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Section 1: 10-Q/A (10-Q/A)

hone_Q12018_10QA

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

AMENDMENT NO. 1

 

(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, 2018

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-37778

 

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)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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  ☐
(Do not check if a smaller reporting company)

 

Smaller reporting company  ☐

Emerging growth company  ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

 

As of May 1, 2018 there were 32,622,695 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

 

 

 


 

Table of Contents

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (this “Amendment”) is being filed by HarborOne Bancorp, Inc. (“Company”) to amend its Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed with the Securities and Exchange Commission on May 9, 2018 (the “Original Filing”).  This Amendment is being filed solely to revise the tabular summary of the Company’s regulatory capital ratios at March 31, 2018 located on page 28 as part of Note 13, “Minimum Regulatory Capital Requirements” in Part I, Financial Statements of the Original Filing. The Original Filing incorrectly stated that as of March 31, 2018, the Company’s actual total capital to risk-weighted assets amount and ratio were $314,880 and 14.1%, respectively.  The correct total capital to risk-weighted assets amount and ratio as of March 31, 2018 were $352,606 and 15.8%, respectively.  Except for the foregoing, the Original Filing remains unchanged.

 

As required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended, new certifications by the Company’s principal executive officer and principal financial officer are filed as exhibits 31.1, 31.2 and 32.1 to this Amendment.

 

This Amendment speaks as of the date of the Original Filing and does not reflect any events that may have occurred after that date.  Except as specifically noted above, the Amendment does not modify or update the financial results or disclosures in the Original Filing.

 

 


 

Table of Contents

 

Index

 

 

 

PAGE

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

 

Financial Statements

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 (unaudited)

1

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (unaudited)

2

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)

3

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2018 and 2017 (unaudited)

4

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)

5

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

 

ITEM 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

ITEM 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

55

ITEM 4. 

 

Controls and Procedures

55

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

ITEM 1. 

 

Legal Proceedings

56

ITEM 1A. 

 

Risk Factors

56

ITEM 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

58

ITEM 3. 

 

Defaults Upon Senior Securities

58

ITEM 4. 

 

Mine Safety Disclosures

58

ITEM 5. 

 

Other Information

58

ITEM 6. 

 

Exhibits

58

 

 

 

 

EXHIBIT INDEX 

 

 

59

 

 

 

 

SIGNATURE 

 

 

60

 

 

 

 

 

 

 

 

3


 

Table of Contents

HarborOne Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(in thousands, except share data)

    

2018

 

2017

 

 

 

 

 

 

 

 

 

Assets

 

 

 

    

 

 

 

Cash and due from banks

 

$

15,205

 

$

16,348

 

Short-term investments

 

 

92,105

 

 

64,443

 

Total cash and cash equivalents

 

 

107,310

 

 

80,791

 

 

 

 

 

 

 

 

 

Securities available for sale, at fair value

 

 

182,173

 

 

170,853

 

Securities held to maturity, at amortized cost

 

 

46,095

 

 

46,869

 

Federal Home Loan Bank stock, at cost

 

 

13,538

 

 

15,532

 

Loans held for sale, at fair value

 

 

34,129

 

 

59,460

 

Loans

 

 

2,233,153

 

 

2,194,967

 

Less: Allowance for loan losses

 

 

(18,863)

 

 

(18,489)

 

Net loans

 

 

2,214,290

 

 

2,176,478

 

Accrued interest receivable

 

 

6,643

 

 

6,545

 

Other real estate owned and repossessed assets

 

 

840

 

 

762

 

Mortgage servicing rights, at fair value

 

 

22,696

 

 

21,092

 

Property and equipment, net

 

 

24,174

 

 

24,487

 

Retirement plan annuities

 

 

12,611

 

 

12,498

 

Bank-owned life insurance

 

 

40,684

 

 

40,446

 

Deferred income taxes, net

 

 

1,425

 

 

843

 

Goodwill and other intangible assets

 

 

13,675

 

 

13,497

 

Other assets

 

 

15,294

 

 

14,767

 

Total assets

 

$

2,735,577

 

$

2,684,920

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

288,276

 

$

264,453

 

Interest-bearing deposits

 

 

1,768,760

 

 

1,675,795

 

Brokered deposits

 

 

70,176

 

 

73,490

 

Total deposits

 

 

2,127,212

 

 

2,013,738

 

Short-term borrowed funds

 

 

 —

 

 

44,000

 

Long-term borrowed funds

 

 

226,364

 

 

246,365

 

Mortgagors' escrow accounts

 

 

5,306

 

 

5,221

 

Accrued interest payable

 

 

419

 

 

518

 

Other liabilities and accrued expenses

 

 

31,419

 

 

31,594

 

Total liabilities

 

 

2,390,720

 

 

2,341,436

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Notes 2, 9 and 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 90,000,000 shares authorized; 32,662,295 shares issued at March 31, 2018 and December 31, 2017, respectively

 

 

327

 

 

327

 

Additional paid-in capital

 

 

148,559

 

 

147,060

 

Retained earnings

 

 

209,946

 

 

207,590

 

Treasury stock, at cost, 39,600 and 14,900 shares at March 31, 2018 and December 31, 2017, respectively

 

 

(742)

 

 

(280)

 

Accumulated other comprehensive loss

 

 

(2,697)

 

 

(528)

 

Unearned compensation - ESOP

 

 

(10,536)

 

 

(10,685)

 

Total stockholders' equity

 

 

344,857

 

 

343,484

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

2,735,577

 

$

2,684,920

 

 

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

 

1


 

Table of Contents

HarborOne Bancorp, Inc.

Consolidated Statements of Operations (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(in thousands, except share data)

 

 

2018

    

2017

 

 

 

 

 

Interest and dividend income:

 

    

 

 

 

 

 

 

Interest and fees on loans

 

 

$

22,504

 

$

19,135

 

Interest on loans held for sale

 

 

 

411

 

 

546

 

Interest on taxable securities

 

 

 

1,279

 

 

998

 

Interest on non-taxable securities

 

 

 

217

 

 

218

 

Other interest and dividend income

 

 

 

274

 

 

252

 

Total interest and dividend income

 

 

 

24,685

 

 

21,149

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

Interest on deposits

 

 

 

3,523

 

 

2,432

 

Interest on borrowed funds

 

 

 

1,038

 

 

1,285

 

Total interest expense

 

 

 

4,561

 

 

3,717

 

 

 

 

 

 

 

 

 

 

Net interest and dividend income

 

 

 

20,124

 

 

17,432

 

Provision for loan losses

 

 

 

808

 

 

265

 

 

 

 

 

 

 

 

 

 

Net interest income, after provision for loan losses

 

 

 

19,316

 

 

17,167

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

Mortgage banking income:

 

 

 

 

 

 

 

 

Changes in mortgage servicing rights fair value

 

 

 

1,022

 

 

(442)

 

Other

 

 

 

6,261

 

 

7,846

 

Total mortgage banking income

 

 

 

7,283

 

 

7,404

 

Deposit account fees

 

 

 

2,967

 

 

2,845

 

Income on retirement plan annuities

 

 

 

113

 

 

110

 

Gain on sale of consumer loans

 

 

 

 —

 

 

78

 

Bank-owned life insurance income

 

 

 

239

 

 

257

 

Other income

 

 

 

747

 

 

760

 

Total noninterest income

 

 

 

11,349

 

 

11,454

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

 

16,352

 

 

14,924

 

Occupancy and equipment

 

 

 

3,275

 

 

2,988

 

Data processing

 

 

 

1,553

 

 

1,522

 

Loan expenses

 

 

 

1,262

 

 

1,363

 

Marketing

 

 

 

999

 

 

482

 

Deposit expenses

 

 

 

330

 

 

341

 

Postage and printing

 

 

 

366

 

 

342

 

Professional fees

 

 

 

968

 

 

930

 

Foreclosed and repossessed assets

 

 

 

63

 

 

27

 

Deposit insurance

 

 

 

494

 

 

462

 

Other expenses

 

 

 

1,937

 

 

1,024

 

Total noninterest expense

 

 

 

27,599

 

 

24,405

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

3,066

 

 

4,216

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

 

 

814

 

 

1,481

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

2,252

 

$

2,735

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic

 

 

$

0.07

 

 

0.09

 

Diluted

 

 

$

0.07

 

 

0.09

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

 

31,569,811

 

 

30,998,163

 

Diluted

 

 

 

31,569,811

 

 

30,998,163

 

 

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

 

2


 

Table of Contents

HarborOne Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(in thousands)

 

2018

 

2017

 

 

 

Net income

 

$

2,252

 

$

2,735

Other comprehensive income:

      

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

Unrealized holding gains (losses)

 

 

(2,647)

 

 

434

Related tax effect

 

 

582

 

 

(152)

Net-of-tax amount

 

 

(2,065)

 

 

282

 

 

 

 

 

 

 

Supplemental director retirement plan:

 

 

 

 

 

 

Reclassification adjustment for amortization of prior service cost

 

 

 —

 

 

60

Related tax effect

 

 

 —

 

 

(9)

Net-of-tax amount

 

 

 —

 

 

51

Total other comprehensive income (loss)

 

 

(2,065)

 

 

333

 

 

 

 

 

 

 

Comprehensive income

 

$

187

 

$

3,068

Amortization of prior service cost is included in compensation and benefits in the unaudited interim Consolidated Statements of Operations. 

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

 

 

 

3


 

Table of Contents

HarborOne Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

Treasury

 

Other

 

Unearned

 

Total

 

(in thousands,

 

Shares

 

 

 

 

 

Paid-in

 

 

Retained

 

 

Stock,

 

Comprehensive

 

Compensation

 

Stockholders'

 

except share data)

    

Outstanding

    

 

Amount

    

 

Capital

    

 

Earnings

    

 

at Cost

    

Loss

    

-ESOP

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

32,120,880

 

$

321

 

$

144,420

 

$

197,211

 

$

 —

 

$

(1,290)

 

$

(11,278)

 

$

329,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

2,735

 

 

 —

 

 

333

 

 

 —

 

 

3,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ESOP shares committed to be released  (14,840 shares)

 

 —

 

 

 —

 

 

135

 

 

 —

 

 

 —

 

 

 —

 

 

148

 

 

283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2017

 

32,120,880

 

 

321

 

 

144,555

 

 

199,946

 

 

 —

 

 

(957)

 

 

(11,130)

 

 

332,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

32,647,395

 

 

327

 

 

147,060

 

 

207,590

 

 

(280)

 

 

(528)

 

 

(10,685)

 

 

343,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 —

 

 

 —

 

 

 —

 

 

2,252

 

 

 —

 

 

(2,065)

 

 

 —

 

 

187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stranded effect of tax rate change (Note 8)

 

 —

 

 

 —

 

 

 —

 

 

104

 

 

 —

 

 

(104)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ESOP shares committed to be released  (14,840 shares)

 

 —

 

 

 —

 

 

133

 

 

 —

 

 

 —

 

 

 —

 

 

149

 

 

282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 —

 

 

 —

 

 

1,366

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchased

 

(24,700)

 

 

 —

 

 

 —

 

 

 —

 

 

(462)

 

 

 —

 

 

 —

 

 

(462)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

32,622,695

 

$

327

 

$

148,559

 

$

209,946

 

$

(742)

 

$

(2,697)

 

$

(10,536)

 

$

344,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4


 

Table of Contents

HarborOne Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended March 31, 

 

(in thousands)

    

2018

    

2017

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

2,252

 

$

2,735

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

808

 

 

265

 

Net amortization of securities premiums/discounts

 

 

146

 

 

194

 

Net amortization of net deferred loan costs/fees and premiums

 

 

907

 

 

1,269

 

Depreciation and amortization of premises and equipment

 

 

718

 

 

675

 

Change in mortgage servicing rights fair value

 

 

(1,022)

 

 

442

 

Mortgage and consumer servicing rights capitalized

 

 

(582)

 

 

(989)

 

Amortization of consumer servicing rights

 

 

12

 

 

14

 

Accretion of fair value adjustment on loans and deposits, net

 

 

(134)

 

 

(150)

 

Amortization of intangible assets

 

 

22

 

 

22

 

Bank-owned life insurance income

 

 

(239)

 

 

(257)

 

Income on retirement plan annuities

 

 

(113)

 

 

(110)

 

Gain on sale of portfolio loans

 

 

 —

 

 

(36)

 

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

 

 

26

 

 

(2)

 

Deferred income tax benefit

 

 

 —

 

 

(53)

 

ESOP expenses

 

 

282

 

 

283

 

Share-based compensation expense

 

 

1,366

 

 

 —

 

Net change in:

 

 

 

 

 

 

 

Loans held for sale

 

 

25,331

 

 

34,511

 

Other assets and liabilities, net

 

 

(1,067)

 

 

(8,349)

 

Net cash provided by operating activities

 

 

28,713

 

 

30,464

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Activity in securities available for sale:

 

 

 

 

 

 

 

Maturities, prepayments and calls

 

 

5,982

 

 

5,888

 

Purchases

 

 

(20,012)

 

 

(34,442)

 

Activity in securities held to maturity:

 

 

 

 

 

 

 

Maturities, prepayment and calls

 

 

691

 

 

1,261

 

Net redemption (purchase) of FHLB stock

 

 

1,994

 

 

(2,114)

 

Participation-in loan purchases

 

 

(4,875)

 

 

(37,527)

 

Loan originations, net of principal payments

 

 

(34,830)

 

 

(29,914)

 

Proceeds from sale of other real estate owned and repossessed assets

 

 

165

 

 

496

 

Additions to property and equipment

 

 

(405)

 

 

(715)

 

Net cash used by investing activities

 

 

(51,290)

 

 

(97,067)

 

(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)

    

2018

    

2017

 

 

 

 

 

          

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net increase in deposits

 

 

113,474

 

 

119,984

 

Net change in borrowed funds with maturities less than ninety days

 

 

(44,000)

 

 

(5,000)

 

Proceeds from other borrowed funds

 

 

10,000

 

 

20,000

 

Repayment of other borrowed funds

 

 

(30,001)

 

 

(15,001)

 

Net change in mortgagors' escrow accounts

 

 

85

 

 

(1,196)

 

Treasury stock purchased

 

 

(462)

 

 

 —

 

Net cash provided by financing activities

 

 

49,096

 

 

118,787

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

26,519

 

 

52,184

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

80,791

 

 

50,215

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

107,310

 

$

102,399

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid on deposits

 

$

3,561

 

$

2,416

 

Interest paid on borrowed funds

 

 

1,084

 

 

1,303

 

Income taxes paid

 

 

730

 

 

745

 

Transfer of loans to other real estate owned and repossessed assets

 

 

313

 

 

597

 

Transfer of loans to loans held for sale

 

 

 —

 

 

5,088

 

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

 

 

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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, 2017 and 2016 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 formed on July 13, 2016, HarborOne Bank (the “Bank”); and the Bank’s wholly-owned subsidiaries.  The Bank’s subsidiaries consist of a mortgage company and two security corporations.  Merrimack Mortgage Company, LLC was acquired and became a wholly-owned subsidiary of the Bank on July 1, 2015, and effective April 3, 2018 became HarborOne Mortgage, LLC (“HarborOne Mortgage”).  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.

 

Stock Conversion

 

On June 29, 2016, the Bank reorganized into a two-tier mutual holding company structure with the Company as a mid-tier stock holding company. The Company sold 14,454,396 shares of common stock at $10.00 per share, including 1,187,188 shares purchased by the Company’s Employee Stock Ownership Plan (“ESOP”). In addition, the Company issued 17,281,034 shares to HarborOne Mutual Bancshares, a mutual holding company (the “MHC”) and 385,450 shares to The HarborOne Foundation, a charitable foundation formed in connection with the stock offering and dedicated to supporting charitable organizations operating in the Bank’s local community. A total of 32,120,880 shares of common stock were outstanding following the completion of the stock offering. The direct costs of the Company’s stock offering of $3.9 million were deferred and deducted from the proceeds of the offering. 

 

Upon the completion of the stock offering, a special “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to the percentage ownership interest in the equity of the Company held by persons other than the MHC as of the date of the latest balance sheet contained in the prospectus. The Company is not permitted to pay dividends on its capital stock if the Company’s shareholders’ equity would be reduced below the amount of the liquidation account. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases in an eligible account holder’s qualifying deposits will not restore such holder’s interest in the liquidation account.

 

Nature of Operations

 

The Company provides a variety of financial services to individuals and businesses through its fourteen full-service and two limited-service bank offices in eastern Massachusetts, a commercial lending office in Providence, Rhode Island, and a loan office in Westford, Massachusetts.  HarborOne Mortgage maintains 36 offices in Massachusetts, New Hampshire, and Maine, and is also licensed to lend in seven 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 and consumer loans, including indirect automobile lending. The Company also originates, sells and services residential mortgage loans primarily through HarborOne Mortgage.

 

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

 

Use of Estimates

 

In preparing unaudited interim Consolidated Financial Statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuations of mortgage servicing rights, derivatives, goodwill and deferred tax assets. 

 

Allowance for Loan Losses

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed and generally do not exceed the time frame provided in the FDIC’s Uniform Retail Credit Classification and Account Management Policy.  Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance consists of general, allocated and unallocated components, as further described below.

 

General component

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the Company’s loan segments.  Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment except commercial real estate and commercial loans.  Due to the lack of historical loss experience for our commercial real estate and commercial loan portfolio, we utilize peer loss data.  Adjustments to this historical loss factor are considered for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions.  There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during 2017 or the three months ended March 31, 2018.  The qualitative factors are determined based on the various risk characteristics of each loan segment.  Risk characteristics relevant to each portfolio segment are as follows:

 

Residential real estate – The Company generally does not originate portfolio loans with a loan-to-value ratio greater than 80 percent without obtaining private mortgage insurance and does not generally grant loans that would be classified as subprime upon origination.  The Company generally has first or second liens on property securing equity lines of credit.  Loans in this segment are generally collateralized by residential real estate and repayment is dependent on the credit quality of the individual borrower.  The overall health of the economy, including unemployment rates and housing prices, can have an effect on the credit quality in this segment.  

 

Commercial real estate – Loans in this segment are primarily secured by income-producing properties in southeastern New England.  The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, could have an effect on the credit quality in this segment.  Management obtains rent rolls annually and continually monitors the cash flows of these loans.

 

Construction – Loans in this segment include both residential and commercial construction loans.  Residential construction loans include loans to build one- to four-family owner-occupied properties, which are subject to the same credit quality factors as residential real estate loans.  Commercial construction loans may include speculative real estate development loans for which payment is derived from lease or sale of the property.  Credit risk is affected by cost overruns, time to lease or sell at an adequate price, and market conditions.

 

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

 

Commercial – Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  A weakened economy, and resultant decreased consumer or business spending, could have an effect on the credit quality in this segment.  

 

Consumer – Loans in this segment are generally secured by automobiles or unsecured and repayment is dependent on the credit quality of the individual borrower.

 

Allocated component

 

The allocated component relates to loans that are classified as impaired.  Residential real estate, commercial, commercial real estate and construction loans are evaluated for impairment on a loan-by-loan basis.  Impairment is determined by nonaccrual status, whether a loan is subject to a troubled debt restructuring agreement or in the case of certain loans, based on the internal credit rating.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, except for troubled debt restructurings (“TDRs”), the Company does not separately identify individual consumer loans for impairment evaluation. 

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. 

 

The Company periodically may agree to modify the contractual terms of loans.  When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR.  All TDRs are initially classified as impaired.  Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.  An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan.

 

Unallocated component

 

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. Additionally the Company's unseasoned commercial portfolio and use of peer group data to establish general reserves for the commercial portfolio adds another element of risk to management's estimates.

 

Stock-based Compensation Plans

 

The Company’s stock-based compensation plans provide for awards of stock options, restricted stock and other stock-based compensation to directors, officers and employees.  The cost of employee services received in exchange for awards of equity instruments is based on the grant-date fair value of those awards.  Compensation cost is recognized over the requisite service period as a component of compensation expense.  The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options granted, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.  The Company accounts for forfeitures of share-based payments by recognizing forfeitures of awards as they occur (e.g., when an award does not vest because the employee leaves the Company or does not meet specific performance measures).

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HarborOne Bancorp, Inc.

Notes to Consolidated Financial Statements (unaudited)

 

 

Earnings Per Share

 

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period.  Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. The restricted stock awards are participating securities; therefore, unvested awards are included as common shares outstanding in the computation of basic earnings per share. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options awards and are determined using the treasury stock method.

 

 

Recent Accounting Pronouncements

 

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.  As of March 31, 2018, there is no significant difference in the comparability of the financial statements as a result of this extended transition period.