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, Catalyst Bank (the “Bank”), formerly known as St. Landry Homestead Federal Savings Bank (“St. Landry Homestead”). 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 St. Landry Homestead, which became the wholly owned subsidiary of Catalyst Bancorp, Inc. In June 2022, St. Landry Homestead changed its name to Catalyst Bank.
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, 2022, we had total assets of $263.3 million, including total loans of $133.6 million and total investment securities of $93.1 million, total deposits of $165.1 million and total shareholders’ equity of $88.5 million. We had net income of $180,000 for the year ended December 31, 2022, compared to net income of $1.9 million for the year ended December 31, 2021. During the year ended December 31, 2021, the Company received and recognized into income a $1.8 million grant from the Community Development Financial Institution (“CDFI”) Rapid Response Program.
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. We have re-focused 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. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, 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 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 have taken 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 $1.8 million, or 1.35% of total loans, at December 31, 2022 and $2.3 million, or 1.72% of total loans, at December 31, 2021. The decrease in the allowance for loan losses largely reflects the reversal of certain provisions made for estimated loan losses during 2020 associated with our initial assessment of COVID-19’s impact on credit risk.
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. 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.
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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.
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, 2022 and December 31, 2021, net unrealized losses on available-for-sale securities totaled $11.5 million and $864,000, respectively. The increase in unrealized losses on available-for-sale securities relates principally to the increases in market rates of similar types of securities. No declines in fair value of available-for-sale securities 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.
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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, 2022 and 2021 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 1,807 2,276
Year Ended December 31,
Selected Operating Data:
Total interest income $ 8,014 $ 7,699
Total interest expense 683 795
Provision for (reversal of) loan losses (375) (660)
Total non-interest income 1,173 2,626
Total non-interest expense 8,720 7,791
Income (loss) before income taxes 159 2,399
Income tax expense (benefit) (21) 484
Selected Performance Ratios:(1)
Average yield on interest-earning assets 3.00 % 3.24 %
Average rate on interest-bearing liabilities 0.44 0.51
Average interest rate spread(2) 2.56 2.73
Net interest margin(2) 2.75 2.91
Total non-interest expense to average assets 3.08 3.08
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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 1.12 % 0.67 %
Non-performing assets as a percent of total assets(5) 0.76 0.43
Net charge-offs to average loans receivable 0.07 0.06
Capital Ratios:(6)
Common equity Tier 1 capital 56.17 % 63.51 %
Total risk-based capital 57.42 64.77
Average equity to average assets 32.90 24.34
Other Data:
Banking offices 6 6
Full-time equivalent employees 50 56
(6) Capital ratios are end of period ratios for the Bank only.
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Comparison of Financial Condition at December 31, 2022 and December 31, 2021
Total Assets. Total assets were $263.3 million at December 31, 2022, down $22.3 million, or 7.8%, from $285.6 million at December 31, 2021. The decrease resulted primarily from a $27.4 million decrease in cash and cash equivalents, which was largely driven by an $11.7 million decline in deposits and the utilization of $10.0 million for purchases of bank-owned life insurance during 2022.
Loans. Total loans grew by $1.5 million, or 1.1%, to $133.6 million at December 31, 2022 compared to $132.1 million at December 31, 2021. Commercial and industrial and construction and land loan growth was partially offset by net declines across the other segments of the portfolio. The increase in the commercial and industrial loan portfolio was primarily driven by direct loans to small and mid-sized businesses involved in a variety of industries in our market area, including industrial manufacturing and equipment, communications, and professional services. All SBA PPP loans were fully paid off during 2022. The total unpaid principal balance of PPP loans, included in commercial and industrial loans, amounted to $2.8 million at December 31, 2021. During 2022, the Company purchased participation interests in two commercial real estate development loans. At December 31, 2022, the aggregate balance of our interests in these participations totaled $1.2 million, which is included in construction and land loans.
The following table shows the composition of our loan portfolio by type of loan at the dates indicated.
December 31,
(Dollars in thousands) Amount % Amount % Change
Real estate loans
Other loans
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The following table shows the scheduled contractual maturities of our loans as of December 31, 2022. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The amounts shown below do not take into account loan prepayments.
Amounts due after December 31, 2022 in
The following table shows the dollar amount of our loans at December 31, 2022, due after December 31, 2023, as shown in the preceding table, which have fixed interest rates or which have floating or adjustable interest rates.
(Dollars in thousands) Fixed-Rate Floating or Adjustable-Rate Total
Amounts due after December 31, 2023
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Non-performing Assets. The following table shows the amounts of our non-performing assets, which include non-accruing loans, accruing loans 90 days or more past due and foreclosed assets at the dates indicated, and our performing TDRs. The increase in non-performing assets from December 31, 2021 to December 31, 2022, was primarily driven by an increase in our non-accruing one- to four-family residential loans. A decline in government stimulus and persistent inflation during 2022 impacted our residential borrowers.
At December 31,
Non-accruing loans
One- to four-family residential $ 1,392 $ 791
Commercial real estate 51 -
Construction and land 51 68
Multi-family residential - -
Commercial and industrial - 18
Consumer - 13
Total non-accruing loans 1,494 890
Accruing loans 90 days or more past due
One- to four-family residential 191 -
Commercial real estate - -
Construction and land - -
Multi-family residential - -
Commercial and industrial - -
Consumer - 1
Total accruing loans 90 days or more past due 191 1
Total non-performing loans 1,685 891
Foreclosed assets 320 340
Total non-performing assets 2,005 1,231
Performing troubled debt restructurings 783 1,873
Total non-performing assets and performing TDRs $ 2,788 $ 3,104
Total non-accruing loans as a percentage of total loans 1.12 % 0.67 %
Total non-performing loans as a percentage of total loans 1.26 0.67
Total non-performing loans as a percentage of total assets 0.64 0.31
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Allowance for Loan Losses. The allowance for loan losses totaled $1.8 million, or 1.35% of total loans, at December 31, 2022 and $2.3 million, or 1.72% of total loans, at December 31, 2021. The decline in the allowance for loan losses primarily reflects the reversal of provisions made for estimated loan losses during 2020 associated with our initial assessment of COVID-19’s impact on credit risk. The Company recorded a reversal to the allowance for loan losses of $375,000 and $660,000 through earnings during the years ended December 31, 2022 and 2021, respectively.
The following table shows changes in our allowance for loan losses and other related data for the periods indicated.
Year Ended December 31,
Allowance for loan losses, beginning of period $ 2,276 $ 3,022
Provision for (reversal of) loan losses (375) (660)
Net loan (charge-offs) recoveries:
One- to four-family residential (69) (69)
Commercial real estate - -
Construction and land - -
Multi-family residential - -
Commercial and industrial 1 -
Consumer (26) (17)
Total net charge-offs (94) (86)
Allowance for loan losses, end of period $ 1,807 $ 2,276
Total non-accrual loans at end of period 1,494 890
Total non-performing loans at end of period 1,685 891
Allowance for loan losses as a percent of:
Total loans 1.35 % 1.72 %
One- to four-family residential (0.08) % (0.07) %
Commercial real estate - -
Construction and land - -
Multi-family residential - -
Commercial and industrial 0.01 -
Consumer (0.66) (0.37)
Total average loans (0.07) (0.06)
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The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated.
December 31,
Investment Securities. Total investment securities, available-for-sale and held-to-maturity, amounted to $93.1 million at December 31, 2022, down $8.8 million, or 8.6%, from $101.8 million at December 31, 2021. Based on amortized cost, 87.1% and 86.9% of our total investment securities were classified as available-for-sale at December 31, 2022 and 2021, respectively. Net unrealized losses on securities available-for-sale totaled $11.5 million at December 31, 2022, compared to $864,000 at December 31, 2021. The increase in unrealized losses on available-for-sale securities related principally to increases in market interest rates for similar securities. Our investment securities portfolio consists 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, 2022, purchases of $13.2 million of investment securities exceeded $10.9 million of maturities, calls and principal repayments.
The following table sets forth the composition of our securities portfolio as of the dates indicated.
December 31,
Securities available-for-sale
Securities held-to-maturity
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The following table presents the amortized cost of our total investment securities portfolio that matures during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2022.
Contractual Maturity as of December 31, 2022
Total investment securities
Weighted average yield
Mortgage-backed securities - % 1.98 % 2.22 % 1.59 % 1.71 %
Municipal obligations - 0.83 2.92 1.35 1.85
Total weighted average yield - 1.21 1.94 1.62 1.63
Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments, or call options. The expected maturities may differ from contractual maturities because of the exercise of call options and potential paydowns. Accordingly, actual maturities may differ from contractual maturities. Weighted average yields are calculated by dividing the estimated annual income divided by the average amortized cost of the applicable securities.
The following table sets forth the dollar value of our investment securities which have fixed interest rates or which have floating or adjustable interest rates at each of the dates indicated.
December 31,
Fixed-rate
Adjustable-rate
Available-for-sale 50 58
Held-to-maturity - -
Total adjustable-rate 50 58
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Deposits. Total deposits were $165.1 million at December 31, 2022, down $11.7 million, or 6.6%, compared to December 31, 2021. The decline was primarily driven by a $14.1 million decline in certificates of deposit, partially offset by increases in non-interest-bearing and NOW account balances. Certificates of deposits as a percent of total deposits fell to 31.8% at December 31, 2022, down from 37.7% of total deposits at December 31, 2021. Total loans as a percent of total deposits were 80.9% and 74.7% at December 31, 2022 and 2021, respectively.
The following table presents total deposits by account type for the dates indicated.
December 31,
(Dollars in thousands) Amount % Amount % Change
The following table shows the average balance of each type of deposit and the average rate paid on each type of interest-bearing deposit for the periods indicated.
Year Ended December 31,
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The following table shows the maturities and weighted average contractual interest rates of our total certificates of deposit at December 31, 2022 by time remaining to maturity.
(Dollars in thousands) Amount Weighted Average Rate
Balance at December 31, 2022 maturing in:
Over three months through six months 11,011 0.76
Total certificates of deposit $ 52,503 1.05
The following table shows the maturities and weighted average contractual interest rates of our certificates of deposit in excess of the FDIC insurance limit (generally, $250,000) at December 31, 2022 by time remaining to maturity.
(Dollars in thousands) Amount Weighted Average Rate
Balance at December 31, 2022 maturing in:
Three months or less $ 977 0.91 %
Over three months through six months 2,553 0.53
The estimated amount of our total uninsured deposits (that is deposits in excess of the FDIC’s insurance limit) was $59.1 million and $48.9 million, respectively, at December 31, 2022 and 2021.
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Borrowings. Our borrowings, which consist of FHLB advances, amounted to $9.2 million at December 31, 2022 compared to $9.0 million at December 31, 2021. The increase in the carrying value of our FHLB advances reflects the amortization of deferred prepayment penalties on $10.0 million in advances restructured in December of 2020. Deferred prepayment penalties on our FHLB advances totaled $802,000 and $982,000 at December 31, 2022 and 2021, respectively. The prepayment penalties are being amortized over the remaining term of the advances. Of our $10.0 million in fixed rate FHLB advances, $3.0 million matures in 2025, $3.0 million matures in 2027 and $4.0 million matures in 2028.
The following table shows certain information regarding our borrowings at or for the dates indicated:
At or For the Year Ended
December 31,
FHLB advances
Maximum balance at any month-end during the period 9,198 9,018
Balance at end of period 9,198 9,018
Average interest rate during the period 3.02 % 3.05 %
Weighted average interest rate at end of period(1) 0.93 0.93
(1) Reflects the weighted average contractual rate of FHLB advances.
Shareholders’ Equity. Shareholders’ equity totaled $88.5 million, or 33.6% of total assets, at December 31, 2022, down $10.1 million, or 10.2%, from $98.6 million, or 34.5% of total assets, at December 31, 2021. The decline in shareholders’ equity was primarily due to a $8.4 million increase in the Company’s accumulated other comprehensive loss position due to unrealized losses on available-for-sale securities.
During the fourth quarter of 2022, the Company began funding purchases of its common stock under the terms of the 2022 Recognition and Retention Plan and Trust Agreement (the “2022 RRP”). Through December 31, 2022, 179,808 shares of the Company’s common stock were purchased at an average cost per share of $13.01, and at December 31, 2022, there were 31,792 shares left to be purchased under the 2022 RRP. During the first quarter of 2023, the Company completed repurchases of 31,792 additional shares of common stock to fund the 2022 RRP and commenced repurchases under its 2023 Repurchase Plan, which was announced on January 26, 2023. Under the 2023 Repurchase Plan, the Company may purchase up to 265,000 shares, or approximately 5% of the Company’s outstanding common stock.
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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. Taxable equivalent (“TE”) yields have been calculated using a marginal tax rate of 21%. All average balances are based on daily balances.
Year Ended December 31,
Interest-earning assets:
Non-interest-earning assets 15,631 15,101
Interest-bearing liabilities:
Non-interest-bearing liabilities 33,297 35,403
Total liabilities 189,857 191,298
Shareholders' equity 93,074 61,542
Net interest-earning assets $ 110,740 $ 81,844
Net interest margin(TE)(3) 2.75 2.91
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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.
Year Ended
Increase (Decrease) Due to Total
(Dollars in thousands) Rate Volume Increase (Decrease)
Interest income:
Loans receivable $ (393) $ (445) $ (838)
Other interest-earning assets 361 (14) 347
Interest expense:
Savings, NOW and money market accounts (4) 10 6
Certificates of deposit (85) (42) (127)
Total deposits (89) (32) (121)
FHLB advances and other borrowings (3) 12 9
Total interest expense (92) (20) (112)
Increase (decrease) in net interest income $ 234 $ 193 $ 427
Comparison of Results of Operation for the Years Ended December 31, 2022 and 2021
General. For the year ended December 31, 2022, the Company reported net income of $180,000, compared to net income of $1.9 million for the year ended December 31, 2021. During 2022, the Bank rebranded and officially changed its name to Catalyst Bank. Pre-tax costs associated with the rebranding of the Bank totaled $269,000 for the year ended December 31, 2022. The Company also received and recognized into non-interest income a $171,000 Bank Enterprise Award (“BEA”) Program grant from the CDFI Fund during 2022. During 2021, the Company received a $1.8 million Rapid Response Program grant from the CDFI Fund, which was fully recognized in non-interest income in the same period it was received.
Interest Income. Total interest income increased $315,000, or 4.1%, to $8.0 million for the year ended December 31, 2022, compared to $7.7 million for the year ended December 31, 2021. This increase was primarily attributable to a $806,000 increase in interest income on investment securities and a $347,000 increase in other interest income, partially offset by a decrease in interest income on loans of $838,000.
The average loan yield was 4.62% for the year ended December 31, 2022, down from 4.91% for the year ended December 31, 2021. In addition, average loans were $132.5 million for the year ended December 31, 2022, down $9.4 million, or 6.6%, compared to 2021. Loan income from the recognition of deferred PPP loan fees totaled $186,000 for the year ended December 31, 2022, down $154,000, or 45.3%, from $340,000 recognized in 2021.
The increase in interest income on investment securities was primarily due to an increase in the average volume of our securities portfolio. The average amortized cost balance of our investment securities was up $46.5 million, or 80.1%, for the year ended December 31, 2022, compared to 2021. During the fourth quarter of 2021, the Company deployed $41.9 million of the proceeds from our IPO into the investment securities portfolio.
Interest income on other interest-earning assets, consisting primarily of interest-earning cash and deposits at other financial institutions, increased primarily due to the impact of rising short-term interest rates during 2022.
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Interest Expense. Total interest expense decreased $112,000, or 14.1%, to $683,000 for the year ended December 31, 2022, compared to $795,000 for the year ended December 31, 2021. Interest expense on deposits was $402,000 for the year ended December 31, 2022, down $121,000, or 23.1%, from $523,000 for the year ended December 31, 2021. Total average interest-bearing deposits were $147.3 million for the year ended December 31, 2022, up less than 1.0% compared to the prior year, while the average rate paid on interest-bearing deposits decreased by nine basis points to 0.27% for the year ended December 31, 2022, compared to 0.36% for the previous year.
Net Interest Income. Net interest income was $7.3 million for the year ended December 31, 2022, up $427,000, or 6.2%, compared to the year ended December 31, 2021. Our average interest rate spread was 2.56% and 2.73% for the years ended December 31, 2022 and 2021, respectively. Our net interest margin was 2.75% and 2.91% for the years ended December 31, 2022 and 2021, respectively. The decline in interest rate spread and net interest margin over the comparable periods was primarily the result of lower average yields on loans and a shift in the mix of our interest-earning assets as we grew our investment securities portfolio and experienced a decline in total average loans during 2022 compared to 2021.
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 reversals to the allowance for loan losses of $375,000 and $660,000 for the years ended December 31, 2022 and 2021, respectively. The amounts recorded during both periods primarily reflect the release of reserve builds recorded during 2020 for the estimated effects of the COVID-19 pandemic on credit quality. While our initial assessment of the impact of the COVID-19 pandemic has improved during 2021 and 2022, uncertainty remains due to risks related to declining government stimulus availability, persistent inflation, rising market interest rates and a slowing economy.
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 decreased $1.5 million, or 55.3%, to $1.2 million for the year ended December 31, 2022, from $2.6 million for the year ended December 31, 2021. In August 2021, the Bank was awarded a $1.8 million grant from the U.S. Treasury Department’s CDFI Rapid Response Program, which was recognized as non-interest income. During 2022, the Company received and recognized into non-interest income a $171,000 BEA Program grant from the CDFI Fund.
Income from bank-owned life insurance (“BOLI”) increased by $224,000 to $314,000 for the year ended December 31, 2022, compared to the prior year, largely due to an aggregate of $10.0 million in additional BOLI policies purchased in March and April of 2022. During 2022, the Company also recorded losses on the disposal of fixed assets with a total net book value of $77,000. Of the assets disposed, $55,000 was attributable to branch signage that was replaced due to the Bank’s rebranding.
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Non-interest Expense. Non-interest expense increased $929,000, or 11.9%, to $8.7 million for the year ended December 31, 2022, compared to $7.8 million for the year ended December 31, 2021. Total non-interest expense for the year ended December 31, 2022 included $214,000 of rebranding-related expenses. The increase in non-interest expense also reflects additional costs associated with operating as a public company and additional resources needed to expand our business.
Salaries and employee benefits expense totaled $4.8 million for the year ended December 31, 2022, an increase of $191,000, or 4.1%, over the previous year primarily due to stock compensation expense in the 2022 period. Allocations under the Company’s ESOP commenced during the fourth quarter of 2021 and the Company granted awards under the 2022 Stock Option Plan and 2022 Recognition and Retention Plan and Trust Agreement in September 2022.
Data processing and communication expense totaled $841,000 for the year ended December 31, 2022, an increase of $64,000, or 8.2%, over the previous year primarily due to the cost of additional technology resources and our newest branch location during the 2022 period. Data processing and communication expense also included $30,000 of rebranding-related expenses during the 2022 period.
Professional fees totaled $538,000 for the year ended December 31, 2022, an increase of $150,000, or 38.7%, over the previous year primarily due to the cost of public company related services during 2022.
Advertising and marketing expense totaled $240,000 for the year ended December 31, 2022, an increase of $197,000 over the previous year primarily due to rebranding-related expenses of $124,000 and increased promotional activities during 2022.
Franchise and shares tax expense totaled $115,000 for the year ended December 31, 2022. As a result of the mutual-to-stock conversion of the Bank and the establishment of Catalyst Bancorp as its holding company, the Company became subject to franchise tax and the Bank became subject to Louisiana shares tax for 2022.
Insurance expense totaled $135,000 for the year ended December 31, 2022, an increase of $72,000, or 114.3%, over the previous year primarily due to additional liability insurance required as a public company.
Income Tax Expense. The Company reported an income tax benefit of $21,000 for the year ended December 31, 2022, compared to income tax expense of $484,000 for the year ended December 31, 2021. The change in income tax expense over the comparable periods was primarily due to the change in taxable earnings.
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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. The majority of our interest-earning assets largely consist 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. Interest rate sensitivity is monitored by management through the use of models which generate estimates of changes in net interest income and the economic value of our assets and liabilities over a range of interest rate scenarios.
Net Interest Income Analysis. We model and analyze potential changes to net interest income over a twelve-month period under rising and falling interest rate scenarios. Our primary model used to analyze the impact of changes in interest rates on net interest income assumes a static balance sheet, applies immediate and sustained rate shocks and assumes no management intervention over the forecast period. The following table summarizes the results of our net interest income model as of December 31, 2022, which estimates the impact of immediate and sustained changes in interest rates on net interest income over the following twelve months.
(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, 2022, in the event of an immediate and sustained 100 basis point increase in interest rates, our net interest income for the 12 months ending December 31, 2023 would be expected to decrease by $150,000 or 1.9%.
Economic Value of Equity. 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, 2022 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 Fair 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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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, 2022, we had outstanding advances from the FHLB with a carrying value of $9.2 million, and had the capacity to borrow approximately an additional $34.2 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 $772,000 for the year ended December 31, 2022. Net cash used in investing activities, which consists primarily of net changes in loans receivable, investment securities and other assets, such as bank-owned life insurance, was $14.1 million for the year ended December 31, 2022. Net cash used in financing activities, consisting of net changes in funding sources and capital, was $14.0 million for the year ended December 31, 2022.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position frequently and anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit that are scheduled to mature in less than one year from December 31, 2022 totaled $40.1 million. Management expects that a majority of the maturing certificates of deposit will be retained. However, if a substantial portion of these deposits is not retained, we have sufficient capacity to utilize FHLB advances or we may raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
At December 31, 2022, we had $1.9 million of outstanding commitments to originate loans and $7.2 million of remaining funds to be disbursed on construction loans in process. Our total unused lines of credit, unused overdraft privilege amounts and letters of credit totaled $13.6 million at December 31, 2022.
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, 2022
Amount of Commitment Expiration — Per Period
Commitments to originate loans $ 1,960 $ 1,960 $ - $ - $ -
Unused overdraft privilege amounts 1,132 - - - 1,132
Letters of credit 4 4 - - -
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The following table summarizes our contractual cash obligations at December 31, 2022.
Payments Due By Period
Operating lease obligations - - - - -
The Bank exceeded all regulatory capital requirements and was categorized as well-capitalized at December 31, 2022 and December 31, 2021. 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.
Actual To be Well Capitalized under the Prompt Corrective Action Provision
(Dollars in thousands) Amount Ratio Amount Ratio
As of December 31, 2022
As of December 31, 2021
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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, 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 30, 2023
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CATALYST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
ASSETS
Non-interest-bearing cash $ 5,092 $ 4,933
Interest-bearing cash and due from banks 8,380 35,951
Investment securities:
Securities available-for-sale, at fair value 79,602 88,339
Allowance for loan losses (1,807) (2,276)
Accrued interest receivable 673 579
Premises and equipment, net 6,303 6,577
Stock in correspondent banks, at cost 1,808 1,793
LIABILITIES
Deposits
Advances from Federal Home Loan Bank 9,198 9,018
SHAREHOLDERS' EQUITY
Unallocated common stock held by benefit plans (6,307) (4,179)
Accumulated other comprehensive income (loss) (9,074) (683)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 263,324 $ 285,610
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 $ 6,127 $ 6,965
INTEREST EXPENSE
Advances from Federal Home Loan Bank 281 272
Total interest expense 683 795
Provision for (reversal of) loan losses (375) (660)
NON-INTEREST INCOME
Service charges on deposit accounts 731 641
Gain (loss) on disposals and sales of fixed assets (77) 25
Bank-owned life insurance 314 90
Federal community development grant 171 1,826
Total non-interest income 1,173 2,626
NON-INTEREST EXPENSE
Salaries and employee benefits 4,822 4,631
Occupancy and equipment 833 774
Data processing and communication 841 777
Foreclosed assets, net 5 90
Advertising and marketing 240 43
Franchise and shares tax 115 -
Regulatory fees and assessments 134 123
Printing, supplies and postage 143 115
Total non-interest expense 8,720 7,791
Income before income tax expense (benefit) 159 2,399
Income tax expense (benefit) (21) 484
Earnings per share - basic $ 0.04 $ 0.39
Earnings per share - diluted $ 0.04 $ 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,
Total other comprehensive income (loss) (8,391) (790)
Total comprehensive income (loss) $ (8,211) $ 1,125
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 - - - 1,915 - 1,915
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
Net income - - - 180 - 180
Other comprehensive income (loss) - - - - (8,391) (8,391)
ESOP shares released for allocation - 69 212 - - 281
Stock compensation expense - 191 - - - 191
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
Investment securities amortization, net 461 409
Federal Home Loan Bank stock dividends (15) (5)
Amortization of prepayment penalties on debt restructuring 180 180
Provision for (reversal of) loan losses (375) (660)
Net loss (gain) on disposals and sales of premises and equipment 77 (25)
Increase in cash surrender value of bank-owned life insurance (314) (90)
Stock-based compensation 472 73
Depreciation of premises and equipment 448 424
Net write-downs and losses (gains) on the sale of foreclosed assets (8) 73
Deferred income tax expense (benefit) (9) 152
(Increase) decrease in other assets (23) 313
Increase (decrease) in other liabilities (302) 669
Net cash provided by operating activities 772 3,428
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Proceeds from maturities, calls, and paydowns 10,884 8,554
Activity in held-to-maturity securities:
Proceeds from maturities and calls - 4,000
Net (increase) decrease in loans (1,607) 19,673
Proceeds from sale of foreclosed assets 39 216
Purchases of premises and equipment (252) (1,512)
Proceeds from sale of premises and equipment - 25
Purchase of bank-owned life insurance (10,000) -
Net cash used in investing activities (14,143) (46,589)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (11,701) 12,197
Proceeds from the issuance of common stock, net of costs - 50,835
Purchase of stock for ESOP - (4,232)
Net cash provided by (used in) financing activities (14,041) 58,800
NET CHANGE IN CASH AND CASH EQUIVALENTS (27,412) 15,639
CASH AND CASH EQUIVALENTS, beginning of period 40,884 25,245
CASH AND CASH EQUIVALENTS, end of period $ 13,472 $ 40,884
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Loans originated to facilitate the sale of real estate owned $ - $ 82
Acquisition of real estate in settlement of loans 10 215
SUPPLEMENTAL SCHEDULE OF INTEREST AND TAXES PAID
Cash paid for interest $ 496 $ 634
Cash paid for income taxes 243 82
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. In June 2022, St. Landry Homestead changed its name to Catalyst Bank (the “Bank”).
Catalyst 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 demand and NOW accounts, money market accounts, savings 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