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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of the financial condition and results of operations of Catalyst Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, St. Landry Homestead Federal Savings Bank (the “Bank”). The information in this section has been derived from the audited financial statements, which appear in Item 8 of this Annual Report on Form 10-K. The information in this section should be read in conjunction with the Consolidated Financial Statements and related notes included herein in “Item 8. Financial Statements and Supplementary Data” and the description of our business included herein in “Item 1. Business”.

Overview

Catalyst Bancorp , Inc. was incorporated by St. Landry Homestead Federal Savings Bank in February 2021 as part of the conversion of St. Landry Homestead from the mutual to the stock form of organization (the “Conversion). The Conversion was completed on October 12, 2021, at which time the Company acquired all of the issued and outstanding shares of common stock of the Bank and became the holding company for the Bank. As a result of the Conversion, the Bank is a wholly owned subsidiary of Catalyst Bancorp Inc.

Founded in 1922, the Bank is a community-oriented savings bank serving the banking needs of customers in the Acadiana region of south-central Louisiana. We are headquartered in Opelousas, Louisiana and serve our customers through six full-service branches located in Carencro, Eunice, Lafayette, Opelousas, and Port Barre. Our primary business consists of attracting deposits from the general public and using those funds together with funds we borrow from the Federal Home Loan Bank (“FHLB”) of Dallas and other sources to originate loans to our customers and invest in securities. At December 31, 2021, we had total assets of $285.3 million, including total loans of $131.8 million and total investment securities of $101.8 million, total deposits of $176.8 million and total shareholders’ equity of $98.3 million. We had net income of $1.9 million for the year ended December 31, 2021, compared to a net loss of $703,000 for the year ended December 31, 2020. The primary reasons for the improvement in our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, were a $1.7 million increase in non-interest income in 2021, due primarily to the recognition into income of a $1.8 million grant from the Community Development Financial Institution (“CDFI”) Rapid Response Program, and a $660,000reversal to the allowance for loan losses in 2021 compared to a $985,000 provision to the allowance for loan losses in 2020.

Historically, we operated as a traditional thrift relying on long-term, single-family residential mortgage loans secured by properties located primarily in St. Landry Parish and adjoining areas to generate interest income. As discussed below, we are re-focusing our business strategy to a relationship-based community bank model. The Conversion and offering were important factors in our efforts to become a more dynamic, profitable and growing institution.

Our results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on our loan and investment portfolios and interest expense on deposits and borrowings. Our net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. Results of operations are also affected by our provisions for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation, office occupancy and equipment expense, data processing, advertising and business promotion and other expense. We expect that our non-interest expenses will increase as we grow and expand our operations. In addition, our compensation expense will increase due to the new stock benefit plans we intend to implement. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, the impact of the COVID-19 pandemic and the on-going economic slowdown, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial condition and results of operations.

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Business Strategy

Our business strategy is focused on transforming St. Landry Homestead into a more dynamic institution by embracing a relationship-oriented community bank model targeting small- to mid-sized businesses and business professionals in our market areas while continuing to serve our traditional customer base. Highlights of our business strategy, which is designed to facilitate our ability to operate and grow as a profitable community-based banking institution, include the following:

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Critical Accounting Estimates

In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the notes to our financial statements. Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. 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 intend 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 accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

Allowance for Loan Losses. We have identified the evaluation of the allowance for loan losses as a critical accounting policy where amounts are sensitive to material variation. The allowance for loan losses represents management’s estimate for probable losses that are inherent in our loan portfolio but which have not yet been realized as of the date of our balance sheet. It is established through a provision for loan losses charged to earnings. Loans, or portions of loans, are charged off against the allowance in the period that such loans, or portions thereof, are deemed uncollectible. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover probable and reasonably estimable losses in the loan portfolio based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant changes as more information becomes available. The allowance for loans losses totaled $2.3 million, or 1.73% of total loans, at December 31, 2021 and $3.0 million, or 1.99% of total loans, at December 31, 2020. The decrease in the allowance for loan losses primarily related to improvements in our assessment of the impact of the COVID-19 pandemic on our borrowers.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan loss have not required significant adjustments from management’s initial estimates. In addition, the Office of the Comptroller of the Currency as an integral part of their examination processes periodically reviews our allowance for loan losses. While management is responsible for the establishment of the allowance for loan losses and for adjusting such allowance through provisions for loan losses, management may determine, as a result of such regulatory reviews, that an increase or decrease in the allowance or provision for loan losses may be necessary or that loan charge-offs are needed. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

Investment Securities. Available-for-sale securities consist of investment securities not classified as trading securities or held-to-maturity securities. Available-for-sale securities are reported at fair value and unrealized holding gains and losses, net of tax, on available-for-sale securities are included in other comprehensive income. The fair market values of investment securities are obtained from a third party service provider, whose prices are based on a combination of observed market prices for identical or similar instruments and various matrix pricing programs. The fair market values of investment securities are classified within Level 2 of the fair value hierarchy.

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Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. The term “other-than-temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Declines in the estimated fair value of individual investment securities below their cost that are considered other-than-temporary are recognized as realized losses in the statement of income. Factors affecting the determination of whether an other-than-temporary impairment has occurred include, among other things, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) that the Company does not intend to sell these securities, and (4) it is more likely than not that the Company will not be required to sell before a period of time sufficient to allow for any anticipated recovery in fair value. Unrealized holding gains and losses, net of tax, on available-for-sale securities are included in other comprehensive income. At December 31, 2021, net unrealized losses on available-for-sale securities totaled $864,000, compared to net unrealized gains on available-for-sale securities of $134,000 at December 31, 2020. The increase in unrealized losses on available-for-sale securities relate principally to the change in interest rates for similar types of securities. No declines in fair value of available-for-sale securities during the years ended December 31, 2021 and 2020 were deemed to be other-than-temporary.

Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws. Realizing our deferred tax assets principally depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.

COVID-19

In light of the recent events surrounding the COVID-19 epidemic, the Company is continually assessing the effects of the pandemic on its employees, customers and communities. The CARES Act, enacted in March of 2020, contains many provisions related to banking, lending, mortgage forbearance and taxation. We have supported our customers through the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), loan modifications and loan deferrals. We have funded 240 SBA PPP loans totaling approximately $8.5 million with an average loan balance of $36,000 to existing customers and key prospects located primarily in our markets in south central Louisiana. In addition, we have granted loan modifications under the CARES Act, generally in the form of three-month deferrals of principal payments and a three-month extension of the maturity date. The Company handles loan modification requests on a case-by-case basis considering the effects of the COVID-19 pandemic, the related economic slowdown and stay-at-home orders on our customers and their current and projected cash flows through the terms of their respective loans. We believe the customer interaction during this time provides us with an opportunity to broaden and deepen our customer relationships while benefiting the local communities we serve. Through December 31, 2021, we granted COVID-19 related payment relief to 204 loans with principal balances totaling $28.2 million. As of December 31, 2021, we had no loans under deferral or extension agreements due to COVID-19.

The Company is working with customers affected by COVID-19 through modifications of their loans. In accordance with guidance from the Federal Deposit Insurance Corporation (the “FDIC”), borrowers who were current prior to becoming affected by COVID-19, that received loan modifications as a result of the pandemic, generally are not reported as past due. Effects of COVID-19 may negatively impact management assumptions and estimates, such as the allowance for loan losses. The Company is evaluating all loan modifications to customers to identify and quantify any impact they may have on the Company. However, it is difficult to assess or predict how and to what extent COVID-19 will affect the Company in the future.

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Selected Financial and Other Data

Set forth below is selected financial and other data of the Company at and for the dates indicated. The following is only a summary and should be read in conjunction with the business and financial information regarding the Company included elsewhere herein, including the financial statements included in Item 8 of this Annual Report on Form 10-K. The information at and for the years ended December 31, 2021 and 2020 is derived from the audited financial statements that appear elsewhere in this Annual Report on Form 10-K.

At December 31,

Selected Financial Condition Data:

Investment securities:

Allowance for loan losses 2,276 3,022

Year Ended December 31,

Selected Operating Data:

Total interest income $ 7,699 $ 8,490

Total interest expense 795 1,705

Provision for (reversal of) loan losses (660) 985

Total non-interest income 2,626 966

Total non-interest expense 7,776 7,943

Income (loss) before income taxes 2,414 (1,177)

Income tax expense (benefit) 487 (474)

Net income (loss) $ 1,927 $ (703)

Selected Performance Ratios:(1)

Average yield on interest-earning assets 3.24 % 3.86 %

Average rate on interest-bearing liabilities 0.51 1.09

Average interest rate spread(2) 2.73 2.77

Net interest margin(2) 2.91 3.09

Total non-interest expense to average assets 3.08 3.41

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At or For the

Year Ended December 31,

Asset Quality Ratios:(4)

Non-accrual loans as a percent of total loans outstanding 0.68 % 0.55 %

Non-performing assets as a percent of total assets(5) 0.43 0.72

Net charge-offs to average loans receivable 0.06 0.02

Capital Ratios:(6)

Common equity Tier 1 capital 63.51 % 40.92 %

Total risk-based capital 64.77 42.29

Average equity to average assets 24.28 22.18

Other Data:

Banking offices 6 5

Full-time equivalent employees 56 52

(6) Capital ratios are end of period ratios for the Bank only.

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Comparison of Financial Condition at December 31, 2021 and December 31, 2020

Total Assets. Total assets increased $60.7 million, or 27.0%, to $285.3 million at December 31, 2021 from $224.7 million at December 31, 2020. The increase resulted primarily from a $63.6 million increase in investment securities and a $15.6 million increase in cash and cash equivalents, offset in part by a decrease of $20.0 million in loans receivable.

Cash and Cash Equivalents. Cash and cash equivalents increased by $15.6 million, or 61.9%, to $40.9 million at December 31, 2021 compared to $25.2 million at December 31, 2020. The increase in cash and cash equivalents reflects a portion of the cash subscriptions received in our initial public offering which had not been invested at December 31, 2021, cash inflows of $19.7 million primarily due to the net decrease in loans in the year ended December 31, 2021, as well as deposit inflows associated with government stimulus payments received by our customers and SBA PPP loans originated during the year. The level of loan principal repayments during the year ended December 31, 2021, reflects in part the continuing effect of the historically low market rates of interest on residential mortgage loans and increased repayments by our mortgage loan customers who have re-financed their loans with other institutions.

Loans. Total loans receivable decreased by $20.0 million, or 13.1%, to $131.8 million at December 31, 2021 compared to $151.8 million at December 31, 2020. During the year ended December 31, 2021, our total real estate loan portfolio decreased by $21.5 million, due primarily to a $12.6 million decrease in one- to four-family residential mortgage loans, a $7.2 million decrease in commercial real estate loans and a $1.5 million decrease in construction and land loans. Our total commercial and industrial loans increased by $1.6 million to $8.4 million at December 31, 2021 compared to $6.7 million at December 31, 2020. The increase in commercial and industrial loans during the year ended December 31, 2021 primarily reflects organic growth unrelated to SBA PPP loans. SBA PPP loans amounted to $2.6 million at December 31, 2021 compared to $3.5 million at December 31, 2020.

Allowance for Loan Losses. The allowance for loans losses totaled $2.3 million, or 1.73% of total loans, at December 31, 2021 and $3.0 million, or 1.99% of total loans, at December 31, 2020. The Company recorded a reversal to the allowance for loan losses of $660,000 through earnings during the year ended December 31, 2021 primarily due to improvements in our assessment of the impact of the COVID-19 pandemic on our borrowers.

Investment Securities. Our total investment securities, available-for-sale and held-to-maturity, amounted to $101.8 million at December 31, 2021, an increase of $63.6 million, or 166.2%, compared to $38.3 million in investment securities at December 31, 2020. At December 31, 2021, $88.3 million, or 86.7%, of our total investment securities were classified as available-for-sale. Our investment securities portfolio at such date consisted primarily of debt obligations issued by the U.S. government and government agencies and government sponsored mortgage-backed securities. During the year ended December 31, 2021, purchases of $77.5 million of investment securities exceeded $8.6 million of maturities, calls and principal repayments.

Deposits. Our total deposits amounted to $176.8 million at December 31, 2021, an increase of $12.2 million, or 7.4%, compared to December 31, 2020. The increase in total deposits at December 31, 2021 compared to December 31, 2020 reflects in part government stimulus payments received by our banking customers as well as depository inflows related to SBA PPP loan proceeds.

Borrowings. Our borrowings, which consist of FHLB advances, amounted to $9.0 million at December 31, 2021 compared to $8.8 million at December 31, 2020. The $180,000 increase in the carrying value of our FHLB advances primarily reflects the amortization of deferred prepayment penalties on $10.0 million in advances restructured in December of 2020. In December of 2020, a total of $15.0 million of long-term FHLB advances were paid off, with resulting prepayment penalties of $1.5 million being charged to earnings. The remaining $10.0 million of long-term debt was restructured to longer maturities at then current interest rates. An additional prepayment penalty for the restructuring of $1.2 million was treated as a discount on the debt.

Shareholders’ Equity. Shareholders’ equity increased $47.8 million to $98.3 million at December 31, 2021 compared to $50.5 million at December 31, 2020. The primary reason for the increase in total shareholders’ equity was the $50.8 million in net proceeds received from our Conversion and initial public offering of our Common Stock, which was completed in October 2021, and net income of $1.9 million for the year, which was partially offset by an increase in unallocated common

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stock of $4.2 million due to the purchase of stock by the ESOP and a $790,000 decrease in accumulated unrealized gains/losses on available for sale securities. At December 31, 2021, our ratio of total shareholders’ equity to total assets was 34.5% compared to 22.5% at December 31, 2020.

Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.

Year Ended December 31,

Interest-earning assets:

Non-interest-earning assets 15,240 12,784

Interest-bearing liabilities:

Non-interest-bearing liabilities 35,353 24,376

Total liabilities 191,248 181,094

Shareholders' equity 61,323 51,600

Net interest-earning assets $ 81,436 $ 63,192

Net interest margin(2) 2.91 % 3.09 %

(2) Equals net interest income divided by average interest-earning assets.

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Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

Increase (Decrease) Due to

(Dollars in thousands) Rate Volume Total Increase (Decrease)

Interest income:

Other interest-earning assets (74) 39 (35)

Interest expense:

Savings, NOW and money market accounts (114) 31 (83)

Certificates of deposit (338) 24 (314)

FHLB advances and other borrowings (39) (474) (513)

Total interest expense (491) (419) (910)

Increase (decrease) in net interest income $ 322 $ (203) $ 119

Comparison of Operating Results for the Years Ended December 31, 2021 and 2020

General. For the year ended December 31, 2021, net income totaled $1.9 million, an increase of $2.6 million compared to a net loss of $703,000 for the year ended December 31, 2020. During 2021, net income included the recognition of $1.8 million in non-interest income related to a CDFI Rapid Response Program grant received in 2021 and a reversal of the allowance for loan losses of $660,000. During 2020, net income included $1.5 million in penalties as non-interest expense upon the prepayment of $15.0 million of FHLB advances and a $985,000 provision for loan losses.

Interest Income. Total interest income decreased $791,000, or 9.3%, to $7.7 million for the year ended December 31, 2021 compared to $8.5 million for the year ended December 31, 2020. Interest income on loans decreased by $862,000, or 11.0%, in 2021. The average balance of our loan portfolio decreased by $19.6 million, or 12.2%, which was partially offset by an increase of six basis points (100 basis points being equal to 1.0%) in the average yield earned on loans in the year ended December 31, 2021 compared to the year ended December 31, 2020. Interest income earned on our investment securities portfolio increased by $106,000, or 18.7%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in 2021 was due primarily to a $23.2 million, or 66.8%, increase in the average balance during the year, which was partially offset by a 47 basis point reduction in the average yield earned on our investment securities. The average yield earned on our investment securities portfolio was 1.17% for the year ended December 31, 2021 compared to 1.64% for the year ended December 31, 2020, primarily reflecting the continuing historically low market rates of interest during the period. Interest income on other interest-earning assets, consisting primarily of cash and cash equivalent deposits at other financial institutions and other equity investments, decreasedby $35,000, or 36.8%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The average yield earned on our other interest-earning assets decreased by 23 basis points to 0.16% for the year ended December 31, 2021 compared to 0.39% for the year ended December 31, 2020, which more than offsetthe effects of an $13.9 million increase in the average balance of other interest-earning assets.

Interest Expense. Total interest expense decreased $910,000, or 53.4%, to $795,000 for the year ended December 31, 2021 compared to $1.7 million for the year ended December 31, 2020. Interest expense on FHLB advances decreased $513,000, or 65.4%, to $272,000 for 2021 compared to 2020 primarily due to a $15.5 million decrease in the average

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balance of FHLB advances during the year. In December of 2020, a total of $15.0 million of long-term FHLB advances were paid off, with resulting prepayment penalties of $1.5 million being charged to non-interest expense. The remaining $10.0 million of long-term FHLB advances were restructured to longer maturities at then current interest rates. An additional prepayment penalty for the restructuring of $1.2 million was treated as a discount on the borrowings and is being amortized into interest expense over the life of the restructured borrowings. Interest expense on total deposits decreased $397,000, or 43.2%, to $523,000 for 2021 compared to 2020 due primarily to a decrease of 34 basis points in the average rate paid on total deposits in the year ended December 31, 2021 compared to the year ended December 31, 2020, which more than offset the effects of a $14.6 million increase in the average balance of total deposits during the period.

Net Interest Income. Net interest income totaled $6.9 million for the year ended December 31, 2021, an increase of $119,000, or 1.8%, compared to $6.8 million for the year ended December 31, 2020. Our interest rate spread decreased to 2.73% for the year ended December 31, 2021 from 2.77% for the year ended December 31, 2020, and our net interest margin decreased to 2.91% for the year ended December 31, 2021 from 3.09% for the year ended December 31, 2020. The decreases in interest rate spread and net interest margin were primarily the result of the continuing low interest rate environment and a shift in the mix of our interest-earning assets as we grew our investment securities portfolio and experienced a decline in total loans during 2021. These factors reduced average yield earned on total interest-earning assets in an amount which more than offset the reduction in the average cost of our interest-bearing liabilities.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to earnings as losses related to our loan portfolio are determined to be probable and can be reasonably estimated. Loans, or portions of loans, are charged off against the allowance in the period that such loans, or portions thereof, are deemed uncollectible. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, and prevailing economic conditions. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

We recorded a reversal for loan losses of $660,000 for the year ended December 31, 2021, compared to a $985,000 provision for the year ended December 31, 2020. During 2020, our evaluation of the allowance for loan losses was significantly influenced by the uncertainty and economic disruption brought on by the COVID-19 pandemic as well as the increases of $872,000 and $529,000, respectively, on the amounts of our impaired loans and substandard loans at December 31, 2020 compared to December 31, 2019. During 2021, our analysis reflected improvements in our assessment of the impact of the COVID-19 pandemic on our borrowers, improvements in the level of impaired and substandard loans and a decline in the size of our loan portfolio.

The establishment of the allowance for loan losses is significantly affected by management judgment and uncertainties and there is a likelihood that different amounts would be reported under different conditions or assumptions. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. While management is responsible for the establishment of the allowance for loan losses and for adjusting such allowance through provisions for loan losses, management may determine, as a result of such regulatory reviews, that an increase or decrease in the allowance or provision for loan losses may be necessary or that loan charge-offs are needed.

Non-interest Income. Non-interest income increased $1.7 million to $2.6 million for the year ended December 31, 2021 from $966,000 for the year ended December 31, 2020. The increase in non-interest income in 2021 was due primarily to the recognition into income of the $1.8 million CDFI grant.

Non-interest Expense. Non-interest expense decreased $167,000, or 2.1%, to $7.8 million for the year ended December 31, 2021 from $7.9 million for the year ended December 31, 2020. In December of 2020, a total of $15.0 million of long-term FHLB advances were paid off, with resulting prepayment penalties of $1.5 million being charged to non-interest expense in 2020. The decrease in non-interest expense due to the absence of prepayment penalties in 2021 was partially offset by increases in compensation and benefits, occupancy and equipment, data processing and

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communication and professional services expenses. Salaries and employee benefits expense increased by $987,000, or 27.1%, to $4.6 million for the year ended December 31, 2021 compared to $3.6 million for the year ended December 31, 2020 primarily due to additional personnel employed and the commencement of the ESOP during 2021. Occupancy and equipment expense increased by $140,000, or 20.6%, to $818,000 for the year ended December 31, 2021 compared to $678,000 for the year ended December 31, 2020 primarily due to expenses related to new branch locations opened in October 2020 and November 2021. Data processing and communication expense increased by $178,000, or 29.1%, to $790,000 for the year ended December 31, 2021 compared to $612,000 for the year ended December 31, 2020 primarily due to the cost of technology resources for new branch locations, additional personnel and improvements in software applications for financial reporting.

We expect non-interest expense to increase into 2022 because of certain costs associated with operating as a public company, including the Louisiana shares tax, the full-year impact of ESOP compensation expense and the possible implementation of stock-based benefit plans, if approved by our shareholders. We also expect to incur increased non-interest expense due to the planned re-branding of St. Landry Homestead. Such re-branding efforts may include a new name, a new marketing campaign, updated on-line and website materials and new signage and logos to capture and reflect the new focus of the Company.

Income Tax Expense. Income tax expense totaled $487,000 for the year ended December 31, 2021, compared to an income tax benefit of $474,000 in the prior year. The change in income tax expense was primarily due to the increase in taxable earnings in 2021 compared to 2020 and the absence of an income tax benefit from a net operating loss (“NOL”) carryback in 2021. During 2020, an income tax benefit of $196,000 was recognized due to a NOL carryback.

Exposure to Changes in Interest Rates

Our ability to maintain net interest income depends upon our ability to earn a higher yield on interest-earning assets than the rates we pay on deposits and borrowings. Our interest-earning assets consist primarily of fixed-rate investment securities and adjustable rate residential and commercial mortgage loans. Consequently, our ability to maintain a positive spread between the interest earned on assets and the interest paid on deposits and borrowings can be adversely affected when market rates of interest change.

Economic Value of Equity. Interest rate sensitivity is monitored by management through the use of models which generate estimates of the change in our economic value of equity over a range of interest rate scenarios. Economic value of equity (“EVE”) represents the market value of portfolio equity, which is different from book value, and is equal to the market value of assets minus the market value of liabilities (that is, the difference between incoming and outgoing discounted cash flows of assets and liabilities) with adjustments made for off-balance sheet items. The EVE ratio, under any interest rate scenario, is defined as the EVE in that scenario divided by the market value of assets in the same scenario. The following table sets forth our EVE as of December 31, 2021 and reflects the changes to EVE as a result of immediate and sustained changes in interest rates as indicated.

Economic Value of Equity EVE as % of Far Value of Assets

(Dollars in thousands) Amount $ Change % Change EVE Ratio Change

Change in Interest Rates In Basis Points (Rate Shock):

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Net Interest Income Analysis. In addition to modeling changes in the economic value of equity, we also analyze potential changes to net interest income for a twelve-month period under rising and falling interest rate scenarios. The following table shows our net interest income model as of December 31, 2021.

(Dollars in thousands) Net Interest Income $ Change % Change

Change in Interest Rates in Basis Points (Rate Shock):

The above table indicates that as of December 31, 2021, in the event of an immediate and sustained 300 basis point increase in interest rates, our net interest income for the 12 months ending December 31, 2022 would be expected to increase by $329,000 or 4.9%.

Liquidity and Capital Resources

The Company maintains levels of liquid assets deemed adequate by management. We adjust our liquidity levels to fund deposit outflows, repay our borrowings, and to fund loan commitments. We also adjust liquidity, as appropriate, to meet asset and liability management objectives.

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, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB. At December 31, 2021, we had outstanding advances from the FHLB with a carrying value of $9.0 million, and had the capacity to borrow approximately an additional $50.5 million from the FHLB and an additional $17.8 million on a line of credit with First National Bankers Bank at such date.

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. 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 $857,000 for the years ended December 31, 2021 and 2020, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable and net change in investment securities, was $46.6 million and $313,000 for the years ended December 31, 2021 and 2020, respectively. Net cash provided by financing activities, consisting primarily of proceeds from the issuance of stock, the activity in deposit accounts and FHLB advances, was $58.8 million and $6.8 million for the years ended December 31, 2021 and 2020, respectively.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. We also anticipate continued use of FHLB advances.

The Bank exceeded all regulatory capital requirements and was categorized as well-capitalized at December 31, 2021 and December 31, 2020. Management is not aware of any conditions or events since the most recent notification that would change our category. The following table presents actual and required capital ratios for the Bank.

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Actual To be Well Capitalized under the Prompt Corrective Action Provision

(Dollars in thousands) Amount Ratio Amount Ratio

As of December 31, 2021

As of December 31, 2020

Off-Balance Sheet Arrangements. At December 31, 2021, we had $1.1 million of remaining funds to be disbursed on construction loans in process and $4.9 million of outstanding commitments to originate loans. Our total letters and lines of credit, unused overdraft privilege amounts and unused lines of credit totaled $3.8 million at December 31, 2021. Certificates of deposit that are scheduled to mature in less than one year from December 31, 2021, totaled $50.0 million at December 31, 2021. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Commitments. The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans at December 31, 2021.

Amount of Commitment Expiration — Per Period

Commitments to originate loans $ 4,865 $ 4,865 $ - $ - $ -

Unused overdraft privilege amounts 1,075 - - - 1,075

Letters of credit 2 2 - - -

Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to our financial statements.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Catalyst Bancorp, Inc.

Opelousas, LA

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of Catalyst Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Castaing, Hussey & Lolan, LLC

We have served as the Company’s auditor since 2020.

New Iberia, LA

March 29, 2022

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CATALYST BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31,

ASSETS

Non-interest-bearing cash $ 4,933 $ 5,507

Interest-bearing cash and due from banks 35,951 19,738

Investment securities:

Securities available-for-sale, at fair value 88,339 20,730

Allowance for loan losses (2,276) (3,022)

Accrued interest receivable 579 564

Premises and equipment, net 6,577 5,489

Stock in Federal Home Loan Bank, at cost 1,399 1,394

Bank-owned life insurance 3,303 3,213

LIABILITIES

Deposits

Advances from Federal Home Loan Bank 9,018 8,838

SHAREHOLDERS' EQUITY

Additional paid-in capital 50,802 -

Accumulated other comprehensive income (loss) (683) 107

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 285,349 $ 224,688

The accompanying Notes are an integral part of these financial statements.

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CATALYST BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,

INTEREST INCOME

Loans receivable, including fees $ 6,965 $ 7,827

Investment securities 674 568

INTEREST EXPENSE

Advances from Federal Home Loan Bank 272 785

Total interest expense 795 1,705

Provision for (reversal of) loan losses (660) 985

NON-INTEREST INCOME

Service charges on deposit accounts 641 575

Gain on sale of fixed assets 24 16

Bank-owned life insurance 90 70

Federal community development grant 1,826 203

Total non-interest income 2,626 966

NON-INTEREST EXPENSE

Salaries and employee benefits 4,631 3,644

Occupancy and equipment 818 678

Data processing and communication 790 612

Foreclosed assets, net 75 287

Advertising and marketing 43 86

Prepayment penalties on FHLB advances - 1,510

Total non-interest expense 7,776 7,943

Income (loss) before income tax expense (benefit) 2,414 (1,177)

Income tax expense (benefit) 487 (474)

NET INCOME (LOSS) $ 1,927 $ (703)

Earnings per share - basic $ 0.40 $ N/A

The accompanying Notes are an integral part of these financial statements.

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CATALYST BANCORP, INC. AND SUBSIDARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,

Net income (loss) $ 1,927 $ (703)

Net unrealized gains (losses) on available-for-sale securities (998) 150

Income tax effect 208 (31)

Total other comprehensive income (loss) (790) 119

Total comprehensive income (loss) $ 1,137 $ (584)

The accompanying Notes are an integral part of these financial statements.

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CATALYST BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Net income (loss) - - - (703) - (703)

Other comprehensive income (loss) - - - - 119 119

Net income - - - 1,927 - 1,927

Other comprehensive income (loss) - - - - (790) (790)

Issuance of common stock 53 50,782 - - - 50,835

Stock purchased by the ESOP - - (4,232) - - (4,232)

ESOP shares released for allocation - 20 53 - - 73

The accompanying Notes are an integral part of these financial statements.

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CATALSYT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss) $ 1,927 $ (703)

Investment securities amortization, net 409 208

Dividends on Federal Home Loan Bank stock (5) (22)

Amortization of prepayment penalties on debt restructuring 180 15

Provision for (reversal of) loan losses (660) 985

Net gain on sale of premises and equipment (24) (16)

Increase in cash surrender value of bank-owned life insurance (90) (70)

Stock-based compensation 73 -

Depreciation of premises and equipment 424 347

Net losses on foreclosed assets 58 264

(Increase) decrease in other assets 456 (86)

Increase (decrease) in other liabilities 680 (65)

Net cash provided by operating activities 3,428 857

CASH FLOWS FROM INVESTING ACTIVITIES

Activity in available-for-sale securities:

Proceeds from maturities, calls, and paydowns 8,554 10,177

Activity in held-to-maturity securities:

Proceeds from maturities and calls 4,000 13,000

Proceeds from sale of foreclosed assets 216 583

Purchases of premises and equipment (1,512) (547)

Proceeds from sale of premises and equipment 24 16

Purchase of bank owned life insurance - (1,000)

Net cash used in investing activities (46,589) (313)

CASH FLOWS FROM FINANCING ACTIVITIES

Repayments of Federal Home Loan Bank advances - (15,000)

Prepayment penalties on debt restructuring - (1,177)

Proceeds from the issuance of common stock, net of costs 50,835 -

Purchase of stock for ESOP (4,232) -

Net cash provided by financing activities 58,800 6,792

NET INCREASE IN CASH AND CASH EQUIVALENTS 15,639 7,336

CASH AND CASH EQUIVALENTS, beginning of period 25,245 17,909

CASH AND CASH EQUIVALENTS, end of period $ 40,884 $ 25,245

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES

Loans originated to facilitate the sale of real estate owned $ 82 $ 48

Acquisition of real estate in settlement of loans $ 215 $ 228

SUPPLEMENTAL SCHEDULE OF INTEREST AND TAXES PAID

Cash paid for interest $ 634 $ 1,768

Cash paid for income taxes $ 82 $ 75

The accompanying Notes are an integral part of these financial statements.

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CATALYST BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Catalyst Bancorp, Inc. (“Catalyst Bancorp” or the “Company”) was incorporated by St. Landry Homestead Federal Savings Bank (“St. Landry Homestead” or the “Bank”) in February 2021 as part of the conversion of St. Landry Homestead from the mutual to the stock-form of organization (the “Conversion). The Conversion was completed on October 12, 2021, at which time the Company acquired all of the issued and outstanding shares of common stock of the Bank and became the holding company for the Bank. St Landry Homestead Federal Savings Bank, which is the sole subsidiary of the Company, provides a variety of banking services to individuals and corporate customers within its principal market area consisting of St. Landry Parish, Evangeline Parish, Acadia Parish and Lafayette Parish, Louisiana, and is subject to competition from other financial institutions. The Bank is a federal savings association subject to examination and regulation by the Office of the Comptroller of the Currency (OCC), and is also subject to examination by the FDIC as deposit insurer. Effective October 16, 2019, the Bank elected to be a “covered association” pursuant to a provision of the Economic Growth Regulatory Relief and Consumer Protection Act (EGRRCPA), that permits a federal savings association to elect to exercise national bank powers without converting to a national bank charter. The Bank’s primary deposit products are savings accounts, demand and NOW accounts, money market accounts, and certificates of deposit. Its primary lending products are single family residential loans, commercial loans, and consumer loans. The Bank is also subject to the regulations of certain federal agencies and undergoes periodic examinations by those agencies.

Summary of Significant Accounting Policies

The accounting and reporting policies of the Company conform to generally accepted accounting principles and to predominant accounting practices within the banking industry. The more significant accounting and reporting policies are as follows:

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation for foreclosed assets. In connection with thedetermination of the estimated losses on loans and foreclosed assets, management obtains independent appraisals for significant properties.

A substantial portion of the Company’s loans and foreclosed assets are secured by real estate in local markets which are largely rural and rely heavily upon agriculture and the oil and gas industry. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio and the recovery of the carrying amount of foreclosed assets are susceptible to changes in local market conditions.

While management uses available information to recognize losses on loans and foreclosed assets, further reductions in the carrying amount of loans and foreclosed assets may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the

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Company’s estimated losses on loans and foreclosed assets. While management is responsible for the establishment of the allowance for loan losses and for adjusting such allowance through provisions for loan losses, as a result of such regulatory reviews management may determine that an increase or decrease in the allowance or provision for loan losses may be necessary. Because of these factors, it is reasonably possible that the estimated losses on loans and foreclosed assets may change materially in the near-term. However, the amount of the change that is reasonably possible cannot be estimated.

Reclassifications

Certain amounts reported in prior periods may have been reclassified to conform to the current period presentation. Such reclassifications had no effect on previously reported equity or net income.

Cash and Cash Equivalents

For the purpose of reporting cash flows, cash and cash equivalents include cash, interest-bearing deposits in other institutions, certificates of deposit purchased with original maturities of three months or less and highly liquid debt instruments with original maturities when purchased for three months or less.

Investment Securities

Investment securities that are acquired with the intention of being resold in the near term are classified as trading securities and are carried at fair value, with unrealized holding gains and losses recognized in current earnings. The Company did not hold any securities for trading purposes at or during the years ended December 31, 2021 or 2020.

Government, federal agency and corporate debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and are reported at cost, adjusted for amortization of premiums and accretion of discounts that are recognized in interest income using methods approximating the interest method over the period to maturity. Available-for-sale securities consist of investment securities not classified as trading securities or held-to-maturity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are included in other comprehensive income.

Premiums and discounts are amortized using the interest method or the straight-line method when appropriate. The use of the straight-line method approximates the interest method and does not result in a material difference. Interest income is recognized when earned.

Realized gains and losses on sales of securities are included in earnings and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on the sale of securities are determined using the specific-identification method. The amortization of premiums and the accretion of discounts are recognized in interest income using methods approximating the interest method over the period of maturity.

Declines in the estimated fair value of individual investment securities below their cost that are other-than-temporary are reflected as realized losses in the statement of income. Factors affecting the determination of whether an other-than-temporary impairment has occurred include, among other things, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) that the Company does not intend to sell these securities, and (4) it is more likely than not that the Company will not be required to sell before a period of time sufficient to allow for any anticipated recovery in fair value.

Loans Receivable

Loans receivable are carried at the amount of unpaid principal balances, net of deferred loan-origination fees and discounts and the allowance for loan losses. Interest income on loans receivable is accrued based on the unpaid principal balance.

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The accrual of interest is discontinued (“nonaccrual status”) when management determines doubt exists as to the collectability of the asset due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, or the depreciation of underlying collateral. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is charged against interest income on loans. Interest payments received on nonaccrual loans are applied to reduce the principal balance.

The allowance for the loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loans, or portions of loans, are charged off against the allowance in the period that such loans, or portions thereof, are deemed uncollectible. Subsequent recoveries, if any, are credited to the allowance.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management measures impairment on a loan-by-loan basis for loans specifically identified for individual evaluation. Factors considered by management in identifying loans for evaluation include payment status, collateral value, and the probability of collecting scheduled principal payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not individually evaluated for impairment.Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment on loans that are individually considered impaired is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

Allowance for Loan Losses

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

An allowance for loan losses is established through a provision for loan losses charged to earnings in the period in which management determines loan losses are probable and reasonably estimable. The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are individually evaluated and considered impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers loans collectively evaluated for impairment. Loan collectively evaluated for impairment are segregated into large groups of homogenous loans to determine the allowance for loan losses for each group, which based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects that margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Foreclosed Assets

Foreclosed assets includes real property and other assets that have been acquired as a result of foreclosure. At the time of foreclosure, foreclosed assets are recorded at fair value, less cost to sell, which becomes the property’s new basis. Any write-downs based on the assets fair value at date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds fair value. Costs incurred in

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maintaining foreclosed assets and subsequent adjustments to the carrying amount of the assets are included in foreclosed assets expense. At December 31, 2021, loans secured by residential real estate for which formal foreclosure proceedings were in process totaled $47,000.

Premises and Equipment

Land is carried at cost. Buildings, furniture, fixtures and equipment are carried at cost, less accumulated depreciation. Buildings, furniture, fixtures and equipment are depreciated using the declining balance and straight-line methods over the estimated useful lives of the assets, which range from 3 to 39 years for buildings and improvements and 3 to 10 years for equipment, fixtures and automobiles.

Federal Home Loan Bank Stock

As a member of the Federal Home Loan Bank (“FHLB”), the Bank is required to purchase and hold shares of capital stock in the FHLB. The stock does not have a readily determinable fair value and is carried at cost, which approximates fair value. The Company’s investments in equity securities without readily determinable fair value are assessed for impairment and any impairment losses are included in net income. For the years ended December 31, 2021 and 2020, no impairment had been recognized.

Bank-owned Life Insurance

The Bank purchased single-premium life insurance on certain employees of the Bank. The investments in bank-owned life insurance are reported at their cash surrender and changes in the cash surrender value are classified as non-interest income. The insurance policies can be surrendered without penalties or charges imposed by the insurance carriers. Upon any surrender, a gain would be recognized as ordinary income.

Government Assistance

The Bank applies for and receives grant proceeds from the U.S. Department of the Treasury’s Community Development Financial Institutions (“CDFI”) Fund. The CDFI Fund helps promote access to capital and local economic growth in urban and rural low-income communities across the nation through monetary awards and the allocation of tax credits. Current GAAP has no specific authoritative guidance on the accounting for government assistance received by business entities. However, Accounting Standard Codification (“ASC”) 105 describes the decision-making framework for determining the guidance to apply when guidance is not specified by GAAP. ASC 105 points to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, and ASC 958-605, Not-for-Profit Entities – Revenue Recognition, that require conditions of the grant to be met in order to recognize the income.

During the year ended December 31, 2021, the Bank received and recognized into income a $1.8 million grant from the CDFI Rapid Response Program. The Bank met the conditions of the grant by deploying the proceeds to capital through income recognition and by originating the required amount of qualifying loans in its target markets. During the year ended December 31, 2020, the Bank received and recognized into income a $203,000 grant from the CDFI Bank Enterprise Award Program. The Bank met the conditions of the grant by providing loans and financial services directly to residents and businesses located in distressed communities. Income from the federal community development grants are reported in non-interest income on the Consolidated Statements of Income.

Income Taxes

Deferred taxes are provided for accumulated temporary differences due to basis differences for assets and liabilities for financial reporting and income tax purposes. The Company’s temporary differences relate primarily to differences between the basis of FHLB stock, available-for-sale securities, depreciation, allowance for loan losses, unearned

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profit on foreclosed assets for financial and income tax reporting, deferred fees and discount on restructuring of FHLB borrowings.

ASC 740 requires that a tax position be recognized or derecognized based on a “more likely than not” threshold. This applies to positions taken or expected to be taken in a tax return where there is uncertainty about whether a tax position will ultimately be sustained upon examination. The Company has evaluated its tax position and determined that it does not have any uncertain tax positions that meet criteria under ASC 740. The Company’s management believes it is no longer subject to income tax examinations for fiscal years prior to December 31, 2018.

Off-balance Sheet Financial Instruments

In the ordinary course of business, the Company has entered in off-balance-sheet financial instruments consisting of commitments to extend credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.

Fair Values of Financial Instruments

The Company follows the guidance of FASB ASC 825, Financial Instruments, and FASB ASC 820, Fair Value Measurement. This guidance permits entities to measure many financial instruments and certain other items at fair value. No assets have been elected to be reported at fair value. The objective is to improve financial reporting by providing the Company with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or to transfer a liability in an orderly transaction between market participants. Under this guidance, fair value measurements are not adjusted for transaction costs. This guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quotes priced in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Accounting Standards Codification 825-10, Recognition and Measurement of Financial Assets and Financial Liabilities requires that the Company disclose estimated fair values for its financial instruments, whether or not recognized in the statement of financial condition. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments of which it is practicable to estimate that value:

Cash and Cash Equivalents

The carrying amounts reported in the statements of financial condition for cash and cash equivalents approximate those assets’ fair values and are classified within Level 1 of the fair value hierarchy.

Investment Securities

The fair market values of investment securities are obtained from a third party service provider, whose prices are based on a combination of observed market prices for identical or similar instruments and various matrix pricing programs. The fair market values of investment securities are classified within Level 2 of the fair value hierarchy.

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Loans Receivable, net

Loans are valued using the methodology developed for Economic Value of Equity pricing, with a build-up for loans based on the U.S. Treasury yield curve, a credit risk spread and an overhead coverage rate. Loans receivable are classified within Level 3 of the fair value hierarchy.

Impaired Loans

The fair value of impaired loans is measured by the fair value of the collateral if the loan is collateral dependent. Fair value of the collateral is determined by appraisals or by independent valuation. Impaired loans are classified within Level 3 of the fair value hierarchy.

Foreclosed Assets

Fair values of foreclosed real estate and other assets are determined by sales agreement or appraisal and costs to sell are based on estimation per the terms and conditions of the sales agreement or amounts commonly used in real estate transactions. Updated appraisals are obtained on at least an annual basis. Foreclosed assets are classified within Level 3 of the fair value hierarchy.

Bank-owned Life Insurance

The cash surrender value of bank-owned life insurance approximates its fair value and is classified within Level 2 of the fair value hierarchy.

Non-maturity Deposit Liabilities

Under ASC 825-10, the fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, NOW, money market and checking accounts, is equal to the amount payable on demand at the reporting date. These non-maturity deposit liabilities are classified within Level 2 of the fair value hierarchy.

Certificates of Deposit

All certificates are assumed to remain on the Company’s books until maturity without any change in coupon. Fair values are estimated using market pricing data for new CDs of similar structure and remaining maturity. Certificates of deposit are classified within Level 2 of the fair value hierarchy.

Federal Home Loan Bank Borrowings

Data is taken from the Company’s FHLB Customer Profile report. All borrowings are priced using current advance pricing data from the FHLB’s website for new borrowings of similar structure and remaining maturity. FHLB borrowings are classified within Level 2 of the fair value hierarchy.

Other Assets and Liabilities

All other assets and liabilities are reported at current book value unless noted otherwise.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.

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Advertising Costs

The Company expenses all advertising costs as incurred. There were no direct response advertising costs capitalized as of December 31, 2021 and December 31, 2020.

Comprehensive Income

Accounting principles generally require that recognized revenue, expense, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the statement of financial condition. Such items, along with net income, are components of comprehensive income.

Earnings Per Share

Basic earnings (loss) per share (“EPS”) represents income available or loss attributable to common shareholders divided by the weighted average number of common shares outstanding. No dilution for any potentially convertible shares is included in the calculation of basic EPS. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per shares until they are committed to be released.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments introduce an impairment model that is based on current expected credit losses (“CECL”), rather than incurred losses, to estimate credit losses on certain types of financial instruments, including loans, held-to-maturity securities and certain off-balance sheet financial instruments. The CECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Financial instruments with similar risk characteristics may be grouped together when estimating the CECL. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial estimate of expected credit loss would be recognized through an allowance for credit losses with an offset to the purchase price at acquisition. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. The ASU also amends the current available-for-sale security impairment model for debt securities whereby credit losses related to available-for-sale debt securities should be recorded through an allowance for credit losses. The amendments will be applied through a modified retrospective approach, resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. On October 18, 2019, FASB approved an effective date delay applicable to smaller reporting companies and non-public business entities until January 2023. The Company has elected to delay implementation of the standard until January 2023. Currently, the Company has implemented a software application to assist in determining our allowance for loan losses under the CECL model and is in the process of evaluating certain methodologies. The impact upon adoption of this ASU is not known and may have a material effect on the Company’s Consolidated Financial Statements.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The amendments in this update require annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The disclosure requirements include (1) information about the nature of the transactions and the related accounting policy, (2) the line items on the financials statements that are impacted, and the amounts applicable to each line item and (3) significant terms and conditions of the transactions. The FASB is issued this update to increase the transparency of government assistance since diversity currently exists in the recognition, measurement, presentation and disclosure of government assistance received by business entities because of the lack of specific authoritative guidance in GAAP. The amendments in this update are effective for all entities within their scope for financial statements issued for annual periods beginning after

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December 15, 2021, however the Company has elected early application of the amendments. The applicable disclosures are presented in this note under the subsection titled “Government Assistance”.

NOTE 2. COMPLETION OF STOCK OFFERING

On January 27, 2021, the Board of Directors of the Bank adopted a plan of conversion (“Plan of Conversion”). The Plan of Conversion was approved by the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System and by a majority of the eligible voting members of the Bank at a special meeting. The Plan of Conversion provided that the Bank convert from the mutual to the stock-form of ownership (the “Conversion”) and establish a holding company, Catalyst Bancorp, as parent of the Bank. Pursuant to the Plan of Conversion, the Bank converted to the stock form of ownership, followed by the issuance of all of the Bank’s outstanding stock to the Company. The Company has been organized as a corporation under the laws of the State of Louisiana and owns all outstanding common stock of the Bank.

The Conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result. In accordance with OCC regulations, at the time of the Conversion, the Bank established a liquidation account. The liquidation account must be maintained for the benefit of eligible account holders and supplemental eligible account holders who continue to maintain their accounts at the Bank after the Conversion. The liquidation account will be reduced annually to the extent that eligible holders and supplemental eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s or supplemental eligible account holder’s interest in the liquidation account. In the event of a complete liquidation by the Bank, and only in such event, each eligible account holder and supplemental eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The Company is an emerging growth company, and, for as long as it 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. The Company intends 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, its financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

The Company completed its initial public offering (“IPO”) of stock in connection with the Bank’s conversion from the mutual to the stock form of organization on October 12, 2021. Information for periods prior to the completion of the Conversion are for the Bank only.

The Company issued a total of 5,290,000 shares of its common stock, par value $0.01 per share, for an aggregate of $52.9 million in total offering proceeds, including shares issued to the Company’s employee stock ownership plan (“ESOP”). The Company made a loan to the ESOP in the amount of $4.2 million, which the ESOP used to purchase 423,200 shares. The Company’s common stock trades on the Nasdaq Capital Market under the symbol “CLST”.

The costs of issuing the common stock were deferred and deducted from the sales proceeds of the IPO at December 31, 2021. Conversion costs totaled $2.1 million and $21,000 at December 31, 2021 and 2020, respectively. The net proceeds of the IPO of $50.8 million are reflected in the Company’s shareholders’ equity at December 31, 2021.

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NOTE 3. EARNINGS PER SHARE

Earnings per common share was computed based on the following:

Year Ended December 31,

(In thousands, except per share data) 2021

Numerator

Net income available to common shareholders $ 1,927

Denominator

Weighted average common shares outstanding 5,290

Weighted average unallocated ESOP shares (421)

Weighted average shares 4,869

Basic earnings per common share $ 0.40

During the year ended December 31, 2021, there were no convertible securities or other contracts to issue common stock outstanding that if converted or exercised would result in potential dilution of earnings per share. At and during the year ended December 31, 2020, the Company did not have any common shares outstanding. The Company completed its initial public offering (“IPO”) of stock in connection with the Bank’s conversion from the mutual to the stock form of organization on October 12, 2021.

NOTE 4. INVESTMENT SECURITIES

Investment securities have been classified according to management’s intent. The amortized cost of securities and their approximate fair values are as follows:

Securities available-for-sale

U.S. Government and agency obligations 9,347 1 (111) 9,237

Securities held-to-maturity

U.S. Government and agency obligations $ 13,019 $ 23 $ (375) $ 12,667

Municipal obligations 479 6 - 485

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Catalyst Bancorp, Inc. CLST US Equity

CLST · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Item 8. Financial Statements and Supplementary Data

Catalyst Bancorp, Inc. CLST US Equity☆

CLST · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Item 8. Financial Statements and Supplementary Data

Catalyst Bancorp, Inc. CLST US Equity