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 March 31, 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 May 1, 2024, there were 44,675,732 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 March 31, 2024 and December 31, 2023 (unaudited)
2
Consolidated Statements of Income for the Three Months Ended March 31, 2024 and 2023 (unaudited)
3
Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2024 and 2023 (unaudited)
4
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2024 and 2023 (unaudited)
5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (unaudited)
6
Notes to Consolidated Financial Statements (unaudited)
Note 1. Summary of Significant Accounting Policies
8
Note 2. Debt Securities
9
Note 3. Loans Held for Sale
12
Note 4. Loans and Allowance for Credit Losses
13
Note 5. Mortgage Loan Servicing
19
Note 6. Goodwill and Other Intangible Assets
20
Note 7. Deposits
21
Note 8. Borrowings
22
Note 9. Other Commitments and Contingencies
23
Note 10. Derivatives
24
Note 11. Operating Lease ROU Assets and Liabilities
29
Note 12. Minimum Regulatory Capital Requirements
30
Note 13. Comprehensive (Loss) Income
32
Note 14. Fair Value of Assets and Liabilities
Note 15. Earnings Per Share
38
Note 16. Revenue Recognition
39
Note 17. Segment Reporting
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
41
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
59
ITEM 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
60
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
61
Defaults Upon Senior Securities
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
62
EXHIBIT INDEX
SIGNATURE
63
The following is a list of common acronyms and terms used regularly in our financial reporting:
ACL
Allowance for Credit Losses
Bank
HarborOne Bank
BIC
Borrower-in-custody
BOLI
Bank-owned life insurance
BTFP
Bank Term Funding Program
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
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
Subordinated Notes
$35.0 million in fixed-to-floating-rate subordinated notes due 2028
Treasury
U.S. Department of the Treasury
USA PATRIOT Act
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
Consolidated Balance Sheets (unaudited)
March 31,
December 31,
(in thousands, except share data)
2024
2023
Assets
Cash and due from banks
$
36,340
38,876
Short-term investments
357,101
188,474
Total cash and cash equivalents
393,441
227,350
Securities available for sale, at fair value
291,008
290,151
Securities held to maturity, at amortized cost (fair value of $19,102 at March 31, 2024 and $19,262 at December 31. 2023)
19,724
19,796
Federal Home Loan Bank stock, at cost
26,565
27,098
Asset held for sale
348
Loans held for sale, at fair value
16,434
19,686
Loans
4,776,685
4,750,311
Less: Allowance for credit losses on loans
(48,185)
(47,972)
Net loans
4,728,500
4,702,339
Accrued interest receivable
19,470
18,169
Mortgage servicing rights, at fair value
46,597
46,111
Property and equipment, net
47,913
48,749
Retirement plan annuities
15,315
15,170
95,421
94,675
Goodwill
59,042
Intangible assets
1,326
1,515
Other assets
101,118
97,697
Total assets
5,862,222
5,667,896
Liabilities and Stockholders’ Equity
Deposits:
Demand deposit accounts
677,152
659,973
NOW accounts
305,071
305,825
Regular savings and club accounts
1,110,404
1,265,315
Money market deposit accounts
1,061,145
966,201
Term certificate accounts
852,326
863,457
Brokered deposits
387,926
326,638
Total deposits
4,394,024
4,387,409
Borrowings
754,380
568,462
Mortgagors’ escrow accounts
10,364
8,872
Accrued interest payable
7,302
5,251
Other liabilities and accrued expenses
118,469
114,143
Total liabilities
5,284,539
5,084,137
Commitments and contingencies (Notes 7, 12 and 13)
Common stock, $0.01 par value; 150,000,000 shares authorized; 60,512,221 and 60,255,288 shares issued; 45,055,006 and 45,401,224 shares outstanding at March 31, 2024 and December 31, 2023, respectively
598
Additional paid-in capital
487,277
486,502
Retained earnings
363,591
359,656
Treasury stock, at cost, 15,457,215 and 14,854,064 shares at March 31, 2024 and December 31, 2023, respectively
(199,853)
(193,590)
Accumulated other comprehensive loss
(48,604)
(43,622)
Unearned compensation - ESOP
(25,326)
(25,785)
Total stockholders’ equity
577,683
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 March 31,
Interest and dividend income:
Interest and fees on loans
59,937
52,771
Interest on loans held for sale
243
286
Interest on taxable securities
2,065
2,079
Other interest and dividend income
4,659
803
Total interest and dividend income
66,904
55,939
Interest expense:
Interest on deposits
26,899
15,913
Interest on borrowings
9,423
5,105
Interest on subordinated debentures
—
523
Total interest expense
36,322
21,541
Net interest and dividend income
30,582
34,398
Provision (benefit) for credit losses
(168)
1,866
Net interest and dividend income, after provision for credit losses
30,750
32,532
Noninterest income:
Mortgage banking income:
Gain on sale of mortgage loans
2,013
2,224
Changes in mortgage servicing rights fair value
54
(1,692)
Other
2,276
2,216
Total mortgage banking income
4,343
2,748
Deposit account fees
4,983
4,733
Income on retirement plan annuities
145
119
Bank-owned life insurance income
746
500
Other income
524
590
Total noninterest income
10,741
8,690
Noninterest expense:
Compensation and benefits
17,636
17,799
Occupancy and equipment
4,781
5,040
Data processing
2,479
2,346
Loan expenses
371
313
Marketing
816
1,181
Deposit expenses
690
534
Postage and printing
438
457
Professional fees
1,457
1,501
Foreclosed and repossessed assets
(17)
Deposit insurance
1,164
510
Other expenses
1,914
1,845
Total noninterest expense
31,750
31,509
Income before income taxes
9,741
9,713
Income tax provision
2,441
2,416
Net income
7,300
7,297
Earnings per common share:
Basic
0.17
0.16
Diluted
Weighted average shares outstanding:
41,912,421
44,857,224
42,127,037
45,284,240
Consolidated Statements of Comprehensive (Loss) Income (unaudited)
(in thousands)
Other comprehensive (loss) income:
Unrealized gain/loss on cashflow hedge:
Unrealized holding gains(losses)
718
(170)
Reclassification adjustment for net gains included in net income
(1,235)
(1,018)
Net change in unrealized losses on derivatives in cashflow hedging instruments
(517)
(1,188)
Related tax effect
148
334
Net-of-tax amount
(369)
(854)
Unrealized gain/loss on securities available for sale:
Unrealized holding (losses) gains
(4,940)
7,089
(1,563)
(4,592)
5,526
Postretirement benefit:
Adjustment of accumulated obligation for postretirement benefits
(1)
Reclassification adjustment for gains recognized in net periodic benefit cost
(20)
Net gains
(21)
Total other comprehensive (loss) income
(4,982)
4,672
Comprehensive income
2,318
11,969
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 December 31, 2022
48,961,452
596
483,031
356,438
(148,384)
(47,082)
(27,623)
616,976
Dividends declared of $0.075 per share
(3,281)
ESOP shares committed to be released (57,681 shares)
312
459
771
Restricted stock awards granted, net of forfeitures
157,059
Share-based compensation expense
488
489
Treasury stock purchased
(2,055,424)
(27,130)
Balance at March 31, 2023
47,063,087
597
483,831
360,454
(175,514)
(42,410)
(27,164)
599,794
Balance at December 31, 2023
45,401,224
Comprehensive income (loss)
Dividends declared of $0.08 per share
(3,365)
162
621
193,073
Performance stock units vested
63,860
613
(603,151)
(6,263)
Balance at March 31, 2024
45,055,006
Consolidated Statements of Cash Flows (unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
Net amortization of securities premiums/discounts
88
106
Proceeds from sale of loans
92,798
81,760
Loans originated for sale
(87,755)
(74,940)
Accretion of net deferred loan costs/fees and premiums
(56)
(88)
Depreciation and amortization of premises and equipment
946
973
Change in mortgage servicing rights fair value
(275)
1,692
Mortgage servicing rights capitalized
(211)
(634)
Accretion of fair value adjustment on loans and deposits, net
(92)
(39)
Amortization of other intangible assets
189
190
Amortization of subordinated debt issuance costs
Net gains on mortgage loan sales, including fair value adjustments
(1,790)
(2,232)
(746)
(500)
(145)
(119)
Net loss (gain) on sale and write-down of other real estate owned and repossessed assets
ESOP expense
Decrease in operating lease ROU assets
462
728
Decrease in operating lease liabilities
(443)
(727)
Change in other assets
(3,803)
4,139
Change in other liabilities
7,437
(11,082)
Net cash provided by operating activities
14,974
9,665
Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls
4,801
5,073
Purchases
(10,689)
Activity in securities held to maturity:
Maturities, prepayment and calls
74
113
Net redemption (purchase) of FHLB stock
533
(3,518)
Participation-in loan purchases
(7,342)
Net loan (originations) payments
(27,822)
(65,510)
Proceeds from sale of other real estate owned and repossessed assets
65
105
Additions to property and equipment
(110)
(491)
Net cash used by investing activities
(33,148)
(71,570)
(continued)
Cash flows from financing activities:
Net increase in deposits
6,615
52,178
Net change in short-term borrowed funds
(68,000)
40,000
Proceeds from borrowings
317,326
150,000
Repayment of borrowings
(63,408)
(10)
Net change in mortgagors’ escrow accounts
1,492
2,048
Dividends paid
(3,497)
(3,444)
Net cash provided by financing activities
184,265
213,642
Net change in cash and cash equivalents
166,091
151,737
Cash and cash equivalents at beginning of period
98,017
Cash and cash equivalents at end of period
249,754
Supplemental cash flow information:
Interest paid on deposits
26,781
15,343
Interest paid on borrowed funds
7,501
6,077
Income taxes paid, net
2,103
1,131
Transfer of loans to other real estate owned and repossessed assets
80
Dividends declared
3,365
3,281
7
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 rising 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 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, a recession, or further escalation of the current geopolitical situation. 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.
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
March 31, 2024:
Securities available for sale
U.S. government and government-sponsored enterprise obligations
47,143
7,127
40,016
U.S. government agency and government-sponsored residential mortgage-backed securities
305,548
59,486
246,071
U.S. government-sponsored collateralized mortgage obligations
1,656
66
1,590
SBA asset-backed securities
1,607
90
1,517
Corporate bonds
2,000
186
1,814
Total securities available for sale
357,954
66,955
Securities held to maturity
15,000
477
14,523
4,724
4,579
Total securities held to maturity
622
19,102
December 31, 2023:
6,961
40,182
300,277
54,683
245,597
1,852
70
1,782
1,885
107
1,778
1,000
188
812
352,157
62,009
14,562
4,796
96
4,700
19,262
Accrued interest receivable is excluded from the amortized cost basis of debt securities. Accrued interest receivable totaled $959,000 and $940,000 as of March 31, 2024 and December 31, 2023, respectively. At March 31, 2024, available-for-sale debt securities with a fair value of $158.3 million were pledged for the BTFP borrowing, and available-for-sale debt securities with a fair value of $129.4 million and held-to-maturity securities with a fair value of $14.5 million were pledged as collateral to provide borrowing capacity through the FRB BIC line.
The amortized cost and fair value of debt securities by contractual maturity at March 31, 2024 is as follows:
Available for Sale
Held to Maturity
After 1 year through 5 years
7,998
7,564
After 5 years through 10 years
41,145
34,266
49,143
41,830
U.S. government-sponsored residential mortgage-backed securities, collateralized mortgage obligations, and securities whose underlying assets are loans from the SBA have stated maturities of one 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 $56.4 million have a final maturity of three to eight years and a call feature of one month to three years. At March 31, 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.
10
There were no sales or calls of securities in the three months ended March 31, 2024 and 2023, respectively.
Information pertaining to securities with gross unrealized losses at March 31, 2024 and December 31, 2023 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
Less Than Twelve Months
Twelve Months and Over
47
9,249
59,439
231,934
814
66,908
275,871
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 March 31, 2024, the Company’s security portfolio consisted of 136 debt securities, 133 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 March 31, 2024 represent a credit loss impairment. As of March 31, 2024, and December 31, 2023, the gross unrealized loss positions were primarily related to mortgage-backed securities and other
11
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 March 31, 2024.
As of March 31, 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
16,125
19,155
Fair value less unpaid principal balance
309
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 a decrease of $222,000 in the three months ended March 31, 2024 to $309,000, compared to an increase of $8,000 to $344,000 in the three months ended March 31, 2023. 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 March 31, 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:
Residential real estate:
One- to four-family
1,507,959
1,513,554
Second mortgages and equity lines of credit
173,613
177,135
Residential real estate construction
14,650
18,132
Total residential real estate loans
1,696,222
1,708,821
Commercial:
Commercial real estate
2,355,672
2,343,675
Commercial construction
234,811
208,443
Commercial and industrial
471,215
466,443
Total commercial loans
3,061,698
3,018,561
Consumer loans:
Auto
11,888
13,603
Personal
7,413
8,433
Total consumer loans
19,301
22,036
Total loans before basis adjustment
4,777,221
4,749,418
Basis adjustment associated with fair value hedge (1)
(536)
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 $8.7 million and $8.5 million as of March 31, 2024 and December 31, 2023, respectively.
As of March 31, 2024 and December 31, 2023, the commercial and industrial loans includes $278,000 and $321,000, respectively, of SBA PPP loans and $32,000 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 March 31, 2024 and December 31, 2023, the Company was servicing commercial loans for participants in the aggregate amount of $416.1 million and $413.0 million, respectively.
The following table presents the activity in the ACL on loans for the three months ended March 31, 2024 and 2023:
Second Mortgages
Residential
One- to Four-
and Equity
Real Estate
Commercial
Family
Lines of Credit
Construction
and Industrial
Consumer
12,101
964
418
21,288
4,824
8,107
270
47,972
Charge-offs
(228)
(49)
(277)
Recoveries
100
46
152
Provision
(66)
(25)
(87)
(125)
498
138
338
12,035
942
331
21,263
5,322
8,063
229
48,185
11,532
924
280
20,357
4,645
7,236
262
45,236
(7)
(14)
16
25
36
475
584
412
255
1,747
11,508
967
755
20,942
5,057
7,484
281
46,994
14
As of March 31, 2024, the carrying value of individually analyzed loans amounted to $12.2 million, with a related allowance of $72,000, and $12.1 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.
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 March 31, 2024 and December 31, 2023:
March 31, 2024
December 31, 2023
Related
Carrying Value
1,496
7,416
1,744
67
1,793
101
Total Commercial
3,240
72
9,209
Residential real estate
8,866
8,054
12,106
17,263
15
The following is a summary of past due and non-accrual loans at March 31, 2024 and December 31, 2023:
90 Days
30-59 Days
60-89 Days
or More
Loans on
Past Due
Non-accrual
2,596
682
5,209
8,487
8,158
608
316
934
708
850
641
603
1,301
1,970
Consumer:
68
27
53
18
3,641
2,559
6,851
13,051
12,160
4,704
2,413
4,418
11,535
7,785
164
130
57
351
473
5,751
247
166
1,332
1,745
1,791
69
169
31
52
44
5,227
2,783
11,593
19,603
17,513
At March 31, 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.
There were no material loan modifications based on borrower financial difficulty during the three months ended March 31, 2024 and 2023. There were no loans to borrowers experiencing financial difficulty that had a payment default during the three months ended March 31, 2024 and 2023 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.
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.
17
The following table summarizes the Company’s loan portfolio by credit quality indicator and loan portfolio segment as of March 31, 2024:
Revolving
Converted
Term Loans at Amortized Cost by Origination Year
to Term
2022
2021
2020
Prior
As of March 31, 2024
Pass
24,559
147,200
826,882
455,253
233,191
614,772
2,301,857
Special mention
1,600
18,839
4,293
27,587
52,319
Substandard
Doubtful
Total commercial real estate
148,800
845,721
237,484
643,855
YTD gross charge-offs
11,690
73,215
50,703
92,676
68,905
94,486
76,180
467,855
427
184
883
1,616
50
390
442
1,253
49
1,302
Total commercial and industrial
51,132
92,860
68,977
97,012
76,329
153
228
45,676
110,181
64,268
721
220,846
4,240
9,725
13,965
Total commercial construction
49,916
119,906
Accrual
12,179
135,862
431,542
471,589
199,720
271,197
163,938
1,329
1,687,356
467
294
322
7,363
Total residential real estate
432,009
471,883
200,042
278,560
164,350
1,337
2,349
5,510
4,791
1,912
2,928
954
19,247
28
Total Consumer
5,514
4,803
807
2,956
960
50,777
413,307
1,453,571
1,086,176
507,310
1,022,383
242,360
Total YTD gross charge-offs
158
84
277
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
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
425
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
127
956
6,959
216
8,258
202,245
39,631
246,144
166,360
8,218
5,366
2,254
1,021
3,135
963
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
26
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 $3.52 billion and $3.56 billion as of March 31, 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 March 31, 2024 and December 31, 2023, the following weighted average assumptions were used in the calculation of fair value of MSRs:
Prepayment speed
7.50
%
7.60
Discount rate
9.94
9.81
Default rate
1.88
2.27
The following summarizes changes to MSRs for the three months ended March 31, 2024 and 2023:
Balance, beginning of period
48,138
Additions
211
634
Changes in fair value due to:
Reductions from loans paid off during the period
(353)
(371)
Changes in valuation inputs or assumptions
628
(1,321)
Balance, end of period
47,080
Contractually specified servicing fees, net of subservicing expense, included in other mortgage banking income amounted to $2.0 million for the three months ended March 31, 2024 and $2.0 million for the three months ended March 31, 2023.
6.
GOODWILL AND OTHER INTANGIBLE ASSETS
At March 31, 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 March 31, 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 March 31, 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 our current forecasts, or significant adverse changes in the operating environment for the financial industry.
Other intangible assets were $1.3 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 March 31, 2024.
7.
DEPOSITS
A summary of deposit balances, by type, is as follows:
NOW and demand deposit accounts
982,223
965,798
Total non-certificate accounts
3,153,772
3,197,314
Term certificate accounts greater than $250,000
219,050
240,702
Term certificate accounts less than or equal to $250,000
633,276
622,755
Total certificate accounts
1,240,252
1,190,095
Total municipal deposits included in the table amounted to $487.0 million at March 31, 2024 and $471.8 million at December 31, 2023. Municipal deposits are generally required to be fully insured. The Company provided supplemental insurance for municipal deposits through a reciprocal deposit program and letters of credit offered by the FHLB. DIF was exited February 24, 2023 and generally provided coverage until February 24, 2024 on deposits that existed at the exit date. The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions. The reciprocal deposit program provides access to FDIC-insured deposit products in aggregate amounts exceeding the current limits for depositors. At March 31, 2024 and December 31, 2023, total reciprocal deposits were $394.9 million and $209.4 million, respectively, consisting of non-certificate accounts.
A summary of certificate accounts by maturity at March 31, 2024 is as follows:
Weighted
Average
Rate
(dollars in thousands)
Within 1 year
1,157,083
4.46
Over 1 year to 2 years
44,999
3.30
Over 2 years to 3 years
36,870
3.96
Over 3 years to 4 years
1,045
1.75
Over 4 years to 5 years
0.52
Total certificate deposits
4.40
8.BORROWINGS
Borrowed funds at March 31, 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 $235.0 million and $303.0 million with a weighted average rate of 5.51% and 5.53%, at March 31, 2024 and December 31, 2023, respectively. Long-term borrowings are summarized by maturity date below.
Amount by
Scheduled
Maturity*
Call Date (1)
Rate (2)
Year ending December 31:
10,000
190,000
1.68
2025
245,987
255,987
4.69
13,400
1.39
2026
130,000
4.30
90,987
4.31
2027
50,000
4.12
110,000
4.20
2028
59,198
19,198
4.03
3.72
2029
23,128
13,128
4.06
3.86
2030 and thereafter
1,067
2.00
1,075
519,380
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 16 callable advances at March 31, 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 $2.04 billion at March 31, 2024 and $2.02 billion at December 31, 2023. As of March 31, 2024, the Company had $532.0 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 March 31, 2024, the Bank had $364.0 million of borrowing capacity secured by 59% of the carrying value of commercial loans with principal balances amounting to $363.4 million and securities with a collateral value in the amount of $151.0 million at March 31,2024, with no balance outstanding. At March 31, 2024, the Bank also had a $175.0 million borrowing under the BTFP secured by available-for-sale securities with a par value of $186.7 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 Subordinated Notes and expensed the remaining unamortized issuance costs. Amortization of issuance costs was $32,000 for the quarter ended March 31, 2023.
9.
OTHER COMMITMENTS AND CONTINGENCIES
ACL on Unfunded Commitments
The ACL on unfunded commitments amounted to $3.4 million and $5.0 million at March 31, 2024 and 2023, respectively. The activity in the ACL on unfunded commitments for the three months ended March 31, 2024 and 2023 is presented below:
254
411
2,351
882
3,918
(51)
(421)
(37)
(506)
258
360
1,930
845
3,412
336
3,079
870
4,927
(74)
(80)
198
548
3,277
940
5,046
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 March 31, 2024 and December 31, 2023. The contract amounts represent credit risk.
Commitments to grant residential real estate loans-HarborOne Mortgage
48,624
35,029
Commitments to grant other loans
39,967
48,547
Unadvanced funds on home equity lines of credit
264,888
260,376
Unadvanced funds on revolving lines of credit
283,982
306,943
Unadvanced funds on construction loans
175,514
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 credit-worthiness 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 or not 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 March 31, 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 March 31, 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)
99,464
100,855
855
(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 March 31, 2024, the amortized cost basis of the closed portfolios used in these hedging relationships was $1.20 billion; the cumulative basis adjustments associated with these hedging relationships was $(536,000) 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 March 31, 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 1.02 years, the current weighted average fixed rate paid is 0.67%, the weighted average 3-month SOFR swap receive rate is 5.61%, and the fair value is $4.6 million. The Company expects approximately $4.4 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
565
Cashflow hedge - interest rate swaps
Total derivatives designated as hedging instruments
5,144
Derivatives not designated as hedging instruments
Derivative loan commitments
34,819
397
Forward loan sale commitments
37,000
Interest rate swaps
877,905
25,365
Interest rate futures
32,000
Risk participation agreements
202,967
Total derivatives not designated as hedging instruments
25,862
25,415
Total derivatives
31,006
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
(1,429)
Interest rate swap contracts
1,420
(9)
Mortgage banking income
558
310
(477)
(221)
146
81
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)
1,235
1,018
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 March 31, 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
(4,579)
Interest rate swap on residential real estate loans
(580)
(15)
Customer interest rate swaps
24,241
(24,421)
(180)
11.
OPERATING LEASE ROU ASSETS AND LIABILITIES
Operating lease ROU assets, included in other assets, were $22.4 million and $22.9 million at March 31, 2024 and December 31, 2023, respectively.
Operating lease liabilities, included in other liabilities and accrued expenses, were $24.1 million and $24.5 million at March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024 and December 31, 2023 there were no leases that had not yet commenced. At March 31, 2024, lease expiration dates ranged from one month to 34.4 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 March 31, 2024 were as follows:
2,754
2,642
2,485
2,239
Thereafter
16,588
Total lease payments
29,124
Imputed interest
(5,044)
Total present value of operating lease liabilities
24,080
The weighted-average discount rate and remaining lease term for operating leases were as follows:
Weighted-average discount rate
2.09
2.08
Weighted-average remaining lease term (years)
16.10
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
Lease Expense:
Operating lease expense
747
Short-term lease expense
Variable lease expense
Sublease income
(5)
Total lease expense
778
834
Cash paid for amounts included in the measurement of lease liabilities-
operating cash flows for operating leases
737
835
Operating Lease - Operating cash flows (Liability reduction)
615
680
ROU assets obtained in exchange for new operating lease liabilities
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 March 31, 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 March 31, 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 March 31, 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
566,298
12.0
212,812
4.5
N/A
Tier 1 capital to risk-weighted assets
283,749
6.0
Total capital to risk-weighted assets
617,896
13.1
378,332
8.0
Tier 1 capital to average assets
9.7
232,397
4.0
567,248
212,816
283,755
619,138
378,340
10.0
226,690
514,878
10.9
212,731
307,278
6.5
283,641
378,188
566,476
472,735
8.9
232,374
290,467
5.0
509,791
10.8
212,724
307,267
283,632
378,175
561,682
11.9
472,719
9.0
226,666
283,333
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 months ended March 31, 2024 and 2023:
Available
Postretirement
for Sale
Flow
Benefit
Securities
Hedge
Balance at beginning of period
85
(47,373)
3,666
150
(53,212)
5,980
Other comprehensive income (loss) before reclassifications
(4,223)
6,919
Amounts reclassified from accumulated other comprehensive (loss) income
(1,255)
Net current period other comprehensive (loss) income
(5,478)
5,901
496
(1,229)
Balance at end of period
64
(51,965)
3,297
(47,686)
5,126
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 March 31, 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 March 31, 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 March 31, 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
33
on the Company’s internal cost analysis that is not observable. The weighted average pull-through rate for derivative loan commitments was approximately 91% and 89% at March 31, 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 March 31, 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 classified 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.
34
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
30,557
449
384,596
385,045
28,340
484
384,288
384,772
24,100
451
The table below presents, for the three months ended March 31, 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:
487
Total gains (losses) included in net income (1)
(35)
279
766
Changes in unrealized gains relating to instruments at period end
Liabilities: Derivative and Forward Loan Sale Commitments:
(451)
(104)
401
(198)
(50)
(302)
Changes in unrealized losses relating to instruments at period end
(1) Included in mortgage banking income on the Consolidated Statements of Income.
35
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 March 31, 2024. There are no liabilities measured at fair value on a non-recurring basis at March 31, 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 March 31, 2024 and December 31, 2023, respectively. Losses on fully charged off loans are not included in the table.
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
108
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 and commercial real estate loan 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.
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
4,500,663
Financial liabilities:
Deposits
4,382,830
Borrowed funds
751,277
Mortgagors' escrow accounts
4,482,448
4,376,269
303,000
567,158
Subordinated debt
-
37
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 March 31, 2024 and 2023, respectively, potential common shares of 105,836 and 134,155 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
45,285,471
48,434,373
Less: Average unallocated ESOP shares and non-vested restricted shares
(3,373,050)
(3,577,149)
Weighted average number of common shares outstanding used to calculate basic earnings per common share
Dilutive effect of share-based compensation
214,616
427,016
Weighted average number of common shares outstanding used to calculate diluted earnings per common share
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 March 31, 2024 and 2023 and for the three months ended March 31, 2024 and 2023 is presented in the tables below.
Three Months Ended March 31, 2024
HarborOne
Mortgage
30,485
Benefit for credit losses
Net interest and dividend income, after benefit for credit losses
30,653
Intersegment gain (loss)
(236)
308
(32)
86
180
2,097
4,504
Other noninterest income
6,391
6,398
6,303
4,514
Noninterest expense
27,407
4,311
9,549
283
Provision for income taxes
2,386
7,163
223
Total assets at period end
5,867,715
92,719
Goodwill at period end
Three Months Ended March 31, 2023
34,562
327
32,696
Intersegment (loss) gain
(348)
(136)
(1,556)
201
2,015
Total mortgage banking (loss) income
(283)
5,942
5,659
26,190
Income(loss) before income taxes
12,165
(1,858)
Provision(benefit) for income taxes
3,115
(565)
Net income (loss)
9,050
(1,293)
5,583,453
109,090
5,572,858
10,760
69,802
40
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 March 31, 2024, and our results of operations for the three months ended March 31, 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; acquisitions may not produce results at levels or within time frames originally anticipated; 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 March 31, 2024 and December 31, 2023
Total Assets. Total assets increased $194.3 million, or 3.4%, to $5.86 billion at March 31, 2024 from $5.67 billion at December 31, 2023. The increase primarily reflects an increase of $168.6 million in short-term investments and a $26.4 million increase in loans. The increase in short-term investments reflects on-balance sheet liquidity.
Cash and Cash Equivalents. Cash and cash equivalents increased $166.1 million to $393.4 million at March 31, 2024 from $227.4 million at December 31, 2023, primarily due to an increase in short-term investments.
Loans Held for Sale. Loans held for sale at March 31, 2024 were $16.4 million, a decrease of $3.3 million from $19.7 million at December 31, 2023, reflecting lower loan production at HarborOne Mortgage.
42
Loans, net. Net loans increased $26.2 million, or 0.6%, to $4.73 billion at March 31, 2024 from $4.70 billion at December 31, 2023. The following table sets forth information concerning the composition of loans:
Increase (Decrease)
Dollars
Percent
(5,595)
(0.4)
Second mortgage and equity lines of credit
(3,522)
(2.0)
Residential construction
(3,482)
(19.2)
(12,599)
(0.7)
11,997
0.5
26,368
12.6
4,772
1.0
43,137
1.4
Consumer loans
(2,735)
(12.4)
27,803
0.6
`
(160.0)
26,374
(213)
0.4
26,161
(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 March 31, 2024 were $291.0 million, an increase of $857,000, or 0.3%, from $290.0 million at December 31, 2023. Securities available for sale were negatively impacted by unrealized losses of $67.0 million and $62.0 million as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 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 March 31, 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 March 31, 2024, we serviced mortgage loans for others with an aggregate outstanding principal balance of $3.52 billion. Total MSRs were $46.6 million at March 31, 2024 and $46.1 million at December 31, 2023. The change in total MSRs for the three months ended March 31, 2024 reflects additions of $211,000 million from new mortgage originations, amortization from loan repayments of $353,000 and a positive fair value mark of $628,000.
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
43
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 $4.39 billion at March 31, 2024 and December 31, 2023. The following table sets forth information concerning the composition of deposits:
Noninterest-bearing deposits
17,179
2.6
305,018
305,774
(756)
(0.2)
Regular savings
(154,911)
(12.2)
Money market accounts
574,155
499,651
74,504
14.9
858,241
(5,915)
Consumer and business deposits
3,519,055
3,588,954
(69,899)
(1.9)
Municipal deposits
487,043
471,817
15,226
3.2
61,288
18.8
0.2
Reciprocal deposits included in total deposits
394,931
209,401
185,530
88.6
Total deposits increased $6.6 million reflecting an increase of $61.3 million in brokered deposits and a $15.2 million increase in municipal deposits partially offset by a $69.9 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 $394.9 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 $1.2 billion and $1.4 billion as of March 31, 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 Company calculates its uninsured deposits based on the guidance provided by the FDIC for regulatory reporting purposes, which includes subsidiary deposits.
The following table summarizes uninsured deposits at the date indicated:
Uninsured deposits, per regulatory reporting requirements
1,192,944
1,420,431
Less: Subsidiary deposits
355,282
349,748
Collateralized deposits
197,871
17,892
Uninsured deposits, after exclusions
639,791
1,052,791
Uninsured deposits, after excluding subsidiary deposits and collateralized deposits, represented 15% of total deposits at March 31, 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 $185.9 million to $754.4 million at March 31, 2024 from $568.5 million at December 31, 2023. At March 31, 2024, FHLB short-term borrowings were $235.0 million and long-term borrowings were $344.4 million. The Company borrowed $175 million for a one-year term under the BTFP during the first quarter of 2024. As of March 31, 2024, the Bank had $921.1 million in available borrowing capacity across multiple relationships.
Stockholders’ equity. Total stockholders’ equity was $577.7 million at March 31, 2024, compared to $583.8 million at December 31, 2023 and $599.8 million at March 31, 2023. Stockholders’ equity decreased 1.0% when compared to the year end, as earnings were offset by share repurchases and an increase in unrealized loss on available-for-sale securities. As of March 31, 2024, the Company’s sixth share repurchase program, commenced in the third quarter of 2023, is ongoing with 1,781,950 shares repurchased since commencement, at an average price of $10.15, including $0.10 per share of excise tax.
The tangible-common-equity-to-tangible-assets ratio (non-GAAP) was 8.92% at March 31, 2024, 9.33% at December 31, 2023, and 9.60% at March 31, 2023. At March 31, 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 March 31, 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 Months Ended March 31, 2024 and 2023
HarborOne Bancorp, Inc. Consolidated
Overview. Consolidated net income for the three months ended March 31, 2024 and 2023 was $7.3 million.
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.
45
Yield/
Balance
Interest
Cost (8)
Interest-earning assets:
Investment securities (1)
372,787
2.23
387,303
2.18
Other interest-earning assets
356,470
5.26
63,426
5.13
14,260
6.85
18,108
6.41
Commercial loans (2)(3)
3,040,835
41,653
5.51
2,901,464
36,837
5.15
Residential real estate loans (3)(4)
1,700,694
18,175
1,647,109
15,616
3.85
Consumer loans (3)
20,539
358
7.01
36,310
519
5.80
4,762,068
60,186
5.08
4,584,883
52,972
Total interest-earning assets
5,505,585
67,153
4.91
5,053,720
56,140
4.51
Noninterest-earning assets
299,153
313,309
5,804,738
5,367,029
Interest-bearing liabilities:
Savings accounts
1,186,201
5,523
1.87
1,459,392
5,445
1.51
289,902
75
0.10
275,801
0.05
994,353
9,313
3.77
824,694
5,238
2.58
Certificates of deposit
855,070
8,554
552,636
2,685
1.97
356,459
3,434
3.87
330,426
2,509
3.08
Total interest-bearing deposits
3,681,985
2.94
3,442,949
764,623
4.96
448,096
4.62
Subordinated debentures
34,298
6.18
Total borrowings
482,394
5,628
4.73
Total interest-bearing liabilities
4,446,608
3.29
3,925,343
Noninterest-bearing liabilities:
654,436
721,536
Other noninterest-bearing liabilities
119,289
101,820
5,220,333
4,748,699
Total equity
584,405
618,330
Total liabilities and equity
Tax equivalent net interest income
30,831
34,599
Tax equivalent interest rate spread (5)
1.62
2.28
Less: tax equivalent adjustment
249
Net interest income as reported
Net interest-earning assets (6)
1,058,977
1,128,377
Net interest margin (7)
2.76
Tax equivalent effect
0.02
Net interest margin on a fully tax equivalent basis
2.25
2.78
Ratio of interest-earning assets to interest-bearing liabilities
123.82
128.75
Supplemental information:
Total deposits, including demand deposits
4,336,421
4,164,485
Cost of total deposits
2.49
1.55
Total funding liabilities, including demand deposits
5,101,044
4,646,879
Cost of total funding liabilities
2.86
(1) Includes securities available for sale and securities held to maturity.
(2) Includes industrial revenue bonds . Interest income from tax exempt loans is computed on a taxable equivalent basis using a rate of 21% for the quarters presented.
(3) Includes nonaccruing loan balances and interest received on such loans.
(4) Includes the basis adjustments of certain loans included in fair value hedging relationships for the quarter ended March 31, 2024.
(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.
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
(69)
55
3,837
3,856
(63)
(43)
Commercial loans
2,038
2,778
4,816
Residential real estate loans
563
1,996
(161)
2,388
4,826
7,214
6,093
4,920
11,013
(1,121)
1,199
78
1,254
2,821
4,075
2,021
3,848
5,869
Brokered deposit
709
925
2,372
8,614
10,986
3,915
403
4,318
(261)
(262)
(523)
3,654
141
3,795
6,026
8,755
14,781
Change in net interest income
(3,835)
(3,768)
Interest and Dividend Income. Interest and dividend income on a tax equivalent basis increased $11.0 million, or 19.6%, to $67.2 million for the three months ended March 31, 2024, compared to $56.1 million for the three months ended March 31, 2023. The significant components of the increase were:
Interest Expense. Interest expense increased $14.8 million, or 68.6%, to $36.3 million for the three months ended March 31, 2024 from $21.5 million for the three months ended March 31, 2023. The significant components of the increase were:
Net Interest and Dividend Income. Net interest and dividend income on a tax equivalent basis decreased $3.8 million, or 10.9%, to $30.8 million for the three months ended March 31, 2024 from $34.6 million for the three months ended March 31, 2023. The average balance of interest bearing assets and liabilities increased $451.9 million and $521.3 million, respectively, and rate increases on interest-bearing liabilities outpaced the increase in the yield on interest-earning assets by 66 basis points. The net interest spread was 1.62% for the three months ended March 31, 2024 compared to 2.28% for the three months ended March 31, 2023 and net interest margin on a full tax equivalent basis decreased 53 basis points to 2.25% for the three months ended March 31, 2024 from 2.78% for three months ended March 31, 2023.
Income Tax Provision. The provision for income taxes and effective tax rate for the three months ended March 31, 2024 were $2.4 million and 25.1%, respectively, compared to $2.4 million and 24.9%, respectively, for the three months ended March 31, 2023.
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.
The tables below show the results of operations for the Company’s segments, HarborOne Bank and HarborOne Mortgage, for the three months ended March 31, 2024 and 2023, and the increase or decrease in those results:
(4,077)
(11.8)
(247)
(75.5)
(2,034)
(109.0)
Net interest and dividend income, after provision (benefit) for credit losses
(2,043)
(6.2)
(9.5)
112
32.2
(146)
(32.2)
104
(76.5)
1,642
105.5
(10.4)
82
4.1
Total mortgage banking income (loss)
195
68.9
1,367
43.6
Other noninterest income (loss)
7.6
644
11.4
1,377
43.9
1,217
4.6
(1,011)
(19.0)
Income (loss) before income taxes
(2,616)
(21.5)
2,141
115.2
Provision (benefit) for income taxes
(729)
(23.4)
625
110.6
(1,887)
(20.9)
1,516
117.2
HarborOne Bank Segment
Results of Operations for the Three Months Ended March 31, 2024 and 2023
Net Income. The Bank’s net income decreased $1.9 million to $7.2 million for the three months ended March 31, 2024 compared to $9.1 million for the three months ended March 31, 2023. The decrease in net income reflects a decrease of $4.1 million, or 11.8%, in net interest and dividend income and a $1.2 million, or 4.6%, increase in noninterest expense, partially offset by a decrease in provision for credit losses of $2.0 million, or 109.0%, and a $644,000, or 11.4%, increase in noninterest income.
Provision for Credit Losses. The Bank recorded a $168,000 negative provision for credit losses for the quarter ended March 31, 2024. The provision for loan credit losses was $338,000, offset by a negative provision of $506,000 for unfunded commitments. The Bank recorded provision for credit losses of $1.9 million the three months ended March 31, 2023, a result of a provision for loan credit losses of $1.7 million and a $119,000 provision for unfunded commitments. Net charge-offs totaled $125,000, or 0.01%, of average loans outstanding on an annualized basis, for the quarter ended March 31, 2024. Net recoveries totaled $11,000 for the quarter ended March 31, 2023. Loan credit loss provisioning primarily reflects replenishment of the ACL on loans due to charge-offs and loan growth.
Total nonperforming assets were $12.2 million at March 31, 2024, compared to $17.6 million at December 31, 2023 and $12.3 million at March 31, 2023. Nonperforming assets as a percentage of total assets were 0.21% at March 31, 2024, 0.31% at December 31, 2023, and 0.22% at March 31, 2023. During the first quarter of 2024, a single credit included in the metro office space loan segment with a carrying value of $5.7 million, considered nonperforming in the prior quarter, was paid with a partial recovery of $99,000.
Noninterest Income. Total noninterest income was $6.3 million for the three months ended March 31, 2024 compared to $5.7 million in the prior year period. The following table sets forth the components of noninterest income:
Intersegment loss
Secondary market loan servicing fees, net of guarantee fees
76.5
Interchange fees
2,566
2,502
Other deposit account fees
2,417
2,231
8.3
21.8
246
49.2
Swap fee income
73
178
(105)
(59.0)
444
7.8
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 $27.4 million for the three months ended March 31, 2024 compared to $26.2 million prior year period. The following table sets forth the components of noninterest expense:
15,307
14,764
543
3.7
4,150
4,295
(3.4)
Data processing expenses
2,470
2,305
165
7.2
71
87
(16)
(18.4)
783
1,063
(280)
(26.3)
156
29.2
424
(18)
(4.1)
1,056
996
123.5
654
128.2
1,288
1,211
77
6.4
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 Months March 31, 2024 and 2023
Net Income. HarborOne Mortgage recorded net income of $223,000 for the three months ended March 31, 2024, compared to a net loss of $1.3 million for the prior year period. The HarborOne Mortgage segment’s results are heavily impacted by prevailing interest rates, refinancing activity, and home sales.
Noninterest Income. Total noninterest income was $4.5 million for the three months ended March 31, 2024 as compared to $3.1 million for the 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
319
276
15.6
Secondary market loan servicing fees net of guarantee fees
1,739
2.2
NM
Originated mortgage servicing rights included in gain on sale of mortgage loans
(423)
(66.7)
Change in 10-year Treasury Constant Maturity rate in basis points
(40)
The primary reasons for the significant variances in the noninterest income category shown in the preceding table are noted below:
The following tables provide additional loan production detail:
Loan
% of Total
Product Type
Conventional
74,582
73.0
62,421
49.7
Government
12,226
9,911
7.9
State Housing Agency
4,542
4.4
6,930
5.5
Jumbo
10,703
10.6
46,305
36.9
Seconds
0.0
102,102
100.0
125,597
Purpose
Purchase
84,002
82.3
116,048
92.4
Refinance
14.2
9,109
3,577
3.5
440
51
Noninterest Expense. Total noninterest expense was $4.3 million for the three months ended March 31, 2024 compared to $5.3 million prior year period. The following table sets forth the components of noninterest expense:
2,919
3,575
(656)
(18.3)
604
701
(97)
(13.8)
(78.0)
304
226
34.5
118
(85)
(72.0)
20.0
132
257
(48.6)
298
394
(96)
(24.4)
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 and performing troubled debt restructurings
12,201
17,582
Period end allowance for credit losses balance
Period end total loan balance
Allowance for credit losses to total loans(1)
1.01
Allowance for credit losses to non-accrual loans
396.26
273.92
Total nonperforming loans to total loans (1)
0.25
0.37
Total nonperforming assets to total assets
0.21
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 $12.2 million at March 31, 2024, compared to $17.6 million at December 31, 2023 and $12.3 million at March 31, 2023. Nonperforming assets as a percentage of total assets were 0.21% at March 31, 2024, 0.31% at December 31, 2023, and 0.22% at March 31, 2023.
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 with, in the opinion of management, limited near-term maturity risk. As of March 31, 2024 commercial loans rated “watch” amounted to $67.9 million, compared to $30.6 million at December 31, 2023. Loans are rated “watch” at the point when there are signs of potential weakness. Approximately 41% of the increase is due to one credit included in the office category. 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 include business-oriented hotels, non-anchored retail space, and metro office space. As of March 31, 2024, business-oriented hotels loans included 14 loans with a total outstanding balance of $122.0 million, non-anchored retail space loans included 28 loans with a total outstanding balance of $44.6 million, and metro office space loans included one loan with a total outstanding balance of $5.1 million. There is one business-oriented hotel credit with a carrying value of $1.8 million that was rated substandard and on nonaccrual. The other 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. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to its historical mean in order to estimate the probability of default for each loan portfolio segment. Utilizing a third-party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment. 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 March 31, 2024, the potential impact of changes to Management’s judgements on total commercial qualitative risk factors ranged between a $14.2 million reduction and $13.6 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 $48.2 million, or 1.01% of total loans, at March 31, 2024, compared to $48.0 million, or 1.01% of total loans, at December 31, 2023. The ACL on individually analyzed loans amounted to $72,000, 0.59% 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 $3.4 million at March 31, 2024, compared to $3.9 million at December 31, 2023 and $5.0 million at March 31, 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
24.98
31.57
25.22
31.87
1.95
3.63
2.01
3.73
0.69
0.87
0.38
44.13
49.31
44.38
49.35
11.04
4.92
10.06
4.39
16.73
9.86
16.90
9.82
0.48
0.40
0.56
0.46
Total allowance for loan credit losses
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)
1,509,433
1,446,937
(0.00)
175,084
(3)
(0.01)
165,861
(0.02)
16,177
34,311
(8)
2,457,496
(100)
2,371,599
221,460
208,018
361,879
182
0.20
321,847
0.01
0.00
Total Consumer loans
0.90
(0.10)
125
(11)
Net charge-offs were $125,000, or 0.01% of average loans outstanding, on an annualized basis for the three months ended March 31, 2024, and net recoveries were $11,000 for the three months ended March 31, 2023.
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 March 31, 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
March 31, 2023
(basis points) (1)
Year One
Year Two
+300
(9.7)
(14.5)
(14.9)
(13.5)
+200
(6.4)
(9.4)
(9.6)
(8.1)
+100
(3.1)
(4.3)
(4.6)
(3.6)
-100
3.6
-200
3.9
6.3
(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 basis points.
The table below sets forth, as of March 31, 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 March 31, 2024
EVE as a Percentage of Economic
Estimated Increase (Decrease)
Value of Assets
Estimated
in EVE
Changes in
EVE Ratio (2)
+ 300
397,055
(190,112)
(32.4)
(2.9)
+ 200
466,345
(120,822)
(20.6)
(1.7)
+ 100
534,351
(52,816)
(9.0)
0
587,167
10.7
- 100
625,139
37,973
11.1
- 200
597,234
10,068
1.7
10.3
(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.
56
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 $393.4 million at March 31, 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 March 31, 2024, we had additional borrowing capacity of $532.0 million from the FHLB and $364.0 million from the FRBB line 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 March 31, 2024, the Company had $387.9 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 March 31, 2024, we had outstanding commitments to originate loans of $88.6 million and unadvanced funds on loans of $724.4 million. Certificates of deposit that are scheduled to mature within one year from March 31, 2024 totaled $1.16 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 March 31, 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:
Tangible common equity:
Less: Goodwill
Less: Other intangible assets (1)
2,082
Tangible common equity
517,315
527,910
Tangible assets:
Tangible assets
5,801,854
5,500,974
Tangible common equity / tangible assets (2)
8.92
9.60
(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.
58
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 March 31, 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 March 31, 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
January 1 to January 31, 2024
20,100
11.35
1,082,339
February 1 to February 29, 2024
248,800
10.50
268,900
833,539
March 1 to March 31, 2024
290,000
10.26
558,900
543,539
10.41
On July 5, 2023, the Company announced a sixth share repurchase program to repurchase up to 2,325,489 shares of its common stock, or approximately 5% of its outstanding shares. During the first quarter of 2024, the Company repurchased 558,900 shares at an average cost of $10.41 per share in open market transactions under the sixth share repurchase program. The sixth share repurchase program will expire on June 30, 2024.
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 March 31, 2024 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No.
Description
10.27*†
Change in Control Agreement dated May 6, 2024 between HarborOne Bancorp, Inc. and Stephen W. Finocchio
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 March 31, 2024 and December 31, 2023, (ii) the Consolidated Statements of Income for the three months ended March 31, 2024 and 2023 (iii) the Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2024 and 2023, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2024 and 2023, (v) the Consolidated Statements of Cash Flows for the three months ended March 31, 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: May 7, 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)