    27,000    42,570    6,000    208,570 

Lynne Morton

   15,750    112,000    27,000    —      —      154,750 

 

(1)

In accordance with FASB ASC Topic 718, the reported amount represents the full grant date value of each award. Since awards vest at a rate of 20% per year beginning in 2021, none of the directors recognized any income from the awards during 2020. The assumptions used in the calculation of these amounts are included in footnote 14 to our audited financial statements beginning on page F-1 of this prospectus. For stock option awards, amounts reported are grant date fair values computed based upon the Black-Scholes option valuation model, and the actual value, if any, that may be realized will depend on the excess of the stock price over the exercise price on the date the option is exercised. Therefore, there is no assurance that the value of an option realized by a director will be at or near the value shown above. Each director holds 4,000 unvested restricted stock awards as of December 31, 2020.

(2)

The non-qualified deferred compensation earnings represents the above market earnings on compensation that was deferred by each director under the Amended and Restated Directors’ Deferred Compensation Plan, which is described below.

(3)

Reflects Cullman Savings Bank’s matching contribution under the Amended and Restated Directors’ Cash Compensation Deferral Plan.

(4)

Judge Chaney retired from the board of directors in March 2020.

Director Fees. Cullman Savings Bank pays each director a fee of $1,750 for each board meeting attended. No separate fees are paid for committee meetings attended or for service as committee chairmen. Old Cullman does not pay any meeting or committee fees.

Amended and Restated Directors’ Deferred Compensation Plan. Cullman Savings Bank maintains a Directors’ Cash Compensation Deferral Plan whereby directors may elect to defer a minimum of 25% and a maximum of 100% of their board fees until the later of age 65 or termination of service, or if earlier, the occurrence of an unforeseen emergency, death, disability or change in control. The Directors’ Cash Compensation Deferral Plan, which is an unfunded plan, provides for an annual matching contribution equal to 100% of the elected deferral amount, not to exceed $6,000 annually, and an assumed annual return on deferred amounts equal to the greater of an interest rate equal to 6% or 10 times Cullman Savings Bank’s return on assets for the most recently completed year, but not to exceed an interest rate of 10%.

In the event Mr. Riley, Dr. Bussman or Ms. McClellan die before a termination of service as a director, their beneficiaries will be paid a death benefit determined by assuming the director had remained in service until age 65 and elected the maximum deferral and received the maximum matching contribution each year reduced by the amount of life insurance proceeds payable upon such death (which is specified in each director’s Split Dollar Agreement). Cullman Savings Bank elected to fund this death benefit through the purchase of life insurance policies on the life of each director. The dollar value of the premiums paid on the life insurance policies is provided below. If Messrs. Barksdale, Burks, Ms. Morton or Ms. Parson die before a termination of service as a director, their Barksdale, Burks, Ms. Morton or Ms. Parson’s beneficiaries will be paid a death benefit equal to the vested

 

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accrued balance under the Directors’ Cash Compensation Deferral Plan. If a director dies after he or she terminates service as a director, the director’s beneficiary will receive only the unpaid portion of the director’s account.

Split Dollar Agreements. In connection with the initial implementation of the Amended and Restated Directors’ Cash Compensation Deferral Plan, Cullman Savings Bank purchased insurance policies on the lives of the directors and entered into endorsement Split Dollar Agreements with each of our directors. Under the Split Dollar Agreements, upon a director’s death while he or she was a director of Cullman Savings Bank, the director’s beneficiary will be paid a death benefit equal to the lesser of (i) 100% of the portion of the insurance proceeds designated in each director’s Split Dollar Agreement, or (ii) the director’s death benefit as calculated under the Cash Compensation Deferral Plan. In the event of the director’s death as of December 31, 2020, the beneficiaries of Mr. Riley, Dr. Bussman, Ms. McClellan would receive a death benefit of $1,661,000, $652,000 and $576,000, respectively. The amount of this benefit is reduced from the amount of the death benefit payable under the Cash Compensation Deferral Plan.

In the event a director dies after he or she terminated service as a director for any reason, including retirement, he or she will not be entitled to any benefits under his or her Split Dollar Agreement. The Split Dollar Agreement may be terminated at any time by Cullman Savings Bank or the director, by written notice to the other. The Split Dollar Agreement will also terminate automatically if a director ceases to serve as a member of the board of directors for any reason except death, upon the surrender, cessation of Cullman Savings Bank’s business or upon bankruptcy, receivership or dissolution of Cullman Savings Bank. Upon termination, the director forfeits any right in the death benefit and Cullman Savings Bank may retain or terminate the insurance policy in its sole discretion.

Benefits to be Considered Following Completion of the Conversion

Stock-Based Benefit Plans. Following the offering, we intend to adopt one or more new stock-based benefit plans that will provide for grants of stock options and restricted stock awards (including restricted stock units). The stock-based benefit plans will not be adopted sooner than six months after the offering, and, if adopted within 12 months after the offering, stockholders must approve the plans by a majority of the votes eligible to be cast. If the stock-based benefit plans are established more than 12 months after the offering, stockholders must approve the plans by a majority of votes cast. Also, if adopted within 12 months following the completion of the conversion, the aggregate number of shares reserved for the exercise of stock options or available for stock awards under the stock-based benefit plans would be limited to 10% and 4%, respectively, of the shares sold in the offering.

The following additional restrictions would apply to our stock-based benefit plans if we adopt such plans within 12 months after the offering:

 

  

non-employee directors in the aggregate may not receive more than 30% of the options and restricted stock awards authorized under the plans;

 

  

any one non-employee director may not receive more than 5% of the options and restricted stock awards authorized under the plans;

 

  

any officer or employee may not receive more than 25% of the options and restricted stock awards authorized under the plans;

 

  

any tax-qualified employee stock benefit plans and restricted stock plans, in the aggregate, may not acquire more than 10% of the shares sold in the offering, unless Cullman Savings Bank has tangible capital of 10% or more, in which case tax-qualified employee stock benefit plans and restricted stock plans may acquire up to 12% of the shares sold in the offering;

 

  

the options and restricted stock awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plans;

 

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accelerated vesting is not permitted except for death, disability or upon a change in control of New Cullman or Cullman Savings Bank; and

 

  

our executive officers or directors must exercise or forfeit their options if Cullman Savings Bank becomes critically undercapitalized, is subject to enforcement action or receives a capital directive.

We have not determined whether we will present stock-based benefit plans for stockholder approval before or after 12 months after the completion of the conversion.

We may obtain the shares needed for our stock-based benefit plans by issuing additional shares of common stock from authorized but unissued shares or through stock repurchases.

The actual value of the shares awarded under stock-based benefit plans would be based in part on the price of New Cullman’s common stock at the time the shares are awarded. The following table presents the total value of all shares of restricted stock that would be available for issuance under the new stock-based benefit plans, assuming the shares are awarded when the market price of our common stock ranges from $8.00 per share to $14.00 per share.

 

Share Price

  114,643 Shares
Awarded at Minimum of
Offering Range
  134,874 Shares
Awarded at Midpoint of
Offering Range
  155,106 Shares Awarded
at Maximum of Offering
Range
  178,372 Shares Awarded
at Adjusted Maximum of
Offering Range
 
(In thousands, except share price information) 
$8.00  $917  $1,079  $1,241  $1,427 
 10.00   1,146   1,349   1,551   1,784 
 12.00   1,376   1,618   1,861   2,140 
 14.00   1,605   1,888   2,171   2,497 

The grant-date fair value of the options granted under the new stock-based benefit plans will be based in part on the price of shares of common stock of New Cullman at the time the options are granted. The value also will depend on the various assumptions utilized in the option pricing model ultimately adopted. The following table presents the total estimated value of the options to be available for grant under the stock-based benefit plans, assuming the market price and exercise price for the stock options are equal and the range of market prices for the shares is $8.00 per share to $14.00 per share. The Black-Scholes option pricing model provides an estimate only of the fair value of the stock options, and the actual value of the stock options may differ significantly from the value set forth in this table.

 

Exercise Price  Grant-Date Fair
Value Per Option
  286,609 Options at
Minimum of
Offering Range
  337,187 Options at
Midpoint of
Offering Range
  387,765 Options at
Maximum of
Offering Range
   445,930 Options at
Adjusted
Maximum of
Offering Range
 
(In thousands, except exercise price and fair value information) 
$8.00  $2.07  $593  $698  $803   $923 
 10.00   2.59   742   873   1,004    1,155 
 12.00   3.11   891   1,049   1,206    1,387 
 14.00   3.63   1,040   1,224   1,408    1,619 

The tables presented above are provided for informational purposes only. There can be no assurance that our stock price will not trade below $10.00 per share. Before you make an investment decision, we urge you to read this prospectus carefully, including, but not limited to, the section entitled “Risk Factors” beginning on page 20.

 

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BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table provides the beneficial ownership of shares of common stock of Old Cullman held by our directors and executive officers, individually and as a group, and all individuals known to management to own more than 5% of our common stock at [stockholder record date]. For purposes of this table, a person is deemed to be the beneficial owner of any shares of common stock over which he has, or shares, directly or indirectly, voting or investment power or as to which he or she has the right to acquire beneficial ownership at any time within 60 days after [stockholder record date].

 

   Number of
Shares
  Percent
Outstanding
(1)
 

5% Beneficial Owners:

   

Cullman Savings Bank, MHC

   1,403,731   57.3

316 Second Avenue SW Cullman, Alabama 35055

   

Cullman Savings Bank Employee Stock Ownership Plan

   231,534   9.4

316 Second Avenue SW Cullman, Alabama 35055

   

Directors:

   

Gregory T. Barksdale

   21,128(2)   * 

Chad T. Burks

   4,500(2)   * 

Dr. Paul D. Bussman

   6,229(2)   * 

Nancy McClellan

   15,917(2)   * 

Lynne Morton

   4,250(2)   * 

Robin Parson

   64,719(3)  

John A. Riley, III

   113,496(4)  

Executive Officers Who Are Not Directors:

   

T’aira Ugarkovich

   20,932(5)   * 

Katrina Stephens

   9,489(6)   * 

All directors and executive officers as a group (9 persons)

   260,660   % 

 

*

Less than 1%.

(1)

Based on 2,450,408 shares outstanding at [stockholder record date].

(2)

Includes 4,000 shares of unvested restricted stock.

(3)

Includes 8,800 shares of unvested restricted stock.

(4)

Includes 20,000 shares of unvested restricted stock and 51,544 shares held by our employee stock ownership plan.

(5)

Includes 12,000 shares of unvested restricted stock and 31,771 shares held by our employee stock ownership plan.

(6)

Includes 4,800 shares of unvested restricted stock and 4,049 shares held by our employee stock ownership plan.

 

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SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

The table below sets forth, for each of New Cullman’s directors and executive officers, and for all of these individuals as a group, the following information:

 

 (i)

the number of exchange shares to be held upon completion of the conversion, based upon their beneficial ownership of Old Cullman common stock at [stockholder record date], as set forth in “Beneficial Ownership of Common Stock”;

 

 (ii)

the proposed purchases of subscription shares, assuming sufficient shares of common stock are available to satisfy their subscriptions; and

 

 (iii)

the total shares of common stock to be held upon completion of the conversion.

In each case, it is assumed that subscription shares are sold at the minimum of the offering range. See “The Conversion and Offering—Additional Limitations on Common Stock Purchases.” Federal regulations prohibit our directors and officers from selling the shares they purchase in the offering for one year after the date of purchase.

 

   Number of  Proposed Purchases of Stock   

Total Common Stock to be
Held at Minimum of
Offering Range (1)(3)

 
   Exchange  

in the Offering (2)

      Percentage 

Name of Beneficial Owner

  

Shares to Be

Held (1)

  

Number of

Shares

  Amount   

Number of
Shares

  of Shares
Outstanding
 

Gregory T. Barksdale

       $                      *

Chad T. Burks

           * 

Dr. Paul D. Bussman

           * 

Nancy McClellan

           * 

Lynne Morton

          

Robin Parson

          

John A. Riley, III

           * 

T’aira Ugarkovich

           * 

Katrina Stephens

           * 
  

 

  

 

  

 

 

   

 

  

 

 

 

All Directors and Executive Officers as a Group

       $                      % 
  

 

  

 

  

 

 

   

 

  

 

 

 

 

*

Less than 1%.

(1)

Based on information presented under “Beneficial Ownership of Common Stock,” and assuming an exchange ratio of 1.8094 at the minimum of the offering range.

(2)

Includes proposed subscriptions, if any, by associates.

(3)

Assuming an exchange ratio of 2.8153 at the adjusted maximum of the offering range, directors and executive officers would beneficially own                  shares, or                 % of our outstanding shares of common stock.

 

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THE CONVERSION AND OFFERING

The boards of directors of Cullman Savings Bank, MHC and Old Cullman have approved the plan of conversion. The plan of conversion must also be approved by the stockholders of Old Cullman and the members of Cullman Savings Bank, MHC (i.e., eligible depositors of Cullman Savings Bank). Special meetings of stockholders and members have been called for this purpose. We have filed applications with the Federal Reserve Board with respect to the conversion and with respect to New Cullman becoming the holding company for Cullman Savings Bank. The approval of the Federal Reserve Board is required before we can consummate the conversion and issue shares of common stock. We have also filed an application with the Office of the Comptroller of the Currency with respect to amendments to Cullman Savings Bank’s charter. The approval of the Office of the Comptroller of the Currency is required before we can consummate the conversion and issue shares of common stock. Any approval by the Federal Reserve Board or the Office of the Comptroller of the Currency does not constitute a recommendation or endorsement of the plan of conversion.

General

Pursuant to the plan of conversion, our organization will convert from the mutual holding company form of organization to the fully stock form. Cullman Savings Bank, MHC will be merged into Old Cullman and as a result Cullman Savings Bank, MHC will cease to exist. Old Cullman, which owns 100% of the outstanding common stock of Cullman Savings Bank, will merge into a new Maryland corporation named New Cullman and as a result Old Cullman will cease to exist. As part of the conversion, the 57.3% ownership interest of Cullman Savings Bank, MHC in Old Cullman will be offered for sale in the offering. When the conversion is completed, New Cullman will own all of the outstanding common stock of Cullman Savings Bank and public stockholders (including our charitable foundations) will own all of the outstanding common stock of New Cullman. A diagram of our corporate structure before and after the conversion is set forth in the “Summary” section of this prospectus.

Under the plan of conversion, at the completion of the conversion and offering, each share of Old Cullman common stock owned by persons other than Cullman Savings Bank, MHC will be converted automatically into the right to receive new shares of New Cullman common stock determined pursuant to an exchange ratio. The exchange ratio will ensure that immediately after the exchange of existing shares of Old Cullman for new shares of New Cullman the public stockholders will own the same aggregate percentage of shares of common stock of New Cullman that they owned in Old Cullman immediately before the conversion, excluding any shares they purchased in the offering, their receipt of cash paid in lieu of fractional shares and the effect of shares issued to the charitable foundation, and adjusted downward to reflect certain assets held by Cullman Savings Bank, MHC.

We intend to retain between $10.7 million and $17.1 million of the net proceeds of the offering and to contribute between $13.1 million and $20.8 million of the net proceeds to Cullman Savings Bank. The conversion will be consummated only upon the issuance of at least the minimum number of shares of our common stock offered pursuant to the plan of conversion.

The plan of conversion provides that we will offer shares of common stock for sale in the subscription offering to eligible account holders, our tax-qualified employee benefit plans, including our employee stock ownership plan, supplemental account holders, and other members (qualifying depositors). In addition, we may offer common stock for sale in a community offering to members of the general public, with a preference given to natural persons (including trusts of natural persons) residing in Cullman County, Alabama.

We have the right to accept or reject, in whole or in part, any orders to purchase shares of the common stock received in the community offering. The community offering may begin concurrently with, during or after the subscription offering and must be completed within 45 days after the completion of the subscription offering unless otherwise extended by the Federal Reserve Board. See “—Community Offering.”

We also may offer for sale shares of common stock not purchased in the subscription or community offerings in a syndicated community offering in which Raymond James will be sole manager. See “—Syndicated Community Offering.”

 

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We determined the number of shares of common stock to be offered in the offering based upon an independent valuation appraisal of the estimated pro forma market value of New Cullman. All shares of common stock to be sold in the offering will be sold at $10.00 per share. Investors will not be charged a commission to purchase shares of common stock. The independent valuation will be updated and the final number of shares of common stock to be issued in the offering will be determined at the completion of the offering. See “—Stock Pricing and Number of Shares to be Issued” for more information as to the determination of the estimated pro forma market value of the common stock.

The following is a brief summary of the conversion and offering and is qualified in its entirety by reference to the provisions of the plan of conversion. A copy of the plan of conversion is available for inspection at each office of Cullman Savings Bank. The plan of conversion is also filed as an exhibit to Cullman Savings Bank, MHC’s application for conversion, of which this prospectus is a part, copies of which may be obtained from the Federal Reserve Board. The plan of conversion is also filed as an exhibit to the registration statement we have filed with the Securities and Exchange Commission, of which this prospectus is a part. Copies of the registration statement may be obtained from the Securities and Exchange Commission or online at the Securities and Exchange Commission’s website (www.sec.gov). See “Where You Can Find Additional Information.”

Reasons for the Conversion

Our primary reasons for converting and undertaking the stock offering are to:

 

  

Facilitate future mergers and acquisitions. Although we do not currently have any understandings or agreements regarding any specific acquisition transaction, the stock holding company structure will give us greater flexibility to structure, and make us a more attractive and competitive bidder for, mergers and acquisitions of other financial institutions or financial service companies as opportunities arise. The additional capital raised in the offering also will enable us to consider larger merger transactions. In addition, although we intend to remain an independent financial institution, the stock holding company structure may make us a more attractive acquisition candidate for other institutions. Applicable regulations prohibit anyone from acquiring or offering to acquire more than 10% of our stock for three years following completion of the conversion without regulatory approval.

 

  

Improve the liquidity of our shares of common stock. We expect that the larger number of shares that will be outstanding after completion of the conversion and offering, as well as our shares of stock being traded on the Nasdaq Capital Market, will result in a more liquid and active market for New Cullman common stock. A more liquid and active market will make it easier for our stockholders to buy and sell our common stock and will give us greater flexibility in implementing capital management strategies.

 

  

Transition our organization to a stock holding company structure, which gives us greater flexibility to access the capital markets compared to our existing mutual holding company structure. The stock holding company structure gives us greater flexibility to access the capital markets to support our growth through possible future equity and debt offerings. We have no current plans, agreements or understandings regarding any additional equity or debt offerings.

 

  

Facilitate our stock holding company’s ability to pay dividends to our public stockholders. Current regulations of the Federal Reserve Board substantially restrict the ability of Cullman Savings Bank, MHC to waive dividends declared by Old Cullman. Accordingly, because any dividends declared and paid by Old Cullman have been paid to Cullman Savings Bank, MHC along with all other stockholders, the amount of dividends available for all other stockholders has been less than if Cullman Savings Bank, MHC were to waive the receipt of dividends. The conversion will eliminate our mutual holding company structure and will facilitate our ability to

 

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pay dividends to all stockholders of New Cullman, subject to legal, regulatory and financial considerations applicable to all financial institutions. See “Our Dividend Policy.”

 

  

Enhance our regulatory capital position to support growth. A strong capital position is essential to achieving our long-term objectives of growing Cullman Savings Bank and building stockholder value. Although Cullman Savings Bank significantly exceeds all regulatory capital requirements, the proceeds from the offering will materially strengthen our capital position and enable us to support our potential growth and expansion through larger legal lending limits. The augmented regulatory capital will be essential to the continued implementation of our business strategy.

Approvals Required

The affirmative vote of a majority of the total votes eligible to be cast by the members of Cullman Savings Bank, MHC (i.e., eligible depositors of Cullman Savings Bank) is required to approve the plan of conversion. By their approval of the plan of conversion, the members of Cullman Savings Bank, MHC will also be approving the merger of Cullman Savings Bank, MHC with and into Old Cullman. The affirmative vote of the holders of at least two-thirds of the outstanding shares of common stock of Old Cullman and the affirmative vote of the holders of a majority of the outstanding shares of common stock of Old Cullman held by the public stockholders of Old Cullman (i.e., all stockholders other than Cullman Savings Bank, MHC) also are required to approve the plan of conversion. We have filed applications with the Federal Reserve Board with respect to the conversion and with respect to New Cullman becoming the holding company for Cullman Savings Bank. The approval of the Federal Reserve Board is required before we can consummate the conversion and issue shares of common stock. The Office of the Comptroller of the Currency must also approve an amendment to Cullman Savings Bank’s charter to establish a liquidation account. The approval of the Office of the Comptroller of the Currency is required before we can consummate the conversion and issue shares of common stock.

The affirmative vote of a majority of the total votes eligible to be cast by the members of Cullman Savings Bank, MHC is required to approve the contribution to the charitable foundation. The affirmative vote of the holders of at least two-thirds of the outstanding shares of common stock of Old Cullman and the affirmative vote of the holders of a majority of the outstanding shares of common stock of Old Cullman held by the public stockholders of Old Cullman (i.e., all stockholders other than Cullman Savings Bank, MHC) also are required to approve the contribution to the charitable foundation. However, member and stockholder approval of the contribution to the charitable foundation is not a condition to the completion of the conversion and offering.

Share Exchange Ratio for Current Stockholders

At the completion of the conversion, each publicly held share of Old Cullman common stock will be converted automatically into the right to receive a number of shares of New Cullman common stock. The number of shares of common stock will be determined pursuant to the exchange ratio, which ensures that the public stockholders will own the same percentage of common stock in New Cullman after the conversion as they held in Old Cullman immediately before the conversion, exclusive of their purchase of additional shares of common stock in the offering, their receipt of cash in lieu of fractional exchange shares and the effect of shares issued to the charitable foundation, and adjusted downward to reflect certain assets held by Cullman Savings Bank, MHC. The exchange ratio will not depend on the market value of Old Cullman common stock. The exchange ratio will be based on the percentage of Old Cullman common stock held by the public, the independent valuation of New Cullman prepared by Keller & Company, Inc., and the number of shares of common stock issued in the offering. The exchange ratio is expected to range from approximately 1.8094 shares for each publicly held share of Old Cullman at the minimum of the offering range to 2.8153 shares for each publicly held share of Old Cullman at the adjusted maximum of the offering range.

The following table shows how the exchange ratio will adjust, based on the appraised value of New Cullman as of February 12, 2021, assuming public stockholders of Old Cullman own 42.7% of the outstanding shares of Old Cullman common stock and Cullman Savings Bank, MHC has cash of $2.6 million immediately before the completion of the conversion. The table also shows how many shares of New Cullman a hypothetical

 

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owner of Old Cullman common stock would receive in the exchange for 100 shares of common stock owned at the completion of the conversion, depending on the number of shares issued in the offering.

 

   Shares to be Sold in
This Offering
 Shares of New
Cullman to be Issued
for Shares of
Old Cullman
 Shares to be Issued
to Charitable
Foundation
 Total Shares
of Common
Stock to be
Issued in
Exchange
and Offering
  Exchange
Ratio
  Equivalent
Value of
Shares
Based
Upon
Offering
Price (1)
  Equivalent
Pro Forma
Tangible
Book Value
Per
Exchanged
Share (2)
  Whole
Shares to
be
Received
for 100
Existing
Shares (3)
   Amount  Percent Amount  Percent Amount  Percent

Minimum

  2,770,891  58.2% 1,893,909  39.8% 95,200  2.0% 4,760,000  1.8094  $18.09  $31.34  180

Midpoint

  3,259,872  58.2% 2,228,128  39.8% 112,000  2.0% 5,600,000  2.1288  21.29  32.98  212

Maximum

  3,748,853  58.2% 2,562,347  39.8% 128,800  2.0% 6,440,000  2.4481  24.48  34.59  244

Adjusted Maximum

  4,311,181  58.2% 2,946,699  39.8% 148,120  2.0% 7,406,000  2.8153  28.15  36.49  281

 

(1)

Represents the value of shares of New Cullman common stock to be received in the conversion by a holder of one share of Old Cullman, pursuant to the exchange ratio, based upon the $10.00 per share offering price.

(2)

Represents the pro forma tangible book value per share at each level of the offering range multiplied by the respective exchange ratio. At December 31, 2020, Old Cullman’s tangible book value per share was $23.81.

(3)

Cash will be paid in lieu of fractional shares.

Options to purchase shares of Old Cullman common stock that are outstanding immediately before the completion of the conversion will be converted into options to purchase shares of New Cullman common stock, with the number of shares subject to the option and the exercise price per share to be adjusted based upon the exchange ratio. The aggregate exercise price, term and vesting period of the options will remain unchanged.

Effects of Conversion

Continuity. The conversion will not affect the normal business of Cullman Savings Bank of accepting deposits and making loans. Cullman Savings Bank will continue to be a federally chartered savings bank and will continue to be regulated by the Office of the Comptroller of the Currency. After the conversion, Cullman Savings Bank will continue to offer existing services to depositors, borrowers and other customers. The directors of Old Cullman serving at the time of the conversion will be the directors of New Cullman upon the completion of the conversion.

Effect on Deposit Accounts. Pursuant to the plan of conversion, each depositor of Cullman Savings Bank at the time of the conversion will automatically continue as a depositor after the conversion, and the deposit balance, interest rate and other terms of such deposit accounts will not change as a result of the conversion. Each such account will be insured by the Federal Deposit Insurance Corporation to the same extent as before the conversion. Depositors will continue to hold their existing certificates and other evidences of their accounts.

Effect on Loans. No loan outstanding from Cullman Savings Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as it was contractually fixed before the conversion.

Effect on Voting Rights of Depositors. Depositors of Cullman Savings Bank are members of, and have voting rights in, Cullman Savings Bank, MHC, as to all matters requiring a vote of members. Upon completion of the conversion, depositors will no longer have voting rights. All voting rights in Cullman Savings Bank will be vested in New Cullman as the sole stockholder of Cullman Savings Bank. The stockholders of New Cullman will possess exclusive voting rights with respect to New Cullman common stock.

Tax Effects. We have received an opinion of counsel with regard to the federal income tax consequences of the conversion and an opinion of our tax advisor with regard to the Alabama income tax consequences of the conversion to the effect that the conversion will not be a taxable transaction for federal or state income tax purposes

 

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to Cullman Savings Bank, MHC, Old Cullman, Cullman Savings Bank, the public stockholders of Old Cullman (except for cash paid for fractional shares), eligible account holders, supplemental eligible account holders, or other members. See “—Material Income Tax Consequences.”

Effect on Liquidation Rights. Each depositor in Cullman Savings Bank has both a deposit account in Cullman Savings Bank and a pro rata ownership interest in the net worth of Cullman Savings Bank, MHC based upon the deposit balance in his or her account. This ownership interest is tied to the depositor’s account and has no tangible market value separate from the deposit account. This ownership interest may only be realized in the event of a complete liquidation of Cullman Savings Bank, MHC and Cullman Savings Bank; however, there has never been a liquidation of a solvent mutual holding company. Any depositor who opens a deposit account prior to the completion of the offering receives a pro rata ownership interest in Cullman Savings Bank, MHC without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the deposit account but nothing for his or her ownership interest in the net worth of Cullman Savings Bank, MHC, which is lost to the extent that the balance in the account is reduced or closed.

Consequently, depositors in a stock depository institution that is a subsidiary of a mutual holding company normally have no way of realizing the value of their ownership interest, which would be realizable only in the unlikely event that Cullman Savings Bank, MHC and Cullman Savings Bank are liquidated completely. If this occurs, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of Cullman Savings Bank, MHC after other claims, including claims of depositors to the amounts of their deposits, are paid.

Under the plan of conversion, Eligible Account Holders (as defined below) and Supplemental Eligible Account Holders (as defined below) will receive an interest in liquidation accounts maintained by New Cullman and Cullman Savings Bank in an aggregate amount equal to (i) Cullman Savings Bank, MHC’s ownership interest in Old Cullman’s total stockholders’ equity as of the date of the latest statement of financial condition included in this prospectus, plus (ii) the value of the net assets of Cullman Savings Bank, MHC as of the date of the latest statement of financial condition of Cullman Savings Bank, MHC before the consummation of the conversion (excluding its ownership of Old Cullman). New Cullman and Cullman Savings Bank will hold the liquidation accounts for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain deposits in Cullman Savings Bank after the conversion. The liquidation accounts are intended to preserve for Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain their deposit accounts with Cullman Savings Bank a liquidation interest in the residual net worth, if any, of New Cullman or Cullman Savings Bank (after the payment of all creditors, including depositors to the full extent of their deposit accounts) in the event of a liquidation of (a) New Cullman and Cullman Savings Bank or (b) Cullman Savings Bank. See “—Liquidation Rights.”

Under the regulations of the Federal Reserve Board that govern mutual-to-stock conversions of mutual holding companies, non-interest-bearing demand deposit accounts do not meet the definition of qualifying deposits, and, therefore, a holder of a non-interest-bearing demand deposit account would not qualify as an eligible account holder or as a supplemental eligible account holder for purposes of obtaining a purchase priority in the stock offering or having the right to an interest in the liquidation account that is required to be established in connection with the conversion.

However, because we afforded subscription rights to holders of non-interest-bearing demand accounts in our 2009 offering in connection with our reorganization into the mutual holding company structure, we submitted to the Federal Reserve Board a request for a waiver from this regulation and the Federal Reserve Board has granted the request. As a result, a depositor of Cullman Savings Bank who has an eligible non-interest-bearing demand deposit account as of the eligibility record date or the supplemental eligibility record date will be deemed to be an eligible account holder or a supplemental eligible account holder, as applicable, by reason of this account.

The inclusion of depositors with non-interest-bearing demand deposits as eligible account holders and supplemental eligible account holders will have a dilutive effect on other qualifying depositors with respect to their stock purchase priorities. It will also have a dilutive effect on the interest of all other eligible account holders and

 

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supplemental eligible account holders with respect to the liquidation account that will be established in connection with the conversion.

Stock Pricing and Number of Shares to be Issued

The plan of conversion and applicable regulations require that the aggregate purchase price of the common stock sold in the offering must be based on the appraised pro forma market value of the common stock, as determined by an independent valuation. We have retained Keller & Company, Inc. to prepare an independent valuation appraisal. For its services in preparing the initial valuation and one valuation update, Keller & Company, Inc. will receive a fee of $40,000, as well as payment for reimbursable expenses. During the past three years, we have not paid any fees to Keller & Company, Inc. We have agreed to indemnify Keller & Company, Inc. and its employees and affiliates for certain costs and expenses in connection with claims or litigation relating to the appraisal and arising out of any misstatement or untrue statement of a material fact in information supplied to Keller & Company, Inc. by us or by an intentional omission by us to state a material fact in the information provided, except where Keller & Company, Inc. has been negligent or at fault.

The independent valuation was prepared by Keller & Company, Inc. in reliance upon the information contained in this prospectus, including the consolidated financial statements of Old Cullman. Keller & Company, Inc. also considered the following factors, among others:

 

  

the present results and financial condition of Old Cullman and the projected results and financial condition of New Cullman;

 

  

the economic and demographic conditions in Old Cullman’s existing market area;

 

  

certain historical, financial and other information relating to Old Cullman;

 

  

a comparative evaluation of the operating and financial characteristics of Old Cullman with those of other publicly traded savings institutions;

 

  

the effect of the conversion and offering on New Cullman’s stockholders’ equity and earnings potential;

 

  

the proposed dividend policy of New Cullman;

 

  

the trading market for securities of comparable institutions and general conditions in the market for such securities.; and

 

  

the contribution to the charitable foundation.

`The independent valuation is also based on an analysis of a peer group of publicly traded savings and loan and bank holding companies that Keller & Company, Inc. considered comparable to New Cullman under regulatory guidelines applicable to the independent valuation. Under these guidelines, a minimum of ten peer group companies are selected from the universe of all publicly traded financial institutions with relatively comparable resources, strategies and financial and other operating characteristics. Such companies must also be traded on a securities exchange (such as Nasdaq or the New York Stock Exchange). The peer group companies selected for New Cullman also consisted of fully-converted stock institutions that were not subject to an actual or rumored acquisition and that had been publicly traded for at least one year. In addition, Keller & Company, Inc. limited the peer group to companies to the following selection criteria: (i) a geographic limitation excluding institutions located in the Northeast and Northwest; (ii) assets of $1.9 billion or less; (iii) return on average assets of 2.25% or less; (iv) equity to assets of 9.0% to 22.0%; and (v) nonperforming assets to assets of 1.16% or less.

 

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The independent valuation appraisal considered the pro forma effect of the offering. Consistent with federal appraisal guidelines, the appraisal applied three primary methodologies: (i) the pro forma price-to-book value approach applied to both reported book value and tangible book value; (ii) the pro forma price-to-earnings approach applied to reported and core earnings; and (iii) the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based on the current market valuations of the peer group companies. Keller & Company, Inc. placed the greatest emphasis on the price-to-earnings and price-to-book approaches in estimating pro forma market value. Keller & Company, Inc. did not consider a pro forma price-to-assets approach to be as meaningful in preparing the appraisal, as this approach is more meaningful when a company has low equity or earnings. The price-to-assets approach is less meaningful for a company like us, as we have equity in excess of regulatory capital requirements and positive core earnings.

In applying each of the valuation methods, Keller & Company, Inc. considered adjustments to the pro forma market value based on a comparison of New Cullman with the peer group. Keller & Company, Inc. made In comparing New Cullman with the peer group, Keller & Company, Inc. made modest upward adjustments for earnings and financial condition. Keller & Company, Inc. made downward adjustments for: (1) market area; (2) stock liquidity; (3) dividends; (4) subscription interest; and (5) marketing of the issue, and made no adjustments for management and asset, loan and deposit growth.

The upward adjustment for earnings took into consideration our higher return on average assets and core return on average assets but consistently lower return on average equity and core return on average equity. We have also demonstrated a higher net interest margin. The upward adjustment for financial condition recognizes our higher equity to assets and lower non-pe