Catalyst Bancorp, Inc. — Q2 2023 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2023, compared with the same 2022 periods. Catalyst Bancorp is the holding company for Catalyst Bank, a community bank operating six branches in south-central Louisiana.
Financial results and condition
- Q2 earnings: Net income was $39,000, or $0.01 per basic and diluted share, versus $15,000, or $0.01 per basic share, in Q2 2022.
- First-half earnings: Net income was $112,000, or $0.03 per share, compared with a $126,000 net loss, or $0.02 loss per share, in the first half of 2022.
- Interest income and margin: Q2 interest income rose 18.2% to $2.322 million; net interest income increased 5.1% to $1.903 million. Taxable-equivalent net interest margin was 3.02%, up from 2.71%. For the first half, net interest income increased 8.6% to $3.869 million and margin was 3.06%, versus 2.65%.
- Funding costs and expenses: Q2 interest expense rose 170.3% to $419,000, largely from higher deposit costs; the average rate paid on interest-bearing deposits increased to 1.04% from 0.23%. Q2 non-interest expense declined 8.1% to $2.191 million. The first-half figures were $720,000 of interest expense, up 128.6%, and $4.376 million of non-interest expense, down 4.6%.
- Assets and lending: Total assets were $265.975 million at June 30, up 1.0% from year-end 2022. Total loans were $133.493 million, essentially flat; commercial and industrial loans grew 27.2% to $17.609 million, while real estate loans declined 3.2% to $112.544 million.
- Deposits, debt, and equity: Deposits increased 3.8% to $171.373 million. FHLB advances were $9.288 million. Shareholders’ equity fell 4.7% to $84.337 million, or 31.7% of assets, primarily reflecting $4.335 million of share repurchases.
- Liquidity and cash flow: Cash and cash equivalents were $19.791 million, up $6.319 million since year-end. First-half operating, investing, and financing cash flows were positive $538,000, $4.252 million, and $1.529 million, respectively. The company reported $47.9 million of additional FHLB borrowing capacity and $17.8 million available on a correspondent-bank line at June 30.
- Credit and capital: The loan-loss allowance was $2.081 million, or 1.56% of loans; the separate reserve for unfunded commitments was $218,000. Nonperforming assets were $2.185 million, or 0.82% of assets, versus $2.005 million and 0.76% at year-end. The Bank was categorized as well-capitalized; its reported total risk-based capital ratio was 57.27%.
Material changes and notable items
- Higher market rates lifted asset yields and net interest margin, but also drove a sharp increase in deposit interest costs.
- Comparisons are affected by 2022 items: a $171,000 community-development grant, a $260,000 first-half credit-loss reversal, and $242,000 of first-half rebranding costs. Q2 2022 included a $189,000 credit-loss reversal and $208,000 of rebranding costs.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $209,000 and added a $216,000 reserve for unfunded commitments, reducing opening retained earnings by $335,000 after tax.
- Available-for-sale securities had $10.945 million of gross unrealized losses at quarter-end, principally attributed to interest rates. Management reported no intent to sell securities in unrealized-loss positions and recorded no securities credit-loss allowance.
- A $62,000 write-down on foreclosed real estate contributed to Q2 foreclosed-asset expense; the property sale closed in July 2023.
- The company repurchased 360,458 shares for $4.335 million during the first half. A second repurchase authorization had 156,542 shares remaining at June 30.
Outlook, risks, and contingencies
No earnings or margin guidance is provided. Management said it expects sufficient liquidity to meet current commitments, anticipates most maturing time deposits will be retained, and expects continued use of FHLB advances. It cautioned that deposit outflows or the need to attract deposits at higher rates could increase funding expense. Other identified risks include interest-rate and margin changes, access to cost-effective funding, local economic and real-estate conditions, credit quality, competition, and natural disasters. Management reported no material pending legal proceedings and no material adverse effect expected from ordinary-course contingencies.
Key investor verification points
- Assess whether rising deposit costs continue to outpace asset-yield gains and pressure net interest margin.
- Review the $50.2 million of estimated uninsured deposits, the $41.9 million of certificates of deposit due within one year, and the company’s stated retention and funding assumptions.
- Monitor nonperforming loans, past-due residential loans, and the adequacy of CECL reserves as the loan portfolio changes.
- Evaluate the interest-rate sensitivity and liquidity implications of securities with $10.945 million of gross unrealized losses, including the held-to-maturity portfolio’s fair-value discount.
- Confirm the effects of continued repurchases on equity and per-share results, and note that the reported very high Bank capital ratios are regulatory ratios, not a measure of holding-company liquidity.