Cullman Bancorp, Inc.

Nonaccrual loans at June 30, 2012 and December 31, 2011 were $3,635 and $1,572, respectively. Nonaccrual loans consisted of $1,589 of one-to four-family, $1,884 of commercial real estate, $157 of commercial, and $5 of consumer loans at June 30, 2012. Nonaccrual loans at December 31, 2011 consisted of one-to four-family loans. Non-performing loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

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

Our total assets decreased to $218.2 million at June 30, 2012 from $223.0 million at December 31, 2011. The decrease was primarily attributable to decreases in loans of $3.2 million, or 2.0%, securities available for sale of $1.7 million, or 5.7%, and a decrease in cash and cash equivalents of $1.3 million, or 13.3%. These decreases were partially offset by an increase in our investment of bank owned life insurance of $2.1 million. The decrease in total assets is reflective of an overall decrease in total deposits of $5.4 million, or 4.0%.

Interest Income. Interest income decreased by $287,000 for the six months ended June 30, 2012 from $5.9 million for the six months ended June 30, 2011, reflecting a decrease in the yield on interest earning assets to 5.6% from 5.8% and a decrease in the average balance of interest earning assets to $203.2 million for the six months ended June 30, 2012 compared to $206.9 million for the six months ended June 30, 2011. The decrease in market interest rates contributed to the downward re-pricing of a portion of our existing assets and lower rates for new assets and the decrease in the average balance of interest earning assets primarily resulted from a decrease in loan demand from the six months ended June 30, 2011.

Provision for Loan Losses. We recorded a provision for loan losses of $1.0 million for the six months ended June 30, 2012 compared to $199,000 for the six months ended June 30, 2011. The allowance for loan losses was $1.5 million, or 0.93%, of total loans at June 30, 2012 compared to $1.1 million, or 0.67% of total loans at December 31, 2011. The increase in our provision reflected net charge offs for the six months ended June 30, 2012 of $604,000. We had $2.5 million in troubled debt restructurings at June 30, 2012 compared with $3.0 million at December 31, 2011. Our non-accrual loans increased to $3.6 million at June 30, 2012 from $1.5 million at December 31, 2011. We used the same methodology in assessing the allowance for both periods. To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended June 30, 2012 and 2011.