Catalyst Bancorp Inc

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 throughsix 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, 2024 and 2023 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, 2023.

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.

Revision of Prior Period Financial Statements

During the three months ended June 30, 2024, it was discovered that the rate of interest paid on one interest-bearing checking account did not reconcile with the contract with the customer. The checking account is a public fund deposit with a negotiated arrangement managed by a lead financial institution that billed the Bank periodically for interest then owed to the municipality. The Bank is a party to the agreement with the municipality but participated in only a portion of the total funds deposited by the municipality and did not deal directly with the municipality with respect to the funds deposited or the interest paid. These responsibilities are handled indirectly through the lead institution. During June of 2024, the Bank became aware of the additional interest owed by it pursuant to the agreement. As a result of the error, $137,000 of total interest expense was not properly accrued or paid by the Bank during the period beginning August 1, 2022 and ending March 31, 2024. In accordance with the guidance set forth in SEC Staff Bulletin 99,Materiality, and SEC Staff Accounting Bulletin 108,Considering Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financials, the Bank concluded that the error was not material to any prior periods, the current period or the trend in earnings from a quantitative and qualitative perspective. However, correcting the cumulative effect of the error in the current period would have resulted in a material misstatement in the current period. Accordingly, management revised the prior period financial statements, related disclosures, and supplemental information presented in this filing to correct the misstatement. We will also revise previously reported financial information for these immaterial errors in our future filings, as applicable. The Company’s previously issued financial statements and related disclosures were not amended and can still be relied upon.

The following highlights the primary changes to prior period financial statements presented in this Form 10-Q caused by the correction of the misstated interest expense:

Management performed a review of all similar contracts with deposit customers and verified that the error was isolated to this unique deposit account. Management and the Audit Committee also assessed the error’s impact on internal controls over financial reporting and did not identify any material weaknesses. For further information on Management’s evaluation of the Company’s internal controls, see Item 4 of this Quarterly Report on Form 10-Q.

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, 2023. Our accounting policies for allowance for credit losses, investment securities, and income taxes comprise those that management believes involve the most critical estimates and aid in fully understanding and evaluating our reported financial results.

During the three months ended March 31, 2024, the measurement of the Company’s deferred income tax assets and liabilities was identified as a critical accounting estimate. Deferred income tax assets and liabilities are 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. At September 30, 2024, the Company’s net deferred tax asset totaled $1.4 million and is included in other assets on the statement of financial condition. According to Subtopic 740-10 of the Accounting Standards Codification (“ASC 740-10”), the measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not

expected to be realized. At September 30, 2024, the Company has not recorded a valuation allowance for its deferred tax assets. 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, which may impact total income tax expense in future periods.

There were no other material changes from the significant accounting policies or critical accounting estimates previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. 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.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Updates Issued, but Not Adopted

ASU No. 2023-09. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this ASU add specific requirements for income tax disclosures to improve transparency and decision usefulness. The guidance in ASU 2023-09 requires that public business entities disclose specific categories in the income tax rate reconciliation and provide additional qualitative information for reconciling items that meet a quantitative threshold. In addition, the amendments in ASU 2023-09 require that all entities disclose the amount of income taxes paid disaggregated by federal, state, and foreign taxes and disaggregated by individual jurisdictions. The ASU also includes other disclosure amendments related to the disaggregation of income tax expense between federal, state and foreign taxes. The Company expects to adopt the amendments in ASU 2023-09 for periods beginning after December 31, 2024.

NOTE 3. EARNINGS (LOSS) PER SHARE

Earnings (loss) per common share was computed based on the following:

The weighted average of potentially dilutive common shares attributable to outstanding stock options that were anti-dilutive totaled 294,573 and 280,620 for the three months ended September 30, 2024 and 2023, respectively, and were excluded from the calculation of diluted earnings per share. The weighted average of potentially dilutive common shares attributable to restricted stock that were anti-dilutive totaled 326 for the three months ended September 30, 2024. There wereno potentially dilutive common shares attributable to restricted stock that were anti-dilutive for the three months ended September 30, 2023.

The weighted average of potentially dilutive common shares attributable to outstanding stock options that were anti-dilutive totaled 294,647 and 290,379 for the nine months ended September 30, 2024 and 2023, respectively, and were excluded from the calculation of diluted earnings per share. The weighted average of potentially dilutive common shares attributable to restricted stock that were anti-dilutive totaled 537 and 39,779 for the nine months ended September 30, 2024 and 2023, respectively, and were excluded from the calculation of diluted earnings per share.

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:

There wereno securities transferred between classifications during the nine months ended September 30, 2024 or 2023. During the nine months ended September 30, 2024, the Company sold 50 available-for-sale investment securities for a total loss of $5.5 million. Proceeds from the sales totaled $42.6 million, inclusive of accrued interest.

Accrued interest receivable on the Company’s investment securities totaled $153,000 and $241,000 at September 30, 2024 and December 31, 2023, respectively.

At September 30, 2024 and December 31, 2023, investment securities totaling $14.4 million and $44.6 million, respectively, were pledged to secure public deposits as required or permitted by law. During the nine months ended September 30, 2024, the Company used a custodial letter of credit granted by the Federal Home Loan Bank of Dallas to collateralize public fund deposits as we executed the investment securities sales. At September 30, 2024, $19.0 million of the custodial letter of credit was pledged as collateral for pubic deposits.

Investment securities totaling $18.9 million and $11.1 million were pledged to the Federal Reserve Bank as collateral for borrowings at September 30, 2024 and December 31, 2023, respectively.

The following is a summary of maturities of securities available-for-sale and held-to-maturity at September 30, 2024 and December 31, 2023:

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.

Information pertaining to securities with gross unrealized losses at September 30, 2024 and December 31, 2023 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

At September 30, 2024 and December 31, 2023, the Company held 42 and 92 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 did not establish an allowance for credit losses for its available-for-sale or held-to-maturity securities at September 30, 2024 or December 31, 2023.

NOTE 5. LOANS RECEIVABLE

Loans receivable at September 30, 2024 and December 31, 2023 are summarized as follows:

At September 30, 2024 and December 31, 2023, real estate loans totaling $81.3 million and $81.2 million, respectively, were pledged as collateral to the Federal Home Loan Bank of Dallas 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 $656,000 and $659,000 at September 30, 2024 and December 31, 2023, 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 credit losses for the nine months ended September 30, 2024 and 2023.

The following tables outline the allowance for loan losses and the balance of loans by method of loss evaluation at September 30, 2024 and December 31, 2023.

At September 30, 2024 and December 31, 2023, all one- to four family residential and construction and land loans individually evaluated for credit losses 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 loans secured by one- to four-family residential properties and land located in our market.

A summary of current, past due and non-accrual loans as of September 30, 2024 and December 31, 2023 follows:

A summary of total non-accrual loans as of September 30, 2024 and December 31, 2023 follows:

The Company was not committed to lend any additional funds on non-accrual loans at September 30, 2024 or December 31, 2023. The Company does not recognize interest income while loans are on non-accrual status. All payments received while on non-accrual status are applied against the principal balance of non-accrual loans.

At September 30, 2024, loans secured by residential real estate for which formal foreclosure proceedings were in process totaled $80,000. At December 31, 2023, loans secured by residential and commercial real estate for which formal foreclosure proceedings were in process totaled $345,000 and $50,000, respectively.

Occasionally loans are modified to assist borrowers experiencing financial difficulty. We consider modifications such as term extensions, principal forgiveness, payment delays or alternate payment schedules, and alternate interest rate terms. At September 30, 2024 and December 31, 2023, loans with modifications for borrowers experiencing financial difficulty totaled $615,000 and $683,000, respectively.

During the nine months ended September 30, 2024, the Company granted one loan modification to a borrower experiencing financial difficulty that resulted in a more than minor change in the timing or amount of contractual cash flows. The maturity date was extended bythree years for a residential mortgage loan with a balance of $20,000. During the nine months ended September 30, 2023, the Company did not grant any loan modifications to borrowers experiencing financial difficulty that resulted in a more than minor change in the timing or amount of contractual cash flows. The Company was not committed to lend any additional funds to borrowers with modified terms and experiencing financial difficulty at September 30, 2024 or December 31, 2023.

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.

The following table presents the Company’s loan portfolio by credit quality classification and origination year as of September 30, 2024. The Company uses the latter of origination or renewal date to classify term loans into vintages.

The following table presents the Company’s loan portfolio by credit quality classification and origination year as of December 31, 2023. The Company uses the latter of origination or renewal date to classify term loans into vintages.

The following table presents gross charge-offs and recoveries for the nine months ended September 30, 2024 by origination year of the related loans. The Company uses the latter of origination or renewal date to classify loans into vintages.

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.

NOTE 6. DEPOSITS

Deposits at September 30, 2024 and December 31, 2023 are summarized as follows:

The estimated amount of our total uninsured deposits (that is, deposits in excess of the FDIC’s insurance limit) was $40.2 million and $44.6 million, respectively, at September 30, 2024 and December 31, 2023.

At September 30, 2024 scheduled maturities of certificates of deposits were as follows: