HarborOne Bancorp(HONE) - 2023 Q4 - Annual Report

Part I Item 1. Business HarborOne Bancorp, a bank holding company, manages $5.67 billion in assets through its banking and mortgage segments, primarily lending in commercial and residential real estate Human Capital Resources HarborOne had 529 employees as of December 31, 2023, with a diverse workforce, emphasizing an inclusive environment and professional development - As of December 31, 2023, the company's workforce was 61% female and 22% racially or ethnically diverse. The senior management team was 44.4% female[20] - The company focuses on employee growth through training programs, customized corporate training, and educational reimbursement[22] Market Area and Competition HarborOne's primary market is Eastern Massachusetts and Rhode Island, facing intense competition from diverse financial institutions across New England - The Bank's primary deposit-gathering area is concentrated in its branch communities, while its lending area extends across New England[26] - Competition is significant from larger financial institutions with greater resources, as well as from non-depository companies and online financial services, which have lowered barriers to entry[29][31] Lending Activities The company's $4.75 billion loan portfolio is dominated by commercial real estate (49.3%) and residential real estate (31.9%), with a portion of mortgages sold on the secondary market Loan Portfolio Composition (December 31, 2023) | Loan Category | Amount (billions) | % of Total Loans | | :--- | :--- | :--- | | Commercial Real Estate | $2.34 | 49.3% | | Residential Real Estate (1-4 Family) | $1.51 | 31.9% | | Commercial & Industrial | $0.47 | 9.8% | | Commercial Construction | $0.21 | 4.4% | | Second Mortgages & HELOCs | $0.18 | 3.7% | | Other (Consumer, Residential Construction) | $0.04 | 0.9% | - For the year ended December 31, 2023, the company originated $1.11 billion in loans, purchased $32.6 million, and sold $480.7 million[66] - The Bank's internal loans-to-one-borrower limit is $85.0 million, below the regulatory limit of $111.6 million. The largest lending relationship was $41.0 million as of year-end[80] Investment Activities The company's $309.9 million investment portfolio, primarily in mortgage-backed securities and government obligations, aims for liquidity, risk mitigation, and returns Investment Portfolio Composition (December 31, 2023) | Security Type | Amount (millions) | % of Portfolio | | :--- | :--- | :--- | | Mortgage-Backed Securities & CMOs | $247.4 | 79.8% | | U.S. Government & GSE Obligations | $55.2 | 17.8% | | SBA Asset-Backed Securities | $6.6 | 2.1% | | Corporate Bonds | $1.0 | 0.3% | | Total Securities | $309.9 | 100.0% | - In addition to the securities portfolio, the company held $27.1 million in FHLB stock and $94.7 million in BOLI[88][89] Sources of Funds Primary funding sources include $4.39 billion in deposits and $568.5 million in borrowings, supplemented by significant additional borrowing capacity from FHLB and BTFP - Total deposits reached $4.39 billion at December 31, 2023. This includes $471.8 million in municipal deposits from over 85 cities and towns[91] - The company utilizes brokered deposits, which totaled $326.6 million (7.4% of total deposits) at year-end[94] - Total borrowings were $568.5 million, consisting of FHLB advances. The company has significant additional liquidity access, including $727.5 million from the FHLB and $360.9 million from the FRBB's BTFP[96][97] Supervision and Regulation HarborOne Bancorp and its subsidiary are extensively regulated by federal and state authorities, covering capital adequacy, consumer protection, and anti-money laundering, with the Bank classified as "well capitalized" - The Company is a bank holding company subject to regulation by the Federal Reserve, while the Bank is a state-chartered trust company regulated by the FDIC and state banking authorities[100][101] - The Bank must comply with capital adequacy rules, including a capital conservation buffer of 2.5%. As of December 31, 2023, the Bank was considered "well capitalized" under all regulatory definitions[123][124] - The Bank is subject to the Community Reinvestment Act (CRA) and received an "Outstanding" rating on its most recent examination. New CRA regulations will become effective on January 1, 2026[118] Item 1A. Risk Factors The company faces significant business risks from economic conditions, interest rate volatility, and credit concentrations in commercial real estate, alongside regulatory compliance and cybersecurity threats - Business & Industry Risks: Economic downturns, interest rate volatility, and inflation pose significant threats. Changes in interest rates led to a $21.7 million (14.6%) decline in net interest and dividend income in 2023[141][143][145] - Credit Risks: The large concentration in commercial real estate ($2.34 billion, 49.3% of total loans) and commercial loans ($466.4 million, 9.8%) carries higher risk than residential lending. The unseasoned nature of this portfolio makes future performance difficult to predict[146][147] - Mortgage Banking Risks: Mortgage banking income is highly sensitive to interest rates and market demand, declining $16.4 million (52.6%) in 2023 due to a 43.4% decrease in loan production[154] - Regulatory Risks: The company operates in a highly regulated environment. Failure to comply with laws like the Community Reinvestment Act (CRA) or anti-money laundering regulations can lead to sanctions, fines, and reputational damage[208][213][215] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[220] Item 1C. Cybersecurity The company manages cybersecurity risks through a comprehensive Information Security Program, overseen by the Board and aligned with NIST and FFIEC frameworks - Oversight is managed by the Chief Risk Officer (CRO) and Chief Information Security Officer (CISO), with ultimate oversight from the Board of Directors and its Audit Committee[222][227] - The Information Security Program aligns with the National Institute of Standards and Technology (NIST) Cybersecurity Framework and FFIEC guidelines, and is reviewed and approved annually by the Board[230][233] - The company uses specialized service providers for continuous monitoring, threat containment, and penetration testing, and maintains a Vendor Management Program for third-party risk[234] Item 2. Properties As of December 31, 2023, the company operated 30 branches and various offices with a net book value of $48.7 million for property and equipment - The company operates 30 full-service branches, with a mix of owned and leased properties, and commercial lending offices in Boston and Providence[236] - The net book value of property and equipment was $48.7 million at year-end 2023[236] Item 3. Legal Proceedings The company is not involved in material pending legal proceedings, with a class action lawsuit regarding overdraft fees settled in November 2023 - A class action lawsuit regarding overdraft fees on re-presented transactions received final court approval for settlement on November 14, 2023[238] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[239] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (HONE) trades on Nasdaq, pays a quarterly dividend, and repurchased 570,527 shares in Q4 2023 under an ongoing program - The company's common stock (HONE) trades on the Nasdaq Global Select Market. It currently pays a quarterly cash dividend of $0.075 per share[241][242] Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Remaining in Program | | :--- | :--- | :--- | :--- | | Oct 2023 | 355,000 | $9.74 | 1,317,966 | | Nov 2023 | 207,000 | $10.82 | 1,110,966 | | Dec 2023 | 8,527 | $11.29 | 1,102,439 | | Total Q4 | 570,527 | $10.15 | 1,102,439 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income significantly decreased to $16.1 million in 2023 due to a goodwill impairment and net interest margin compression, despite asset and deposit growth, while asset quality remained strong Key Performance Indicators (2023 vs 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $16.1 million | $45.6 million | | Diluted EPS | $0.37 | $0.97 | | Net Interest Income | $127.3 million | $149.0 million | | Net Interest Margin | 2.44% | 3.35% | | Return on Average Assets | 0.29% | 0.95% | | Return on Average Equity | 2.68% | 7.14% | - The decrease in profitability was driven by a $10.8 million goodwill impairment charge at the HarborOne Mortgage segment and significant net interest margin compression[299][323] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment, including the Allowance for Credit Losses (ACL), Goodwill impairment (fully impaired for HarborOne Mortgage in 2023), and Deferred Tax Assets - Allowance for Credit Losses (ACL): Estimated using the CECL model, which involves significant management judgment on economic forecasts and qualitative factors. A sensitivity analysis on commercial loan qualitative factors showed the ACL could vary by approximately +/- $13 million[265][266][269] - Goodwill: Tested annually for impairment. The determination of fair value for reporting units (Bank and HarborOne Mortgage) requires significant assumptions. In 2023, the goodwill for the HarborOne Mortgage reporting unit was determined to be fully impaired[271][274][275] - Deferred Tax Assets: Management assesses the need for a valuation allowance based on historical and forecasted operating results. Realization is dependent on generating future taxable income[276] Comparison of Financial Condition Total assets grew 5.8% to $5.67 billion, driven by loan and deposit growth, while stockholders' equity decreased due to share repurchases Balance Sheet Changes (2023 vs 2022) | Account | Dec 31, 2023 ($B) | Dec 31, 2022 ($B) | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $5.67 | $5.36 | 5.8% | | Net Loans | $4.70 | $4.50 | 4.4% | | Total Deposits | $4.39 | $4.19 | 4.7% | | Total Borrowings | $0.57 | $0.43 | 31.3% | | Stockholders' Equity | $0.58 | $0.62 | -5.4% | - The deposit mix shifted significantly, with noninterest-bearing and regular savings deposits declining by 13.5% and 13.8% respectively, while term certificate accounts grew by 73.5% as customers sought higher yields[291] - Stockholders' equity decreased primarily due to the repurchase of 3.7 million shares for $44.9 million during 2023[298] Comparison of Results of Operations Consolidated net income decreased to $16.1 million in 2023 due to lower net interest income and a goodwill impairment, with net interest margin compressing to 2.44% Consolidated Income Statement Highlights (2023 vs 2022) | Metric | 2023 ($M) | 2022 ($M) | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $127.3 | $149.0 | -14.6% | | Provision for Credit Losses | $5.7 | $5.7 | 0.0% | | Noninterest Income | $41.9 | $57.3 | -26.9% | | Noninterest Expense | $138.3 | $138.9 | -0.4% | | Net Income | $16.1 | $45.6 | -64.7% | - Net interest margin on a tax equivalent basis decreased 91 basis points to 2.44% in 2023 from 3.35% in 2022, as the cost of interest-bearing liabilities rose from 0.70% to 2.83%[302][309] Segment Net Income (Loss) (2023 vs 2022) | Segment | 2023 Net Income ($M) | 2022 Net Income ($M) | | :--- | :--- | :--- | | HarborOne Bank | $32.0 | $43.0 | | HarborOne Mortgage | $(14.0) | $4.8 | - HarborOne Mortgage's results were significantly impacted by a $10.8 million goodwill impairment charge and a 53.7% decrease in mortgage banking income, driven by a 43.4% decline in loan closings to $579.5 million[323][324] Asset Quality Asset quality remained strong in 2023, with nonperforming assets at 0.31% of total assets, primarily due to a single commercial real estate credit Asset Quality Metrics | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Nonperforming Assets | $17.6 million | $14.8 million | | Nonperforming Assets to Total Assets | 0.31% | 0.28% | | Nonperforming Loans to Total Loans | 0.37% | 0.32% | | ACL to Total Loans | 1.01% | 0.99% | | Net Charge-offs to Average Loans (Annual) | 0.08% | 0.09% | - The increase in non-accrual loans was primarily driven by a single commercial real estate credit in the metro office sector with a carrying value of $5.7 million[332] - The ACL methodology uses a DCF model incorporating a one-year forecast of the national unemployment rate, supplemented by qualitative factors[335][337] Management of Market Risk The company manages interest rate risk using NII simulation and EVE analysis, showing asset sensitivity in falling rates and liability sensitivity in rising rates Net Interest Income Sensitivity (as of Dec 31, 2023) | Rate Shock (basis points) | Year One NII Change | Year Two NII Change | | :--- | :--- | :--- | | +300 | (17.5)% | (14.2)% | | +200 | (11.6)% | (9.2)% | | +100 | (5.6)% | (4.2)% | | -100 | 6.1% | 5.3% | - The company also uses an Economic Value of Equity (EVE) analysis. A +200 basis point rate shock was estimated to decrease EVE by 19.0%[355] Liquidity Management and Capital Resources The company maintains a strong liquidity position with $277.4 million in cash and significant borrowing capacity, exceeding all regulatory capital requirements - Primary liquidity sources are deposits, loan repayments, and borrowings. The company has access to significant secondary liquidity sources[358] Available Borrowing Capacity (as of Dec 31, 2023) | Source | Capacity (millions) | | :--- | :--- | | FHLB | $727.5 | | FRBB (BTFP) | $360.9 | | FRBB (BIC) | $69.4 | | Correspondent Bank Line | $25.0 | - At December 31, 2023, both the Company and the Bank were considered "well capitalized" under regulatory guidelines[363] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2023, including balance sheets, income statements, and detailed notes on accounting policies and financial instruments Report of Independent Registered Public Accounting Firm Crowe LLP issued an unqualified opinion on the financial statements and internal controls, identifying ACL qualitative factors as a critical audit matter - Crowe LLP provided an unqualified opinion, stating the financial statements are presented fairly in all material respects and that internal control over financial reporting was effective[375] - The critical audit matter identified was the determination of qualitative factors for the Allowance for Credit Losses (ACL), which involves significant management judgment and subjectivity[381][385] Consolidated Financial Statements The consolidated financial statements show total assets of $5.67 billion and net income of $16.1 million for 2023, a decrease primarily due to lower net interest income and goodwill impairment Consolidated Balance Sheet Highlights (as of Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Assets | | | Net Loans | $4,702,339 | | Securities (AFS & HTM) | $309,947 | | Goodwill | $59,042 | | Total Assets | $5,667,896 | | Liabilities & Equity | | | Total Deposits | $4,387,409 | | Total Borrowings | $568,462 | | Total Liabilities | $5,084,137 | | Total Stockholders' Equity | $583,759 | Consolidated Income Statement Highlights (Year Ended Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Net Interest Income | $127,271 | | Provision for Credit Losses | $5,680 | | Noninterest Income | $41,854 | | Noninterest Expense | $138,320 | | Net Income | $16,077 | Notes to Consolidated Financial Statements The notes detail accounting policies and financial data, including CECL, loan and securities portfolios, goodwill impairment, deposit structures, and regulatory capital compliance, confirming "well capitalized" status - Note 4 (Loans and ACL): Details the loan portfolio composition, with commercial loans at $3.02 billion and residential at $1.71 billion. The ACL on loans was $48.0 million at year-end 2023[512][515] - Note 8 (Goodwill): A goodwill impairment charge of $10.8 million was recorded for the HarborOne Mortgage reporting unit in 2023, representing 100% of its goodwill balance[543] Regulatory Capital Ratios (as of Dec 31, 2023) | Ratio | HarborOne Bancorp, Inc. | HarborOne Bank | Minimum to be Well Capitalized (Bank) | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 12.0% | 10.8% | 6.5% | | Tier 1 Capital | 12.0% | 10.8% | 8.0% | | Total Capital | 13.1% | 11.9% | 10.0% | | Tier 1 Leverage | 10.0% | 9.0% | 5.0% | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[701] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes in Q4 - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[702] - Management's assessment, based on the COSO framework, concluded that the company maintained effective internal control over financial reporting as of December 31, 2023[704] Item 9B. Other Information The company reports no other required information and no Rule 10b5-1 trading plan changes by directors or executive officers in Q4 2023 - No directors or executive officers adopted, modified, or terminated a Rule 10b5-1 trading plan or any non-Rule 10b5-1 trading arrangement during the fourth quarter of 2023[707] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Definitive Proxy Statement - Information is incorporated by reference from the company's proxy statement[710] Item 11. Executive Compensation Information on executive and director compensation is incorporated by reference from the company's Definitive Proxy Statement - Information is incorporated by reference from the company's proxy statement[711] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 31, 2023, equity compensation plans had 1,049,075 securities for outstanding options and 3,564,628 available for future issuance Equity Compensation Plan Information (as of Dec 31, 2023) | Description | Value | | :--- | :--- | | Securities to be issued upon exercise of outstanding options | 1,049,075 | | Weighted-average exercise price | $10.00 | | Securities remaining available for future issuance | 3,564,628 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's Definitive Proxy Statement - Information is incorporated by reference from the company's proxy statement[714] Item 14. Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the company's Definitive Proxy Statement - Information is incorporated by reference from the company's proxy statement[715] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including organizational documents, compensation plans, and certifications - Lists all exhibits filed with or incorporated by reference into the Annual Report on Form 10-K[718] Item 16. Form 10-K Summary This item is not applicable to the company - Not applicable[722]