Catfish – (noun) a species of fish.
To fish – (verb) to try and catch/hunt for fish, usually with a fishing rod.
Rod – (noun) the pole/stick that has a (nylon) line and hook to catch fish. Rod is a short way of saying fishing rod.
Fisherman A: Have you ever seen a catfish?
Fisherman B: No, how does it hold the rod?
Why is it funny?
Fisherman B understood “cat fish” (a cat doing the action of fishing) instead of the word “catfish” (a type of fish.) Fisherman B thinks that Fisherman A has asked him if he has ever seen a cat fishing (the idea of a cat holding a rod and fishing in a human way is amusing). Fisherman A is actually asking if Fisherman A has seen a particular species of fish.