Catalyst Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial amounts below are in U.S. dollars; unless stated otherwise, dollar amounts are in millions. Comparisons with 2021 require context: Catalyst Bancorp completed its stock conversion and IPO in October 2021, so pre-conversion periods reflect the Bank only.
Business context and financial position
Catalyst Bancorp is the holding company for Catalyst Bank, a community-oriented bank serving south-central Louisiana through six full-service branches. Its strategy is shifting from a traditional residential-mortgage thrift toward relationship banking for small- and mid-sized businesses while continuing to serve existing customers.
- At September 30, 2022, assets were $283.4 million, loans $131.7 million, investment securities $92.0 million, deposits $184.2 million, and shareholders’ equity $89.3 million.
- Compared with December 31, 2021, assets declined 0.7%; deposits rose 4.2%; and equity declined 9.2%, primarily because of unrealized losses on available-for-sale securities.
- Cash and cash equivalents were $36.2 million. FHLB advances had a carrying value of $9.2 million; the Bank reported capacity for approximately $37.6 million of additional FHLB borrowing and $17.8 million on a line of credit with First National Bankers Bank.
- The Bank was categorized as well capitalized. At quarter-end, reported ratios included 57.84% Common Equity Tier 1 and Tier 1 risk-based capital, 59.09% total risk-based capital, and 28.29% Tier 1 leverage capital.
Results, cash flow and key metrics
- Third quarter: Net interest income was $1.87 million, up 12.4% from $1.66 million. Net income was $139,000 versus $1.43 million; basic and diluted earnings per share were $0.03.
- Third-quarter interest income was $2.03 million and interest expense $162,000. The loan-loss provision was a $115,000 reversal. Non-interest income was $296,000 and non-interest expense was $2.13 million.
- Third-quarter net interest margin was 2.75%, down from 2.81% a year earlier. Average loan yield fell to 4.42% from 4.84%; lower loan yields and a greater securities mix more than offset lower funding costs.
- Nine months: Net interest income was $5.43 million, up 4.5%; net income was $26,000 versus $1.84 million. Net interest margin fell to 2.69% from 3.09%. Interest income was $5.91 million, interest expense $477,000, and the loan-loss provision was a $375,000 reversal.
- Nine-month operating cash flow was $376,000; investing cash outflow was $12.50 million, including a $10.0 million purchase of bank-owned life insurance; financing cash inflow was $7.43 million, primarily from deposit growth. Cash declined $4.69 million to $36.20 million.
- Loans were essentially flat versus year-end. Commercial and industrial loans increased 32.4% to $11.1 million, while commercial real estate loans declined 8.8% to $21.1 million. All PPP loans were repaid during the first nine months.
Material changes, outlook and risks
- The sharp year-over-year earnings decline principally reflects the absence of the $1.8 million CDFI Rapid Response grant recognized in the third quarter and first nine months of 2021. In 2022, the Company recognized a $171,000 Bank Enterprise Award grant during the nine-month period.
- For the first nine months of 2022, net interest income rose despite lower loan income, as securities and other interest income increased and interest expense declined. The reported net interest margin and spread nevertheless contracted.
- Non-interest expense rose 20.1% to $6.70 million for the nine months, reflecting public-company costs, investment in operations, stock compensation, taxes and rebranding. The Bank reported $270,000 of pretax rebranding costs; the nine-month expense discussion separately identifies $215,000 of rebranding-related expenses.
- Available-for-sale securities had $12.6 million of net unrealized losses at September 30, 2022, versus $864,000 at year-end 2021, primarily due to higher market rates. The losses reduced accumulated other comprehensive income and equity; management stated it did not consider them other-than-temporary.
- Credit metrics warrant monitoring: non-performing loans were $1.60 million (1.21% of loans), versus $891,000 (0.68%) at year-end. Past-due and nonaccrual balances included $379,000 of loans 90 days or more past due and accruing. The allowance was $1.80 million, or 1.37% of loans.
- Certificates of deposit totaling $45.7 million were scheduled to mature within one year. Management expected to retain most maturing deposits, but noted that lower retention could require higher deposit rates or additional FHLB borrowing, increasing funding costs.
- Management said it expects sufficient liquidity, anticipates continued FHLB borrowing, and expects most maturing time deposits to be retained. No quantified earnings or growth guidance was provided.
- The Company planned to adopt CECL in January 2023 and expected the allowance to increase; the impact was not yet known. Disclosed risks include interest-rate changes, credit quality, funding access, economic conditions, real-estate values, competition, natural disasters and operational or technology risks.
- Management reported effective disclosure controls as of September 30, 2022, and no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Important facts for investors to verify
- How higher rates and any deposit repricing affect net interest margin, securities values and funding costs.
- Whether deposit retention, especially for the $45.7 million of certificates maturing within one year, matches management’s expectation.
- Whether non-performing loans and past-due balances continue to rise, and whether the allowance remains adequate as CECL is adopted.
- The expected CECL transition adjustment and the effect on future credit-loss expense and capital.
- How much future earnings depend on recurring banking operations versus grants, and the ongoing costs of rebranding, public-company operations and stock-based compensation.
- The effects of unrealized securities losses on equity and liquidity if securities need to be sold; the filing reports fair-value declines but does not indicate that management expects forced sales.