Catalyst Bancorp, Inc. - Quarter Report: 2023 September (Form 10-Q)

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, 2023

☐	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 4,769,155 shares of Registrant’s common stock, par value of $0.01 per share, issued and outstanding as of November 6, 2023.

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CATALYST BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition	2

	Consolidated Statements of Income	3

	Consolidated Statements of Comprehensive Income	4

	Consolidated Statements of Changes in Shareholders' Equity	5

	Consolidated Statements of Cash Flows	6

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4.	Controls and Procedures	50

PART II	OTHER INFORMATION	51

Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	Mine Safety Disclosures	51

Item 5	Other Information	51

Item 6.	Exhibits	52

SIGNATURES		53

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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)	2023		2022
ASSETS
Non-interest-bearing cash	$	3,497	$	5,092
Interest-bearing cash and due from banks		9,769		8,380
Total cash and cash equivalents		13,266		13,472
Investment securities:
Securities available-for-sale, at fair value		71,808		79,602
Securities held-to-maturity (fair values of $10,573 and $10,724, respectively)		13,464		13,475
Loans receivable, net of unearned income		135,672		133,607
Allowance for loan losses		(2,036)		(1,807)
Loans receivable, net		133,636		131,800
Accrued interest receivable		806		673
Foreclosed assets		37		320
Premises and equipment, net		6,160		6,303
Stock in correspondent banks, at cost		1,858		1,808
Bank-owned life insurance		13,917		13,617
Other assets		2,956		2,254
TOTAL ASSETS	$	257,908	$	263,324

LIABILITIES
Deposits
Non-interest-bearing	$	33,222	$	33,657
Interest-bearing		131,998		131,437
Total deposits		165,220		165,094
Advances from Federal Home Loan Bank		9,333		9,198
Other liabilities		1,147		558
TOTAL LIABILITIES		175,700		174,850

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; 4,848,290 and 5,290,000 issued and outstanding at September 30, 2023 and December 31, 2022, respectively		48		53
Additional paid-in capital		45,855		51,062
Unallocated common stock held by benefit plans		(6,274)		(6,307)
Retained earnings		52,687		52,740
Accumulated other comprehensive income (loss)		(10,108)		(9,074)
TOTAL SHAREHOLDERS' EQUITY		82,208		88,474
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	257,908	$	263,324

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)	2023		2022		2023		2022
INTEREST INCOME
Loans receivable, including fees	$	1,852	$	1,466	$	5,172	$	4,584
Investment securities		403		381		1,243		1,062
Other		214		185		643		262
Total interest income		2,469		2,032		7,058		5,908
INTEREST EXPENSE
Deposits		428		93		1,012		272
Advances from Federal Home Loan Bank		69		69		205		205
Total interest expense		497		162		1,217		477
Net interest income		1,972		1,870		5,841		5,431
Provision for (reversal of) credit losses		-		(115)		-		(375)
Net interest income after provision for (reversal of) credit losses		1,972		1,985		5,841		5,806
NON-INTEREST INCOME
Service charges on deposit accounts		190		192		573		542
Gain (loss) on disposals and sales of fixed assets		-		-		-		(77)
Bank-owned life insurance		104		97		300		216
Federal community development grant		-		-		-		171
Other		12		7		44		20
Total non-interest income		306		296		917		872
NON-INTEREST EXPENSE
Salaries and employee benefits		1,141		1,168		3,522		3,647
Occupancy and equipment		198		203		609		640
Data processing and communication		228		216		675		666
Professional fees		100		157		346		472
Directors’ fees		116		75		345		185
ATM and debit card		68		76		187		184
Foreclosed assets, net		2		3		67		-
Advertising and marketing		25		36		77		187
Franchise and shares tax		19		15		71		131
Regulatory fees and assessments		33		35		99		104
Insurance		26		34		80		100
Printing, supplies and postage		28		37		102		117
Other		97		78		277		285
Total non-interest expense		2,081		2,133		6,457		6,718
Income (loss) before income tax expense (benefit)		197		148		301		(40)
Income tax expense (benefit)		27		13		19		(49)
NET INCOME	$	170	$	135	$	282	$	9

Earnings per share - basic	$	0.03	$	0.03	$	0.06	$	0.01
Earnings per share - diluted		0.03		0.03		0.06		0.01

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)	2023		2022		2023		2022
Net income	$	170	$	135	$	282	$	9
Net change in unrealized gains (losses) on available-for-sale securities		(1,852)		(4,229)		(1,309)		(11,776)
Income tax effect		389		888		275		2,473
Total other comprehensive income (loss)		(1,463)		(3,341)		(1,034)		(9,303)
Total comprehensive income (loss)	$	(1,293)	$	(3,206)	$	(752)	$	(9,294)

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 Benefit Plans		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
BALANCE, JUNE 30, 2022	$	53	$	50,838	$	(4,073)	$	52,434	$	(6,645)	$	92,607
Net income		-		-		-		135		-		135
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)	$	52,569	$	(9,986)	$	89,518

BALANCE, JUNE 30, 2023	$	49	$	47,032	$	(6,616)	$	52,517	$	(8,645)	$	84,337
Net income		-		-		-		170		-		170
Other comprehensive income (loss)		-		-		-		-		(1,463)		(1,463)
ESOP shares released for allocation		-		10		53		-		-		63
2022 Recognition and Retention Plan shares released for allocation		-		(289)		289		-		-		-
Stock compensation expense		-		102		-		-		-		102
Repurchase of common stock		(1)		(1,000)		-		-		-		(1,001)
BALANCE, SEPTEMBER 30, 2023	$	48	$	45,855	$	(6,274)	$	52,687	$	(10,108)	$	82,208

BALANCE, DECEMBER 31, 2021	$	53	$	50,802	$	(4,179)	$	52,560	$	(683)	$	98,553
Net income		-		-		-		9		-		9
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)	$	52,569	$	(9,986)	$	89,518

BALANCE, DECEMBER 31, 2022	$	53	$	51,062	$	(6,307)	$	52,740	$	(9,074)	$	88,474
Impact of adoption of ASC 326		-		-		-		(335)		-		(335)
Net income		-		-		-		282		-		282
Other comprehensive income (loss)		-		-		-		-		(1,034)		(1,034)
Stock purchased to fund the 2022 Recognition and Retention Plan		-		-		(415)		-		-		(415)
ESOP shares released for allocation		-		27		159		-		-		186
2022 Recognition and Retention Plan shares released for allocation		-		(289)		289		-		-		-
Stock compensation expense		-		386		-		-		-		386
Repurchase of common stock		(5)		(5,331)		-		-		-		(5,336)
BALANCE, SEPTEMBER 30, 2023	$	48	$	45,855	$	(6,274)	$	52,687	$	(10,108)	$	82,208

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)	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	282	$	9
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Investment securities amortization, net		236		370
Federal Home Loan Bank stock dividends		(49)		(6)
Amortization of prepayment penalties on debt restructuring		135		135
Provision for (reversal of) credit losses		-		(375)
Net loss (gain) on disposals and sales of premises and equipment		-		77
Increase in cash surrender value of bank-owned life insurance		(300)		(216)
Stock-based compensation		572		259
Depreciation of premises and equipment		301		343
Net write-downs and losses (gains) on the sale of foreclosed assets		62		(9)
Deferred income tax expense (benefit)		(74)		54
(Increase) decrease in other assets		(395)		(111)
Increase (decrease) in other liabilities		308		(154)
Net cash provided by (used in) operating activities		1,078		376
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Proceeds from maturities, calls, and paydowns		6,259		8,547
Purchases		-		(10,900)
Net decrease (increase) in loans		(2,019)		54
Proceeds from sale of foreclosed assets		259		39
Purchases of premises and equipment		(158)		(235)
Purchase of bank-owned life insurance		-		(10,000)
Net cash provided by (used in) investing activities		4,341		(12,495)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits		126		7,432
Purchase of stock to fund the 2022 Recognition and Retention Plan		(415)		-
Repurchase of common stock		(5,336)		-
Net cash provided by (used in) financing activities		(5,625)		7,432
NET CHANGE IN CASH AND CASH EQUIVALENTS		(206)		(4,687)
CASH AND CASH EQUIVALENTS, beginning of period		13,472		40,884
CASH AND CASH EQUIVALENTS, end of period	$	13,266	$	36,197

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Acquisition of real estate in settlement of loans	$	37	$	10

SUPPLEMENTAL SCHEDULE OF INTEREST AND TAXES PAID
Cash paid for interest	$	916	$	345
Cash paid for income taxes		-		243

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 (“GAAP”). 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, 2023 and 2022 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, 2022.

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.

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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, 2022.

As of January 1, 2023, the Company adopted the guidance in Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. The main provisions of the ASU have been codified by the Financial Accounting Standards Board (“FASB”) in Topic 326 of the Accounting Standards Codification (“ASC 326”). The new standard changed the impairment model for most financial assets that are measured at amortized cost, including off-balance sheet credit exposures, from an incurred loss model to an expected loss model. Determining the appropriateness of the allowance requires judgement by management about the effect of matters that are inherently uncertain. Changes in factors and forecasts used in evaluating the overall loan portfolio may result in significant changes in the allowance for credit losses and related provision expense in future periods. The allowance level is influenced by loan volumes, loan asset quality ratings, delinquency status, historical credit loss experience, loan performance characteristics, forecasted information and other conditions influencing loss expectations. Changes to the assumptions in the model in future periods could have a material impact on the Company’s Consolidated Financial Statements. See Note 2 for more detailed information on the Company’s estimate of expected credit losses and its impact on the financial statements.

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, 2022. 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.

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NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in 2023

ASU No. 2016-13. On January 1, 2023, the Company adopted the guidance under ASU No. 2016-13, Financial Instruments – Credit Losses, Measurement of Credit Losses on Financial Instruments. The amendments introduced 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. The main provisions of the ASU have been codified by the FASB under ASC 326. ASC 326 requires financial assets measured on an amortized cost basis, including loans and held-to-maturity debt securities, to be presented at an amount net of an allowance for credit losses, which reflects expected losses for the full life of the financial asset. Unfunded lending commitments are also within the scope of ASC 326. Under former GAAP, credit losses were not recognized until the occurrence of the loss was probable and, as a result, the allowance for credit losses did not reflect an estimate of credit losses for the full life of financial assets.

In addition, ASC 326 requires expected credit related losses for available-for-sale debt securities to be recorded through an allowance for credit losses, while non-credit related losses will continue to be recognized through other comprehensive income. Under former GAAP, we assessed our investment securities for other-than-temporary impairment and any declines in fair value that were deemed other-than-temporary resulted in a direct write-down to the amortized cost basis of the related security. The allowance approach allows estimated expected credit losses to be adjusted from period-to-period, as opposed to a permanent write-down.

The Company applied the guidance under ASC 326 using the modified retrospective approach which resulted in an adjustment to beginning retained earnings for 2023. The information for reporting periods beginning on and after January 1, 2023 are presented under ASC 326, while prior periods continue to be reported in accordance with previously applicable GAAP. The following table illustrates the impact of ASC Topic 326.


	December 31,		ASC 326 Adoption		January 1,
(Dollars in thousands)	2022		Impact		2023
Allowance for credit losses
One- to four-family residential	$	1,224	$	158	$	1,382
Commercial real estate		248		(53)		195
Construction and land		74		40		114
Multi-family residential		40		5		45
Commercial and industrial		175		51		226
Consumer		46		8		54
Total allowance for loan losses	$	1,807	$	209	$	2,016
Unfunded lending commitments⁽¹⁾		-		216		216
Total allowance for credit losses	$	1,807	$	425	$	2,232

Retained Earnings
Total increase in the allowance for credit losses			$	425
Tax effect				(90)
Decrease to retained earnings, net of tax effect			$	335

(1)

The allowance for credit losses on unfunded lending commitments is recorded within “other liabilities” on the statement of financial condition. The related provision for credit losses for unfunded lending commitments is recorded with the provision for loan losses and reported in aggregate as the provision for credit losses on the income statement.

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Under ASC 326, the Company groups loans and unfunded lending commitments with similar risk characteristics into pools or segments and collectively evaluates each pool to estimate the allowance for credit losses. For each loan pool, the Company uses the remaining life method to calculate its credit loss estimate under CECL. The remaining life method applies an estimated average loss rate to the expected future outstanding balances of the relevant pool of loans. The estimated average loss rate is based on historical charge-off rates and the future balances or the remaining life of each pool is based on recent trends in the rate at which existing loans have paid-off or paid-down. We attempt to forecast the average loss rate for each pool over the first two years of the estimated remaining life, then revert to the long-term average after the forecast period. For each pool of loans, management also evaluates and applies qualitative adjustments to the calculated allowance for credit losses based on several factors, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and loan concentrations, changes in credit quality, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry.

The ultimate loss rates computed for each loan pool (a product of our quantitative calculation and qualitative adjustments) are used to estimate the allowance for credit losses on unfunded lending commitments. The pooled loan loss rates are applied to the portion of the unfunded lending commitments that management expects to fund in the future. These unfunded commitments are segmented into pools consistent with our grouping of outstanding loans and include available portions of lines of credit, undisbursed portions of construction loans and commitments to originate new loans.

The Company has identified the following portfolio segments based on the risk characteristics described below.

One- to four-family residential – This category primarily consists of loans secured by residential real estate located in our market. The performance of these loans may be adversely affected by, among other factors, unemployment rates, local residential real estate market conditions and the interest rate environment. Generally, these loans are for longer terms than commercial and construction loans.

Commercial real estate – This category generally consists of loans secured by retail and industrial use buildings, hotels, strip shopping centers and other properties used for commercial purposes. The performance of these loans may be adversely affected by, among other factors, conditions specific to the relevant industry, the real estate market for the property type and geographic region where the property or borrower is located.

Construction and land – This category consists of loans to finance the ground-up construction and/or improvement of residential and commercial properties and loans secured by land. The performance of these loans is generally dependent upon the successful completion of improvements and/or land development for the end user, the sale of the property to a third party, or a secondary source of cash flow from the owners. The successful completion of planned improvements and development may be adversely affected by changes in the estimated property value upon completion of construction, projected costs and other conditions leading to project delays.

Multi-family residential – This category consists of loans secured by apartment or residential buildings with five or more units used to accommodate households on a temporary or permanent basis. The performance of multi-family loans is generally dependent on the receipt of rental income from the tenants who occupy the subject property. The occupancy rate of the subject property and the ability of the tenants to pay rent may be adversely affected by the location of the subject property and local economic conditions.

Commercial and industrial – This category primarily consists of secured and unsecured loans to small and mid-sized businesses to fund operations or purchase non-real estate assets. Secured loans are primarily secured by accounts receivable, inventory, equipment and certain other business assets. The performance of these loans may be adversely affected by, among other factors, conditions specific to the relevant industry, fluctuations in the value of the collateral and individual performance factors related to the borrower.

Consumer – This category consists of loans to individuals for household, family and other personal use. The performance of these loans may be adversely affected by national and local economic conditions, unemployment rates and other factors affecting the borrower’s income available to service the debt.

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Loans are individually evaluated for credit losses when they do not share similar risk characteristics with our identified loan pools under ASC 326. Generally, management considers loans for individual analysis when the outstanding balance is greater than $50,000 and when we have identified certain unique characteristics that impact the risk of credit loss. These characteristics include, but are not limited to, the creditworthiness of the borrower, the reliability of the primary source of repayment, the quality of the collateral, the size of the loan or relationship, and the industry of the borrower. The allowance for credit losses on individually evaluated, collateral-dependent loans is based on a comparison of the recorded investment in the loan with the fair value of the underlying collateral. Alternatively, we estimate credit losses on individual loans by comparing the loan’s recorded investment to the loan’s estimated fair value based on discounted cash flows or an observable market price.

At adoption of ASC 326, management also evaluated its securities portfolio for credit losses. The types of securities in the Company’s portfolio have a long history of minimal credit risk and management does not expect or estimate any credit losses to occur over the life of these assts. In addition, management does not have the intent to sell any of the Company’s securities in an unrealized loss position and believes that it is more likely than not that the Company will not have to sell any such securities before recovery of cost. As a result, the Company has not recorded an allowance for credit losses for its held-to-maturity or available-for-sale securities.

ASU No. 2022-02. 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. 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. The amendments in ASU 2022-02 were effective at adoption of the amendments in ASU 2016-13. The implementation of ASU 2022-02 did not materially impact the Company’s financial statements or disclosures.

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NOTE 3. 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)	2023		2022		2023		2022
Numerator
Net income available to common shareholders	$	170	$	135	$	282	$	9

Denominator
Weighted average common shares outstanding		4,901		5,290		5,033		5,290
Weighted average unallocated common stock held by benefit plans		(588)		(405)		(597)		(410)
Weighted average shares - basic		4,313		4,885		4,436		4,880
Effect of dilutive stock-based awards:
Stock options		-		-		-		-
Restricted stock		11		-		6		-
Weighted average shares - assuming dilution		4,324		4,885		4,442		4,880

Basic earnings per common share	$	0.03	$	0.03	$	0.06	$	0.01
Diluted earnings per common share		0.03		0.03		0.06		0.01

Diluted earnings per share was computed using the treasury stock method. The weighted average of potentially dilutive common shares attributable to outstanding stock options that were anti-dilutive totaled 280,620 and 290,379 for the three and nine months ended September 30, 2023, respectively, and were excluded from the calculation of diluted earnings per share. There were no potentially dilutive common shares attributable to restricted stock that were anti-dilutive for the three months ended September 30, 2023. For the nine months ended September 30, 2023, the weighted average of potentially dilutive common shares attributable to restricted stock that were anti-dilutive totaled 39,779 and were excluded from the calculation of diluted earnings per share.

During the three and nine months ended September 30, 2022, there were no convertible securities or other contracts to issue common stock outstanding that if converted or exercised would result in potential dilution of earnings per share.

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NOTE 4. INVESTMENT SECURITIES

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


	September 30, 2023
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available-for-sale
Mortgage-backed securities	$	67,604	$	-	$	(11,181)	$	56,423
U.S. Government and agency obligations		10,985		-		(949)		10,036
Municipal obligations		6,014		-		(665)		5,349
Total available-for-sale	$	84,603	$	-	$	(12,795)	$	71,808
Securities held-to-maturity
U.S. Government and agency obligations	$	13,004	$	-	$	(2,846)	$	10,158
Municipal obligations		460		-		(45)		415
Total held-to-maturity	$	13,464	$	-	$	(2,891)	$	10,573


	December 31, 2022
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available-for-sale
Mortgage-backed securities	$	74,044	$	15	$	(9,892)	$	64,167
U.S. Government and agency obligations		10,979		-		(1,062)		9,917
Municipal obligations		6,065		4		(551)		5,518
Total available-for-sale	$	91,088	$	19	$	(11,505)	$	79,602
Securities held-to-maturity
U.S. Government and agency obligations	$	13,006	$	-	$	(2,718)	$	10,288
Municipal obligations		469		-		(33)		436
Total held-to-maturity	$	13,475	$	-	$	(2,751)	$	10,724

There were no securities transferred between classifications during the nine months ended September 30, 2023 or 2022.

Accrued interest receivable on the Company’s investment securities totaled $243,000 and $257,000 at September 30, 2023 and December 31, 2022, respectively.

Investment securities with a carrying amount of approximately $43.6 million and $20.4 million, respectively, were pledged to secure public deposits as required or permitted by law at September 30, 2023 and December 31, 2022. At September 30, 2023, investment securities with a carrying value of $1.0 million were pledged to the Federal Reserve Bank as collateral for borrowings.

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The following is a summary of maturities of securities available-for-sale and held-to-maturity at September 30, 2023 and December 31, 2022:


	September 30, 2023
	Available-for-Sale				Held-to-Maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	1,000	$	993	$	-	$	-
After one through five years		12,984		12,154		2,336		2,014
After five through ten years		16,883		14,951		7,124		5,561
After ten years		53,736		43,710		4,004		2,998
Total	$	84,603	$	71,808	$	13,464	$	10,573


	December 31, 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	$	1,000	$	962	$	-	$	-
After one through five years		11,496		10,634		2,343		2,031
After five through ten years		17,139		15,699		7,125		5,611
After ten years		61,453		52,307		4,007		3,082
Total	$	91,088	$	79,602	$	13,475	$	10,724

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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Information pertaining to securities with gross unrealized losses at September 30, 2023 and December 31, 2022 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:


	September 30, 2023
	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	$	1,534	$	(47)	$	54,889	$	(11,134)	$	56,423	$	(11,181)
U.S. Government and agency obligations		-		-		10,036		(949)		10,036		(949)
Municipal obligations		1,597		(45)		3,752		(620)		5,349		(665)
Total available-for-sale	$	3,131	$	(92)	$	68,677	$	(12,703)	$	71,808	$	(12,795)
Securities held-to-maturity
U.S. Government and agency obligations	$	-	$	-	$	10,158	$	(2,846)	$	10,158	$	(2,846)
Municipal obligations		-		-		415		(45)		415		(45)
Total held-to-maturity	$	-	$	-	$	10,573	$	(2,891)	$	10,573	$	(2,891)
Total	$	3,131	$	(92)	$	79,250	$	(15,594)	$	82,381	$	(15,686)


	December 31, 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	$	9,759	$	(546)	$	53,402	$	(9,346)	$	63,161	$	(9,892)
U.S. Government and agency obligations		-		-		9,917		(1,062)		9,917		(1,062)
Municipal obligations		602		(16)		3,885		(535)		4,487		(551)
Total available-for-sale	$	10,361	$	(562)	$	67,204	$	(10,943)	$	77,565	$	(11,505)
Securities held-to-maturity
U.S. Government and agency obligations	$	-	$	-	$	10,288	$	(2,718)	$	10,288	$	(2,718)
Municipal obligations		120		(6)		316		(27)		436		(33)
Total held-to-maturity	$	120	$	(6)	$	10,604	$	(2,745)	$	10,724	$	(2,751)
Total	$	10,481	$	(568)	$	77,808	$	(13,688)	$	88,289	$	(14,256)

At September 30, 2023 and December 31, 2022, the Company held 98 and 96 securities, respectively, with an unrealized loss. The securities with unrealized losses consisted of government-sponsored mortgage-backed securities and debt obligations guaranteed by federal, state and local government entities. These unrealized losses relate principally to noncredit related factors, including changes in current interest rates for similar types of securities. Based on management’s evaluation of the securities portfolio, the Company has not established an allowance for credit losses for its available-for-sale or held-to-maturity securities at September 30, 2023.

Under ASC 326, management evaluates available-for-sale securities in unrealized loss positions to determine if the decline in the fair value of each security below its amortized cost basis is due to credit-related factors or noncredit-related factors. Consideration is given to the extent to which that fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period sufficient to allow for any anticipated recovery in fair value. At September 30, 2023, management does not have the intent to sell any of the Company’s securities in an unrealized loss position and believes that it is more likely than not that the Company will not have to sell any such securities before recovery of cost.

Prior to the adoption of ASC 326, management evaluated securities for other-than-temporary impairment and, as of December 31, 2022, no declines in fair value were deemed to be other-than temporary. See Note 2 for more information on the adoption of ASC 326.

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NOTE 5. LOANS RECEIVABLE

Loans receivable at September 30, 2023 and December 31, 2022 are summarized as follows:


	September 30,		December 31,
(Dollars in thousands)	2023		2022
Real estate loans
One- to four-family residential	$	83,973	$	87,508
Commercial real estate		19,113		19,437
Construction and land		6,622		6,172
Multi-family residential		3,424		3,200
Total real estate loans		113,132		116,317
Other loans
Commercial and industrial		19,634		13,843
Consumer		2,906		3,447
Total other loans		22,540		17,290
Total loans		135,672		133,607
Less: Allowance for loan losses		(2,036)		(1,807)
Net loans	$	133,636	$	131,800

At September 30, 2023 and December 31, 2022, real estate loans totaling $77.9 million and $64.1 million, respectively, were pledged as collateral to the Federal Home Loan Bank for borrowings under a blanket lien agreement. Refer to Note 7 for more information on borrowed funds.

Accrued interest receivable on the Company’s loans totaled $562,000 and $411,000 at September 30, 2023 and December 31, 2022, respectively. Accrued interest receivable is excluded from the Company’s estimate of the allowance for credit losses.

The following tables outline the changes in the allowance for loan losses for the nine months ended September 30, 2023 and 2022.


	For the Nine Months Ended September 30, 2023
(Dollars in thousands)	Beginning Balance			ASC 326 Adoption Impact⁽¹⁾	Provision (Reversal)		Charge-offs		Recoveries		Ending Balance
Allowance for credit losses
One- to four-family residential	$	1,224	$	158	$	(299)	$	-	$	98	$	1,181
Commercial real estate		248		(53)		(5)		-		-		190
Construction and land		74		40		48		-		-		162
Multi-family residential		40		5		(2)		-		-		43
Commercial and industrial		175		51		73		-		1		300
Consumer		46		8		2		(26)		11		41
Unallocated		-		-		119		-		-		119
Total for loans	$	1,807	$	209	$	(64)	$	(26)	$	110	$	2,036
Unfunded lending commitments⁽²⁾		-		216		64		-		-		280
Total	$	1,807	$	425	$	-	$	(26)	$	110	$	2,316

(1)	Refer to Note 2 for more information on the adoption of ASC 326.

(2)

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	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

The following tables outline the allowance for loan losses and the balance of loans by method of loss evaluation at September 30, 2023 and December 31, 2022.


	September 30, 2023						December 31, 2022
(Dollars in thousands)	Individually Evaluated		Collectively Evaluated		Total		Individually Evaluated		Collectively Evaluated		Total
Allowance for loan losses
One- to four-family residential	$	127	$	1,054	$	1,181	$	216	$	1,008	$	1,224
Commercial real estate		-		190		190		-		248		248
Construction and land		49		113		162		-		74		74
Multi-family residential		-		43		43		-		40		40
Commercial and industrial		-		300		300		-		175		175
Consumer		-		41		41		-		46		46
Unallocated		-		119		119		-		-		-
Total	$	176	$	1,860	$	2,036	$	216	$	1,591	$	1,807
Loans
One- to four-family residential	$	957	$	83,016	$	83,973	$	2,712	$	84,796	$	87,508
Commercial real estate		50		19,063		19,113		51		19,386		19,437
Construction and land		135		6,487		6,622		33		6,139		6,172
Multi-family residential		-		3,424		3,424		-		3,200		3,200
Commercial and industrial		-		19,634		19,634		-		13,843		13,843
Consumer		-		2,906		2,906		-		3,447		3,447
Total	$	1,142	$	134,530	$	135,672	$	2,796	$	130,811	$	133,607

At September 30, 2023 all loans individually evaluated for credit losses, totaling $1.1 million, were considered collateral-dependent financial assets under ASC 326. Loans are considered collateral-dependent and individually evaluated when, based on management’s assessment as of the reporting date, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Collateral-dependent loans primarily consist of residential real estate loans secured by one- to four-family residential properties located in our market.

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A summary of current, past due and nonaccrual loans as of September 30, 2023 and December 31, 2022 follows:


	As of September 30, 2023
(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	$	1,473	$	127	$	1,038	$	2,638	$	80,505	$	830	$	83,973
Commercial real estate		110		-		50		160		18,953		-		19,113
Construction and land		-		-		-		-		6,579		43		6,622
Multi-family residential		-		-		-		-		3,424		-		3,424
Commercial and industrial		113		-		-		113		19,521		-		19,634
Consumer		14		-		-		14		2,892		-		2,906
Total	$	1,710	$	127	$	1,088	$	2,925	$	131,874	$	873	$	135,672


	As of December 31, 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	$	2,077	$	191	$	716	$	2,984	$	83,848	$	676	$	87,508
Commercial real estate		166		-		51		217		19,220		-		19,437
Construction and land		156		-		18		174		5,965		33		6,172
Multi-family residential		-		-		-		-		3,200		-		3,200
Commercial and industrial		-		-		-		-		13,843		-		13,843
Consumer		6		-		-		6		3,441		-		3,447
Total	$	2,405	$	191	$	785	$	3,381	$	129,517	$	709	$	133,607

A summary of total nonaccrual loans as of September 30, 2023 and December 31, 2022 follows:


							December 31,
	September 30, 2023						2022
(Dollars in thousands)	With Allowance for Credit Loss		Without Allowance for Credit Loss		Total		Total
Nonaccrual loans
One- to four-family residential	$	1,673	$	195	$	1,868	$	1,392
Commercial real estate		-		50		50		51
Construction and land		43		-		43		51
Multi-family residential		-		-		-		-
Commercial and industrial		-		-		-		-
Consumer		-		-		-		-
Total	$	1,716	$	245	$	1,961	$	1,494

The Company was not committed to lend any additional funds on nonaccrual loans at September 30, 2023 or December 31, 2022. The Company does not recognize interest income while loans are on nonaccrual status. All payments received while on nonaccrual status are applied against the principal balance of nonaccrual loans.

At September 30, 2023, loans secured by residential and commercial real estate for which formal foreclosure proceedings were in process totaled $476,000 and $50,000, respectively. At December 31, 2022, loans secured by residential and commercial real estate for which formal foreclosure proceedings were in process totaled $331,000 and $50,000, respectively.

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During the nine months ended September 30, 2023 and the year ended December 31, 2022, the Company did not grant any loan modifications to borrowers experiencing financial difficulty.

Information on impaired loans as of December 31, 2022 follows:


	December 31, 2022
(Dollars in thousands)	Recorded Investment Without an Allowance		Recorded Investment With an Allowance		Unpaid Principal		Related Allowance
One- to four-family residential	$	1,843	$	869	$	3,149	$	216
Commercial real estate		51		-		52		-
Construction and land		33		-		42		-
Multi-family residential		-		-		-		-
Commercial and industrial		-		-		-		-
Consumer		-		-		-		-
Total	$	1,927	$	869	$	3,243	$	216

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


	Three Months Ended				Nine Months Ended
	September 30, 2022				September 30, 2022
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
One- to four-family residential	$	2,655	$	16	$	2,718	$	49
Commercial real estate		50		-		51		-
Construction and land		34		-		35		-
Multi-family residential		-		-		-		-
Commercial and industrial		-		-		-		-
Consumer		12		-		13		-
Total	$	2,751	$	16	$	2,817	$	49

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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 credit losses.

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The following table presents the Company’s loan portfolio by credit quality classification and origination year as of September 30, 2023. The Company uses the latter of origination or renewal date to classify term loans into vintages.


															Line-of-credit
															Arrangements
	Term Loans by Origination Year												Line-of-credit		Converted to
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Arrangements		Term Loans		Total
One- to four-family residential
Pass	$	1,695	$	11,175	$	3,308	$	2,994	$	3,230	$	55,100	$	1,603	$	2,031	$	81,136
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		24		-		12		126		13		2,662		-		-		2,837
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	1,719	$	11,175	$	3,320	$	3,120	$	3,243	$	57,762	$	1,603	$	2,031	$	83,973
Commercial real estate
Pass	$	1,790	$	2,067	$	2,049	$	4,396	$	3,470	$	4,445	$	33	$	355	$	18,605
Special Mention		-		110		106		-		-		-		-		-		216
Substandard		-		-		-		-		-		292		-		-		292
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	1,790	$	2,177	$	2,155	$	4,396	$	3,470	$	4,737	$	33	$	355	$	19,113
Construction and land
Pass	$	57	$	188	$	57	$	70	$	46	$	498	$	5,528	$	-	$	6,444
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		135		-		14		-		29		-		-		178
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	57	$	323	$	57	$	84	$	46	$	527	$	5,528	$	-	$	6,622
Multi-family residential
Pass	$	382	$	-	$	470	$	-	$	282	$	2,290	$	-	$	-	$	3,424
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	382	$	-	$	470	$	-	$	282	$	2,290	$	-	$	-	$	3,424
Commercial and industrial
Pass	$	5,989	$	2,490	$	853	$	326	$	303	$	70	$	9,603	$	-	$	19,634
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	5,989	$	2,490	$	853	$	326	$	303	$	70	$	9,603	$	-	$	19,634
Consumer
Pass	$	914	$	559	$	700	$	311	$	199	$	223	$	-	$	-	$	2,906
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	914	$	559	$	700	$	311	$	199	$	223	$	-	$	-	$	2,906
Total
Pass	$	10,827	$	16,479	$	7,437	$	8,097	$	7,530	$	62,626	$	16,767	$	2,386	$	132,149
Special Mention		-		110		106		-		-		-		-		-		216
Substandard		24		135		12		140		13		2,983		-		-		3,307
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	10,851	$	16,724	$	7,555	$	8,237	$	7,543	$	65,609	$	16,767	$	2,386	$	135,672

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The following table presents gross charge-offs and recoveries for the nine months ended September 30, 2023 by origination year of the related loans. The Company uses the latter of origination or renewal date to classify loans into vintages.


	Loan Origination Year
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Total
Charge-offs
One- to four-family residential	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate		-		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-		-
Multi-family residential		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-
Consumer		4		5		9		1		2		5		26
Total	$	4	$	5	$	9	$	1	$	2	$	5	$	26
Recoveries
One- to four-family residential	$	-	$	-	$	-	$	-	$	-	$	98	$	98
Commercial real estate		-		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-		-
Multi-family residential		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		1		1
Consumer		-		-		2		1		-		8		11
Total	$	-	$	-	$	2	$	1	$	-	$	107	$	110

The following table presents the Company’s loan portfolio by credit quality classification as of December 31, 2022.


	December 31, 2022
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
One- to four-family residential	$	84,219	$	171	$	3,118	$	-	$	87,508
Commercial real estate		19,334		-		103		-		19,437
Construction and land		5,822		291		59		-		6,172
Multi-family residential		3,200		-		-		-		3,200
Commercial and industrial		13,843		-		-		-		13,843
Consumer		3,447		-		-		-		3,447
Total	$	129,865	$	462	$	3,280	$	-	$	133,607

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NOTE 6. DEPOSITS

Deposits at September 30, 2023 and December 31, 2022 are summarized as follows:


	September 30, 2023				December 31, 2022
(Dollars in thousands)	Amount		Percent		Amount		Percent
Non-interest-bearing demand deposits	$	33,222	20.1	%	$	33,657	20.4	%
Interest-bearing demand deposits		38,881	23.5			36,991	22.4
Money market		15,473	9.4			15,734	9.5
Savings		27,237	16.5			26,209	15.9
Certificates of deposit		50,407	30.5			52,503	31.8
Total deposits	$	165,220	100.0	%	$	165,094	100.0	%

The estimated amount of our total uninsured deposits (that is, deposits in excess of the FDIC’s insurance limit) was $45.2 million and $43.4 million, respectively, at September 30, 2023 and December 31, 2022.

Certificates of deposit and other time deposits issued in denominations that exceed FDIC insurance limit of $250,000 or more totaled $7.7 million and $8.9 million at September 30, 2023 and December 31, 2022, respectively, and are included in interest-bearing deposits in the statements of financial condition.

At September 30, 2023 scheduled maturities of certificates of deposits were as follows:


(Dollars in thousands)	Amount
2023	$	10,527
2024		34,662
2025		3,616
2026		1,002
2027		451
2028		149
Total	$	50,407

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NOTE 7. BORROWED FUNDS

Borrowed funds at September 30, 2023 and December 31, 2022 are summarized as follows:


	September 30, 2023				December 31, 2022
(Dollars in thousands)	Rate		Amount		Rate		Amount
Advances from Federal Home Loan Bank	0.65	%	$	3,000	0.65	%	$	3,000
	0.96			3,000	0.96			3,000
	1.12			4,000	1.12			4,000
				10,000				10,000
Debt modification discount				(667)				(802)
			$	9,333			$	9,198

Interest payments on outstanding borrowings are due monthly, and maturities are as follows:


(Dollars in thousands)	Amount
Amounts maturing in:
2024	$	-
2025		3,000
2026		-
2027		3,000
2028		4,000
Total	$	10,000

At September 30, 2023 and December 31, 2022, the Company had $48.0 million and $34.2 million, respectively, in available borrowing capacity with the Federal Home Loan Bank (“FHLB”). Borrowings from the FHLB are secured though a blanket floating lien on real estate loans. At September 30, 2023 and December 31, 2022, loans totaling $77.9 million and $64.1 million, respectively, were pledged to the FHLB under the blanket lien.

Other available funding sources include an Unsecured Federal Funds Master Purchase Agreement with First National Bankers Bank for $17.8 million and borrowings from the Federal Reserve Bank’s discount window and Bank Term Funding Program. At September 30, 2023 and December 31, 2022, these credit facilities were unused.

At September 30, 2023, investment securities with a carrying value of $1.0 million were pledged to the Federal Reserve Bank as collateral for borrowings and investment securities with a total carrying value of $30.3 million were available for pledging to the Federal Reserve Bank. In aggregate, the par value of securities pledged and available for pledging to the Federal Reserve Bank totaled $35.7 million at September 30, 2023.

NOTE 8. CAPITAL AND 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.

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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, 2023 and December 31, 2022, the Bank met all of the capital adequacy requirements to which it is subject.

At September 30, 2023 and December 31, 2022, 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, 2023
Common Equity Tier 1 Capital	$	78,925	54.97	%	$	9,332	>6.5	%
Tier 1 Risk-Based Capital		78,925	54.97			11,486	>8.0
Total Risk-Based Capital		80,726	56.23			14,357	>10.0
Tier 1 Leverage Capital		78,925	31.08			12,697	>5.0

As of December 31, 2022
Common Equity Tier 1 Capital	$	78,527	56.17	%	$	9,087	>6.5	%
Tier 1 Risk-Based Capital		78,527	56.17			11,184	>8.0
Total Risk-Based Capital		80,275	57.42			13,980	>10.0
Tier 1 Leverage Capital		78,527	30.37			12,929	>5.0

Share Repurchase Plans

In January 2023, the Company’s Board of Directors approved the Company’s first share repurchase plan (the “January 2023 Repurchase Plan”), which allowed the Company to purchase 265,000 shares, or approximately 5% of the Company’s outstanding common stock. The January 2023 Repurchase Plan was completed in April 2023. In April 2023, the Company announced its second share repurchase plan (the “April 2023 Repurchase Plan”). Under the April 2023 Repurchase Plan, the Company may purchase up to 252,000 shares, or approximately 5% of the Company’s outstanding shares of common stock.

During the three months ended September 30, 2023, the Company repurchased 81,252 shares of its common stock at an average cost per share of $12.33. During the nine months ended September 30, 2023, the Company repurchased 441,710 shares of its common stock at an average cost per share of $12.08. At September 30, 2023, 75,290 shares were available for repurchase under the April 2023 Repurchase Plan.

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NOTE 9. 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, 2023 and December 31, 2022 follows:


	Fair Value Measurements at Reporting Date Using
(Dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
September 30, 2023
Available-for-sale securities	$	71,808	$	-	$	71,808	$	-

December 31, 2022
Available-for-sale securities	$	79,602	$	-	$	79,602	$	-

Fair values of assets and liabilities measured on a nonrecurring basis at September 30, 2023 and December 31, 2022 follows:


	Fair Value Measurements at Reporting Date Using
(Dollars in thousands)	Fair Value		Level 1		Level 2		Level 3
September 30, 2023
Loans individually evaluated for credit losses	$	457	$	-	$	-	$	457
Foreclosed assets		37		-		-		37
Total	$	494	$	-	$	-	$	494
December 31, 2022
Loans individually evaluated for credit losses	$	898	$	-	$	-	$	898
Foreclosed assets		320		-		-		320
Total	$	1,218	$	-	$	-	$	1,218

At September 30, 2023 and December 31, 2022, individually evaluated loans with a recorded investment of $633,000 and $1.1 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 three and nine months ended September 30, 2023, the Company incurred a total loss on the sale of foreclosed assets of $62,000. During the three and nine months ended September 30, 2022, no impairment losses on foreclosed assets were recognized.

The fair value of loans individually evaluated 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 10. 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.

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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 or 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, 2023 and December 31, 2022 are as follows:


	September 30, 2023
(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	13,266	$	13,266	$	13,266	$	-	$	-
Investment securities:
Available-for-sale		71,808		71,808		-		71,808		-
Held-to-maturity		13,464		10,573		-		10,573		-
Loans receivable, net		133,636		122,993		-		-		122,993
Bank-owned life insurance		13,917		13,917		-		13,917		-
Financial Liabilities:
Deposits		165,220		164,081		-		164,081		-
Borrowed funds		9,333		8,489		-		8,489		-


	December 31, 2022
(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	13,472	$	13,472	$	13,472	$	-	$	-
Investment securities:
Available-for-sale		79,602		79,602		-		79,602		-
Held-to-maturity		13,475		10,724		-		10,724		-
Loans receivable, net		131,800		121,208		-		-		121,208
Bank-owned life insurance		13,617		13,617		-		13,617		-
Financial Liabilities:
Deposits		165,094		163,797		-		163,797		-
Borrowed funds		9,198		8,484		-		8,484		-

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 stock in correspondent banks because the equity securities are not marketable. The carrying amount of investments without readily determinable fair value are reported in the statements of financial condition at historical cost.

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NOTE 11. 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, 2023, 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 unfunded 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.

On January 1, 2023 and at adoption of ASC 326, the Company recorded an allowance for credit losses on unfunded lending commitments of $216,000. Refer to Note 2 for more information on the adoption of ASC 326. The allowance for credit losses on unfunded lending commitments is recorded within “other liabilities” on the statement of financial condition. The related provision for credit losses for unfunded lending commitments is recorded with the provision for loan losses and reported in aggregate as the provision for credit losses on the income statement. At September 30, 2023, the allowance for credit losses for unfunded lending commitments totaled $280,000. Total unfunded lending commitments amounted to $33.5 million and $22.8 million at September 30, 2023 and December 31, 2022, respectively.

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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, 2023 and for the three and nine months ended September 30, 2023 and 2022 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, 2022.

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 COVID-19, 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;

●

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;

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●

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, which became the wholly-owned subsidiary of Catalyst Bancorp. The Bank officially changed its name to Catalyst Bank in June 2022.

Founded in 1922, the Bank is a community-oriented savings bank serving the banking needs of customers in the Acadiana region of south-central Louisiana. We are headquartered in Opelousas, Louisiana and serve our customers through six full-service branches located in Carencro, Eunice, Lafayette, Opelousas, and Port Barre. Our primary business consists of attracting deposits from the general public and using those funds together with funds we borrow from the Federal Home Loan Bank (“FHLB”) of Dallas 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, 2023, total assets were $257.9 million, including total loans of $135.7 million and total investment securities of $85.3 million, total deposits were $165.2 million and total shareholders’ equity was $82.2 million. The Company reported net income of $170,000 for the three months ended September 30, 2023, and $282,000 for the nine months ended September 30, 2023. For the same three and nine-month periods in 2022, the Company reported net income of $135,000 and $9,000, respectively. On June 23, 2022, the Bank rebranded and officially changed its name to Catalyst Bank. Pre-tax costs associated with the rebranding of the Bank totaled $28,000 and $270,000 for the three and nine months ended September 30, 2022, respectively. The Company also received and recognized into income a $171,000 Bank Enterprise Award (“BEA”) Program grant from the Community Development Financial Institution (“CDFI”) Fund during the three months ended June 30, 2022. The Company will receive and recognize as income a $437,000 BEA Program grant during the fourth quarter of 2023. Consulting fees associated with obtaining the grant total $66,000 and will be expensed in the same period.

Our results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on our loan and investment portfolios and interest expense on deposits and borrowings. Our net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. Results of operations are also affected by our provisions for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation, office occupancy and equipment expense, data processing, advertising and business promotion and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial condition and results of operations.

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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, 2022. Any changes to our significant accounting policies are described in Note 1 to the unaudited, consolidated financial statements included in Item 1 of this Form 10-Q. 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 Credit Losses. We have identified the evaluation of the allowance for credit losses as a critical accounting policy where amounts are sensitive to material variation. On January 1, 2023, the Company adopted the guidance under ASU No. 2016-13, Financial Instruments – Credit Losses, Measurement of Credit Losses on Financial Instruments. The main provisions of the ASU have been codified by the FASB under ASC 326. The amendments introduced an impairment model that is based on current expected credit losses (“CECL”), rather than incurred losses, to estimate credit losses on loans. For reporting periods beginning on or after January 1, 2023, the allowance for credit losses reflects management’s current estimate of expected credit losses over the remaining life of its loans as of the end of the reporting period. For reporting periods prior to January 1, 2023, the allowance for credit losses represented management’s estimate for probable and reasonably estimable loan losses, but which had not yet been realized as of the end of the reporting period. Refer to Note 2 of the unaudited, consolidated financial statements included in Item 1 of this Form 10-Q for more information on the adoption of ASC 326.

The allowance for credit losses includes the allowance for loan losses and the allowance for credit losses on unfunded lending commitments, which is recorded in other liabilities on the statement of financial condition. The allowance for credit losses is established through a provision for credit losses charged to earnings. Loans, or portions of loans, are charged off against the allowance in the period that such loans, or portions thereof, are deemed uncollectible. Subsequent recoveries are added to the allowance. The allowance for loan losses totaled $2.0 million, or 1.50% of total loans, at September 30, 2023 and $1.8 million, or 1.35% of total loans, at December 31, 2022. The increase in the allowance for loan losses from December 31, 2022 largely reflects the addition of forecasted credit losses due to the adoption ASC 326.

Management’s estimate of the allowance for credit losses considers factors such as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, current and future economic conditions, and forecasted information. This evaluation is inherently subjective as it requires material estimates including, among others, average historical loss experience, expected future loss rates, the amount and timing of expected future pay-downs on existing loans and fundings on unfunded commitments, and the value of underlying collateral. All of these estimates may be susceptible to significant changes as more information becomes available.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. In addition, the Office of the Comptroller of the Currency as an integral part of their examination processes periodically reviews our allowance for credit losses. While management is responsible for the establishment of the allowance for credit losses and for adjusting such allowance through provisions for credit losses, management may determine, as a result of such regulatory reviews, that an increase or decrease in the allowance or provision for credit losses may be necessary or that loan charge-offs are needed. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for credit losses may be required that would adversely impact earnings in future periods.

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Investment Securities. Available-for-sale securities consist of investment securities not classified as trading securities or held-to-maturity securities. Available-for-sale securities are reported at fair value and unrealized holding gains and losses, net of tax, on available-for-sale securities are included in other comprehensive income. The fair market values of investment securities are obtained from a third party service provider, whose prices are based on a combination of observed market prices for identical or similar instruments and various matrix pricing programs. The fair market values of investment securities are classified within Level 2 of the fair value hierarchy. At September 30, 2023 and December 31, 2022, net unrealized losses on available-for-sale securities totaled $12.8 million and $11.5 million, respectively. Unrealized losses on our available-for-sale securities relate principally to the increases in market rates of similar types of securities. The Company has not realized or recognized any losses in the statement of income for any investment securities held at September 30, 2023 or December 31, 2022.

The adoption of ASC 326 amended the guidance applicable to measuring and recognizing losses on available-for-sale securities. Under ASC 326, expected credit related losses for available-for-sale debt securities are recorded through an allowance for credit losses, while non-credit related losses will continue to be recognized through other comprehensive income as unrealized holding gains and losses, net of tax. Under former GAAP, we assessed our investment securities for other-than-temporary impairment and any declines in fair value that were deemed other-than-temporary resulted in a direct write-down to the amortized cost basis of the related security. The allowance approach allows estimated expected credit losses to be adjusted from period-to-period, as opposed to a permanent write-down.

For reporting periods on or after January 1, 2023 and the adoption of ASC 326, management evaluates available-for-sale securities in unrealized loss positions to determine if the decline in the fair value of each security below its amortized cost basis is due to credit-related factors or noncredit-related factors. Consideration is given to the extent to which that fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period sufficient to allow for any anticipated recovery in fair value.

For reporting periods prior to January 1, 2023, management evaluated securities for other-than-temporary impairment. If declines in the estimated fair value of individual investment securities below their cost were considered other-than-temporary, impairment losses were recognized in the statement of income with an offset to the carrying value of the investment security. Factors affecting the determination of whether an other-than-temporary impairment had occurred include, among other things, the length of time and the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, that the Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell before a period of time sufficient to allow for any anticipated recovery in fair value.

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Comparison of Financial Condition at September 30, 2023 and December 31, 2022

Total Assets. Total assets decreased $5.4 million, or 2.1%, to $257.9 million at September 30, 2023 from $263.3 million at December 31, 2022. The decrease was primarily due to the amortization of our investment securities portfolio. The Company has not purchased investment securities since the fourth quarter of 2022.

Loans. Total loans increased by $2.1 million, or 1.5%, to $135.7 million at September 30, 2023, compared to $133.6 million at December 31, 2022. During the nine months ended September 30, 2023, loan growth was largely driven by commercial and industrial loans, partially offset by net pay-downs in one- to four-family residential real estate loans.

The majority of the Company’s loan portfolio consists of real estate loans secured by properties in our local market area, the Acadiana region of south Louisiana. Approximately 64% of our real estate loans have adjustable rates and, of our total real estate loans, approximately $54.7 million, or 48%, are scheduled to re-price or mature during the next 12 months.

Our non-real estate loans primarily consist of commercial and industrial loans. This segment of the portfolio largely consists of loans to local businesses involved in industrial manufacturing and equipment, communications, and professional services. Approximately 34% of our commercial and industrial loans have adjustable rates and, of total commercial and industrial loans, approximately $9.1 million, or 47%, are scheduled to re-price or mature during the next 12 months.

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



	September 30, 2023				December 31, 2022
(Dollars in thousands)	Amount		%		Amount		%		Change
Real estate loans
One- to four-family residential	$	83,973	61.9	%	$	87,508	65.5	%	$	(3,535)	(4.0)	%
Commercial real estate		19,113	14.1			19,437	14.5			(324)	(1.7)
Construction and land		6,622	4.9			6,172	4.6			450	7.3
Multi-family residential		3,424	2.5			3,200	2.4			224	7.0
Total real estate loans		113,132	83.4			116,317	87.0			(3,185)	(2.7)
Other loans
Commercial and industrial		19,634	14.5			13,843	10.4			5,791	41.8
Consumer		2,906	2.1			3,447	2.6			(541)	(15.7)
Total other loans		22,540	16.6			17,290	13.0			5,250	30.4
Total loans	$	135,672	100.0	%	$	133,607	100.0	%	$	2,065	1.5

Allowance for Credit Losses. As of January 1, 2023, the Company adopted the guidance under ASC 326. The adoption of ASC 326 resulted in a $209,000, or 12%, increase in the allowance for loan losses, and a $216,000 increase in other liabilities due to the allowance for credit losses on unfunded commitments. At adoption, we also recorded a corresponding $335,000 after-tax decrease in retained earnings. The increase in the total allowance for credit losses, which is inclusive of the reserve for unfunded commitments, was primarily due to the addition of forecasted credit losses. Refer to Note 2 of the financial statements for more information on the adoption of ASC 326.

At January 1, 2023, the allowance for loan losses totaled $2.0 million, or 1.51% of total loans, compared to $1.8 million, or 1.35% of total loans, at December 31, 2022. At September 30, 2023, the allowance for loan losses totaled $2.0 million, or 1.50% of total loans, and the allowance for credit losses on unfunded commitments totaled $280,000, up $64,000 from the date of adoption of ASC 326. The total provision for credit losses on loans and unfunded commitments was zero for the first nine months of 2023.

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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)	2023			2022			2022
Allowance for loan losses:
Balance, beginning of period	$	1,807		$	2,276		$	2,276
Impact of adoption of ASC 326		209			-			-
Provision for (reversal of) loan losses		(64)			(375)			(375)
Net loan recoveries (charge-offs):
One- to four-family residential		98			(84)			(69)
Commercial real estate		-			-			-
Construction and land		-			-			-
Multi-family residential		-			-			-
Commercial and industrial		1			(2)			1
Consumer		(15)			(11)			(26)
Total net recoveries (charge-offs)		84			(97)			(94)
Balance, end of period	$	2,036		$	1,804		$	1,807

Allowance for credit losses on unfunded lending commitments:
Balance, beginning of period	$	-		$	-		$	-
Impact of adoption of ASC 326		216			-			-
Provision for (reversal of) credit losses on unfunded lending commitments		64			-			-
Balance, end of period	$	280		$	-		$	-

Total allowance for credit losses, end of period	$	2,316		$	1,804		$	1,807
Total provision for (reversal of) credit losses		-			(375)			(375)

Total loans at end of period	$	135,672		$	131,942		$	133,607
Total non-accrual loans at end of period		1,961			1,221			1,494
Total non-performing loans at end of period		2,088			1,600			1,685
Total average loans		134,013			132,301			132,503

Allowance for loan losses as a percent of:
Total loans		1.50	%		1.37	%		1.35	%
Non-accrual loans		103.82			147.75			120.95
Non-performing loans		97.51			112.75			107.24

Net annualized recoveries (charge-offs) as a percent of average loans by portfolio:
One- to four-family residential		0.15	%		(0.13)	%		(0.08)	%
Commercial real estate		-			-			-
Construction and land		-			-			-
Multi-family residential		-			-			-
Commercial and industrial		0.01			(0.03)			0.01
Consumer		(0.63)			(0.36)			(0.66)
Total loans		0.08			(0.10)			(0.07)

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Non-performing Assets. The following table shows the amounts of our non-performing assets, which include non-accruing loans, accruing loans 90 days or more past due and real estate owned at the dates indicated. The increase in non-performing loans over the periods presented below was largely attributable to an increase in past due one- to four-family residential mortgage loans.


	September 30,			December 31,
(Dollars in thousands)	2023			2022
Non-accruing loans
One- to four-family residential	$	1,868		$	1,392
Commercial real estate		50			51
Construction and land		43			51
Multi-family residential		-			-
Commercial and industrial		-			-
Consumer		-			-
Total non-accruing loans		1,961			1,494
Accruing loans 90 days or more past due
One- to four-family residential		127			191
Commercial real estate		-			-
Construction and land		-			-
Multi-family residential		-			-
Commercial and industrial		-			-
Consumer		-			-
Total accruing loans 90 days or more past due		127			191
Total non-performing loans		2,088			1,685
Foreclosed assets		37			320
Total non-performing assets	$	2,125		$	2,005

Total loans	$	135,672		$	133,607
Total assets		257,908			263,324

Total non-accruing loans as a percentage of total loans		1.45	%		1.12	%
Total non-performing loans as a percentage of total loans		1.54			1.26
Total non-performing loans as a percentage of total assets		0.81			0.64
Total non-performing assets as a percentage of total assets		0.82			0.76

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Investment Securities. Total investment securities, available-for-sale and held-to-maturity, amounted to $85.3 million at September 30, 2023, down $7.8 million, or 8.4%, compared to $93.1 million in investment securities at December 31, 2022. Net unrealized losses on securities available-for-sale totaled $12.8 million at September 30, 2023, compared to $11.5 million at December 31, 2022. Unrealized losses on available-for-sale securities relate principally to increases in market interest rates for similar securities. At September 30, 2023, 86.3% of total investment securities, based on amortized cost, or $84.6 million, were classified as available-for-sale. Our investment securities portfolio consists primarily of debt obligations issued by the U.S. government and government agencies and government-sponsored mortgage-backed securities. During the nine months ended September 30, 2023, investment security maturities, calls and principal repayments totaled $6.3 million. The Company has not purchased investment securities since the fourth quarter of 2022. We have also not sold or reclassified securities since the Federal Reserve Board began raising interest rates in March 2022.

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, 2023.


	Contractual Maturity as of September 30, 2023
(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	$	-		$	3,513		$	12,005		$	52,086		$	67,604
U.S. Government and agency obligations		1,000			9,985			9,000			4,004			23,989
Municipal obligations		-			1,822			3,002			1,650			6,474
Total	$	1,000		$	15,320		$	24,007		$	57,740		$	98,067

Weighted average yield
Mortgage-backed securities		-	%		2.92	%		1.85	%		1.62	%		1.73	%
U.S. Government and agency obligations		0.50			1.08			1.26			2.37			1.34
Municipal obligations		-			1.11			2.56			1.41			1.86
Total weighted average yield		0.50			1.50			1.72			1.67			1.64

Investment securities with a fair value of approximately $41.7 million and $18.7 million, respectively, were pledged to secure public fund deposits in excess of the FDIC’s insurance limit at September 30, 2023 and December 31, 2022.

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Deposits. Total deposits were $165.2 million at September 30, 2023, up $126,000, or 0.1%, compared to December 31, 2022. The following table presents total deposits by account type for the dates indicated.


	September 30, 2023				December 31, 2022
(Dollars in thousands)	Amount		%		Amount		%		Change
Non-interest-bearing demand deposits	$	33,222	20.1	%	$	33,657	20.4	%	$	(435)	(1.3)	%
Interest-bearing demand deposits		38,881	23.5			36,991	22.4			1,890	5.1
Money market		15,473	9.4			15,734	9.5			(261)	(1.7)
Savings		27,237	16.5			26,209	15.9			1,028	3.9
Certificates of deposit		50,407	30.5			52,503	31.8			(2,096)	(4.0)
Total deposits	$	165,220	100.0	%	$	165,094	100.0	%	$	126	0.1

The increase in interest-bearing demand deposits and decline in certificates of deposit were mainly due to changes in the balance of our public fund deposits. Overall, our public fund deposits consist primarily of non-interest bearing and interest-bearing demand deposits from municipalities within our market. Our public fund deposits totaled $26.4 million, or 16.0% of total deposits, at September 30, 2023, compared to $21.0 million, or 12.7% of total deposits, at December 31, 2022. The increase in savings deposits was primarily driven by commercial deposits.

Our total uninsured deposits (that is deposits in excess of the FDIC’s insurance limit), inclusive of public funds, were approximately $45.2 million at September 30, 2023 and $43.4 million at December 31, 2022. Total uninsured non-public fund deposits were approximately $23.9 million and $26.9 million at September 30, 2023 and December 31, 2022, respectively. The full amount of our public fund deposits in excess of the FDIC’s insurance limit are secured by pledging investment securities.

Borrowings. Our borrowings, which consist of FHLB advances, amounted to $9.3 million and $9.2 million at September 30, 2023 and December 31, 2022, respectively. The change in the carrying value of our FHLB advances reflects the amortization of deferred prepayment penalties on $10.0 million in advances restructured in December of 2020. Deferred prepayment penalties on our FHLB advances totaled $667,000 and $802,000 at September 30, 2023 and December 31, 2022, respectively.

Shareholders’ Equity. Shareholders’ equity totaled $82.2 million, or 31.9% of total assets, at September 30, 2023, down $6.3 million, or 7.1%, from $88.5 million, or 33.6% of total assets, at December 31, 2022. During the first nine months of 2023, shareholders’ equity decreased by $5.3 million due to the Company’s repurchases of its common stock.

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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,
	2023						2022
(Dollars in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans receivable⁽¹⁾	$	134,851	$	1,852	5.45	%	$	131,827	$	1,466	4.41	%
Investment securities^(TE)(2)		99,373		403	1.64			104,403		381	1.48
Other interest-earning assets		16,915		214	5.02			34,547		185	2.12
Total interest-earning assets^(TE)		251,139		2,469	3.91			270,777		2,032	2.99
Non-interest-earning assets		13,918						17,467
Total assets	$	265,057					$	288,244
Interest-bearing liabilities:
NOW, money market and savings accounts		83,051		154	0.73			91,738		29	0.13
Certificates of deposit		50,526		274	2.15			59,833		64	0.43
Total interest-bearing deposits		133,577		428	1.27			151,571		93	0.24
FHLB advances		9,306		69	2.93			9,126		69	2.99
Total interest-bearing liabilities		142,883		497	1.38			160,697		162	0.40
Non-interest-bearing liabilities		38,153						34,591
Total liabilities		181,036						195,288
Shareholders' equity		84,021						92,956
Total liabilities and shareholders' equity	$	265,057					$	288,244
Net interest-earning assets	$	108,256					$	110,080
Net interest income; average interest rate spread^(TE)			$	1,972	2.53	%			$	1,870	2.59	%
Net interest margin^(TE)(3)					3.13						2.75
Average interest-earning assets to average interest-bearing liabilities					175.77						168.50

(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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	Nine Months Ended September 30,
	2023						2022
(Dollars in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans receivable⁽¹⁾	$	134,013	$	5,172	5.16	%	$	132,301	$	4,584	4.63	%
Investment securities^(TE)(2)		101,564		1,243	1.65			104,061		1,062	1.37
Other interest-earning assets		18,369		643	4.68			34,735		262	1.01
Total interest-earning assets^(TE)		253,946		7,058	3.72			271,097		5,908	2.92
Non-interest-earning assets		14,393						16,150
Total assets	$	268,339					$	287,247
Interest-bearing liabilities:
NOW, money market and savings accounts		85,966		376	0.59	%		86,459		77	0.12	%
Certificates of deposit		51,076		636	1.66			63,547		195	0.41
Total interest-bearing deposits		137,042		1,012	0.99			150,006		272	0.24
FHLB advances		9,262		205	2.95			9,080		205	3.00
Total interest-bearing liabilities		146,304		1,217	1.11			159,086		477	0.40
Non-interest-bearing liabilities		36,450						33,565
Total liabilities		182,754						192,651
Shareholders' equity		85,585						94,596
Total liabilities and shareholders' equity	$	268,339					$	287,247
Net interest-earning assets	$	107,642					$	112,011
Net interest income; average interest rate spread^(TE)			$	5,841	2.61	%			$	5,431	2.52	%
Net interest margin^(TE)(3)					3.08						2.68
Average interest-earning assets to average interest-bearing liabilities					173.57						170.41

(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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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, 2023 vs 2022						September 30, 2023 vs 2022
	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	$	351	$	35	$	386	$	528	$	60	$	588
Investment securities		41		(19)		22		207		(26)		181
Other interest-earning assets		161		(132)		29		557		(176)		381
Total interest income		553		(116)		437		1,292		(142)		1,150
Interest expense:
NOW, money market and savings accounts		128		(3)		125		299		-		299
Certificates of deposit		221		(11)		210		486		(45)		441
Total deposits		349		(14)		335		785		(45)		740
FHLB advances and other borrowings		(1)		1		-		(4)		4		-
Total interest expense		348		(13)		335		781		(41)		740
Increase (decrease) in net interest income	$	205	$	(103)	$	102	$	511	$	(101)	$	410

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Comparison of Results of Operations for the Three Months Ended September 30, 2023 and 2022.

General. For the three months ended September 30, 2023 and 2022, the Company reported net income of $170,000 and $135,000, respectively. Net interest income was up $102,000, or 5.5%, for the three months ended September 30, 2023, compared to the same period in 2022. The provision for credit losses totaled zero for the three months ended September 30, 2023, compared to a reversal of loan losses of $115,000 for the same period in 2022. Total non-interest expense for the three months ended September 30, 2023 was down $52,000, or 2.4%, from the same period in 2022.

Interest Income. Total interest income increased $437,000, or 21.5%, to $2.5 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Interest income on loans, investment securities, and other interest-earning assets were up by $386,000, $22,000, and $29,000, respectively.

The average loan yield was 5.45% for the three months ended September 30, 2023, up from 4.41% for the three months ended September 30, 2022. Average loans were $134.9 million for the three months ended September 30, 2023, up $3.0 million, or 2.3%, compared to the same period in 2022. At September 30, 2023, approximately 59% of our total loans have adjustable rates and approximately 48% of total loans are scheduled to re-price or mature during the next 12 months.

The increase in interest income on investment securities was due to an increase in the average rate earned on our securities portfolio. The average rate earned on our investment securities portfolio was 1.64% for the three months ended September 30, 2023, up 16 basis points compared to 1.48% for the same period in 2022.

Interest income on other interest-earning assets, consisting primarily of interest-earning cash and deposits at other financial institutions, increased due to the impact of higher average short-term interest rates during the 2023 period compared to 2022.

Interest Expense. Total interest expense increased $335,000, or 206.8%, to $497,000 for the three months ended September 30, 2023, compared to $162,000 for the three months ended September 30, 2022. Interest expense on deposits was $428,000 during the three months ended September 30, 2023, up $335,000, or 360.2%, from $93,000 for the three months ended September 30, 2022. The average rate paid on interest-bearing deposits was 1.27% for the three months ended September 30, 2023, up 103 basis points from 0.24% for the three months September 30, 2022.

Net Interest Income. Net interest income was $2.0 million for the three months ended September 30, 2023, up $102,000, or 5.5%, from the three months ended September 30, 2022. Our interest rate spread was 2.53% and 2.59% for the three months ended September 30, 2023 and 2022, respectively. Our net interest margin was 3.13% and 2.75% for the three months ended September 30, 2023 and 2022, respectively. The increase in net interest margin and net interest income over the comparable periods was primarily the result of increased yields on our interest-earning assets due to significant increases in market interest rates during 2022 and 2023. Rising market rates have also led to an increase in the average cost of our deposits, though the increase in the average rate paid on our deposit accounts did not completely offset the increase in income on interest-earning assets over the comparable three-month periods.

Provision for Credit Losses. The total provision for credit losses on loans and unfunded commitments was zero for the three months ended September 30, 2023, compared to a reversal of $115,000 for the same period in 2022. The reversal during the 2022 period primarily reflected the release of reserve builds recorded during 2020 for the estimated effects of the COVID-19 pandemic on credit quality. While our initial assessment of the impact of the COVID-19 improved during 2022, uncertainty remains due to risks related to declining government stimulus availability, rising market interest rates, property insurance costs in Louisiana, and inflation.

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Non-interest Income. Non-interest income totaled $306,000 for the three months ended September 30, 2023, up $10,000, or 3.4%, compared to $296,000 for the three months ended September 30, 2022, primarily due an increase in income on bank-owned life insurance and other non-interest income.

Non-interest Expense. Non-interest expense totaled $2.1 million for the three months ended September 30, 2023, down $52,000, or 2.4%, compared to the three months ended September 30, 2022.

Salaries and employee benefits expense totaled $1.1 million for the three months ended September 30, 2023, down $27,000, or 2.3%, compared to the same period in 2022 primarily due to a lower employee count in the 2023 period.

Data processing and communication expense totaled $228,000 for the three months ended September 30, 2023, up $12,000, or 5.6%, compared to the same period in 2022 primarily due to an increase in the cost of lending software as a result of increased loan volume in 2023.

Professional fees totaled $100,000 for the three months ended September 30, 2023, down $57,000, or 36.3%, from the same period in 2022 primarily due to a decrease in legal and consulting expense. During the three months ended September 30, 2022, the Company incurred additional professional fees for assistance with the initial grants under our 2022 Stock Option Plan and 2022 Recognition and Retention Plan.

Directors’ fees totaled $116,000 for the three months ended September 30, 2023, up $41,000 from the same period in 2022 due to stock compensation expense related to awards granted in September 2022 under the 2022 Stock Option Plan and 2022 Recognition and Retention Plan.

Income Tax Expense. The Company reported an income tax expense of $27,000 and $13,000 for the three months ended September 30, 2023 and 2022, respectively. The increase in income tax expense over the comparable prior period was largely due to an increase in taxable income in 2023.

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Comparison of Results of Operations for the Nine Months Ended September 30, 2023 and 2022.

General. For the nine months ended September 30, 2023, the Company reported net income of $282,000, compared to $9,000 for the nine months ended September 30, 2022. Net interest income was up $410,000, or 7.5%, for the nine months ended September 30, 2023, compared to the same period in 2022. The provision for credit losses totaled zero for the nine months ended September 30, 2023, compared to a reversal of loan losses of $375,000 for the nine months ended September 30, 2022. During the nine months ended September 30, 2022, the Company recognized a $171,000 BEA Program grant as non-interest income and officially changed the name of the Bank to Catalyst Bank. Pre-tax costs associated with the rebranding of the Bank totaled $270,000 for the nine months ended September 30, 2022. Total non-interest expense for the nine months ended September 30, 2023 was down $261,000, or 3.9%, compared to the same period in 2022.

Interest Income. Total interest income increased $1.1 million, or 19.5%, to $7.1 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. Interest income on loans, investment securities, and other interest-earning assets were up by $588,000, $181,000, and $381,000, respectively.

The average loan yield was 5.16% for the nine months ended September 30, 2023, up from 4.63% for the nine months ended September 30, 2022. Average loans were $134.0 million for the nine months ended September 30, 2023, up $1.7 million, or 1.3%, compared to the same period in 2022. Interest income on loans for the nine months ended September 30, 2022 included $186,000 of recognized deferred PPP loan fees.

The increase in interest income on investment securities was due to an increase in the average rate earned on our securities portfolio. The average rate earned on our investment securities portfolio was 1.65% for the nine months ended September 30, 2023, up 28 basis points compared to 1.37% for the same period in 2022.

Interest Expense. Total interest expense increased $740,000, or 155.1%, to $1.2 million for the nine months ended September 30, 2023, compared to $477,000 for the nine months ended September 30, 2022. Interest expense on deposits was $1.0 million during the nine months ended September 30, 2023, up $740,000, or 272.1%, from $272,000 for the nine months ended September 30, 2022. The average rate paid on interest-bearing deposits was 0.99% for the nine months ended September 30, 2023, up 75 basis points from 0.24% for the nine months September 30, 2022.

Net Interest Income. Net interest income was $5.8 million for the nine months ended September 30, 2023, up $410,000, or 7.5%, from the nine months ended September 30, 2022. Our interest rate spread was 2.61% and 2.52% for the nine months ended September 30, 2023 and 2022, respectively. Our net interest margin was 3.08% and 2.68% for the nine months ended September 30, 2023 and 2022, respectively. The increase in net interest margin and net interest income over the comparable periods was primarily the result of increased yields on our interest-earning assets due to significant increases in market interest rates during 2022 and 2023. Rising market rates have also led to an increase in the average cost of our deposits, though the increase in the average rate paid on our deposit accounts did not completely offset the increase in interest income over the comparable periods.

Provision for Credit Losses. The total provision for credit losses on loans and unfunded commitments was zero for the nine months ended September 30, 2023, compared to a reversal of $375,000 for the same period in 2022. The reversal during the 2022 period primarily reflected the release of reserve builds recorded during 2020 for the estimated effects of the COVID-19 pandemic on credit quality.

Non-interest Income. Non-interest income totaled $917,000 for the nine months ended September 30, 2023, up $45,000, or 5.2%, compared to $872,000 for the nine months ended September 30, 2022. Income from bank-owned life insurance (“BOLI”) increased by $84,000, or 38.9%, to $300,000 for the nine months ended September 30, 2023, compared to the same period in 2022, largely due to an aggregate of $10.0 million in additional BOLI policies purchased in March and April of 2022.

Non-interest income for the nine months ended September 30, 2022 included income of $171,000 from a BEA Program grant and losses on the disposal of fixed assets of $77,000. Of the losses on disposed assets, $55,000 was attributable to branch signage that was replaced due to our rebranding.

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The BEA Program grants awards to depository institutions that have successfully increased their investments in economically distressed communities through certain qualified activities, including investments in CDFIs and providing loans, investments and financial services to businesses and residents located in distressed communities. The Company will receive and recognize as income a $437,000 BEA Program grant during the fourth quarter of 2023.

Non-interest Expense. Non-interest expense totaled $6.5 million for the nine months ended September 30, 2023, down $261,000, or 3.9%, compared to the nine months ended September 30, 2022. Total non-interest expense for the nine months ended September 30, 2022 included $215,000 of rebranding-related expenses.

Salaries and employee benefits expense totaled $3.5 million for the nine months ended September 30, 2023, down $125,000, or 3.4%, compared to the same period in 2022 primarily due to a lower employee count, a decline in ESOP expense and a reduction in bonus expense in the 2023 period. These cost savings were partially offset by stock compensation expense in 2023. Stock compensation expense related to awards granted in September 2022 and included in salaries and employee benefits expense totaled $202,000 for the nine months ended September 30, 2023, compared to $27,000 for the nine months ended September 30, 2022.

Directors’ fees for the nine months ended September 30, 2023 included $184,000 of stock compensation expense, compared to $20,000 for the nine months ended September 30, 2022. Total directors’ fees were $345,000 for the nine months ended September 30, 2023, up $160,000 compared to the same period in 2022.

Professional fees totaled $346,000 for the nine months ended September 30, 2023, down $126,000, or 26.7%, from the same period in 2022 primarily due to a decrease in consulting and legal expenses. The Company incurred professional fees in 2022 for assistance with the initial grants under our 2022 Stock Option Plan and 2022 Recognition and Retention Plan. Also, professional fees of $26,000 were incurred for assistance with the BEA Program grant application during the 2022 period. Professional fees associated with obtaining our 2023 BEA grant total $66,000 and will be expensed in the fourth quarter of 2023.

Foreclosed assets expense totaled $67,000 for the nine months ended September 30, 2023, compared to zero for the same period in 2022. The Company realized a loss of $62,000 on the sale of real estate held as foreclosed assets during the nine months ended September 30, 2023. The real estate had a carrying value of $320,000 at December 31, 2022.

Advertising and marketing expense totaled $77,000 for the nine months ended September 30, 2023, down $110,000 from the comparable period in 2022. Advertising and marketing expense for the nine months ended September 30, 2022 included rebranding-related expenses of $124,000.

Franchise and shares tax expense totaled $71,000 for the nine months ended September 30, 2023, a decrease of $60,000, or 45.8%, compared to the same period in 2022. Management’s estimate of Louisiana shares tax due for 2023 is based on the actual shares tax paid for 2022. Shares tax due for 2022 was received during the fourth quarter of 2022 and the amount was less than our initial estimate recorded in the first three quarters of 2022.

Income Tax Expense. The Company reported income tax expense of $19,000 for the nine months ended September 30, 2023 and an income tax benefit of $49,000 for the nine months ended September 30, 2022. The change in income taxes over the comparable nine-month periods was primarily due to the increase in taxable earnings during 2023.

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Liquidity and Capital Resources

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

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB, Federal Reserve, and our primary correspondent bank.

At September 30, 2023, our borrowed funds consisted of outstanding advances from the FHLB with a carrying value of $9.3 million. We had available capacity to borrow $48.0 million from the FHLB and $17.8 million from our primary correspondent bank at such date. In addition, securities held by the Bank with a total par value of $35.7 million and fair value of $30.2 million were available to pledge as collateral for borrowings from the Federal Reserve at September 30, 2023.

The Company also has a $20.0 million custodial letter of credit outstanding from the FHLB as of September 30, 2023, which is included in the calculation of our available capacity with the FHLB. The Company can allocate portions of this letter of credit to collateralize certain deposit balances in excess of the FDIC’s insurance limit as an alternative to pledging investment securities for the same purpose.

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 $1.1 million for the nine months ended September 30, 2023. Net cash provided by investing activities, which consists primarily of net changes in loans receivable, investment securities and other assets was $4.3 million for the nine months ended September 30, 2023. Net cash used in financing activities, consisting of the net change in deposits and purchases of common stock, was $5.6 million for the nine months ended September 30, 2023.

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

The Bank exceeded all regulatory capital requirements and was categorized as well-capitalized at September 30, 2023 and December 31, 2022. Management is not aware of any conditions or events since the most recent notification that would change our category. The following table presents actual and required capital.


	Actual				To be Well Capitalized under the Prompt Corrective Action Provision
(Dollars in thousands)	Amount		Ratio		Amount		Ratio
As of September 30, 2023
Common Equity Tier 1 Capital	$	78,925	54.97	%	$	9,332	>6.5	%
Tier 1 Risk-Based Capital		78,925	54.97			11,486	>8.0
Total Risk-Based Capital		80,726	56.23			14,357	>10.0
Tier 1 Leverage Capital		78,925	31.08			12,697	>5.0

As of December 31, 2022
Common Equity Tier 1 Capital	$	78,527	56.17	%	$	9,087	>6.5	%
Tier 1 Risk-Based Capital		78,527	56.17			11,184	>8.0
Total Risk-Based Capital		80,275	57.42			13,980	>10.0
Tier 1 Leverage Capital		78,527	30.37			12,929	>5.0

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The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans at September 30, 2023.


			Amount of Commitment Expiration — Per Period
(Dollars in thousands)	Total Amounts Committed at September 30, 2023		To 1 Year		1 - 3 Years		3 - 5 Years		After 5 Years
Commitments to originate loans	$	11,421	$	11,421	$	-	$	-	$	-
Undisbursed portion of construction loans in process		6,227		1,978		4,249		-		-
Unused lines of credit		14,705		12,397		1,733		-		575
Unused overdraft privilege amounts		1,132		-		-		-		1,132
Letters of credit		2		2		-		-		-
Total commitments	$	33,487	$	25,798	$	5,982	$	-	$	1,707

The following table summarizes our contractual cash obligations at September 30, 2023.


			Payments Due By Period
(Dollars in thousands)	Total at September 30, 2023		To 1 Year		1 - 3 Years		3 - 5 Years		After 5 Years
Certificates of deposit	$	50,407	$	42,152	$	7,328	$	927	$	-
FHLB advances		10,000		-		3,000		3,000		4,000
Total term debt	$	60,407	$	42,152	$	10,328	$	3,927	$	4,000

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 borrowings from our secondary funding sources or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see Note 2 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, 2023, 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, 2023, 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, 2023, 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, 2023, 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

The Company’s purchases of its common stock made during the three months ended September 30, 2023 consisted of share repurchases under the Company’s approved plans and are set forth in the following table.


For the Month Ended	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under Plans or Programs
July 31, 2023		13,528	$	12.15		13,528		143,014
August 31, 2023		16,634		12.07		16,634		126,380
September 30, 2023		51,090		12.19		51,090		75,290
Total		81,252	$	12.16		81,252

The January 2023 Repurchase Plan was announced on January 26, 2023, and authorized the Company to repurchase up to 265,000 shares, or approximately 5% of the Company’s common stock. The Company completed repurchases under the January 2023 Repurchase Plan in April 2023. On April 27, 2023, the Company announced the approval of its second repurchase plan (the “April 2023 Repurchase Plan”). Under the April 2023 Repurchase Plan, the Company may purchase up to 252,000 shares, or approximately 5% of the Company’s outstanding shares of common stock. At September 30, 2023, 75,290 shares were available for repurchase under the April 2023 Repurchase Plan. As of November 6, 2023, the Company completed repurchases under the April 2023 Repurchase Plan.

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 9, 2023	By:	/s/ Joseph B. Zanco
		Joseph B. Zanco
		President and Chief Executive Officer
		(Duly Authorized Officer)

Date: November 9, 2023	By:	/s/ Jacques L. J. Bourque
		Jacques L. J. Bourque
		Chief Financial Officer
		(Principal Financial and Accounting Officer)