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. (“Catalyst Bancorp” or the “Company”) is the holding company for Catalyst Bank (the “Bank”), formerly known as St. Landry Homestead Federal Savings Bank. The Company was incorporated by the Bank in February 2021 as part of the conversion of the Bank 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, which became the wholly-owned subsidiary of Catalyst Bancorp. The Bank officially changed its name to Catalyst Bank in June 2022.
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, Federal Reserve Bank of Atlanta, and other sources to originate loans to our customers and invest in securities.
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. In 2021, we re-focused our business strategy to a relationship-based community bank model targeting small- to mid-sized businesses and business professionals in our market areas while continuing to serve our traditional customer base. The Conversion and offering were important factors in our efforts to become a more dynamic, profitable and growing institution.
The following is an overview of financial results for the year ended December 31, 2023, compared to December 31, 2022:
● Total assets of $270.9 million at December 31, 2023, up $7.6 million or 2.9%
● Non-performing assets of $2.1 million at December 31, 2023, up $46,000 or 2.3%
● Non-interest expense decreased $141,000, or 1.6%, to $8.6 million.
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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 credit 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, 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.
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 consolidated financial statements included in Item 8 of this Form 10-K. 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 of 2012 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 are taking 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 Credit Losses. We have identified the evaluation of the allowance for credit losses as a critical accounting policy where amounts are sensitive to material variation. On January 1, 2023, the Company adopted the guidance under ASU No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. The main provisions of the ASU have been codified by the FASB under ASC 326. The amendments introduced an impairment model that is based on current expected credit losses, rather than incurred losses, to estimate credit losses on loans. For reporting periods beginning on or after January 1, 2023, the allowance for credit losses reflects management’s current estimate of expected credit losses over the remaining life of its loans as of the end of the reporting period. For reporting periods prior to January 1, 2023, the allowance for credit losses represented management’s estimate for probable and reasonably estimable loan losses, but which had not yet been realized as of the end of the reporting period. Refer to Note 1 of the consolidated financial statements included in Item 8 of this Form 10-K for more information on the adoption of ASC 326.
The allowance for credit losses includes the allowance for loan losses and the allowance for credit losses on unfunded lending commitments, which is recorded in other liabilities on the statement of financial condition. The allowance for credit losses is established through a provision for credit 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 for loan losses totaled $2.1 million, or 1.47% of total loans, at December 31, 2023 and $1.8 million, or 1.35% of total loans, at December 31, 2022. The increase in the allowance for loan losses from December 31, 2022 largely reflects the addition of forecasted credit losses due to the adoption ASC 326 and the impact of loan growth in 2023.
Management’s estimate of the allowance for credit losses considers factors such 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, current and future economic conditions, and forecasted information. This evaluation is inherently subjective as it requires material estimates including, among others, average historical loss experience, expected future loss rates, the amount and timing of expected future pay-downs on existing loans and fundings on unfunded commitments, and the value of underlying collateral. All of these estimates may be susceptible to significant changes as more information becomes available.
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 credit losses. While management is responsible for the establishment of the allowance for credit losses and for adjusting such allowance through provisions for credit losses, management may determine, as a result of
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such regulatory reviews, that an increase or decrease in the allowance or provision for credit 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 credit 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. At December 31, 2023 and 2022, net unrealized losses on available-for-sale securities totaled $9.2 million and $11.5 million, respectively. Unrealized losses on our available-for-sale securities relate principally to the increases in market rates of similar types of securities. The Company has not realized or recognized any losses in the statement of income for any investment securities held at December 31, 2023 or 2022.
The adoption of ASC 326 amended the guidance applicable to measuring and recognizing losses on available-for-sale securities. Under ASC 326, expected credit related losses for available-for-sale debt securities are recorded through an allowance for credit losses, while non-credit related losses will continue to be recognized through other comprehensive income as unrealized holding gains and losses, net of tax. Under former GAAP, we assessed our investment securities for other-than-temporary impairment and any declines in fair value that were deemed other-than-temporary resulted in a direct write-down to the amortized cost basis of the related security. The allowance approach allows estimated expected credit losses to be adjusted from period-to-period, as opposed to a permanent write-down.
For reporting periods on or after January 1, 2023 and the adoption of ASC 326, management evaluates available-for-sale securities in unrealized loss positions to determine if the decline in the fair value of each security below its amortized cost basis is due to credit-related factors or noncredit-related factors. Consideration is given to the extent to which that fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period sufficient to allow for any anticipated recovery in fair value.
For reporting periods prior to January 1, 2023, management evaluated securities for other-than-temporary impairment. If declines in the estimated fair value of individual investment securities below their cost were considered other-than-temporary, impairment losses were recognized in the statement of income with an offset to the carrying value of the investment security. Factors affecting the determination of whether an other-than-temporary impairment had occurred include, among other things, the length of time and the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, that the Company does not intend to sell these securities, and 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.
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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, 2023 and 2022 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 2,124 1,807
Year Ended December 31,
Selected Operating Data:
Total interest income $ 9,661 $ 8,014
Total interest expense 1,860 683
Provision for (reversal of) credit losses 128 (375)
Total non-interest income 1,589 1,173
Total non-interest expense 8,579 8,720
Income (loss) before income taxes 683 159
Income tax expense (benefit) 81 (21)
Selected Performance Ratios:(1)
Average yield on interest-earning assets 3.83 % 3.00 %
Average rate on interest-bearing liabilities 1.27 0.44
Average interest rate spread(2) 2.56 2.56
Net interest margin(2) 3.10 2.75
Total non-interest expense to average assets 3.22 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 1.36 % 1.12 %
Non-performing assets as a percent of total assets(5) 0.76 0.76
Net (charge-offs) recoveries to average loans receivable 0.02 (0.07)
Capital Ratios:(6)
Common equity Tier 1 capital 52.34 % 56.17 %
Total risk-based capital 53.59 57.42
Average equity to average assets 31.79 32.91
Other Data:
Banking offices 6 6
Full-time equivalent employees 48 50
(6) Capital ratios are end of period ratios for the Bank only.
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Comparison of Financial Condition at December 31, 2023 and December 31, 2022
Total Assets. Total assets increased $7.6 million, or 2.9%, to $270.9 million at December 31, 2023 from $263.4 million at December 31, 2022. The increase was primarily due to additional borrowings in 2023 which were used to fund loan growth and invested in interest-bearing cash.
Loans. Total loans increased by $11.3 million, or 8.5%, to $144.9 million at December 31, 2023, compared to $133.6 million at December 31, 2022. During 2023, loan growth was primarily driven by commercial business. Construction loan growth was largely driven by three separate projects involving the purchase and renovation of a hotel, the construction of a retail health care center, and the purchase and renovation of an industrial warehouse. Commercial and industrial loan growth was mainly driven by loans secured by industrial equipment and accounts receivable. A significant driver of commercial real estate loan growth was a loan to finance the purchase of a multi-tenant office building in Lafayette, Louisiana.
The following table shows the composition of our loan portfolio by type of loan at the dates indicated.
(Dollars in thousands) Amount % Amount % Change
Real estate loans
Other loans
Approximately 60% of our real estate loans have adjustable rates and, of our total real estate loans, approximately $60.7 million, or 50%, are scheduled to re-price or mature during the next 12 months. The largest segment of our total loan portfolio consists of one- to four-family residential real estate loans, and approximately 74% of these loans were originated prior to 2021.
Our commercial and industrial loans largely consist of loans to local businesses involved in industrial manufacturing and equipment, communications, professional services, and oil and gas support services. Approximately 39% of our commercial and industrial loans have adjustable rates and, of total commercial and industrial loans, approximately $10.2 million, or 51%, are scheduled to re-price or mature during the next 12 months.
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The following table shows the scheduled contractual maturities of our loans as of December 31, 2023. 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, 2023 in
The following table shows the dollar amount of our loans at December 31, 2023, due after December 31, 2024, 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, 2024
Allowance for Credit Losses. As of January 1, 2023, the Company adopted the guidance under ASC 326. The adoption of ASC 326 resulted in a $209,000, or 12%, increase in the allowance for loan losses, and a $216,000 increase in other liabilities due to the allowance for credit losses on unfunded commitments. At adoption, we also recorded a corresponding $335,000 after-tax decrease in retained earnings. The increase in the total allowance for credit losses, which is inclusive of the reserve for unfunded commitments, was primarily due to the addition of forecasted credit losses. Refer to Note 1 of the financial statements for more information on the adoption of ASC 326.
At January 1, 2023, the allowance for loan losses totaled $2.0 million, or 1.51% of total loans, compared to $1.8 million, or 1.35% of total loans, at December 31, 2022. At December 31, 2023, the allowance for loan losses totaled $2.1 million, or 1.47% of total loans, and the allowance for credit losses on unfunded commitments totaled $257,000, up $41,000 from the date of adoption of ASC 326. The total provision for credit losses on loans and unfunded commitments was $128,000 for 2023, which was largely attributable to loan growth that necessitated additional loan provisions according to the Bank’s current expected credit losses model.
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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:
Balance, beginning of period $ 1,807 $ 2,276
Impact of adoption of ASC 326 209 -
Provision for (reversal of) loan losses 87 (375)
Net loan recoveries (charge-offs):
One- to four-family residential 42 (69)
Commercial real estate - -
Construction and land - -
Multi-family residential - -
Commercial and industrial 1 1
Consumer (22) (26)
Total net recoveries (charge-offs) 21 (94)
Balance, end of period $ 2,124 $ 1,807
Allowance for credit losses on unfunded lending commitments:
Balance, beginning of period $ - $ -
Impact of adoption of ASC 326 216 -
Balance, end of period $ 257 $ -
Total allowance for credit losses, end of period $ 2,381 $ 1,807
Total provision for (reversal of) credit losses 128 (375)
Total non-accrual loans at end of period 1,967 1,494
Total non-performing loans at end of period 1,991 1,685
Allowance for loan losses as a percent of:
Total loans 1.47 % 1.35 %
One- to four-family residential 0.05 % (0.08) %
Commercial real estate - -
Construction and land - -
Multi-family residential - -
Commercial and industrial 0.01 0.01
Consumer (0.71) (0.66)
Total loans 0.02 (0.07)
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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. The increase in non-performing loans from December 31, 2022 to December 31, 2023, was primarily driven by an increase in our non-accruing one- to four-family residential loans. Persistent inflation and a decline in state government assistance impacted our residential borrowers in both 2022 and 2023.
At December 31,
Non-accruing loans
One- to four-family residential $ 1,875 $ 1,392
Commercial real estate 50 51
Construction and land 42 51
Multi-family residential - -
Commercial and industrial - -
Consumer - -
Total non-accruing loans 1,967 1,494
Accruing loans 90 days or more past due
One- to four-family residential 24 191
Commercial real estate - -
Construction and land - -
Multi-family residential - -
Commercial and industrial - -
Consumer - -
Total accruing loans 90 days or more past due 24 191
Total non-performing loans 1,991 1,685
Foreclosed assets 60 320
Total non-performing assets 2,051 2,005
Total non-accruing loans as a percentage of total loans 1.36 % 1.12 %
Total non-performing loans as a percentage of total loans 1.37 1.26
Total non-performing loans as a percentage of total assets 0.73 0.64
The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated.
December 31,
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Investment Securities. Total investment securities, available-for-sale and held-to-maturity, amounted to $84.0 million at December 31, 2023, down $9.1 million, or 9.8%, compared to $93.1 million in investment securities at December 31, 2022. Net unrealized losses on securities available-for-sale totaled $9.2 million at December 31, 2023, compared to $11.5 million at December 31, 2022. Unrealized losses on available-for-sale securities relate 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 2023, investment security maturities, calls and principal repayments totaled $9.1 million. The Company has not purchased investment securities since the fourth quarter of 2022. During the fourth quarter of 2023, the Company sold two available-for-sale investment securities for a pre-tax loss of $92,000. Cash proceeds from the sales totaled $1.9 million.
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
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, 2023.
Contractual Maturity as of December 31, 2023
Total investment securities
Weighted average yield
Mortgage-backed securities - % 3.12 % 1.67 % 1.66 % 1.76 %
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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 42 50
Held-to-maturity - -
Total adjustable-rate 42 50
Deposits. Total deposits were $165.6 million at December 31, 2023, up $528,000, or less than 1%, compared to December 31, 2022. The following table presents total deposits by account type as of the dates indicated.
December 31,
(Dollars in thousands) Amount % Amount % Change
The increases in savings and certificates of deposits were largely driven by rate specials offered to depositors during 2023. Of the $5.5 million decline in non-interest-bearing demand deposits from December 31, 2022 to December 31, 2023, approximately $3.5 million was attributable to two commercial deposit account closures.
Our public fund deposits totaled $23.3 million, or 14.1% of total deposits, at December 31, 2023, compared to $21.0 million, or 12.7% of total deposits, at December 31, 2022. At December 31, 2023, approximately 78% of our total public funds consisted of non-interest-bearing and interest-bearing demand deposits from municipalities within our market.
Our total uninsured deposits (that is deposits in excess of the FDIC’s insurance limit), inclusive of public funds, were approximately $44.6 million at December 31, 2023 and $43.4 million at December 31, 2022. Total uninsured non-public funds deposits were approximately $26.3 million and $26.9 million at December 31, 2023 and 2022, respectively. The full amount of our public fund deposits in excess of the FDIC’s insurance limit are secured by pledging investment securities.
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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,
The following table shows the maturities and weighted average contractual interest rates of our total certificates of deposit at December 31, 2023 by time remaining to maturity.
(Dollars in thousands) Amount Weighted Average Rate
Balance at December 31, 2023 maturing in:
Over three months through six months 16,372 3.22
Total certificates of deposit $ 53,928 2.82
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, 2023 by time remaining to maturity.
(Dollars in thousands) Amount Weighted Average Rate
Balance at December 31, 2023 maturing in:
Three months or less $ 1,654 3.12 %
Over three months through six months 5,258 4.07
Borrowings.Total borrowings at December 31, 2023 were $19.4 million, up $10.2 million from December 31, 2022. During the fourth quarter of 2023, the Bank began borrowing from the Federal Reserve Bank of Atlanta through its Bank Term Funding Program (“BTFP”). At December 31, 2023, the Bank had one $10.0 million BTFP loan outstanding with a contractual interest rate of 4.83% and a maturity date of December 27, 2024.
Other borrowings outstanding at December 31, 2023 consisted of FHLB advances totaling $9.4 million and $9.2 million at December 31, 2023 and 2022, respectively. The change 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 $622,000 and $802,000 at December 31, 2023 and 2022, respectively.
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The following table shows certain information regarding our borrowings at or for the dates indicated:
At or For the Year Ended
December 31,
Advance from Federal Reserve Bank of Atlanta
Average balance $ 923 $ -
Maximum balance at any month-end during the period 10,000 -
Balance at end of period 10,000 -
Average interest rate during the period 4.95 % - %
Weighted average interest rate at end of period(1) 4.83 -
Advances from FHLB
Maximum balance at any month-end during the period 9,378 9,198
Balance at end of period 9,378 9,198
Average interest rate during the period 2.94 % 3.02 %
Weighted average interest rate at end of period(1) 0.93 0.93
(1) Reflects the weighted average contractual rate of advances.
Shareholders’ Equity. Shareholders’ equity totaled $84.7 million, or 31.2% of total assets, at December 31, 2023, down $3.9 million, or 4.4%, from $88.5 million, or 33.6% of total assets, at December 31, 2022. During 2023, shareholders’ equity decreased by $6.3 million due to the Company’s repurchases of its common stock. This was partially offset by a $1.8 million decrease in accumulated other comprehensive loss due to the change in unrealized losses on available-for-sale investment securities.
During the year ended December 31, 2023, the Company repurchased 528,674 shares of its common stock at an average cost per share of $11.94 through the completion of repurchases of 265,000 shares under its January 2023 Repurchase Plan and 252,000 under its April 2023 Repurchase Plan, and the repurchase of another 11,674 shares pursuant to a third repurchase plan announced in November (the “November 2023 Repurchase Plan”). At December 31, 2023, the Company had common shares outstanding of 4,761,326 and 228,326 of those shares were available for repurchase under the November 2023 Repurchase Plan.
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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 14,077 15,631
Interest-bearing liabilities:
Non-interest-bearing liabilities 35,387 33,260
Total liabilities 181,916 189,820
Shareholders' equity 84,777 93,111
Net interest-earning assets $ 106,087 $ 110,740
Net interest margin(TE)(3) 3.10 2.75
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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:
Other interest-earning assets 630 (257) 373
Interest expense:
Demand deposits, money market and savings accounts 449 (1) 448
Certificates of deposit 746 (55) 691
Increase (decrease) in net interest income $ 606 $ (136) $ 470
Comparison of Results of Operation for the Years Ended December 31, 2023 and 2022
General.For the year ended December 31, 2023, the Company reported net income of $602,000, compared to $180,000 for the year ended December 31, 2022. Net interest income was up $470,000, or 6.4%, in 2023 compared to 2022. The provision for credit losses totaled $128,000 in 2023, compared to a reversal of loan losses of $375,000 for 2022. During 2023 and 2022, the Company recognized income of $437,000 and $171,000, respectively, due to Bank Enterprise Award (“BEA”) Program grants received from the Community Financial Institution (“CDFI”) Fund. During 2022, the Company officially changed the name of the Bank to Catalyst Bank and incurred pre-tax costs of $269,000.
Interest Income.Total interest income increased $1.6 million, or 20.6%, to $9.7 million for the year ended December 31, 2023, compared to 2022. Interest income on loans, investment securities, and other interest-earning assets were up by $1.1 million, $163,000, and $373,000, respectively.
The average loan yield was 5.33% for the year ended December 31, 2023, up from 4.62% for the year ended December 31, 2022. Average loans were $135.7 million for the year ended December 31, 2023, up $3.2 million, or 2.4%, compared to 2022. At December 31, 2023, approximately 56% of our total loans have adjustable rates and approximately 49% of total loans are scheduled to re-price or mature during the next 12 months.
The increase in interest income on investment securities was due to an increase in the average rate earned on our investment securities portfolio. The average rate earned on our investment securities portfolio was 1.66% for the year ended December 31, 2023, up 23 basis points compared to 1.43% for 2022.
Interest income on other interest-earning assets, consisting primarily of interest-earning cash and deposits at other financial institutions, increased due to the impact of higher average short-term interest rates during 2023 compared to 2022.
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Interest Expense. Total interest expense increased $1.2 million, or 172.3%, to $1.9 million for the year ended December 31, 2023, compared to $683,000 for 2022. Interest expense on deposits was $1.5 million during 2023, up $1.1 million, or 283.3%, from $402,000 for 2022. The average rate paid on interest-bearing deposits was 1.13% during 2023, up 86 basis points from 0.27% during 2022.
Net Interest Income. Net interest income was $7.8 million for the year ended December 31, 2023, up $470,000, or 6.4%, compared to 2022. Our interest rate spread was 2.56% for the years ended December 31, 2023 and 2022, respectively. Our net interest margin was 3.10% and 2.75% for the years ended December 31, 2023 and 2022, respectively. The increase in net interest margin and net interest income over the comparable periods was primarily the result of increased yields on our interest-earning assets due to significant increases in market interest rates during 2022 and 2023. Rising market rates have also led to an increase in the average cost of our deposits.
Provision for Credit Losses. The total provision for credit losses on loans and unfunded commitments was $128,000 for the year ended December 31, 2023, compared to a reversal of $375,000 in 2022. In 2023, the provision for credit losses was largely attributable to loan growth that necessitated additional loan provisions according to the Bank’s current expected credit losses model. The reversal during the 2022 period primarily reflected the release of reserve builds recorded during 2020 for the estimated effects of the COVID-19 pandemic on credit quality.
Non-interest Income. Non-interest income totaled $1.6 million for the year ended December 31, 2023, up $416,000, or 35.5%, compared to $1.2 million for 2022. In 2023, income from the CDFI Fund’s BEA Program grant totaled $437,000, up $266,000 from the amount received and recognized in 2022. The BEA Program grants awards to depository institutions that have successfully increased their investments in economically distressed communities through certain qualified activities, including investments in CDFIs and providing loans, investments and financial services to businesses and residents located in distressed communities.
Non-interest income for 2023 also included the $92,000 loss on the sale of investment securities discussed previously. The securities were sold for a total of $1.9 million.
Income from bank-owned life insurance (“BOLI”) increased by $95,000, or 30.3%, to $409,000 for the year ended December 31, 2023, compared to 2022, largely due to an aggregate of $10.0 million in additional BOLI policies purchased in March and April of 2022.
Non-interest income for the year ended December 31, 2022 included losses on the disposal of fixed assets of $77,000. Of the losses on disposed assets, $55,000 was attributable to branch signage that was replaced due to our rebranding.
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Non-interest Expense. Non-interest expense totaled $8.6 million for the year ended December 31, 2023, down $141,000, or 1.6%, compared to 2022. Total non-interest expense for year ended December 31, 2022 included $214,000 of rebranding-related expenses.
Salaries and employee benefits expense totaled $4.7 million for the year ended December 31, 2023, down $151,000, or 3.1%, compared to 2022 primarily due to a lower employee count in 2023. These cost savings were partially offset by higher stock compensation expense in 2023. Stock compensation expense related to awards granted in September 2022 and included in salaries and employee benefits expense totaled $277,000 for the year ended December 31, 2023, compared to $110,000 in 2022.
Directors’ fees for the year ended December 31, 2023 included $245,000 of stock compensation expense, compared to $82,000 in 2022. Total directors’ fees were $463,000 in 2023, up $161,000 compared to 2022.
Data processing and communication expense totaled $911,000 for the year ended December 31, 2023, up $70,000, or 8.3%, compared to 2022 primarily due to annual rate increases by our core system provider and growth in the volume of accounts. For the year ended December 31, 2022, data processing and communication expense included $30,000 of re-branding related expenses.
Professional fees totaled $486,000 for the year ended December 31, 2023, down $52,000, or 9.7%, from 2022. The Company incurred professional fees in 2022 for assistance with the initial grants under our 2022 Stock Option Plan and 2022 Recognition and Retention Plan. Professional fees associated with obtaining our 2023 and 2022 BEA grants totaled $66,000 and $26,000, respectively.
Foreclosed assets expense totaled $72,000 for the year ended December 31, 2023, compared to $5,000 for 2022. The Company realized losses of $66,000 on the sale of real estate held as foreclosed assets during 2023. Prior to the losses recorded in 2023, the real estate properties had a total carrying value of $381,000, of which $320,000 was held at December 31, 2022. The remaining properties were acquired and sold in 2023.
Advertising and marketing expense totaled $100,000 for the year ended December 31, 2023, down $140,000 from 2022. Advertising and marketing expense for the year ended December 31, 2022 included rebranding-related expenses of $124,000.
Income Tax Expense. The Company reported income tax expense of $81,000 for the year ended December 31, 2023 and an income tax benefit of $21,000 for the year ended December 31, 2022. The change in income taxes over the comparable periods was primarily due to the increase in taxable earnings during 2023.
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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, 2023, 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, 2023, in the event of an immediate and sustained 100 basis point decrease in interest rates, our net interest income for the 12 months ending December 31, 2024 would be expected to decrease by $158,000 or 1.9%. In January 2024, the Company initiated a strategy involving the sale of a substantial portion of its available-for-sale investment securities. The Company expects to deploy the net sales proceeds into a mix of cash and higher-yielding earning assets to improve net interest income and our exposure to interest rate risk. Refer to Note 17 of the financial statements included in Item 8 of this Form 10-K for more information.
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, 2023 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, Federal Reserve Bank of Atlanta, and our primary correspondent bank.
At December 31, 2023, our borrowed funds consisted of a $10 million BTFP advance and FHLB advances with a carrying value of $9.4 million. The table below summarizes our unused and available liquidity sources as of December 31, 2023.
Advances from the Federal Home Loan Bank of Dallas $ 48,467
Line of credit with primary correspondent bank 17,800
Federal Reserve's Bank Term Funding Program 1,434
Federal Reserve Discount Window 718
Unpledged available-for-sale investment securities, at fair value 25,385
Total unused and available liquidity $ 93,804
Pledged securities under the BTFP are valued at par when determining borrowing capacity. The total par value of unpledged investment securities eligible as collateral for advances under the BTFP was $16.5 million at December 31, 2023. The Bank refinanced and acquired additional BTFP advances during January 2024. At March 22, 2024, the Bank had one $20.0 million BTFP advance with a rate of 4.76% and a maturity date of January 15, 2025.
The Company also had a $20.0 million custodial letter of credit outstanding from the FHLB as of December 31, 2023, which is included in the calculation of our available capacity with the FHLB. The Company can allocate portions of this letter of credit to collateralize certain deposit balances in excess of the FDIC’s insurance limit as an alternative to pledging investment securities for the same purpose. During the first quarter of 2024, the Company increased this letter of credit to $40.0 million to collateralize public fund deposits as we pursue the investment securities strategy discussed in Note 17 of the financial statements included in Item 8 of this Form 10-K.
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. The details of these cash flow classifications are presented on the statement of cash flows included in Item 8 of this Form 10-K. The most significant uses and sources of cash flows during the year ended December 31, 2023 included: $11.4 million in outflows due to the net increase in loans, $11.0 million in proceeds from maturities, paydowns, and sales of investment securities, $10.0 million in proceeds from BTFP advances, and $6.3 million in outflows for the repurchase of the Company’s common stock.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily and 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 the majority of maturing time deposits will be retained. We also anticipate continued use of our secondary funding sources.
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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, 2023.
Amount of Commitment Expiration — Per Period
Commitments to originate loans $ 141 $ 141 $ - $ - $ -
Unused overdraft privilege amounts 1,142 - - - 1,142
Letters of credit 2 2 - - -
The following table summarizes our contractual cash obligations at December 31, 2023.
Payments Due By Period
The Bank exceeded all regulatory capital requirements and was categorized as well-capitalized at December 31, 2023 and December 31, 2022. 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, 2023
As of December 31, 2022
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to our financial statements included in Item 8 of this Form 10-K.
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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, 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 28, 2024
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CATALYST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
ASSETS
Non-interest-bearing cash $ 3,654 $ 5,092
Interest-bearing cash and due from banks 15,357 8,380
Investment securities:
Securities available-for-sale, at fair value 70,540 79,602
Allowance for loan losses (2,124) (1,807)
Accrued interest receivable 906 673
Foreclosed assets 60 320
Premises and equipment, net 6,072 6,303
Stock in correspondent banks, at cost 1,878 1,808
LIABILITIES
Deposits
SHAREHOLDERS' EQUITY
Unallocated common stock held by benefit plans (6,221) (6,307)
Accumulated other comprehensive income (loss) (7,237) (9,074)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 270,932 $ 263,362
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 $ 7,238 $ 6,127
INTEREST EXPENSE
Total interest expense 1,860 683
Provision for (reversal of) credit losses 128 (375)
NON-INTEREST INCOME
Service charges on deposit accounts 774 731
Bank-owned life insurance 409 314
Gain (loss) on sales of investment securities (92) -
Gain (loss) on disposals and sales of fixed assets - (77)
Federal community development grant 437 171
Total non-interest income 1,589 1,173
NON-INTEREST EXPENSE
Salaries and employee benefits 4,671 4,822
Occupancy and equipment 802 833
Data processing and communication 911 841
Foreclosed assets, net 72 5
Advertising and marketing 100 240
Franchise and shares tax 81 115
Regulatory fees and assessments 131 134
Printing, supplies and postage 145 143
Total non-interest expense 8,579 8,720
Income before income tax expense (benefit) 683 159
Income tax expense (benefit) 81 (21)
Earnings per share - basic $ 0.14 $ 0.04
Earnings per share - diluted $ 0.14 $ 0.04
The accompanying Notes are an integral part of these financial statements.
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CATALYST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
Reclassification adjustment for (gains) losses included in net income 92 -
Total other comprehensive income (loss) 1,837 (8,391)
Total comprehensive income (loss) $ 2,439 $ (8,211)
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 - - - 180 - 180
Other comprehensive income (loss) - - - - (8,391) (8,391)
ESOP shares released for allocation - 69 212 - - 281
Stock compensation expense - 191 - - - 191
Impact of adoption of ASC 326 - - - (335) - (335)
Net income - - - 602 - 602
Other comprehensive income (loss) - - - - 1,837 1,837
ESOP shares released for allocation - 34 212 - - 246
Stock compensation expense - 523 - - - 523
Repurchase of common stock (5) (6,310) - - - (6,315)
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 308 461
Federal Home Loan Bank stock dividends (69) (15)
Amortization of prepayment penalties on debt restructuring 180 180
Provision for (reversal of) credit losses 128 (375)
Loss on sales of investment securities 92 -
Loss on disposals and sales of premises and equipment - 77
Stock-based compensation 769 472
Depreciation of premises and equipment 403 448
Net write-downs and losses (gains) on the sale of foreclosed assets 66 (8)
Deferred income tax expense (benefit) (12) (9)
(Increase) decrease in other assets (510) (23)
Increase (decrease) in other liabilities 460 (302)
Net cash provided by operating activities 2,008 772
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Proceeds from maturities, calls, and paydowns 9,105 10,884
Proceeds from sales 1,896 -
Proceeds from sale of foreclosed assets 320 39
Purchases of premises and equipment (172) (252)
Purchase of bank-owned life insurance - (10,000)
Net cash provided by (used in) investing activities (267) (14,143)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 528 (11,701)
Net advances from the Federal Reserve Bank of Atlanta 10,000 -