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HONE HarborOne Bancorp

Filed: 7 May 21, 8:41am

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, 2021

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 of
incorporation or organization)

 

(I.R.S. Employer
Identification 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).

Yes No

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 3, 2021, there were 56,175,161 shares of the Registrant’s common stock, par value $0.01 per share, outstanding

Table of Contents

HarborOne Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

March 31, 

December 31, 

(in thousands, except share data)

    

2021

2020

 

Assets

    

 

Cash and due from banks

$

37,074

$

31,777

Short-term investments

281,451

174,093

Total cash and cash equivalents

318,525

205,870

Securities available for sale, at fair value

304,168

276,498

Federal Home Loan Bank stock, at cost

7,572

8,738

Loans held for sale, at fair value

210,494

208,612

Loans

3,461,479

3,494,642

Less: Allowance for loan losses

(55,384)

(55,395)

Net loans

3,406,095

3,439,247

Accrued interest receivable

11,308

11,874

Other real estate owned and repossessed assets

530

595

Mortgage servicing rights, at fair value

33,939

24,833

Property and equipment, net

50,630

49,580

Retirement plan annuities

13,851

13,747

Bank-owned life insurance

88,443

87,950

Goodwill

69,802

69,802

Intangible assets

4,047

4,370

Other assets

86,554

81,899

Total assets

$

4,605,958

$

4,483,615

Liabilities and Stockholders' Equity

Deposits:

Demand deposit accounts

$

777,959

$

689,672

NOW accounts

224,869

218,584

Regular savings and club accounts

1,113,450

998,994

Money market deposit accounts

861,867

866,661

Term certificate accounts

696,438

732,298

Total deposits

3,674,583

3,506,209

Short-term borrowed funds

35,000

Long-term borrowed funds

97,488

114,097

Subordinated debt

34,064

34,033

Mortgagors' escrow accounts

8,468

7,736

Accrued interest payable

739

1,262

Other liabilities and accrued expenses

92,543

88,964

Total liabilities

3,907,885

3,787,301

Commitments and contingencies (Notes 9 and 10)

Common stock, $0.01 par value; 150,000,000 shares authorized; 59,086,187 and 58,834,970 shares issued; 56,228,762 and 57,205,458 shares outstanding at March 31, 2021 and December 31, 2020, respectively

585

584

Additional paid-in capital

465,832

464,176

Retained earnings

294,116

277,312

Treasury stock, at cost, 2,857,425 and 1,629,512 shares at March 31, 2021 and December 31, 2020, respectively

(31,460)

(16,644)

Accumulated other comprehensive (loss) income

(160)

2,185

Unearned compensation - ESOP

(30,840)

(31,299)

Total stockholders' equity

698,073

696,314

Total liabilities and stockholders' equity

$

4,605,958

$

4,483,615

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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Table of Contents

HarborOne Bancorp, Inc.

Consolidated Statements of Income (unaudited)

Three Months Ended March 31, 

(in thousands, except share data)

  

2021

  

2020

  

Interest and dividend income:

Interest and fees on loans

$

33,860

$

34,025

Interest on loans held for sale

1,324

577

Interest on taxable securities

585

1,742

Interest on non-taxable securities

66

Other interest and dividend income

78

759

Total interest and dividend income

35,847

37,169

Interest expense:

Interest on deposits

2,720

8,693

Interest on FHLB borrowings

552

1,253

Interest on subordinated debentures

523

523

Total interest expense

3,795

10,469

Net interest and dividend income

32,052

26,700

Provision for loan losses

91

3,749

Net interest and dividend income, after provision for loan losses

31,961

22,951

Noninterest income:

Mortgage banking income:

Gain on sale of mortgage loans

24,802

12,278

Changes in mortgage servicing rights fair value

3,409

(4,387)

Other

4,515

2,343

Total mortgage banking income

32,726

10,234

Deposit account fees

3,852

3,931

Income on retirement plan annuities

104

101

Gain on sale and call of securities, net

2,525

Bank-owned life insurance income

493

551

Other income

634

1,296

Total noninterest income

37,809

18,638

Noninterest expense:

Compensation and benefits

27,454

21,185

Occupancy and equipment

5,256

4,563

Data processing

2,343

2,180

Loan expenses

2,435

1,253

Marketing

813

876

Deposit expenses

440

499

Postage and printing

401

496

Professional fees

1,583

1,228

Foreclosed and repossessed assets

23

125

Deposit insurance

320

271

Other expenses

1,734

2,484

Total noninterest expense

42,802

35,160

Income before income taxes

26,968

6,429

Income tax provision

7,576

1,705

Net income

$

19,392

$

4,724

Earnings per common share:

Basic

$

0.37

$

0.09

Diluted

$

0.37

$

0.09

Weighted average shares outstanding:

Basic

52,537,409

54,392,465

Diluted

53,000,830

54,392,465

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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HarborOne Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

Three Months Ended March 31, 

(in thousands)

    

2021

2020

Net income

$

19,392

$

4,724

Other comprehensive income:

Unrealized gain/loss on cash flow hedge:

Unrealized holding gains

1,733

Reclassification adjustment for net losses included in net income

112

Net change in unrealized gains on derivatives in cash flow hedging instruments

1,845

Related tax effect

(516)

Net-of-tax amount

1,329

Unrealized gain/loss on securities available for sale:

Unrealized holding (losses) gains

(4,713)

6,018

Reclassification of unrealized gain on securities transferred to available for sale

522

Reclassification adjustment for net realized gains

(2,525)

Net unrealized (losses) gains

(4,713)

4,015

Related tax effect

1,039

(1,237)

Net-of-tax amount

(3,674)

2,778

Total other comprehensive (loss) income

(2,345)

2,778

Comprehensive income

$

17,047

$

7,502

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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HarborOne Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Accumulated

Common Stock

Additional

Treasury

Other

Unearned

Total

Outstanding

Paid-in

Retained

Stock,

Comprehensive

Compensation

Stockholders'

(in thousands, except share data)

Shares

Amount

Capital

Earnings

at Cost

Income (Loss)

- ESOP

Equity

Balance at December 31, 2019

54,418,021

$

584

$

460,232

$

237,356

$

(721)

$

1,480

$

(33,137)

$

665,794

Comprehensive income

4,724

2,778

7,502

ESOP shares committed to be released (57,681 shares)

121

459

580

Share-based compensation expense

1,263

1,263

Balance at March 31, 2020

54,418,021

$

584

$

461,616

$

242,080

$

(721)

$

4,258

$

(32,678)

$

675,139

Balance at December 31, 2020

57,205,458

$

584

$

464,176

$

277,312

$

(16,644)

$

2,185

$

(31,299)

$

696,314

Comprehensive income(loss)

19,392

(2,345)

17,047

Dividends declared of $0.05 per share

(2,588)

(2,588)

ESOP shares committed to be released (57,681 shares)

242

459

701

Restricted stock awards granted

188,377

Share-based compensation expense

772

772

Stock option exercised

62,840

1

642

643

Treasury stock purchased

(1,227,913)

(14,816)

(14,816)

Balance at March 31, 2021

56,228,762

$

585

$

465,832

$

294,116

$

(31,460)

$

(160)

$

(30,840)

$

698,073

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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Table of Contents

HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

    

Three Months Ended March 31, 

(in thousands)

    

2021

    

2020

Cash flows from operating activities:

Net income

$

19,392

$

4,724

Adjustments to reconcile net income to net cash used by operating activities:

Provision for loan losses

91

3,749

Net amortization of securities premiums/discounts

1,201

242

Proceeds from sale of loans

696,005

315,290

Loans originated for sale

(678,960)

(309,054)

Net (accretion) amortization of net deferred loan costs/fees and premiums

(393)

629

Depreciation and amortization of premises and equipment

1,325

1,005

Change in mortgage servicing rights fair value

(3,409)

4,387

Mortgage servicing rights capitalized

(5,697)

(444)

Accretion of fair value adjustment on loans and deposits, net

(1,212)

(383)

Amortization of other intangible assets

323

447

Amortization of subordinated debt issuance costs

31

31

Gain on sale and call of securities, net

(2,525)

Net gains on mortgage loan sales, including fair value adjustments

(18,927)

(14,000)

Bank-owned life insurance income

(493)

(551)

Income on retirement plan annuities

(104)

(101)

Net loss on disposal of premises and equipment

110

Net loss on sale and write-down of other real estate owned and repossessed assets

21

55

ESOP expense

701

580

Share-based compensation expense

772

1,263

Change in other assets

(3,128)

(25,901)

Change in other liabilities

3,579

21,341

Net cash used by operating activities

11,118

894

Cash flows from investing activities:

Activity in securities available for sale:

Maturities, prepayments and calls

46,956

13,947

Purchases

(80,540)

(62,755)

Sales

65,971

Activity in securities held to maturity:

Maturities, prepayment and calls

432

Sales

4,759

Net redemption of FHLB stock

1,166

3,591

Participation-in loan purchases

(17,535)

(679)

Net loan (originations) payments

51,982

(13,490)

Proceeds from sale of other real estate owned and repossessed assets

407

518

Additions to property and equipment

(2,375)

(750)

Net cash used by investing activities

61

11,544

(continued)

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

Three Months Ended March 31, 

(in thousands)

    

2021

    

2020

          

Cash flows from financing activities:

Net increase in deposits

168,230

78,149

Net change in short-term borrowed funds

(35,000)

(79,000)

Proceeds from other borrowed funds and subordinated debt

3,400

40,000

Repayment of other borrowed funds

(20,009)

(30,009)

Net change in mortgagors' escrow accounts

732

2,226

Proceeds from exercise of stock options

643

Treasury stock purchased

(14,816)

Dividends paid

(1,704)

Net cash provided by financing activities

101,476

11,366

Net change in cash and cash equivalents

112,655

23,804

Cash and cash equivalents at beginning of period

205,870

211,616

Cash and cash equivalents at end of period

$

318,525

$

235,420

Supplemental cash flow information:

Interest paid on deposits

$

2,723

$

8,600

Interest paid on borrowed funds

1,597

2,367

Income taxes paid, net

1,779

3,748

Transfer of loans to other real estate owned and repossessed assets

363

393

Transfer of securities held to maturity to available for sale, fair value

22,051

Dividends declared

2,588

Supplemental disclosure related to adoption of ASU 2016-02, detailed in Note 1:

ROU asset

$

23,189

$

Operating lease liabilities

24,370

The accompanying notes are an integral part of these unaudited interim Consolidated Financial Statements.

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Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The unaudited interim Consolidated Financial Statements of HarborOne Bancorp, Inc. (the “Company”) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by the U.S. generally accepted accounting principles (“GAAP”). In the opinion of management, all adjustments and disclosures considered necessary for the fair presentation of the accompanying 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 year ended December 31, 2020 and 2019 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; HarborOne Bank (the “Bank”); and the Bank’s wholly-owned subsidiaries, which consist of HarborOne Mortgage, LLC (“HarborOne Mortgage”), a passive investment corporation, and 2 security corporations. The passive investment corporation maintains and manages certain assets of the Bank. The security corporations were established for the purpose of buying, holding and selling securities on their 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 26 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 more than 30 offices in Massachusetts, Rhode Island, New Hampshire, Maine, and New Jersey and is licensed to lend in 5 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

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, and almost all public commerce and related business activities were, to varying degrees, curtailed. While some industries have been impacted more severely than others, all businesses have been impacted to some degree, and the outbreak has caused significant disruptions in the U.S. economy and adversely impacted a broad range of industries in which the Company’s customers operate and may impair their ability to fulfill their financial obligations to the Company. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.  

Congress, the President, and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was enacted on December 27, 2020, providing for a second round of PPP loans (“PPP-2”). Additionally, the Consolidated Appropriations Act passed on December 27, 2020 provided the option of postponing adoption of the standard until the earlier of the end of the national emergency declaration related to the COVID-19 pandemic or December 31, 2022. The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Act (the Economic Aid Act) amended the PPP by extending the authority of the SBA to guarantee loans and the ability of PPP lenders to disburse PPP loans until March 31, 2021. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extends the PPP application deadline to May 31, 2021 and provides the SBA additional time to process applications through June 30, 2021. The Federal Reserve also took actions to mitigate the economic impact of the COVID-19 pandemic, including cutting the federal funds rate 150 basis points and targeting a 0 to 25 basis point rate. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The fiscal stimulus and relief programs have been an effective mitigant to credit losses in the near term and significant progress has been made in combating COVID-19; however, once these programs are discontinued the severity of potential losses is uncertain and depends on numerous factors and future developments. And while macroeconomic conditions have stabilized as of March 31, 2021, if there is a resurgence in the virus, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. Effects may include:

Net interest income could be reduced. In accordance with regulatory guidance, the Company is actively working with borrowers impacted by the COVID-19 pandemic to defer payments. While interest will continue to be recognized in accordance with GAAP, should eventual credit losses on these deferments emerge, interest income would be negatively impacted.
The provision for loan losses could increase. Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for loan losses. It also is possible that asset quality could worsen, and loan charge-offs increase. The Company participated in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) providing loans to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government.
Noninterest income could be reduced. Uncertainty regarding the severity and duration of the COVID-19 pandemic could cause further volatility in the financial markets. The COVID-19 pandemic and the measures taken to control its spread may disrupt the mortgage loan origination process. Mortgage banking revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets.
Valuation and fair value measurement challenges may occur. Changes in the COVID-19 pandemic could cause a decline in the Company’s stock price or other triggering events could occur that would cause management to perform a goodwill impairment test that may result in an impairment charge being recorded to earnings for that period.

Summary of Significant Accounting Policies and Recently Adopted Accounting Standards Updates (“ASU”)

As an “emerging growth company”, as defined in Title 1 of the Jumpstart Our Business Startups (“JOBS”) Act, the Company has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company’s emerging growth company status is scheduled to end December 31, 2021 unless a triggering event occurs sooner.

Significant accounting policies in effect and disclosed within the Company’s most recent audited consolidated financial statements as of December 31, 2020 remain substantially unchanged with the exception of the accounting policy for leases as a result of adopting ASU 2016-02, Leases (Topic 842) and subsequent related updates (collectively ASU 2016-02) as described below.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The Company adopted ASU 2016-02 on January 1, 2021, which requires lessees to recognize most leases on their balance sheet. Lessor accounting is largely unchanged. ASU 2016-02 requires both quantitative and qualitative disclosures regarding key information about lease arrangements from both lessees and lessors. The Company elected the effective date transition method utilizing the adoption date as the first date of application of the revised guidance. As a result, prior period amounts have not been restated. Upon adoption, the Company elected certain transitional practical expedients offered through the guidance, including the “package of practical expedients” whereby it did not reassess (i) whether any expired or existing contracts contain leases, (ii) the lease classification of any expired or existing leases, and (iii) initial direct costs for any existing leases, which resulted in the Company not recognizing a cumulative effect adjustment to retained earnings. Management evaluated the leasing contracts and activities and developed methodologies and processes to estimate and account for the right-of-use (“ROU”) assets and lease liabilities for building leases based on the present value of future lease payments. On January 1, 2021, the Company recorded ROU assets, included in other assets, and lease liabilities, included in other liabilities, totaling $23.2 million and $24.4 million, respectively. The impact to capital ratios as a result of increased risk-weighted assets was immaterial. The adoption of this guidance did not result in a material change to lessee expense recognition.

The Company is committed to rent premises and equipment used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception. Leases that transfer substantially all of the benefits and risks of ownership to the Company are classified as finance leases, while all others are classified as operating leases. At lease commencement, a lease liability and ROU asset are calculated and recognized on both types of leases. The lease liability is equal to the present value of the future minimum lease payments. The ROU asset is equal to the lease liability, plus any initial direct costs and prepaid lease payments, less any lessor incentives received. Operating lease ROU assets are included in other assets and finance lease ROU assets are included in premises and equipment, net. The Company’s leases do not provide an implicit interest rate, therefore the Company used the appropriate Federal Home Loan Bank (“FHLB”) term rate commensurate with the underlying lease terms to determine the present value of operating lease liabilities. The lease term used in the calculation includes any options to extend that the Company is reasonably certain to exercise, determined on a lease-by-lease basis. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

At March 31, 2021, the Company had 0 finance lease ROU assets or lease liabilities. For operating leases, total lease cost is comprised of lease expense, short-term lease cost, and variable lease cost. Lease expense includes future minimum lease payments, which are recognized on a straight-line basis over the lease term, as well as common area maintenance charges, real estate taxes, insurance and other expenses, where applicable, which are expensed as incurred. Total lease cost for operating leases is recorded in occupancy and equipment noninterest expense. See Note 11, Operating Lease Right-of-Use Assets and Liabilities, for further information.

The Company also adopted the following ASU on January 1, 2021, which did not have a material impact on the Company’s Consolidated Financial Statements:

ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. This guidance provides better alignment of financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 also permitted the reclassification of eligible securities from the held-to-maturity classification to the available for sale classification. The Company did not reclassify investment securities from held to maturity to available for sale upon the original adoption of the amendments.

ASUs not yet Adopted

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These provisions apply to contract modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification would be considered “minor” so that any existing unamortized deferred loan origination

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company has formed a cross functional working group and is currently evaluating the effect that this ASU will have on the Company’s consolidated financial statements.

ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The amendments in this ASU are intended to simplify the accounting for income taxes. ASU 2019-12 is effective for public companies for fiscal years beginning after December 15, 2020, with early adoption permitted. For all other entities the guidance is effective for fiscal years beginning after December 15, 2021. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The Company expects to adopt ASU 2019-12 on December 31, 2021 and it is not expected to have a material impact on the Company’s consolidated financial statements.

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). Commonly referred to as “CECL,” requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. For public entities that are SEC filers, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For non-public entities, this ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. With the passage of the CARES Act, the option to delay CECL was provided until the earlier of the national health emergency being declared over or December 31, 2020. The Consolidated Appropriations Act passed on December 27, 2020 provided the option of postponing adoption of the standard until the earlier of the end of the national emergency declaration related to the COVID-19 pandemic or December 31, 2022. The Company continues to evaluate the impact of this ASU on the consolidated financial statements and disclosures. The Company has formed a cross functional working group and selected a third-party vendor to assist with the application of this ASU. The working group has an implementation plan which includes assessment and documentation of processes, internal controls, data sources and model development and documentation. The working group has met key milestones within the implementation plan and the Company expects to adopt the ASU on January 1, 2022.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

2.

DEBT SECURITIES

The amortized cost and fair value of securities with gross unrealized gains and losses is as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

    

Gains

    

Losses

    

Value

 

(in thousands)

���

March 31, 2021:

Securities available for sale

U.S. government and government-sponsored enterprise obligations

$

5,001

$

58

$

$

5,059

U.S. government agency and government-sponsored residential mortgage-backed securities

274,928

2,053

3,459

273,522

U.S. government-sponsored collateralized mortgage obligations

10,266

273

10,539

SBA asset-backed securities

14,584

464

15,048

Total securities available for sale

$

304,779

$

2,848

$

3,459

$

304,168

December 31, 2020:

Securities available for sale

U.S. government and government-sponsored enterprise obligations

$

5,002

$

93

$

$

5,095

U.S. government agency and government-sponsored residential mortgage-backed securities

234,819

3,113

305

237,627

U.S. government-sponsored collateralized mortgage obligations

16,326

330

16,656

SBA asset-backed securities

16,249

871

17,120

Total securities available for sale

$

272,396

$

4,407

$

305

$

276,498

In February 2020, with the intention to reduce credit risk in the investment portfolio and to support the Bank’s credit risk policy, the Bank executed the sale of 6 held-to-maturity investments. The securities had a total amortized cost of $4.5 million and a $357,000 gain on sale was recorded during the three months ended March 31, 2020. As a result, the remaining held to maturity securities, with an amortized cost of $21.5 million and an unrealized gain of approximately $522,000, were transferred to the available for sale category at a fair value of $22.1 million.

NaN mortgage-backed securities with a combined fair value of $26.4 million are pledged as collateral for interest rate swap agreements as of March 31, 2021 (see Note 10). NaN mortgage-backed securities with a combined fair value of $40.3 million were pledged as collateral for interest rate swap agreements as of December 31, 2020.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2021 is as follows:

Available for Sale

Amortized

Fair

    

Cost

    

Value

 

(in thousands)

After 1 year through 5 years

$

$

After 5 years through 10 years

5,001

5,059

Over 10 years

5,001

5,059

U.S. government agency and government-sponsored residential mortgage-backed securities

274,928

273,522

U.S. government-sponsored collateralized mortgage obligations

10,266

10,539

SBA asset-backed securities

14,584

15,048

Total

$

304,779

$

304,168

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 1 to 30 years; however, it is expected that such securities will have shorter actual lives due to prepayments. U.S. government and government-sponsored enterprise obligations are callable at the discretion of the issuer. The U.S. government and government-sponsored enterprise obligations with a total fair value of $5.1 million have a final maturity of 7 years and a call feature of 5 months. At the quarter ended March 31, 2021 there were 0 holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholder equity.

The following table shows proceeds and gross realized gains and losses related to the sales and calls of securities for the periods indicated:

Three Months Ended March 31, 

2021

2020

(in thousands)

Sales

Proceeds

$

$

70,729

Gross gains

2,521

Gross losses

Calls

Proceeds

$

$

1,667

Gross gains

4

Gross losses

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Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Information pertaining to securities with gross unrealized losses at March 31, 2021 and December 31, 2020 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

Gross

Gross

Unrealized

Fair

Unrealized

Fair

    

Losses

    

Value

    

Losses

    

Value

 

(in thousands)

March 31, 2021:

Securities available for sale

U.S. government agency and government-sponsored residential mortgage-backed securities

$

3,455

$

170,872

$

4

$

1,233

December 31, 2020:

Securities available for sale

U.S. government agency and government-sponsored residential mortgage-backed securities

$

283

$

67,460

$

22

$

3,668

Management evaluates securities for other-than-temporary impairment (“OTTI”) at each reporting period, and more frequently when economic or market concerns warrant such evaluation.

As of March 31, 2021, the Company’s security portfolio consisted of 105 debt securities, 33 of which were in an unrealized loss position. The unrealized losses are related to the Company’s mortgage-backed securities and were issued by U.S. government-sponsored entities and agencies.

Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2021.

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:

March 31, 

December 31, 

    

2021

    

2020

(in thousands)

Loans held for sale, fair value

$

210,494

$

208,612

Loans held for sale, contractual principal outstanding

206,741

198,984

Fair value less unpaid principal balance

$

3,753

$

9,628

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 $5.9 million in the three months ended March 31, 2021 to $3.8 million, compared to an increase of $1.7 million in the three months ended March 30, 2020. 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.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

At March 31, 2021 and December 31, 2020, there were 0 loans held for sale that were greater than 90 days past due.

4.

LOANS

A summary of the balances of loans follows:

March 31, 

December 31, 

    

2021

    

2020

 

(in thousands)

Residential real estate:

One- to four-family

$

892,263

$

928,934

Second mortgages and equity lines of credit

138,123

145,672

Residential real estate construction

31,843

31,217

1,062,229

1,105,823

Commercial:

Commercial real estate

1,559,056

1,551,265

Commercial construction

112,187

99,331

Commercial and industrial

499,728

464,393

Total commercial loans

2,170,971

2,114,989

Consumer loans:

Auto

220,464

265,266

Personal

7,815

8,564

Total consumer loans

228,279

273,830

Total loans

3,461,479

3,494,642

Allowance for loan losses

(55,384)

(55,395)

Loans, net

$

3,406,095

$

3,439,247

As of March 31, 2021 and December 31, 2020, the commercial and industrial loans include $164.3 million and $126.5 million, respectively, of PPP loans and $5.0 million and $2.7 million, 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 real estate 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, 2021 and December 31, 2020, the Company was servicing loans for participants aggregating $297.4 million and $284.2 million, respectively.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Acquired Loans

The loans purchased from Coastway Bancorp, Inc. included $5.4 million in purchased credit impaired (“PCI”) loans. PCI loans were primarily residential real estate loans. The following table provides certain information pertaining to PCI loans:

March 31,

December 31,

    

2021

    

2020

(in thousands)

Outstanding balance

$

4,284

$

4,307

Carrying amount

$

4,063

$

4,079

The following table summarizes activity in the accretable yield for PCI loans:

Three Months Ended March 31,

2021

2020

(in thousands)

Balance at beginning of period

$

141

$

149

Additions

Accretion

(3)

(2)

Reclassification from nonaccretable difference

Balance at end of period

$

138

$

147

The following is the activity in the allowance for loan losses for the three months ended March 31, 2021 and 2020:

Residential

Commercial

Commercial

Commercial

    

Real Estate

    

Real Estate

    

Construction

    

and Industrial

    

Consumer

    

Unallocated

    

Total

 

(in thousands)

Balance at December 31, 2019

$

3,178

$

12,875

$

2,526

$

2,977

$

1,010

$

1,494

$

24,060

Provision (credit) for loan losses

(49)

2,940

(4)

(159)

691

330

3,749

Charge-offs

(1,174)

(297)

(253)

(1,724)

Recoveries

48

1

219

36

304

Balance at March 31, 2020

$

3,177

$

14,642

$

2,522

$

2,740

$

1,484

$

1,824

$

26,389

Balance at December 31, 2020

$

7,419

$

34,765

$

1,955

$

5,311

$

2,475

$

3,470

$

55,395

Provision (credit) for loan losses

(221)

218

282

1,494

(412)

(1,270)

91

Charge-offs

(185)

(55)

(240)

Recoveries

71

4

7

56

138

Balance at March 31, 2021

$

7,269

$

34,987

$

2,237

$

6,627

$

2,064

$

2,200

$

55,384

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Allocation of the allowance to loan segments at March 31, 2021 and December 31, 2020 follows:

Residential

Commercial

Commercial

Commercial

    

Real Estate

    

Real Estate

    

Construction

    

and Industrial

    

Consumer

    

Unallocated

    

Total

 

(in thousands)

March 31, 2021:

Loans:

Impaired loans

$

22,033

$

12,502

$

$

8,071

$

$

42,606

Non-impaired loans

1,040,196

1,546,554

112,187

491,657

228,279

3,418,873

Total loans

$

1,062,229

$

1,559,056

$

112,187

$

499,728

$

228,279

$

3,461,479

Allowance for loan losses:

Impaired loans

$

720

$

1,797

$

$

1,386

$

$

$

3,903

Non-impaired loans

6,549

33,190

2,237

5,241

2,064

2,200

51,481

Total allowance for loan losses

$

7,269

$

34,987

$

2,237

$

6,627

$

2,064

$

2,200

$

55,384

December 31, 2020:

Loans:

Impaired loans

$

24,384

$

12,513

$

$

9,359

$

$

46,256

Non-impaired loans

1,081,439

1,538,752

99,331

455,034

273,830

3,448,386

Total loans

$

1,105,823

$

1,551,265

$

99,331

$

464,393

$

273,830

$

3,494,642

Allowance for loan losses:

Impaired loans

$

802

$

1,845

$

$

31

$

$

$

2,678

Non-impaired loans

6,617

32,920

1,955

5,280

2,475

3,470

52,717

Total allowance for loan losses

$

7,419

$

34,765

$

1,955

$

5,311

$

2,475

$

3,470

$

55,395

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Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following is a summary of past due and non-accrual loans at March 31, 2021 and December 31, 2020:

90 Days

30-59 Days

60-89 Days

or More

Total

Loans on

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Non-accrual

 

(in thousands)

March 31, 2021

Residential real estate:

One- to four-family

$

8,098

$

1,667

$

2,505

$

12,270

$

10,606

Second mortgages and equity lines of credit

214

51

483

748

856

Commercial real estate

22

3,372

3,394

12,478

Commercial construction

Commercial and industrial

606

1,049

1,655

8,059

Consumer:

Auto

825

347

236

1,408

327

Personal

3

21

9

33

29

Total

$

9,768

$

2,086

$

7,654

$

19,508

$

32,355

December 31, 2020

Residential real estate:

One- to four-family

$

12,148

$

2,223

$

6,418

$

20,789

$

11,611

Second mortgages and equity lines of credit

460

46

433

939

834

Residential real estate construction

471

471

Commercial real estate

416

3,369

3,785

12,486

Commercial construction

Commercial and industrial

444

191

1,243

1,878

8,606

Consumer:

Auto

1,657

397

488

2,542

557

Personal

88

11

2

101

7

Total

$

15,684

$

2,868

$

11,953

$

30,505

$

34,101

At March 31, 2021 and December 31, 2020, there were 0 loans past due 90 days or more and still accruing.

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Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following information pertains to impaired loans:

March 31, 2021

December 31, 2020

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

    

Investment

    

Balance

    

Allowance

    

Investment

    

Balance

    

Allowance

 

(in thousands)

Impaired loans without a specific reserve:

Residential real estate

$

11,663

$

12,259

$

$

12,284

$

13,039

$

Commercial real estate

3,541

4,732

3,552

4,741

Commercial construction

Commercial and industrial

5,922

8,619

9,243

11,604

Total

21,126

25,610

25,079

29,384

Impaired loans with a specific reserve:

Residential real estate

10,370

10,651

720

12,100

12,355

802

Commercial real estate

8,961

8,961

1,797

8,961

8,961

1,845

Commercial construction

Commercial and industrial

2,149

2,449

1,386

116

181

31

Total

21,480

22,061

3,903

21,177

21,497

2,678

Total impaired loans

$

42,606

$

47,671

$

3,903

$

46,256

$

50,881

$

2,678

Three Months Ended March 31, 

2021

2020

Interest

Interest

Average

Interest

Income

Average

Interest

Income

Recorded

Income

Recognized

Recorded

Income

Recognized

Investment

    

Recognized

    

on Cash Basis

    

Investment

    

Recognized

    

on Cash Basis

(in thousands)

Residential real estate

$

23,209

$

296

$

105

$

26,367

$

322

$

245

Commercial real estate

12,508

2

2

2,118

Commercial construction

11,108

Commercial and industrial

8,715

120

120

5,392

7

7

Total

$

44,432

$

418

$

227

$

44,985

$

329

$

252

Interest income recognized and interest income recognized on a cash basis in the tables above represent interest income for the three months ended March 31, 2021 and 2020, not for the time period designated as impaired. NaN additional funds are committed to be advanced in connection with impaired loans.

There were 0 material troubled debt restructuring (“TDR”) loan modifications for the three months ended March 31, 2021 and 2020.  

The recorded investment in TDRs was $13.9 million and $15.1 million at March 31, 2021 and December 31, 2020, respectively. Commercial TDRs totaled $2.2 million and $2.5 million at March 31, 2021 and December 31, 2020, respectively. The remainder of the TDRs outstanding at the end of these periods were residential loans. Non-accrual TDRs totaled $3.3 million and $3.6 million at March 31, 2021 and December 31, 2020, respectively. Of these loans, $2.2 million and $2.5 million were non-accrual commercial TDRs at March 31, 2021 and December 31, 2020, respectively.

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Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

All TDR loans are considered impaired and management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each loan. TDR loans which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In either case, any reserve required is recorded as part of the allowance for loan losses.

During the three months ended March 31, 2021 and 2020, there were 0 payment defaults on TDRs.  

Credit Quality Information

The Company uses a 10-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 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.  

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.

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Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following table presents the Company’s loans by risk rating at March 31, 2021 and December 31, 2020:

March 31, 2021

December 31, 2020

Commercial

Commercial

Commercial

Commercial

Commercial

Commercial

    

Real Estate

    

Construction

    

and Industrial

    

Real Estate

    

Construction

    

and Industrial

 

(in thousands)

Loans rated 1 - 6

$

1,531,940

$

112,187

$

489,189

$

1,524,105

$

99,331

$

452,665

Loans rated 7

14,638

2,668

14,674

3,122

Loans rated 8

9,444

4,875

9,455

7,080

Loans rated 9

3,034

2,996

3,031

1,526

Loans rated 10

Loans not rated

$

1,559,056

$

112,187

$

499,728

$

1,551,265

$

99,331

$

464,393

5.

MORTGAGE LOAN SERVICING

The Company sells residential mortgages to government-sponsored entities and other parties. The Company retains no beneficial interests in these loans, but 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 mortgage servicing rights (“MSRs”) relate primarily to changes in prepayments that primarily result from shifts in mortgage interest rates. The unpaid principal balance of mortgage loans serviced for others was $3.41 billion and $3.05 billion as of March 31, 2021 and December 31, 2020, respectively.  

The Company accounts for MSRs at fair value. The Company obtains valuations from independent third parties 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, 2021 and December 31, 2020, the following weighted average assumptions were used in the calculation of fair value of MSRs:

March 31, 

December 31, 

    

2021

    

2020

  

Prepayment speed

10.20

14.30

%

Discount rate

9.22

9.23

Default rate

2.43

2.27

The following summarizes changes to MSRs for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31, 

    

2021

2020

(in thousands)

Balance, beginning of period

$

24,833

$

17,150

Additions

5,697

444

Changes in fair value due to:

Reductions from loans paid off during the period

(1,599)

(576)

Changes in valuation inputs or assumptions

5,008

(3,811)

Balance, end of period

$

33,939

$

13,207

Contractually specified servicing fees included in other mortgage banking income amounted to $2.1 million for the three months ended March 31, 2021 and $1.3 million for the three months ended March 31, 2020, respectively.

20

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

6.

GOODWILL AND INTANGIBLE ASSETS

As of March 31, 2021, the Company had $69.8 million in goodwill, of which $59.0 million was allocated to the Bank reporting unit and $10.8 million was allocated to the HarborOne Mortgage reporting unit. The Company typically performs its goodwill impairment test during the fourth quarter of the year, unless certain indicators suggest earlier testing to be warranted. Other intangible assets were $4.0 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, 2021.

7.

DEPOSITS

A summary of deposit balances, by type, is as follows:

March 31, 

December 31, 

    

2021

    

2020

 

(in thousands)

NOW and demand deposit accounts

    

$

1,002,828

$

908,256

Regular savings and club accounts

1,113,450

998,994

Money market deposit accounts

861,867

866,661

Total non-certificate accounts

2,978,145

2,773,911

Term certificate accounts greater than $250,000

122,951

135,190

Term certificate accounts less than or equal to $250,000

473,487

497,108

Brokered deposits

100,000

100,000

Total certificate accounts

696,438

732,298

Total deposits

$

3,674,583

$

3,506,209

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, 2021 and December 31, 2020, total reciprocal deposits were $81.0 million and $104.9 million, respectively, consisting primarily of money market accounts.

A summary of certificate accounts by maturity at March 31, 2021 is as follows:

Weighted

Average

    

Amount

    

Rate

 

(dollars in thousands)

Within 1 year

$

562,996

0.60

%

Over 1 year to 2 years

110,293

0.92

Over 2 years to 3 years

4,580

1.80

Over 3 years to 4 years

17,124

1.05

Over 4 years to 5 years

1,935

0.70

Total certificate deposits

696,928

0.67

%

Less unaccreted acquisition discount

(490)

Total certificate deposits, net

$

696,438

21

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

8.BORROWED FUNDS

Borrowed funds at March 31, 2021 and December 31, 2020 consist of Federal Home Loan Bank (“FHLB”) advances. Short-term advances were $35.0 million with a weighted average rate of 0.42% at December 31, 2020. There were 0 short-term advances at March 31, 2021. Long-term advances are summarized by maturity date below.  

March 31, 2021

December 31, 2020

Amount by

Weighted

Amount by

Weighted

Scheduled

Amount by

Average

Scheduled

Amount by

Average

    

Maturity*

    

Call Date (1)

    

Rate (2)

    

Maturity*

    

Call Date (1)

    

Rate (2)

 

(dollars in thousands)

Year ending December 31:

             

2021

$

21,750

$

81,750

3.09

%      

$

41,750

101,750

2.47

%

2022

0

0

2023

20,191

191

3.48

20,190

190

3.48

2024

13,400

13,400

1.39

10,000

10,000

1.68

2025

40,987

987

1.32

40,987

987

1.32

2026 and thereafter

1,160

1,160

2.00

1,170

1,170

2.00

$

97,488

$

97,488

2.18

%  

$

114,097

$

114,097

2.16

%

* 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.

(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 certain multi-family and commercial real estate loans held in the Bank’s portfolio. The carrying value of the loans pledged as collateral for these borrowings totaled $1.23 billion at March 31, 2021 and $1.25 billion at December 31, 2020. As of March 31, 2021, the Company had $744.2 million of available borrowing capacity with the FHLB.  

The Company also has additional borrowing capacity under a $25.0 million unsecured federal funds line with a correspondent bank and a secured line of credit with the Federal Reserve Bank of Boston secured by 55% of the carrying value of indirect auto and commercial loans with principal balances amounting to $104.5 million and $107.1 million at March 31, 2021 and December 31, 2020, respectively. NaN amounts were outstanding under either line at March 31, 2021 or December 31, 2020.

As a participating lender in the PPP, the Company also has access to additional borrowing capacity through the Federal Reserve’s Paycheck Protection Program Liquidity Facility. Only loans issued under the PPP may be pledged as collateral.

On August 30, 2018, the Company issued $35.0 million in fixed-to-floating rate subordinated notes due 2028 (the “Notes”) in a private placement transaction to institutional accredited investors. The Notes bear interest at annual fixed rate of 5.625% until September 1, 2023 at which time the interest rate resets quarterly to an interest rate per annum equal to the three–month LIBOR plus 278 basis points. Interest is payable semi-annually on March 1 and September 1 each year through September 1, 2023 and quarterly thereafter. The Notes can be redeemed partially or in whole, prior to the maturity date beginning September 1, 2023 and on any scheduled interest payment date thereafter, at par. The Notes are carried on the Consolidated Balance Sheets net of unamortized issuance costs of $936,000 and $967,000 at March 31, 2021 and December 31, 2020, respectively, which are being amortized over the period to maturity date using the interest method. At March 31, 2021 and December 31, 2020, the Notes qualified as Tier 2 capital for regulatory capital purposes.

22

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

9.

OTHER COMMITMENTS AND CONTINGENCIES

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, 2021 and December 31, 2020. The contract amounts represent credit risk.

March 31, 

December 31, 

    

2021

    

2020

 

(in thousands)

Commitments to grant residential real estate loans-HarborOne Mortgage

$

412,662

$

485,428

Commitments to grant other loans

74,651

53,714

Unadvanced funds on home equity lines of credit

187,667

178,432

Unadvanced funds on revolving lines of credit

182,178

169,907

Unadvanced funds on construction loans

117,672

127,776

Commitments to extend credit and unadvanced portion 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, 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.

23

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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.

Interest Rate Swaps Designated as a 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 do 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 cash flow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized.

As of March 31, 2021, the Company had 1 interest rate swap agreement with a notional amount of $100.0 million that was designated as a cash flow hedge of certificates of deposits. The interest rate swap agreement has an average maturity of 4.0 years, the current weighted average fixed rate paid is 0.67%, the weighted average 3-month LIBOR swap receive rate is 0.22%, and the fair value is $438,000. The Company expects approximately $464,000 related to the cash flow hedge to be reclassified to interest expense, from other comprehensive income, in the next twelve months.

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.  

24

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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. Mortgage-backed securities with a fair value of $26.4 million are pledged to secure the Company’s liability for the offsetting interest rate swaps (see Note 2). The interest rate swap notional amount is the aggregate notional amount of the customer swap and the offsetting third-party swap.

Risk Participation Agreements

The Company has entered into risk participation agreements with the 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.

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. However, as of March 31, 2021 and December 31, 2020, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has classified its derivative valuations in their entirety as Level 2.

The following tables presents the outstanding notional balances and fair values of outstanding derivative instruments:

Assets

Liabilities

Balance

Balance

Notional

Sheet

Fair

Sheet

Fair

    

Amount

    

Location

    

Value

    

Location

    

Value

 

(in thousands)

March 31, 2021:

       

Derivatives designated as Hedging Instruments

Interest rate swaps

$

100,000

Other assets

$

438

Other liabilities

$

Derivatives not designated as Hedging Instruments

Derivative loan commitments

$

412,662

Other assets

$

6,988

Other liabilities

$

119

Forward loan sale commitments

315,000

Other assets

3,236

Other liabilities

24

Interest rate swaps

832,015

Other assets

22,552

Other liabilities

22,552

Risk participation agreements

132,066

Other assets

Other liabilities

Total

$

33,214

$

22,695

December 31, 2020:

Derivatives designated as Hedging Instruments

Interest rate swaps

$

100,000

$

Other liabilities

$

1,407

Derivatives not designated as Hedging Instruments

Derivative loan commitments

$

485,428

Other assets

$

12,623

Other liabilities

$

341

Forward loan sale commitments

356,500

Other assets

Other liabilities

2,204

Interest rate swaps

867,728

Other assets

39,320

Other liabilities

39,320

Risk participation agreements

132,379

Other assets

Other liabilities

Total

$

51,943

$

43,272

25

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following table presents the recorded net gains and losses pertaining to the Company’s derivative instruments:

Three Months Ended March 31, 

2021

2020

(in thousands)

Derivatives designated as hedging instruments

Gain in OCI on derivatives (effective portion), net of tax

$

1,329

$

Loss reclassified from OCI into interest income or interest expense (effective portion)

$

(112)

$

Derivatives not designated as hedging instruments

Changes in fair value of derivative loan commitments

Mortgage banking income

$

(5,413)

$

5,191

Changes in fair value of forward loan sale commitments

Mortgage banking income

5,417

(3,672)

Total

$

4

$

1,519

11.

OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES

Operating lease ROU assets, included in other assets, were $24.1 million at March 31, 2021.

Operating lease liabilities, included in other liabilities and accrued expenses, were $25.6 million at March 31, 2021. As of March 31, 2021 the Company does not have leases that have not yet commenced. At March 31, 2021 lease expiration dates ranged from 1 month to 36.9 years and have a weighted average remaining lease term of 18.1 years.

Future minimum lease payments under non-cancellable leases and a reconciliation to the amount recorded as operating lease liabilities as of March 31, 2021 and December 31, 2020 were as follows:

March 31, 2021

December 31, 2020

(in thousands)

2021

$

2,032

$

2,452

2022

2,545

2,239

2023

2,316

1,847

2024

1,956

1,644

2025

1,871

1,684

Thereafter

20,822

13,134

Total lease payments

31,542

$

23,000

Imputed interest

(5,971)

Total present value of operating lease liabilities

$

25,571

The weighted-average discount rate and remaining lease term for operating leases were as follows:

March 31, 2021

Weighted-average discount rate

1.96

%

Weighted-average remaining lease term (years)

18.10

26

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $682,000 and $627,000, respectively, for the three months ended March 31, 2021 and 2020. 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

March 31, 2021

(in thousands)

Lease Expense:

Operating lease expense

$

632

Short-term lease expense

41

Variable lease expense

9

Total lease expense

$

682

12.

STOCK-BASED COMPENSATION

Under the HarborOne, Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”), adopted on September 29, 2020, the Company may grant stock options, restricted stock awards, performance restricted stock units and other equity incentives to its directors, officers and employees. Total shares reserved for issuance under the 2020 Equity Plans are 4,500,000. The 2017 Stock Option and Incentive Plan (the “2017 Equity Plan” and together with the 2020 Equity Plan, the “Equity Plans”), adopted on August 9, 2017, was discontinued upon the adoption of the 2020 Equity Plan and as such the Company may only award shares from the 2020 Equity Plan.

Expense related to awards granted to employees is recognized as compensation expense, and expense related to awards granted to directors is recognized as directors’ fees within noninterest expense. Total expense for the Equity Plans was $772,000 for the three months ended March 31, 2021 and $1.3 million for the three months ended March 31, 2020.

Stock Options

Stock options are generally granted with the exercise price equal to the market price of the Company’s common stock at the date of the grant with vesting periods ranging from 1 to 3 years and have 10-year contractual terms.

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

Volatility is based on peer group volatility due to lack of sufficient trading history for the Company.
Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term and the vesting period.
Expected dividend yield is based on the Company’s history and expectation of dividend payouts.
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

During the three months ended March 31, 2021, the Company made no awards of nonqualified options to purchase shares of common stock.

27

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

A summary of the status of the Company’s stock option grants for the three months ended March 31, 2021, is presented in the table below:

Outstanding

Nonvested

Weighted

Average

Weighted

Weighted

Remaining

Aggregate

Average

Stock Option

Average

Contractual

Intrinsic

Stock Option

Grant Date

Awards

Exercise Price

Term (years)

Value

Awards

Fair Value

  

  

  

  

  

Balance at January 1, 2021

  

  

2,106,403

  

$

9.86

  

  

  

431,550

  

$

2.55

Granted

Exercised

(62,840)

10.23

Vested

(176,165)

2.47

Forfeited

Expired

Balance at March 31, 2021

2,043,563

$

9.85

7.00

$

255,385

$

2.60

Exercisable at March 31, 2021

1,746,283

$

9.94

6.85

$

Unrecognized cost inclusive of directors' awards

$

622,000

Weighted average remaining recognition period (years)

0.89

Restricted Stock and Performance Restricted Stock Units

Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company. Any shares not issued because vesting requirements are not met will again be available for issuance under the plan. The fair market value of shares awarded, based on the market price at the date of grant, is unearned compensation to be amortized over the applicable vesting period.

Performance Restricted Stock Units vest based on a combination of performance and service requirements. The number of performance restricted stock units granted reflects the target number able to be earned under a given award. Nonvested performance restricted stock unit compensation expense is based on the most recent performance assumption available and is adjusted as assumptions change.

The following table presents the activity in non-vested restricted stock awards under the Equity Plans for the three months ended March 31, 2021:

Restricted

Weighted Average

Stock Awards

Grant Price

Non-vested stock awards at January 1, 2021

384,692

$

9.33

Vested

(3,782)

8.82

Granted

188,377

11.95

Forfeited

Non-vested stock awards at March 31, 2021

569,287

$

10.20

Unrecognized cost inclusive of directors' awards

$

4,884,000

Weighted average remaining recognition period (years)

2.03

28

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The following table presents the activity in non-vested performance restricted stock units under the 2020 Equity Plan for the three months ended March 31, 2021:

Performance

Weighted Average

Restricted Stock Units

Grant Price

Non-vested performance restricted stock units at January 1, 2021

$

Vested

Granted

85,066

11.95

Forfeited

Non-vested performance restricted stock units at March 31, 2021

85,066

$

11.95

Unrecognized cost

$

988,000

Weighted average remaining recognition period (years)

2.92

13.MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Company and 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 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, 2021 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, 2021 also exceeded the minimum capital requirements, including the currently applicable capital conservation buffer of 2.5%.

29

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

The Company’s and the Bank’s actual regulatory capital ratios as of March 31, 2021 and December 31, 2020 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

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

(dollars in thousands)

HarborOne Bancorp, Inc.

March 31, 2021

Common equity Tier 1 capital to risk-weighted assets

$

625,494

17.8

%  

$

158,349

4.5

%  

N/A

N/A

Tier 1 capital to risk-weighted assets

625,494

17.8

211,132

6.0

N/A

N/A

Total capital to risk-weighted assets

704,620

20.0

281,510

8.0

N/A

N/A

Tier 1 capital to average assets

625,494

14.2

176,015

4.0

N/A

N/A

December 31, 2020

Common equity Tier 1 capital to risk-weighted assets

$

621,153

17.7

%  

$

158,050

4.5

%  

N/A

N/A

Tier 1 capital to risk-weighted assets

621,153

17.7

210,733

6.0

N/A

N/A

Total capital to risk-weighted assets

700,197

19.9

280,978

8.0

N/A

N/A

Tier 1 capital to average assets

621,153

14.5

171,578

4.0

N/A

N/A

HarborOne Bank

March 31, 2021

Common equity Tier 1 capital to risk-weighted assets

$

528,351

15.0

%  

$

158,358

4.5

%  

$

228,740

6.5

%

Tier 1 capital to risk-weighted assets

528,351

15.0

211,144

6.0

281,526

8.0

Total capital to risk-weighted assets

572,481

16.3

281,526

8.0

351,907

10.0

Tier 1 capital to average assets

528,351

12.0

175,976

4.0

219,970

5.0

December 31, 2020

Common equity Tier 1 capital to risk-weighted assets

$

506,822

14.4

%  

$

158,081

4.5

%  

$

228,339

6.5

%

Tier 1 capital to risk-weighted assets

506,822

14.4

210,775

6.0

281,033

8.0

Total capital to risk-weighted assets

550,875

15.7

281,033

8.0

351,291

10.0

Tier 1 capital to average assets

506,822

11.8

171,501

4.0

214,377

5.0

30

Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

14.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 Consolidated Balance Sheets, such items, along with net income, are components of comprehensive income (loss).

The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:

March 31, 

December 31, 

    

2021

    

2020

 

(in thousands)

Cash flow hedge:

Net unrealized gain (loss)

$

438

$

(1,407)

Related tax effect

(122)

394

Total accumulated other comprehensive income (loss)

$

316

$

(1,013)

Securities available for sale:

Net unrealized gain (loss)

$

(611)

$

4,102

Related tax effect

135

(904)

Total accumulated other comprehensive income (loss)

$

(476)

$

3,198

The following tables present changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31, 

2021

2020

Available

Cash

Available

for Sale

Flow

for Sale

Securities

Hedge

Total

Securities

(in thousands)

Balance at beginning of period

   

$

3,198

$

(1,013)

$

2,185

   

$

1,480

Other comprehensive income (loss) before reclassifications

(4,713)

1,733

(2,980)

6,018

Amounts reclassified to accumulated other comprehensive income for transfer of securities to available for sale

522

Amounts reclassified from accumulated other comprehensive income (loss)

112

112

(2,525)

Net current period other comprehensive income (loss)

(4,713)

1,845

(2,868)

4,015

Related tax effect

1,039

(516)

523

(1,237)

Balance at end of period

$

(476)

$

316

$

(160)

$

4,258

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Table of Contents

HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

15.

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 0 Level 1 securities held at March 31, 2021 and 2020.

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, individual name issuer trust preferred debt 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 0 Level 3 securities held at March 31, 2021 and December 31, 2020.

 

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 0 mortgage loans held for sale 90 days or more past due as of March 31, 2021 and December 31, 2020.

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, such as accruing troubled debt restructured loans, 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.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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.

Interest rate swap designated as a cashflow hedge - The Company works directly with a third-party vendor to provide periodic valuations for its interest rate risk management agreements to determine fair value of its interest rate swaps executed for interest rate risk management. The vendor utilizes standard valuation methodologies applicable to interest rate derivatives based on readily observable market data and are therefore considered Level 2 valuations.

Forward loan sale commitments and derivative loan commitments - Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. The assumptions for pull-through rates are derived from internal data and adjusted using management judgment. Derivative loan commitments include the value of servicing rights and non-refundable costs of originating the loan based on the Company’s internal cost analysis that is not observable. The weighted average pull-through rate for derivative loan commitments was approximately 87% and 76% at March 31, 2021 and December 31, 2020, 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. The Company incorporates credit valuation analysis for counterparty nonperformance risk in the fair value measurement, including the impact of netting applicable credit enhancements such as available collateral.

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 0 transfers during the periods presented.

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

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:

Total

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

 

(in thousands)

March 31, 2021

Assets

Securities available for sale

$

$

304,168

$

$

304,168

Loans held for sale

210,494

210,494

Mortgage servicing rights

33,939

33,939

Derivative loan commitments

6,988

6,988

Forward loan sale commitments

3,236

3,236

Interest rate management agreements

438

438

Interest rate swaps

22,552

22,552

$

$

571,591

$

10,224

$

581,815

Liabilities

Derivative loan commitments

$

$

$

119

$

119

Forward loan sale commitments

24

24

Interest rate management agreements

Interest rate swaps

22,552

22,552

$

$

22,552

$

143

$

22,695

December 31, 2020

Assets

Securities available for sale

$

$

276,498

$

$

276,498

Loans held for sale

208,612

208,612

Mortgage servicing rights