Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-38955
HarborOne Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts
81-1607465
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
770 Oak Street, Brockton, Massachusetts
02301
(Address of principal executive offices)
(Zip Code)
(508) 895-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Title of each Class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.01 par value
HONE
The NASDAQ Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of July 31, 2024, there were 44,408,490 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.
Index
PAGE
Glossary of Acronyms and Terms
1
PART I.
FINANCIAL INFORMATION
ITEM 1.
Financial Statements
Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023 (unaudited)
2
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)
3
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)
4
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)
5
Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)
7
Notes to Consolidated Financial Statements (unaudited)
Note 1. Summary of Significant Accounting Policies
9
Note 2. Debt Securities
10
Note 3. Loans Held for Sale
13
Note 4. Loans and Allowance for Credit Losses
14
Note 5. Mortgage Loan Servicing
21
Note 6. Goodwill and Other Intangible Assets
Note 7. Deposits
22
Note 8. Borrowings
23
Note 9. Other Commitments and Contingencies
24
Note 10. Derivatives
25
Note 11. Operating Lease ROU Assets and Liabilities
29
Note 12. Minimum Regulatory Capital Requirements
31
Note 13. Comprehensive (Loss) Income
33
Note 14. Fair Value of Assets and Liabilities
34
Note 15. Earnings Per Share
39
Note 16. Revenue Recognition
40
Note 17. Segment Reporting
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
65
ITEM 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
66
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
67
Defaults Upon Senior Securities
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
68
EXHIBIT INDEX
SIGNATURE
69
The following is a list of common acronyms and terms used regularly in our financial reporting:
ACL
Allowance for Credit Losses
ASU
Accounting Standards Update
Bank
HarborOne Bank
BIC
Borrower-in-custody
BOLI
Bank-owned life insurance
BTFP
Bank Term Funding Program
Company
DCF
Discounted cash flow
DIF
Massachusetts Depositors Insurance Fund
EPS
Earnings Per Share
ESOP
Employee Stock Ownership Plan
EVE
Equity at risk
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Federal Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
Federal Reserve
Board of Governors of the Federal Reserve System
FHLB
Federal Home Loan Bank
FRBB
Federal Reserve Bank of Boston
GAAP
Accounting principles generally accepted in the United States of America
HarborOne Mortgage
HarborOne Mortgage, LLC
Management
Company's management
MSRs
Mortgage servicing rights
PPP
Paycheck Protection Program
ROU
Right-of-use
SBA
U.S. Small Business Administration
SEC
U.S. Securities and Exchange Commission
SOFR
Secured Overnight Financing Rate
TDRs
Troubled debt restructurings
Treasury
U.S. Department of the Treasury
Consolidated Balance Sheets (unaudited)
June 30,
December 31,
(in thousands, except share data)
2024
2023
Assets
Cash and due from banks
$
48,097
38,876
Short-term investments
186,965
188,474
Total cash and cash equivalents
235,062
227,350
Securities available for sale, at fair value
269,078
290,151
Securities held to maturity, at amortized cost (fair value of $19,121 at June 30, 2024 and $19,262 at December 31, 2023)
19,725
19,796
Federal Home Loan Bank stock, at cost
25,311
27,098
Asset held for sale
—
348
Loans held for sale, at fair value
41,814
19,686
Loans
4,839,232
4,750,311
Less: Allowance for credit losses on loans
(49,139)
(47,972)
Net loans
4,790,093
4,702,339
Accrued interest receivable
19,276
18,169
Mortgage servicing rights, at fair value
46,209
46,111
Property and equipment, net
47,190
48,749
Retirement plan annuities
15,456
15,170
96,179
94,675
Goodwill
59,042
Intangible assets
1,136
1,515
Other assets
121,464
97,697
Total assets
5,787,035
5,667,896
Liabilities and Stockholders' Equity
Deposits:
Demand deposit accounts
689,800
659,973
NOW accounts
308,016
305,825
Regular savings and club accounts
989,720
1,265,315
Money market deposit accounts
1,100,215
966,201
Term certificate accounts
985,293
863,457
Brokered deposits
385,253
326,638
Total deposits
4,458,297
4,387,409
Borrowings
619,372
568,462
Mortgagors' escrow accounts
9,632
8,872
Accrued interest payable
8,262
5,251
Other liabilities and accrued expenses
114,143
Total liabilities
5,209,706
5,084,137
Commitments and contingencies (Notes 7, 12 and 13)
Common stock, $0.01 par value; 150,000,000 shares authorized; 60,511,658 and 60,255,288 shares issued; 44,459,490 and 45,401,224 shares outstanding at June 30, 2024 and December 31, 2023, respectively
598
Additional paid-in capital
487,980
486,502
Retained earnings
367,584
359,656
Treasury stock, at cost, 16,052,168 and 14,854,064 shares at June 30, 2024 and December 31, 2023, respectively
(205,944)
(193,590)
Accumulated other comprehensive loss
(48,023)
(43,622)
Unearned compensation - ESOP
(24,866)
(25,785)
Total stockholders' equity
577,329
583,759
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.
Consolidated Statements of Income (unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
Interest and dividend income:
Interest and fees on loans
61,512
55,504
121,449
108,275
Interest on loans held for sale
347
326
590
612
Interest on taxable securities
2,121
2,035
4,186
4,114
Other interest and dividend income
3,971
2,935
8,630
3,738
Total interest and dividend income
67,951
60,800
134,855
116,739
Interest expense:
Interest on deposits
27,272
20,062
54,171
35,975
Interest on borrowings
9,329
8,114
18,752
13,219
Interest on subordinated debentures
524
1,047
Total interest expense
36,601
28,700
72,923
50,241
Net interest and dividend income
31,350
32,100
61,932
66,498
Provision for credit losses
615
3,283
447
5,149
Net interest and dividend income, after provision for credit losses
30,735
28,817
61,485
61,349
Noninterest income:
Mortgage banking income:
Gain on sale of mortgage loans
3,143
3,300
5,156
5,524
Changes in mortgage servicing rights fair value
(1,098)
436
(1,044)
(1,256)
Other
2,356
2,312
4,632
4,528
Total mortgage banking income
4,401
6,048
8,744
8,796
Deposit account fees
5,223
5,012
10,206
9,745
Income on retirement plan annuities
141
128
286
247
Gain on sale of asset held for sale
1,809
Loss on sale of securities
(1,041)
Bank-owned life insurance income
758
511
1,504
1,011
Other income
628
963
1,152
1,553
Total noninterest income
11,919
12,662
22,660
21,352
Noninterest expense:
Compensation and benefits
18,976
18,220
36,612
36,019
Occupancy and equipment
4,636
4,633
9,417
9,673
Data processing
2,375
2,403
4,854
4,749
Loan expenses
461
417
832
730
Marketing
1,368
925
2,184
2,106
Deposit expenses
739
1,429
860
Postage and printing
401
425
839
882
Professional fees
1,236
1,114
2,693
2,615
Foreclosed and repossessed assets
(12)
Deposit insurance
993
1,176
2,157
1,686
Other expenses
1,958
2,081
3,872
3,926
Total noninterest expense
33,144
31,725
64,894
63,234
Income before income taxes
9,510
9,754
19,251
19,467
Income tax provision
2,214
2,275
4,655
4,691
Net income
7,296
7,479
14,596
14,776
Earnings per common share:
Basic
0.18
0.17
0.35
0.34
Diluted
0.33
Weighted average shares outstanding:
41,293,787
43,063,507
41,603,104
43,955,411
41,370,289
43,133,455
41,748,663
44,203,893
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
(in thousands)
Other comprehensive income:
Unrealized gain/loss on cashflow hedge:
Unrealized holding gains
268
1,577
986
1,407
Reclassification adjustment for net gains included in net income
(1,264)
(1,134)
(2,499)
(2,152)
Net change in unrealized (losses) gains on derivatives in cashflow hedging instruments
(996)
443
(1,513)
(745)
Related tax effect
285
(124)
433
210
Net-of-tax amount
(711)
319
(1,080)
(535)
Unrealized gain/loss on securities available for sale:
Unrealized holding gains (losses)
650
(5,366)
(4,290)
1,723
Reclassification adjustment for realized losses
1,041
Net unrealized gains (losses)
1,691
(3,249)
(378)
1,205
(30)
(358)
1,313
(4,161)
(3,279)
1,365
Postretirement benefit:
Adjustment of accumulated obligation for postretirement benefits
Reclassification adjustment for gains recognized in net periodic benefit cost
(22)
(39)
(42)
Net gains
(21)
(38)
Total other comprehensive income (loss)
581
(3,880)
(4,401)
792
Comprehensive income
7,877
3,599
10,195
15,568
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
Accumulated
Common Stock
Additional
Unearned
Total
Outstanding
Paid-in
Retained
Stock,
Comprehensive
Compensation
Stockholders'
Shares
Amount
Capital
Earnings
at Cost
Income (Loss)
- ESOP
Equity
Balance at March 31, 2023
47,063,087
597
483,831
360,454
(175,514)
(42,410)
(27,164)
599,794
Comprehensive income (loss)
Dividends declared of $0.075 per share
(3,224)
ESOP shares committed to be released (57,681 shares)
91
460
551
Restricted stock awards forfeited, net of awards
(15,127)
Share-based compensation expense
622
Treasury stock purchased
(472,482)
(5,810)
Balance at June 30, 2023
46,575,478
484,544
364,709
(181,324)
(46,290)
(26,704)
595,532
Balance at March 31, 2024
45,055,006
487,277
363,591
(199,853)
(48,604)
(25,326)
577,683
Dividends declared of $0.08 per share
(3,303)
132
592
Restricted stock awards forfeited
(563)
571
(594,953)
(6,091)
Balance at June 30, 2024
44,459,490
Balance at December 31, 2022
48,961,452
596
483,031
356,438
(148,384)
(47,082)
(27,623)
616,976
Cumulative effect of change in accounting principle - ASC 326
Dividends declared of $0.15 per share
(6,505)
ESOP shares committed to be released (115,362 shares)
403
919
1,322
Restricted stock awards granted, net of forfeitures
141,932
Performance stock units vested
1,110
1,111
Stock options exercised
(2,527,906)
(32,940)
Balance at December 31, 2023
45,401,224
Dividends declared of $0.16 per share
(6,668)
294
1,213
192,510
63,860
1,184
(1,198,104)
(12,354)
6
Consolidated Statements of Cash Flows (unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Net amortization of securities premiums/discounts
191
223
Proceeds from sale of loans
204,970
198,615
Loans originated for sale
(221,768)
(195,460)
Accretion of net deferred loan costs/fees and premiums
(63)
(130)
Depreciation and amortization of premises and equipment
1,888
1,925
Change in mortgage servicing rights fair value
543
1,256
Mortgage servicing rights capitalized
(641)
(1,294)
Accretion of fair value adjustment on loans and deposits, net
(276)
(106)
Amortization of other intangible assets
379
Amortization of subordinated debt issuance costs
63
Net gains on mortgage loan sales, including fair value adjustments
(5,329)
(5,560)
(1,504)
(1,011)
(286)
(247)
(1,809)
Net gain on sale and write-down of other real estate owned and repossessed assets
(5)
(13)
Bargain purchase contribution
675
ESOP expense
Decrease in operating lease ROU assets
1,131
840
Decrease in operating lease liabilities
(1,020)
(833)
Change in other assets
(25,557)
Change in other liabilities
5,431
20,941
Net cash provided (used) by operating activities
(24,569)
41,568
Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls
10,693
10,634
Purchases
(10,689)
Sales
16,584
Activity in securities held to maturity:
Maturities, prepayment and calls
74
113
Net redemption (purchase) of FHLB stock
1,787
(7,052)
Proceeds on asset held for sale
1,482
Participation-in loan purchases
(16,276)
Net loan originations
(90,569)
(135,216)
Proceeds from sale of other real estate owned and repossessed assets
115
215
Additions to property and equipment
(330)
(2,619)
Net cash used by investing activities
(70,853)
(150,201)
(continued)
Cash flows from financing activities:
Net increase in deposits
70,888
97,906
Net change in short-term borrowed funds
(173,000)
29,000
Proceeds from borrowings
427,326
175,000
Repayment of borrowings
(203,416)
(107)
Net change in mortgagors' escrow accounts
760
1,536
Dividends paid
(7,070)
(6,928)
Net cash provided by financing activities
103,134
263,467
Net change in cash and cash equivalents
7,712
154,834
Cash and cash equivalents at beginning of period
98,017
Cash and cash equivalents at end of period
252,851
Supplemental cash flow information:
Interest paid on deposits
54,602
35,142
Interest paid on borrowed funds
15,292
13,438
Income taxes paid, net
4,375
5,005
Transfer of loans to other real estate owned and repossessed assets
41
173
Dividends declared
6,668
6,505
8
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The unaudited interim Consolidated Financial Statements of HarborOne Bancorp, Inc. presented herein have been prepared pursuant to the rules of the SEC for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of Management, all adjustments and disclosures considered necessary for the fair presentation of the accompanying unaudited interim Consolidated Financial Statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements for the years ended December 31, 2023 and 2022 and notes thereto included in the Company’s Annual Report on Form 10-K.
The unaudited interim Consolidated Financial Statements include the accounts of the Company; the Company’s subsidiaries, Legion Parkway Company LLC (a security corporation) and HarborOne Bank; and the Bank’s wholly owned subsidiaries, which consist of HarborOne Mortgage, LLC, HarborOne Security Company, Inc. and a passive investment corporation. The passive investment corporation maintains and manages certain assets of the Bank. The security company was established for the purpose of buying, holding and selling securities on its own behalf. All significant intercompany balances and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. These changes and reclassifications did not impact previously reported net income or comprehensive income.
Nature of Operations
The Company provides a variety of financial services to individuals and businesses through its 30 full-service branches in Massachusetts and Rhode Island, and a commercial lending office in each of Boston, Massachusetts and Providence, Rhode Island. HarborOne Mortgage maintains offices in Florida, Maine, Massachusetts, New Hampshire, New Jersey and Rhode Island and originates loans in five additional states.
The Company’s primary deposit products are checking, money market, savings, and term certificate of deposit accounts, while its primary lending products are commercial real estate, commercial, residential mortgages, home equity, and consumer loans. The Company also originates, sells and services residential mortgage loans through HarborOne Mortgage.
Risks and Uncertainties
Macroeconomic trends are mixed as uncertainty remains about the economy and banking industry. Market conditions and external factors may unpredictably impact the competitive landscape for deposits in the banking industry. Additionally, the interest rate environment has increased competition for liquidity and the premium at which liquidity is available to meet funding needs. An unexpected increase of withdrawals of deposits could adversely impact the Company’s ability to fund its operations, potentially requiring greater reliance on secondary sources of liquidity to meet withdrawal demands or to fund continuing operations. These sources may include proceeds from FRBB and FHLB advances, sales of investment securities and loans, federal funds lines of credit from correspondent banks, and brokered deposits.
Reliance on secondary funding sources could increase the Company’s overall cost of funds and thereby reduce net income. While the Company believes its current sources of liquidity are adequate to fund operations, there is no guarantee they will suffice to meet future liquidity demands. This may necessitate slowing or discontinuing loan growth, capital expenditures, or other investments, or liquidating assets.
Additionally, the Company could experience adverse effects on its business, financial condition, results of operations and cash flows if there is severe or prolonged inflation or a recession. While asset quality continues to point to economic recovery, the Company’s customers could experience similar adverse effects from these uncertainties that would impair their ability to fulfill their financial obligations to the Company resulting in deteriorating credit quality and loan charge-offs.
Summary of Significant Accounting Policies and Recently Adopted Accounting Standards Updates
Significant accounting policies in effect and disclosed within the Company’s most recent audited Consolidated Financial Statements as of December 31, 2023 remain substantially unchanged.
In accordance with the Bank’s policies, Management annually assesses model inputs and assumptions for the ACL on loans and made changes to certain assumptions. Key model assumptions include loan segmentation, prepayment rates, the funding rates for unfunded commitments, and macro-economic drivers. Management selected multiple economic forecasts including the civilian unemployment rate, residential property price indices, commercial price indices, and real disposable income, generally applying two forecasts to each loan segment. The forecasts assume that economic variables revert to long-term average. Reversion periods generally begin eight quarters after the forecast start date and generally concludes within sixteen quarters of the forecast start date.
2.DEBT SECURITIES
The following is a summary of securities available for sale and held to maturity:
Gross
Allowance
Amortized
Unrealized
for Credit
Fair
Cost
Gains
Losses
Value
June 30, 2024:
Securities available for sale
U.S. government and government-sponsored enterprise obligations
42,143
6,850
35,293
U.S. government agency and government-sponsored residential mortgage-backed securities
288,584
58,137
230,456
SBA asset-backed securities
1,606
98
1,508
Corporate bonds
2,000
182
1,821
Total securities available for sale
334,333
12
65,267
Securities held to maturity
15,000
458
14,542
4,725
146
4,579
Total securities held to maturity
604
19,121
December 31, 2023:
47,143
6,961
40,182
300,277
54,683
245,597
U.S. government-sponsored collateralized mortgage obligations
1,852
70
1,782
1,885
107
1,778
1,000
188
812
352,157
62,009
438
14,562
4,796
96
4,700
534
19,262
Accrued interest receivable is excluded from the amortized cost basis of debt securities. Accrued interest receivable totaled $1.02 million and $940,000 as of June 30, 2024 and December 31, 2023, respectively. At June 30, 2024, available-for-sale debt securities with a fair value of $144.2 million were pledged for the BTFP borrowing, and available-for-sale debt securities with a fair value of $120.1 million and held-to-maturity securities with a fair value of $14.6 million were pledged as collateral to provide borrowing capacity through the FRBB’s BIC line.
The amortized cost and fair value of debt securities by contractual maturity at June 30, 2024 is as follows:
Available for Sale
Held to Maturity
After 1 year through 5 years
17,643
15,472
After 5 years through 10 years
26,500
21,642
Over 10 years
44,143
37,114
U.S. government-sponsored residential mortgage-backed securities and securities whose underlying assets are loans from the SBA have stated maturities of three to 29 years; however, it is expected that such securities will have shorter actual lives due to prepayments. U.S. government and government-sponsored enterprise obligations and corporate bonds are callable at the discretion of the issuer. U.S. government and government-sponsored enterprise obligations and corporate bonds with a total fair value of $51.7 million have a final maturity of three to eight years and a call feature of one month to three years. At June 30, 2024, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholder equity.
The following table shows proceeds and gross realized gains and losses related to the sales of securities for the periods indicated:
Proceeds
Gross gains
Gross losses
Information pertaining to securities with gross unrealized losses at June 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:
11
Less Than Twelve Months
Twelve Months and Over
8,961
58,072
216,643
818
65,202
254,262
240,955
285,509
Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists.
As of June 30, 2024, the Company’s security portfolio consisted of 111 debt securities, 108 of which were in an unrealized loss position. The unrealized losses are primarily related to the Company’s debt securities that were issued by U.S. government-sponsored enterprises and agencies. The Company does not believe that the debt securities that were in an unrealized loss position as of June 30, 2024 represent a credit loss impairment. As of June 30, 2024, and December 31, 2023, the gross unrealized loss positions were primarily related to mortgage-backed securities and other obligations issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Total gross unrealized losses were primarily attributable to changes in interest rates relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.
Management reviewed the collectability of the corporate bonds taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. Management believes the unrealized losses on the corporate bonds are primarily attributable to changes in the investment spreads and interest rates, and not changes in the credit quality of the issuers of the corporate bonds.
Management expects to recover the entire amortized cost basis of the available-for-sale debt securities with an unrealized loss. Furthermore, the Company does not intend to sell these securities, and it is unlikely that the Company will be required to sell these securities, before recovery of their cost basis, which may be at maturity. Therefore, no ACL was recorded at June 30, 2024.
As of June 30, 2024, the held-to-maturity securities were U.S. government-sponsored enterprise obligations. These securities are guaranteed by the government-sponsored enterprise with a long history of no credit losses, and Management has determined these securities to have a zero loss expectation and therefore does not estimate an ACL on these securities.
3.LOANS HELD FOR SALE
The following table provides the fair value and contractual principal balance outstanding of loans held for sale accounted for under the fair value option:
Loans held for sale, fair value
Loans held for sale, contractual principal outstanding
41,110
19,155
Fair value less unpaid principal balance
704
531
The Company has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them. Changes in fair value of mortgage loans held for sale accounted for under the fair value option election amounted to an increase of $395,000 and $173,000 in the three and six months ended June 30, 2024, respectively, to $704,000, compared to an increase of $28,000 and $35,000 in the three and six months ended June 30, 2023, respectively. These amounts are offset in earnings by the changes in fair value of forward sale commitments. The changes in fair value are reported as a component of gain on sale of mortgage loans in the unaudited Consolidated Statements of Income.
At June 30, 2024 and December 31, 2023, there were no loans held for sale that were greater than 90 days past due.
4.LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of the balances of loans follows:
Commercial:
Commercial real estate
2,380,881
2,343,675
Commercial construction
233,926
208,443
Commercial and industrial
499,043
466,443
Total commercial loans
3,113,850
3,018,561
Residential real estate:
One- to four-family
1,519,123
1,513,554
Second mortgages and equity lines of credit
175,457
177,135
Residential real estate construction
12,831
18,132
Total residential real estate loans
1,707,411
1,708,821
Consumer loans:
Auto
10,624
13,603
Personal
8,080
8,433
Total consumer loans
18,704
22,036
Total loans before basis adjustment
4,839,965
4,749,418
Basis adjustment associated with fair value hedge (1)
(733)
893
Total loans
Allowance for credit losses on loans
Loans, net
(1) Represents the basis adjustment associated with the application of hedge accounting on certain loans. Refer to Note 10 - Derivatives.
The net unamortized deferred loan origination costs included in total loans and leases were $9.0 million and $8.5 million as of June 30, 2024 and December 31, 2023, respectively.
As of June 30, 2024 and December 31, 2023, the commercial and industrial loans includes $242,000 and $321,000, respectively, of SBA PPP loans and $9,000 and $36,000, respectively, of deferred fees on the PPP loans. PPP loans are fully guaranteed by the U.S. government.
The Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying unaudited interim Consolidated Balance Sheets. The Company and participating lenders share ratably in cash flows and any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders, and disburses required escrow funds to relevant parties. At June 30, 2024 and December 31, 2023, the Company was servicing commercial loans for participants in the aggregate amounts of $424.0 million and $413.0 million, respectively.
The following table presents the activity in the ACL on loans for the three and six months ended June 30, 2024 and 2023:
Second Mortgages
Residential
Commercial
One- to Four-
and Equity
Real Estate
Construction
and Industrial
Family
Lines of Credit
Consumer
21,263
5,322
8,063
12,035
942
331
229
48,185
Charge-offs
(184)
(17)
(201)
Recoveries
Provision
3,101
(1,589)
644
(1,334)
529
(127)
(75)
1,149
24,364
3,733
8,523
10,703
1,474
204
138
49,139
21,288
4,824
8,107
12,101
964
418
270
47,972
(412)
(66)
(478)
100
46
158
2,976
(1,091)
782
(1,400)
504
(214)
(70)
1,487
20,942
5,057
7,484
11,508
967
755
281
46,994
(2,918)
(28)
(2,988)
275
36
317
2,574
316
19
676
(125)
3,498
20,599
5,373
7,750
12,185
1,012
630
272
47,821
20,357
4,645
7,236
11,532
924
280
262
45,236
(35)
(49)
(3,002)
20
342
3,158
728
274
651
45
350
5,245
As of June 30, 2024, the carrying value of individually analyzed loans amounted to $9.7 million, with a related allowance of $121,000, and $9.7 million of individually analyzed loans were considered collateral-dependent. As of December 31, 2023, the carrying value of individually analyzed loans amounted to $17.5 million, with a related allowance of $108,000, and $17.3 million were considered collateral-dependent.
15
For collateral-dependent loans where Management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.
The following table presents the carrying value of collateral-dependent individually analyzed loans as of June 30, 2024 and December 31, 2023:
June 30, 2024
December 31, 2023
Related
Carrying Value
7,416
1,773
121
1,793
101
Total Commercial
9,209
106
Residential real estate
7,949
8,054
9,722
17,263
The following is a summary of past due and non-accrual loans at June 30, 2024 and December 31, 2023:
90 Days
30-59 Days
60-89 Days
or More
Loans on
Past Due
Non-accrual
60
139
1,333
1,501
5,442
2,067
3,018
10,527
7,087
437
99
164
700
862
Consumer:
58
104
27
30
44
6,053
2,381
4,556
12,990
9,766
5,751
166
1,332
1,745
1,791
4,704
2,413
4,418
11,535
7,785
130
57
351
473
169
16
52
5,227
2,783
11,593
19,603
17,513
At June 30, 2024 and December 31, 2023, there were no loans past due 90 days or more and still accruing.
Loan Modifications to Borrowers Experiencing Financial Difficulty
The Bank will modify the contractual terms of loans to a borrower experiencing financial difficulties as a way to mitigate loss and comply with regulations regarding bankruptcy and discharge situations. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.
The following table presents the amortized cost basis of loans at June 30, 2024 that were both experiencing financial difficulty and modified during the three and six months ended June 30, 2024, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below:
Three Months Ended June 30, 2024
Six Months Ended June 30, 2024
Total Class
Term
Interest Rate
of Financing
Extension
Reduction
Receivable
15,275
0.64
%
54
0.01
The financial effect of the modifications to loans in the commercial real estate category was a reduced weighted-average contractual rate from 5.6% to 4% and the financial effect of the modification to the loan in the commercial and industrial category was an additional 7.7 years to the life of the loan. There were no material loan modifications based on borrower financial difficulty during the three and six months ended June 30, 2023.
The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. As of June 30, 2024, modified loans to borrowers experiencing financial difficulty had a current payment status. During the three and six months ended June 30, 2024 and 2023, there were no loans to borrowers experiencing financial difficulty that had a payment default and were modified in the twelve months prior to that default. Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure. Modified loans in default are individually evaluated for the allowance for credit losses or if the modified loan is deemed uncollectible, the loan, or a portion of the loan, is written off, and the allowance for credit losses is adjusted accordingly.
Credit Quality Indicators
The Company uses a ten-grade internal loan rating system for commercial real estate, commercial construction and commercial loans, as follows:
Loans rated 1 – 6 are considered “pass”-rated loans with low to average risk.
Loans rated 7 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by Management.
Loans rated 8 are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
17
Loans rated 9 are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 10 are considered “uncollectible” (loss), and of such little value that their continuance as loans is not warranted.
Loans not rated consist primarily of certain smaller balance commercial real estate and commercial loans that are managed by exception.
On an annual basis, or more often if needed, the Company formally reviews on a risk-adjusted basis, the ratings on substantially all commercial real estate, construction and commercial loans. Semi-annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.
Residential and Consumer
On a monthly basis, the Company reviews the residential construction, residential real estate, and consumer installment portfolios for credit quality primarily through the use of delinquency reports.
18
The following table summarizes the Company’s loan portfolio by credit quality indicator and loan portfolio segment as of June 30, 2024:
Revolving
Converted
Term Loans at Amortized Cost by Origination Year
to Term
2022
2021
2020
Prior
As of June 30, 2024
Pass
29,650
146,426
839,118
453,903
231,444
609,795
2,310,336
Special mention
1,601
42,119
4,287
22,538
70,545
Substandard
Doubtful
Total commercial real estate
148,027
881,237
235,731
632,333
YTD gross charge-offs
36,438
71,938
54,003
89,518
67,315
90,537
86,090
495,839
92
298
160
914
1,485
341
421
1,249
49
1,298
Total commercial and industrial
72,054
54,303
89,678
67,336
93,041
86,193
252
78
53
412
643
56,527
91,176
68,810
1,054
218,210
5,975
9,741
15,716
Total commercial construction
62,502
100,917
Accrual
49,341
132,666
426,068
464,100
196,785
263,245
165,811
1,446
1,699,462
490
127
6,585
625
Total residential real estate
49,456
464,590
196,912
269,830
166,436
1,453
4,237
5,026
4,317
1,663
605
1,833
979
18,660
26
Total Consumer
5,052
4,329
609
1,834
980
120,424
420,301
1,466,854
1,078,644
500,588
997,038
254,663
Total YTD gross charge-offs
47
257
97
478
The following table summarizes the Company’s loan portfolio by credit quality indicator and loan portfolio segment as of December 31, 2023:
2019
As of December 31, 2023
152,047
828,335
455,996
234,585
233,713
405,103
2,309,779
10,971
4,300
8,977
2,232
26,480
1,670
5,746
839,306
238,885
242,690
414,751
4,171
73,240
52,190
94,570
70,565
22,988
75,493
74,125
463,171
454
948
50
1,481
367
445
1,297
1,346
52,696
94,582
70,588
22,990
78,105
74,242
35,181
109,291
60,113
843
205,853
2,590
111,881
138,541
434,421
480,010
202,118
38,675
239,185
166,144
1,469
1,700,563
956
6,959
216
8,258
202,245
39,631
246,144
166,360
8,218
5,366
2,254
1,021
3,135
1,031
21,988
48
8,232
5,384
2,259
3,137
1,036
89
407,241
1,443,688
1,092,960
513,582
308,448
739,967
242,063
129
4,202
4,426
5.MORTGAGE LOAN SERVICING
The Company sells residential mortgages to government-sponsored enterprises and other parties. The Company retains no beneficial interests in these loans, but it may retain the servicing rights of the loans sold. Mortgage loans serviced for others are not included in the accompanying unaudited interim Consolidated Balance Sheets. The risks inherent in MSRs relate primarily to changes in prepayments that generally result from shifts in mortgage interest rates. The unpaid principal balance of mortgage loans serviced for others was $3.48 billion and $3.56 billion as of June 30, 2024 and December 31, 2023, respectively.
The Company accounts for MSRs at fair value. The Company obtains and reviews valuations from an independent third party to determine the fair value of MSRs. Key assumptions used in the estimation of fair value include prepayment speeds, discount rates, and default rates. At June 30, 2024 and December 31, 2023, the following weighted average assumptions were used in the calculation of fair value of MSRs:
Prepayment speed
7.60
Discount rate
9.98
9.81
Default rate
1.48
2.27
The following summarizes changes to MSRs for the three and six months ended June 30, 2024 and 2023:
Balance, beginning of period
46,597
47,080
48,138
Additions
430
660
641
1,294
Changes in fair value due to:
Reductions from loans paid off during the period
(545)
(479)
(898)
(850)
Changes in valuation inputs or assumptions
(273)
915
355
(406)
Balance, end of period
48,176
Contractually specified servicing fees, net of subservicing expense, included in other mortgage banking income amounted to $1.9 million and $ 3.9 million for both the three and six months ended June 30, 2024 and 2023.
6.GOODWILL AND OTHER INTANGIBLE ASSETS
At June 30, 2024 and December 31, 2023, the carrying value of the Bank’s goodwill was $59.0 million as of both dates. In connection with the annual goodwill impairment test as of October 31, 2023, it was determined that HarborOne Mortgage’s goodwill was 100% impaired, and a $10.8 million goodwill impairment charge was recorded for the period ended December 31, 2023.
Goodwill is tested for impairment annually on October 31 or on an interim basis if an event triggering impairment may have occurred. As of June 30, 2024, the Company assessed whether there were additional events or changes in circumstances since its annual goodwill impairment test that would indicate that it was more likely than not that the fair value of the reporting unit was less than the reporting unit’s carrying amounts that would require an interim impairment assessment after October 31, 2023. The Company determined there had been no such indicators, therefore, no interim goodwill impairment assessment as of June 30, 2024 was performed.
The process of evaluating fair value is highly subjective and requires significant judgment and estimates. The goodwill at the Bank is at risk of future impairment in the event of a sustained decline in the value of its stock as well as
values of other financial institutions, declines in revenue for the Company beyond current forecasts, or significant adverse changes in the operating environment for the financial industry.
Other intangible assets were $1.1 million and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company determined that there was no triggering event that warranted an interim impairment test at June 30, 2024.
7.DEPOSITS
A summary of deposit balances, by type, is as follows:
NOW and demand deposit accounts
997,816
965,798
Total non-certificate accounts
3,087,751
3,197,314
Term certificate accounts greater than $250,000
271,544
240,702
Term certificate accounts less than or equal to $250,000
713,749
622,755
Total certificate accounts
1,370,546
1,190,095
Total municipal deposits included in the table amounted to $492.1 million at June 30, 2024 and $471.8 million at December 31, 2023. Municipal deposits are generally required to be fully insured. The Company provides supplemental insurance for municipal deposits through a reciprocal deposit program and letters of credit offered by the FHLB. The Company participates in a reciprocal deposit program with other financial institutions that provides access to FDIC-insured deposit products in aggregate amounts exceeding the current limits for depositors. At June 30, 2024 and December 31, 2023, total reciprocal deposits were $369.9 million and $209.4 million, respectively.
A summary of certificate accounts by maturity at June 30, 2024 is as follows:
Weighted
Average
Rate
(dollars in thousands)
Within 1 year
1,211,746
4.77
Over 1 year to 2 years
121,092
4.34
Over 2 years to 3 years
35,664
4.07
Over 3 years to 4 years
1,502
3.38
Over 4 years to 5 years
542
2.74
Total certificate deposits
4.71
8.BORROWINGS
Borrowed funds at June 30, 2024 consisted of FHLB advances and a BTFP advance, while at December 31, 2023 borrowed funds consisted only of FHLB advances. Short-term advances were $130.0 million and $303.0 million with a weighted average rate of 5.53%, at both June 30, 2024 and December 31, 2023. Long-term borrowings are summarized by maturity date below.
Amount by
Scheduled
Maturity*
Call Date (1)
Rate (2)
Year ending December 31:
10,000
160,000
1.68
13,400
1.39
2025
235,987
255,987
4.70
90,987
4.31
2026
75,000
40,000
4.39
110,000
4.20
2027
85,000
4.17
3.72
2028
59,198
19,198
4.04
3.86
2029
23,128
13,128
4.06
2030 and thereafter
1,059
2.00
1,075
489,372
4.37
265,462
4.02
* Includes an amortizing advance requiring monthly principal and interest payments.
(1) Callable FHLB advances are shown in the respective periods assuming that the callable debt is redeemed at the call date, while all other advances are shown in the periods corresponding to their scheduled maturity date. There were 9 callable advances at June 30, 2024.
(2) Weighted average rates are based on scheduled maturity dates.
The FHLB advances are secured by a blanket security agreement which requires the Bank to maintain certain qualifying assets as collateral, principally residential mortgage loans and commercial real estate loans held in the Bank’s portfolio. The carrying value of the loans pledged as collateral for these borrowings totaled $2.16 billion at June 30, 2024 and $2.02 billion at December 31, 2023. As of June 30, 2024, the Company had $733.9 million of available borrowing capacity with the FHLB.
The Bank maintains a BIC line at the FRBB, with total credit based on eligible collateral. At June 30, 2024, the Bank had $404.9 million of borrowing capacity secured by 73% of the carrying value of commercial loans with principal balances amounting to $374.5 million and securities with a collateral value in the amount of $131.0 million at June 30, 2024, with no balance outstanding. At June 30, 2024, the Bank also had a $175.0 million borrowing under the BTFP secured by available-for-sale securities with a par value of $184.3 million. The BTFP ceased making new loans on March 11, 2024. The Company also has additional borrowing capacity under a $25.0 million unsecured federal funds line with a correspondent bank.
On December 1, 2023, the Company fully redeemed its 5.625% Fixed-to-Floating Rate Subordinated Notes due September 1, 2028 and expensed the remaining unamortized issuance costs. Amortization of issuance costs was $32,000 and $63,000 for the three and six months ended June 30, 2023, respectively.
9.OTHER COMMITMENTS AND CONTINGENCIES
ACL on Unfunded Commitments
The ACL on unfunded commitments amounted to $2.8 million and $4.8 million at June 30, 2024 and 2023, respectively. The activity in the ACL on unfunded commitments for the three and six months ended June 30, 2024 and 2023 is presented below:
360
1,930
845
258
3,412
(1)
(663)
(43)
(9)
(534)
359
1,267
802
440
2,878
548
3,277
940
5,046
(58)
(97)
(215)
3,180
870
4,831
411
2,351
254
3,918
(52)
(1,084)
(80)
186
(10)
(1,040)
3,079
336
4,927
(138)
(64)
(96)
Loan Commitments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and advance funds on various lines of credit. Those commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying unaudited interim Consolidated Financial Statements.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.
The following off-balance sheet financial instruments were outstanding at June 30, 2024 and December 31, 2023. The contract amounts represent credit risk.
Commitments to grant residential real estate loans-HarborOne Mortgage
78,332
35,029
Commitments to grant other loans
126,696
48,547
Unadvanced funds on home equity lines of credit
269,935
260,376
Unadvanced funds on revolving lines of credit
279,006
306,943
Unadvanced funds on construction loans
147,538
210,829
Commitments to extend credit and unadvanced portions of construction loans are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments to grant loans generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for unadvanced funds on construction loans and home equity and revolving lines of credit may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. Commitments to grant loans, and unadvanced construction loans and home equity lines of credit are collateralized by real estate, while revolving lines of credit are unsecured.
10.DERIVATIVES
The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally to manage the Company’s interest-rate risk. Additionally, the Company enters into interest rate derivatives to accommodate the business requirements of its customers. All derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of a derivative instrument depends upon whether it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.
Derivatives Designated as Hedging Instruments
Fair Value Hedge - The Company is exposed to changes in the fair value of fixed-rate assets due to changes in benchmark interest rates. In June 2023, to manage its exposure to changes in the fair value of a closed asset pool of fixed-rate residential mortgages, the Company entered into interest rate swaps with a total notional amount of $100.0 million, designated as fair value portfolio layer hedges. The Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts. The gain or loss on these derivatives, as well as the offsetting loss or gain on the hedged items attributable to the hedged risk, are recognized in interest income in the Company’s Consolidated Statements of Income.
As of June 30, 2024, the Company had two interest rate swap agreements with a notional amount of $100.0 million that were designated as a fair value hedge of fixed-rate residential mortgages. The hedges were determined to be effective during the three months ended June 30, 2024, and the Company expects the hedges to remain effective during the remaining terms of the swaps.
The following amounts were recorded on the Consolidated Balance Sheets related to cumulative basis adjustment for fair value hedges as of the dates indicated:
Cumulative Amount of Fair Value
Hedging Adjustment Included in the
Line Item in the Consolidated Balance Sheets
Carrying Amount of the Hedged
in Which the Hedged Item is Included
Loans held for investment (1)
99,267
99,556
(444)
(1) These amounts were included in the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At June 30, 2024, the amortized cost basis of the closed portfolios used in these hedging relationships was $1.17 billion; the cumulative basis adjustments associated with these hedging relationships was $(733,000) and the amount of the designated hedged items were $100.0 million.
Cashflow Hedge - As part of its interest-rate risk-management strategy, the Company utilizes interest rate swap agreements to help manage its interest-rate risk positions. The notional amount of the interest rate swaps does not represent the amount exchanged by the parties. The exchange of cash flows is determined by reference to the notional amounts and the other terms of the interest rate swap agreements. The changes in fair value of derivatives designated as cashflow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized.
As of June 30, 2024, the Company had one interest rate swap agreement with a notional amount of $100.0 million that was designated as a cashflow hedge of brokered deposits. The interest rate swap agreement has an average maturity of 0.77 year, the current weighted average fixed rate paid is 0.67%, the weighted average 3-month SOFR swap receive rate is 5.62%, and the fair value is $3.6 million. The Company expects approximately $3.4 million related to the cashflow hedge to be reclassified to interest expense, from other comprehensive income, in the next twelve months.
Derivatives Not Designated as Hedging Instruments
Derivative Loan Commitments - Mortgage loan commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock.
Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of a rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.
Forward Loan Sale Commitments -The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.
With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the number of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.
With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower).
The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.
Interest Rate Swaps -The Company enters into interest rate swap agreements that are transacted to meet the financing needs of its commercial customers. Offsetting interest rate swap agreements are simultaneously transacted with a third-party financial institution to effectively eliminate the Company’s interest-rate risk associated with the customer swaps. The primary risks associated with these transactions arise from exposure to the ability of the counterparties to meet the terms of the contract. The interest rate swap notional amount is the aggregate notional amount of the customer swap and the offsetting third-party swap. The Company also assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determines whether the credit valuation adjustments are significant to the overall valuation of its derivatives.
Interest Rate Futures -The Company uses interest rate futures to mitigate the impact of fluctuations in interest rates and interest rate volatility on the fair value of the MSRs. Changes in their fair value are reflected in current period earnings in mortgage banking income.
Risk Participation Agreements -The Company has entered into risk participation agreements with correspondent institutions and shares in any interest rate swap losses incurred as a result of the commercial loan customers’ termination of a loan-level interest rate swap agreement prior to maturity. The Company records these risk participation agreements at fair value. The Company’s maximum credit exposure is based on its proportionate share of the settlement amount of the referenced interest rate swap. Settlement amounts are generally calculated based on the fair value of the swap plus outstanding accrued interest receivables from the customer.
The following table presents the outstanding notional balances and fair values of outstanding derivative instruments:
Liabilities
Notional
Derivatives designated as hedging instruments
Fair value hedge - interest rate swaps
100,000
783
Cashflow hedge - interest rate swaps
3,583
Total derivatives designated as hedging instruments
4,366
Derivatives not designated as hedging instruments
Derivative loan commitments
64,477
482
167
Forward loan sale commitments
67,500
156
83
Interest rate swaps
908,019
25,128
Risk participation agreements
205,980
Interest Rate Futures
30,500
207
Total derivatives not designated as hedging instruments
25,973
25,378
Total derivatives
30,339
855
5,095
30,165
480
30,000
293
863,348
23,245
189,275
23,729
23,696
28,824
24,551
The following table presents the recorded net gains and losses pertaining to the Company’s derivative instruments:
Location of gain (loss)
recognized in
Income
Derivatives designated as fair value hedge
Hedged items - loans
Interest income
(197)
(1,626)
Interest rate swap contracts
217
1,637
(7)
Mortgage banking income
(293)
266
527
363
Interest rate futures
(280)
(501)
(291)
234
(145)
315
28
The effect of cashflow hedge accounting on accumulated other comprehensive income is as follows:
(Loss) gain in OCI on derivatives (effective portion), net of tax
Gain (loss) reclassified from OCI into interest income or interest expense (effective portion)
1,264
1,134
2,499
2,152
Master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds.
The following table presents the offsetting of derivatives and amounts subject to an enforceable master netting arrangement, not offset in the Consolidated Balance Sheets at June 30, 2024:
Gross Amounts Not Offset in the Consolidated Balance Sheets
Net Amounts
Gross Amounts
Assets (Liabilities)
Cash
of Recognized
Offset in the
presented in the
Collateral
Consolidated
Financial
(Received)
Net
(Liabilities)
Balance Sheets
Instruments
Posted
Interest rate swap on deposits
(3,583)
Interest rate swap on residential real estate loans
(860)
(77)
Customer interest rate swaps
24,197
(23,217)
11.OPERATING LEASE ROU ASSETS AND LIABILITIES
Operating lease ROU assets, included in other assets, were $21.7 million and $22.9 million at June 30, 2024 and December 31, 2023, respectively.
Operating lease liabilities, included in other liabilities and accrued expenses, were $23.5 million and $24.5 million at June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, there was one additional operating lease that has not yet commenced with an undiscounted contract amount up to $190,000 and a lease term of up to 36 months. At June 30, 2024, lease expiration dates ranged from one month to 34.2 years and had a weighted average remaining lease term of 16.1 years. At December 31, 2023, lease expiration dates ranged from two months to 34.7 years and had a weighted average remaining lease term of 16.2 years.
Future minimum lease payments under non-cancellable leases and a reconciliation to the amount recorded as operating lease liabilities as of June 30, 2024 were as follows:
1,388
2,720
2,509
2,445
2,293
Thereafter
17,128
Total lease payments
28,483
Imputed interest
(4,980)
Total present value of operating lease liabilities
23,503
The weighted-average discount rate and remaining lease term for operating leases were as follows:
Weighted-average discount rate
2.10
2.08
Weighted-average remaining lease term (years)
16.09
16.24
Rental expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease components, such as fair-market value adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.
The following table presents the components of total lease expense:
Three Months Ended
Six Months Ended
Lease Expense:
Operating lease expense
714
1,461
1,599
Short-term lease expense
35
55
Variable lease expense
Sublease income
(4)
Total lease expense
748
826
1,526
1,660
Cash paid for amounts included in the measurement of lease liabilities-
operating cash flows for operating leases
729
779
1,466
1,614
Operating Lease - Operating cash flows (Liability reduction)
608
655
1,223
1,335
ROU assets obtained in exchange for new operating lease liabilities
84
122
12.MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve and the FDIC. Failure to meet minimum capital requirements can result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s unaudited Consolidated Financial Statements.
Under the capital rules, risk-based capital ratios are calculated by dividing Tier 1, common equity Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several risk-weight categories, based primarily on relative risk. The rules require banks and bank holding companies to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%. In addition, a Tier 1 leverage ratio of 4.0% is required. Additionally, the capital rules require a bank holding company to maintain a capital conservation buffer of common equity Tier 1 capital in an amount above the minimum risk-based capital requirements equal to 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases.
Under the FDIC’s prompt corrective action rules, an insured state nonmember bank is considered “well capitalized” if its capital ratios meet or exceed the ratios as set forth in the following table and is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. The Bank must meet well capitalized requirements under prompt corrective action provisions. Prompt corrective action provisions are not applicable to bank holding companies.
A bank holding company is considered “well capitalized” if the bank holding company (i) has a total risk-based capital ratio of at least 10.0%, (ii) has a Tier 1 risk-based capital ratio of at least 6.0%, and (iii) is not subject to any written agreement order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.
At June 30, 2024, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements, and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at June 30, 2024 also exceeded the minimum capital requirements, including the currently applicable capital conservation buffer of 2.5%.
The Company’s and the Bank’s actual regulatory capital ratios as of June 30, 2024 and December 31, 2023 are presented in the table below.
Minimum Required to be
Considered "Well Capitalized"
Minimum Required for
Under Prompt Corrective
Actual
Capital Adequacy Purposes
Action Provisions
Ratio
Common equity Tier 1 capital to risk-weighted assets
565,499
11.7
216,996
4.5
N/A
Tier 1 capital to risk-weighted assets
289,328
6.0
Total capital to risk-weighted assets
617,517
12.8
385,770
8.0
Tier 1 capital to average assets
9.7
232,787
4.0
567,248
12.0
212,816
283,755
619,138
13.1
378,340
10.0
226,690
519,928
10.8
216,905
313,307
6.5
289,206
385,608
571,946
11.9
482,010
8.9
232,761
290,951
5.0
509,791
212,724
307,267
283,632
378,175
561,682
472,719
9.0
226,666
283,333
32
13.COMPREHENSIVE (LOSS) INCOME
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the stockholders’ equity section of the unaudited Consolidated Balance Sheets, such items, along with net income, are components of comprehensive income (loss).
The following table presents changes in accumulated other comprehensive (loss) income by component for the three and six months ended June 30, 2024 and 2023:
Post-
Available
retirement
for Sale
Flow
Benefit
Securities
Hedge
Balance at beginning of period
64
(51,965)
3,297
150
(47,686)
5,126
Other comprehensive income (loss) before reclassifications
(3,788)
Amounts reclassified from accumulated other comprehensive (loss) income
(245)
(1,173)
Net current period other comprehensive (loss) income
674
(4,961)
(93)
1,081
Balance at end of period
(50,652)
2,586
112
(51,847)
5,445
85
(47,373)
3,666
(53,212)
5,980
Other comprehensive (loss) income before reclassifications
(3,304)
3,131
(1,500)
(2,191)
(4,804)
(148)
14.FAIR VALUE OF ASSETS AND LIABILITIES
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
•Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following methods and assumptions were used by the Company in estimating fair value disclosures:
Debt Securities – Available-for-sale debt securities are recorded at fair value on a recurring basis. When available, the Company uses quoted market prices to determine the fair value of debt securities; such items are classified as Level 1. There were no Level 1 securities held at June 30, 2024 and December 31, 2023.
Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, and corporate bonds.
Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no Level 3 securities held at June 30, 2024 and December 31, 2023.
Loans held for sale - The fair value of mortgage loans held for sale is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets. There were no mortgage loans held for sale 90 days or more past due as of June 30, 2024 and December 31, 2023.
Collateral-Dependent Impaired Loans - The fair value of collateral-dependent loans that are deemed to be impaired is determined based upon the fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral-dependent loans for which repayment is dependent on the sale of the collateral, Management adjusts the fair value for estimated costs to sell. For collateral-dependent loans for which repayment is dependent on the operation of the collateral, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral-dependent impaired loans are categorized as Level 3.
Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
Retirement plan annuities - The carrying value of the annuities are based on their contract values which approximate fair value.
MSRs - Fair value is based on a third-party valuation model that calculates the present value of estimated future net servicing income and includes observable market data such as prepayment speeds and default and loss rates.
Deposits and mortgagors’ escrow accounts - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) and mortgagors’ escrow accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a DCF calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Borrowed funds - The fair values of borrowed funds are estimated using DCF analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.
Accrued interest - The carrying amounts of accrued interest approximate fair value.
Derivatives
Derivatives designated as hedging instrument - The Company works directly with a third-party vendor to provide periodic valuations for its interest-rate risk-management agreements to determine fair value of its interest rate swaps executed for interest-rate risk management. The vendor utilizes standard valuation methodologies applicable to interest rate derivatives based on readily observable market data and are therefore considered Level 2 valuations.
Forward loan sale commitments and derivative loan commitments - Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. The assumptions for pull-through rates are derived from internal data and adjusted using Management judgment. Derivative loan commitments include the value of servicing rights and non-refundable costs of originating the loan based on the Company’s internal cost analysis that is not observable. The weighted average pull-through rate for derivative loan commitments was approximately 93% and 89% at June 30, 2024 and December 31, 2023, respectively.
Interest rate swaps and risk participation agreements - The Company’s interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. For these interest rate derivatives, fair value is determined by a third party utilizing models that use primarily market observable inputs, such as swap rates and yield curves. The pricing models used to value interest rate swaps calculate the sum of each instrument’s fixed and variable cash flows, which are then discounted using an appropriate yield curve to arrive at the fair value of each swap. The pricing models do not contain a high level of subjectivity as the methodologies used do not require significant judgment.
Although the Company has determined that the majority of the inputs used to value its interest rate swaps and risk participation agreements fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with interest rate contracts and risk participation agreements utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of June 30, 2024 and December 31, 2023, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company classified its derivative valuations in their entirety as Level 2.
Interest rate futures – The Company’s interest rate futures are valued based on quoted prices for similar assets in an active market with inputs that are observable and as a result, the Company has classified these derivatives as Level 2.
Off-balance sheet credit-related instruments - Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of off-balance sheet instruments is immaterial.
Transfers between levels are recognized at the end of the reporting period, if applicable. There were no transfers during the periods presented.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Level 1
Level 2
Level 3
Fair Value
Loans held for sale
29,701
638
386,802
387,440
250
28,340
484
384,288
384,772
24,100
451
The table below presents, for the three and six months ended June 30, 2024 and 2023, the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis.
Assets: Derivative and Forward Loan Sale Commitments:
449
766
487
Total gains included in net income (1)
189
154
296
Changes in unrealized gains relating to instruments at period end
Liabilities: Derivative and Forward Loan Sale Commitments:
(50)
(302)
(451)
(104)
Total gains (losses) included in net income (1)
(200)
201
(250)
(85)
Changes in unrealized losses relating to instruments at period end
(1) Included in mortgage banking income on the Consolidated Statements of Income.
Assets Measured at Fair Value on a Non-recurring Basis
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements. There were no assets measured at fair value on a non-recurring basis at June 30, 2024. There are no liabilities measured at fair value on a non-recurring basis at June 30, 2024 or December 31, 2023.
Collateral-dependent impaired loans
Losses in the following table represent the amount of the fair value adjustments recorded during the period on the carrying value of the assets held at June 30, 2024 and December 31, 2023, respectively. Losses on fully charged off loans are not included in the table.
2,977
2,982
The table below presents quantitative information about significant unobservable inputs (Level 3) for assets measured at fair value on a non-recurring basis at the dates indicated.
Valuation Technique
5,908
Sales Comparison Approach (1)
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which includes unobservable inputs such as adjustments for differences between the comparable sales. The Company may also use another source of collateral assessment to determine a reasonable estimate of the fair value of the collateral. Appraisals may be adjusted by Management for qualitative factors and estimated liquidation expenses. Generally, appraisals for residential real estate loans are discounted 15% while commercial real estate loan appraisals are discounted 20%. Commercial and industrial appraisals are generally discounted 25%-50%. Management may take larger discounts to reflect market liquidity for certain types of assets not addressed in the appraisals.
37
Summary of Fair Values of Financial Instruments
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
Carrying
Financial assets:
Cash and cash equivalents
Federal Home Loan Bank stock
4,562,942
Financial liabilities:
Deposits
4,450,347
Borrowed funds
617,064
4,482,448
4,376,269
567,158
38
15.EARNINGS PER SHARE
Basic EPS represents net income attributable to common shareholders divided by the weighted-average number of common shares outstanding during the period. Non-vested restricted shares that are participating securities are included in the computation of basic EPS. Diluted EPS is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding, plus the effect of potential dilutive common stock equivalents outstanding during the period. At June 30, 2024 and 2023, respectively, potential common shares of 130,225 and 1,308,266 were considered to be anti-dilutive and excluded from EPS.
The following table presents earnings per common share.
Net income available to common stockholders (in thousands)
Average number of common shares outstanding
44,648,561
46,620,893
Less: Average unallocated ESOP shares and non-vested restricted shares
(3,354,774)
(3,557,386)
Weighted average number of common shares outstanding used to calculate basic earnings per common share
Dilutive effect of share-based compensation
76,502
69,948
Weighted average number of common shares outstanding used to calculate diluted earnings per common share
44,967,016
47,522,623
(3,363,912)
(3,567,212)
145,559
248,482
16. REVENUE RECOGNITION
Revenue from contracts with customers in the scope of ASC Topic 606 is measured based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations.
The Company’s performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time. Unsatisfied performance obligations at the report date are not material to our Consolidated Financial Statements.
In certain cases, other parties are involved with providing services to our customers. If the Company is a principal in the transaction (providing services itself or through a third party on its behalf), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Company is an agent in the transaction (referring to another party to provide services), the Company reports its net fee or commission retained as revenue.
The Company recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Additionally, revenue is collected from loan fees, such as letters of credit, line renewal fees and application fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction.
17.SEGMENT REPORTING
The Company has two reportable segments: HarborOne Bank and HarborOne Mortgage. Revenue from HarborOne Bank consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. Revenue from HarborOne Mortgage comprises interest earned on loans and fees received as a result of the residential mortgage origination, sale and servicing process.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Segment profit and loss is measured by net income on a legal entity basis. Intercompany transactions are eliminated in consolidation.
Information about the reportable segments and reconciliation to the unaudited interim Consolidated Financial Statements at June 30, 2024 and 2023 and for the three and six months ended June 30, 2024 and 2023 is presented in the tables below.
HarborOne
Mortgage
31,098
240
Net interest and dividend income, after benefit for credit losses
30,483
3,141
Intersegment gain (loss)
(464)
464
(74)
(1,024)
180
2,177
4,758
Other noninterest income (loss)
7,514
7,518
7,156
4,762
Noninterest expense
27,791
5,269
Income (loss) before income taxes
9,848
(267)
Provision (benefit) for income taxes
2,310
(76)
Net income (loss)
7,538
(191)
61,583
320
61,136
5,155
(700)
772
(938)
4,273
Total mortgage banking income (loss)
(446)
9,262
Other noninterest income
13,905
13,916
13,459
9,276
55,196
9,580
19,399
4,696
(16)
14,703
Total assets at period end
5,793,429
120,390
Goodwill at period end
Three Months Ended June 30, 2023
32,490
120
29,207
90
407
195
2,117
(134)
5,914
6,614
6,480
26,193
5,493
9,494
541
Provision for income taxes
2,193
232
7,301
309
Six Months Ended June 30, 2023
67,052
61,903
(706)
544
(1,149)
396
4,132
(417)
9,051
12,556
12,139
52,383
10,815
21,659
(1,317)
5,308
(333)
16,351
(984)
5,668,582
115,782
5,659,254
10,760
69,802
42
Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition at June 30, 2024, and our results of operations for the three and six months ended June 30, 2024 and 2023. This section should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes thereto of the Company appearing in Part I, Item 1 of this Form 10-Q.
Forward-Looking Statements
Certain statements herein constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. Such statements may be identified by words such as “believes,” “will,” “would,” “expects,” “project,” “may,” “could,” “developments,” “strategic,” “launching,” “opportunities,” “anticipates,” “estimates,” “intends,” “plans,” “targets” and similar expressions. These statements are based upon the current beliefs and expectations of the Company’s Management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements as a result of numerous factors. Factors that could cause such differences to exist include, but are not limited to, changes in general business and economic conditions (including inflation and concerns about liquidity) on a national basis and in the local markets in which the Company operates, including changes that adversely affect borrowers’ ability to service and repay the Company’s loans; changes in customer behavior; ongoing turbulence in the capital and debt markets and the impact of such conditions on the Company’s business activities; changes in interest rates; increases in loan default and charge-off rates; decreases in the value of securities in the Company’s investment portfolio; fluctuations in real estate values; the possibility that future credit losses may be higher than currently expected due to changes in economic assumptions, customer behavior or adverse economic developments; the adequacy of loan loss reserves; decreases in deposit levels necessitating increased borrowing to fund loans and investments; competitive pressures from other financial institutions; cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest, and future pandemics; changes in regulation; changes in accounting standards and practices; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; demand for loans in the Company’s market area; the Company’s ability to attract and maintain deposits; risks related to the implementation of acquisitions, dispositions, and restructurings; the risk that the Company may not be successful in the implementation of its business strategy; changes in assumptions used in making such forward-looking statements and the risk factors described in the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q as filed with the SEC, which are available at the SEC’s website, www.sec.gov. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, HarborOne’s actual results could differ materially from those discussed. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this release. The Company disclaims any obligation to publicly update or revise any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except as required by law.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in its most recent Annual Report on Form 10-K. Modifications to significant accounting policies made during the year are described in Note 1 to the Consolidated Financial Statements included in Item 1 of this report. The preparation of the Consolidated Financial Statements in accordance with GAAP and practices generally applicable to the financial services industry requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.
Certain of our accounting policies, which are important to the portrayal of our financial condition, require Management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently
uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.
Management has identified the Company’s most critical accounting policies as related to:
•Allowance for Credit Losses
•Goodwill
•Deferred Tax Assets
The accounting policies and estimates, including the nature of the estimates and types of assumptions used, are described in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s most recent Form 10-K and pertain to discussion in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report.
Comparison of Financial Condition at June 30, 2024 and December 31, 2023
Total Assets. Total assets increased $119.1 million, or 2.1%, to $5.79 billion at June 30, 2024 from $5.67 billion at December 31, 2023. The increase primarily reflects an increase of $88.9 million in loans and a $22.1 million increase in loans held for sale.
Cash and Cash Equivalents. Cash and cash equivalents increased $7.7 million to $235.1 million at June 30, 2024 from $227.4 million at December 31, 2023, primarily due to an increase in cash and due from banks.
Assets Held for Sale. The decrease in assets held for sale of $348,000 reflects the sale-leaseback of the building that currently houses HarborOne’s Legion Parkway banking center in downtown Brockton and previously served as the Bank’s headquarters. The sale-leaseback continues the Company’s longtime commitment to Brockton, which was made in conjunction with a project to revitalize the downtown area, with plans for a mixed-use property that includes a lease-back by the Company for a state-of-the-art HarborOne banking center. The transaction resulted in a gain of $1.8 million recorded in noninterest income, partially offset by the $675,000 bargain purchase element of the property sale included in marketing expense as a contribution.
Loans Held for Sale. Loans held for sale at June 30, 2024 were $41.8 million, an increase of $22.1 million from $19.7 million at December 31, 2023, reflecting increased loan production at HarborOne Mortgage.
Loans, net. Net loans increased $87.8 million, or 1.9%, to $4.79 billion at June 30, 2024 from $4.70 billion at December 31, 2023. The following table sets forth information concerning the composition of loans:
Increase (Decrease)
Dollars
Percent
37,206
1.6
25,483
12.2
32,600
7.0
95,289
3.2
5,569
0.4
Second mortgage and equity lines of credit
(1,678)
(0.9)
Residential construction
(5,301)
(29.2)
(1,410)
(0.1)
Consumer loans
(3,332)
(15.1)
90,547
1.9
`
(182.1)
88,921
(1,167)
2.4
87,754
(1) Represents the basis adjustment associated with the application of hedge accounting on certain residential real estate loans. Refer to Note 10 - Derivatives.
The growth in net loans primarily reflects commercial loan growth. Management continues to seek prudent commercial lending opportunities to deepen relationships with existing customers and develop new relationships with strong borrowers.
Securities. Investment securities available for sale at June 30, 2024 were $269.1 million, a decrease of $21.1 million, or 7.3%, from $290.2 million at December 31, 2023. The decrease primarily reflects the sale of $17.5 million of low-yield securities with a loss on sale of $1.0 million. Securities available for sale were negatively impacted by unrealized losses of $65.3 million and $62.0 million as of June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024 and December 31, 2023, the gross unrealized loss positions were primarily related to mortgage-backed securities and other obligations issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Total gross unrealized losses were primarily attributable to changes in interest rates relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.
Securities held to maturity amounted to $19.7 million at June 30, 2024 and $19.8 million at December 31, 2023, with a fair value of $19.1 million and $19.3 million, respectively.
Mortgage servicing rights. MSRs are created as a result of our mortgage banking origination activities and accounted for at fair value. At June 30, 2024, we serviced mortgage loans for others with an aggregate outstanding principal balance of $3.48 billion. Total MSRs were $46.2 million at June 30, 2024 and $46.1 million at December 31, 2023. The change in total MSRs for the six months ended June 30, 2024 reflects additions of $641,000 million from new mortgage originations, amortization from loan repayments of $898,000 and a positive fair value mark of $355,000.
Quarterly, we utilize a third-party provider to assist in the determination of the fair value of our MSRs. They provide the appropriate prepayment speed, and discount and default rate assumptions based on our portfolio and key benchmark mortgage rates. Management reviews the assumptions and calculation. Any measurement of fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied at a different point in time.
The assumptions used in the MSR fair value calculation are significantly impacted by the residential mortgage benchmark indices. Decreasing mortgage rates normally encourages increased mortgage refinancing activity, which reduces the life of the loans underlying the MSRs, thereby reducing the value of MSRs, whereas increasing interest rates would result in increases in fair value, and a corresponding increase in earnings. MSRs recorded during periods of historically low interest rates may be less sensitive to falling rates in the future as they were originated in a low mortgage rate environment.
Deposits. Deposits were $4.46 billion and $4.39 billion at June 30, 2024 and December 31, 2023, respectively. The following table sets forth information concerning the composition of deposits:
Noninterest-bearing deposits
29,827
308,006
305,774
0.7
Regular savings
(275,595)
(21.8)
Money market accounts
608,629
499,651
108,978
21.8
984,792
858,241
126,551
14.7
Consumer and business deposits
3,580,947
3,588,954
(8,007)
(0.2)
Municipal deposits
492,097
471,817
20,280
4.3
58,615
17.9
Reciprocal deposits
369,875
209,401
160,474
76.6
Total deposits increased $70.9 million reflecting an increase of $58.6 million in brokered deposits and a $20.3 million increase in municipal deposits partially offset by a $8.0 million decrease in consumer and business deposits due to the competitive deposit pricing market. Brokered deposits provide a channel for the Company to seek additional funding outside the Company’s core market. We participate in a reciprocal deposit program that provides access to FDIC-insured deposit products in aggregate amounts exceeding the current limits for depositors. Total deposits included $369.9 million in reciprocal deposits. The increase in reciprocal deposits primarily reflects municipal depositors increased utilization of the reciprocal deposit program, as municipal deposits are generally required to be insured or secured by FHLB letters of credit.
The total of estimated deposits in excess of the FDIC insurance limits amounted to $1.3 billion and $1.4 billion as of June 30, 2024 and December 31, 2023, respectively. Until February 24, 2023, insurance for deposits in excess of FDIC limits was provided through the DIF. On February 24, 2023, at 5 p.m. local time, the Bank exited DIF. All customer non-certificate deposits as of that date and time were covered by DIF insurance until February 24, 2024. Certificates of deposit as of 5 p.m. local time on February 24, 2023 remain covered by DIF insurance until their maturity date.
The following table summarizes uninsured deposits at the date indicated:
Uninsured deposits, per regulatory reporting requirements
1,299,305
1,420,431
Less: Subsidiary deposits
377,285
349,748
Collateralized deposits
195,973
17,892
Uninsured deposits, after exclusions
726,047
1,052,791
Uninsured deposits, after excluding subsidiary deposits and collateralized deposits, represented 16% of total deposits at June 30, 2024. Management believes that this provides a more informative view of uninsured deposits, as subsidiary deposits are eliminated in consolidation and collateralized deposits are secured.
Borrowed Funds. Borrowings increased $50.9 million to $619.4 million at June 30, 2024 from $568.5 million at December 31, 2023. At June 30, 2024, FHLB short-term borrowings were $130.0 million and long-term borrowings were $314.4 million. The Company borrowed $175 million for a one-year term under the BTFP during the first quarter of 2024. As of June 30, 2024, the Bank had $1.2 billion in available borrowing capacity across multiple relationships.
Stockholders’ equity. Total stockholders’ equity was $577.3 million at June 30, 2024, compared to $583.8 million at December 31, 2023 and $595.5 million at June 30, 2023. Stockholders’ equity decreased 1.1% when compared to the year end, as earnings were offset by share repurchases, dividends and an increase in unrealized loss on available-for-sale securities. Share repurchases for the six months ended June 30, 2024 were 1,230,353 shares at an average price of $10.37, including $0.10 per share of excise tax.
The tangible-common-equity-to-tangible-assets ratio (non-GAAP) was 9.03% at June 30, 2024, 9.33% at December 31, 2023, and 9.38% at June 30, 2023. At June 30, 2024, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements, and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at June 30, 2024, also exceeded the minimum capital requirements, including the currently applicable capital conservation buffer of 2.5%. Regulatory capital ratios are not impacted by the decline in other comprehensive income as a result of the unrealized losses on available-for-sale investment securities.
Comparison of Results of Operations for the Three and Six Months Ended June 30, 2024 and 2023
HarborOne Bancorp, Inc. Consolidated
Overview. Consolidated net income for the three and six months ended June 30, 2024 and 2023 was $7.3 million and $14.6 million, respectively, compared to net income of $7.5 million and $14.8 million for the three and six months ended June 30, 2023.
Average Balances and Yields. The following tables set forth average balance sheets, annualized average yields and costs, and certain other information for the periods indicated, on a consolidated basis. Interest income on tax-exempt loans and securities has been adjusted to a fully taxable-equivalent basis using a federal tax rate of 21%. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or expense.
Yield/
Balance
Interest
Cost (8)
Interest-earning assets:
Investment securities (1)
374,730
2.28
381,762
2.14
Other interest-earning assets
306,361
5.21
238,891
4.93
20,775
6.72
19,614
6.67
Commercial loans (2)(3)
3,091,004
43,023
5.60
2,938,292
38,842
5.30
Residential real estate loans (3)(4)
1,695,059
18,393
4.36
1,682,860
16,456
3.92
Consumer loans (3)
19,221
352
7.37
29,025
419
5.79
4,805,284
61,768
5.17
4,650,177
55,717
4.81
Total interest-earning assets
5,507,150
68,207
4.98
5,290,444
61,013
4.63
Noninterest-earning assets
300,847
305,132
5,807,997
5,595,576
Interest-bearing liabilities:
Savings accounts
1,058,524
4,305
1.64
1,421,622
6,165
1.74
299,536
88
0.12
280,501
59
0.08
1,069,153
10,186
3.83
802,373
6,256
3.13
Certificates of deposit
931,255
9,946
4.30
708,087
5,273
2.99
300,385
2,747
3.68
281,614
2,309
3.29
Total interest-bearing deposits
3,658,853
3.00
3,494,197
2.30
776,852
4.83
666,345
4.88
Subordinated debentures
-
34,331
6.12
Total borrowings
700,676
8,638
4.94
Total interest-bearing liabilities
4,435,705
3.32
4,194,873
Noninterest-bearing liabilities:
670,494
712,081
Other noninterest-bearing liabilities
126,477
88,363
5,232,676
4,995,317
Total equity
575,321
600,259
Total liabilities and equity
Tax equivalent net interest income
31,606
32,313
Tax equivalent interest rate spread (5)
1.66
1.89
Less: tax equivalent adjustment
256
213
Net interest income as reported
Net interest-earning assets (6)
1,071,445
1,095,571
Net interest margin (7)
2.29
2.43
Tax equivalent effect
0.02
Net interest margin on a fully tax equivalent basis
2.31
2.45
Ratio of interest-earning assets to interest-bearing liabilities
124.16
126.12
Supplemental information:
Total deposits, including demand deposits
4,329,347
4,206,278
Cost of total deposits
2.53
1.91
Total funding liabilities, including demand deposits
5,106,199
4,906,954
Cost of total funding liabilities
2.88
2.35
(1) Includes securities available for sale and securities held to maturity.
(2) Includes industrial revenue bonds for the quarter ended June 30, 2024. Interest income from tax exempt loans is computed on a taxable equivalent basis using a rate of 21% for the quarters presented.
(3) Includes non-accruing loan balances and interest received on such loans.
(4) Includes the basis adjustments of certain loans included in fair value hedging relationships.
(5) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(6) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(7) Net interest margin represents net interest income divided by average total interest-earning assets.
(8) Annualized.
373,758
2.25
384,517
2.16
331,416
5.24
151,644
4.97
17,517
6.77
18,865
6.54
3,065,921
84,675
5.55
2,919,980
75,679
5.23
1,697,878
36,568
4.33
1,665,083
32,072
3.88
19,879
711
7.19
32,647
938
4,783,678
121,954
5.13
4,617,710
108,689
4.75
5,506,369
135,360
5,172,736
117,153
4.57
299,999
309,198
5,806,368
5,481,934
1,122,362
9,827
1.76
1,440,403
11,610
1.63
294,719
163
0.11
278,164
95
0.07
1,031,753
19,499
3.80
813,472
11,494
2.85
893,162
18,501
630,791
7,958
2.54
328,422
6,181
3.78
305,885
4,818
3.18
3,670,418
2.97
3,468,715
2.09
770,738
4.89
557,823
4.78
34,315
6.15
592,138
14,266
4.86
4,441,156
3.30
4,060,853
2.49
662,465
716,782
122,884
95,054
5,226,505
4,872,689
579,863
609,245
62,437
66,912
505
414
1,065,213
1,111,883
2.26
2.59
2.61
123.99
127.38
4,332,883
4,185,497
2.51
1.73
5,103,621
4,777,635
2.87
2.12
(5) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated, on a consolidated basis. 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.
2024 v. 2023
Due to Changes in
Increase
Volume
(Decrease)
Investment securities
(40)
126
86
(114)
72
871
165
4,681
211
4,892
(44)
Commercial loans
2,138
2,043
4,181
4,172
8,996
Residential real estate loans
109
1,828
1,937
649
3,847
4,496
(135)
(67)
(351)
124
(227)
2,112
3,939
6,051
4,470
8,795
13,265
2,962
4,232
7,194
8,993
9,214
18,207
(1,508)
(352)
(1,860)
(2,710)
927
(1,783)
62
2,343
1,587
3,930
3,567
4,438
8,005
1,968
2,705
4,673
4,164
6,379
10,543
Brokered deposit
161
277
984
1,363
2,968
4,242
7,210
5,406
12,790
18,196
1,340
1,215
3,896
5,533
(524)
(1,047)
816
691
2,849
4,486
3,784
4,117
7,901
8,255
14,427
22,682
Change in net interest income
(822)
(707)
738
(5,213)
(4,475)
Interest and Dividend Income. Interest and dividend income on a tax equivalent basis increased $7.2 million, or 11.8%, to $68.2 million for the three months ended June 30, 2024, compared to $61.0 million for the three months ended June 30, 2023. The significant components of the increase were:
Compared to the first six months of 2023, interest and dividend income on a tax equivalent basis increased $18.2 million, or 15.5%, reflecting similar trends to the quarter-over-quarter results, increased volume and rates on interest bearing assets.
Interest Expense. Interest expense increased $7.9 million, or 27.5%, to $36.6 million for the three months ended June 30, 2024 from $28.7 million for the three months ended June 30, 2023. The significant components of the increase were:
Compared to the first six months of 2023, interest expense increased $22.7 million, or 45.1%, reflecting similar
trends to the quarter-over-quarter results, increased volume and rates on interest-bearing liabilities.
Net Interest and Dividend Income. Net interest and dividend income on a tax equivalent basis decreased $707,000, or 2.2%, to $31.6 million for the three months ended June 30, 2024 from $32.3 million for the three months ended June 30, 2023. The average balance of interest bearing assets and liabilities increased $216.7 million and $240.8 million, respectively, and rate increases on interest-bearing liabilities outpaced the increase in the yield on interest-earning assets by 23 basis points. The net interest spread was 1.66% for the three months ended June 30, 2024 compared to 1.89% for the three months ended June 30 2023 and net interest margin on a full tax equivalent basis decreased 14 basis points to 2.31% for the three months ended June 30, 2024 from 2.45% for three months ended June 30, 2023.
Compared to the first six months of 2023, net interest and dividend income on a tax equivalent basis decreased
$4.5 million, or 6.7%, to $62.4 million from $66.9 million. The tax equivalent net interest spread decreased 44 basis
points to 1.64% for the six months ended June 30, 2024 from 2.08% for the six months ended June 30, 2023, and net
interest margin on a tax equivalent basis decreased by 33 basis points to 2.28% for the six months ended June 30, 2024
from 2.61% for the six months ended June 30, 2023.
Income Tax Provision. The provision for income taxes was $2.2 million and $4.7 million for the three and six months ended June 30, 2024 compared to $2.3 million and $4.7 million, for the three and six months ended June 30, 2023.
The effective tax rate for three months ended June 30, 2024 and 2023 was 23.3%. The effective tax rate for the six months ended June 30, 2024 and 2023 was 24.2% and 24.1%, respectively.
Segments. The Company has two reportable segments: HarborOne Bank and HarborOne Mortgage. Revenue from HarborOne Bank consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. Revenue from HarborOne Mortgage is comprised of interest earned on loans and fees received as a result of the residential mortgage origination, sale and servicing process. Residential real estate portfolio loans are originated by HarborOne Mortgage and purchased by the Bank.
51
The tables below show the results of operations for the Company’s segments, HarborOne Bank and HarborOne Mortgage, for the three and six months ended June 30, 2024 and 2023, and the increase or decrease in those results:
(1,392)
(4.3)
100.0
Provision (benefit) for credit losses
(2,668)
(81.3)
Net interest and dividend income, after provision (benefit) for credit losses
1,276
4.4
(159)
(4.8)
29.6
374
415.6
(103)
(355.2)
(1,431)
(351.6)
(15)
(7.7)
2.8
(224)
167.2
(1,156)
(19.5)
900
13.6
10.4
(1,152)
1,598
6.1
(4.1)
354
3.7
(808)
(149.4)
117
5.3
(308)
(132.8)
237
(500)
(161.8)
(5,469)
(8.2)
(28.4)
(4,702)
(91.3)
(767)
(1.2)
(369)
(6.7)
(0.8)
228
41.9
(18.4)
(36)
(9.1)
3.4
(29)
2.3
1,349
10.7
1,320
10.9
225
2.5
2,813
5.4
(1,235)
(11.4)
(2,260)
(10.4)
(101.2)
(612)
(11.5)
(95.2)
(1,648)
(10.1)
1,016
(103.3)
HarborOne Bank Segment
Results of Operations for the Three and Six Months Ended June 30, 2024 and 2023
Net Income. The Bank’s net income increased $237,000 to $7.5 million for the three months ended June 30, 2024 compared to $7.3 million for the three months ended June 30, 2023. The increase in net income reflects a decrease of $1.4
million, or 4.3%, in net interest and dividend income and a $1.6 million, or 6.1%, increase in noninterest expense, partially offset by a decrease in provision for credit losses of $2.7 million, or 81.3%, and a $676,000, or 10.4%, increase in noninterest income.
Compared to the first six months of 2023, the Bank’s net income for the six months ended June 30, 2024 decreased
$1.7 million to $14.7 million from $16.4 million. The decrease in net income reflects a decrease of $5.5 million, or 8.2%,
in net interest and dividend income and an increase in noninterest expense of $2.8 million, or 5.4%, partially offset by a $4.7 million, or 91.3%, decrease in the provision for credit losses and a $1.3 million, or 10.9%, increase in noninterest income.
Provision for Credit Losses. The Bank recorded a provision for credit losses of $615,000 and $447,000 for the three and six months ended June 30, 2024. The provision for credit losses in 2024 primarily reflects provisioning for loan growth partially offset by negative provisions on unfunded commitments. The Bank recorded provision for credit losses of $3.3 million and $5.1 million for the three and six months ended June 30, 2023. The provision for credit losses in 2023 primarily reflects replenishment as a result of $2.9 million in charge-offs and loan growth.
Net charge-offs totaled $195,000, or 0.02%, of average loans outstanding on an annualized basis, for the quarter ended June 30, 2024 compared to net charge-offs of $2.7 million, or 0.23% for the same period in 2023. For the six months ended June 30, 2024 and 2023, net charge-offs were $320,000 and $2.7 million, respectively.
Noninterest Income. Total noninterest income was $7.2 million and $12.8 million for the three and six months ended June 30, 2024 compared to $6.5 million and $12.1 million for the respective prior year period. The following table sets forth the components of noninterest income:
Intersegment loss
Secondary market loan servicing fees, net of guarantee fees
Interchange fees
2,754
2,690
Other deposit account fees
2,469
2,323
6.3
10.2
48.3
Swap fee income
(164)
(59.2)
685
(174)
(25.4)
Total mortgage banking loss
5,320
5,192
4,886
4,554
332
7.3
15.8
493
48.8
455
(269)
(59.1)
955
1,097
(142)
(12.9)
The primary reasons for the variances within the noninterest income categories shown in the preceding table are noted below:
Noninterest Expense. Total noninterest expense was $27.8 million and $55.2 million for the three and six months ended June 30, 2024 compared to $26.2 million and $52.4 million prior year period. The following table sets forth the components of noninterest expense:
15,627
15,067
560
4,052
3,910
142
3.6
Data processing expenses
2,363
2,355
0.3
187
94.8
1,331
787
69.1
413
126.7
378
398
(20)
(5.0)
771
699
10.3
992
(15.6)
1,350
1,374
(24)
(1.7)
30,934
29,831
1,103
8,202
8,205
(3)
(0.0)
4,833
4,660
183
71
38.8
2,114
1,850
264
14.3
569
66.2
(4.5)
1,827
1,695
7.8
(141.7)
2,156
470
27.9
2,640
2,585
2.1
The primary reasons for the significant variances within the noninterest expense categories shown in the preceding table are noted below:
HarborOne Mortgage Segment
Results of Operations for the Three and Six Months June 30, 2024 and 2023
Net Income. HarborOne Mortgage recorded net loss of $191,000 and net income of $32,000 for the three and six months ended June 30, 2024, compared to a net income of $309,000 and net loss of $984,000 for the prior year periods. The HarborOne Mortgage segment’s results are heavily impacted by prevailing interest rates, refinancing activity, and home sales.
Noninterest Income. Total noninterest income was $4.8 million and $9.3 million for the three and six months ended June 30, 2024 as compared to $5.9 million and $9.1 million for the respective prior year period. Noninterest income is primarily from mortgage banking income, for which the following table provides further detail:
Intersegment gain
Processing, underwriting and closing fees
467
426
9.6
Secondary market loan servicing fees net of guarantee fees
1,710
1.1
0
Originated mortgage servicing rights included in gain on sale of mortgage loans
(230)
(34.8)
Change in 10-year Treasury Constant Maturity rate in basis points
786
702
3,487
3,430
1.7
(653)
(50.5)
The primary reasons for the significant variances in the noninterest income category shown in the preceding table are noted below:
56
The following tables provide additional loan production detail:
Loan
% of Total
Product Type
Conventional
117,199
67.7
91,760
53.3
Government
12,072
14,015
8.1
State Housing Agency
4,614
2.7
10,969
6.4
Jumbo
38,854
22.5
55,388
32.2
Seconds
255
0.1
172,994
172,153
Purpose
Purchase
157,767
91.2
159,448
92.6
Refinance
11,425
6.6
9,203
3,802
2.2
3,502
2.0
191,781
69.7
154,181
51.8
24,553
23,926
9,155
3.3
17,899
49,557
18.1
101,693
34.2
0.0
275,095
297,750
241,768
87.9
275,496
92.5
25,948
9.4
18,312
7,379
3,942
1.3
Noninterest Expense. Total noninterest expense was $5.3 million and $9.6 million for the three and six months ended June 30, 2024 compared to $5.5 million and $10.8 million for the respective prior year periods. The following table sets forth the components of noninterest expense:
3,944
3,700
244
547
688
(141)
(20.5)
(37)
(77.1)
321
(47)
(14.6)
(102)
(73.9)
(38.5)
131
(27.2)
318
405
(87)
(21.5)
6,863
7,275
(5.7)
1,151
1,389
(238)
(17.1)
(69)
(77.5)
578
5.7
(187)
(73.0)
(13.0)
263
(39.8)
616
799
(183)
(22.9)
Asset Quality
The following table provides information with respect to our nonperforming assets at the dates indicated. We did not have any accruing loans past due 90 days or more at the dates presented.
Non-accrual loans:
Total non-accrual loans
Other real estate owned and repossessed assets:
One- to four-family residential real estate owned
Other repossessed assets
Total nonperforming assets
17,582
Period end allowance for credit losses balance
Period end total loan balance
Allowance for credit losses to total loans(1)
1.02
1.01
Allowance for credit losses to non-accrual loans
503.16
273.92
Total nonperforming loans to total loans (1)
0.20
0.37
Total nonperforming assets to total assets
0.31
(1) Total loans are presented before allowance for credit losses, but include deferred loan origination costs (fees), net, and the basis adjustment associated with the application of hedge accounting on certain residential real estate loans. Refer to Note 10 - Derivatives.
Credit quality performance has remained strong, with total nonperforming assets of $9.8 million at June 30, 2024, compared to $17.6 million at December 31, 2023 and $20.2 million at June 30, 2023. Nonperforming assets as a percentage of total assets were 0.17% at June 30, 2024, 0.31% at December 31, 2023, and 0.36% at June 30, 2023. Loans to borrowers experiencing financial difficulty was $15.3 million as of June 30, 2024, representing two credits that were provided rate reduction and term extension modifications. As of June 30, 2024, the loans were performing in accordance with the modified terms, were current and risk-rated special mention.
Management continues to closely monitor the loan portfolio for signs of deterioration in light of speculation that commercial real estate values may deteriorate as the market adjusts to higher vacancies and interest rates. The commercial real estate portfolio is centered in New England, with approximately 75% of the portfolio secured by property located in Massachusetts and Rhode Island. Approximately 60% of the commercial real estate loans are fixed-rate loans which, in the opinion of Management, have limited near-term maturity risk. As of June 30, 2024 and March 31, 2024, commercial loans rated “special mention” amounted to $87.7 million and $67.9 million, respectively. Loans are rated “special mention” at the point when there are signs of potential weakness. Management performs comprehensive reviews and works proactively with creditworthy borrowers facing financial distress and implements prudent workouts and accommodations to improve the Bank’s prospects of contractual repayment.
Three sub-sectors that Management identified as potentially more susceptible to weakness includes business-oriented hotels, non-anchored retail space, and metro office space. As of June 30, 2024, business-oriented hotels loans included 12 loans with a total outstanding balance of $119.7 million, non-anchored retail space loans included 29 loans with a total outstanding balance of $48.6 million, and metro office space loans included one loan with a total outstanding balance of $6.2 million. All of the loans in these groups were performing in accordance with their terms.
Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first
component involves pooling loans into portfolio segments for loans that share similar risk characteristics. A DCF methodology is used to estimate credit losses for each pooled portfolio segment. The methodology incorporates the probability of default and loss given default forecasted based on economic variable loss drivers. Management utilizes multiple economic projections and assumes these variables revert to the long-term average. Reversion towards long-term average generally begins eight quarters after the forecast start date and generally concludes within sixteen quarters of the forecast start date. The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds to estimate a reserve for each loan. The sum of all the loan level reserves is aggregated for each portfolio segment and a loss rate factor is derived. Quantitative loss factors for pooled loans are also supplemented by certain qualitative risk factors reflecting Management’s view of how losses may vary from those represented by quantitative loss rates.
The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. For loans that are individually analyzed, the ACL is measured using a DCF methodology based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral-dependent, at the fair value of the collateral.
In estimating the ACL on loans, Management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from Management’s estimate. Management performed a sensitivity analysis to understand the impact of hypothetical changes in qualitative loss factors on the ACL. Due to the concentration of the Bank’s ACL allocation in the total commercial portfolio, the sensitivity analysis evaluated the impact of changes to commercial loan segments. At June 30, 2024, the potential impact of changes to Management’s judgements on total commercial qualitative risk factors ranged between a $17.7 million reduction and $26.8 million increase in the ACL. This sensitivity analysis does not represent a change to Management’s judgment, but rather provides a hypothetical result to assess the sensitivity of the ACL to a key input.
The ACL was $49.1 million, or 1.02% of total loans, at June 30, 2024, compared to $48.0 million, or 1.01% of total loans, at December 31, 2023. The ACL on individually analyzed loans amounted to $121,000, or 1.24% of the carrying value of individually analyzed loans. The ACL on unfunded commitments, included in other liabilities on the unaudited Consolidated Balance Sheets, amounted to $2.9 million at June 30, 2024, compared to $3.9 million at December 31, 2023 and $4.8 million at June 30, 2023.
The following table sets forth the breakdown of the ACL by loan category at the dates indicated:
% of
Amount to
% of Loans
in Category
to Total Loans
49.58
49.20
44.38
49.35
4.84
10.06
17.34
10.31
16.90
9.82
21.78
31.36
25.22
31.87
3.63
2.01
3.73
0.42
0.27
0.87
0.38
0.28
0.39
0.56
0.46
Total allowance for credit losses on loans
100.00
The following table sets forth net charge-offs (recoveries) and the ratio of annualized net charge-offs (recoveries) to average loans for the periods indicated:
Net Charge-
off (Recovery)
(Recoveries)
2,477,675
2,384,603
2,917
0.49
231,623
223,324
381,706
184
0.19
330,365
(0.30)
2,670
0.36
1,505,677
(2)
(0.00)
1,485,914
174,323
(0.01)
168,100
(0.08)
15,059
28,846
Total Consumer loans
0.52
2,671
0.23
2,467,586
(100)
2,378,137
2,916
0.25
226,542
215,713
371,793
366
326,130
(240)
(0.15)
2,676
1,507,556
1,466,533
174,704
(6)
166,987
(0.05)
15,618
31,563
(8)
(45)
0.62
2,660
Net charge-offs were $195,000 and $320,000 for the three and six months ended June 30, 2024. Net charge-offs were $2.7 million for the three and six months ended June 30, 2023. During the quarter ended June 30, 2023 there was a $2.9 million charge off on a single credit.
61
Management of Market Risk
The principal market risk facing the Company is interest-rate risk. The Company’s Asset/Liability Committee establishes exposure limits that govern the Company’s tolerance for interest-rate risk. The policy limits and guidelines serve as benchmarks for measuring interest-rate risk and for providing a framework for evaluation and interest-rate risk-management decision making. The Company’s primary measure of its interest-rate risk is an income simulation model and an economic value of equity analysis.
Net Interest Income Analysis. The Company uses income simulation as the primary tool for measuring interest-rate risk inherent in our balance sheet at a given point in time by showing the effect on net interest income, over specified time frames, of instantaneous parallel shifts in market rates. For simulation purposes, the Company’s balance sheet is assumed to remain static over the simulation horizon. The model results are dependent on material assumptions. These assumptions include, but are not limited to, Management’s best assessment of the effect of changing interest rates on the prepayment speeds of certain assets and liabilities, projections for account balances in each of the product lines offered and the historical behavior of deposit rates and balances in relation to changes in interest rates (deposit betas). These assumptions are inherently changeable, and as a result, the model is not expected to precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from the simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in the balance sheet composition and market conditions. Assumptions are supported with quarterly back-testing of the model to actual market rate shifts.
The table below sets forth, as of June 30, 2024 and 2023, the net interest income simulation results that estimate the impact of interest rate changes on the Company’s estimated net interest income over two years:
Change in Net Interest Income
(% change from year one base)
Changes in Interest Rates
June 30, 2023
(basis points) (1)
Year One
Year Two
+300
(12.0)
(14.7)
(10.9)
+200
(7.9)
(9.5)
(7.3)
(6.5)
+100
(3.8)
(4.4)
(3.5)
(2.9)
-100
-200
5.5
-300
5.9
-400
6.2
(1) The calculated change in net interest income assumes an instantaneous parallel shift of the yield curve.
Economic Value of Equity Analysis. The Company also uses the net present value of EVE methodology. This methodology calculates the difference between the present value of expected cash flows from assets and liabilities. The comparative scenarios assume an immediate parallel shift in the yield curve up 100, 200, and 300 basis points and down 100, 200, 300 and 400 basis points.
The table below sets forth, as of June 30, 2024 the estimated changes in the EVE that would result from an instantaneous parallel shift in interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
At June 30, 2024
EVE as a Percentage of Economic
Estimated Increase (Decrease)
Value of Assets
Estimated
in EVE
Changes in
EVE Ratio (2)
+ 300
382,963
(182,118)
(32.2)
7.7
(2.8)
+ 200
450,225
(114,856)
(20.3)
8.8
+ 100
515,966
(49,115)
(8.7)
9.8
(0.7)
565,081
10.5
- 100
601,265
36,184
- 200
573,225
8,144
1.4
10.1
(0.4)
- 300
530,722
(34,359)
(6.1)
9.1
(1.4)
464,640
(100,441)
(17.8)
(2.7)
(1) Assumes instantaneous parallel changes in interest rates.
(2) EVE Ratio represents EVE divided by the economic value of assets.
The board of directors and Management review the methodology’s measurements for both net interest income and EVE on a quarterly basis to determine whether the exposure resulting from the changes in interest rates remains within established tolerance levels and develop appropriate strategies to manage this exposure.
Liquidity Management and Capital Resources
Liquidity measures the Company’s ability to meet both current and future financial obligations of a short- and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans are greatly influenced by general interest rates, economic conditions, and competition.
The objective of our liquidity risk management process is to manage cash flow and liquidity in an effort to provide continuous access to sufficient, reasonably priced funds. Funding requirements are impacted by loan originations and refinancings, deposit balance changes, liability issuances and settlements, and off-balance sheet funding commitments. We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions. Management regularly adjusts our investments in liquid assets based upon an assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of our interest-rate risk and investment policies.
We continue to focus on maintaining a strong liquidity position. We have access to immediate liquid resources in cash and cash equivalents of $235.1 million at June 30, 2024, which are primarily on deposit with FRBB. Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and FRBB. As of June 30, 2024, we had additional borrowing capacity of $733.9 million from the FHLB and $404.9 million from the FRBB based on the amount of collateral pledged. We also have additional borrowing capacity under a $25.0 million unsecured federal funds line with a correspondent bank. Potential sources of liquidity also include unpledged investment securities in our available-for-sale securities portfolio with a carrying value of $7.9 million and our ability to sell loans in the secondary market.
Our core deposits (which we define as deposits other than certificates of deposits) have historically provided us with a long-term source of stable and relatively lower cost source of funding. However, deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, competition, local and national economic conditions and fluctuations in our business customers’ own liquidity needs and may be negatively impacted by unexpected deposit withdrawals from weakness in the financial markets and industry-wide reductions in liquidity. The Company utilizes third- party brokers to obtain brokered deposits to supplement core deposit fluctuations and loan growth. At June 30, 2024, the Company had $385.3 million in brokered deposits. Additional funding is available through the issuance of long-term debt or equity.
In the ordinary course of the Company’s operations, the Company has entered into certain contractual obligations and has made other commitments to make future payments. At June 30, 2024, we had outstanding commitments to originate loans of $205.0 million and unadvanced funds on loans of $696.5 million. Certificates of deposit that are scheduled to mature within one year from June 30, 2024 totaled $1.21 billion.
The Company believes that it will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels and liquidity. Other than normal changes in the ordinary course of business, there have been no significant changes in the types of contractual obligations or amounts due since December 31, 2023.
Our ability to maintain adequate levels of liquidity is dependent on our ability to continue to maintain a strong risk profile and capital base. The Company and the Bank are subject to various regulatory capital requirements. At June 30, 2024, the Company and the Bank exceeded all regulatory capital requirements and were considered “well capitalized” under regulatory guidelines. See Note 12 of the Notes to Consolidated Financial Statements.
Non-GAAP Financial Measures and Reconciliation to GAAP
In addition to results presented in accordance with generally accepted accounting principles, this Form 10-Q contains certain non-GAAP financial measures. The Company believes that the supplemental non-GAAP information, which consists of the tangible-common-equity-to-tangible-assets ratio, is utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors. These disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names.
The following table reconciles the Company’s tangible-common-equity-to-tangible-assets ratio for the periods indicated:
(dollars on thousands)
Tangible common equity:
Less: Goodwill
Less: Other intangible assets (1)
1,893
Tangible common equity
517,151
523,837
Tangible assets:
Tangible assets
5,726,857
5,587,559
Tangible common equity / tangible assets (2)
9.03
9.38
(1) Other intangible assets are core deposit intangibles.
(2) This non-GAAP ratio is total stockholders' equity less goodwill and intangible assets to total assets less goodwill and intangible assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is included in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading “Management of Market Risk.”
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, the Company carried out an evaluation under the supervision and with the participation of the Company’s Management, including the Company’s principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures as of the period ended June 30, 2024. Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s Management including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures. The Company will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate.
Internal Control Over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any material pending legal proceedings as a plaintiff or a defendant other than routine
legal proceedings occurring in the ordinary course of business. We are not involved in any legal proceedings the outcome
of which we believe would be material to our financial condition or results of operations.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors described in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 7, 2024.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Total number of
Maximum number (or
shares (or units)
approximate dollar
purchased as part
value) of shares (or
of publicly
units) that may yet be
Average price paid
announced plans or
purchased under the
Period
purchased
per share (or unit)
programs
plans or programs
April 1 to April 30, 2024
365,000
9.87
178,539
May 1 to May 31, 2024
10.86
543,539
2,222,568
June 1 to June 30, 2024
51,414
10.69
594,953
2,171,154
10.24
During the second quarter of 2024, the Company completed its previously announced sixth share repurchase program of 2,325,489 shares at an average price of $10.16, including $0.10 per share of excise tax.
On May 29, 2024, the Company announced a share repurchase program to repurchase up to 2,222,568 shares of its common stock, or approximately 5% of its outstanding shares. During the second quarter of 2024, the Company repurchased 51,414 shares at an average cost of $10.69 per share in open market transactions under the share repurchase program. The share repurchase program will expire on May 28, 2025.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
The exhibits listed in the Exhibit Index are included in, or incorporated by reference into, this Quarterly Report on Form 10-Q.
The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No.
Description
31.1*
Certification of Chief Executive Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
31.2*
Certification of Chief Financial Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
32.1**
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Interactive data files (formatted in Inline XBRL) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023, (ii) the Consolidated Statements of Income for the three months and six months ended June 30, 2024 and 2023 (iii) the Consolidated Statements of Comprehensive (Loss) Income for the three months and six months ended June 30, 2024 and 2023, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three months and six months ended June 30, 2024 and 2023, (v) the Consolidated Statements of Cash Flows for the three months and six months ended June 30, 2024 and 2023, and (vi) the Notes to the unaudited Consolidated Financial Statements.
Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101)
*Filed herewith
**Furnished herewith
† Management contract or compensation plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 6, 2024
By:
/s/ Joseph F. Casey
Joseph F. Casey
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Stephen W. Finocchio
Stephen W. Finocchio
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)