HarborOne Bancorp(US:HONE)2023-11-07 13:47PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents the unaudited interim consolidated financial statements and related notes for HarborOne Bancorp, Inc Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands USD): | Item | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Total Assets | $5,664,387 | $5,359,545 | | Total Liabilities | $5,079,753 | $4,742,569 | | Total Stockholders' Equity | $584,634 | $616,976 | | Net Loans | $4,674,542 | $4,504,434 | | Total Deposits | $4,409,958 | $4,189,499 | Consolidated Statements of Income Consolidated Statements of Income Highlights (in thousands USD): | Item | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total interest and dividend income | $63,164 | $44,556 | $179,903 | $120,015 | | Total interest expense | $32,084 | $5,224 | $82,325 | $10,218 | | Net interest and dividend income | $31,080 | $39,332 | $97,578 | $109,797 | | Total noninterest income | $11,598 | $14,245 | $32,950 | $47,409 | | Total noninterest expense | $31,872 | $34,473 | $95,106 | $104,262 | | Net income | $8,412 | $13,758 | $23,188 | $36,012 | | Basic EPS | $0.20 | $0.30 | $0.53 | $0.77 | | Diluted EPS | $0.20 | $0.30 | $0.53 | $0.76 | Consolidated Statements of Comprehensive (Loss) Income Consolidated Statements of Comprehensive (Loss) Income Highlights (in thousands USD): | Item | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $8,412 | $13,758 | $23,188 | $36,012 | | Total other comprehensive loss | $(10,699) | $(14,414) | $(9,907) | $(47,044) | | Comprehensive income (loss) | $(2,287) | $(656) | $13,281 | $(11,032) | Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Changes in Stockholders' Equity Highlights (in thousands USD): | Item | Balance at Sep 30, 2023 | Balance at Dec 31, 2022 | Balance at Sep 30, 2022 | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | | Total Stockholders' Equity | $584,634 | $616,976 | $611,370 | | Retained Earnings | $369,930 | $356,438 | $350,049 | | Treasury Stock, at cost | $(187,803) | $(148,384) | $(143,125) | | Accumulated other comprehensive loss | $(56,989) | $(47,082) | $(48,681) | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands USD): | Item | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $69,584 | $53,286 | | Net cash used by investing activities | $(166,767) | $(593,734) | | Net cash provided by financing activities | $245,950 | $431,683 | | Net change in cash and cash equivalents | $148,767 | $(108,765) | | Cash and cash equivalents at end of period | $246,784 | $85,954 | Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies This note details the basis of financial statement presentation, company operations, and the adoption of ASU 2022-02 - The Company adopted ASU 2022-02 effective January 1, 2023, which eliminated TDR accounting guidance and enhanced disclosures for loan refinancings and restructurings. The adoption did not materially impact the financial statements39 - The banking industry experienced significant volatility in Q1 2023, leading to concerns about liquidity and deposit outflows. The Bank Term Funding Program (BTFP) was introduced to enhance liquidity33 - The Company provides financial services through 30 full-service branches in Massachusetts and Rhode Island, and a commercial lending office in Boston and Providence. HarborOne Mortgage operates in multiple states31 Note 2. Debt Securities This note summarizes debt securities, highlighting unrealized losses due to interest rate changes, not credit quality Debt Securities Summary (in thousands USD): | Category | Amortized Cost (Sep 30, 2023) | Fair Value (Sep 30, 2023) | Gross Unrealized Losses (Sep 30, 2023) | | :------------------------------------------------ | :---------------------------- | :------------------------ | :------------------------------------- | | Securities available for sale | $352,328 | $271,078 | $81,250 | | Securities held to maturity | $19,795 | $18,683 | $1,112 | | Total | $372,123 | $289,761 | $82,362 | - As of September 30, 2023, all 132 debt securities in the Company's portfolio were in an unrealized loss position, primarily due to changes in interest rates, not credit quality. No Allowance for Credit Losses (ACL) was recorded444547 - At September 30, 2023, available-for-sale debt securities with a fair value of $268.6 million and held-to-maturity securities with an amortized cost of $15.0 million were pledged as collateral for BTFP borrowing capacity, which was $361.0 million based on par value41 Note 3. Loans Held for Sale This note details loans held for sale, accounted at fair value, which decreased due to hedging strategies Loans Held for Sale (in thousands USD): | Item | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------ | :----------- | :----------- | | Loans held for sale, fair value | $17,796 | $18,544 | | Loans held for sale, contractual principal outstanding | $17,590 | $18,208 | | Fair value less unpaid principal balance | $206 | $336 | - The Company uses the fair value option for mortgage loans held for sale to match changes in fair value with forward sale commitment contracts used for hedging. Fair value decreased by $165,000 (three months) and $130,000 (nine months) ended September 30, 202349 Note 4. Loans and Allowance for Credit Losses This note details the loan portfolio, ACL, credit quality, and methodology for estimating credit losses Summary of Loan Balances (in thousands USD): | Loan Type | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Residential real estate | $1,708,412 | $1,634,319 | | Commercial loans | $2,991,657 | $2,873,930 | | Consumer loans | $24,247 | $41,421 | | Total loans before basis adjustment | $4,724,316 | $4,549,670 | | Allowance for credit losses on loans | $(48,312) | $(45,236) | | Net loans | $4,674,542 | $4,504,434 | Allowance for Credit Losses (ACL) Activity (in thousands USD): | Item | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Balance at beginning of period | $47,821 | $45,236 | | Charge-offs | $(37) | $(3,039) | | Recoveries | $55 | $398 | | Provision | $473 | $5,717 | | Balance at end of period | $48,312 | $48,312 | - The Company uses a ten-grade internal loan rating system for commercial loans, ranging from 'pass' (1-6) to 'uncollectible' (10), with annual or more frequent reviews62636466 Note 5. Mortgage Loan Servicing This note details Mortgage Servicing Rights (MSRs), their fair value, and key valuation assumptions - The Company serviced $3.59 billion in mortgage loans for others as of September 30, 2023, with MSRs valued at $49.2 million71 Key Assumptions for MSR Fair Value Calculation: | Assumption | Sep 30, 2023 | Dec 31, 2022 | | :---------------- | :----------- | :----------- | | Prepayment speed | 7.20% | 7.10% | | Discount rate | 10.03% | 9.81% | | Default rate | 1.68% | 1.63% | Changes in MSRs (in thousands USD): | Item | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Balance, beginning of period | $48,176 | $48,138 | | Additions | $900 | $2,194 | | Reductions from loans paid off | $(644) | $(1,494) | | Changes in valuation inputs or assumptions | $769 | $363 | | Balance, end of period | $49,201 | $49,201 | Note 6. Goodwill and Other Intangible Assets This note confirms no changes in goodwill carrying value or impairment for the reporting periods - Goodwill carrying values remained unchanged at $59.0 million for HarborOne Bank and $10.8 million for HarborOne Mortgage as of September 30, 2023, and December 31, 202273 - No interim goodwill impairment assessment was performed as of September 30, 2023, as management determined no triggering events or changes in circumstances indicated impairment74 Note 7. Deposits This note summarizes deposit balances by type and maturity, highlighting growth in term certificates and municipal deposits Summary of Deposit Balances (in thousands USD): | Deposit Type | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | NOW and demand deposit accounts | $997,988 | $1,060,268 | | Regular savings and club accounts | $1,324,635 | $1,468,172 | | Money market deposit accounts | $951,128 | $861,704 | | Total non-certificate accounts | $3,273,751 | $3,390,144 | | Term certificate accounts | $859,266 | $497,975 | | Brokered deposits | $276,941 | $301,380 | | Total deposits | $4,409,958 | $4,189,499 | - Total municipal deposits increased to $493.4 million at September 30, 2023, from $413.5 million at December 31, 2022. Reciprocal deposits significantly increased to $177.3 million from $28.6 million78 Certificate Accounts by Maturity (Sep 30, 2023, in thousands USD): | Maturity | Amount | Weighted Average Rate | | :-------------------- | :----------- | :-------------------- | | Within 1 year | $1,079,547 | 4.19% | | Over 1 year to 2 years | $27,003 | 2.01% | | Over 2 years to 3 years | $26,809 | 3.06% | | Over 3 years to 4 years | $2,467 | 0.73% | | Over 4 years to 5 years | $381 | 2.58% | | Total | $1,136,207 | 4.10% | Note 8. Borrowings This note details borrowed funds, available borrowing capacities, and the redemption of subordinated notes Borrowed Funds (in thousands USD): | Item | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | FHLB borrowings | $475,470 | $400,675 | | Subordinated debt | $34,380 | $34,285 | - FHLB short-term advances were $250.0 million at September 30, 2023, with a weighted average rate of 5.52%80 - The Company had significant available borrowing capacity: $830.7 million with FHLB, a secured line with FRBB, and $360.9 million under the BTFP, with no amounts outstanding under BTFP at September 30, 2023848586 - The Company exercised its option to redeem $35.0 million in fixed-to-floating-rate subordinated notes due 2028, effective December 1, 202387 Note 9. Other Commitments and Contingencies This note outlines off-balance sheet commitments and contingencies, including ACL on unfunded commitments ACL on Unfunded Commitments (in thousands USD): | Item | Sep 30, 2023 | Sep 30, 2022 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | :----------- | | Balance at period end | $4,245 | $5,502 | $4,927 | Off-Balance Sheet Financial Instruments (in thousands USD): | Commitment Type | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Commitments to grant residential real estate loans | $52,370 | $57,916 | | Commitments to grant other loans | $63,777 | $43,700 | | Unadvanced funds on home equity lines of credit | $255,391 | $251,759 | | Unadvanced funds on revolving lines of credit | $318,427 | $351,382 | | Unadvanced funds on construction loans | $226,626 | $262,945 | Note 10. Derivatives This note details derivative financial instruments used for interest-rate risk management and customer financing needs - The Company uses interest rate swaps as fair value hedges for fixed-rate residential mortgages (notional $100.0 million) and as cashflow hedges for brokered deposits (notional $100.0 million)949598 Outstanding Notional Balances and Fair Values of Derivatives (Sep 30, 2023, in thousands USD): | Derivative Type | Notional Amount | Fair Value (Assets) | Fair Value (Liabilities) | | :-------------------------------- | :-------------- | :------------------ | :----------------------- | | Fair value hedge - interest rate swaps | $100,000 | $1,463 | $0 | | Cashflow hedge - interest rate swaps | $100,000 | $6,946 | $0 | | Derivative loan commitments | $40,445 | $420 | $111 | | Forward loan sale commitments | $31,000 | $304 | $0 | | Interest rate swaps (not designated) | $859,275 | $33,889 | $33,889 | | Risk participation agreements | $182,347 | $0 | $0 | | Total derivatives | - | $43,022 | $34,000 | - Derivative loan commitments and forward loan sale commitments are used to mitigate interest rate risk on residential mortgage loans intended for sale in the secondary market99101 Note 11. Operating Lease ROU Assets and Liabilities This note provides information on operating lease ROU assets and liabilities, including weighted-average terms and discount rates Operating Lease ROU Assets and Liabilities (in thousands USD): | Item | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Operating lease ROU assets | $23,500 | $26,900 | | Operating lease liabilities | $25,200 | $28,600 | Weighted-Average Lease Terms and Discount Rates: | Item | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Weighted-average discount rate | 2.08% | 2.02% | | Weighted-average remaining lease term (years) | 16.25 | 17.33 | Total Lease Expense (in thousands USD): | Item | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Operating lease expense | $766 | $2,365 | | Short-term lease expense | $40 | $105 | | Variable lease expense | $5 | $10 | | Sublease income | $(3) | $(12) | | Total lease expense | $808 | $2,468 | Note 12. Minimum Regulatory Capital Requirements This note confirms the Company and Bank exceeded all regulatory capital requirements and are 'well capitalized' - Both the Company and the Bank exceeded all regulatory capital requirements and were considered "well capitalized" at September 30, 2023122 HarborOne Bancorp, Inc. Regulatory Capital Ratios (Sep 30, 2023): | Capital Ratio | Actual Ratio | Minimum Required for Capital Adequacy | | :-------------------------------- | :----------- | :------------------------------------ | | Common equity Tier 1 capital to risk-weighted assets | 12.0% | 4.5% | | Tier 1 capital to risk-weighted assets | 12.0% | 6.0% | | Total capital to risk-weighted assets | 13.7% | 8.0% | | Tier 1 capital to average assets | 10.1% | 4.0% | HarborOne Bank Regulatory Capital Ratios (Sep 30, 2023): | Capital Ratio | Actual Ratio | Minimum Required for Capital Adequacy | Minimum Required to be "Well Capitalized" | | :-------------------------------- | :----------- | :------------------------------------ | :---------------------------------------- | | Common equity Tier 1 capital to risk-weighted assets | 11.5% | 4.5% | 6.5% | | Tier 1 capital to risk-weighted assets | 11.5% | 6.0% | 8.0% | | Total capital to risk-weighted assets | 12.6% | 8.0% | 10.0% | | Tier 1 capital to average assets | 9.7% | 4.0% | 5.0% | Note 13. Comprehensive (Loss) Income This note presents changes in accumulated other comprehensive (loss) income by component Changes in Accumulated Other Comprehensive (Loss) Income (in thousands USD): | Component | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net current period other comprehensive (loss) income | $(15,361) | $(14,421) | | Related tax effect | $4,662 | $4,514 | | Balance at end of period | $(56,989) | $(56,989) | Note 14. Fair Value of Assets and Liabilities This note describes fair value measurements for assets and liabilities, categorized by Level 1, 2, and 3 inputs - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (significant unobservable inputs)127128 Assets and Liabilities Measured at Fair Value on a Recurring Basis (Sep 30, 2023, in thousands USD): | Item | Level 1 | Level 2 | Level 3 | Total Fair Value | | :-------------------------------- | :------ | :-------- | :-------- | :--------------- | | Assets: | | | | | | Securities available for sale | $0 | $271,078 | $0 | $271,078 | | Loans held for sale | $0 | $17,796 | $0 | $17,796 | | Mortgage servicing rights | $0 | $49,201 | $0 | $49,201 | | Derivatives | $0 | $42,298 | $724 | $43,022 | | Liabilities: | | | | | | Derivatives | $0 | $33,889 | $111 | $34,000 | Assets Measured at Fair Value on a Non-recurring Basis (in thousands USD): | Item | Sep 30, 2023 (Level 3) | Dec 31, 2022 (Level 3) | | :-------------------------------- | :--------------------- | :--------------------- | | Collateral-dependent impaired loans | $7,340 | $349 | Note 15. Earnings Per Share This note provides the calculation for basic and diluted Earnings Per Share (EPS) for the reporting periods Earnings Per Common Share: | Item | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income available to common stockholders (in thousands) | $8,412 | $13,758 | $23,188 | $36,012 | | Basic EPS | $0.20 | $0.30 | $0.53 | $0.77 | | Diluted EPS | $0.20 | $0.30 | $0.53 | $0.76 | | Weighted average shares outstanding (Basic) | 42,876,893 | 45,830,737 | 43,591,954 | 46,875,312 | | Weighted average shares outstanding (Diluted) | 42,983,477 | 46,420,527 | 43,793,137 | 47,541,647 | Note 16. Revenue Recognition This note describes the Company's revenue recognition policies, including principal/agent roles and transactional sources - Revenue is recognized when performance obligations are satisfied, either at a point in time (e.g., card interchange fees, ATM fees, loan fees) or over time157158160 - The Company reports revenue based on gross consideration if acting as a principal, and net fee or commission if acting as an agent159 Note 17. Segment Reporting This note identifies HarborOne Bank and HarborOne Mortgage as reportable segments, detailing their revenue sources and net income - The Company operates with two reportable segments: HarborOne Bank and HarborOne Mortgage161 - HarborOne Bank's revenue is mainly from interest on loans and investment securities, and deposit account service charges. HarborOne Mortgage's revenue is from interest on loans and fees from residential mortgage origination, sale, and servicing161 Segment Net Income (Loss) (in thousands USD): | Segment | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | HarborOne Bank | $9,104 | $12,490 | $25,455 | $30,650 | | HarborOne Mortgage | $(138) | $1,521 | $(1,122) | $7,147 | | Consolidated Net Income | $8,412 | $13,758 | $23,188 | $36,012 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition, operating results, asset quality, market risk, liquidity, and capital resources Forward-Looking Statements - This section contains forward-looking statements subject to risks and uncertainties, including economic conditions, interest rate changes, loan defaults, market turbulence, and regulatory changes169 Critical Accounting Policies and Estimates - Management's critical accounting policies include Allowance for Credit Losses, Goodwill, and Deferred Tax Assets, which involve significant judgment and estimates susceptible to changes in interest rates, economic performance, and borrower financial condition173174 Recent Developments - The Company enacted cost-savings measures and operational efficiencies in 2023, resulting in approximately $4.6 million in pre-tax annual savings176 - Cash and available-for-sale securities represented 9.1% of assets at September 30, 2023. The Company maintains access to $1.3 billion in contingent liquidity at FHLB and FRBB177 - Macroeconomic trends remain mixed, with ongoing uncertainty in the economy and banking industry, potentially impacting the Company's competitive landscape and funding costs178 Comparison of Financial Condition Total assets increased to $5.66 billion, driven by investments and loans, while equity decreased due to repurchases Total Assets - Total assets increased $304.8 million, or 5.7%, to $5.66 billion at September 30, 2023, from $5.36 billion at December 31, 2022179 - The increase was primarily due to a $149.9 million increase in short-term investments and a $173.2 million increase in loans179 Cash and Cash Equivalents - Cash and cash equivalents increased $148.8 million to $246.8 million at September 30, 2023, from $98.0 million at December 31, 2022, mainly due to increased short-term investments180 Loans Held for Sale - Loans held for sale decreased by $748,000 to $17.8 million at September 30, 2023, from $18.5 million at December 31, 2022181 Loans, net - Net loans increased $170.1 million, or 3.8%, to $4.67 billion at September 30, 2023, from $4.50 billion at December 31, 2022183 Composition of Loans (in thousands USD): | Loan Type | Sep 30, 2023 | Dec 31, 2022 | Increase (Decrease) | | :-------------------------------- | :----------- | :----------- | :------------------ | | Residential real estate | $1,708,412 | $1,634,319 | $74,093 (4.5%) | | Commercial loans | $2,991,657 | $2,873,930 | $117,727 (4.1%) | | Consumer loans | $24,247 | $41,421 | $(17,174) (-41.5%) | | Total loans before basis adjustment | $4,724,316 | $4,549,670 | $174,646 (3.8%) | | Allowance for credit losses on loans | $(48,312) | $(45,236) | $(3,076) (6.8%) | | Loans, net | $4,674,542 | $4,504,434 | $170,108 (3.8%) | - The increase in net loans was primarily driven by commercial real estate and residential real estate loan growth184 Securities - Investment securities available for sale decreased $30.0 million (10.0%) to $271.1 million at September 30, 2023, from $301.1 million at December 31, 2022, primarily due to unrealized losses from interest rate changes185 - Securities held to maturity were $19.8 million at September 30, 2023, with a fair value of $18.7 million186 Mortgage servicing rights - Total Mortgage Servicing Rights (MSRs) were $49.2 million at September 30, 2023, up from $48.1 million at December 31, 2022187 - The change in MSRs for the nine months ended September 30, 2023, included $2.2 million in additions, $1.5 million in amortization from loan repayment, and a positive fair value mark of $363,000187 - MSR fair value is significantly impacted by residential mortgage benchmark indices; increasing interest rates generally increase MSR fair value by reducing prepayment speeds192 Deposits - Deposits increased $220.5 million, or 5.3%, to $4.41 billion at September 30, 2023, from $4.19 billion at December 31, 2022193 Composition of Deposits (in thousands USD): | Deposit Type | Sep 30, 2023 | Dec 31, 2022 | Increase (Decrease) | | :-------------------------------- | :----------- | :----------- | :------------------ | | Noninterest-bearing deposits | $708,847 | $762,576 | $(53,729) (-7.0%) | | NOW accounts | $289,085 | $297,625 | $(8,540) (-2.9%) | | Regular savings | $1,324,635 | $1,468,172 | $(143,537) (-9.8%) | | Money market accounts | $470,499 | $451,663 | $18,836 (4.2%) | | Term certificate accounts | $846,568 | $494,599 | $351,969 (71.2%) | | Consumer and business deposits | $3,639,634 | $3,474,635 | $164,999 (4.7%) | | Municipal deposits | $493,383 | $413,484 | $79,899 (19.3%) | | Brokered deposits | $276,941 | $301,380 | $(24,439) (-8.1%) | | Total deposits | $4,409,958 | $4,189,499 | $220,459 (5.3%) | | Reciprocal deposits | $177,271 | $28,560 | $148,711 (520.7%) | - Uninsured deposits, after excluding subsidiary and collateralized deposits, represented 26% of total deposits at September 30, 2023196 Borrowed Funds - FHLB borrowings increased $74.8 million to $475.5 million at September 30, 2023, from $400.7 million at December 31, 2022197 - At September 30, 2023, the Bank had $1.28 billion in available borrowing capacity across multiple relationships197 Stockholders' equity - Total stockholders' equity was $584.6 million at September 30, 2023, a 5.2% decrease from $617.0 million at December 31, 2022, primarily due to share repurchases198 - The tangible-common-equity-to-tangible-assets ratio was 9.17% at September 30, 2023, down from 10.31% at December 31, 2022199 - Regulatory capital ratios for both the Company and the Bank exceeded all requirements, including the capital conservation buffer, and were not impacted by unrealized losses on available-for-sale investment securities199 Comparison of Results of Operations Consolidated net income decreased due to higher interest expense, impacting net interest income and segment performance Overview Consolidated Net Income (in thousands USD): | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three months ended September 30 | $8,412 | $13,758 | | Nine months ended September 30 | $23,188 | $36,012 | Average Balances and Yields Average Balances and Yields (3 Months Ended Sep 30, in thousands USD): | Item | 2023 Average Balance | 2023 Yield/Cost | 2022 Average Balance | 2022 Yield/Cost | | :-------------------------------- | :------------------- | :-------------- | :------------------- | :-------------- | | Total interest-earning assets | $5,310,258 | 4.74% | $4,502,230 | 3.93% | | Total interest-bearing liabilities | $4,193,726 | 3.04% | $3,312,898 | 0.63% | | Net interest margin (fully tax equivalent) | - | 2.34% | - | 3.47% | | Cost of total deposits | - | 2.28% | - | 0.36% | Average Balances and Yields (9 Months Ended Sep 30, in thousands USD): | Item | 2023 Average Balance | 2023 Yield/Cost | 2022 Average Balance | 2022 Yield/Cost | | :-------------------------------- | :------------------- | :-------------- | :------------------- | :-------------- | | Total interest-earning assets | $5,219,080 | 4.63% | $4,333,172 | 3.70% | | Total interest-bearing liabilities | $4,105,631 | 2.68% | $3,156,892 | 0.43% | | Net interest margin (fully tax equivalent) | - | 2.52% | - | 3.39% | | Cost of total deposits | - | 1.92% | - | 0.25% | Rate/Volume Analysis Change in Net Interest Income (3 Months Ended Sep 30, 2023 vs. 2022, in thousands USD): | Item | Due to Volume | Due to Rate | Total Increase (Decrease) | | :-------------------------------- | :------------ | :---------- | :------------------------ | | Total interest-earning assets | $9,129 | $9,730 | $18,859 | | Total interest-bearing liabilities | $4,405 | $22,455 | $26,860 | | Change in net interest income | $4,724 | $(12,725) | $(8,001) | Change in Net Interest Income (9 Months Ended Sep 30, 2023 vs. 2022, in thousands USD): | Item | Due to Volume | Due to Rate | Total Increase (Decrease) | | :-------------------------------- | :------------ | :---------- | :------------------------ | | Total interest-earning assets | $26,149 | $34,404 | $60,553 | | Total interest-bearing liabilities | $17,114 | $54,993 | $72,107 | | Change in net interest income | $9,035 | $(20,589) | $(11,554) | Interest and Dividend Income - Interest and dividend income (tax equivalent) increased $18.9 million (42.3%) to $63.4 million for the three months ended September 30, 2023, driven by loan growth and higher yields214215 - For the nine months ended September 30, 2023, interest and dividend income increased $60.6 million (50.5%), reflecting similar trends of increased volume and rates on interest-bearing assets217 Interest Expense - Interest expense increased $26.9 million (514.1%) to $32.1 million for the three months ended September 30, 2023, primarily due to deposit growth and a 227 basis-point increase in deposit rates, as well as higher FHLB borrowing costs217222 - For the nine months ended September 30, 2023, interest expense increased $72.1 million (705.7%), reflecting similar trends of increased volume and rates on interest-bearing liabilities218 Net Interest and Dividend Income - Net interest and dividend income (tax equivalent) decreased $8.0 million (20.3%) to $31.3 million for the three months ended September 30, 2023, as rate increases on interest-bearing liabilities outpaced asset yields219 - The net interest spread was 1.70% for the three months ended September 30, 2023, down from 3.30% in the prior year, and net interest margin decreased to 2.34% from 3.47%219 - For the nine months ended September 30, 2023, net interest and dividend income decreased $11.6 million (10.5%) to $98.2 million, with net interest margin decreasing to 2.52% from 3.39%220 Income Tax Provision Income Tax Provision and Effective Tax Rate: | Period | Provision (in thousands USD) | Effective Tax Rate | | :-------------------------------- | :----------------------- | :----------------- | | Three months ended September 30, 2023 | $2,507 | 23.0% | | Three months ended September 30, 2022 | $4,678 | 25.4% | | Nine months ended September 30, 2023 | $7,198 | 23.7% | | Nine months ended September 30, 2022 | $13,380 | 27.1% | Segments HarborOne Bank Segment HarborOne Bank's net income decreased due to lower net interest income, despite improved noninterest income and expense Results of Operations HarborOne Bank Net Income (in thousands USD): | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three months ended September 30 | $9,104 | $12,490 | | Nine months ended September 30 | $25,455 | $30,650 | Provision for Credit Losses - The Bank recorded a reversal of provision for credit losses of $113,000 for the three months ended September 30, 2023, driven by a $586,000 reversal for unfunded commitments, partially offset by a $472,000 provision for loan credit losses228 - For the nine months ended September 30, 2023, provision for credit losses was $5.0 million, reflecting a $5.7 million provision for loan credit losses, partially offset by a $682,000 reversal for unfunded commitments228 - Nonperforming assets to total assets were 0.33% at September 30, 2023, down from 0.47% at September 30, 2022229 Noninterest Income HarborOne Bank Noninterest Income (in thousands USD): | Item | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total mortgage banking income (loss) | $8 | $(522) | $(409) | $(1,056) | | Interchange fees | $2,685 | $2,574 | $7,877 | $7,754 | | Other deposit account fees | $2,447 | $2,296 | $7,001 | $6,480 | | Swap fee income | $233 | $70 | $688 | $112 | | Total noninterest income | $6,511 | $5,658 | $18,650 | $17,095 | - The Bank's intersegment loss on loans purchased from HarborOne Mortgage decreased, reflecting lower residential mortgage loan purchases234 - Other deposit account fees increased due to higher overdraft protection fees and fees on business accounts234 Noninterest Expense HarborOne Bank Noninterest Expense (in thousands USD): | Item | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Compensation and benefits | $15,238 | $16,455 | $45,069 | $47,942 | | Occupancy and equipment | $3,828 | $4,096 | $12,033 | $12,598 | | Data processing expenses | $2,527 | $2,219 | $7,187 | $6,552 | | Deposit insurance | $1,004 | $357 | $2,690 | $1,060 | | Total noninterest expense | $26,272 | $27,707 | $78,655 | $81,663 | - Compensation expense decreased due to lower incentive and benefit expenses and headcount reductions, despite including one-time severance costs237 - Deposit insurance expense increased significantly due to a two-basis-point increase in the insurance rate237 HarborOne Mortgage Segment HarborOne Mortgage reported net losses due to weak mortgage demand and decreased banking income from higher interest rates Results of Operations HarborOne Mortgage Net Income (Loss) (in thousands USD): | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three months ended September 30 | $(138) | $1,521 | | Nine months ended September 30 | $(1,122) | $7,147 | Noninterest Income HarborOne Mortgage Noninterest Income (in thousands USD): | Item | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Gain on sale of mortgage loans | $2,704 | $3,809 | $8,228 | $13,669 | | Changes in mortgage servicing rights fair value | $107 | $1,652 | $(1,042) | $7,082 | | Total mortgage banking income | $5,142 | $8,394 | $14,193 | $30,336 | - Gain on sale of mortgages and processing, underwriting, and closing fees decreased due to weak mortgage demand from higher interest rates243 - The change in MSR fair value for the three and nine months ended September 30, 2023, reflected increased benchmark residential rates, muted by MSR price caps and amortization240242 Noninterest Expense HarborOne Mortgage Noninterest Expense (in thousands USD): | Item | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Compensation and benefits | $4,014 | $4,788 | $11,289 | $15,974 | | Total noninterest expense | $5,490 | $6,610 | $16,305 | $21,613 | - Compensation and benefits decreased primarily due to lower commission expense, consistent with reduced mortgage origination volumes, and decreased staffing levels, including severance costs246 Asset Quality Asset quality remains strong with nonperforming assets at 0.33% of total assets, though commercial real estate is monitored Nonperforming Assets (in thousands USD): | Item | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Total non-accrual loans | $18,783 | $14,786 | | Other real estate owned and repossessed assets | $12 | $54 | | Total nonperforming assets | $18,795 | $14,840 | | Allowance for credit losses to total loans | 1.02% | 0.99% | | Allowance for credit losses to non-accrual loans | 257.21% | 305.94% | | Total nonperforming assets to total assets | 0.33% | 0.28% | - Management monitors commercial real estate sectors (business-oriented hotels, non-anchored retail, metro office space) for increased credit risk due to pandemic trends and current economic conditions251 - The ACL on loans was $48.3 million (1.02% of total loans) at September 30, 2023, with a sensitivity analysis indicating potential changes between a $12.8 million reduction and $12.2 million increase based on qualitative risk factors257258 Management of Market Risk Market risk, primarily interest-rate risk, is managed via income simulation and Economic Value of Equity (EVE) analysis Net Interest Income Analysis - The Company uses income simulation to measure interest-rate risk by estimating the effect of instantaneous parallel shifts in market rates on net interest income over specified time frames265 Net Interest Income Simulation Results (Change from Year One Base): | Changes in Interest Rates (basis points) | Sep 30, 2023 (Year One) | Sep 30, 2023 (Year Two) | Sep 30, 2022 (Year One) | Sep 30, 2022 (Year Two) | | :--------------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | +300 | (-13.1%) | (-11.8%) | (-6.9%) | (-4.4%) | | +200 | (-8.6%) | (-7.7%) | (-4.4%) | (-2.5%) | | +100 | (-4.2%) | (-3.5%) | (-2.2%) | (-1.2%) | | -100 | 4.6% | 4.7% | 0.8% | (-1.1%) | Economic Value of Equity Analysis - The EVE methodology calculates the difference between the present value of expected cash flows from assets and liabilities, assuming immediate parallel shifts in the yield curve267 Estimated Changes in EVE (Sep 30, 2023, in thousands USD): | Changes in Interest Rates (basis points) | Estimated EVE | Estimated Increase (Decrease) in EVE (Amount) | Estimated Increase (Decrease) in EVE (Percent) | EVE as a Percentage of Economic Value of Assets | | :--------------------------------------- | :------------ | :-------------------------------------------- | :--------------------------------------------- | :---------------------------------------------- | | +300 | $412,808 | $(192,950) | (-31.9%) | 8.6% | | +200 | $482,037 | $(123,721) | (-20.4%) | 9.7% | | +100 | $552,023 | $(53,735) | (-8.9%) | 10.8% | | 0 | $605,758 | $0 | 0% | 11.6% | | -100 | $650,654 | $44,896 | 7.4% | 12.0% | Liquidity Management and Capital Resources The Company maintains strong liquidity and capital resources, exceeding all regulatory requirements and considered 'well capitalized' - The Company's primary sources of funds include deposit inflows, loan repayments, maturities and sales of securities, and FHLB borrowings273 - At September 30, 2023, the Company had $246.8 million in cash and cash equivalents, and additional borrowing capacity of $830.7 million from FHLB, $68.0 million from FRBB, and $360.9 million from the BTFP275 - The Company and the Bank exceeded all regulatory capital requirements at September 30, 2023, and were considered "well capitalized"281 Non-GAAP Financial Measures and Reconciliation to GAAP - The tangible-common-equity-to-tangible-assets ratio is presented as a non-GAAP financial measure, used by regulators and analysts to evaluate financial condition282 Tangible Common Equity to Tangible Assets Ratio (in thousands USD): | Item | Sep 30, 2023 | Sep 30, 2022 | | :-------------------------------- | :----------- | :----------- | | Total stockholders' equity | $584,634 | $611,370 | | Less: Goodwill | $69,802 | $69,802 | | Less: Other intangible assets | $1,704 | $2,461 | | Tangible common equity | $513,128 | $539,107 | | Total assets | $5,664,387 | $4,987,643 | | Less: Goodwill | $69,802 | $69,802 | | Less: Other intangible assets | $1,704 | $2,461 | | Tangible assets | $5,592,881 | $4,915,380 | | Tangible common equity / tangible assets | 9.17% | 10.97% | ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This item refers to the 'Management of Market Risk' section for disclosures on interest-rate risk management - Information on quantitative and qualitative disclosures about market risk is included in the "Management of Market Risk" section of Item 2286 ITEM 4. Controls and Procedures Disclosure controls and procedures were effective, with no material changes in internal control over financial reporting Disclosure Controls and Procedures - The Company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023, ensuring timely and accurate reporting of information286 Internal Control Over Financial Reporting - No material changes in the Company's internal controls over financial reporting occurred during the quarter ended September 30, 2023287 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings No material changes to legal proceedings have occurred, and no current proceedings are deemed material - No material changes in legal proceedings have occurred since previous filings, and no current proceedings are deemed material to the Company's financial condition or results of operations290 ITEM 1A. Risk Factors No material changes to previously disclosed risk factors in the Annual Report or prior Quarterly Report - No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for 2022 and the Quarterly Report on Form 10-Q for Q1 2023291 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred; details of the share repurchase program are provided - No unregistered sales of equity securities occurred292 Repurchase of Equity Securities (Q3 2023): | Period | Total shares purchased | Average price paid per share | Maximum shares yet to be purchased | | :-------------------------- | :--------------------- | :--------------------------- | :--------------------------------- | | July 1 to July 31, 2023 | 30,000 | $10.65 | 2,295,489 | | August 1 to August 31, 2023 | 300,000 | $10.12 | 1,995,489 | | September 1 to September 30, 2023 | 322,523 | $9.69 | 1,672,966 | | Total (Q3 2023) | 652,523 | $9.93 | 1,672,966 | - The Company commenced a sixth share repurchase program in Q3 2023, repurchasing 652,523 shares at an average price of $9.93, with the program expiring on June 30, 2024292 ITEM 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - No defaults upon senior securities occurred293 ITEM 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable294 ITEM 5. Other Information No Rule 10b5-1 or non-Rule 10b5-1 trading plans were adopted, modified, or terminated by officers/directors - No directors or executive officers had, adopted, modified, or terminated Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the quarter295 ITEM 6. Exhibits This item lists exhibits included or incorporated by reference into this Quarterly Report on Form 10-Q - The report includes certifications (31.1, 31.2, 32.1) and interactive data files (101, 104) as exhibits298