CATALYST BANCORP, INC. This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of the financial condition and results of operations ofCatalyst Bancorp, Inc. (the "Company") and its wholly owned subsidiary,Catalyst Bank (the "Bank"), formerly known asSt. Landry Homestead Federal Savings Bank ("St. Landry Homestead"). The information in this section has been derived from the audited financial statements, which appear in Item 8 of this Annual Report on Form 10-K. The information in this section should be read in conjunction with the Consolidated Financial Statements and related notes included herein in " Item 8. Financial Statements and Supplementary Data " and the description of our business included herein in " Item 1. Business ".
Overview
Catalyst Bancorp, Inc. was incorporated bySt. Landry Homestead Federal Savings Bank inFebruary 2021 as part of the conversion of St. Landry Homestead from the mutual to the stock form of organization (the "Conversion"). The Conversion was completed onOctober 12, 2021 , at which time the Company acquired all of the issued and outstanding shares of common stock of St. Landry Homestead, which became the wholly owned subsidiary ofCatalyst Bancorp, Inc. InJune 2022 , St. Landry Homestead changed its name toCatalyst Bank . Founded in 1922, the Bank is a community-oriented savings bank serving the banking needs of customers in the Acadiana region of south-centralLouisiana . We are headquartered inOpelousas, Louisiana and serve our customers through six full-service branches located inCarencro ,Eunice ,Lafayette ,Opelousas , andPort Barre . Our primary business consists of attracting deposits from the general public and using those funds together with funds we borrow from theFederal Home Loan Bank ("FHLB") ofDallas and other sources to originate loans to our customers and invest in securities. AtDecember 31, 2022 , we had total assets of$263.3 million , including total loans of$133.6 million and total investment securities of$93.1 million , total deposits of$165.1 million and total shareholders' equity of$88.5 million . We had net income of$180,000 for the year endedDecember 31, 2022 , compared to net income of$1.9 million for the year endedDecember 31, 2021 . During the year endedDecember 31, 2021 , the Company received and recognized into income a$1.8 million grant from theCommunity Development Financial Institution ("CDFI") Rapid Response Program. Historically, we operated as a traditional thrift relying on long-term, single-family residential mortgage loans secured by properties located primarily inSt. Landry Parish and adjoining areas to generate interest income. We have re-focused our business strategy to a relationship-based community bank model. The Conversion and offering were important factors in our efforts to become a more dynamic, profitable and growing institution. Our results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on our loan and investment portfolios and interest expense on deposits and borrowings. Our net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. Results of operations are also affected by our provisions for loan losses, fee income and other non-interest income and non-interest expense. Non-interest expense principally consists of compensation, office occupancy and equipment expense, data processing, advertising and business promotion and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial condition and results of operations. 25 Table of Contents Business Strategy Our business strategy is focused on embracing a relationship-oriented community bank model targeting small- to mid-sized businesses and business professionals in our market areas while continuing to serve our traditional customer base. Highlights of our business strategy, which is designed to facilitate our ability to operate and grow as a profitable community-based banking institution, include the following:
Growing the loan portfolio with greater diversification. Historically, our
primary lending focus was the origination of one- to four-family residential
mortgage loans. We have increased our commercial lending activities and, we are
? focused on building full-service banking relationships with small- to mid-sized
businesses and business professionals in our market area. We believe that
increased commercial lending offers an opportunity to enhance our profitability
and our growth prospects.
Grow our franchise organically through enhanced banking products and services.
We have implemented a strategy of prudent growth. We believe we have an
opportunity to grow organically by focusing on building relationships with
small- to mid-sized businesses and business professionals in our market area
? and by enhancing the products and services we offer. We will continue to
enhance our staff capacity through training and hiring of new employees as
needed to facilitate our growth. In addition, we continue to review our
technology and infrastructure and will implement new and enhanced technology
tools and on-line services preferred by many of our existing and prospective
customers.
Recruiting and retaining top talent and personnel. Since
Company has made several personnel changes and additional new hires, including
but not limited to: a new President and CEO, a
of Operations, an Acadiana Market President, a Chief Financial Officer and
? several commercial bankers. Recruiting and retaining talented individuals to
guide us through the implementation of our business strategy is critical to our
success. Our mutual-to-stock Conversion was a key contributor to our ability to
attract and retain talent. In
grants under the Company's 2022 Stock Option Plan and 2022 Recognition and
Retention Plan and Trust Agreement. Expand our franchise through possible acquisition of other financial
institutions. We believe there will be opportunities to utilize our strong
? capital position for expansion through acquisitions of other financial
institutions in our current market area and adjoining markets in south
Rebranding our banking franchise.
completed its re-branding and changed its name to
? In addition to a new name, our re-branding efforts included new marketing
campaigns, updated on-line and website materials and new signage and logos to
capture and reflect the mission of the bank.
Manage credit risk to reduce our level of non-performing assets. We believe
that strong asset quality is a key to long-term financial success. Our strategy
? for credit risk management focuses on an experienced team of credit
professionals, well-defined credit policies and procedures, appropriate loan
underwriting criteria and active credit monitoring.
26
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Critical Accounting Estimates
In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the notes to our financial statements. Our accounting and financial reporting policies conform to accounting principles generally accepted inthe United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an emerging growth company we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have taken advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods. Allowance for Loan Losses. We have identified the evaluation of the allowance for loan losses as a critical accounting policy where amounts are sensitive to material variation. The allowance for loan losses represents management's estimate for probable losses that are inherent in our loan portfolio but which have not yet been realized as of the date of our balance sheet. It is established through a provision for loan losses charged to earnings. Loans, or portions of loans, are charged off against the allowance in the period that such loans, or portions thereof, are deemed uncollectible. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover probable and reasonably estimable losses in the loan portfolio based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant changes as more information becomes available. The allowance for loans losses totaled$1.8 million , or 1.35% of total loans, atDecember 31, 2022 and$2.3 million , or 1.72% of total loans, atDecember 31, 2021 . The decrease in the allowance for loan losses largely reflects the reversal of certain provisions made for estimated loan losses during 2020 associated with our initial assessment of COVID-19's impact on credit risk. While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. In addition, theOffice of the Comptroller of the Currency as an integral part of their examination processes periodically reviews our allowance for loan losses. While management is responsible for the establishment of the allowance for loan losses and for adjusting such allowance through provisions for loan losses, management may determine, as a result of such regulatory reviews, that an increase or decrease in the allowance or provision for loan losses may be necessary or that loan charge-offs are needed. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods. 27
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Investment Securities . Available-for-sale securities consist of investment securities not classified as trading securities or held-to-maturity securities. Available-for-sale securities are reported at fair value and unrealized holding gains and losses, net of tax, on available-for-sale securities are included in other comprehensive income. The fair market values of investment securities are obtained from a third party service provider, whose prices are based on a combination of observed market prices for identical or similar instruments and various matrix pricing programs. The fair market values of investment securities are classified within Level 2 of the fair value hierarchy. Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. The term "other-than-temporary" is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Declines in the estimated fair value of individual investment securities below their cost that are considered other-than-temporary are recognized as realized losses in the statement of income. Factors affecting the determination of whether an other-than-temporary impairment has occurred include, among other things, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) that the Company does not intend to sell these securities, and (4) it is more likely than not that the Company will not be required to sell before a period of time sufficient to allow for any anticipated recovery in fair value. Unrealized holding gains and losses, net of tax, on available-for-sale securities are included in other comprehensive income. AtDecember 31, 2022 andDecember 31, 2021 , net unrealized losses on available-for-sale securities totaled$11.5 million and$864,000 , respectively. The increase in unrealized losses on available-for-sale securities relates principally to the increases in market rates of similar types of securities. No declines in fair value of available-for-sale securities were deemed to be other-than-temporary. Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws. Realizing our deferred tax assets principally depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change. 28
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Selected Financial and Other Data
Set forth below is selected financial and other data of the Company at and for the dates indicated. The following is only a summary and should be read in conjunction with the business and financial information regarding the Company included elsewhere herein, including the financial statements included in Item 8 of this Annual Report on Form 10-K. The information at and for the years endedDecember 31, 2022 and 2021 is derived from the audited financial statements that appear elsewhere in this Annual Report on Form 10-K. At December 31, (Dollars in thousands) 2022 2021 Selected Financial Condition Data: Total assets$ 263,324 $ 285,610 Cash and cash equivalents 13,472 40,884 Investment securities: Available for sale 79,602 88,339 Held to maturity 13,475 13,498 Loans receivable, net of unearned income 133,607 132,103 Allowance for loan losses 1,807 2,276 Total deposits 165,094 176,795 FHLB advances 9,198 9,018 Shareholders' equity 88,474 98,553 Year Ended December 31, (Dollars in thousands) 2022 2021 Selected Operating Data: Total interest income$ 8,014 $ 7,699 Total interest expense 683 795 Net interest income 7,331 6,904
Provision for (reversal of) loan losses (375)
(660)
Net interest income after provision for (reversal of) loan losses 7,706 7,564 Total non-interest income 1,173 2,626 Total non-interest expense 8,720 7,791
Income (loss) before income taxes 159
2,399
Income tax expense (benefit) (21) 484
Net income $ 180 $ 1,915
Selected Performance Ratios:(1)
Average yield on interest-earning assets 3.00 % 3.24 %
Average rate on interest-bearing liabilities 0.44 0.51
Average interest rate spread(2) 2.56
2.73
Net interest margin(2) 2.75
2.91
Average interest-earning assets to average interest-bearing liabilities 170.73
152.50
Net interest income after provision for loan losses to non-interest expense 88.37
97.09
Total non-interest expense to average assets 3.08
3.08
Efficiency ratio(3) 102.55
81.76
Return on average assets (ratio of net income to average total assets) 0.06
0.76
Return on average equity (ratio of net income to
average total equity) 0.19 3.11
29
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At or For the
Year Ended December 31,
2022 2021
Asset Quality Ratios:(4)
Non-accrual loans as a percent of total loans
outstanding 1.12 % 0.67 %
Non-performing assets as a percent of total assets(5) 0.76 0.43
Non-performing assets and troubled debt restructurings as a percent of total assets(5)
1.06 1.09
Allowance for loan losses as a percent of total loans
outstanding 1.35 1.72
Allowance for loan losses as a percent of
non-performing loans 107.24 255.44
Net charge-offs to average loans receivable 0.07
0.06
Capital Ratios:(6)
Common equity Tier 1 capital 56.17 % 63.51 %
Tier 1 leverage capital 30.37 27.38
Tier 1 risk-based capital 56.17 63.51
Total risk-based capital 57.42 64.77Average equity to average assets 32.90
24.34
Other Data:
Banking offices 6 6Full-time equivalent employees 50 56
(1) With the exception of end of period ratios, all ratios are based on average
daily balances during the indicated periods.
Average interest rate spread represents the difference between the average (2) yield on interest-earning assets and the average rate paid on
interest-bearing liabilities, and net interest margin represents net interest
income as a percentage of average interest-earning assets.
(3) The efficiency ratio represents the ratio of non-interest expense divided by
the sum of net interest income and non-interest income.
(4) Asset quality ratios are end of period ratios, except for net charge-offs to
average loans receivable.
Non-performing assets consist of non-performing loans and foreclosed assets.
Non-performing loans consist of all non-accruing loans and loans 90 days or (5) more past due. Foreclosed assets consist of real estate acquired through
foreclosure or real estate acquired by acceptance of a deed-in-lieu of
foreclosure.
(6) Capital ratios are end of period ratios for the Bank only.
30
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Comparison of Financial Condition at
Total Assets. Total assets were$263.3 million atDecember 31, 2022 , down$22.3 million , or 7.8%, from$285.6 million atDecember 31, 2021 . The decrease resulted primarily from a$27.4 million decrease in cash and cash equivalents, which was largely driven by an$11.7 million decline in deposits and the utilization of$10.0 million for purchases of bank-owned life insurance during 2022. Loans. Total loans grew by$1.5 million , or 1.1%, to$133.6 million atDecember 31, 2022 compared to$132.1 million atDecember 31, 2021 . Commercial and industrial and construction and land loan growth was partially offset by net declines across the other segments of the portfolio. The increase in the commercial and industrial loan portfolio was primarily driven by direct loans to small and mid-sized businesses involved in a variety of industries in our market area, including industrial manufacturing and equipment, communications, and professional services. All SBA PPP loans were fully paid off during 2022. The total unpaid principal balance of PPP loans, included in commercial and industrial loans, amounted to$2.8 million atDecember 31, 2021 . During 2022, the Company purchased participation interests in two commercial real estate development loans. AtDecember 31, 2022 , the aggregate balance of our interests in these participations totaled$1.2 million , which is included in construction and land loans. The following table shows the composition of our loan portfolio by type of loan at the dates indicated. December 31, 2022 2021 (Dollars in thousands) Amount % Amount % Change Real estate loans One- to four-family residential$ 87,508 65.5 %$ 87,564 66.3 %$ (56) (0.1) % Commercial real estate 19,437 14.5 23,112 17.5 (3,675) (15.9) Construction and land 6,172 4.6 4,079 3.1 2,093 51.3 Multi-family residential 3,200 2.4 4,589 3.5 (1,389) (30.3) Total real estate loans 116,317 87.0 119,344 90.4 (3,027) (2.5) Other loans Commercial and industrial 13,843 10.4 8,374 6.3 5,469 65.3 Consumer 3,447 2.6 4,385 3.3 (938) (21.4) Total other loans 17,290 13.0 12,759 9.6 4,531 35.5 Total loans$ 133,607 100.0 % 132,103 100.0 %$ 1,504 1.1 31 Table of Contents
The following table shows the scheduled contractual maturities of our loans as ofDecember 31, 2022 . Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The amounts shown below do not take into account loan prepayments. Amounts due after December 31, 2022 in After one year After five (Dollars in One year or through five years through thousands) less years 15 years After 15 years Total One- to four-family residential$ 1,126 $ 4,067 $ 33,910 $ 48,405 $ 87,508 Commercial real estate 782 5,751 8,896 4,008 19,437
Construction and land 1,997 3,308 766 101 6,172 Multi-family residential - 797 2,403 - 3,200 Commercial and industrial 4,316 7,628 1,666 233 13,843 Consumer 220 1,901 1,139 187 3,447 Total$ 8,441 $ 23,452 $ 48,780 $
52,934
The following table shows the dollar amount of our loans atDecember 31, 2022 , due afterDecember 31, 2023 , as shown in the preceding table, which have fixed interest rates or which have floating or adjustable interest rates. Floating or (Dollars in thousands) Fixed-Rate Adjustable-Rate Total Amounts due afterDecember 31, 2023 One- to four-family residential$ 28,241 $ 58,141$ 86,382 Commercial real estate 6,180 12,475 18,655 Construction and land 937 3,238 4,175 Multi-family residential 317 2,883 3,200 Commercial and industrial 6,561 2,966 9,527 Consumer 1,569 1,658 3,227 Total$ 43,805 $ 81,361$ 125,166 32 Table of Contents Non-performing Assets. The following table shows the amounts of our non-performing assets, which include non-accruing loans, accruing loans 90 days or more past due and foreclosed assets at the dates indicated, and our performing TDRs. The increase in non-performing assets fromDecember 31, 2021 toDecember 31, 2022 , was primarily driven by an increase in our non-accruing one- to four-family residential loans. A decline in government stimulus and persistent inflation during 2022 impacted our residential borrowers. At December 31, (Dollars in thousands) 2022 2021 Non-accruing loans
One- to four-family residential$ 1,392 $
791
Commercial real estate 51 -
Construction and land 51 68
Multi-family residential - -
Commercial and industrial - 18
Consumer - 13
Total non-accruing loans 1,494 890
Accruing loans 90 days or more past due
One- to four-family residential 191
-
Commercial real estate - -
Construction and land - -
Multi-family residential - -
Commercial and industrial - -
Consumer - 1Total accruing loans 90 days or more past due 191
1
Total non-performing loans 1,685 891
Foreclosed assets 320 340
Total non-performing assets 2,005 1,231Performing troubled debt restructurings 783
1,873
Total non-performing assets and performing TDRs
3,104 Total loans$ 133,607 $ 132,103 Total assets 263,324 285,610 Total non-accruing loans as a percentage of total loans 1.12 % 0.67 % Total non-performing loans as a percentage of total loans 1.26
0.67
Total non-performing loans as a percentage of total assets 0.64
0.31
Total non-performing assets as a percentage of
total assets 0.76 0.43
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Allowance for Loan Losses. The allowance for loan losses totaled $1.8 million ,
or 1.35% of total loans, at December 31, 2022 and $2.3 million , or 1.72% of
total loans, at December 31, 2021 . The decline in the allowance for loan losses
primarily reflects the reversal of provisions made for estimated loan losses
during 2020 associated with our initial assessment of COVID-19's impact on
credit risk. The Company recorded a reversal to the allowance for loan losses of
$375,000 and $660,000 through earnings during the years ended December 31, 2022
and 2021, respectively.
The following table shows changes in our allowance for loan losses and other related data for the periods indicated.
Year Ended December 31 ,
(Dollars in thousands) 2022 2021
Allowance for loan losses, beginning of period
$ 3,022 Provision for (reversal of) loan losses (375)
(660)
Net loan (charge-offs) recoveries: One- to four-family residential (69)
(69)
Commercial real estate - -
Construction and land - -
Multi-family residential - -
Commercial and industrial 1 -
Consumer (26) (17)
Total net charge-offs (94) (86)Allowance for loan losses, end of period$ 1,807
Total loans at end of period$ 133,607 $ 132,103 Total non-accrual loans at end of period 1,494
890
Total non-performing loans at end of period 1,685
891
Total average loans 132,503
141,860
Allowance for loan losses as a percent of: Total loans 1.35 % 1.72 % Non-accrual loans 120.95 255.73 Non-performing loans 107.24 255.44 Net charge-offs (recoveries) as a percent of average loans by portfolio: One- to four-family residential (0.08) %
(0.07) %
Commercial real estate - -
Construction and land - -
Multi-family residential - -
Commercial and industrial 0.01 -
Consumer (0.66) (0.37)
Total average loans (0.07) (0.06)
34
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The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated.
December 31,
2022 2021
Percent Percent
of Loans of Loans
Percent of in Percent of in
Allowance Category Allowance Category(Dollars in Amount of to Total to Total Amount of to Total to Total thousands) Allowance Allowance Loans Allowance Allowance Loans One-to four-family residential$ 1,224 67.7 % 65.5 %$ 1,573 69.1 % 66.3 % Commercial real estate 248 13.7 14.5 370 16.3 17.5 Construction and land 74 4.1 4.6 55 2.4 3.1 Multi-family residential 40 2.2 2.4 73 3.2 3.5 Commercial and industrial 175 9.7 10.4 137 6.0 6.3 Consumer 46 2.6 2.6 68 3.0 3.3 Total$ 1,807 100.0 % 100.0 %$ 2,276 100.0 % 100.0 %
Investment Securities . Total investment securities, available-for-sale and held-to-maturity, amounted to$93.1 million atDecember 31, 2022 , down$8.8 million , or 8.6%, from$101.8 million atDecember 31, 2021 . Based on amortized cost, 87.1% and 86.9% of our total investment securities were classified as available-for-sale atDecember 31, 2022 and 2021, respectively. Net unrealized losses on securities available-for-sale totaled$11.5 million atDecember 31, 2022 , compared to$864,000 atDecember 31, 2021 . The increase in unrealized losses on available-for-sale securities related principally to increases in market interest rates for similar securities. Our investment securities portfolio consists primarily of debt obligations issued by theU.S. government and government agencies and government sponsored mortgage-backed securities. During the year endedDecember 31, 2022 , purchases of$13.2 million of investment securities exceeded$10.9 million of maturities, calls and principal repayments. The following table sets forth the composition of our securities portfolio as of the dates indicated. December 31, 2022 2021 Amortized Amortized (Dollars in thousands) Cost % of Total Fair Value Cost % of Total Fair Value Securities available-for-sale
Mortgage-backed securities$ 74,044 70.8 %$ 64,167 $ 75,374 73.4 %$ 74,663 U.S. Government and agency obligations 10,979 10.5 9,917 9,347 9.1 9,237 Municipal obligations 6,065 5.8 5,518 4,482 4.4 4,439 Total securities available-for-sale 91,088 87.1 79,602 89,203 86.9 88,339 Securities held-to-maturityU.S. Government and agency obligations 13,006 12.4 10,288 13,019 12.7 12,667 Municipal obligations 469 0.5 436 479 0.4 485 Total securities held to maturity 13,475 12.9 10,724 13,498 13.1 13,152 Total investment securities$ 104,563 100.0 %$ 90,326 $ 102,701 100.0 %$ 101,491 35 Table of Contents
The following table presents the amortized cost of our total investment
securities portfolio that matures during each of the periods indicated and the
weighted average yields for each range of maturities at
Contractual
Maturity as of
After One Through After Five Through
(Dollars in thousands) One Year or Less Five Years Ten Years Over Ten Years Total
Total investment securities
Mortgage-backed securities $ - $ 2,434 $ 12,706 $ 58,904 $ 74,044
U.S. Government and agency
obligations 1,000 9,979 9,000 4,006 23,985
Municipal obligations - 1,426 2,558 2,550 6,534
Total $ 1,000 $ 13,839 $ 24,264 $ 65,460 $ 104,563
Weighted average yieldMortgage-backed securities - % 1.98 % 2.22 % 1.59 % 1.71 %U.S. Government and agency obligations 0.50 1.08 1.26 2.13 1.30 Municipal obligations - 0.83 2.92 1.35 1.85 Total weighted average yield - 1.21 1.94 1.62 1.63 Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments, or call options. The expected maturities may differ from contractual maturities because of the exercise of call options and potential paydowns. Accordingly, actual maturities may differ from contractual maturities. Weighted average yields are calculated by dividing the estimated annual income divided by the average amortized cost of the applicable securities. The following table sets forth the dollar value of our investment securities which have fixed interest rates or which have floating or adjustable interest rates at each of the dates indicated. December 31, (Dollars in thousands) 2022 2021 Fixed-rate Available-for-sale$ 79,552 $ 88,281 Held-to-maturity 13,475 13,498 Total fixed-rate 93,027 101,779 Adjustable-rate Available-for-sale 50 58 Held-to-maturity - - Total adjustable-rate 50 58 Total investment securities$ 93,077 $ 101,837 36 Table of Contents Deposits. Total deposits were$165.1 million atDecember 31, 2022 , down$11.7 million , or 6.6%, compared toDecember 31, 2021 . The decline was primarily driven by a$14.1 million decline in certificates of deposit, partially offset by increases in non-interest-bearing and NOW account balances. Certificates of deposits as a percent of total deposits fell to 31.8% atDecember 31, 2022 , down from 37.7% of total deposits atDecember 31, 2021 . Total loans as a percent of total deposits were 80.9% and 74.7% atDecember 31, 2022 and 2021, respectively. The following table presents total deposits by account type for the dates indicated. December 31, 2022 2021 (Dollars in thousands) Amount % Amount % Change Non-interest-bearing demand deposits$ 33,657 20.4 %$ 30,299 17.1 %$ 3,358 11.1 % Negotiable order of withdrawal ("NOW") 36,991 22.4 34,357 19.4 2,634 7.7 Money market 15,734 9.5 18,878 10.7 (3,144) (16.7) Savings 26,209 15.9 26,698 15.1 (489) (1.8) Certificates of deposit 52,503 31.8 66,563 37.7 (14,060) (21.1) Total deposits$ 165,094 100.0 %$ 176,795 100.0 %$ (11,701) (6.6) The following table shows the average balance of each type of deposit and the average rate paid on each type of interest-bearing deposit for the periods indicated. Year Ended December 31, 2022 2021 Average Interest Average Rate Average Interest Average (Dollars in thousands) Balance Expense Paid Balance Expense Rate Paid Negotiable order of withdrawal ("NOW")$ 40,231 $ 46 0.11 %$ 35,998 $ 44 0.12 % Money market 18,588 32 0.17 17,860 36 0.20 Savings accounts 27,060 36 0.13 24,295 28 0.12 Certificates of deposit 61,387 288 0.47 68,815 415 0.60 Total interest-bearing deposits$ 147,266 $ 402 0.27$ 146,968 $ 523 0.36 Non-interest-bearing demand deposits 32,560 - 34,056 - Total deposits$ 179,826 $ 402 $ 181,024 $ 523 37 Table of Contents
The following table shows the maturities and weighted average contractual
interest rates of our total certificates of deposit at
Weighted
(Dollars in thousands) Amount Average Rate
Balance at December 31, 2022 maturing in:
Three months or less $ 13,553 0.55 %
Over three months through six months 11,011 0.76 Over six through 12 months
15,572 1.36
Over 12 months 12,367 1.45
Total certificates of deposit $ 52,503 1.05
The following table shows the maturities and weighted average contractual
interest rates of our certificates of deposit in excess of the
Weighted
(Dollars in thousands) Amount Average Rate
Balance at December 31, 2022 maturing in:
Three months or less $ 977 0.91 %
Over three months through six months 2,553 0.53 Over six through 12 months 3,205 1.41 Over 12 months 2,178 1.50 Total certificates of deposit with balances in excess of$250,000 $ 8,913
1.13
The estimated amount of our total uninsured deposits (that is deposits in excess
of the
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Borrowings. Our borrowings, which consist of FHLB advances, amounted to$9.2 million atDecember 31, 2022 compared to$9.0 million atDecember 31, 2021 . The increase in the carrying value of our FHLB advances reflects the amortization of deferred prepayment penalties on$10.0 million in advances restructured in December of 2020. Deferred prepayment penalties on our FHLB advances totaled$802,000 and$982,000 atDecember 31, 2022 and 2021, respectively. The prepayment penalties are being amortized over the remaining term of the advances. Of our$10.0 million in fixed rate FHLB advances,$3.0 million matures in 2025,$3.0 million matures in 2027 and$4.0 million matures in 2028. The following table shows certain information regarding our borrowings at or for the dates indicated: At or For the Year Ended December 31, (Dollars in thousands) 2022 2021 FHLB advances Average balance$ 9,294 $ 8,927
Maximum balance at any month-end during the period 9,198 9,018 Balance at end of period 9,198 9,018 Average interest rate during the period 3.02 % 3.05 % Weighted average interest rate at end of period(1) 0.93 0.93
(1) Reflects the weighted average contractual rate of FHLB advances.
Shareholders' Equity. Shareholders' equity totaled$88.5 million , or 33.6% of total assets, atDecember 31, 2022 , down$10.1 million , or 10.2%, from$98.6 million , or 34.5% of total assets, atDecember 31, 2021 . The decline in shareholders' equity was primarily due to a$8.4 million increase in the Company's accumulated other comprehensive loss position due to unrealized losses on available-for-sale securities. During the fourth quarter of 2022, the Company began funding purchases of its common stock under the terms of the 2022 Recognition and Retention Plan and Trust Agreement (the "2022 RRP"). ThroughDecember 31, 2022 , 179,808 shares of the Company's common stock were purchased at an average cost per share of$13.01 , and atDecember 31, 2022 , there were 31,792 shares left to be purchased under the 2022 RRP. During the first quarter of 2023, the Company completed repurchases of 31,792 additional shares of common stock to fund the 2022 RRP and commenced repurchases under its 2023 Repurchase Plan, which was announced onJanuary 26, 2023 . Under the 2023 Repurchase Plan, the Company may purchase up to 265,000 shares, or approximately 5% of the Company's outstanding common stock. 39 Table of Contents Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Taxable equivalent ("TE") yields have been calculated using a marginal tax rate of 21%. All average balances are based on daily balances. Year Ended December 31, 2022 2021 Average Average Average Average (Dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate Interest-earning assets: Loans receivable(1)$ 132,503 $ 6,127 4.62 %$ 141,860 $ 6,965 4.91 % Investment securities(TE)(2) 104,421 1,480 1.43 57,967 674 1.18 Other interest-earning assets 30,376 407 1.34 37,912 60 0.16 Total interest-earning assets(TE) 267,300 8,014 3.00 237,739 7,699 3.24 Non-interest-earning assets 15,631 15,101 Total assets$ 282,931 $ 252,840 Interest-bearing liabilities: NOW, money market and savings accounts 85,879 114 0.13 % 78,153 108 0.14 % Certificates of deposit 61,387 288 0.47 68,815 415 0.60 Total interest-bearing deposits 147,266 402 0.27 146,968 523 0.36 FHLB advances 9,294 281 3.02 8,927 272 3.05 Total interest-bearing liabilities 156,560 683 0.44 155,895 795 0.51 Non-interest-bearing liabilities 33,297 35,403 Total liabilities 189,857 191,298 Shareholders' equity 93,074 61,542 Total liabilities and shareholders' equity$ 282,931 $ 252,840 Net interest-earning assets$ 110,740 $ 81,844 Net interest income; average interest rate spread(TE)$ 7,331 2.56 %$ 6,904 2.73 % Net interest margin(TE)(3) 2.75 2.91 Average interest-earning assets to average interest-bearing liabilities 170.73 152.50
(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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Rate/Volume Analysis. The following table shows the extent to which changes in
interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities affected our interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate, which is the change in rate multiplied by prior year
volume, and (2) changes in volume, which is the change in volume multiplied by
prior year rate. The combined effect of changes in both rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.
Year Ended
December 31, 2022 vs 2021
Increase (Decrease) Due to Total
Increase
(Dollars in thousands) Rate Volume (Decrease)
Interest income:
Loans receivable $ (393) $ (445) $ (838)
Investment securities 174 632 806Other interest-earning assets 361 (14) 347 Total interest income 142 173 315 Interest expense: Savings, NOW and money market accounts (4)
10 6 Certificates of deposit (85) (42) (127) Total deposits (89) (32) (121)
FHLB advances and other borrowings (3) 12 9 Total interest expense (92) (20) (112) Increase (decrease) in net interest income $ 234 $
193 $ 427
Comparison of Results of Operation for the Years Ended
General. For the year endedDecember 31, 2022 , the Company reported net income of$180,000 , compared to net income of$1.9 million for the year endedDecember 31, 2021 . During 2022, the Bank rebranded and officially changed its name toCatalyst Bank . Pre-tax costs associated with the rebranding of the Bank totaled$269,000 for the year endedDecember 31, 2022 . The Company also received and recognized into non-interest income a$171,000 Bank Enterprise Award ("BEA") Program grant from theCDFI Fund during 2022. During 2021, the Company received a$1.8 million Rapid Response Program grant from theCDFI Fund , which was fully recognized in non-interest income in the same period it was received. Interest Income. Total interest income increased$315,000 , or 4.1%, to$8.0 million for the year endedDecember 31, 2022 , compared to$7.7 million for the year endedDecember 31, 2021 . This increase was primarily attributable to a$806,000 increase in interest income on investment securities and a$347,000 increase in other interest income, partially offset by a decrease in interest income on loans of$838,000 . The average loan yield was 4.62% for the year endedDecember 31, 2022 , down from 4.91% for the year endedDecember 31, 2021 . In addition, average loans were$132.5 million for the year endedDecember 31, 2022 , down$9.4 million , or 6.6%, compared to 2021. Loan income from the recognition of deferred PPP loan fees totaled$186,000 for the year endedDecember 31, 2022 , down$154,000 , or 45.3%, from$340,000 recognized in 2021. The increase in interest income on investment securities was primarily due to an increase in the average volume of our securities portfolio. The average amortized cost balance of our investment securities was up$46.5 million , or 80.1%, for the year endedDecember 31, 2022 , compared to 2021. During the fourth quarter of 2021, the Company deployed$41.9 million of the proceeds from our IPO into the investment securities portfolio.
Interest income on other interest-earning assets, consisting primarily of interest-earning cash and deposits at other financial institutions, increased primarily due to the impact of rising short-term interest rates during 2022.
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Interest Expense. Total interest expense decreased $112,000 , or 14.1%, to
$683,000 for the year ended December 31, 2022 , compared to $795,000 for the year
ended December 31, 2021 . Interest expense on deposits was $402,000 for the year
ended December 31, 2022 , down $121,000 , or 23.1%, from $523,000 for the year
ended December 31, 2021 . Total average interest-bearing deposits were $147.3
million for the year ended December 31, 2022 , up less than 1.0% compared to the
prior year, while the average rate paid on interest-bearing deposits decreased
by nine basis points to 0.27% for the year ended December 31, 2022 , compared to
0.36% for the previous year.
Net Interest Income. Net interest income was $7.3 million for the year ended
December 31, 2022 , up $427,000 , or 6.2%, compared to the year ended December 31,
2021 . Our average interest rate spread was 2.56% and 2.73% for the years ended
December 31, 2022 and 2021, respectively. Our net interest margin was 2.75% and
2.91% for the years ended December 31, 2022 and 2021, respectively. The decline
in interest rate spread and net interest margin over the comparable periods was
primarily the result of lower average yields on loans and a shift in the mix of
our interest-earning assets as we grew our investment securities portfolio and
experienced a decline in total average loans during 2022 compared to 2021.
Provision for Loan Losses. The allowance for loan losses is established through
a provision for loan losses charged to earnings as losses related to our loan
portfolio are determined to be probable and can be reasonably estimated. Loans,
or portions of loans, are charged off against the allowance in the period that
such loans, or portions thereof, are deemed uncollectible. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of the underlying collateral, and prevailing economic conditions. The
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
We recorded reversals to the allowance for loan losses of $375,000 and $660,000
for the years ended December 31, 2022 and 2021, respectively. The amounts
recorded during both periods primarily reflect the release of reserve builds
recorded during 2020 for the estimated effects of the COVID-19 pandemic on
credit quality. While our initial assessment of the impact of the COVID-19
pandemic has improved during 2021 and 2022, uncertainty remains due to risks
related to declining government stimulus availability, persistent inflation,
rising market interest rates and a slowing economy.
The establishment of the allowance for loan losses is significantly affected by
management judgment and uncertainties and there is a likelihood that different
amounts would be reported under different conditions or assumptions. Various
regulatory agencies, as an integral part of their examination process,
periodically review our allowance for loan losses. While management is
responsible for the establishment of the allowance for loan losses and for
adjusting such allowance through provisions for loan losses, management may
determine, as a result of such regulatory reviews, that an increase or decrease
in the allowance or provision for loan losses may be necessary or that loan
charge-offs are needed.
Non-interest Income. Non-interest income decreased $1.5 million , or 55.3%, to
$1.2 million for the year ended December 31, 2022 , from $2.6 million for the
year ended December 31, 2021 . In August 2021 , the Bank was awarded a $1.8
million grant from the U.S. Treasury Department's CDFI Rapid Response Program,
which was recognized as non-interest income. During 2022, the Company received
and recognized into non-interest income a $171,000 BEA Program grant from the
CDFI Fund .
Income from bank-owned life insurance ("BOLI") increased by $224,000 to $314,000
for the year ended December 31, 2022 , compared to the prior year, largely due to
an aggregate of $10.0 million in additional BOLI policies purchased in March and
April of 2022. During 2022, the Company also recorded losses on the disposal of
fixed assets with a total net book value of $77,000 . Of the assets disposed,
$55,000 was attributable to branch signage that was replaced due to the Bank's
rebranding.
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Non-interest Expense. Non-interest expense increased$929,000 , or 11.9%, to$8.7 million for the year endedDecember 31, 2022 , compared to$7.8 million for the year endedDecember 31, 2021 . Total non-interest expense for the year endedDecember 31, 2022 included$214,000 of rebranding-related expenses. The increase in non-interest expense also reflects additional costs associated with operating as a public company and additional resources needed to expand our business. Salaries and employee benefits expense totaled$4.8 million for the year endedDecember 31, 2022 , an increase of$191,000 , or 4.1%, over the previous year primarily due to stock compensation expense in the 2022 period. Allocations under the Company's ESOP commenced during the fourth quarter of 2021 and the Company granted awards under the 2022 Stock Option Plan and 2022 Recognition and Retention Plan and Trust Agreement inSeptember 2022 . Data processing and communication expense totaled$841,000 for the year endedDecember 31, 2022 , an increase of$64,000 , or 8.2%, over the previous year primarily due to the cost of additional technology resources and our newest branch location during the 2022 period. Data processing and communication expense also included$30,000 of rebranding-related expenses during the 2022 period.
Professional fees totaled
Advertising and marketing expense totaled$240,000 for the year endedDecember 31, 2022 , an increase of$197,000 over the previous year primarily due to rebranding-related expenses of$124,000 and increased promotional activities during 2022. Franchise and shares tax expense totaled$115,000 for the year endedDecember 31, 2022 . As a result of the mutual-to-stock conversion of the Bank and the establishment ofCatalyst Bancorp as its holding company, the Company became subject to franchise tax and the Bank became subject toLouisiana shares tax for 2022.
Insurance expense totaled
Income Tax Expense. The Company reported an income tax benefit of$21,000 for the year endedDecember 31, 2022 , compared to income tax expense of$484,000 for the year endedDecember 31, 2021 . The change in income tax expense over the comparable periods was primarily due to the change in taxable earnings. 43
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Exposure to Changes in Interest Rates
Our ability to maintain net interest income depends upon our ability to earn a higher yield on interest-earning assets than the rates we pay on deposits and borrowings. The majority of our interest-earning assets largely consist of fixed-rate investment securities and adjustable rate residential and commercial mortgage loans. Consequently, our ability to maintain a positive spread between the interest earned on assets and the interest paid on deposits and borrowings can be adversely affected when market rates of interest change. Interest rate sensitivity is monitored by management through the use of models which generate estimates of changes in net interest income and the economic value of our assets and liabilities over a range of interest rate scenarios. Net Interest Income Analysis. We model and analyze potential changes to net interest income over a twelve-month period under rising and falling interest rate scenarios. Our primary model used to analyze the impact of changes in interest rates on net interest income assumes a static balance sheet, applies immediate and sustained rate shocks and assumes no management intervention over the forecast period. The following table summarizes the results of our net interest income model as ofDecember 31, 2022 , which estimates the impact of immediate and sustained changes in interest rates on net interest income over the following twelve months. Net Interest (Dollars in thousands) Income $ Change % Change Change in Interest Rates in Basis Points (Rate Shock): 300$ 7,706 $ (195) (2.5) % 200 7,783 (118) (1.5) 100 7,751 (150) (1.9) Static 7,712 (189) (2.4) (100) 7,423 (478) (6.0) (200) 7,138 (763) (9.7) (300) 6,912 (989) (12.5)
The above table indicates that as of
Economic Value of Equity. Economic value of equity ("EVE") represents the
market value of portfolio equity, which is different from book value, and is
equal to the market value of assets minus the market value of liabilities (that
is, the difference between incoming and outgoing discounted cash flows of assets
and liabilities) with adjustments made for off-balance sheet items. The EVE
ratio, under any interest rate scenario, is defined as the EVE in that scenario
divided by the market value of assets in the same scenario. The following table
sets forth our EVE as of December 31, 2022 and reflects the changes to EVE as a
result of immediate and sustained changes in interest rates as indicated.
EVE as % of Fair Value of
Economic Value of Equity Assets
EVE
(Dollars in thousands) Amount $ Change % Change Ratio Change
Change in Interest
Rates In Basis Points
(Rate Shock):
300 $ 85,492 $ (9,431) (9.9) % 37.0 % (1.3) %
200 87,606 (7,317) (7.7) 36.9 (1.4)
100 90,497 (4,426) (4.7) 37.2 (1.1)
Static 94,923 - - 38.3 -
(100) 98,394 3,471 3.7 38.8 0.5
(200) 98,241 3,318 3.5 37.7 (0.6)
(300) 100,683 5,760 6.1 37.9 (0.4)
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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. AtDecember 31, 2022 , we had outstanding advances from the FHLB with a carrying value of$9.2 million , and had the capacity to borrow approximately an additional$34.2 million from the FHLB and an additional$17.8 million on a line of credit withFirst National Bankers Bank at such date. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was$772,000 for the year endedDecember 31, 2022 . Net cash used in investing activities, which consists primarily of net changes in loans receivable, investment securities and other assets, such as bank-owned life insurance, was$14.1 million for the year endedDecember 31, 2022 . Net cash used in financing activities, consisting of net changes in funding sources and capital, was$14.0 million for the year endedDecember 31, 2022 . We are committed to maintaining a strong liquidity position. We monitor our liquidity position frequently and anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit that are scheduled to mature in less than one year fromDecember 31, 2022 totaled$40.1 million . Management expects that a majority of the maturing certificates of deposit will be retained. However, if a substantial portion of these deposits is not retained, we have sufficient capacity to utilize FHLB advances or we may raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
At
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 atDecember 31, 2022
Amount of Commitment Expiration - Per Period
Total Amounts Committed
(Dollars in thousands) at December 31, 2022 To 1 Year 1 - 3 Years 3 - 5 Years After 5 Years
Commitments to originate loans $ 1,960 $ 1,960 $ - $ - $ -
Undisbursed portion of
construction loans in process 7,212 1,855
5,357 - -
Unused lines of credit 12,453 6,146 5,702 - 605
Unused overdraft privilege
amounts 1,132 - - - 1,132
Letters of credit 4 4 - - -
Total commitments $ 22,761 $ 9,965 $ 11,059 $ - $ 1,737
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The following table summarizes our contractual cash obligations at December 31,
2022 .
Payments Due By Period
Total at After 5
(Dollars in thousands) December 31, 2022 To 1 Year 1 - 3 Years 3 - 5 Years Years
Certificates of deposit $ 52,503 $ 40,136 $ 11,351 $ 1,016 $ -
FHLB advances 10,000 - 3,000 3,000 4,000
Total long-term debt 62,503 40,136 14,351 4,016 4,000
Operating lease obligations - - - - -
Total contractual obligations $ 62,503 $ 40,136 $
14,351
The Bank exceeded all regulatory capital requirements and was categorized as well-capitalized atDecember 31, 2022 andDecember 31, 2021 . Management is not aware of any conditions or events since the most recent notification that would change our category. The following table presents actual and required capital. To be Well Capitalized under the Prompt Corrective Actual Action Provision (Dollars in thousands) Amount Ratio Amount Ratio As ofDecember 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 >8.0Total Risk-Based Capital 80,275 57.42 13,980 >10.0 Tier 1 Leverage Capital 78,527 30.37 12,929 >5.0 As ofDecember 31, 2021 Common Equity Tier 1 Capital$ 77,819 63.51 %$ 7,965 >6.5 % Tier 1 Risk-Based Capital 77,819 63.51 9,803 >8.0Total Risk-Based Capital 79,360 64.77 12,253 >10.0 Tier 1 Leverage Capital 77,819 27.38 14,210 >5.0
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to our financial statements.
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