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Catalyst Bancorp, Inc. - Quarter Report: 2022 September (Form 10-Q)

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from                      to                     

Commission file number: 001-40893

CATALYST BANCORP, INC.

(Exact name of registrant as specified in its charter)

Louisiana

    

86-2411762

(State or other jurisdiction of incorporation
of organization)

(I.R.S. Employer Identification No.)

235 N. Court Street, Opelousas, Louisiana 70570

(Address of principal executive offices; Zip Code) 

(337) 948-3033

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock

CLST

Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

There were 5,290,000 shares of Registrant’s common stock, par value of $0.01 per share, issued and outstanding as of November 4, 2022.

Table of Contents

CATALYST BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Consolidated Statements of Financial Condition

1

Consolidated Statements of Income

2

Consolidated Statements of Comprehensive Income

3

Consolidated Statements of Changes in Shareholders' Equity

4

Consolidated Statements of Cash Flows

5

Notes to Unaudited Consolidated Financial Statements

6

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

45

Item 4.

Controls and Procedures

45

PART II

OTHER INFORMATION

46

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3.

Defaults Upon Senior Securities

46

Item 4.

Mine Safety Disclosures

46

Item 5

Other Information

46

Item 6.

Exhibits

47

SIGNATURES

48

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PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

CATALYST BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

    

(Unaudited)

September 30, 

December 31, 

(Dollars in thousands)

2022

2021

ASSETS

 

  

 

  

Non-interest-bearing cash

$

4,558

$

4,933

Interest-bearing cash and due from banks

 

31,639

 

35,951

Total cash and cash equivalents

 

36,197

 

40,884

Investment securities:

 

  

 

  

Securities available-for-sale, at fair value

 

78,563

 

88,339

Securities held-to-maturity (fair values of $10,794 and $13,152, respectively)

 

13,480

 

13,498

Loans receivable, net of unearned income

 

131,701

 

131,842

Allowance for loan losses

 

(1,804)

 

(2,276)

Loans receivable, net

 

129,897

 

129,566

Accrued interest receivable

 

566

 

579

Foreclosed assets

 

320

 

340

Premises and equipment, net

 

6,392

 

6,577

Stock in correspondent banks, at cost

 

1,799

 

1,793

Bank-owned life insurance

 

13,519

 

3,303

Other assets

 

2,681

 

470

TOTAL ASSETS

$

283,414

$

285,349

 

  

 

  

LIABILITIES

 

  

 

  

Deposits

 

  

 

  

Non-interest-bearing

$

31,988

$

30,299

Interest-bearing

 

152,239

 

146,496

Total deposits

 

184,227

 

176,795

Advances from Federal Home Loan Bank

 

9,153

 

9,018

Other liabilities

 

706

 

1,190

TOTAL LIABILITIES

 

194,086

 

187,003

 

  

 

  

SHAREHOLDERS' EQUITY

 

  

 

  

Preferred stock, $0.01 par value - 5,000,000 shares authorized; none issued

-

-

Common stock, $0.01 par value - 30,000,000 shares authorized; 5,290,000 issued and outstanding

53

53

Additional paid-in capital

50,902

50,802

Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")

(4,020)

(4,179)

Retained earnings

 

52,379

 

52,353

Accumulated other comprehensive income (loss)

 

(9,986)

 

(683)

TOTAL SHAREHOLDERS' EQUITY

 

89,328

 

98,346

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

283,414

$

285,349

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

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CATALYST BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

(Dollars in thousands)

2022

2021

2022

2021

INTEREST INCOME

  

  

  

  

Loans receivable, including fees

$

1,466

$

1,671

$

4,584

$

5,344

Investment securities

 

381

 

172

 

1,062

 

434

Other

 

185

 

13

 

262

 

37

Total interest income

 

2,032

 

1,856

 

5,908

 

5,815

INTEREST EXPENSE

 

  

 

  

 

  

 

  

Deposits

 

93

 

124

 

272

 

414

Advances from Federal Home Loan Bank

 

69

 

68

 

205

 

204

Total interest expense

 

162

 

192

 

477

 

618

Net interest income

 

1,870

 

1,664

 

5,431

 

5,197

Provision for (reversal of) loan losses

 

(115)

 

-

 

(375)

 

(286)

Net interest income after provision for (reversal of) loan losses

 

1,985

 

1,664

 

5,806

 

5,483

NON-INTEREST INCOME

 

  

 

  

 

  

 

  

Service charges on deposit accounts

 

192

 

165

 

542

 

448

Gain (loss) on disposals and sales of fixed assets

 

-

 

-

 

(77)

 

25

Bank-owned life insurance

 

97

 

22

 

216

 

67

Federal community development grant

 

-

 

1,826

 

171

 

1,826

Other

 

7

 

12

 

20

 

36

Total non-interest income

 

296

 

2,025

 

872

 

2,402

NON-INTEREST EXPENSE

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

1,168

 

1,084

 

3,647

 

3,331

Occupancy and equipment

 

203

 

200

 

640

 

554

Data processing and communication

 

216

 

201

 

666

 

556

Professional fees

 

157

 

88

 

472

 

255

Directors’ fees

 

75

 

70

 

185

 

211

ATM and debit card

 

76

 

48

 

184

137

Foreclosed assets, net

 

(2)

 

39

 

(21)

 

74

Advertising and marketing

 

36

 

14

 

187

 

35

Franchise and shares tax

15

-

131

-

Regulatory fees and assessments

35

32

104

95

Insurance

34

14

100

35

Printing, supplies and postage

37

27

117

82

Other

 

78

 

67

 

285

 

211

Total non-interest expense

 

2,128

 

1,884

 

6,697

 

5,576

Income (loss) before income tax expense (benefit)

 

153

 

1,805

 

(19)

 

2,309

Income tax expense (benefit)

 

14

 

372

 

(45)

 

465

NET INCOME

$

139

$

1,433

$

26

$

1,844

Earnings per share - basic

$

0.03

$

N/A

$

0.01

$

N/A

Earnings per share - diluted

$

0.03

$

N/A

$

0.01

$

N/A

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

(Unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

(Dollars in thousands)

2022

    

2021

2022

    

2021

Net income

$

139

$

1,433

$

26

$

1,844

Net change in unrealized gains (losses) on available-for-sale securities

 

(4,229)

 

(209)

 

(11,776)

 

(477)

Income tax effect

 

888

 

44

 

2,473

 

100

Total other comprehensive income (loss)

 

(3,341)

 

(165)

 

(9,303)

 

(377)

Total comprehensive income (loss)

$

(3,202)

$

1,268

$

(9,277)

$

1,467

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

(Unaudited)

(Dollars in thousands)

Common Stock

Additional Paid-in Capital

Unallocated Common Stock Held by ESOP

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Total

BALANCE, JUNE 30, 2021

$

-

$

-

$

-

$

50,837

$

(105)

$

50,732

Net income

 

-

 

-

 

-

 

1,433

 

-

 

1,433

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

(165)

 

(165)

BALANCE, SEPTEMBER 30, 2021

$

-

$

-

$

-

$

52,270

$

(270)

$

52,000

BALANCE, JUNE 30, 2022

$

53

$

50,838

$

(4,073)

$

52,240

$

(6,645)

$

92,413

Net income

 

-

 

-

 

-

 

139

 

-

 

139

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

(3,341)

 

(3,341)

ESOP shares released for allocation

 

-

 

17

 

53

 

-

-

 

70

Stock compensation expense

 

-

 

47

 

-

 

-

-

 

47

BALANCE, SEPTEMBER 30, 2022

$

53

$

50,902

$

(4,020)

$

52,379

$

(9,986)

$

89,328

BALANCE, DECEMBER 31, 2020

$

-

$

-

$

-

$

50,426

$

107

$

50,533

Net income

 

-

 

-

 

-

 

1,844

 

-

 

1,844

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

(377)

 

(377)

BALANCE, SEPTEMBER 30, 2021

$

-

$

-

$

-

$

52,270

$

(270)

$

52,000

BALANCE, DECEMBER 31, 2021

$

53

$

50,802

$

(4,179)

$

52,353

$

(683)

$

98,346

Net income

 

-

 

-

 

-

 

26

 

-

 

26

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

(9,303)

 

(9,303)

ESOP shares released for allocation

 

-

 

53

 

159

 

-

-

 

212

Stock compensation expense

 

-

 

47

 

-

 

-

-

 

47

BALANCE, SEPTEMBER 30, 2022

$

53

$

50,902

$

(4,020)

$

52,379

$

(9,986)

$

89,328

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

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CATALYST BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended September 30, 

(Dollars in thousands)

2022

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES

 

  

 

  

Net income

$

26

$

1,844

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Investment securities amortization, net

 

370

 

295

Federal Home Loan Bank stock dividends

 

(6)

 

(4)

Amortization of prepayment penalties on debt restructuring

135

135

Provision for (reversal of) loan losses

 

(375)

 

(286)

Net loss (gain) on disposals and sales of premises and equipment

 

77

 

(25)

Increase in cash surrender value of bank-owned life insurance

(216)

(67)

Stock-based compensation

259

-

Depreciation of premises and equipment

 

343

 

308

Net writedowns and losses (gains) on the sale of foreclosed assets

 

(29)

 

59

Deferred income tax expense (benefit)

 

58

 

(24)

(Increase) decrease in other assets

 

(112)

 

(263)

Increase (decrease) in other liabilities

 

(154)

 

535

Net cash provided by operating activities

 

376

 

2,507

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Activity in available-for-sale securities:

 

  

 

  

Proceeds from maturities, calls, and paydowns

 

8,547

 

5,967

Purchases

 

(10,900)

 

(35,672)

Activity in held-to-maturity securities:

 

  

 

Proceeds from maturities and calls

 

-

 

4,000

Net (increase) decrease in loans

 

54

 

14,791

Proceeds from sale of foreclosed assets

 

39

 

156

Purchases of premises and equipment

 

(235)

 

(1,477)

Proceeds from sale of premises and equipment

 

-

 

25

Purchase of bank-owned life insurance

 

(10,000)

 

-

Net cash used in investing activities

 

(12,495)

 

(12,210)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

  

Net increase in deposits

 

7,432

 

84,862

Net cash provided by financing activities

 

7,432

 

84,862

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(4,687)

 

75,159

CASH AND CASH EQUIVALENTS, beginning of period

 

40,884

 

25,245

CASH AND CASH EQUIVALENTS, end of period

$

36,197

$

100,404

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

$

345

$

502

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

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

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 Bank has been in operation in the Acadiana region of south-central Louisiana since 1922 and offers commercial and retail banking products through six full-service locations.

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 and became the holding company for the Bank. Shares of the Company’s common stock were issued and sold in an offering to certain depositors of the Bank and others. The Company was not engaged in operations and had not issued any shares of stock prior to the completion of the Conversion.

As used in this report, unless the context otherwise requires, the terms “we,” “our,” “us,” or the “Company” refer to Catalyst Bancorp, and the term the “Bank” refers to Catalyst Bank, the wholly owned subsidiary of the Company. In addition, unless the context otherwise requires, references to the operations of the Company include the operations of the Bank.

The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, comprehensive income, changes in equity and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and nine months ended September 30, 2022 and 2021 are not necessarily indicative of the results which may be expected for the entire fiscal year. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2021.

Critical Accounting Policies and Estimates

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could reflect materially different results under different assumptions and conditions. Methodologies the Company uses when applying critical accounting policies and developing critical estimates are included in its Annual Report on Form 10-K for the year ended December 31, 2021.

On March 23, 2022, the Board of Directors adopted the 2022 Stock Option Plan and the 2022 Recognition and Retention Plan and Trust Agreement (“2022 Recognition and Retention Plan”), which were approved by shareholders at our annual meeting on May 17, 2022. Under the terms of both plans, officers, employees and directors selected by the Compensation Committee of the Board of Directors are eligible to receive benefits. A total of 529,000 shares of common stock, or 10% of the shares sold in the conversion offering, have been reserved for the future issuance pursuant to the 2022 Stock Option Plan. Options to acquire shares of common stock will be awarded with an exercise price no less than the fair market value of the common stock on the grant date. Under the terms of the 2022 Recognition and Retention Plan, the Company will contribute sufficient funds to the Recognition and Retention Plan Trust so that the Trust can purchase 211,600 shares of common stock, or 4.0% of the shares sold in the conversion offering. During the fourth quarter of 2022, the 2022 Recognition and Retention Plan commenced purchasing shares in the open market to the extent available.

On September 1, 2022, the Company granted a total of 295,340 awards under the 2022 Stock Option Plan and 119,336 awards under the 2022 Recognition and Retention Plan. In accordance with ASC 718, Compensation – Stock Compensation, the Company measures stock compensation expense based on the fair market value of the instrument as of

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the grant date and is recognized over the service period, which is usually the vesting period. All awards issued on September 1, 2022 were issued with a five year vesting period.

There were no other material changes from the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In preparing the financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the Company’s financial condition, results of operations, comprehensive income, changes in equity and cash flows for the interim periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.

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

NOTE 2. COMPLETION OF STOCK OFFERING

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

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

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

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

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

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In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326), Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures. The amendments in this ASU respond to feedback received by the FASB during the post-implementation review of the amendments included in ASU 2016-13. The amendments in ASU 2022-02 eliminate the accounting guidance for TDRs by creditors in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors and enhance disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Stakeholders have observed that the additional designation of a loan modification as a TDR and the related accounting under current GAAP are unnecessarily complex and do not provide decision-useful information after the adoption of ASU 2016-13 since credit losses from TDRs are incorporated under the CECL model.  Under the amendments in ASU 2022-02, an entity must apply the guidance under ASC 310-20 to determine whether a modification results in a new loan or a continuation of an existing loan rather than applying the guidance for TDRs.  For public business entities, the amendments in ASU 2022-02 also require an entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20. The amendments in ASU 2022-02 are effective at the time of adoption of the amendments in ASU 2016-13. The Company is currently evaluating the provisions of the amendment; however, we do not expect that the adoption of ASU 2022-02 will have a material effect on the Company’s consolidated financial statements.

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NOTE 4. EARNINGS PER SHARE

Earnings per common share was computed based on the following:

Three Months Ended September 30, 

Nine Months Ended September 30, 

(In thousands, except per share data)

2022

2022

Numerator

 

  

 

  

Net income available to common shareholders

$

139

$

26

Denominator

 

  

 

  

Weighted average common shares outstanding

 

5,290

 

5,290

Weighted average unallocated ESOP shares

(405)

(410)

Weighted average shares

4,885

4,880

Effect of dilutive shares:

Restricted stock

-

-

Stock options

-

-

Weighted average shares - assuming dilution

4,885

4,880

Basic earnings per common share

$

0.03

$

0.01

Diluted earnings per common share

$

0.03

$

0.01

During the three and nine months ended September 30, 2022, the number of convertible securities or other contracts to issue common stock outstanding that if converted or exercised would result in potential dilution of earnings per share was immaterial. At and during the three and nine months ended September 30, 2021, the Company did not have any common shares outstanding. The Company completed its IPO of stock in connection with the Bank’s Conversion from the mutual to the stock form of organization on October 12, 2021.

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NOTE 5. INVESTMENT SECURITIES

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

    

September 30, 2022

(Dollars in thousands)

Amortized Cost

    

Gross Unrealized Gains

    

Gross Unrealized Losses

    

Fair Value

Securities available-for-sale

 

  

 

  

 

  

 

Mortgage-backed securities

$

74,762

$

-

$

(10,834)

$

63,928

U.S. Government and agency obligations

 

10,977

 

-

 

(1,098)

 

9,879

Municipal obligations

 

5,464

 

-

 

(708)

 

4,756

Total available-for-sale

$

91,203

$

-

$

(12,640)

$

78,563

Securities held-to-maturity

 

  

 

  

 

  

 

  

U.S. Government and agency obligations

$

13,009

$

-

$

(2,640)

$

10,369

Municipal obligations

 

471

 

-

 

(46)

 

425

Total held-to-maturity

$

13,480

$

-

$

(2,686)

$

10,794

    

December 31, 2021

(Dollars in thousands)

Amortized Cost

    

Gross Unrealized Gains

    

Gross Unrealized Losses

    

Fair Value

Securities available-for-sale

 

  

 

  

 

  

 

Mortgage-backed securities

$

75,374

$

87

$

(798)

$

74,663

U.S. Government and agency obligations

 

9,347

 

1

 

(111)

 

9,237

Municipal obligations

 

4,482

 

-

 

(43)

 

4,439

Total available-for-sale

$

89,203

$

88

$

(952)

$

88,339

Securities held-to-maturity

 

  

 

  

 

  

 

  

U.S. Government and agency obligations

$

13,019

$

23

$

(375)

$

12,667

Municipal obligations

 

479

 

6

 

-

 

485

Total held-to-maturity

$

13,498

$

29

$

(375)

$

13,152

There were no securities transferred between classifications during the nine months ended September 30, 2022 or 2021.

Investment securities with a carrying amount of approximately $14.2 million and $10.2 million, respectively, were pledged to secure deposits as required or permitted by law at September 30, 2022 and December 31, 2021.

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Table of Contents

The following is a summary of maturities of securities held-to-maturity and available-for-sale at September 30, 2022 and December 31, 2021:

September 30, 2022

Available-for-Sale

Held-to-Maturity

(Dollars in thousands)

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

Amounts maturing in:

 

  

 

  

 

  

 

  

One year or less

$

-

$

-

$

-

$

-

After one through five years

 

12,392

 

11,455

 

1,345

 

1,172

After five through ten years

 

15,562

 

13,910

 

8,125

 

6,460

After ten years

 

63,249

 

53,198

 

4,010

 

3,162

Total

$

91,203

$

78,563

$

13,480

$

10,794

December 31, 2021

Available-for-Sale

Held-to-Maturity

(Dollars in thousands)

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

Amounts maturing in:

 

  

 

  

 

  

 

  

One year or less

$

-

$

-

$

-

$

-

After one through five years

 

8,431

 

8,396

 

-

 

-

After five through ten years

 

12,695

 

12,604

 

9,479

 

9,157

After ten years

 

68,077

 

67,339

 

4,019

 

3,995

Total

$

89,203

$

88,339

$

13,498

$

13,152

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.

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Table of Contents

Information pertaining to securities with gross unrealized losses at September 30, 2022 and December 31, 2021 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

September 30, 2022

Less than 12 Months

12 Months or Greater

Total

(Dollars in thousands)

    

Fair Value

    

Gross Unrealized Losses

    

Fair Value

    

Gross Unrealized Losses

    

Fair Value

    

Gross Unrealized Losses

Securities available-for-sale

 

  

 

  

 

  

 

  

 

 

Mortgage-backed securities

$

32,451

$

(4,669)

$

31,477

$

(6,165)

$

63,928

$

(10,834)

U.S. Government and agency obligations

 

6,707

 

(521)

 

3,172

 

(577)

 

9,879

 

(1,098)

Municipal obligations

 

2,408

 

(146)

 

2,348

 

(562)

 

4,756

 

(708)

Total available-for-sale

$

41,566

$

(5,336)

$

36,997

$

(7,304)

$

78,563

$

(12,640)

Securities held-to-maturity

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Government and agency obligations

$

2,443

$

(566)

$

7,926

$

(2,074)

$

10,369

$

(2,640)

Municipal obligations

 

425

 

(46)

 

-

 

-

 

425

 

(46)

Total held-to-maturity

$

2,868

$

(612)

$

7,926

$

(2,074)

$

10,794

$

(2,686)

Total

$

44,434

$

(5,948)

$

44,923

$

(9,378)

$

89,357

$

(15,326)

    

December 31, 2021

Less than 12 Months

12 Months or Greater

Total

(Dollars in thousands)

   

Fair Value

Gross Unrealized Losses

Fair Value

Gross Unrealized Losses

Fair Value

Gross Unrealized Losses

Securities available-for-sale

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage-backed securities

$

68,412

$

(746)

$

1,889

$

(52)

$

70,301

$

(798)

U.S. Government and agency obligations

 

5,697

 

(24)

 

1,913

 

(87)

 

7,610

 

(111)

Municipal obligations

 

3,283

 

(24)

 

1,156

 

(19)

 

4,439

 

(43)

Total available-for-sale

$

77,392

$

(794)

$

4,958

$

(158)

$

82,350

$

(952)

Securities held-to-maturity

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Government and agency obligations

$

1,940

$

(61)

$

7,685

$

(314)

$

9,625

$

(375)

Municipal obligations

 

-

 

-

 

-

 

-

 

-

 

-

Total held-to-maturity

$

1,940

$

(61)

$

7,685

$

(314)

$

9,625

$

(375)

Total

$

79,332

$

(855)

$

12,643

$

(472)

$

91,975

$

(1,327)

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which that fair value has been 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 of time sufficient to allow for any anticipated recovery in fair value.

At September 30, 2022, the Company held 95 securities with an unrealized loss, compared to 67 securities with an unrealized loss at December 31, 2021. The securities in unrealized loss positions consisted of government-sponsored mortgage-backed securities and debt obligations guaranteed by federal, state and local government entities. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. As management has the intent and ability to hold securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

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Table of Contents

NOTE 6.  LOANS RECEIVABLE

Loans receivable at September 30, 2022 and December 31, 2021 are summarized as follows:

September 30, 

December 31, 

(Dollars in thousands)

2022

2021

Real estate loans

 

  

 

  

One- to four-family residential

$

88,327

$

87,303

Commercial real estate

 

21,073

 

23,112

Construction and land

 

4,450

 

4,079

Multi-family residential

 

3,252

 

4,589

Total real estate loans

117,102

119,083

Other loans

Commercial and industrial

11,087

8,374

Consumer

 

3,512

 

4,385

Total other loans

14,599

12,759

Total loans

131,701

131,842

Less: Allowance for loan losses

(1,804)

(2,276)

Net loans

$

129,897

$

129,566

The following tables outline the changes in the allowance for loan losses by collateral type for the nine months ended September 30, 2022 and 2021.

For the Nine Months Ended September 30, 2022

(Dollars in thousands)

  

Beginning Balance

    

Provision (Reversal)

    

Charge-offs

    

Recoveries

    

Ending Balance

Allowance for loan losses

 

  

 

  

 

  

 

  

 

  

One- to four-family residential

$

1,573

$

(232)

$

(154)

$

70

$

1,257

Commercial real estate

 

370

 

(101)

 

-

 

-

 

269

Construction and land

 

55

 

(10)

 

-

 

-

 

45

Multi-family residential

 

73

 

(33)

 

-

 

-

 

40

Commercial and industrial

 

137

 

4

 

(21)

 

19

 

139

Consumer

 

68

 

(3)

 

(16)

 

5

 

54

Total

$

2,276

$

(375)

$

(191)

$

94

$

1,804

    

For the Nine Months Ended September 30, 2021

(Dollars in thousands)

    

Beginning Balance

    

Provision (Reversal)

    

Charge-offs

    

Recoveries

    

Ending Balance

Allowance for loan losses

 

  

 

  

 

  

 

  

 

  

One- to four-family residential

$

1,910

$

(220)

$

(123)

$

51

$

1,618

Commercial real estate

 

744

 

(32)

 

-

 

-

 

712

Construction and land

 

82

 

(32)

 

-

 

-

 

50

Multi-family residential

 

68

 

-

 

-

 

-

 

68

Commercial and industrial

 

101

 

(8)

 

-

 

-

 

93

Consumer

 

78

 

2

 

(27)

 

9

 

62

Unallocated

 

39

 

4

 

-

 

-

 

43

Total

$

3,022

$

(286)

$

(150)

$

60

$

2,646

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Table of Contents

The following tables outline the allowance for loan losses for loans individually and collectively evaluated for impairment, and the balance of loans individually and collectively evaluated for impairment at September 30, 2022 and December 31, 2021.

    

September 30, 2022

    

December 31, 2021

(Dollars in thousands)

Individually Evaluated

Collectively Evaluated

Total

Individually Evaluated

Collectively Evaluated

Total

Allowance for loan losses

 

  

 

 

  

 

  

 

  

 

  

One- to four-family residential

$

251

$

1,006

$

1,257

$

319

$

1,254

$

1,573

Commercial real estate

-

 

269

 

269

 

-

 

370

 

370

Construction and land

-

 

45

 

45

 

-

 

55

 

55

Multi-family residential

-

 

40

 

40

 

-

 

73

 

73

Commercial and industrial

-

 

139

 

139

 

17

 

120

 

137

Consumer

6

 

48

 

54

 

-

 

68

 

68

Total

$

257

$

1,547

$

1,804

$

336

$

1,940

$

2,276

Loans

 

  

 

  

 

 

  

 

  

 

One- to four-family residential

$

2,631

$

85,696

$

88,327

$

2,266

$

85,037

$

87,303

Commercial real estate

 

51

 

21,022

 

21,073

 

-

23,112

 

23,112

Construction and land

 

34

 

4,416

 

4,450

 

37

 

4,042

 

4,079

Multi-family residential

 

-

 

3,252

 

3,252

 

-

 

4,589

 

4,589

Commercial and industrial

 

-

 

11,087

 

11,087

 

18

 

8,356

 

8,374

Consumer

 

11

3,501

 

3,512

 

-

 

4,385

 

4,385

Total

$

2,727

$

128,974

$

131,701

$

2,321

$

129,521

$

131,842

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Table of Contents

A summary of current, past due and nonaccrual loans as of September 30, 2022 and December 31, 2021 follows:

    

As of September 30, 2022

(Dollars in thousands)

Past Due 30-89 Days and Accruing

    

Past Due Over 90 Days and Accruing

    

Past Due Over 30 Days and Non-accruing

    

Total Past Due

    

Current and Accruing

    

Current and Non-accruing

    

Total Loans

One- to four-family residential

$

1,981

$

287

$

699

$

2,967

$

84,935

$

425

$

88,327

Commercial real estate

 

65

 

92

 

50

 

207

 

20,866

 

-

 

21,073

Construction and land

 

44

 

-

 

-

 

44

 

4,370

 

36

 

4,450

Multi-family residential

 

-

 

-

 

-

 

-

 

3,252

 

-

 

3,252

Commercial and industrial

 

-

 

-

 

-

 

-

 

11,087

 

-

 

11,087

Consumer

 

11

 

-

 

11

 

22

 

3,490

 

-

 

3,512

Total

$

2,101

$

379

$

760

$

3,240

$

128,000

$

461

$

131,701

As of December 31, 2021

(Dollars in thousands)

    

Past Due 30-89 Days and Accruing

    

Past Due Over 90 Days and Accruing

    

Past Due Over 30 Days and Non-accruing

    

Total Past Due

    

Current and Accruing

    

Current and Non-accruing

    

Total Loans

One- to four-family residential

$

2,116

$

-

$

411

$

2,527

$

84,396

$

380

$

87,303

Commercial real estate

 

133

 

-

 

-

 

133

 

22,979

 

-

 

23,112

Construction and land

 

62

 

-

 

31

 

93

 

3,949

 

37

 

4,079

Multi-family residential

 

-

 

-

 

-

 

-

 

4,589

 

-

 

4,589

Commercial and industrial

 

-

 

-

 

17

 

17

 

8,356

 

1

 

8,374

Consumer

 

32

 

1

 

13

 

46

 

4,339

 

-

 

4,385

Total

$

2,343

$

1

$

472

$

2,816

$

128,608

$

418

$

131,842

The Company was not committed to lend any additional funds on nonaccrual loans at September 30, 2022 or December 31, 2021. At September 30, 2022 and December 31, 2021, loans secured by residential real estate for which formal foreclosure proceedings were in process totaled $84,000 and $47,000, respectively.

15

Table of Contents

A Troubled Debt Restructuring (“TDR”) is considered such if the lender, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. During the nine months ended September 30, 2022, no loans were modified in a manner deemed to constitute a TDR. Information pertaining to loans modified during the year ended December 31, 2021 follows:

Recorded Investment

(Dollars in thousands)

Number of Contracts

Pre-modification 

Post-modification 

December 31, 2021

 

  

 

  

 

  

One- to four-family residential

 

3

$

186

$

189

Total

 

3

$

186

$

189

Troubled debt restructured loans were modified to defer principal and extend maturity on average for three months. All three loans modified during the year ended December 31, 2021 defaulted after modification. The modifications and defaults did not have a significant impact on the determination of the allowance for loan losses. The Company has no commitments to loan additional funds to the borrowers whose loans have been modified.

Information on impaired loans as of September 30, 2022 and December 31, 2021 follows:

    

September 30, 2022

(Dollars in thousands)

Recorded Investment Without an Allowance

Recorded Investment With an Allowance

Unpaid Principal

Related Allowance

One- to four-family residential

$

1,807

$

824

$

3,051

$

251

Commercial real estate

 

51

 

-

 

52

 

-

Construction and land

 

34

 

-

 

43

 

-

Multi-family residential

 

-

 

-

 

-

 

-

Commercial and industrial

 

-

 

-

 

-

 

-

Consumer

 

-

 

11

 

11

 

6

Total

$

1,892

$

835

$

3,157

$

257

    

December 31, 2021

(Dollars in thousands)

Recorded Investment Without an Allowance

Recorded Investment With an Allowance

Unpaid Principal

Related Allowance

One- to four-family residential

$

1,153

$

1,113

$

3,128

$

319

Commercial real estate

 

-

 

-

 

-

 

-

Construction and land

 

37

 

-

 

44

 

-

Multi-family residential

 

-

 

-

 

-

 

-

Commercial and industrial

 

1

 

17

 

21

 

17

Consumer

 

-

 

-

 

-

 

-

Total

$

1,191

$

1,130

$

3,193

$

336

16

Table of Contents

The tables below present the average balances and interest income for impaired loans for the three and nine months ended September 30, 2022 and 2021.

    

Three Months Ended

September 30, 2022

September 30, 2021

(Dollars in thousands)

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

One- to four-family residential

$

2,655

$

16

$

2,446

$

19

Commercial real estate

 

50

 

-

 

-

 

-

Construction and land

 

34

 

-

 

40

 

-

Multi-family residential

 

-

 

-

 

1,182

 

14

Commercial and industrial

 

-

 

-

 

19

 

-

Consumer

 

12

 

-

 

-

 

-

Total

$

2,751

$

16

$

3,687

$

33

    

Nine Months Ended

September 30, 2022

September 30, 2021

(Dollars in thousands)

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

One- to four-family residential

$

2,718

$

49

$

2,502

$

57

Commercial real estate

 

51

 

-

 

-

 

-

Construction and land

 

35

 

-

 

40

 

-

Multi-family residential

 

-

 

-

 

1,190

 

42

Commercial and industrial

 

-

 

-

 

21

 

-

Consumer

 

13

 

-

 

-

 

-

Total

$

2,817

$

49

$

3,753

$

99

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Table of Contents

Loans are categorized by credit quality indicators based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Credit quality classifications follow regulatory guidelines and can generally be described as follows:

Pass – Loans in this category have strong asset quality and liquidity along with a multi-year track record of profitability.

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – Loans classified as loss have been identified as uncollectible and are generally charged-off in the period identified.

The information for each of the credit quality indicators is updated at least quarterly in conjunction with the determination of the adequacy of the allowance for loan losses.

September 30, 2022

(Dollars in thousands)

    

Pass

    

Special Mention

    

Substandard

    

Doubtful

    

Total

One- to four-family residential

$

85,175

$

173

$

2,979

$

-

$

88,327

Commercial real estate

 

20,026

 

942

 

105

 

-

 

21,073

Construction and land

 

4,131

 

275

 

44

 

-

 

4,450

Multi-family residential

 

3,252

 

-

 

-

 

-

 

3,252

Commercial and industrial

 

11,087

 

-

 

-

 

-

 

11,087

Consumer

 

3,501

 

-

 

11

 

-

 

3,512

Total

$

127,172

$

1,390

$

3,139

$

-

$

131,701

December 31, 2021

(Dollars in thousands)

    

Pass

    

Special Mention

    

Substandard

    

Doubtful

    

Total

One- to four-family residential

$

83,405

$

504

$

3,394

$

-

$

87,303

Commercial real estate

 

20,995

 

2,058

 

59

 

-

 

23,112

Construction and land

 

3,990

 

-

 

89

 

-

 

4,079

Multi-family residential

 

3,419

 

1,170

 

-

 

-

 

4,589

Commercial and industrial

 

8,356

 

-

 

18

 

-

 

8,374

Consumer

 

4,372

 

-

 

13

 

-

 

4,385

Total

$

124,537

$

3,732

$

3,573

$

-

$

131,842

18

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NOTE 7. DEPOSITS

Deposits at September 30, 2022 and December 31, 2021 are summarized as follows:

September 30, 2022

December 31, 2021

(Dollars in thousands)

Amount

    

Percent

Amount

    

Percent

Non-interest-bearing demand deposits

$

31,988

 

17.4

%  

$

30,299

 

17.1

%

Negotiable order of withdrawal (“NOW”)

 

50,547

 

27.4

 

34,357

 

19.4

Money market

 

17,129

 

9.3

 

18,878

 

10.7

Savings

 

26,874

 

14.6

 

26,698

 

15.1

Certificates of deposit

 

57,689

 

31.3

 

66,563

 

37.7

Total deposits

$

184,227

 

100.0

%  

$

176,795

 

100.0

%

Certificates of deposit and other time deposits issued in denominations that exceed FDIC insurance limit of $250,000 or more totaled $10.2 million and $14.5 million at September 30, 2022 and December 31, 2021, respectively, and are included in interest-bearing deposits in the statements of financial condition.

At September 30, 2022 scheduled maturities of certificates of deposits were as follows:

(Dollars in thousands)

Amount

2023

$

49,023

2024

 

7,001

2025

 

1,131

2026

 

516

2027

 

18

Total

$

57,689

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NOTE 8. CAPITAL REQUIREMENTS AND OTHER REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of the Comptroller of the Currency (“OCC”). Failure to meet minimum regulatory capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Company and the Bank. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital, Tier 1 Capital to risk-weighted assets, and Tier 1 Capital to adjusted total assets. As of September 30, 2022 and December 31, 2021, the Bank met all of the capital adequacy requirements to which it is subject.

At September 30, 2022 and December 31, 2021, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the most recent notification that management believes have changed the Bank’s prompt corrective action category. The following table presents actual and required capital ratios for the Bank.

Actual

To be Well Capitalized under the Prompt Corrective Action Provision

(Dollars in thousands)

    

Amount

    

Ratio

Amount

    

Ratio

As of September 30, 2022

Common Equity Tier 1 Capital

$

77,997

57.84

%  

$

8,765

>6.5

%  

Tier 1 Risk-Based Capital

 

77,997

57.84

 

10,788

>8.0

Total Risk-Based Capital

 

79,684

59.09

 

13,485

>10.0

Tier 1 Leverage Capital

 

77,997

28.29

 

13,784

>5.0

As of December 31, 2021

 

  

  

 

  

  

Common Equity Tier 1 Capital

$

77,819

63.51

%  

$

7,965

>6.5

%  

Tier 1 Risk-Based Capital

 

77,819

63.51

 

9,803

>8.0

Total Risk-Based Capital

 

79,360

64.77

 

12,253

>10.0

Tier 1 Leverage Capital

 

77,819

27.38

 

14,210

>5.0

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NOTE 9. COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying financial statements. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on our financial statements.

The Company is not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at September 30, 2022, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the statement of financial position. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in particular classes of instruments.

NOTE 10. FAIR VALUE MEASUREMENTS

In accordance with fair value guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 — Valuation is based on inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the asset or liability.

Level 3 — Valuation is based on unobservable income inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

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Fair values of assets and liabilities measured on a recurring basis at September 30, 2022 and December 31, 2021 follows:

Fair Value Measurements at Reporting Date Using

(Dollars in thousands)

    

Fair Value

    

Level 1

    

Level 2

    

 Level 3

September 30, 2022

  

  

  

  

Available-for-sale securities

$

78,563

$

-

$

78,563

$

-

December 31, 2021

  

  

  

  

Available-for-sale securities

$

88,339

$

-

$

88,339

$

-

Fair values of assets and liabilities measured on a nonrecurring basis at September 30, 2022 and December 31, 2021 follows:

Fair Value Measurements at Reporting Date Using

(Dollars in thousands)

    

Fair Value

    

Level 1

    

Level 2

    

 Level 3

September 30, 2022

  

  

  

  

Impaired loans

$

837

$

-

$

-

$

837

Foreclosed assets

320

  

-

  

-

  

320

Total

$

1,157

$

-

$

-

$

1,157

December 31, 2021

  

Impaired loans

$

1,020

$

-

$

-

$

1,020

Foreclosed assets

340

-

-

340

Total

$

1,360

$

-

$

-

$

1,360

At September 30, 2022 and December 31, 2021, impaired loans with a recorded investment of $1.1 million and $1.4 million, respectively, have been written down to their fair value by a charge to the allowance for loan losses. Foreclosed assets are written down to fair value by a charge to earnings through foreclosed asset expense. During the nine months ended September 30, 2022, no impairment losses on foreclosed assets were recognized.

The fair value of impaired loans and foreclosed assets is estimated using third-party appraisals of the collateral or asset held less estimated costs to sell and discounts to reflect current conditions.

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NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

Investment Securities - The fair market values of investments 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.

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

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

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

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

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

Other Assets and Liabilities - All other assets and liabilities are reported at current book value unless noted otherwise.

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

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

The estimated fair values of the Company’s financial instruments as of September 30, 2022 and December 31, 2021 are as follows:

September 30, 2022

(Dollars in thousands)

    

Carrying Amount

    

Fair Value

    

Level 1

    

Level 2   

    

Level 3

Financial Assets:

  

  

  

  

  

Cash and cash equivalents

$

36,197

$

36,197

$

36,197

 

$

-

 

$

-

Investment securities:

 

  

 

  

 

  

 

 

  

 

 

  

Available-for-sale

 

78,563

 

78,563

 

-

 

 

78,563

 

 

-

Held-to-maturity

 

13,480

 

10,794

 

-

 

 

10,794

 

 

-

Loans receivable, net

 

129,897

 

121,981

 

-

 

 

-

 

 

121,981

Bank-owned life insurance

13,519

13,519

-

13,519

-

Financial Liabilities:

 

  

 

  

 

  

 

 

  

 

 

  

Deposits

 

184,227

 

182,779

 

-

 

 

182,779

 

 

-

Borrowed funds

 

9,153

 

7,532

 

-

 

 

7,532

 

 

-

December 31, 2021

(Dollars in thousands)

    

Carrying Amount

    

Fair Value

    

Level 1

    

Level 2   

    

Level 3

Financial Assets:

 

  

 

  

 

  

 

 

  

 

 

  

Cash and cash equivalents

$

40,884

$

40,884

$

40,884

 

$

-

 

$

-

Investment securities:

 

  

 

  

 

  

 

 

  

 

 

  

Available-for-sale

 

88,339

 

88,339

 

-

 

 

88,339

 

 

-

Held-to-maturity

 

13,498

 

13,152

 

-

 

 

13,152

 

 

-

Loans receivable, net

 

129,566

 

128,591

 

-

 

 

-

 

 

128,591

Bank-owned life insurance

3,303

3,303

-

3,303

-

Financial Liabilities:

 

  

 

  

 

  

 

 

  

 

 

  

Deposits

 

176,795

 

176,869

 

-

 

 

176,869

 

 

-

Borrowed funds

 

9,018

 

8,720

 

-

 

 

8,720

 

 

-

The carrying amounts in the preceding table are included in the statement of financial condition under the applicable captions. It is not practical to estimate the fair value of Federal Home Loan Bank (“FHLB”) and First National Bankers Bank stock because they are not marketable. The carrying amount of investments without readily determinable fair value  are reported in the Consolidated Statements of Financial Condition at historical cost.

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NOTE 12. STOCK COMPENSATION

On September 1, 2022, the Company granted a total of 295,340 awards under the 2022 Stock Option Plan and 119,336 awards under the 2022 Recognition and Retention Plan. In accordance with ASC 718, Compensation – Stock Compensation, the Company measures stock compensation expense based on the fair market value of the instrument as of the grant date and is recognized over the service period, which is usually the vesting period. Total stock compensation expense, allocated between salaries and employee benefits expense and directors’ fees, totaled $47,000 for the three and nine months ended September 30, 2022.

All awards issued on September 1, 2022 were issued with a five year vesting period. Awards granted under the 2022 Stock Option Plan were issued with an exercise price of $13.30 and may be exercised at any time after vesting and within 10 years of the grant date. The Company estimated the fair value of each option granted to be $4.36 using the Black-Scholes option pricing model. Key management assumptions for the model included an expected life of 6.50 years, expected volatility of 32.55% and expected dividend yield of 1.50%. Awards granted under the 2022 Recognition and Retention Plan were issued with a fair value of $13.30 per share, which was based on the closing price per share of the Company’s common stock as of September 1, 2022.

NOTE 13. SUBSEQUENT EVENTS

On March 23, 2022, the Board of Directors adopted the 2022 Stock Option Plan and the 2022 Recognition and Retention, which were approved by shareholders at our annual meeting on May 17, 2022. Under the terms of the 2022 Recognition and Retention Plan, the Company will contribute sufficient funds to the Recognition and Retention Plan Trust so that the Trust can purchase 211,600 shares of common stock, or 4.0% of the shares sold in the conversion offering. On October 13, 2022, the 2022 Recognition and Retention Plan began purchasing shares of the Company’s common stock through open market purchases in accordance with the terms of the Plan.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Management’s Discussion and Analysis of Financial Condition and Results of Operations at September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements of the Company and the notes thereto appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q as well as the business and financial information included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2021.

Cautionary Note Regarding Forward-Looking Statements

Certain matters in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.”   These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These forward-looking statements are based on our current beliefs and expectations and, by their nature, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

Important factors that could cause our actual results to differ materially from the results anticipated or projected, include, but are not limited to, the following:

general economic conditions, either nationally or in our market areas, that are different than expected;
conditions relating to the COVID-19 pandemic, or other infectious disease outbreaks, including the severity and duration of the associated economic slowdown, either nationally or in our market areas, that are worse than expected;
changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the allowance for loan losses;
our ability to access cost-effective funding;
major catastrophes such as hurricanes, floods or other natural disasters, the related disruption to local, regional and global economic activity and financial markets, and the impact that any of the foregoing may have on us and our customers and other constituencies;

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technological changes that may be more difficult or expensive than expected;
success or consummation of new business initiatives may be more difficult or expensive than expected;
the inability of third party service providers to perform;
fluctuations in real estate values and both residential and commercial real estate market conditions;
demand for loans and deposits in our market area;
our ability to continue to implement our business strategies;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans;
adverse changes in the securities markets;
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
our ability to manage market risk, credit risk and operational risk in the current economic conditions;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the U. S. Securities and Exchange Commission or the Public Company Accounting Oversight Board;
our ability to retain key employees; and our compensation expense associated with equity allocated or awarded to our employees.

We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.

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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 and became the holding company for the Bank. As a result of the Conversion, the Bank is a wholly owned subsidiary of Catalyst Bancorp. The Company was not engaged in operations and had not issued any shares of stock prior to the completion of the Conversion.

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. 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 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.

At September 30, 2022, total assets were $283.4 million, including total loans of $131.7 million and total investment securities of $92.0 million, total deposits were $184.2 million and total shareholders’ equity was $89.3 million. The Company reported net income of $139,000 for the three months ended September 30, 2022, compared to net income of $1.4 million for the three months ended September 30, 2021. For the nine months ended September 30, 2022, the Company reported net income of $26,000, compared to net income of $1.8 million for the nine months ended September 30, 2021. During the three and nine months ended September 30, 2021, the Company received a $1.8 million grant from the Community Development Financial Institution (“CDFI”) Rapid Response Program and recognized the amount in non-interest income.  During the nine months ended September 30, 2022, the Company received and recognized into income a $171,000 Bank Enterprise Award (“BEA”) Program grant from the CDFI Fund. Professional fees associated with the grant totaled $26,000 and were recorded in non-interest expense in the same period. The Bank also rebranded and officially changed its name to Catalyst Bank during the 2022 period. Pre-tax costs associated with the rebranding of the Bank totaled $270,000 for the nine months ended September 30, 2022.

Our results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on our loan and investment portfolios and interest expense on deposits and borrowings. Our net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. Results of operations are also affected by our provisions for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation, office occupancy and equipment expense, data processing, advertising and business promotion and other expense. We expect that our non-interest expenses will continue to increase as we grow and expand our operations. In addition, our compensation expense will increase due to the new stock benefit plans we adopted and implemented in 2022. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, the impact of the COVID-19 pandemic, 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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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 the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2021. 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 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 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 1.37% of total loans, at September 30, 2022 and $2.3 million, or 1.73% 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.

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

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Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. The term “other-than-temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Declines in the estimated fair value of individual investment securities below their cost that are considered other-than-temporary are recognized as realized losses in the statement of income. Factors affecting the determination of whether an other-than-temporary impairment has occurred include, among other things, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) that the Company does not intend to sell these securities, and (4) it is more likely than not that the Company will not be required to sell before a period of time sufficient to allow for any anticipated recovery in fair value. Unrealized holding gains and losses, net of tax, on available-for-sale securities are included in other comprehensive income. At September 30, 2022 and December 31, 2021, net unrealized losses on available-for-sale securities totaled $12.6 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.

COVID-19

The CARES Act, enacted in March of 2020 in response to the economic disruption brought about by the COVID-19 pandemic, contains many provisions related to banking, lending, mortgage forbearance and taxation. Under the provisions of the act, we supported our customers through the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), loan modifications and loan deferrals. We funded 240 SBA PPP loans totaling $8.5 million with an average initial loan balance of $36,000 to existing customers and key prospects located primarily in our markets in south central Louisiana. As of December 31, 2021, the unpaid principal balance of PPP loans totaled $2.8 million. During the nine months ended September 30, 2022, all of our outstanding PPP loans were fully repaid.

In addition, we granted modifications, generally in the form of three-month deferrals of principal payments and a three-month extension of the maturity date, to 204 loans with principal balances totaling $28.2 million under the CARES Act. In accordance with guidance from the Federal Deposit Insurance Corporation (the “FDIC”), borrowers who were current prior to becoming affected by COVID-19, that received loan modifications as a result of the pandemic, generally were not reported as past due or categorized as troubled debt restructurings. This relief provided by the CARES Act expired January 1, 2022. At December 31, 2021, we had no loans under deferral or extension agreements due to COVID-19.

Management’s assumptions and estimates, such as the allowance for loan losses, may be negatively impacted as the Company continues to evaluate and consider the effects of the COVID-19 pandemic. However, it is difficult to assess or predict how and to what extent COVID-19 will affect the Company in the future.

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Table of Contents

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total Assets.  Total assets decreased $1.9 million, or 0.7%, to $283.4 million at September 30, 2022 from $285.3 million at December 31, 2021. The decrease resulted primarily from declines in available-for-sale investment securities, down $9.8 million, and in cash and cash equivalents, down $4.7 million, partially offset by an increase in bank-owned life insurance of $10.2 million.

Loans.  Total loans receivable fell by $141,000, or 0.1%, to $131.7 million at September 30, 2022, compared to $131.8 million at December 31, 2021. Commercial and industrial and residential mortgage loan growth was entirely offset by net declines across the other segments of the portfolio. All PPP loans were fully paid off during the nine months ended September 30, 2022. The total unpaid principal balance of PPP loans, included in commercial and industrial loans, amounted to $2.8 million at December 31, 2021.

The following table summarizes the changes in the composition of our loan portfolio by type of loan as of the dates indicated.

September 30, 2022

December 31, 2021

(Dollars in thousands)

    

Amount

    

%

  

Amount

    

%

Change

Real estate loans

One- to four-family residential

$

88,327

 

67.1

%  

$

87,303

 

66.2

%  

$

1,024

1.2

%  

Commercial real estate

 

21,073

 

16.0

 

23,112

 

17.5

 

(2,039)

(8.8)

Construction and land

 

4,450

 

3.4

 

4,079

 

3.1

 

371

9.1

Multi-family residential

 

3,252

 

2.5

 

4,589

 

3.5

 

(1,337)

(29.1)

Total real estate loans

117,102

 

89.0

119,083

 

90.3

(1,981)

(1.7)

Other loans

 

 

Commercial and industrial

11,087

 

8.4

8,374

 

6.4

2,713

32.4

Consumer

3,512

 

2.6

4,385

 

3.3

(873)

(19.9)

Total other loans

14,599

 

11.0

12,759

 

9.7

1,840

14.4

Total loans

$

131,701

 

100.0

%  

131,842

 

100.0

%  

$

(141)

(0.1)

%  

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Table of Contents

Allowance for Loan Losses. The allowance for loans losses totaled $1.8 million, or 1.37% of total loans, at September 30, 2022 and $2.3 million, or 1.73% 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 and a $79,000 decrease in reserves for loans individually evaluated for impairment. During the nine months ended September 30, 2022, net loan charge-offs totaled $97,000 and the Company recorded a reversal to the allowance for loan losses of $375,000.

The following table presents the changes in the allowance for loan losses and other related data for the periods indicated.

Nine Months Ended September 30, 

Year Ended December 31,

(Dollars in thousands)

    

2022

2021

2021

Allowance for loan losses, beginning of period

$

2,276

 

$

3,022

$

3,022

Provision for (reversal of) loan losses

 

(375)

 

(286)

(660)

Net loan charge-offs:

 

 

  

  

One- to four-family residential

 

(84)

 

(72)

(69)

Commercial real estate

 

-

 

-

-

Construction and land

 

-

 

-

-

Multi-family residential

 

-

 

-

-

Commercial and industrial

 

(2)

 

-

-

Consumer

 

(11)

 

(18)

(17)

Total net charge-offs

 

(97)

 

(90)

(86)

Allowance for loan losses, end of period

$

1,804

 

$

2,646

$

2,276

Total loans at end of period

$

131,701

 

$

136,720

$

131,842

Total non-accrual loans at end of period

 

1,221

 

752

890

Total non-performing loans at end of period

 

1,600

 

917

891

Total average loans

132,052

143,075

141,592

Allowance for loan losses as a percent of:

Total loans

 

1.37

%  

1.94

%

1.73

%

Non-accrual loans

 

147.75

351.86

255.73

Non-performing loans

 

112.75

288.55

255.44

Net annualized charge-offs as a percent of average loans by portfolio:

One- to four-family residential

(0.13)

%  

(0.10)

%

(0.07)

%

Commercial real estate

-

-

-

Construction and land

-

-

-

Multi-family residential

-

-

-

Commercial and industrial

(0.03)

-

-

Consumer

(0.36)

(0.53)

(0.37)

Total loans

(0.10)

(0.08)

(0.06)

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Table of Contents

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 real estate owned at the dates indicated, and our performing TDRs.

    

September 30, 

December 31, 

(Dollars in thousands)

2022

2021

Non-accruing loans

 

  

 

  

One- to four-family residential

$

1,124

$

791

Commercial real estate

 

50

 

-

Construction and land

 

36

 

68

Multi-family residential

 

-

 

-

Commercial and industrial

 

-

 

18

Consumer

 

11

 

13

Total non-accruing loans

 

1,221

890

Accruing loans 90 days or more past due

 

  

 

  

One- to four-family residential

 

287

 

-

Commercial real estate

 

92

 

-

Construction and land

 

-

 

-

Multi-family residential

 

-

 

-

Commercial and industrial

 

-

 

-

Consumer

 

-

 

1

Total accruing loans 90 days or more past due

379

 

1

Total non-performing loans

1,600

891

Foreclosed assets

320

340

Total non-performing assets

1,920

1,231

Performing troubled debt restructurings

891

1,873

Total non-performing assets and performing TDRs

$

2,811

$

3,104

Total loans

$

131,701

$

131,842

Total assets

$

283,414

$

285,349

Total non-accruing loans as a percentage of total loans

0.93

%  

 

0.68

%  

Total non-performing loans as a percentage of total loans

1.21

%  

 

0.68

%  

Total non-performing loans as a percentage of total assets

0.56

%  

 

0.31

%  

Total non-performing assets as a percentage of total assets

0.68

%  

 

0.43

%  

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Table of Contents

Investment Securities.  Our total investment securities, available-for-sale and held-to-maturity, amounted to $92.0 million at September 30, 2022, a decrease of $9.8 million, or 9.6%, compared to $101.8 million in investment securities at December 31, 2021. Net unrealized losses on securities available-for-sale totaled $12.6 million at September 30, 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. At September 30, 2022, 87% of total investment securities, based on amortized cost, or $91.2 million, were classified as available-for-sale. Our investment securities portfolio at such date consisted primarily of debt obligations issued by the U.S. government and government agencies and government-sponsored mortgage-backed securities. During the nine months ended September 30, 2022, purchases of $10.9 million of investment securities exceeded $8.5 million of maturities, calls and principal repayments.

The following table presents the amortized cost of our total investment securities portfolio that mature during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2022.

Contractual Maturity as of September 30, 2022

(Dollars in thousands)

One Year or Less

After One Through Five Years

After Five Through Ten Years

Over Ten Years

Total

Total investment securities

Mortgage-backed securities

$

-

$

2,331

$

11,740

$

60,691

$

74,762

U.S. Government and agency obligations

 

-

 

9,977

 

10,000

 

4,009

 

23,986

Municipal obligations

-

1,429

1,947

2,559

5,935

Total

$

-

$

13,737

$

23,687

$

67,259

$

104,683

Weighted average yield

 

  

 

  

 

  

 

  

 

  

Mortgage-backed securities

 

-

%  

 

2.27

%  

 

1.82

%  

 

1.56

%  

 

1.62

%  

U.S. Government and agency obligations

 

-

 

1.03

 

1.23

 

2.13

 

1.30

Municipal obligations

 

-

 

0.83

 

2.29

 

1.35

 

1.53

Total weighted average yield

 

-

%  

 

1.22

%  

 

1.61

%  

 

1.58

%  

 

1.54

%  

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.

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Table of Contents

Deposits.  Our total deposits amounted to $184.2 million at September 30, 2022, an increase of $7.4 million, or 4.2%, compared to December 31, 2021. This increase resulted primarily from increases in NOW account balances, partially offset by declines in certificates of deposit.

The following table presents total deposits by account type for the dates indicated.

September 30, 2022

December 31, 2021

(Dollars in thousands)

    

Amount

    

%

  

Amount

    

%

Change

Non-interest-bearing demand deposits

$

31,988

 

17.4

%  

$

30,299

 

17.1

%  

$

1,689

5.6

%  

Negotiable order of withdrawal (“NOW”)

 

50,547

 

27.4

 

34,357

 

19.4

 

16,190

47.1

Money market

 

17,129

 

9.3

 

18,878

 

10.7

 

(1,749)

(9.3)

Savings

 

26,874

 

14.6

 

26,698

 

15.1

 

176

0.7

Certificates of deposit

57,689

 

31.3

66,563

 

37.7

(8,874)

(13.3)

Total deposits

$

184,227

 

100

%  

$

176,795

 

100

%  

$

7,432

4.2

Borrowings. Our borrowings, which consist of FHLB advances, amounted to $9.2 million at September 30, 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 $847,000 and $982,000 at September 30, 2022 and December 31, 2021, respectively.

Shareholders’ Equity.  Shareholders’ equity decreased $9.0 million, or 9.2%, to $89.3 million at September 30, 2022 compared to $98.3 million at December 31, 2021. The primary reason for the decrease in total shareholders’ equity was a $9.3 million increase in the Company’s accumulated other comprehensive loss position due to unrealized losses on available-for-sale securities. At September 30, 2022, our ratio of total shareholders’ equity to total assets was 31.5% compared to 34.5% at December 31, 2021.

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Table of Contents

Average Balances, Net Interest Income, and Yields Earned and Rates Paid.  The following tables show for the periods indicated the total dollar amount of interest income 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.

Three Months Ended September 30, 

2022

2021

(Dollars in thousands)

  

Average Balance

  

Interest

  

Average Yield/Rate

Average Balance

  

Interest

  

Average Yield/Rate

Interest-earning assets:

 

Loans receivable(1)

 

$

131,583

$

1,466

 

4.42

%  

$

137,031

$

1,671

 

4.84

%

Investment securities(TE)(2)

 

 

104,403

 

381

 

1.48

 

61,912

 

172

 

1.13

Other interest-earning assets

 

 

34,548

 

185

 

2.12

 

36,504

 

13

 

0.14

Total interest-earning assets(TE)

 

270,534

 

2,032

 

2.99

 

235,447

 

1,856

 

3.13

Non-interest-earning assets

 

17,518

 

17,729

Total assets

$

288,052

$

253,176

Interest-bearing liabilities:

 

Savings, NOW and money market accounts

 

 

91,738

 

29

 

0.13

 

81,650

 

26

 

0.12

Certificates of deposit

 

 

59,833

 

64

 

0.43

 

69,076

 

98

 

0.56

Total interest-bearing deposits

 

 

151,571

 

93

 

0.24

 

150,726

 

124

 

0.33

FHLB advances

 

 

9,126

 

69

 

2.99

 

8,966

 

68

 

3.04

Total interest-bearing liabilities

 

160,697

 

162

 

0.40

 

159,692

 

192

 

0.48

Non-interest-bearing liabilities

 

34,591

 

42,534

Total liabilities

 

195,288

 

202,226

Shareholders' equity

 

92,764

 

50,950

Total liabilities and shareholders' equity

$

288,052

$

253,176

Net interest-earning assets

$

109,837

$

75,755

Net interest income; average interest rate spread(TE)

$

1,870

 

2.59

%  

$

1,664

 

2.65

%

Net interest margin(TE)(3)

 

2.75

%  

 

2.81

%

Average interest-earning assets to average interest-bearing liabilities

 

168.35

%  

 

147.44

%

(1)Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts and loans in process.
(2)Average investment securities does not include unrealized holding gains/ losses on available-for-sale securities.
(3)Equals net interest income divided by average interest-earning assets. Taxable equivalent yields are calculated using a marginal tax rate of 21%.

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Table of Contents

Nine Months Ended September 30, 

    

2022

2021

(Dollars in thousands)

Average Balance

Interest

Average Yield/Rate

Average Balance

Interest

Average Yield/Rate

Interest-earning assets:

Loans receivable(1)

$

132,052

$

4,584

 

4.64

%  

$

143,075

$

5,344

 

4.99

%

Investment securities(TE)(2)

 

104,061

 

1,062

 

1.37

 

50,894

 

434

 

1.16

Other interest-earning assets

 

34,735

 

262

 

1.01

 

30,904

 

37

 

0.16

Total interest-earning assets(TE)

 

270,848

 

5,908

 

2.92

 

224,873

 

5,815

 

3.46

Non-interest-earning assets

 

16,152

 

15,472

Total assets

$

287,000

$

240,345

Interest-bearing liabilities:

Savings, NOW and money market accounts

 

86,459

 

77

 

0.12

 

77,928

 

84

 

0.14

Certificates of deposit

 

63,547

 

195

 

0.41

 

69,157

 

330

 

0.64

Total interest-bearing deposits

 

150,006

 

272

 

0.24

 

147,085

 

414

 

0.38

FHLB advances

 

9,080

 

205

 

3.00

 

8,907

 

204

 

3.06

Total interest-bearing liabilities

 

159,086

 

477

 

0.40

 

155,992

 

618

 

0.53

Non-interest-bearing liabilities

 

33,514

 

33,675

Total liabilities

 

192,600

 

189,667

Shareholders' equity

 

94,400

 

50,678

Total liabilities and shareholders' equity

$

287,000

$

240,345

Net interest-earning assets

$

111,762

$

68,881

Net interest income; average interest rate spread(TE)

$

5,431

 

2.52

%  

$

5,197

 

2.93

%  

Net interest margin(TE)(3)

 

2.69

%  

 

3.09

%  

Average interest-earning assets to average interest-bearing liabilities

 

170.25

%  

 

144.16

%  

(1)Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts and loans in process.
(2)Average investment securities does not include unrealized holding gains/ losses on available-for-sale securities.
(3)Equals net interest income divided by average interest-earning assets. Taxable equivalent yields are calculated using a marginal tax rate of 21%.

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Table of Contents

Rate/Volume Analysis.  The following tables show 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.

    

Three Months Ended

    

Nine Months Ended

September 30, 2022 vs 2021

September 30, 2022 vs 2021

Increase (Decrease) Due to

Total

Increase (Decrease) Due to

Total

(Dollars in thousands)

Rate

Volume

Increase (Decrease)

Rate

Volume

Increase (Decrease)

Interest income:

 

  

 

  

 

  

 

  

 

  

 

  

Loans receivable

$

(140)

$

(65)

$

(205)

$

(363)

$

(397)

$

(760)

Investment securities

 

66

 

143

 

209

 

101

 

527

 

628

Other interest-earning assets

 

172

 

-

 

172

 

220

 

5

 

225

Total interest income

 

98

 

78

 

176

 

(42)

 

135

 

93

Interest expense:

 

  

 

  

 

  

 

  

 

  

 

  

Savings, NOW and money market accounts

 

-

 

3

 

3

 

(15)

 

8

 

(7)

Certificates of deposit

 

(22)

 

(12)

 

(34)

 

(110)

 

(25)

 

(135)

Total deposits

 

(22)

 

(9)

 

(31)

 

(125)

 

(17)

 

(142)

FHLB advances and other borrowings

 

(1)

 

2

 

1

 

(3)

 

4

 

1

Total interest expense

 

(23)

 

(7)

 

(30)

 

(128)

 

(13)

 

(141)

Increase (decrease) in net interest income

$

121

$

85

$

206

$

86

$

148

$

234

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Table of Contents

Comparison of Results of Operations for the Three Months Ended September 30, 2022 and 2021.

General. For the three months ended September 30, 2022, the Company reported net income of $139,000, compared to net income of $1.4 million for the three months ended September 30, 2021. During the three months ended September 30, 2021, we received and recognized into non-interest income $1.8 million related to a CDFI Rapid Response Program grant. During the three months ended September 30, 2022, the Company recorded a reversal to the allowance for loan losses of $115,000, compared to no provision for or reversal of loan losses for the three months ended September 30, 2021.

Interest Income. Total interest income increased $176,000, or 9.5%, to $2.0 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021. This increase was primarily attributable to a $209,000 increase in interest income on investment securities and a $172,000 increase in other interest income, partially offset by a decrease in interest income on loans of $205,000.

The average loan yield was 4.42% for the three months ended September 30, 2022, down from 4.84% for the three months ended September 30, 2021. Average loans were $131.6 million for the three months ended September 30, 2022, down $5.4 million, or 4.0%, compared to the same period in 2021. Interest income on loans for the three months ended September 30, 2021 included $70,000 of recognized deferred PPP loan fees. PPP loans were fully paid-off in 2022 and no deferred fee income was earned from PPP loans during the three months ended September 30, 2022.

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 portfolio was up $42.5 million, or 68.6%, for the three months ended September 30, 2022, compared to the same period in 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 Expense. Total interest expense decreased $30,000, or 15.6%, to $162,000 for the three months ended September 30, 2022 from $192,000 for the three months ended September 30, 2021. Interest expense on deposits was $93,000 during the three months ended September 30, 2022, down $31,000, or 25.0%, from $124,000 for the three months ended September 30, 2021.  While the average balance of our total interest-bearing deposits increased by $845,000, or 0.6%, to $151.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, the average rate paid on interest-bearing deposits was down nine basis points to 0.24% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Net Interest Income. Net interest income was $1.9 million for the three months ended September 30, 2022, up $206,000, or 12.4%, from the three months ended September 30, 2021. Our interest rate spread was 2.59% and 2.65% for the three months ended September 30, 2022 and 2021, respectively. Our net interest margin was 2.75% and 2.81% for the three months ended September 30, 2022 and 2021, respectively. The decline in interest rate spread and net interest margin over the prior comparable periods was primarily the result of lower average yields earned 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 loans outstanding. The impact on yield due to these factors more than offset the increase in yield on other interest-earning assets and the reduction in the average cost of our interest-bearing liabilities.

Provision for Loan Losses.  During the three months ended September 30, 2022, the Company recorded a reversal to the allowance for loan losses of $115,000. We recorded no provision or reversal to the allowance for loan losses for the three months ended September 30, 2021. The reversal during the 2022 period primarily reflects 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 $296,000 for the three months ended September 30, 2022, compared to $2.0 million for the three months ended September 30, 2021. Non-interest income in the 2021 period primarily reflects the receipt of a $1.8 million grant from the U.S. Treasury Department’s CDFI Rapid Response Program. The CDFI Rapid Response Program is designed to quickly deploy capital to community development financial institutions, such as the Bank, in order to provide them with resources to help counter the economic impact created by the COVID-19 pandemic in distressed and underserved communities.

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Non-interest Expense.  Non-interest expense increased $244,000, or 13.0%, to $2.1 million for the three months ended September 30, 2022, compared to $1.9 million for the three months ended September 30, 2021. The increase in non-interest expense primarily reflects the additional costs associated with operating as a public company since the completion of our IPO in October 2021 and additional resources needed to expand our business.

Salaries and employee benefits expense totaled $1.2 million for the three months ended September 30, 2022, an increase of $84,000, or 7.7%, over the comparable period in 2021 primarily due to stock compensation expense recognized 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 $216,000 for the three months ended September 30, 2022, an increase of $15,000, or 7.5%, over the comparable period in 2021 primarily due to the cost of technology resources for additional personnel and our newest branch location.

Professional fees totaled $157,000 for the three months ended September 30, 2022, an increase of $69,000, or 78.4%, over the comparable period in 2021 primarily due to public company consulting, legal services and other professional fees.

Advertising and marketing expense totaled $36,000 for the three months ended September 30, 2022, an increase of $22,000 over the comparable period in 2021 primarily due to an increased focus on in-person promotional efforts to familiarize our market with the Bank’s new name and mission.

Franchise and shares tax expense totaled $15,000 for the three months ended September 30, 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.

Income Tax Expense.  The Company reported an income tax expense of $14,000 for the three months ended September 30, 2022, compared to income tax expense of $372,000 for the three months ended September 30, 2021. The change in income tax expense over the comparable three-month periods was primarily due to the change in taxable earnings.

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Comparison of Results of Operations for the Nine Months Ended September 30, 2022 and 2021.

General. For the nine months ended September 30, 2022, the Company reported net income of $26,000, compared to net income of $1.8 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2021, the Company received a $1.8 million Rapid Response Program grant from the CDFI Fund and recognized the amount in non-interest income. During the nine months ended September 30, 2022, the Company received and recognized into non-interest income a $171,000 BEA Program grant from the CDFI Fund. The Bank also rebranded and officially changed its name to Catalyst Bank during the 2022 period. Pre-tax costs associated with the rebranding of the Bank totaled $270,000 for the nine months ended September 30, 2022. Professional fees associated with the grant totaled $26,000 and were recorded in non-interest expense in the same period.

Interest Income. Total interest income increased $93,000, or 1.6%, to $5.9 million for the nine months ended September 30, 2022, from $5.8 million for the nine months ended September 30, 2021. This increase was primarily attributable to a $628,000 increase in interest income on investment securities and a $225,000 increase in other interest income, partially offset by a decrease in interest income on loans of $760,000.

The average loan yield was 4.64% for the nine months ended September 30, 2022, down from 4.99% for the nine months ended September 30, 2021. In addition, average loans were $132.1 million for the nine months ended September 30, 2022, down $11.0 million, or 7.7%, compared to the same period in 2021. Loan income from the recognition of deferred PPP loan fees totaled $186,000 for the nine months ended September 30, 2022, down $94,000, or 33.6%, from $280,000 recognized in the same period 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 $53.2 million, or 104.5%, for the nine months ended September 30, 2022, compared to the same period in 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 Expense. Total interest expense decreased $141,000, or 22.8%, to $477,000 for the nine months ended September 30, 2022 from $618,000 for the nine months ended September 30, 2021. Interest expense on deposits was $272,000 during the nine months ended September 30, 2022, down $142,000, or 34.3%, from $414,000 for the nine months ended September 30, 2021.  While the average balance of our total interest-bearing deposits increased by $2.9 million, or 2.0%, to $150.0 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, the average rate paid on interest-bearing deposits decreased by 14 basis points to 0.24% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Net Interest Income. Net interest income was $5.4 million for the nine months ended September 30, 2022, an increase of $234,000, or 4.5%, compared to the nine months ended September 30, 2021. Our average interest rate spread was 2.52% and 2.93% for the nine months ended September 30, 2022 and 2021, respectively. Our net interest margin was 2.69% and 3.09% for the nine months ended September 30, 2022 and 2021, respectively. The decline in interest rate spread and net interest margin over the prior comparable periods was primarily the result of lower average yield 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 loans. The impact on yield due to these factors more than offset the increase in yield on other interest-earning assets and the reduction in the average cost of our interest-bearing liabilities.

Provision for Loan Losses.  During the nine months ended September 30, 2022 and 2021, the Company recorded reversals to the allowance for loan losses of $375,000 and $286,000, 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.

Non-interest Income.  Non-interest income decreased by $1.5 million, or 63.7%, to $872,000 for the nine months ended September 30, 2022 from $2.4 million for the nine months ended September 30, 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.

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During the nine months ended September 30, 2022, the Company received and recognized into non-interest income a $171,000 BEA Program grant from the CDFI Fund. BOLI income increased by $149,000 to $216,000 for the nine months ended September 30, 2022, compared to the same period in 2021, largely due to an aggregate of $10.0 million in additional BOLI policies purchased in March and April of 2022. During the 2022 period, 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.

Non-interest Expense.  Non-interest expense increased $1.1 million, or 20.1%, to $6.7 million for the nine months ended September 30, 2022, compared to $5.6 million for the nine months ended September 30, 2021. Total non-interest expense for the nine months ended September 30, 2022 included $215,000 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 $3.6 million for the nine months ended September 30, 2022, an increase of $316,000, or 9.5%, over the comparable period in 2021 primarily due to stock compensation expense and new personnel 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 $666,000 for the nine months ended September 30, 2022, an increase of $110,000, or 19.8%, over the comparable period in 2021 primarily due to the cost of technology resources for additional personnel 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 $472,000 for the nine months ended September 30, 2022, an increase of $217,000, or 85.1%, over the comparable period in 2021 primarily due to public company consulting and legal services.

Advertising and marketing expense totaled $187,000 for the nine months ended September 30, 2022, an increase of $152,000 over the comparable period in 2021 primarily due to rebranding-related expenses of $124,000 incurred during the nine months ended September 30, 2022.

Franchise and shares tax expense totaled $131,000 for the nine months ended September 30, 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.

Income Tax Expense.  The Company reported an income tax benefit of $45,000 for the nine months ended September 30, 2022, compared to income tax expense of $465,000 for the nine months ended September 30, 2021. The change in income tax expense over the comparable nine-month periods was primarily due to the change in taxable earnings.

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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 September 30, 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 $37.6 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 $376,000 for the nine months ended September 30, 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 $12.5 million for the nine months ended September 30, 2022. Net cash provided by financing activities, consisting of the net change in deposits, was $7.4 million for the nine months ended September 30, 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. 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 FHLB advances.

The Bank exceeded all regulatory capital requirements and was categorized as well-capitalized at September 30, 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 September 30, 2022

Common Equity Tier 1 Capital

$

77,997

57.84

%  

$

8,765

>6.5

%  

Tier 1 Risk-Based Capital

 

77,997

57.84

 

10,788

>8.0

Total Risk-Based Capital

 

79,684

59.09

 

13,485

>10.0

Tier 1 Leverage Capital

 

77,997

28.29

 

13,784

>5.0

As of December 31, 2021

 

  

  

 

  

  

Common Equity Tier 1 Capital

$

77,819

63.51

%  

$

7,965

>6.5

%  

Tier 1 Risk-Based Capital

 

77,819

63.51

 

9,803

>8.0

Total Risk-Based Capital

 

79,360

64.77

 

12,253

>10.0

Tier 1 Leverage Capital

 

77,819

27.38

 

14,210

>5.0

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At September 30, 2022, we had $872,000 of outstanding commitments to originate loans and $3.7 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 $12.9 million at September 30, 2022. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2022, totaled $45.7 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 may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

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 September 30, 2022.

Amount of Commitment Expiration — Per Period

(Dollars in thousands)

Total Amounts Committed at September 30, 2022

To 1 Year

1 - 3 Years

3 - 5 Years

After 5 Years

Commitments to originate loans

$

872

$

872

$

-

$

-

$

-

Undisbursed portion of construction loans in process

 

3,730

 

2,075

 

1,655

 

-

 

-

Unused lines of credit

 

11,771

 

6,978

 

3,408

 

-

 

1,385

Unused overdraft privilege amounts

 

1,117

 

-

 

-

 

-

 

1,117

Letters of credit

4

4

-

-

-

Total commitments

$

17,494

$

9,929

$

5,063

$

-

$

2,502

The following table summarizes our contractual cash obligations at September 30, 2022.

Payments Due By Period

(Dollars in thousands)

Total at September 30, 2022

To 1 Year

1 - 3 Years

3 - 5 Years

After 5 Years

Certificates of deposit

$

57,689

$

45,702

$

11,408

$

579

$

-

FHLB advances

 

10,000

 

-

 

-

 

3,000

 

7,000

Total long-term debt

 

67,689

 

45,702

 

11,408

 

3,579

 

7,000

Operating lease obligations

 

-

 

-

 

-

 

-

 

-

Total contractual obligations

$

67,689

$

45,702

$

11,408

$

3,579

$

7,000

Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see Note 3 of the notes to our financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Act”)) as of September 30, 2022, was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management.  Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures in effect as of September 30, 2022, were effective.  In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We do not expect that our disclosure controls and procedures and internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at September 30, 2022, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Nothing to report.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Nothing to report.

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ITEM 6. EXHIBITS

31.1

Rule 13a-14(a) Certifications (Chief Executive Officer)

31.2

Rule 13a-14(a) Certifications (Chief Financial Officer)

32.0

Section 1350 Certifications

101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definitions Linkbase Document

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CATALYST BANCORP, INC.

Date: November 10, 2022

By:

/s/ Joseph B. Zanco

Joseph B. Zanco

President and Chief Executive Officer

(Duly Authorized Officer)

Date: November 10, 2022

By:

/s/ Jacques L. J. Bourque

Jacques L. J. Bourque

Chief Financial Officer

(Principal Financial and Accounting Officer)

48