Catalyst Bancorp, Inc. — Q2 2022 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2022; financial statements are unaudited. Catalyst Bancorp is the holding company for Catalyst Bank, a community bank operating six branches in south-central Louisiana. The Bank rebranded from St. Landry Homestead Federal Savings Bank in June 2022. Comparisons with 2021 reflect the Bank before the October 2021 conversion and IPO; the Company had no shares outstanding in those earlier periods.
Financial performance and condition
| Metric | Q2 2022 / June 30, 2022 | Comparable period / prior date |
|---|---|---|
| Net income (loss) | $18,000 for Q2; $(113,000) for the first six months | $260,000 for Q2 2021; $411,000 for first-half 2021 |
| Net interest income | $1.81 million Q2; $3.56 million first half | $1.81 million Q2 2021; $3.53 million first-half 2021 |
| Net interest margin | 2.71% Q2; 2.65% first half | 3.26% Q2 2021; 3.25% first-half 2021 |
| Total assets | $281.0 million | $285.3 million at December 31, 2021 |
| Total loans / net loans | $133.6 million / $131.6 million | $131.8 million / $129.6 million at December 31, 2021 |
| Deposits | $178.7 million | $176.8 million at December 31, 2021 |
| Cash and cash equivalents | $29.1 million | $40.9 million at December 31, 2021 |
| Shareholders’ equity | $92.4 million; 32.9% of assets | $98.3 million; 34.5% of assets at December 31, 2021 |
| FHLB advances | $9.1 million carrying amount | $9.0 million at December 31, 2021 |
Q2 interest income was $1.97 million and interest expense was $155,000. First-half operating cash flow was $51,000; investing cash flow was $(13.74) million and financing cash flow was $1.94 million. Cash declined by $11.75 million, primarily reflecting investing activity, including a $10.0 million purchase of bank-owned life insurance (BOLI).
Material changes versus comparable periods
- Q2 net income fell $242,000 year over year; first-half results shifted from $411,000 profit to a $113,000 loss. Management attributed the deterioration mainly to higher non-interest expense.
- Non-interest expense rose 21.1% to $2.38 million in Q2 and 23.8% to $4.57 million in the first half. Higher costs included rebranding, public-company operations, staffing and business expansion.
- Net interest margin declined 55 basis points in Q2 and 60 basis points in the first half. Lower loan yields and a greater mix of securities weighed on asset yields; reduced deposit costs partly offset the effect.
- First-half loans grew 1.4%, led by residential and commercial-and-industrial lending. Commercial-and-industrial loans increased 36.3% from year-end; commercial real estate and multifamily balances declined.
- Available-for-sale securities’ net unrealized losses rose to $8.4 million from $864,000 at year-end, principally due to higher market interest rates. Accumulated other comprehensive loss reached $6.65 million.
- The allowance for loan losses declined to $1.98 million, or 1.48% of loans, from $2.28 million, or 1.73%, at year-end. The first half included a $260,000 reversal of provision and $36,000 in net charge-offs.
Outlook, commentary, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management expects non-interest expenses to increase as the business grows and from stock-benefit plans. It anticipates retaining a substantial portion of maturing certificates of deposit and continued use of FHLB advances.
- Management reported approximately $45.0 million of additional FHLB borrowing capacity and a further $17.8 million available on a line of credit at June 30. It stated that liquidity was monitored daily and expected to be sufficient for current commitments.
- Certificates of deposit totaling $50.5 million mature within one year. If deposits are not retained, replacement funding or higher deposit rates could increase interest expense. Outstanding loan and other customer commitments totaled $14.5 million.
- Non-performing loans increased to $1.29 million (0.96% of loans) from $891,000 (0.68%) at year-end; non-performing assets rose to $1.61 million. Loans over 30 days past due and non-accruing totaled $768,000. Management cited improved COVID-related credit assessments as a principal reason for releasing reserves, but actual credit outcomes may differ.
- Q2 included a $171,000 Community Development Financial Institution grant, $208,000 in pre-tax rebranding costs, and a $77,000 loss on fixed-asset disposals. First-half rebranding costs were $242,000. The grant was partly offset by $26,000 of related professional fees.
- The Bank was categorized as well capitalized. Its reported June 30 ratios included 58.51% Common Equity Tier 1 and 59.76% total risk-based capital. These are Bank regulatory ratios, not the Company’s shareholder-equity ratio.
- Management said it had no material pending legal proceedings. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter. The company is evaluating CECL adoption, scheduled for January 2023; its impact was not yet known and may be material.
- Risks cited include interest-rate and securities-market changes, credit losses, funding access, economic conditions, real-estate values, competition, operational and technology risks, and hurricanes or other natural disasters affecting the region.
Important facts for investors to verify
- Whether margin pressure persists as rates change and the asset mix shifts, and how securities losses affect capital or liquidity if securities must be sold.
- Deposit retention and replacement-funding costs for the $50.5 million of certificates maturing within one year.
- Trends in non-performing loans, delinquencies, charge-offs and the adequacy of the allowance as CECL is adopted.
- How much of the expense increase is recurring versus rebranding, public-company, growth and stock-compensation costs; also the sustainability of grant and BOLI income.
- Potential dilution and compensation cost from plans reserving 529,000 option shares and 211,600 recognition-and-retention shares. As of the filing date, no awards or purchases had been made; initial grants were expected by September 30, 2022.