Winchester Bancorp, Inc.: Form 10-Q for the period ended Dec 31, 2024
Filed with the SEC on Mar 27, 2025 and accepted by EDGAR at Mar 27, 2025, 11:41 ET.
Management's discussion and analysis
As filed, 55,724 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
General
Management’s discussion and analysis of financial condition and results of operations at December 31, 2024 and June 30, 2024 and for the three and six months ended December 31, 2024 and 2023 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which can be identified by the use of words such as “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “estimate,” “expect,” “indicate,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and words of similar meaning. These forward-looking statements include, but are not limited to:
- statements of our goals, intentions and expectations;
- statements regarding our business plans, prospects, growth and operating strategies;
- statements regarding the quality of our loan and investment portfolios; and
- estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
- general economic conditions, including any recessionary conditions and/or increases in unemployment, either nationally or in our market areas, that are worse than expected;
- changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
- our ability to access cost-effective funding;
- fluctuations in real estate values and in the conditions;
- demand for loans, deposits and non-banking services in our market area;
- our ability to implement and change our business strategies;
- competition among depository and other financial institutions, including with respect to ability to charge overdraft fees;
- inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and will make;
- adverse changes in the securities or secondary mortgage markets;
- changes in laws or government regulations or policies affecting financial institutions and/or their holding companies, including changes in regulatory fees, capital requirements and insurance premiums;
- monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;
- changes in the quality or composition of our loan or investment portfolios;
- technological changes that may be more difficult or expensive than expected;
- the inability of third-party providers to perform as expected;
- a failure or breach of our operational or information security systems or infrastructure, including cyberattacks;
- our ability to manage market risk, credit risk and operational risk;
- our ability to enter new markets successfully and capitalize on growth opportunities;
- our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
- changes in consumer spending, borrowing and savings habits;
- changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
- changes in accounting and/or tax estimates;
- our ability to retain key employees;
- the effects of any national or global conflict, war or act of terrorism;
- the ability of the U.S. Government to remain open, function properly and manage federal debt limits;
- the impact of a pandemic on our operations and financial results and those of our customers;
- our compensation expense associated with equity allocated or awarded to our employees; and
- changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represents our critical accounting policy.
Allowance for Credit Losses on Loans. The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Such allowance is based on losses expected to arise over the life of the asset (contractual term). The allowance for credit losses on loans is established through a provision for credit losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
We measure the allowance for credit losses on loans using the Scaled CECL Allowance for Losses Estimator (“SCALE”) method, which is a simple, spreadsheet-based method developed by the Federal Reserve Board to assist community banks in calculating a CECL compliant allowance for credit losses using proxy expected lifetime loss rates. The SCALE tool is a template designed for smaller community banks with total assets of less than $1 billion. It uses publicly available data to derive the initial proxy lifetime loss rates. Management uses judgment to further adjust the proxy expected lifetime loss rates with qualitative factors to reflect the facts and circumstances of our internal loss history and credit risk factors for each loan segment. The allowance for credit losses on loans is measured on a collective (pool) basis when similar characteristics exist. We segment our loan portfolio to correspond to call report classification to make peer data more useful.
The allowance for credit losses on loans is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. For example, an increase of 25 basis points as our adjustment to our lifetime loss rate for qualitative factors for all loan categories at December 31, 2024 would have increased our allowance for credit losses on loans at that date to $5.4 million from $3.6 million.
Loans that do not share risk characteristics are evaluated on an individual loan basis. Loans evaluated individually are not also included in the collective evaluation. For loans that are collateral dependent, that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated portion of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating collectively and individually evaluated loans in the portfolio.
Although we believe that we use the best information available to establish the allowance for credit losses on loans, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Massachusetts Commissioner of Banks and the FDIC, as an integral part of their examination process, periodically review our allowance for credit losses on loans, and as a result of such reviews, we may have to adjust our allowance for credit losses on loans. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.
For more information on our critical accounting policies, see Note 1 of the notes to our consolidated financial statements.
Comparison of Financial Condition at December 31, 2024 and June 30, 2024
Total Assets. Total assets increased $41.1 million, or 4.8%, to $894.1 million at December 31, 2024, from $853.0 million at June 30, 2024. The increase was primarily due to an increase in loans, partially offset primarily by a decrease in cash and cash equivalents and investment securities.
Cash and Cash Equivalents. Cash and cash equivalents decreased $2.6 million, or 5.8%, to $41.5 million at December 31, 2024 from $44.1 million at June 30, 2024. The decrease was due to using excess cash to fund loan growth.
Investment Securities. Investment securities, comprised of both available for sale and held to maturity securities, aggregated $85.7 million at December 31, 2024 compared to $86.6 million at June 30, 2024, as we used excess cash to fund loan growth instead of investing in securities.
Gross Loans. Loans increased $43.4 million, or 6.3%, to $727.8 million at December 31, 2024 compared to $684.4 million at June 30, 2024. The primary increases were in construction loans ($13.4 million, or 13.2%), multi-family real estate loans ($12.0 million, or 9.6%), commercial real estate loans ($10.5 million, or 12.3%) and one- to four-family residential real estate loans ($10.2 million, or 3.0%) We continued our focus on originating construction and multi-family real estate loans at a higher point in the market interest rate cycle. Our strategy is to continue to grow our loan portfolio, with a focus on commercial real estate, multi-family residential real estate and construction loans, while continuing to originate single-family residential real estate loans to support local homebuyers. The recent increase in one- to four-family residential real estate loans was due to our establishing new broker relationships and our recent efforts to balance our concentration of commercial real estate loans, particularly with respect to our level of regulatory capital.
Deposits. Deposits increased $25.6 million, or 4.0%, to $661.0 million at December 31, 2024 from $635.4 million at June 30, 2024. The increase was due primarily to an increase in certificates of deposit, which increased $25.3 million, or 9.7%, to $287.5 million at December 31, 2024 from $262.2 million at June 30, 2024, as customers continued to hold deposit products with higher interest rates. This increase was comprised of an increase of $30.7 million, or 30.2%, in certificates of deposit in amounts of $250,000 or greater (the limit for federal deposit insurance), and a decrease of $5.4 million, or 3.4%, in certificates of deposit in amounts of less than $250,000. As described above, all of our deposits are fully insured under the
DIF. The increase in deposits was also due to a $17.1 million, or 20.0%, increase in money market accounts, to $102.5 million at December 31, 2024 from $85.5 million at June 30, 2024. The increase in certificates of deposit and money market accounts were offset partially by a decrease of $16.1 million, or 6.9%, in lower-costing NOW and savings accounts from a total of $235.3 million at June 30, 2024 to $219.2 million at December 31, 2024.
Borrowings. Borrowings, which consisted solely of Federal Home Loan Bank of Boston advances, increased $16.0 million, or 12.4%, to $145.5 million at December 31, 2024, compared to $129.5 million from June 30, 2024. Advances were used to fund loan growth that exceeded our increase in deposits, described above.
Total Surplus. Total surplus increased $37,000 and was $80.3 million at each December 31, 2024 and June 30, 2024. Total surplus increased due to a $296,000 decrease in accumulated other comprehensive loss to $1.5 million at December 31, 2024, partially offset by a net loss of $259,000 for the six months ended December 31, 2024.
Comparison of Operating Results for the Three Months Ended December 31, 2024 and 2023
General. We recorded net income of $373,000 and $272,000 for the three months ended December 31, 2024 and 2023, respectively. The increase in net income was due to an increase in interest and dividend income and a decrease in operating expense, partially offset by an increase in interest expense, the provision for credit losses, and a decrease in other income.
Interest and Dividend Income. Interest and dividend income increased $2.0 million, or 23.7%, to $10.5 million for the three months ended December 31, 2024, from $8.5 million for the three months ended December 31, 2023. Interest and fees on loans, which is our primary source of interest income, increased $1.7 million, or 22.2%, to $9.2 million for the three months ended December 31, 2023.
The average balance of loans increased by $74.3 million, or 11.6%, to $716.3 million for the three months ended December 31, 2024, over the average balance for the three months ended December 31, 2023., while the average yield on loans increased by 45 basis points to 5.16% for the three months ended December 31, 2024, from 4.71% for the three months ended December 31, 2023. The increase in the average yield was due to increases in market interest rates as well as in improvement in the composition of our loan portfolio to include a higher percentage of higher yielding construction and commercial real estate loans, as well as multi-family residential real estate loans. The increase in average balance was due to our continuing to pursue new commercial relationships.
Interest Expense. Total interest expense increased $1.6 million, or 31.5%, to $6.5 million for the three months ended December 31, 2024, compared to $4.9 million for the three months ended December 31, 2023. Interest expense on deposits increased $1.1 million, or 29.1%, to $4.9 million for the three months ended December 31, 2024, from $3.8 million for the three months ended December 31, 2023. Our average balance of interest-bearing deposits increased $63.7 million, or 11.9%, to $601.2 million, while our average cost of deposits increased 44 basis points to 3.29% for the three months ended December 31, 2024, from 2.85% for the three months ended December 31, 2023. The increase in the average cost of deposits was due to increases in market interest rates as well as a higher percentage of our deposits consisting of certificates of deposit, which bear higher rates than other deposit categories.
Interest expense on Federal Home Loan Bank advances increased $438,000, or 40.0%, to $1.5 million for the three months ended December 31, 2024, from $1.1 million for the three months ended December 31, 2023. The increase was due to increases in our average balance of Federal Home Loan Bank advances ($39.6 million, or 40.5%) while our average cost of borrowings decreased 2 basis points to 4.47% for the three months ended December 31, 2024, from 4.49% for the three months ended December 31, 2023. As described above, we increased Federal Home Loan Bank borrowings in recent periods primarily to fund loan growth.
Net Interest Income. Net interest income was $4.0 million for the three months ended December 31, 2024, compared to $3.5 million for the three months ended December 31, 2023, as our interest income increased faster than our interest expense. Our interest rate spread increased to 1.49% for the three months ended December 31, 2024 from 1.47% for the three months ended December 31, 2023, while our net interest margin was 1.92% for each period.
Provision for Credit Losses. Based on an analysis of the factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Allowance for Credit Losses,” we recorded a provision for credit losses of $238,000 for the three months ended December 31, 2024, compared to a provision of $76,000 for the three months ended December 31, 2023. The increase in the provision for credit losses on loans for the three months ended December 31, 2024 was primarily due to an increase in loan balances. The allowance for credit losses on loans was
$3.6 million at December 31, 2024 and $3.1 million at December 31, 2023 and represented 0.50% and 0.47% of total loans at December 31, 2024 and 2023, respectively. The allowance for credit losses for off balance sheet commitments was $1.1 million at December 31, 2024 and $1.2 million at December 31, 2023. The benefit for off balance sheet commitments related to lower balances of loan commitments as the commitments were converted to loans.
Total nonaccrual loans were $1.9 million at December 31, 2024, compared to $1.4 million at December 31, 2023. Total loans past due 30 days or greater were $2.4 million at December 31, 2024 compared to $1.9 million at December 31, 2023. As a percentage of nonperforming loans, the allowance for credit losses on loans was 187.86% at December 31, 2024 compared to 216.55% at December 31, 2023.
Our estimates and assumptions used in the determination of the adequacy of the allowance could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions. Any such increase in future provisions that may be required may adversely impact our financial condition and results of operations.
Other Income. Other income information is as follows.
(Dollars in thousands)
| Three Months Ended December 31, 2024 | 2023 | Change Amount | Percent | |
|---|---|---|---|---|
| Customer service fees | $180 | $167 | $13 | 7.8% |
| Bank owned life insurance | 118 | 66 | 52 | 78.8% |
| Gain on marketable equity securities, net | 52 | 165 | (113) | (68.5)% |
| Gain (loss) on investment securities | — | (32) | 32 | (100.0)% |
| Gain on sale of fixed assets | — | 314 | (314) | (100.0)% |
| Miscellaneous | 38 | 17 | 21 | 123.5% |
| Total other income | $388 | $697 | $(309) | (44.3)% |
Gain on the sale of fixed assets during the 2023 period was related to the sale of a branch building. The decrease in gain on marketable equity securities, net, was due to more favorable market conditions in the prior period. The increase in income on bank owned life insurance was due to the purchase of $4.0 million of additional policies during the 2024 fiscal year.
Operating Expense. Operating expense information is as follows.
(Dollars in thousands)
| Three Months Ended December 31, 2024 | 2023 | Change Amount | Percent | |
|---|---|---|---|---|
| Salaries and employee benefits | $2,174 | $2,352 | $(178) | (7.6)% |
| Occupancy and equipment, net | 413 | 386 | 27 | 7.0% |
| Data processing | 305 | 261 | 44 | 16.9% |
| Deposit insurance | 207 | 100 | 107 | 107.0% |
| Marketing and advertising | 96 | 102 | (6) | (5.9)% |
| Other | 572 | 663 | (91) | (13.7)% |
| Total operating expense | $3,767 | $3,864 | $(97) | (2.5)% |
The decrease in salaries and employee benefits was due to lower expenses related to the pension plan, while the increase in deposit insurance expense was due to an increase in FDIC insurance rates and our higher deposit levels.
Income Taxes. Income tax expense decreased to $41,000 for the three months ended December 31, 2024, compared to $56,000 the three months ended December 31, 2023. The effective tax rates were 9.9% and 17.0% for the three months ended December 31, 2024 and 2023, respectively, as we had lower levels of taxable income during the 2024 period.
Average Balances and Yields
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances, and the average balance of loans includes non-accrual loans. The yields set forth below include the effect of deferred fees/costs, discounts, and premiums that are amortized or accreted to interest income.
(Dollars in thousands)
| Interest-earning assets: | For the Three Months Ended December 31, 2024 Average Outstanding Balance | Interest | Average Yield/Rate (1) | 2023 Average Outstanding Balance | Interest | Average Yield/Rate (1) |
|---|---|---|---|---|---|---|
| Loans | $716,262 | $9,245 | 5.16% | $642,010 | $7,565 | 4.71% |
| Securities available for sale | 32,248 | 315 | 3.91% | 24,995 | 182 | 2.91% |
| Securities held to maturity | 54,394 | 440 | 3.24% | 46,683 | 322 | 2.76% |
| Interest-bearing deposits and other | 38,698 | 507 | 5.24% | 29,848 | 427 | 5.72% |
| Total interest-earning assets | 841,602 | 10,507 | 4.99% | 743,536 | 8,496 | 4.57% |
| Noninterest-earning assets | 29,012 | 21,944 | ||||
| Allowance for credit losses on loans | (3,467) | (2,944) | ||||
| Total assets | $867,147 | $762,536 | ||||
| Interest-bearing liabilities: | ||||||
| NOW and demand deposits | $52,110 | 4 | 0.03% | $75,306 | 190 | 1.01% |
| Savings accounts | 162,074 | 969 | 2.39% | 171,694 | 1,008 | 2.35% |
| Money market accounts | 98,441 | 823 | 3.34% | 55,757 | 324 | 2.32% |
| Certificates of deposit | 288,580 | 3,146 | 4.36% | 234,755 | 2,307 | 3.93% |
| Total interest-bearing deposits | 601,205 | 4,942 | 3.29% | 537,512 | 3,829 | 2.85% |
| Borrowings | 137,205 | 1,534 | 4.47% | 97,643 | 1,096 | 4.49% |
| Total interest-bearing liabilities | 738,410 | 6,476 | 3.51% | 635,155 | 4,925 | 3.10% |
| Other noninterest-bearing liabilities | 48,073 | 49,028 | ||||
| Total liabilities | 786,483 | 684,183 | ||||
| Surplus | 80,664 | 78,353 | ||||
| Total liabilities and surplus | $867,147 | $762,536 | ||||
| Net interest income | $4,031 | $3,571 | ||||
| Net interest rate spread (2) | 1.48% | 1.47% | ||||
| Net interest-earning assets (3) | $103,192 | $108,381 | ||||
| Net interest margin (4) | 1.92% | 1.92% | ||||
| Average interest-earning assets to interest-bearing liabilities | 113.97% | 117.06% |
(1) Annualized.
(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
(In thousands)
| Interest-earning assets: | Three Months Ended December 31, 2024 vs. 2023 Increase (Decrease) Due to Volume | Rate | Total Increase (Decrease) |
|---|---|---|---|
| Loans | $920 | $760 | $1,680 |
| Securities available for sale | 61 | 72 | 133 |
| Securities held to maturity | 58 | 60 | 118 |
| Interest-bearing deposits and other | 112 | (32) | 80 |
| Total interest-earning assets | 1,151 | 860 | 2,011 |
| Interest-bearing liabilities: | |||
| NOW and demand deposits | (45) | (141) | (186) |
| Savings accounts | (58) | 19 | (39) |
| Money market accounts | 317 | 182 | 499 |
| Certificates of deposit | 569 | 270 | 839 |
| Borrowings | 442 | (4) | 438 |
| Total interest-bearing liabilities | 1,225 | 326 | 1,551 |
| Change in net interest income | $(74) | $534 | $460 |
Comparison of Operating Results for the six months ended December 31, 2024 and 2023
General. We recorded a net loss of $259,000 for the six months ended December 31, 2024 compared to net income of $485,000 for the six months ended December 31, 2023. The decrease in net income was due primarily to increases in interest expense and the provision for credit losses, partially offset by an increase in interest and dividend income and a decrease in income tax expense.
Interest and Dividend Income. Interest and dividend income increased $4.4 million, or 27.3%, to $20.7 million for the six months ended December 31, 2024, from $16.3 million for the six months ended December 31, 2023. Interest and fees on loans, which is our primary source of interest income, increased $3.7 million, or 25.6%, to $18.3 million for the six months ended December 31, 2024, from $14.5 million for the six months ended December 31, 2023.
The average balance of loans increased by $80.5 million, or 12.8%, to $708.5 million for the six months ended December 31, 2024, over the average balance for the six months ended December 31, 2023, while the average yield on loans increased by 52 basis points to 5.15% for the six months ended December 31, 2024, from 4.63% for the six months ended December 31, 2023. The increase in the average yield was due to increases in market interest rates as well as changes in the composition of our loan portfolio to include a higher percentage of higher yielding construction and commercial real estate loans, as well as multi-family residential real estate loans. The increase in average balance was due to our continuing to pursue new commercial relationships.
Interest Expense. Total interest expense increased $4.0 million, or 44.5%, to $12.9 million for the six months ended December 31, 2024, compared to $9.0 million for the six months ended December 31, 2023. Interest expense on deposits increased $2.9 million, or 41.1%, to $10.0 million for the six months ended December 31, 2024, from $7.1 million for the six months ended December 31, 2023. Our average balance of interest-bearing deposits increased $61.8 million, or 11.6%, to $594.7 million, while our average cost of deposits increased 70 basis points to 3.35% for the six months ended December 31, 2024, from 2.65% for the six months ended December 31, 2023. The increase in the average cost of deposits was due to increases in market interest rates as well as a higher percentage of our deposits consisting of certificates of deposit, which bear higher rates than other deposit categories.
Interest expense on Federal Home Loan Bank advances increased $1.1 million, or 56.9%, to $3.0 million for the six months ended December 31, 2024, from $1.9 million for the six months ended December 31, 2023. The increase was due to increases in both our average balance of Federal Home Loan Bank advances ($43.8 million, or 49.3%) and our average cost of borrowings (22 basis points to 4.51% for the six months ended December 31, 2024, from 4.29% for the six months ended December 31, 2023). As described above, we increased Federal Home Loan Bank borrowings in recent periods primarily to fund loan growth. The increase in the average cost of borrowings was due to increases in market interest rates between the periods.
Net Interest Income. Net interest income was $7.8 million for the six months ended December 31, 2024, compared to $7.3 million for the six months ended December 31, 2023, as our interest income increased faster than our interest expense. Our interest rate spread decreased to 1.44% for the six months ended December 31, 2024 from 1.59% for the six months ended December 31, 2023, while our net interest margin decreased to 1.88% for the six months ended December 31, 2024 from 2.01% for the six months ended December 31, 2023. The interest rate spread and net interest margin were both adversely impacted by the increases in market interest rates during 2024.
Provision for Credit Losses. Based on an analysis of the factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Allowance for Credit Losses,” we recorded a provision for credit losses of $1.4 million for the six months ended December 31, 2024, compared to a provision of $139,000 for the six months ended December 31, 2023. The provision for credit losses on loans was $1.5 million while a benefit of $111,000 was recorded for off balance sheet commitments. The increase in the provision for credit losses on loans for the six months ended December 31, 2024 was primarily due to our charging off approximately 80% of a $1.6 million commercial loan as of September 30, 2024 due to the borrower’s filing for bankruptcy protection and terminating operations of the underlying business. The allowance for credit losses on loans was $3.6 million at December 31, 2024 and $3.1 million at December 31, 2023 and represented 0.50% and 0.47% of total loans at December 31, 2024 and 2023, respectively. The allowance for credit losses for off balance sheet commitments was $1.1 million at December 31, 2024 and $1.2 million at December 31, 2023. The benefit for off balance sheet commitments related to lower balances of loan commitments as they were converted to loans.
Total nonaccrual loans were $1.9 million at December 31, 2024, compared to $1.4 million at December 31, 2023. Total loans past due 30 days or greater were $2.4 million at December 31, 2024 compared to $1.9 million at December 31, 2023. As a percentage of nonperforming loans, the allowance for credit losses on loans was 187.86% at December 31, 2024 compared to 216.55% at December 31, 2023.
Our estimates and assumptions used in the determination of the adequacy of the allowance could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions. Any such increase in future provisions that may be required may adversely impact our financial condition and results of operations.
Other Income. Other income information is as follows.
(Dollars in thousands)
| Six Months Ended December 31, 2024 | 2023 | Change Amount | Percent | |
|---|---|---|---|---|
| Customer service fees | $368 | $341 | $27 | 7.9% |
| Bank owned life insurance | 235 | 132 | 103 | 78.0% |
| Gain on marketable equity securities, net | 223 | 73 | 150 | 205.5% |
| Loss on investment securities | — | (32) | 32 | (100.0)% |
| Gain on sale of fixed assets | — | 314 | (314) | (100.0)% |
| Miscellaneous | 63 | 60 | 3 | 5.0% |
| Total other income | $889 | $888 | $1 | 0.1% |
Gain on sale of fixed assets during the 2023 period was related to the sale of a bank branch. The increase in gain on marketable equity securities, net, was due to favorable market conditions during the 2024 period, while the increase in income on bank owned life insurance was due to the purchase of $4.0 million of additional policies during the 2024 fiscal year.
Operating Expense. Operating expense information is as follows.
(Dollars in thousands)
| Six Months Ended December 31, 2024 | 2023 | Change Amount | Percent | |
|---|---|---|---|---|
| Salaries and employee benefits | $4,436 | $4,567 | $(131) | (2.9)% |
| Occupancy and equipment, net | 790 | 734 | 56 | 7.6% |
| Data processing | 652 | 522 | 130 | 24.9% |
| Deposit insurance | 428 | 191 | 237 | 124.1% |
| Marketing and advertising | 192 | 184 | 8 | 4.3% |
| Other | 1,205 | 1,303 | (98) | (7.5)% |
| Total operating expense | $7,703 | $7,501 | $202 | 2.7% |
The increase in deposit insurance expense was due to an increase in FDIC insurance rates and our higher deposit levels, while the increase in data processing expense was due to our implementing a new program for electronic communications.
Income Taxes. Income taxes decreased by $257,000 to a benefit of $157,000 for the six months ended December 31, 2024, compared to a provision of $100,000 for the six months ended December 31, 2023. The decrease in the income tax provision was due primarily to a net loss for the 2024 period. The effective tax rates were (37.7)% and 17.1% for the six months ended December 31, 2024 and 2023, respectively.
Average Balances and Yields
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances, and the average balance of loans includes non-accrual loans. The yields set forth below
include the effect of deferred fees/costs, discounts, and premiums that are amortized or accreted to interest income. Deferred loan fees for the six months ended December 31, 2024 and 2023 were not material.
(Dollars in thousands)
| Interest-earning assets: | For the Six Months Ended December 31, 2024 Average Outstanding Balance | Interest | Average Yield/Rate (1) | 2023 Average Outstanding Balance | Interest | Average Yield/Rate (1) |
|---|---|---|---|---|---|---|
| Loans | $708,470 | $18,260 | 5.15% | $627,961 | $14,534 | 4.63% |
| Securities available for sale | 31,000 | 588 | 3.79% | 25,795 | 363 | 2.81% |
| Securities held to maturity | 55,108 | 933 | 3.39% | 45,523 | 595 | 2.61% |
| Interest-bearing deposits and other | 35,878 | 956 | 5.33% | 29,357 | 801 | 5.46% |
| Total interest-earning assets | 830,456 | 20,737 | 4.99% | 728,636 | 16,293 | 4.47% |
| Noninterest-earning assets | 28,227 | 24,224 | ||||
| Allowance for credit losses on loans | (3,447) | (4,238) | ||||
| Total assets | $855,236 | $748,622 | ||||
| Interest-bearing liabilities: | ||||||
| NOW and demand deposits | $56,469 | 127 | 0.45% | $73,923 | 288 | 0.78% |
| Savings accounts | 164,589 | 2,041 | 2.48% | 170,183 | 1,919 | 2.26% |
| Money market accounts | 94,165 | 1,641 | 3.49% | 54,786 | 536 | 1.96% |
| Certificates of deposit | 279,453 | 6,142 | 4.40% | 233,956 | 4,308 | 3.68% |
| Total interest-bearing deposits | 594,676 | 9,951 | 3.35% | 532,848 | 7,051 | 2.65% |
| Borrowings | 132,607 | 2,988 | 4.51% | 88,799 | 1,905 | 4.29% |
| Total interest-bearing liabilities | 727,283 | 12,939 | 3.56% | 621,647 | 8,956 | 2.88% |
| Other noninterest-bearing liabilities | 47,741 | 51,107 | ||||
| Total liabilities | 775,024 | 672,754 | ||||
| Surplus | 80,212 | 75,868 | ||||
| Total liabilities and surplus | $855,236 | $748,622 | ||||
| Net interest income | $7,798 | $7,337 | ||||
| Net interest rate spread (2) | 1.43% | 1.59% | ||||
| Net interest-earning assets (3) | $103,173 | $106,989 | ||||
| Net interest margin (4) | 1.88% | 2.01% | ||||
| Average interest-earning assets to interest-bearing liabilities | 114.19% | 117.21% |
(1) Annualized.
(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
(In thousands)
| Interest-earning assets: | Six Months Ended December 31, 2024 vs. 2023 Increase (Decrease) Due to Volume | Rate | Total Increase (Decrease) |
|---|---|---|---|
| Loans | $1,976 | $1,751 | $3,727 |
| Securities available for sale | 82 | 142 | 224 |
| Securities held to maturity | 140 | 198 | 338 |
| Interest-bearing deposits and other | 173 | (18) | 155 |
| Total interest-earning assets | 2,371 | 2,073 | 4,444 |
| Interest-bearing liabilities: | |||
| NOW and demand deposits | (58) | (103) | (161) |
| Savings accounts | (60) | 182 | 122 |
| Money market accounts | 529 | 576 | 1,105 |
| Certificates of deposit | 919 | 915 | 1,834 |
| Borrowings | 940 | 143 | 1,083 |
| Total interest-bearing liabilities | 2,270 | 1,713 | 3,983 |
| Change in net interest income | $101 | $360 | $461 |
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage the impact of changes in market interest rates on net interest income and capital. We have an Asset/Liability Committee that is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of trustees. The Committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
As part of our ongoing asset-liability management, we use the following strategies to manage our interest rate risk:
- emphasizing the marketing of our non-interest-bearing demand, money market, savings and demand accounts;
- investing in short- to medium-term repricing and/or maturing investment securities whenever the market allows;
- maintaining capital levels that exceed those required for well-capitalized status under federal banking regulations;
- maintaining prudent levels of liquidity;
- managing our utilization of wholesale funding with borrowings and brokered deposits; and
- continuing to diversify our loan portfolio by adding more commercial-related loans and consumer loans, which typically have shorter maturities.
We do not engage in hedging activities, such as engaging in futures, options or interest rate swap transactions, nor invest in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by up to 300 basis points, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 2% to 3% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The tables below sets forth, as of December 31, 2024 and June 30, 2024, the calculation of the estimated changes in our net interest income that would result from the designated instantaneous changes in the United States Treasury yield curve.
At December 31, 2024
(Dollars in thousands)
| Change in Interest Rates (Basis Points) (1) | Net Interest Income Year 1 Forecast | Year 1 Change From Level |
|---|---|---|
| +300 | $12,008 | (35.0)% |
| +200 | 14,383 | (22.1)% |
| +100 | 16,666 | (9.7)% |
| Level | 18,464 | — |
| -100 | 19,277 | 4.4% |
| -200 | 19,891 | 7.7% |
| -300 | 20,393 | 10.5% |
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
At June 30, 2024
(Dollars in thousands)
| Change in Interest Rates (Basis Points) (1) | Net Interest Income Year 1 Forecast | Year 1 Change From Level |
|---|---|---|
| +300 | $10,385 | (34.9)% |
| +200 | 12,304 | (22.8)% |
| +100 | 14,189 | (11.0)% |
| Level | 15,940 | — |
| -100 | 16,959 | 6.4% |
| -200 | 17,367 | 8.9% |
| -300 | 17,778 | 11.5% |
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
The tables above indicate that at December 31, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 22.1% decrease in net interest income, and in the event of an instantaneous parallel 200 basis point decrease in interest rates, we would have experienced a 7.7% increase in net interest income and at June 30, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 22.8% decrease in net interest income, and in the event of an instantaneous parallel 200 basis point decrease in interest rates, we would have experienced a 8.9% increase in net interest income.
Economic Value of Equity. We also compute amounts by which the net present value of our assets and liabilities (economic value of equity, or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by up to 300 basis points, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
The tables below sets forth, as of December 31, 2024 and June 30, 2024, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.
At December 31, 2024
(Dollars in thousands)
| Change in Interest Rates (Basis Points)(1) | Estimated EVE (2) | Estimated Increase (Decrease) in EVE Amount | Percent | EVE as a Percentage of Present Value of Assets (3) EVE Ratio (4) | Increase (Decrease) (Percent) |
|---|---|---|---|---|---|
| +300 | $37,537 | $(38,873) | (50.9)% | 4.9% | (46.5)% |
| +200 | 52,727 | (23,683) | (31.0)% | 6.6% | (27.0)% |
| +100 | 65,910 | (10,500) | (13.7)% | 8.1% | (11.4)% |
| — | 76,410 | — | — | 9.1% | — |
| -100 | 85,217 | 8,807 | 11.5% | 9.9% | 8.3% |
| -200 | 84,868 | 8,459 | 11.1% | 9.6% | 5.5% |
| -300 | 85,891 | 9,481 | 12.4% | 9.5% | 4.5% |
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) EVE Ratio represents EVE divided by the present value of assets.
At June 30, 2024
(Dollars in thousands)
| Change in Interest Rates (Basis Points) (1) | Estimated. EVE (2) | Estimated Increase (Decrease) in EVE Amount | Percent | EVE as a Percentage of Present Value of Assets (3) EVE Ratio (4) | Increase (Decrease) (Percent) |
|---|---|---|---|---|---|
| +300 | $30,105 | $(39,142) | (56.5)% | 4.2% | (52.2)% |
| +200 | 46,018 | (23,229) | (33.5)% | 6.1% | (29.4)% |
| +100 | 59,554 | (9,693) | (14.0)% | 7.7% | (11.5)% |
| — | 69,248 | — | — | 8.7% | — |
| -100 | 77,981 | 8,763 | 12.6% | 9.5% | 9.2% |
| -200 | 75,905 | 6,657 | 9.6% | 9.0% | 4.1% |
| -300 | 75,835 | 6,587 | 9.5% | 8.8% | 1.8% |
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) EVE Ratio represents EVE divided by the present value of assets.
The tables above indicate that at December 31, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 31.0% decrease in EVE, and in the event of an instantaneous parallel 200 basis point decrease in interest rates, we would have experienced a 11.1% increase in EVE, and at June 30, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 33.5% decrease in EVE, and in the event of an instantaneous parallel 200 basis point decrease in interest rates, we would have experienced a 9.6% increase in EVE.
At December 31, 2024, all estimated changes described above with respect to net interest income and EVE with respect to potential increases in market interest rates were not in compliance with the current policy limits established by the board of trustees. We have determined that selling assets to comply with our internal policies would result in a significant loss that would deplete capital and, as a result, restrict future growth, while providing limited benefit during a period of declining market interest rates, as has begun in the latter half of 2024.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the changes in net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the tables.
Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
Liquidity and Capital Resources
Liquidity is our ability to meet current and future financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from maturities and calls of securities. We also have the ability to borrow from the Federal Home Loan Bank of Boston. At December 31, 2024, we had $145.5 million outstanding in advances from the Federal Home Loan Bank of Boston. At December 31, 2024, we had the ability to borrow $107.9 million in additional Federal Home Loan Bank of Boston advances. At December 31, 2024, we had a $5.3 million line of credit with the Federal Home Loan Bank of Boston, $4.5 million of which was drawn at December 31, 2024. Additionally, at December 31, 2024, we had a $11.1 million secured line of credit through the Federal Reserve Borrower in Custody program. At that date, there were no amounts outstanding.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending, and investing activities during any given period.
We test the level of our liquidity monthly and quarterly. Our monthly liquidity test is the ratio of basic surplus (deficit) divided by total assets, with basic surplus/deficit consisting of liquid assets (cash and due from banks, federal funds sold, securities available for sale, loans held for sale, total equities and securities maturities and payment) divided by investment commitments (loan commitments, 10% of certificates of deposit maturing within 30 days and 5% of non-maturing deposits). Our key quarterly test is the Primary Liquidity ratio, which we calculate as total liquid assets (cash and due from banks, federal funds sold and all securities that are not pledged to secure borrowing) as a percentage of total assets.
We seek minimum a monthly liquidity ratio of 4% to 6% of assets, and a minimum quarterly Primary Liquidity ratio of 15%. Primary Liquidity measures total liquid assets consisting of, Cash & Due from Banks, Federal Funds Sold and unpledged securities, to total assets. At December 31, 2024 and June 30, 2024, we were in compliance with both of these guidelines.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was ($277,000) and $804,000 for the six months ended December 31, 2024 and 2023, respectively. Net cash used by investing activities, which consists primarily of disbursements for loan originations and the purchase of investment securities, offset by principal collections on loans and proceeds from maturing securities and pay downs on securities, was $44.1 million and $58.7 million for the six months ended December 31, 2024 and 2023, respectively. Net cash provided by financing activities was $41.9 million and $49.9 million for the six months ended December 31, 2024 and 2023, respectively.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments based on our current strategy to increase loans with an increase in core deposits and the continued use of Federal Home Loan Bank of Boston advances, as needed.
At December 31, 2024, Winchester Savings Bank exceeded its applicable regulatory capital requirement, and was considered “well capitalized” under regulatory guidelines.
The net proceeds from the offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net offering proceeds are used for general corporate purposes, including funding loans. Our financial condition and results of operations will be enhanced by the net proceeds from the offering, which will increase our net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds, as well as other factors associated with the offering, our return on equity will be lower immediately following the offering.
Recent Accounting Pronouncements
There are no recent accounting pronouncements issued, but not yet adopted, that are expected to have a significant impact on our financial statements. As an emerging growth company, we have elected to use the extended transition period to delay the adoption of new or re-issued accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Controls and procedures
As filed, 1,088 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by the quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2024-12-31. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Income tax | 3 months2024-10-01 to 2024-12-31 | $41.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months2024-07-01 to 2024-12-31 | −$157.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-10-01 to 2024-12-31 | $373.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months2024-07-01 to 2024-12-31 | −$259.0k | us-gaap:NetIncomeLoss |
| Operating cash flow | 6 months2024-07-01 to 2024-12-31 | −$277.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | At period end2024-12-31 | $41.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | At period end2024-12-31 | $894.1m | us-gaap:Assets |
| Total liabilities | At period end2024-12-31 | $813.8m | us-gaap:Liabilities |
| Shareholders' equity | At period end2024-12-31 | $80.3m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000950170-25-045817. Last ingested by Listed: Oct 24, 2026, 15:06 ET. Listed shows no prices and gives no investment advice.